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ECONOMY: Market Heating Up the Globe

Analysis by John Vandaele*

BRUSSELS, Mar 11 2008 (IPS) - One way to look at the climate problem is through the lens of the market. If you do, only one conclusion is possible – the climate change problem is a massive market failure, a failure of market mechanisms to factor in future costs of a change in climate in real time prices.

Because of that failure the industrialised countries have changed the atmosphere so drastically that climate is changing already now. Because of that failure the world economy, if unchecked, heads for disaster.

This has the elements of a well-known Greek drama – Icarus flies up towards the sun, but his success brings him ever closer to the sun; that melts the wax in his wings, and finally brings him down.

Humanity is like Icarus: it is, finally, spreading the wealth of its industrial development based on fossil fuels over the whole planet, bringing material wellbeing within reach of a majority of the world&#39s population. But for that reason, it is changing the planet&#39s atmosphere every day a bit more. And the best available knowledge tells us that if the average temperature on earth rises more than two degrees Celsius, we&#39ll be really in an Icarusean position: we will lose control over our trajectory.

The massive loss of biodiversity is another example of market failure. The market cannot by itself price the future costs of the extinction of this or that organism, and so we destroy thousands of species each year that might be very useful to humanity.

These massive challenges influence political and economic thinking. It&#39s getting more and more obvious that only government intervention on the national and international level can steer the world economy and its markets – nobody seriously thinks of eliminating markets – in a more sustainable direction.

If you observe closely what is happening in Kyoto and post-Kyoto processes, it is clear that the governments of the world are influenced by ecological economists like the U.S. professor Herman Daly. That must taste like sweet revenge for Daly. Once he headed the environmental division of the World Bank, but he left because he felt that the basic philosophy of the Bank was incompatible with his thinking.

Ecological economy wants primarily that the economy has a sustainable scale relative to the ecosystems on which it relies. That is exactly what the climate negotiations try to realise.

Governments try to agree on the maximum scale of greenhouse gas (GHG) emissions for the world economy. Climate scientists can more or less compute how much GHG the world&#39s atmosphere can stomach before temperature will rise two degrees Celsius. Governments base themselves on this knowledge to agree on a maximum of GHG emissions.

The second step is a fair distribution between countries of the right to pollute, or of the "sink capacity" for GHG of the world&#39s ecosystems. This too will be the result of hard and complex negotiations between governments. Fair distribution is central to the ecological economy.

After these two steps have been taken, governments have to decide how they can reach their national emission target. Here too, governments play a pivotal role. They can stimulate their economy in the right direction by changing the prices in such a way that they reflect real costs. A carbon dioxide (CO2) tax per tonne of CO2 emission would be the best way to steer the economy in the right direction. If that proves impossible, total permitted emissions have to be distributed among polluters. Only if this happens can market mechanisms do their job.

Governments play a crucial role also in the development, demonstration and diffusion of green technologies. They finance fundamental research that may not lead to profits in the short run, and they play a role as first users, and in so doing create a market for eco-technologies. Thirdly, they can stimulate large-scale use of green technologies through subsidies. All this accelerates the process of scaling up the production of eco-technologies and bringing down the price per unit.

The European Union seems to be playing a leading role in multilateral environmental governance, whether it is in financing the world&#39s Multilateral Environmental Agreements (MEAs), or in taking the lead in negotiating processes leading up to new agreements. Lately the EU announced it will reduce its greenhouse gas emissions by 20 percent by 2020.

This green choice is at odds with another priority of the EU: stimulating trade, whether inside the EU or internationally. Traditionally the EU has been a leading actor within the World Trade Organisation (WTO), asking for more free trade (except for agricultural products).

The question is how the EU will reconcile these two priorities. If you stimulate trade, you stimulate the production of GHG, because goods have to be transported by lorries, ships, trains or, worst of all, planes. The EU was also a staunch supporter and initiator of the liberalisation of air travel inside the EU: this has democratised prices of airfares, and enormously driven up the number of flights and hence pollution.

On the global level there is an even more fundamental problem. The WTO is a strong organisation: all its members have to accept almost all of its rules. That is no small thing: the World Trade Agreement of 1994 ran into 26,000 pages. All these rules are not just words, because the WTO harbours a kind of court that can punish (commercially) countries that don&#39t respect its rules.

World environmental governance is very different from that. First, there is no world environment organisation, so countries just ratify the MEAs they like. Second, even if a country ratifies a MEA, there are no real sanctions if it doesn&#39t live up to its obligations under it. &#39International shaming&#39 is the only sanction.

The Kyoto protocol is the only partial exception to this rule: countries that lie about their emissions will be excluded from international emission trading, and hence have to realise their emission target on their own territory.

This difference between hard WTO rules and soft environmental rules can create economic tensions: if EU steel becomes more expensive because EU producers have to pay more for their emissions than their Chinese or U.S. competitors, the global system in a way punishes the good environmental students.

José Manuel Barroso, president of the EU Commission, the executive arm of the EU, said in a recent interview that European producers don&#39t have to fear this; when it comes to climate policy, the EU will not allow unfair competition and will stifle import of steel or other products that are cheaper because they are climate unfriendly.

This sounds like a quite technical remark, yet it is like swearing in the neo-liberal church. Remember, the WTO axiom is that "thou shall not hinder trade unnecessarily". This axiom has often put national environmental rules under WTO pressure. Now we hear the president of the European Commission say that trade must be subordinated to ecological objectives. That&#39s new.

It remains to be seen what will happen if the EU wants to put respect for the climate above free trade. The U.S. has already signalled it will fight such EU moves through the WTO. On the other hand, Barroso&#39s words can also motivate countries such as the U.S. to agree to a post-Kyoto deal: not doing so risks putting world trade in stormy waters.

*John Vandaele is journalist with the Belgian magazine Mo*, and author of several books on globalisation, most recently &#39The Silent Death of Neoliberalism, 2007.