Keynsian economics solve climate change – its try or die

Of the three short, medium and long-term policy categories outlined above, neoclassical economics is only useful for assessing the one that considers the medium term; and only then for price-based policies. However, all three of the policy areas outlined above play in some way to the relative strengths of post-Keynesian economics. The first, short-term policy area relates strongly to human behaviour. Many of the lowest-cost ways of reducing greenhouse gas emissions are through efficiency measures. These efficiency measures are often cost-effective but in the current market are not taken up. The reasons for a lack of take-up are regarded by mainstream economics as market failures (and ignored altogether in CGE models). Examples include information gaps (e.g. most householders do not know how to improve the efficiency of their homes). Some groups may lack the necessary access to finance and there are also principal agent problems relating to rented homes. In contrast to the results from current neoclassical models, it seems pretty clear that leaving things to the market will not produce the best outcomes. The second, medium-term policy area is more relevant to the decisions taken by firms. Pricing instruments may help to guide these decisions but there are other factors too. For example, institutional structure is important. The degree of competition in a particular sector can impact on outcomes. Policy makers usually wish to know where the costs of decarbonisation will be borne; assumptions about perfect competition and the full pass-through of economic costs do not provide useful information on this topic. Finally, technology development will be critical to any successful decarbonisation strategy. Assessments that do not include endogenous representations of technology development will provide a biased estimate of the outcomes for implementing climate policy. The issue of finance cuts across all three policy areas. A transition to a low-carbon economy will require substantial amounts of investment (see e.g. IEA, 2018) and the global economy is likely to become more capital-intensive and less energy-intensive. Without an understanding of how the financial system works, it is not possible to provide a realistic assessment of the main decarbonisation policies (Pollitt and Mercure, 2018). In particular, the ‘crowding out’ effects of investment in neoclassical models (in which a fixed money supply dictates that higher energy-sector investment leads to lower investment or consumption elsewhere) is one of the main drivers of negative outcomes in their results, but also at odds with the observed reality. The indicators that policy makers require are in general similar to those that Keynes originally set out to address. First and foremost, elected officials and civil servants both focus primarily on the number of jobs created and lost. After that they need a range of socio-economic indicators that show both the absolute levels and distributions of wealth within society. Nevertheless, despite all the advantages that post-Keynesian economics has to offer, it remains the case that the majority of policy analysis carried out is based on CGE models and other optimization based approaches. This can sometimes lead to rather dubious policy conclusions. For example, analyses conducted by global institutions often use CGE analysis to show that carbon taxes provide the ‘optimal’ way in which to reduce emissions. However, this analysis is doing little more than reproducing the neoclassical assumptions on which the model was founded. In addition, the set-up of CGE-based analyses typically rule out the possibility of green-growth and environmental double dividends by assumption. Every policy that is entered into the model (usually a carbon or fuel pricing measure) acts as an additional constraint on the model’s optimisation, meaning that results can only get worse. This has led to a popular conception that climate policy can only have negative economic impacts, and the role for policy makers is to minimise the costs. In reality, there is little evidence from anywhere in the world that climate policy has led to substantial reductions in GDP and household incomes.