On October 25, the electric-vehicle producer Tesla’s market capitalisation reached $1 trillion — more than the combined value of the next ten global car manufacturers. Even after discounting for exuberance, this is a strong indicator of how the threat of climate change is triggering a transformation of capitalism. To be sure, polluters still abound, and greenwashing is pervasive. But it would be a mistake to dismiss the changeover under way.
Governments, however, are not on track to deliver on their promise in the 2015 Paris climate agreement to limit global warming to “well below” 2° Celsius relative to pre-industrial levels. According to the International Energy Agency, meeting the national pledges made so far within the framework of the Paris accord would lead to an increase in global temperature of 2.1°C. Moreover, actual policies fall short of even these insufficient pledges: under the IEA’s “stated policies scenario,” global warming would reach 2.6°C.
Add to this the fact that — as the Energy Transitions Commission has documented — most governments have committed to achieving net-zero emissions only by 2050 or 2060, and plan to postpone major mitigation efforts until after 2030, and the emerging picture is one of massive credibility failure.
The root of the problem is well known. The Paris agreement was based on the realistic judgment that governments could not agree on a precisely defined allocation of climate-change mitigation efforts. This conclusion had emerged from the collapse of the 1997 Kyoto Protocol (which involved such an allocation but left out emerging economies, including China) and the failure of the 2009 United Nations Climate Change Conference in Copenhagen (where an attempt to muster a global Kyoto-type agreement ended in dispute).
So, the world tried a different approach: experts would assess the climate efforts needed, governments would formulate pledges, and civil society would scrutinise them. No one expected the initial pledges to be sufficient. But the hope was that peer pressure, the weight of public opinion, and relentless warnings by the scientific community would gradually put policies on the right track.
Economists were sceptical. Christian Gollier and Jean Tirole of the Toulouse School of Economics warned early on that the strategy was “doomed to fail.” And William Nordhaus of Yale University showed that voluntary climate coalitions are vulnerable to free-riding and prone to instability.
The Paris accord encouraged investors and managers to ponder the risk of being left with stranded assets or an obsolete business model. Mark Carney, then-governor of the Bank of England, added that regulators would hold financial institutions accountable for hidden climate risks. Such considerations generated private-sector momentum towards decarbonisation.
But green capitalism can prosper only if governments eventually keep their climate promises. Most investments in renewable energy, energy-efficient buildings, or zero-emission vehicles require carbon pricing, tight regulation, or both. Forward-looking investors may well bet on the eventual enactment of such measures, but only up to a point, and not without consequences.
The lack of climate-policy credibility partly reflects domestic political considerations, because governments simultaneously promise a green future and the continuation of the status quo.
Copyright — Project Syndicate @2021
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