Initiatives to curb the anthropogenic greenhouse gas emissions that cause climate change have, since 1997, centered upon the implementation of top-down market-based solutions known generically as cap and trade. Theoretically speaking, cap and trade is based on the premise that climate change is best conceptualized as a case of market failure. As Nicholas Stern said, “The problem of climate change involves a fundamental failure of markets: those who damage others by emitting greenhouse gases generally do not pay.” This conceptualization, however, misapprehends the challenge of climate change because it doesn’t address the problem’s fundamental political dimension.
Cap and trade is built on a theory of economics known as game theory. Game theory is, as behavioral economics and moral psychology have empirically demonstrated, at best an unproven and, at worst, a disproven theory about the economic and political behavior of human beings and organizations. Therefore, cap and trade schemes based on creating a structure of top-down rational “incentive and coercion” market correction mechanisms are largely inadequate.
During the past decade and a half ”cap and trade” initiatives have proven to be a chimera. The most dramatic evidence of their failure can be found in the current malfunctioning of the European Union Emissions Trading System (EU ETS), the largest “cap and trade” system at work in the world today. EU ETS has become rife with “corruption and bad faith,” two irrational forms of human economic behavior known to behavioral economists as “animal spirits.” These refer not to illegal activities, but a distortion of the original or ostensible purpose of the system.
As Akerloff and Shiller point out:
“There are changes over time in the prevalence of bad faith economic activity that while technically legal, has sinister motive … Capitalism has at least one downside. It does not automatically produce what people really need; it produces what they think they need, and are willing to pay for. If they are willing to pay for real medicine, it will produce real medicine. But if they are also willing to pay for snake oil it will produce snake oil.”
Behavioral economics diverges from game theory by postulating that human beings and economic institutions cannot be theoretically represented as “homo economicus,” or rational egoist actors that weigh all options in terms of individual self-interest and the profit motive. In fact, human beings and their collective institutional arrangements are often governed by “irrational” psychological perceptions of reality. Economic actors can pursue their self-serving irrational goals relentlessly, ultimately leading to deleterious aggregate outcomes in the form of “boom and bust” business cycles or, as we argue here, climate change.
What seems like a “rational” solution to the problem from a game theory point of view doesn’t take into account the political context and structures in which economic systems (and thus the market) are embedded. The nation-state is the only force that can curb individual or corporate “rational egoist” behavior to uphold the common good, in this case, to mitigate climate change. But “cap and trade” has historically been enforced by international regimes that are, to a great extent, political empty shells. Deprived of a security mandate, territorial jurisdiction, and enforcement mechanisms, these governments are politically weak institutions likely to be captured by self-serving extractive economic and political elites. As Acemoglu and Robinson put it: “The synergistic relationship between extractive economic and political institutions introduces a strong feedback loop: political institutions enable the elites controlling political power to choose economic institutions with few constraints or opposing forces. They also enable the elites to structure future political institutions and their evolution.”
Climate Change As Security Dilemma
Top-down “cap and trade” initiatives backed by toothless international negotiations are not the way to go strategically in the current political and economic context. What, then, would be a more realistic or viable strategy? Climate change, we argue, should be thought of as a “security dilemma.” When seen through this perspective, the key issue becomes not how to curb carbon emissions but how to build a political coalition that can check the “animal spirits” of powerful extractive political and economic elites for the common good. Market failure, in other words, is just the economic consequence of the security dilemma, not its cause.
A security dilemma with regard to climate change emerges when a given political system is trapped in double-bind reasoning. If a nation-state chooses to do nothing about climate change, a deteriorating environment will almost certainly lead to a national security crisis. If, however, the nation-state decides to act unilaterally against climate change, it is perceived to lose economic competitiveness with regards to other nation-states and thus its national security is undermined.
Consider George W. Bush’s reasoning regarding international climate negotiations: “Unless China and India are at the table, unless they agree to a goal, unless they agree to firm strategies to achieve that goal, then I don’t see how any international agreement can be effective.”
The security dilemma of climate change must be turned on its head such that decreasing dependence on fossil fuels fortifies national security and clean energy technology gives the US the “security edge” that nation-states seek to preserve their security. Inter-state competition, rather than cooperation, is the only way to achieve this transformation.
This contradicts the current strategy of “cap and trade” market mechanisms, which argue that international agreements on national limits, like disarmament treaties, are the only route to curb emissions. This is bound to fail. No state wants to lose the large capital investment from the fossil fuel industrial complex, or face the political backlash that will be incurred by transforming their economies away from dependence on dirty energy.
Only leading nation-states can end this stalemate by deliberately provoking a clean-energy “race” similar to the “arms” or “space” races that took place during the Cold War. Many groups closest to President Obama, ideologically speaking, may find the notion of deliberately fomenting and unleashing a clean energy race an anathema. Yet, we must not be scared of thinking outside the dogma of international relations theory. In this formula, a race between the most technologically advanced nation-states of the planet does not entail leaving the Earth’s atmosphere, but ensuring that everyone can continue to live within it.