At the Limits of the Market: Why Capitalism Won't Solve Climate Change, Part 1

climate change, capitalism, environmental issues in Canada

One of the great mysteries of contemporary capitalism is the fact that as a system it appears absolutely incapable of responding to the crisis of climate change. Why can’t a system that made the automobile into an accessible mass consumer good provide us with clean and efficient mass transit, or at the very least electric cars? Why are we still burning coal, the energy source that drove the Industrial Revolution over 200 years ago? Where are all the new green enterprises leading the way into a low-carbon future?

From Joseph Schumpeter’s description of “creative destruction” to the fabled entrepreneurial powers of innovators like Steve Jobs, we’re accustomed to thinking that capitalism provides the social and economic framework that best nurtures human creativity and fosters technological innovation.

But with atmospheric concentrations of CO2 sailing past 400ppm and scientists warning of a global environmental catastrophe caused by the breaching of the nine planetary boundaries, the forces of the market are curiously silent.

To be fair, there is no shortage of innovation in green technology. Just recently, Australian scientists developed a printer capable of printing out sheets of thin, flexible solar panels that can be integrated directly into building construction materials. But while it sounds cool, the prospect of such technology rapidly scaling up and replacing fossil fuel use is limited by one overwhelming problem: profitability is the guiding force behind investment and production, even when the long-term costs massively outweigh the short-term gains. 

No longer are the long-term costs of climate change some abstract threat to be dealt with in the distant future. Earlier this year, the IMF released a report calculating that the damages incurred by climate change will cost $25 per ton of CO2 emissions. Other researchers put that number as high as $85. To put that into perspective, all of the bitumen in the Alberta tar sands amounts to an estimated total of 240 billion tons of CO2. While the oil companies are posting record profits now, we’re all going to be picking up an enormous tab later. 

It’s not that capitalism as a system makes us oblivious to the consequences of our actions. Quite the opposite: from market research to insurance to financial management, legions of people are employed in fields devoted to predicting and measuring the future.

Nor is the problem that corporations and investment banks are staffed exclusively by climate deniers—you’d be hard pressed to find a risk analyst at Goldman Sachs who doesn’t accept the science on climate change. Plus every major oil company has a climate change division devoted to calculating risk and making business plans for a warming planet.

Is it greed? It’s a tempting conclusion, particularly when we look at the spectacular excesses of Wall Street in an era of stagnant wages, precarious employment and rising living costs. But since capitalism is by definition a system of competitive profit maximization, what looks like greed from the outside is actually rational behavior; if one firm doesn’t pursue a profitable opportunity their competitors will, driving the first company out of business.

As with all complex systems, effects rarely have a single cause. But there is one explanation that’s increasingly difficult to ignore: capitalism cannot respond to the climate crisis because it is a system that seeks to commodify everything, including the negative consequences of the system itself.

Take derivatives as an example. In the United States, derivatives were originally developed as a hedging instrument to shelter farmers from the financial risks of a bad harvest. But derivatives have since evolved into a massive global market for managing all kinds of risk, with a total value between $600 and $700 trillion, according to the Bank for International Settlements. Other estimates put that value closer to $1.2 quadrillion, or more than 20 times global GDP.

The derivatives market is like a massive network of countless, interlocking insurance policies against risk, loss and negative outcomes of all stripes. Derivatives also double as a high-yield financial instrument for speculative investors.

But where we once thought of the careful calculation of risk as being at the core of capitalism, derivatives function to take uncertainty itself and turn it into a highly profitable commodity. With so many different companies purchasing derivatives as insurance policies, and banks and hedge funds then investing in the success or failure of those policies, the global derivatives market has become an incomprehensibly complex, high-stakes casino.

Even as extreme weather wreaks havoc on crop yields and threatens coastlines, new custom-made financial instruments offer the savvy investor the chance to profit from destruction. Weather derivatives offer both a profitable investment today and an insurance policy against future damages by flooding or drought. While the estimated costs of climate change continue to climb, the profits to be made by betting on those costs keep growing faster.

In effect, what we have is a situation in which investors are busy betting on what’s going to happen with the climate. Depending on how they invest, they can make money if things get worse or if they get better. If they pick the wrong horse, their bad investments can also be insured by purchasing still more derivatives.

When too many bets start going bad at the same time, as happened during the subprime mortgage crisis, the entire financial system is at risk. But the game is rigged: the now-familiar principle of “too big to fail” holds that governments will bail out megabanks and businesses when they go broke, and impose austerity policies on their own populations in order to pay for it.

Ultimately, this means that ordinary people bear the costs when the casino falls apart, but the financial players get all their bad bets reimbursed. If the costs of financial crises and climate change can be socialized while maintaining private profits, why bother with green energy and reducing emissions?

Developing new green technology, hiring workers and investing in new productive facilities involves a real risk: it may not be as profitable as purely speculative investments. With derivatives and the implicit backing of government removing the fear of failure for the world’s biggest corporations, there simply isn’t an economic incentive to make investment decisions that would help to avert climate catastrophe.

