The Climate Bargain Approach Towards A Sustainable Economy

Climate change is the most severe collective challenge that humanity has ever faced. If climate change is to be halted, our global economy must transition to a sustainable economy that is no longer dependent on fossil fuels. However, the investments required to achieve this transition are far from being met: Recent estimates of the required investments until 2050 vary from $4.5 trillion to $9 trillion, indicating that there is a massive gap in private investment in renewable energy projects. Furthermore, given experiences with decades of effectively empty international pledges and political inaction, there is significant doubt that a climate transition will succeed by 2050 as stated in the Paris Agreement. In light of this, a new approach to the climate transition has received significant support in recent years.

The central idea of this approach is that if the climate transition is to succeed, it must do so by enabling a win-win bargain between the emitters of greenhouse gases and current and future victims of climate change. The bargain entails that victims compensate emitters for shifting their investments from fossil fuels to sustainable investments. In return, victims will profit from the resulting impact of reduced emisions on climate change. Call this the “climate bargain” approach (CB). CB’s major appeal stems from the implicit promise to create a win-win opportunity for both victims and emitters, potentially breaking the decades-long political gridlock that has thus far hindered an efficient transition to a sustainable global economy. In fact,

CB’s central idea of promoting the climate transition without requiring sacrifices from either victims or emitters is deeply reminiscent of the “de-risking” paradigm which currently dominates global sustainable finance policy in almost all relevant national and international policy-shaping institutions. In the effort to incentivize private investors to fund risky sustainable projects, de-risking entails using scarce public resources to improve the risk-reward profile of low emission climate resilient investment and crowd-in private finance, which is done primarily via complex financial instruments. Given these parallels between the widespread de-risking policy paradigm and the philosophical and economic reasoning underlying CB, it is well worth subjecting the approach to philosophical scrutiny. This is the aim of this project.
 
CB rests on two foundational claims: First, the transition to a sustainable global economy can be achieved via a bundle of policies which generates win-win opportunities. Second, a policy bundle which will not generate win-win opportunities, and in particular, demand sacrifices from wealthy and politically powerful emitters, is politically not feasible. In the first stage of this project, I focus on the question whether CB generates win-win opportunities. CB fundamentally rests on insights drawn from the standard economic analysis of externalities. However, the political philosophy literature convincingly illustrates that standard economic theory on externalities (which CB ultimately rests on) often feeds off moral theory. An illustrative example are disagreements among economists regarding the external cost of emissions, which are typically traced back to moral disagreements about the rate at which future economic value ought to be discounted.

But normative disagreements can enter at a deeper stage: Both what we consider an externality and when we consider an externality eliminated depends on normative background assumptions. These include matters such as what effects of climate change ought to be considered “harmful”, the justifiability of initial property rights allocations over emissions, and what constitutes appropriate compensation for bearing external costs. Promoters of CB can only claim that CB is able to resolve the climate externality by staying vague on many of these issues.

Upon closer inspection, however, we have good reason to believe that CB will not deliver on its promise of win-win opportunities. Instead, CB will most likely create uncompensated losers who suffer primarily due to the side-effects of exacerbated inequality made possible by CB’s insistence not to impose any losses on the wealthy and powerful during the transition to a sustainable economy. These side-effects include adverse effects of inequality on democratic stability and intergenerational reciprocity. While the political philosophy literature on externalities is mature, very few of its theoretical insights on the impact of normative background conditions have been applied to the context of climate change and the transition towards a sustainable economy. Filling in this gap could have far-reaching ramifications for climate ethics and the economics of climate change in general.
 
The second stage of this project focuses on CB’s purportedly unique political feasibility. CB can be classified as a “realistic” non-ideal approach to the climate transition in the sense that it purportedly takes political feasibility constraints seriously and rejects political idealization. This move is motivated by the claim that unfeasible policy suggestions have little chance of ever being implemented and therefore carry little normative force. However, CB does employ economic idealization. CB’s reliance on economic idealization also impacts the normative force of the approach adversely.

The central problem here is that proponents of CB simply idealize away, for example, issues regarding transaction costs and rent-seeking by wealthy and powerful emitters. What we should reasonably expect from any climate transition policy is that its implementation will ultimately produce winners and losers. Because of CB’s naïve reliance on standard economic theory, it is likely that those who command little power in the international political realm will become the losers of the proposed climate transition. But if these outcomes are to be expected, CB’s overall desirability is questionable. The resulting suspicion is that economic idealization in CB amounts to what philosophers like Ingrid Robeyns calls “bad idealizations”: Idealization which arguably works to the advantage of those who are already benefitting from the current unjust arrangements and create an ideological bias in theory.