Climate action stands to either be capitalisms greatest success or its greatest failure. The changing climate is testing the ability of our global economic system to act in a way that it never has before – for the collective good.

Market capitalism is inherently de-centralized, with perfuse interests, and a short time horizon. None of these qualities necessarily lend themselves to tackling a collective, and long-term issue such as climate change.

So, is it possible to save the environment, while still maintaining our current economic order?

While this answer to this question is not entirely black and white, the debate over climate policy presents a useful tool to better understand the characteristics and limitations of the system, as well as the two prevailing schools of political thought.  

The Challenge:

The energy sector allows us to better understand the policy challenge facing our economy. Since the industrial revolution, the developed world has built much of its wealth on the back of cheap and accessible hydrocarbons, most notably coal and petroleum. Now, as nations such as China and India develop, these very same resources threaten not only our economies but our entire species.

Coal remains one of the cheapest sources of energy, yet its carbon intensity is devastating to our climate. Even as we better understand the long-term harm of coal use, the U.S. Energy Information Administration predicts that global demand for the product will continue to increase until 2040. While some progress has been made, much of the current displacement of coal consumptions seems to be due to cheap natural gas prices, rather than the adoption of renewable energy sources.

While this is a classic case of a market failure, there is strong division on how to solve it.

Carbon Tax: A Market Based Solution

Climate action may validate classical economic theory, in that by leveraging established market dynamics, no problem is too big to solve. For this camp, the best way to solve climate change is to internalize external costs of emissions and reorient incentives through market-based mechanisms, most notably a carbon tax.

Carbon pricing has gained a significant amount of mainstream traction in recent years, with Former U.S. Fed chair Janet Yellen, Canadian Prime Minister Justin Trudeau, and even Exxon Mobile counted amongst its supporters.

Champions of this approach argue that carbon pricing offers more a predictable, “hands-off” solution when compared to more conventional environmental regulations and allows the private sector to best determine how to reduce emissions.

However, this route also risks exacerbating existing social and economic inequities. If not implemented correctly, or without proper accommodations, carbon pricing can be a regressive tax shouldered by the poor. One need not look further than the current fuel-tax riots in the streets of Paris to see the possible social push-back to these policies.  

While a carbon tax may be the simplest solution to climate change for some, it is heavily reliant on both political courage and on developing a mechanism that doesn’t worsen other issues in our society. 

Green New Deal: A fundamental shift

For others, climate change necessitates a fundamental transformation of our economic order. 

In the United States this has taken the shape of the “Green New Deal.” Just as the Great Depression required President Roosevelt to profoundly change U.S. fiscal and welfare policy, advocates for this Green New Deal contend that climate change requires the same drastic approach. 

Proponents of this strategy such as newly elected U.S. Congresswoman Ocasio-Cortez, believe market based solution cannot solve climate change alone. Others see climate change as an irreconcilable failure of the market, and therefore reject the market as the primary means to solve it. 

Labour Party leader Jeremy Corbyn has taken a similar approach and proposed the nationalization of entire sectors in order to combat climate change. Mr. Corbyn recently told a conference in London that “The challenge of climate change requires us to radically shift the way we organise our economy.”

However, critics are weary of government over-reach and the financial cost of such strong interventions. If a carbon tax requires governments to carefully balance public need with public welfare, an economic transformation does as well. If a more transformative approach is taken, it raises an important question for which there is no easy answer, “a transformation into what?”

Fundamental Questions:

It may not be entirely hyperbolic to say that if capitalism cannot solve climate change, it may well be dissolved by it. Just as past crises did, climate action raises important questions about the role of the free market in public policy – in terms of both its advantages and limitations.    

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Iqbal Ahmed is a first year MPA student at the London School of Economics. Having grown up between Alaska and Vancouver Canada, his policy interest is in the relationship between equity, the environment, and cities. Prior to the LSE he spent a number of years working in public policy development and advocacy.

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