Harry Geels: Why is the climate transition so slow?

June 4, 2024

_{This column was originally written in Dutch. This is an English translation.}

By Harry Geels

Government patronization, the need for growth from the government and the banks, and the insatiable needs of consumers for more material and intangible growth are the three reasons why the climate transition is not accelerating. The solution for the climate is simple: tax pollution and the market will do the rest.

The climate transition is currently being tackled along roughly three routes.

First of all, it is done through more government regulations. In Europe, for example, consider the CSRD, which regulates the reporting obligation on criteria other than financial, and the CSDDD, which makes companies liable for abuses throughout the chain.

Secondly, it is done by large companies that have committed to the UN SDG agenda. Some out of a deeper conviction, others for more opportunistic reasons, because it fits in with marketing, or out of fear of negative press.

Finally, it is done by climate activists who use the courts to encourage companies to follow the climate objectives set by (supra)national governments.

These three routes involve major complications. The new rules lead on the one hand to additional costs for companies (and profits for consultants hired for this purpose), on the other hand to the need to arrive at all kinds of standards and taxonomies, which in turn has five deeper implications, including the issue of definition of complex and non-static matters.

The SDG agenda also suffers from a definitional issue. For example, certain SDGs can contradict each other. Questions can also be raised about democratic legitimacy. After all, we have never voted on this subject. Finally, the route to the court is also problematic. Many topics and definitions are not properly laid down by law and judges are allowed to fill this in. Climate control should not lie with the judges, but primarily with the market and secondarily with the government.

Three main causes for the difficult climate transition

The climate transition is going slowly, even far too slowly, according to climate alarmists. To solve the problem, we need to look at the root causes behind the slow transition. We roughly arrive at three 'inconvenient truths'.

Firstly, all kinds of rules and (SDG) agendas lead to all kinds of definition issues and discussions, which may or may not be fought out in court, resulting in delays. The more rules and agendas there are, the less freedom people have and the more complicated things become.

The second problem is the idea of ​​growth. And let's not blame capitalism for this. The biggest growth engines are the government, (central) banks and consumers themselves. The government wants to spend more and more, or has to because of more regulations, and therefore needs economic and nominal tax growth, with central banks facilitating this with an inflation target. The banks because of their revenue model: providing leveraged credit to invest or to consume extra.

Thirdly, there is the consumer, who apparently has unsatisfiable needs. Whether it's more stuff, personal development or travel, we want material and intangible growth. I have yet to meet the first employee who goes to his employer with a request to earn less because he wants to spend less to save the climate. The Wall Street Journal has nicely described our economy as the Taylor Swift economy. We love flying around the world to see Swift (or other artists) perform.

The solution is simple, but not easy

The only really effective solution is pricing externalities. This solution is, in the words of Warren Buffett – 'investing is simple but not easy' – simple and difficult at the same time. If we make polluting products more expensive and healthy and non-polluting ones cheaper, the sectors that suffer will try to defend their interests. But nevertheless, pricing will lead to the most efficient transformation. You'll be amazed at how quickly the aviation industry, for example, transforms when flying becomes three times more expensive.

And we should not save companies that are in danger of collapsing in such a transformation. Because that is a harmful form of 'corporate socialism', which again delays the climate transition.

Pricing externalities has been advocated by economists for decades, if not longer. Even by Nobel Prize winner Milton Friedman, the most famous supporter of the free market of the last fifty years. In this YouTube video of only two and a half minutes, he explains in his usual eloquent manner under what circumstances government intervention is necessary, namely when transactions between two parties (usually consumers and producers) lead to negative consequences for third parties, which applies to non-priced climate damage.

So not all government regulations are wrong. The trading of CO₂ emissions has led to a pricing of fossil emissions. And the EU regulatory framework for the Carbon Border Adjustment Mechanism may provide a level playing field for companies outside the EU that do not have to pay for their CO₂ emissions. New scientific research also seems to prove that external pricing works. The EU ETS reduced emissions by 14-16% with no discernible contraction in economic activity. We can set up similar mechanisms for nitrogen and the like.

This article contains a personal opinion from Harry Geels

More columns by Harry Geels