Market forces are not enough to halt climate change

Title: The Challenges in Decarbonizing the Global Economy

1. The Strategy for Climate Change Mitigation:

The primary strategies aimed at combating damaging climate change involve decarbonizing electricity and electrifying the economy.

2. The Current Status:

Unfortunately, the progress in implementing these strategies has been sluggish. In 2023, the production of electricity generated by fossil fuels reached an all-time high, despite a drop in its share from 67% in 2015 to 61% in 2023. The overall electricity output increased by 23% in eight years, and while renewable and nuclear sources of electricity saw an impressive 44% rise, the production from fossil fuels still rose by 12%.

3. Factors Driving Electricity Production:

The significant increase in electricity production can be attributed to the growing desire of people and businesses in developing countries to adopt energy-intensive lifestyles similar to those in high-income countries. With high-income countries unwilling to abandon these lifestyles, they have little ground for criticism.

4. The Need for Accelerated Decarbonization:

The only solution to this challenge is to hasten the decarbonization process, necessitating greater investment in electricity produced by renewables, nuclear, and any source other than burning fossil fuels. However, the current reality indicates that emissions are not declining, and both greenhouse gas levels and global temperatures are increasing.

5. Potential Responses to Climate Change Inaction:

Responses to inaction on climate change vary, from the “de-growth” movement advocating for a halt to growth (a politically irrelevant perspective) to the opposing free-market and nationalist viewpoint: “Who cares? Let the fossil-fuel economy thrive.”

6. The Impact of Climate Change on the Global Economy:

A study by the Potsdam Institute for Climate Impact Research indicates that the world economy is committed to a 19% income reduction by 2050, given past emissions and socio-economically plausible future scenarios. The costs of mitigating this climate impact are much lower compared to the costs of climate change itself, with the greatest losses affecting poorer countries in “lower latitudes” (today’s “Global South”).

7. The Falling Cost of Renewable Energy and Market Solutions:

Brett Christophers argues in his book, The Price is Wrong, that the declining cost of electricity generated by renewables does not make them an attractive investment for investors, as profits, not marginal costs, matter. Christophers suggests that a combination of heavy carbon taxes, long-term subsidies, and changes in the design of electricity markets will be required.

8. Capital Markets and Climate Change:

Lord Nicholas Stern and Joseph Stiglitz argue that a significant issue is the failure of capital markets to price the future appropriately, with today’s investors seeking returns that imply the welfare of future generations is of minimal importance. This mindset requires governments to exert influence over investment decisions. This is particularly crucial for emerging and developing countries, where the cost of capital is often punitive.

9. Conclusion:

Climate change represents a massive global market failure that requires bold, immediate action from governments worldwide. The market is unlikely to fix this issue, and today’s political fragmentation and populism make it difficult to take the necessary, courageous steps required to protect our planet.

[Source: [email protected] Martin Wolf with myFT and on X]

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