The Market Does What a Climate Summit Can’t
They say the sequel is never as good as the original, and it’s easy to see how the 26th entry in a series can struggle to keep things interesting. We’ve come a long way from the Kyoto Protocol to the Paris Agreement, but all international conferences on climate change still tend to follow a set script. World leaders gather. They make many fine speeches about the importance and urgency of action to prevent dangerous increases in global temperatures. On occasion, they make non-binding commitments that they will reduce their emissions by X amount over the next Y years. And then they return home and promptly forget the whole thing.
With COP26, climate advocates did not even have to wait to feel disappointment. The conference was chiefly notable for a late intervention by China and India that watered down language about the need to end coal use. Yet activist disappointment overlooks a parallel, positive, and largely market-driven trend towards lower emissions.
Collective Action and Negative Externalities
There are two features of climate change that make it difficult to address properly. First, it involves what economists call “negative externalities.” Imagine that I have a neighbor who likes to play loud music late at night, keeping me awake. When he does this, he derives a benefit (it helps him relax) and also imposes a cost (I cannot sleep). But whereas the benefit accrues entirely to himself, the cost is borne by someone else: me. Before you feel too sorry for me, though, know that I am a morning person, and like to use my leaf blower first thing in the morning. Now the situations are reversed. Since each of us reaps nearly all of the benefit from our noise-making activities while bearing nearly none of the costs, we each will do more of it than we would if we had to bear all of the costs as well as all of the benefits. And the same is true for the greenhouse gas emissions associated with the gasoline used to run my leaf blower and the fossil-fuel-generated electricity used to power his speakers.
This feature is common to all environmental problems, and communities have developed ways to deal with the challenge, whether through nuisance litigation, regulation, fees and payments, or other means. Climate change, however, faces an additional hurdle. As the name suggests, global warming is a global issue. Greenhouse gas emissions anywhere affect temperatures everywhere. But unlike national environmental problems, which can be handled via common law legal or government action, there is no worldwide governmental body that can address the issue.
Overall, the fact that there is no world government is very much to the good. But it does mean that all countries are in the same position with respect to climate change—just as my neighbor and I would be if there were no authority to which we could turn to resolve our issues. If it were just the two of us, we probably could work out some mutual agreement to keep the noise down. But what if there were 200 of us, each deriving significant benefits from their own noise-making activities but annoyed by the overall deafening din? The challenge of getting us all to agree—and then to stick to it—would be daunting. This is known as a collective action problem, perhaps best described by Mancur Olson in his work, The Logic of Collective Action.
Which brings us back to why all those world leaders keep gathering in places like Glasgow.
Since none of the ordinary means of dealing with collective action problems are live options, many politicians and activists have resorted to hoping that if they keep at the topic long enough, they can all talk themselves into doing something about it.
Exacerbating these difficulties is the fundamental difference in how rich and poor countries view the issue. Citizens in wealthy countries are unlikely to make sacrifices to reduce their own carbon footprint if these reductions are swamped by increases in the developing world, which is expected to comprise the bulk of future emissions. Yet to developing countries, there is something hypocritical about this stance. Wealthy countries used fossil fuel generated power to get rich, but now want to deny them the chance to do the same. Internal political dynamics often pose an obstacle, since policies need to be maintained over the long term to be effective. Given the natural cycling between opposing political factions in a democracy, success requires not just a political victory by one party at a point in time, but substantive buy-in from all major political factions.
It is often suggested that the way out of this impasse is for the United States to show leadership: it should act first, cutting its own emissions, and this will lead the other nations of the world to gratefully respond by cutting their own emissions as well.
As a negotiation strategy, this leaves something to be desired. Typically, effective agreements between countries involve some kind of trade: we do something they want, and in exchange, they do something we want. Unilaterally committing to sacrifices in the hope that others will follow suit seems to stand this on its head.
Unsurprisingly, this approach has not worked. While not often remarked upon, the United States is in fact a leader in emissions reduction. In 2020, U.S. carbon dioxide emissions were 24 percent lower than what they were in 2005, the year typically used as a baseline for emissions reduction commitments. These reductions far surpass those made by other nations. Indeed, the United States alone is responsible for two-thirds of all CO2 emissions reductions made by OECD member nations since 2005.
Yet this leadership has not translated into corresponding emissions decreases from other major emitters. For every metric ton CO2 emissions have declined in the United States since 2005, China’s emissions have increased by 3.74 metric tons.
What Really Reduces Emissions
U.S. leadership on real-world emissions reduction is notable, though, for a different reason: it came about without the sort of comprehensive climate policy typically thought to be the sine qua non of dealing with the issue. In 2009, Democrats in Congress proposed the Waxman-Markey climate bill, with a seemingly ambitious goal of reducing U.S. emissions 17 percent below 2005 emissions by 2020. Waxman-Markey did not pass, yet the country still met the bill’s emissions reduction target. Similarly, President Barack Obama’s Clean Power Plan was supposed to reduce power sector emissions by 32 percent by 2030. As with Waxman-Markey, the Clean Power Plan never went into effect, yet America met its emissions target—and did so a full decade ahead of schedule.
How does the United States keep achieving emissions targets in policies it does not enact? The answer is important because it highlights what is likely to be the real driver of most emissions reductions in the coming decades. Unlike the talk without action that often characterizes climate gabfests, the majority of U.S. emissions reductions have come from action without talk in market forces. Higher emissions fuel sources have been replaced in the market by lower emitting ones; first coal by natural gas and now renewables. Increased efficiency has reduced the carbon intensity of everything from driving to manufacturing. And new innovations on the horizon suggest that this process is not likely to stop soon. There’s also progress being made by that bugbear of many on both left and right: multinational corporations. Many businesses are at the forefront of decarbonization efforts internationally, and emissions cuts will accelerate organically if the international community uses things such as emissions reporting and benchmarks that recognize success by governments and private actors alike.
That’s good news because it offers the potential to overcome the collective action problem that otherwise bedevils the climate issue. The thing about cleaner, cheaper, more efficient technologies is that you generally don’t have to twist people’s arms to get them to use it. People like paying less for something that also pollutes less. We can therefore expect market-driven emissions reductions to spread globally, irrespective of whether there are international agreements calling on countries to do so. Markets and international agreements aren’t mutually exclusive, of course, and it may actually be easier for political leaders to reach an agreement if they know market-driven trends will make it less painful to implement. But market trends also mean that less hangs on the outcome of a particular international conference.
Ironically, countries like the United States tend not to be given credit for market-driven emissions cuts. In the minds of many activists and politicians, unless you can point to a policy, target, or plan that was responsible for a given decline in emissions, then it doesn’t really count. However, the effect of one less ton of CO2 emitted does not depend on whether the cut happened due to the market or government action. Politicians naturally will tend to take a government-centric view, but while we can expect international conferences like COP to continue, we should not expect them to be a primary driver of emissions reductions.
Image credit: Jon Le-Bon