At the Limits of the Market Part 2: Why Capitalism Hasn't Solved Climate Change

climate change, capitalism, environmental issues in Canada

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

One answer to the question of why free market capitalism has failed to generate technological solutions to the crisis of climate change is that green innovation simply isn’t as profitable as speculation. In an era when financial markets generate record profits and investment banks are too big to fail, the long work of investment, research and construction of new energy infrastructure simply isn’t attractive to profit-seeking corporations.

Faced with the clear failure of the free market to respond to the approaching dangers of climate change, politicians have reacted by attempting to coax corporations into serving the needs of people as well as the bottom line. This is typically referred to as finding “market-based solutions.” It sounds good at first: we’ll harness the best minds in the private sector to develop new technology, create new jobs and solve climate change in the process.

But all too often the phrase “market-based solutions” works as a kind of coded communication. In effect, it signals to corporations that the government will not take any measures that could interfere with their business model. Rather than impose meaningful restrictions on emissions or the extraction of fossil fuels, market-based solutions focus on changing behavior by creating the right set of incentives.  

But without strong penalties to go along with those incentives—a stick alongside the carrot—market-based solutions simply end up creating profitable new markets without addressing the underlying economic drivers of climate change.

When the Kyoto Protocol was adopted in 1997, the creation of markets for trading carbon emissions (typically referred to as a cap-and-trade system) was established as the primary means of tackling climate change without endangering profits. The basic idea of carbon markets is simple: establish a cap or limit on the total amount of CO2 that companies can emit. That amount of carbon is then divided up and allocated to different companies through the creation of carbon permits: in order to emit any amount of carbon, each company needs the corresponding permits.

For those companies that emit less than the allotted amount, carbon permits can be traded or sold for additional income. For those companies that produce carbon emissions over the limit, the need to purchase costly permits should function as a reason to innovate and develop low-carbon production methods.

But carbon emissions trading hasn’t lived up to its promise. The world’s largest market for carbon emissions trading, the European Union Emissions Trading Scheme (EU ETS), is failing. The European system is awash in excessive permits, meaning that the price of emitting carbon is so low that corporations have no incentive to clean up their production methods. At the global level, the United Nations Clean Development Mechanism (CDM) is suffering a similar fate.

As Steffen Böhm, director of the Essex Sustainability Institute at the University of Essex contends, “Carbon markets have lost us more than 15 years in the battle against climate change.” A combination of aggressive industry lobbying for additional permits, a lack of transparency and inadequate oversight mechanisms has simply turned carbon markets into yet another profitable arena for speculation, with no measurable effect in terms of reducing emissions.

One of the staunchest critics of the emissions trading approach is NASA climate scientist and activist James Hansen. Hansen has accused carbon markets of failing to rein in emissions and allowing “polluters and Wall Street traders to fleece the public out of billions of dollars.”

Hansen’s critique is more than grousing from the sidelines. Alongside groups such as the Citizens Climate Lobby in Canada, Hansen advocates an alternative approach to reducing emissions called fee and dividend. Although it remains a solution based on the market, fee and dividend takes a different tactic: rather than work to create new avenues for profit, it restricts markets, makes the fossil fuel sector less lucrative, and attempts to direct markets to meet human needs.

Unlike the cap and trade system, which is plagued by an opaque structure and dominated by bankers, industry insiders and technocrats, fee and dividend relies on a simple mechanism. It works by imposing a carbon fee directly at the point in which fossil fuels enter the economy: the port, the wellhead or the mineshaft. The collected fees are then distributed in their entirety to the population in the form of a monthly dividend. Everyone receives the same amount deposited directly into their bank account, regardless of income or assets.

The carbon fee would then increase each year, slowly making reliance on fossil fuels less and less economical, while driving incentive for green innovation. Since the increased cost of fossil fuels would then be passed along to consumers in the form of higher prices, the monthly dividend provides a cushion to compensate for higher heating and transportation costs.

