Environmental degradation – neoliberalism erodes governmental capacity to make the transformative changes necessary to solve escalating environmental crises

Anders Fremstad and Mark Paul, “Neoliberalism and climate change: How the free-market myth has prevented climate action,” Ecological Economics, vol. 197, June 2022, pp. 2-3, https://www.sciencedirect.com/science/article/abs/pii/S0921800922000155?fr=RR-1&ref=cra_js_challenge.

Yet how the ideas of neoliberal thinkers have influenced climate policy remains an open question. While neoliberal thought promotes individual agency, unleashing individualism also generates externalities (Vatn and Bromley 1997). Hayek largely ignores externalities; however Hunt and d’Arge (1973) argue in their seminal paper, externalities are indeed pervasive throughout market transactions. Firms, households, and governments have exploited fossil energy—and the lack of regulation or pricing—to make climate change “the greatest market failure the world has seen” (Stern, 2007). To contribute to the literature on neoliberalism and climate policy we identify and focus on three tenets of neoliberalism that hamper action on climate change. By adopting these ideological tenets, the United States became a neoliberal outlier in general and a rogue state on climate in particular (MacNeil and Paterson, 2012).

Neoliberalism has frustrated efforts to reduce emissions through ideological arguments to:

1. Decentralize democracy: A feature of the neoliberal order has been the systematic decentralization of government to mitigate “government failure.” Neoliberalism has promoted federalism to subject the state to market forces, which has exacerbated a race to the bottom in climate policy.

2. Defund public investment: Neoliberals dismantled the Keynesian consensus that the state has a major role to play in providing public goods, stabilizing the macroeconomy, addressing pervasive externalities, and solving coordination problems. Government investments are rejected as expensive and wasteful, crowding out productive private investments.

3. Deregulate the economy: Neoliberalism has launched a concentrated attack on the government’s ability to regulate the economy. Rather than viewing regulations as useful tools to shape markets, neoliberals dismiss government regulations as “red tape” that increases the cost of doing business and weakens the economy. Prominent economists have made arguments for each of these tenets. This paper engages with each of these arguments, while also making the case that subscribing to each of these tenets exacerbates the climate crisis.

While we focus on the U.S. in this paper, a brief look at cross-country data suggests there is a relationship between these pillars of neoliberalism and action on climate change. Fig. 1 shows a negative correlation between neoliberalism and climate change performance, with more neoliberal countries like the U.S. and Australia scoring much worse than social democracies like France ?thyc=5?> and Finland. Our sample is restricted to high-income countries, leaving out many large economies, including China, whose degree of neoliberalism would be difficult to classify along our dimensions.4 Despite significant variation in climate change performance, we recognize that none of the countries are on track to meet Paris Agreement stipulations to limit global temperature increases to “well below 2 degrees” (United Nations Framework Convention on Climate Change, 2015). Finally, the strength of the correlation depends on how exactly neoliberalism and climate action are quantified. Nevertheless, Fig. 1 suggests that we may fruitfully study the relationship between neoliberalism and decarbonization by focusing on the U.S. case—an outlier in terms of both neoliberalism and climate inaction. The purpose of this paper is not to quantify the relationship between neoliberalism and climate inaction but to investigate how neoliberal ideology constrains the collective action necessary to decarbonize the economy.

Economists’ support for these neoliberal tenets helps explain why so many disagree with climate scientists and the public about what policies are needed to meet emissions targets and curtail the climate crisis. Most scientists view climate change as an existential threat that justifies a broad range of policies. The 2018 IPCC report notes that limiting warming to 1.5 ◦C would require “a wide portfolio of mitigation options and a significant upscaling of investments in those options” (Intergovernmental Panel on Climate Change (IPCC), 2018, 15). The IPCC calls for “urgent action” through “cooperative policy environments that transform both the supply and demand side” of the fossil fuel economy (Intergovernmental Panel on Climate Change (IPCC), 2018, 32). Although the IPCC does not lay out how exactly the global community should pursue decarbonization—this is not, after all, its role—it does not see carbon pricing as a panacea, but rather as one tool in policymakers’ toolkit, along with multilevel governance, regulations, and public investment (Intergovernmental Panel on Climate Change (IPCC), 2018, 33).

While the Intergovernmental Panel on Climate Change (IPCC) (2018) frames the climate crisis as requiring “systems transitions” which are “unprecedented in terms of scale,” mainstream economists typically frame the problem more narrowly as a negative externality that simply needs to be internalized through the price mechanism. Mainstream economists, whom Naomi Klein refers to as “neoliberal economists” (Klein, 2014, 101), are skeptical of large-scale public investments or regulatory actions which they often characterize as “inefficient” (Arrow et al., 2009; Fischer and Newell, 2008). They promote carbon pricing as the only rational tool for reducing emissions. To be sure, a high carbon price could help decarbonize the economy, but this blunt tool disproportionately burdens low-income people5 and ignores important characteristics of real-world economies, including bounded rationality, asymmetric information, economies of scale, coordination problems, persistent unemployment, and other social dilemmas necessary to overcome in order to prevent climate catastrophe (Milinski et al., 2008; Moore and Diaz 2015; Paul et al., 2019; Ricke et al. 2018).

Economists’ neoliberal blinders may even explain their disagreement with climate scientists about the goals of climate policy. While scientists generally view 2 ◦C as the maximum acceptable level of warming, prominent economists argue that it would be “optimal” for the planet to warm more than 3.5 ◦C on the basis of Integrative Assessment Models (IAMs) that claim to balance the tradeoff between the cost of mitigating emissions with the benefit of a more stable climate.6 The most widely known IAM is the Dynamic Integrated Model of Climate and the Economy (DICE), developed by the recent Nobel Laureate, William Nordhaus. DICE suggests that the optimal price of a ton of carbon dioxide is currently $43 (Nordhaus, 2019), which would raise the price of a gallon of gasoline by approximately $0.43 (Fremstad and Paul, 2019) and put the world on a path towards 3.5 ◦C of warming by 2100 (and more thereafter). According to Nordhaus’s calculations, putting a price on carbon to limit warming to 1.5 ◦C is simply “not feasible” (Nordhaus, 2019). If carbon pricing at the level necessary to achieve rapid decarbonization appears infeasible, this paper suggests we call into question the ideological tenets that constrain climate policy and politics. In what follows, we investigate how the three tenets of neoliberal ideology constrain climate politics and how these barriers may be overcome.