When it comes to governing the world’s market economies, business as usual needs to become more unusual. Markets have proven a great coordinator of economic activity that promotes human well-being. But markets are not usually perfect, and their shortcomings are becoming more apparent, urgent, and unprecedented in scale. What’s needed now is a transition to greater emphasis on sustainability—where public policy guides market economies to take greater account of the balance between economic, environmental, and social concerns.
The world faces immediate challenges brought about by the novel coronavirus. Our lives have been disrupted, unemployment rates are disconcertingly high, and economies have been devastated. It is unclear how long the crisis will last, and how long it will take to recover. But we will. And when we emerge on the other side, two of the world’s enduring challenges will remain: global climate change and widening income inequality.
That human-induced climate change is a real and growing threat is no longer a topic of serious debate. The new normal is record breaking temperatures, increased severity of droughts and rainfall, and more frequent and intense storms and wildfires. The reality is setting in that concern about climate change is no longer rooted only in abstract concerns about future generations—it is affecting lives and livelihoods here and now.
But the impacts are not felt equally, nor will they be in the future. Adapting to the effects of climate change takes resources. The poor and less well-off, both within and across countries, face greater challenges in their ability to relocate if needed, to access air conditioning, to purchase crop insurance, or to procure a reliable supply of basic needs. Climate-related disruptions exacerbate these vulnerabilities. This is one reason why climate change and income inequality are interconnected problems. It is out of necessity that governments around the world must increasingly provide assistance during natural disasters, anticipate conflict and migration spurred on by a changing climate, and begin planning for rising sea levels in some of the poorest and most populated regions.
And yet, given scientific forecasts of how severe the challenges will be, adaptation will not be enough. Bold leadership is needed to mitigate the problem of climate change. Developed countries must contend with their historically high emissions and far greater emissions per capita today. Developing countries must contend with trends pointing towards significantly larger shares of emissions in the future.
The biggest challenge for mitigation everywhere, however, is the way economies are so heavily dependent on fossil fuels. This calls for a fundamental energy transition towards renewable and low-emission sources of energy to power everything from industry to households to transportation. Remarkable progress has been made over the last decade, due largely to the falling costs of wind and solar energy, along with innovations in battery technology. But we are only scratching the surface of what’s needed. Despite ever louder calls for greater ambition to address climate change in national and international fora, global emissions continue to rise at an alarming rate.
The underlying problem is an uneven playing field for competition among different sources of energy. The burning of fossil fuels emits greenhouse gases and other pollutants that adversely affect human health. These are real and significant costs borne by society that are not reflected in market prices. By not taking them into account—that is, by not internalizing the externality—we confer an implicit subsidy to fossil fuels. This continues to prop them up and make it harder for low- or zero-emitting alternatives to enter the marketplace and compete on equal terms.
Implementing policies that level the energy playing field should be a starting point for the economics of sustainability. Voluntary behavioral adjustments and moral suasion are not up to the task. The needed policies can take a variety of forms: pollution taxes, subsidies for cleaner forms of energy, government supported research and development, and quantity targets that limit pollution or require greater performance. These policies work by creating incentives that push away from high-emission sources of energy, pull towards lower-emission sources, or a combination of both. At a bare minimum, governments should phase out explicit fossil fuel subsidies, which remain high in many countries.
By changing incentives, we can align market forces to achieve environmental goals that improve overall economic welfare. We can use the power and efficiency of markets to our advantage, in a way that benefits all of society. While climate change is a global problem that requires concerted effort across countries of the world, the health effects of local pollution provide entirely domestic reasons for a transition to cleaner forms of energy. What is more, research focused on European countries finds no evidence that implementing carbon pricing adversely effects GDP and total employment growth rates.
But the three-legged stool of sustainability—economic, environmental, and social concerns—means that we cannot overlook the importance of distributional impacts. The consequences of failing to do so were recently on display in France’s yellow vests movement, triggered in part by a carbon tax, and Iranian uprisings, triggered by a decrease in fossil fuel subsidies in 2019. The ultimate success of any such policies is likely to depend heavily on accompanying mechanisms that compensate those most adversely effected by the transition. These will often be the poorest and least well-off, reinforcing the need to frame climate change and income inequality as interconnected issues.
Fortunately, many of the policy instruments that are the most efficient also have revenue-raising potential, creating scope for mechanisms that can simultaneously provide compensation and build political coalitions. For example, carbon taxes or auctionable emission allowances generate government revenue that can be rebated back to citizens in ways that accomplish distributional goals.
These are nevertheless difficult times for any country to realistically contemplate policies that will impose additional costs on the economy, at least in the near term. Instead, leaders are rightly focused on how to best increase government spending to help soften the economic toll of the coronavirus and facilitate a recovery. But this too provides an opportunity to simultaneously address immediate concerns while laying the foundation for those that are more long-term.
The fact is that government spending now requires a plan to raise revenue in the future, and why not integrate sustainability goals as a fundamental part of the plan? Doing so will promote a win-win-win: guiding the needed transition to an economy that is more economically efficient, environmentally sound, and equitably just—that is, an economy that is more sustainable.