At the Limits of the Market: Why Capitalism Won’t Solve Climate Change, Part 1

One of the great mysteries of contemporary capitalism is the fact that as a system it appears absolutely incapable of responding to the crisis of climate change. Why can’t a system that made the automobile into an accessible mass consumer good provide us with clean and efficient mass transit, or at the very least electric cars? Why are we still burning coal, the energy source that drove the Industrial Revolution over 200 years ago? Where are all the new green enterprises leading the way into a low-carbon future?

From Joseph Schumpeter’s description of “creative destruction” to the fabled entrepreneurial powers of innovators like Steve Jobs, we’re accustomed to thinking that capitalism provides the social and economic framework that best nurtures human creativity and fosters technological innovation.

But with atmospheric concentrations of CO2 sailing past 400ppm and scientists warning of a global environmental catastrophe caused by the breaching of the nine planetary boundaries, the forces of the market are curiously silent.

To be fair, there is no shortage of innovation in green technology. Just recently, Australian scientists developed a printer capable of printing out sheets of thin, flexible solar panels that can be integrated directly into building construction materials. But while it sounds cool, the prospect of such technology rapidly scaling up and replacing fossil fuel use is limited by one overwhelming problem: profitability is the guiding force behind investment and production, even when the long-term costs massively outweigh the short-term gains. 

No longer are the long-term costs of climate change some abstract threat to be dealt with in the distant future. Earlier this year, the IMF released a report calculating that the damages incurred by climate change will cost $25 per ton of CO2 emissions. Other researchers put that number as high as $85. To put that into perspective, all of the bitumen in the Alberta tar sands amounts to an estimated total of 240 billion tons of CO2. While the oil companies are posting record profits now, we’re all going to be picking up an enormous tab later. [view:in_this_series=block_1]

It’s not that capitalism as a system makes us oblivious to the consequences of our actions. Quite the opposite: from market research to insurance to financial management, legions of people are employed in fields devoted to predicting and measuring the future.

Nor is the problem that corporations and investment banks are staffed exclusively by climate deniers—you’d be hard pressed to find a risk analyst at Goldman Sachs who doesn’t accept the science on climate change. Plus every major oil company has a climate change division devoted to calculating risk and making business plans for a warming planet.

Is it greed? It’s a tempting conclusion, particularly when we look at the spectacular excesses of Wall Street in an era of stagnant wages, precarious employment and rising living costs. But since capitalism is by definition a system of competitive profit maximization, what looks like greed from the outside is actually rational behavior; if one firm doesn’t pursue a profitable opportunity their competitors will, driving the first company out of business.

As with all complex systems, effects rarely have a single cause. But there is one explanation that’s increasingly difficult to ignore: capitalism cannot respond to the climate crisis because it is a system that seeks to commodify everything, including the negative consequences of the system itself.

Take derivatives as an example. In the United States, derivatives were originally developed as a hedging instrument to shelter farmers from the financial risks of a bad harvest. But derivatives have since evolved into a massive global market for managing all kinds of risk, with a total value between $600 and $700 trillion, according to the Bank for International Settlements. Other estimates put that value closer to $1.2 quadrillion, or more than 20 times global GDP.

The derivatives market is like a massive network of countless, interlocking insurance policies against risk, loss and negative outcomes of all stripes. Derivatives also double as a high-yield financial instrument for speculative investors.

But where we once thought of the careful calculation of risk as being at the core of capitalism, derivatives function to take uncertainty itself and turn it into a highly profitable commodity. With so many different companies purchasing derivatives as insurance policies, and banks and hedge funds then investing in the success or failure of those policies, the global derivatives market has become an incomprehensibly complex, high-stakes casino.

Even as extreme weather wreaks havoc on crop yields and threatens coastlines, new custom-made financial instruments offer the savvy investor the chance to profit from destruction. Weather derivatives offer both a profitable investment today and an insurance policy against future damages by flooding or drought. While the estimated costs of climate change continue to climb, the profits to be made by betting on those costs keep growing faster.

In effect, what we have is a situation in which investors are busy betting on what’s going to happen with the climate. Depending on how they invest, they can make money if things get worse or if they get better. If they pick the wrong horse, their bad investments can also be insured by purchasing still more derivatives.

When too many bets start going bad at the same time, as happened during the subprime mortgage crisis, the entire financial system is at risk. But the game is rigged: the now-familiar principle of “too big to fail” holds that governments will bail out megabanks and businesses when they go broke, and impose austerity policies on their own populations in order to pay for it.

Ultimately, this means that ordinary people bear the costs when the casino falls apart, but the financial players get all their bad bets reimbursed. If the costs of financial crises and climate change can be socialized while maintaining private profits, why bother with green energy and reducing emissions?

Developing new green technology, hiring workers and investing in new productive facilities involves a real risk: it may not be as profitable as purely speculative investments. With derivatives and the implicit backing of government removing the fear of failure for the world’s biggest corporations, there simply isn’t an economic incentive to make investment decisions that would help to avert climate catastrophe.

In the second installment of this post, we’ll look at a policy proposal that aims to make CO2 emissions too expensive to be profitable. By changing the structure of the market, can capitalism produce the solutions to the climate crisis?

Art by Will Brown. All Rights Reserved.