The Failure of Market Solutions and the Green New Deal – Pt 1

Alyssa Battistoni – 

market failures.jpgFor the three decades that climate change has been a political issue, it has been understood primarily as an instance of severe “market failure”: as the 2006 Stern Review on the Economics of Climate Change explains, “greenhouse gas emissions are externalities and represent the biggest market failure the world has seen.” In other words, carbon emissions do not have a direct price, meaning that emissions send no market signals and are not included in economic decision-making. The most prominent solutions to climate change have followed this model, recommending a carbon tax or other economic measures by which to “internalize the externality” of greenhouse gas emissions—to account for the social and environmental costs of carbon. Pricing carbon is supposed to make fossil fuels more expensive, ostensibly creating incentives for innovation in clean energy and other green technologies, and in turn prompting a shift towards their use.

In this first of two posts, I’ll explain how this model developed, and what kind of intervention the Green New Deal represents. In short, the scale of transformation called for implies a far more robust role for the state, going beyond mere market corrections to more substantial intervention in the economy. I’m not convinced, however, that the current framing of the Green New Deal is steeped in a vision of the old economy, and doesn’t address necessary support for social and ecological reproduction. (I’ll elaborate that critique in my second post.)

There are different ways of internalizing externalities. The economist Arthur Pigou, who observed “externalities” occurred when prices failed to reflect the “full social cost” of production, thought that such market failures licensed state intervention via taxes or public provision of goods. Taxes were a way of integrating social costs into the actual prices of goods—this is the insight behind the idea of a carbon tax. So-called Pigovian taxes remained the primary model for internalizing externalities until Ronald Coase wrote “The Problem of Social Cost” in 1960—a foundational paper in law and economics, and one of the most-cited legal papers of all time.

Pigou, Coase observed, had assumed that the state should correct market failures through taxes and other forms of intervention. But solutions imposed by the state, he argued, cost something to implement, and might not be the most efficient option. It was rare, he thought, that people wanted to eliminate pollution altogether—it was, after all, a sign of production and economic activity. The point of taxing smoky chimneys, for example, wasn’t to eliminate smoke—rather, it was to “secure the optimum amount of smoke pollution, this being the amount that will maximize the value of production.” But to assess the actual damages caused by factory smoke would be an immensely complicated problem, and taxes were a blunt tool, likely to overcorrect.

Instead, Coase proposed creating rights to the activities in question and allowing private individuals or firms to work out the allocation of harms for themselves. Chicago School economist George Stigler repackaged Coase’s argument into what Stigler called the “Coase Theorem,” which held that externalities could be addressed without government action if private property rights were well-defined and transaction costs were low (a theorem that Coase himself disavowed as such, thinking it a simplification of his actual point.)

The idea underlines the creation of cap-and-trade systems, wherein companies receive rights to emit a certain amount of pollution and can trade those rights among themselves, ostensibly resulting in certain pollution targets at the least cost. These mechanisms dominated environment policy in the Bush (I) and Clinton years. But both frameworks—the carbon tax and cap-and-trade—reflect relatively minimalist views of state action, in which the role of the state is to correct market failures but not to intervene more substantially in economic processes. Once prices are adjusted to reflect social and ecological harms, the theory holds, markets will sort out the rest.

Yet thus far, efforts to address market failure through market mechanisms have, well, failed. Despite efforts to institute carbon taxes and carbon markets, few have been implemented, and their results have fallen far short of expectations. The gilets jaunes protests against a fuel tax in France, meanwhile, suggest that even where such measures have been implemented, they fall far short of the mark. As Colin Kinniburgh argues in Dissent,

By way of a stern warning, the gilets jaunes have dragged the climate debate just one step further away from incremental, market-based half-measures and toward an egalitarian alternative…The French government’s approach is symptomatic of the attitude that treats climate change as a market error—one which can be corrected with a tax here, an incentive there, targeted primarily at individual consumers—when climate science increasingly tells us that confronting climate change means reorienting our entire economies, and fast.

The inklings of a different vision of climate politics is reflected in recent proposals for a Green New Deal, which propose to invest in green energy infrastructure, to provide plentiful green jobs in place of environmentally destructive work, and to undertake other public works projects aimed at remaking the economy along sustainable lines.

As a recent piece by Robinson Meyer suggests, this is simply a return to an old idea: industrial policy, using state investment to shape the economy, and in particular to support a strong manufacturing sector. As Meyer argues, instead of using market mechanisms to make carbon-intensive energy more expensive, the GND “throws all of American government and industry behind an attempt to make renewable energy cheap.” For Meyer, this is a progressive variation on Trump’s call for a revival of American industry—a return to the things that really made America great, from publicly funded research and development to massive infrastructure investments. As Rhiana Gunn-Wright, a policy researcher who helped draft AOC’s proposal, told Meyer, “We’ve stopped making things. We’ve stopped investing in the real economy”; elsewhere she notes that people “get really excited about the thought of making stuff again…That they’ll not just be a cashier, but that they’ll make wind turbines.”

This focus on manufacturing reflects the historical understanding that state intervention in the economy is sometimes warranted in relation to industrial production, whether requiring automobile factories to produce tanks in wartime or nurturing nascent manufacturing. The aim of such projects has typically been to maximize production, often despite significant social and ecological costs. Proposals for a Green New Deal, although departing from the previous paradigm of climate policy in their scale and ambition, remain largely within the same economic framework. Gunn-Wright suggests that appeals to “manufacturing” have come to stand in for appeals to the “white working class,” making it hard to talk about manufacturing on the left. From this perspective, the GND is an attempt to connect industrial policy to both racial and economic justice.

That’s an important project. But I’m still concerned about the perpetual celebration of manufacturing and “making stuff” as “real work”: it seems to me to revive a production fetish at odds with a sustainable economy. In my next post, I’ll explain how we might see the economy differently, and how a Green New Deal can—and should—shape it.

Alyssa Battistoni is a graduate student in political science at Yale University, and an associate faculty member at the Brooklyn Institute for Social Research.