If the way out of climate crisis requires a world that works together, can economics and markets provide the direction? Şerban Scrieciu reflects.
Two globally significant events this year have togetherness at their hearts. As I write, the 17th International Architecture Exhibition (2021 Venice Biennale) is tackling its thematic question: how will we live together? The curator of the exhibition, architect and scholar, Hashim Sarkis, challenges architects to “aspire to enable the best of the social contract”, so that “we can generously live together”. Meanwhile the upcoming UN Climate Change Conference (COP-26) runs under the banner “uniting the world to tackle climate change”.
Togetherness is clearly central to dealing with the climate emergency. But economists would certainly struggle to begin to answer the question underpinning the architecture exhibition.
In an article published for Royal Economic Society, Andrew Oswald and Nicholas Stern show that mainstream economics has devoted little attention to sustainability research. Top-ranked economics journals have published extremely few or even zero articles on climate change. Even when mainstream economic thought focuses on the climate problem, it tends to do so through the narrow lens of trusting markets, always, to allocate scarce resources efficiently.
In this interpretation, the rationality of economic players is in the driving seat of human decision-making. Economic agents are assumed to be capable of optimising and systematically calculating all the costs and benefits of their actions. Yet, reflecting on togetherness in climate economics and policy, there are three interrelated factors that challenge these assumptions:
- the limits of market-based solutions;
- the differentiated impact of decarbonisation policies; and
- the role of social diversity in climate economics thinking.
A closer look at each of these factors reveals the value of economic thinking outside the neo-classical-driven mainstream.
Other strands of economic thinking, as well as policy practices can help. These see carbon pricing as merely a mechanism amongst many others.
The economics literature and policy practice place an unhelpful overemphasis on price mechanisms and the market as a source for solutions. Traditional economists typically regard carbon prices, especially emissions trading schemes and carbon taxes, as the most cost-effective lever to reduce emissions. Their approach is synthesised, for instance, in the Economists’ Statement on Carbon Pricing, initiated through the European Association of Environmental and Resources Economists. However, if we are to stabilise the climate, there is more to decarbonisation than price competitiveness. Achieving togetherness implies bringing climate action to the heart of people. It suggests being cost-effective beyond a narrow monetary sense, and in a broader societal progressive sense.
Other strands of economic thinking, as well as policy practices, can help. These see carbon pricing as merely a mechanism amongst many others. They regard market-based instruments as one type of measure, within an otherwise diverse portfolio of climate policies. For example, Post-Keynesian economics and institutional economics have long argued for the significance of regulatory interventions and institutional change. In climate policy, these may include mandatory actions and targeted regulatory measures, such as energy efficiency standards or building codes.
Behavioural economics, which has already penetrated segments of the mainstream, uses insights from psychology to provide more realistic explanations of economic behaviour. It points, for instance, to the relevance of cost-effective, information-based instruments to encourage voluntary mitigation and lifestyle changes. These may refer to eco-labelling, energy-performance certificates, mandatory emissions disclosures, or educational and awareness-raising campaigns.
Fairer decarbonisation policies
Market and non-market policies for carbon reduction have varying distributional and social outcomes with critical implications for social inclusion and acceptability, public support, and the long-term sustainability of the measures implemented. All these social dimensions are critical aspects for attaining togetherness.
A recent systematic review published in Nature Climate Change found that several studies reported negative distributional impacts, for small firms and low-income households, from energy taxation, feed-in tariffs, and carbon and fuel taxes. This is especially the case when exemptions or recycling mechanisms are not set up. Fairer measures include non-price based instruments, such as energy savings certificates and building codes because they do not disproportionately burden low-income end-users.
So the equal consideration of price and non-price factors has the added potential of helping curtail socioeconomic inequalities. Equity and other social issues are not just unintended consequences of markets and prices performing their decarbonisation miracles. They are fundamental elements of climate economics and policy that need more than financial support or compensation.
By its nature, social diversity links to the monetary / non-monetary divide, because it is at the core of entrepreneurship and economic growth. Urban scholar, Jane Jacobs, argued eloquently for this, in the case of cities.
Chiefly, economic agents are social actors. They do not base their economic decisions solely on price signals or with a view to maximise their consumption desires. People and businesses make their economic choices on a diverse array of considerations and values. Yes, they do rationalise. Yet, they also imitate, compare with their peers, play by the rules of thumb, change their minds and habits, or rely on emotions, moods, and feelings. Two overlapping strands of alternative economic thinking – Complexity economics and Evolutionary economics – are well equipped for tracing such dynamics.
Understanding social diversity can support a better policy targeting of those segments more likely to adopt low-carbon technologies at a faster rate .
Leading academics in these fields, including J. Barkley Rosser Jr., W. Brian Arthur, Alan Kirman, Cristiano Antonelli, and Sheri Markose, have shown how the interplay between many diverse individual firms and households results in changes, from the inside, in overall economic systems. They point towards the open, reactionary, and adaptive features of economies. Such traits are essential for technological and organisational innovation to occur. The implications for climate policy are substantial.
Understanding social diversity can support better policy targeting of those segments more likely to adopt low-carbon technologies at a faster rate than other segments. The outcome could be an acceleration in the overall diffusion of low-carbon technologies and practices.
Ultimately, simply embracing diversity in economic thought can activate a much-needed boost in climate economics and policy. Returning to the Biennale, economists could do well to heed Sarkis’ call to arms. They could more tellingly work together, and collectively aspire to deliver “the best of the social contract”.