Climate Crisis as Market Failure?

By Robert Bernstein   |   November 16, 2021

As I write this, countries from around the world are convening in Glasgow for COP26 to solve the climate crisis. It is 26 because for 26 years these meetings have been going on and the threat keeps getting worse. I first began talking about the climate crisis in 1981 when it was called Global Warming due to the Greenhouse Effect. Swedish Chemistry Nobel Laureate Svante Arrhenius first warned of this in 1896.

The climate crisis is like a meteor headed at the Earth. The damage may be decades away, but the action must happen now. Nature has no obligation to give a warning; we are lucky that we are seeing effects now of the huge disaster that lies ahead. Including vast areas of land that become uninhabitable due to flooding or desertification. Swiss Reinsurance Company estimates $23 trillion in economic costs by 2050. The real costs later will probably be an order of magnitude higher when the long-term impacts really hit.

We have known for just as long that we need to move to renewable energy even without a climate crisis. Because fossil fuels will run out. The cost of this transition is high, but far less than not making the transition. So, why hasn’t the transition happened? Market failure.

In everyday life we see market successes. Consumer goods like food, clothing, smart phones, and televisions are produced abundantly. Because producers are incentivized to compete and provide these goods as efficiently as possible. But this totally breaks down if no one must pay the true cost of their activity. In the case of fossil fuels, no one is paying to use our fragile atmosphere as a garbage dump.

One option: Charge a carbon tax equal to the environmental impact of the carbon. Another option: Decide how much carbon the atmosphere can safely hold and auction the right to dump or remove carbon from the atmosphere. This is called “cap and trade.”

This would allow renewable energy sources to compete fairly and to stimulate investment and innovation.

But this only works if a government mandates paying the true cost. No business will willingly pay a cost if competing businesses are not compelled to do so, too. Furthermore, the mandate must be applied across all major countries.

Another option is for government to “pick a winner” and start investing in sustainable transportation and energy directly. Despite claims of “free market” ideologues, government has always picked winners. Under President Eisenhower the government invested in the Interstate Highway system. Other countries at that time were investing in high-speed rail.

Those highways were sold to the public with visions of wide-open roads and high-speed travel. The reality is very different for most commuters trying to get to work in traffic jams, moving at a crawl.

This is another example of a market failure. When you enter a crowded road, you are slowing down everyone else. You are not made to pay for their time you are wasting. Again, a market solution is possible. Some cities charge congestion pricing to enter during peak times.

Singapore offers another solution. They figured out how many cars can fit in their finite country without congestion and cap the number at that limit. They then auction off the right to have a car. About $50,000 for a 10-year “Certificate of Entitlement” for an economy car. That is not a government tax. It is what the market has determined.

Perhaps the biggest market failure? Those who have no money have no leverage in the market. People in poor countries will suffer most from the Climate Crisis even though they had little to do with causing it.

The solutions may be complex. But Step Zero is acknowledging that market failures are real and require intervention. Libertarian belief in markets is a religion that is unique to the U.S. But market failures occur everywhere. China does not have the same political pressures as the U.S., but the effect is similar. They also have big corporations employing large numbers of people digging up fossil fuels.

China has invested heavily in solar electric projects and high-speed rail. But coal plants are still being built in parallel with that.

Some system of international accounting and accountability is needed to remedy these market failures. I plan to write about other market failures, such as our broken healthcare non-system and homelessness. But the climate crisis is the big one now.


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