The advantages of this system over cap and trade are clear and significant. It is simple and transparent, requires no new government bureaucracy, and does not create new opportunities for speculation. When coupled with the removal of all fossil fuel subsidies, it aims straight for the heart of the economic motor of climate change: cheap oil, gas and coal.

Crucially, fee and dividend also has a progressive dimension. According to a 2011 report by the Canadian Centre for Policy Alternatives (CCPA), the emissions of the top 1% of households are approximately three times the average, or six times greater than those of the bottom 10%. The report also shows that two-thirds of Canadians have average or below-average emission levels. Since every household receives the same size monthly carbon dividend, fee and dividend acts as a progressive income boost for lower-income, lower-emission groups. Plus, it provides an economic incentive for all Canadians to reduce their household emissions.  

By ensuring that the costs of reducing emissions are largely borne by the enormously profitable fossil fuel companies themselves, fee and dividend provides an equitable and effective way forward. With the window for action on reducing emissions rapidly closing, we can’t afford to wait for the market to decide that preventing catastrophic climate change is profitable.    

Art by Will Brown. All Rights Reserved.


In calling for a carbon fee, your essay seems to argue for retaining capitalism.   If we are too far gone - as we may be - then such a carbon fee would have to be enormous.  Some very serious climate modelers think we have to halt all carbon combustion AND sequester CO2

You overlook the very structure of our Robber-Baron-Carbon-Capitalism that accelerates global warming.   The rules for commerce and control of carbon were set down at the very start (figure around 1850) and little has changed since. 

Lame, crippled and corrupt governements will can do nothing to stop it.  Or change it.  Yet this is the very time where we NEED strong governments - especially global government.    Why is it so difficult to grasp that we live on a giant globe of Space Ship Earth? - and that our environmental life-support systems are more important than anything else?   Why do we permit carbon psychopaths to play with fire?   Do you really expect them to turn into a new breed of Life-Support-Capitalists that will take control of our future?   Perhaps selling tickets as if it was a one way Disneyland ride?   (like a cheap sci-fi horror plot) 

So we are in a game of economic chicken  - carbon capitalism so dominates governments that we can no longer look to governments as helping humans face the future.   It kind of means that it will fall apart.

Carbon capitalism will be driven by the market incentive - only the future markets, facing global warming will shrivel up and disappear.  This may happen in a few decades - or many decades  - but it will happen.  And capitalism mourns that no insurance industry can pay off on that last catastrophe.  

An enlightened capitalist would see that markets must be protected and nurtured - by either government or by capitalist self-regulation.  Take your pick.   And after you choose one, realize that physical science and the laws of thermodynamics trumps all.  When the ice melts, the seas rise, and holding your hand out to prevent it means nothing.   Or putting your head in the sand means you are the first to drown. 

Capitalism, now over-playing carbon combustion, is in full self-destruct mode.    Insanely wealthy, but stupid.   Blundering stupidity.  Driven by momentum now, the sharp sticks and fire are still irresistable to the billions of starry-eyed youth.   Slight possibility that a form of technocratic Stalinism would take hold, or a few petty tyrants, but everyone would have to want it bad enough

Interesting times, these are. 


The dividend part of fee-and-dividend will have very good effects, but governments already take the lion's share of fossil fuel profits in the forms of import duties, excise taxes, royalties, and perhaps some other ways to say it that I haven't run into yet.

It would be wise to start fee-and-dividend with the dividend, applied to these existing revenues. This would establish, in the minds of the electorate, that you aren't just going to take more fossil fuel revenue and use it to set up beautiful executive assistants in downtown apartments.

Having got the dividend going, and thus eliminated governments' now strong interest in keeping carbon emissions going, we will find getting off carbon a lot easier. Adding more fees, and so increasing the cash flow from persons who are responsible for large carbon dioxide emissions to low-emitting persons, may then be helpful but certainly won't be necessary.

Fee and Dividend is what they are doing in British Columbia.  (Someone can probably correct me on that.)

In any case.. the government has had to claim zero emmissions for new developments of natural gas.  You can't tax it if its not there…  (Equally interesting is that is proof positive that Natural gas is environmentally destructive.)