In the second installment of this post, we’ll look at a policy proposal that aims to make CO2 emissions too expensive to be profitable. By changing the structure of the market, can capitalism produce the solutions to the climate crisis?

Art by Will Brown. All Rights Reserved.


What a wonderful topic for discussion.   Thanks 

Capital wealth certainly understands the challenge.   The World Bank, the Insurance industry, and military and academia - they all understand it.  And many nations too. 

This is the end-time of plunder and the establishment of feudal fiefdoms ready to hunker down.   In the near-term we will see the crucible events that filter out survivors so the wealthy, powerful and very strong can survive.  This is not by plan, but it appears to be the structure.  In our human future, either some will survive, or none will.  (a vital future for all 8 billion is impossible without inventing some sort of tech-magical tool )  

So we are witnessing capitalism behave as if it holds a future wealth scenario where only a few percent of total population will survive, but not much more.   Say 1% survival is the perfect number for a shock level reduction in globlal warming emissions.   This would be the perfect turnaround - a 99% reduction in emissions is just what's needed for human survival.  

The pity is that this must happen very soon, and it will be very messy.   But the economic actions today seem to indicate this belief - if only by the short-sighted tactics today.    

And it could just work for our species.  Because having all human civilization drop carbon emissions to near zero is not going to happen willingly - but accidentally is great.  And capitalism, or any other human philosophy has not yet proposed an alternate scenario.   Agro-climatologists say that around 2030 the heat will severely stress most all flowering plants.  Less than 2 decades till the super stress times - which may last many hundreds of years -  (um, we all do know that global heating will continue to rise past the year 2100, don't we?)  Those who expect to dwell on this planet cannot allow any more heating  -  and they must have tremendous resources to survive.   Trickle-down Reaganomics will not suffice. 

So either this is end-times for humans, (and we can then accept and adjust) or this is the time of selection for making ready those who will live in caves and migrate with weather changes for the next thousand years.   It appears that such a campaign of climate capitalism is well underway - as if it has decided to be the chosen culture for our species.    

Or we could all agree to face it now, or we could invent some magic device. Whimper or bang,  Other ideas may apply.  

Great topic. 


David - There is an alternative vision, that this system we are living in now will transform in a very short time to one where we are burning almost no fossil fuels.  It just looks dismal because we are caught in the transition and it seems to be going slowly.  However, together we are rapidly creating a viable alternative to the fossil fuel industry which will inevitably replace them because the cost for renewable energy is now less than for carbon-based energy.  Those two lines have crossed, and the gap will now keep widening.  So the market is going to pressure everyone to “go solar” within the decade - home energy will be solar and hydrogen, and we will charge our electric cars, with range over 100 miles on a single charge, off our roofs.  The fossil fuel industry and their centralized distribution system of massive energy companies will go out with a whimper, and this will happen sooner than anyone has predicted.

We saw this before. When computers first came out the idea that IBM was promoting, and that everyone accepted, was that there would be a mainframe computer center in each town, and one in each large company, hermetically sealed and cooled and staffed by geniuses. And we would all drive over there to get our computing done. Then along came the upstarts Microsoft and Apple and HP and Dell and Texas Instruments, and pretty soon we had distributed computing available in every home, in every briefcase and now in every phone. And what ever happened to the largest computer company in the World - IBM? We used to call it “Big Blue” and they had the hottest tech stock before there was even the term “tech stock.” My Dad told me “Invest in IBM, you can never go wrong.”  That transformation took a decade.

Well what we are creating now is distributed energy. By the end of this decade we will be in the thick of the most exciting transformation you will see in your lifetime - from centralized energy generation and distribution to individual energy production at the home and community level. We will all charge our cars off our roofs either directly with solar or indirectly with solar generated hydrogen, and we will have solar and hydrogen highways that criss-cross the nation.  We need to get the government and the dirty fuel companies out of the way and let pure capitalism take over and provide the “invisible hand” of profit maximization.  

In poor countries thay can skip the petroleum and coal model altogether and go to a clean and green future directly, cheaper than simply replicating the history of the West.  The model here is integrated steel plants.  Because they did not need to retrace our history, countries like South Korea could hop right over the Bessemer-type systems and jump right from no steel industry at all into the most modern technology.  A decade after they built their first plant they had captured almost half the new steel business in the World and Bethlehem Steel and US Steel were on the way out.

So this does not require fighting against anyone or any system. If you fight them, they are ruthless and have the power to crush you. I am personally helping create an alternative system so that one day kids will not even know that there were gas powered cars and coal fired power plants because the new normal will be distributed energy, just as the normal today is distributed computing.  Our program, Climate Change is Elementary, is training professional presenters to get paid to go into schools and get this program moving.

And our partners, who provide access to renewable energy, will give rebates to schools for family purchases of  renewables and other environmentallly sound products and services.  As families invest in a clean green futurte they are raining money to green their schools with rebates from our vendor partners.  We need to trust that this will work, because the alternatives to this system are unwieldy and will take too many decades to implement.  We just need to make the playing field level and get the oligarchs out of the way.