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[Jean Pisani-Ferry] Climate versus capitalism?

The latest report from the Intergovernmental Panel on Climate Change leaves no doubt: Global warming will continue until at least 2050, even if greenhouse gas emissions are drastically reduced in the coming decades. If they are cut too slowly, the kinds of heat waves, droughts, heavy rains and flooding experienced this summer will become more frequent. More catastrophic outcomes, such as abrupt, irreversible changes in oceanic circulation, cannot be ruled out.

Fortunately, the public is increasingly convinced of the urgency of the problem. A recent United Nations poll indicates that nearly two-thirds of people across 50 countries regard climate change as an emergency. The question, then, is what climate action should entail. How will it affect incomes, jobs and living conditions? Most citizens simply don’t know, because they are being offered very contrasting perspectives on the future.

On one hand, techno-optimists are confident that green innovations can go a long way toward solving the problem. Their vision of the future is simple: We will be driving electric cars instead of petrol cars, traveling on high-speed trains instead of taking planes and inhabiting carbon-neutral houses. The rich may have to give up holidaying on other continents, but everyone else’s lifestyle will essentially be preserved.

Growth skeptics, on the other hand, depict the transition to carbon neutrality as a fundamental change that will end decades of consumer-driven economic expansion. We will enter a new “post-growth,” or even “de-growth,” era. Quality will be substituted for quantity, and social interaction for material consumption.

Both camps share the goal of curtailing emissions. But while techno-optimists trust green capitalism to drive an economic transformation, skeptics suggest that growth is a destructive addiction, curable only by reining in wasteful private conduct. The fight against climate change, in their view, is a fight against capitalism itself.

Economists tend to side with the techno-optimists. Back in 2009, MIT’s Daron Acemoglu, the College de France’s Philippe Aghion and their co-authors observed that technical progress had been massively biased toward brown (carbon-intensive) technologies. They pointed out that government subsidies, regulations and carbon pricing would direct innovation toward cleaner technologies, making green growth increasingly efficient. These predictions have been vindicated by the collapse of the cost of renewable energy. Adair Turner, the chair of the Energy Transitions Commission, notes that for many developing countries, green energy is quickly becoming cheaper than fossil-fuel energy. The same applies to electric batteries.

The reason is that capitalism has begun to turn green, with an increasing number of companies investing in being part of a cleaner future. Tesla is now valued seven times higher than General Motors, despite having sold 14 times fewer cars in 2020. Still, brown capitalism lingers, fighting for survival. As when agrarian and manufacturing interests fought each other in the 19th century, today’s defining battle is not between climate activists and capitalism, but rather between two strands of capitalism.

That is good news. But two caveats are in order. First, even if technology comes to the consumer society’s rescue, people will need to change their lifestyles. Because many energy-intensive suburban dwellings are unlikely to pass the carbon-neutrality test, they could end up as stranded assets. That will be a problem for households whose main asset is their current home equity. Similarly, the deep transformation of meat-intensive diets will disrupt millennia-old agricultural and food traditions.

Growth skeptics therefore have a point when they say that technology is no magic bullet. While it is nonsense to think that de-growth will solve the climate problem, it does make sense psychologically to warn people that behavioral changes will be needed.

The second caveat is that even if green technologies turn out to be less costly than traditional ones, the transition costs will be substantial. Having procrastinated for so long, we are now confronted with a sudden, abrupt changeover. Put simply, a significant share of the existing capital stock -- buildings, machines and vehicles -- will need to be discarded and replaced before it reaches the end of its economic life. Whether this phaseout is triggered by carbon pricing or by tighter emission regulations is immaterial. Either way, greater investment will be needed to maintain the same level of output.

Economists call sudden obsolescence of capital stock a negative supply shock, because its main economic effect is to reduce potential output (at least temporarily). The expression was coined in the 1970s to make sense of the sudden rise in oil prices. A back-of-the-envelope calculation suggests that the shock awaiting us in the coming decade will be roughly the same order of magnitude.

The combination of reduced potential output and greater investment -- amounting to 2 percent of GDP, according to several estimates -- implies that consumer welfare will take a hit. More precisely, it will be diminished in the short term and improved in the long term, as when a country undertakes a military buildup to preserve its security. Also, jobs will be lost in traditional carbon-intensive sectors, but other jobs will be created in carbon-neutral industries. Again, this will involve significant transition costs: Foundry workers will not instantaneously be transformed into building-insulation experts.

Political leaders should be honest about what is coming. President Joe Biden is being a bit misleading when he speaks of “an opportunity to create millions of good-paying, middle-class, union jobs,” as is European Commission President Ursula von der Leyen when she suggests that the European Green Deal is Europe’s “new growth strategy.” Both are right to speak of a bright future, but wrong to overlook the fact that certain jobs will be destroyed and prosperity diminished along the way.

Citizens are conscious of the urgency of climate action, yet they remain uncertain of its implications. What they need is clarity, not starry-eyed promises. The best way to convince people to embrace decarbonization efforts is not by minimizing the challenges ahead, but by describing them accurately and explaining how they will be addressed. 

Jean Pisani-Ferry
Jean Pisani-Ferry is a senior fellow at Brussels-based think tank Bruegel. -- Ed.

(Project Syndicate)

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