Could destruction help the economy grow?

Economic growth and environmental degradation : The price of CO2 can break the Gordian knot

Graciela Chichilnisky is Professor of Economics and Mathematical Statistics at Columbia University and a co-author of Reversing Climate Change. Peter Bal is a co-author of Reversing Climate Change.

The climate crisis and the 2008 financial crisis are two sides of the same coin. Both have the same toxic characteristic of the prevailing economic model: the practice of not thinking and acting in a forward-looking manner.

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In a way, both crises stemmed from the same event: the creation of a new international order after World War II. The Bretton Woods institutions on which this order was based - the World Bank and the International Monetary Fund - promoted rapid globalization characterized by a sharp increase in commodity exports from the global south to the global north. The revival of neoliberal economic policies - including the removal of trade barriers, widespread deregulation, and the abolition of capital controls - in the late 1970s accelerated this process.

Growth and development were encouraged - but it had major disadvantages

Although this system promoted growth and development of the economy, it had serious drawbacks. Innovative financial instruments were always one step ahead of any regulation, allowing the financial industry to expand its influence on the economy, take massive risks and make big profits. That eventually led to the 2008 crisis that brought the global financial system to the brink of collapse. Since the system was not reformed in a meaningful way, acute systemic risks still exist today.

In the environmental sector, the rampant extraction of resources destroyed the ecosystems of developing countries and at the same time promoted the rapidly increasing consumption - especially of energy - in industrialized countries. Today, although the developed economies only make up around 18 percent of the world's population, they consume around 70 percent of the world's energy, the vast majority (87 percent) of which comes from fossil fuels.

The solution to the problem boils down to one consideration: maintaining current economic prosperity. The realistic solution to the climate crisis is therefore to replace fossil fuels quickly and inexpensively with renewable ones to such an extent that the engines of growth continue to run. The key to this is a global carbon market.

The 1997 Kyoto Protocol attempted to use a system of tradable quotas to price CO2 emissions. While several countries refused to join the protocol, the carbon market that was created helped make clean energy more profitable and dirty energy less profitable. The world built on this work: The value of the globally traded markets for CO2 certificates rose by 250 percent last year and now exceeds 178 billion dollars annually.

The Gordian knot of economic growth and environmental degradation can be cut

A revitalized global carbon market would help break the Gordian knot of economic growth and environmental degradation. It would also cost practically nothing to create and operate a system with market-based efficiency. Such a system would appeal to developed economies while developing countries would support it because binding emission limits would only apply to high- and middle-income economies.

The potential of a global CO2 market continues to grow. Last year, the US National Academies of Science, Engineering, and Medicine and the Intergovernmental Panel on Climate Change reported that "negative emission technologies" that remove and store CO2 from the air could be safely scaled to a significant portion of total emissions to deposit and save. This process would be so inexpensive that the separated CO2 could be sold at a profit.

The UN is considering other green markets

Of course, the CO2 emissions are not the only cause of the climate crisis. Other green markets can also be created. Even before the Kyoto Protocol, the Chicago Board of Trade created a private market for rights to emit sulfur dioxide. The UN is now considering using markets to protect biodiversity and the watershed.

By enabling actors to buy and sell rights to use the global commons, green markets naturally combine efficiency and equity. Yet the persistent north-south divide - and especially the rift between the US and China - is hampering our ability to realize its potential. We have the means to stop and even reverse climate change. It is time to come together and take advantage of them.

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