A man stands in front of a chemical factory as it discharges exhaust into the air of Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Dumping Capitalism Won’t Save the Planet

BloombergOpinion

(Bloomberg Opinion) -- It has become fashionable on social media and in certain publications to argue that capitalism is killing the planet. Even renowned investor Jeremy Grantham, hardly a radical, made that assertion last year. The basic idea is that the profit motive drives the private sector to spew carbon into the air with reckless abandon. Though many economists and some climate activists believe that the problem is best addressed by modifying market incentives with a carbon tax, many activists believe that the problem can’t be addressed without rebuilding the economy along centrally planned lines.

The climate threat is certainly dire, and carbon taxes are unlikely to be enough to solve the problem. But eco-socialism is probably not going to be an effective method of addressing that threat. Dismantling an entire economic system is never easy, and probably would touch off armed conflict and major political upheaval. In the scramble to win those battles, even the socialists would almost certainly abandon their limitation on fossil-fuel use — either to support military efforts, or to keep the population from turning against them. The precedent here is the Soviet Union, whose multidecade effort to reshape its economy by force amid confrontation with the West led to profound environmental degradation. The world's climate does not have several decades to spare.

Even without international conflict, there’s little guarantee that moving away from capitalism would mitigate our impact on the environment. Since socialist leader Evo Morales took power in Bolivia, living standards have improved substantially for the average Bolivian, which is great. But this has come at the cost of higher emissions. Meanwhile, the capitalist U.S managed to decrease its per capita emissions a bit during this same period (though since the U.S. is a rich country, its absolute level of emissions is much higher).

Dumping Capitalism Won’t Save the Planet

In other words, in terms of economic growth and carbon emissions, Bolivia looks similar to more capitalist developing countries. That suggests that faced with a choice of enriching their people or helping to save the climate, even socialist leaders will often choose the former. And that same political calculus will probably hold in China and the U.S., the world’s top carbon emitters — leaders who demand draconian cuts in living standards in pursuit of environmental goals will have trouble staying in power.

The best hope for the climate therefore lies in reducing the tradeoff between material prosperity and carbon emissions. That requires technology — solar, wind and nuclear power, energy storage, electric cars and other vehicles, carbon-free cement production and so on. The best climate policy plans all involve technological improvement as a key feature.

Recent developments show that the technology-centered approach can work. A recent report by Bloomberg New Energy Finance analyzed about 7000 projects in 46 countries, and found that large drops in the cost of solar power from photovoltaic systems, wind power and lithium-ion batteries have made utility-scale renewable electricity competitive with fossil fuels. A 76 percent decline in the cost of energy for short-term battery storage since 2012 is especially important.

In a blog post, futurist and energy writer Ramez Naam underscores the significance of these developments. Naam notes the important difference between renewables being cheap enough to outprice new fossil-fuel plants, and being inexpensive enough to undercut existing plants. The former is already the case across much of the world, which is among the reasons for an 84 percent decrease in the number of new coal-fired plants worldwide since 2015.

But when it becomes cheaper to scrap existing fossil-fuel plants and build renewables in their place, it will allow renewables to start replacing coal and gas much more quickly. Naam cites examples from Florida and Indiana where this is already being done. He cites industry predictions that replacing existing fossil-fuel plants with renewables will be economically efficient almost everywhere at some point in the next decade.

Electricity is far from the only source of carbon emissions — there’s also transportation, manufacturing (especially of steel and cement), home and office heating, and agriculture to worry about. But the rapid advance of solar technology is a huge victory in the struggle against climate change, because it will allow people all over the world to have electricity without cooking the planet.

And how was this victory achieved? A combination of smart government policy and private industry. Massachusetts Institute of Technology researchers Goksin Kavlak, James McNerney and Jessika Trancik in a recent paper evaluated the factors behind the solar-price decline from 1980 to 2012. They concluded that from 1980 to 2001, government-funded research and development was the main factor in bringing down costs, but from 2001 to 2012, the biggest factor was economies of scale. These economies of scale were driven by private industry increasing output, but with government subsidies helping to increase the incentive to ramp up production.

It’s apparent, therefore, that both government and profit-seeking enterprises have their roles to play. Government funds the development of early-stage technology and then helps push the private sector toward adopting those technologies, while private companies compete to find ever-cheaper methods of implementation. Instead of eco-socialism, it’s eco-industrialism. If there’s any system that can beat climate change, this looks like it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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