As William Nordhaus illustrated in his Nobel award address in December last year, the free-rider problem is particularly severe for climate change. Those who do nothing ride free, while those who undertake costly reductions pay dearly. If an important player does not go along, the others could establish a climate club with penalties in the form of tariffs for the free rider.
On June 1, 2017, President Trump announced his intent to withdraw the United States from the Paris Agreement. This intent was reiterated in a December 2018 meeting of the Parties. Thus, the US is on the trajectory of becoming that free rider.
From a strategic point of view, we are reminded that "economic elites and organized groups representing business interests have substantial and independent impact on US government policy, while average citizens and mass-based interest groups have little or no independent influence." (Gilens 2014) Given the present situation and dynamics of free riders, the critical question is: where are the US economic elites going? Strangely, my impression is that our economic elites are in a bind.
Indeed they obtained huge benefits through the Tax Cuts and Jobs Act of 2017. The nonpartisan Congressional Budget Office reported that under the Act, individuals and pass-through entities like partnerships and S corporations would receive about $1,125 billion in net benefits (i.e., net tax cuts offset by reduced healthcare subsidies) over ten years, while corporations would receive around $320 billion in benefits. The only catch here is that this represents a continuation of the story of economic inequality. The top one percent had real income after transfers and taxes, 225 percent greater than that in 1979 as compared to 41 percent for the middle class. From 1989 to 2018, the top 1 percent increased its total net worth by $21 trillion. The bottom 50 percent saw its net worth decrease by $900 billion over the same period, in 2018 dollars (Bruenig 2019). The American dream of upward mobility has been dramatically weakened, with many families taking on multiple jobs trying to pay higher education, health care, and adequate housing. Some financial elites are beginning to wonder if this is good for America and the market. "Shortsighted executives may be satisfied with an American economy whose firms win in global markets without lifting US living standards. But any leader with a long view understands that business has a profound stake in the prosperity of the average American.” (Vladmanis 2014)
Another part of the economic elite, the managers of Big Oil have been hyper-active, promoting more sales of fossil fuels and the weakening of environmental regulation involving their products. The petroleum industry may have made a compromise with the automotive sector, avoiding two auto emission standards and two markets for future vehicles, an absurd and anti-economic situation, apparently finally abandoned thanks to the resistance of California and other states. Naturally, carbon pricing is off the agenda, along with modifying the massive oil subsidies.
Big Tech, another critical component of the economic elite, has avoided any constraining legislation. What Tech, and all of us, did not get with Trump was an infrastructure program, which could have had many features of a green economy, such as the use of more renewables, decentralized energy production, energy-efficient buildings. Of course, the oil industry would be opposed to this version of infrastructure.
Big Tech does not conduct a significant amount of research on climate change. Some loners, like Bill Gates, through his foundation, are running some pilot experiments. Tech may believe that science and technology can solve everything. Still, it seems they are applying their new super tool, Artificial Intelligence, primarily to lower labor costs or to get more information about us consumers and forecast (and change) our purchasing habits. If one takes climate change seriously, they are solving the wrong problems. Are they going to sit out climate change in fire-protected villas, or allocate needed funds for technological research on climate warming? What about supporting an ARPA for climate research?
International banks are getting a bit uneasy about the prospects of the fossil fuel industry. In a new draft policy, the European Investment Bank pledged to stop funding of fossil infrastructure projects by the end of next year. In addition, stock prices of the oil and gas sector of the S&P total markets index have been declining five years for a variety of reasons, but one issue is what happens if there is more adherence to the Paris Agreement. Some banks are prohibiting investments in new coal projects, the most damaging source in terms of local air pollution and deaths. Instead, they are actively financing renewable energy projects.
Recently 225 of the world's largest 500 companies, participating in a continuing disclosure survey for climate change, reported substantial risks to climate change but with potential opportunities outweighing the risks. They also had higher rates of board oversight and stakeholder scrutiny of climate-related issues and higher rates of potential reputational risks. "The top four drivers for potential financial impact are increased revenue through demand for low emission products and services; better competitive position to reflect shifting consumer preferences; increased revenue through new solutions to adaption needs; and increased capital availability (as more investors favor low emissions producers)." (CDP 2019). These global producers appear to operate in an environment quite different from the US situation.
In my opinion, the primary short-term stumbling blocks for the US economic elites are the economic and international uncertainties generated by the Trump administration. A return to protectionism is not helpful, nor is the lack of trust of America in trade and foreign relations. This could be improved with new elections.
Two essential issues remain: how to deal with climatic and economic injustice. Mother nature will keep reminding us of our progress, or lack thereof, in combating climate warming. All the recent forest fires from Brazil to California should be a wake-up call. The hollowing out of the middle class, also due to unfavorable globalization, is not going away and may eventually find a more articulate political voice.
In other words, the US economic elites, at least in part, could go for green infrastructure, some carbon taxes, and higher income (lower taxes) for the middle and lower classes. It is a shift to the left but in their best interests and more in line with the international situation. This implies a potential conflict of interests between the oil industry and the others.
What the economic elites, and many others, keep underestimating is the race against time with climate change. Not only does it cost much more if you delay investing in climate abatement, but there may be a point where it will become apparent that additional economic growth is the problem.
Energy intensity is declining at around 0.4 percent a year. To hit midcentury global de-carbonization targets, global energy intensity needs to decline by between 4 and 10 percent a year. That means the world should accelerate efficiency and electrification rates by about ten times (REN21 2019). Diverse rebound effects are working against rapid improvements in energy intensity, as reported by the European Environmental Bureau (Parrique 2019). Not meeting these targets implies a much warmer climate, higher costs, lower productivity, and even more drastic needs for intensity reductions, which we eventually may not be able to achieve.
If we get to the necessity of de-growth, this will challenge our traditional capitalistic model and make the economic inequalities practically impossible to justify. The kings indeed will be nude. United consumers and labor unions may make a difference in forcing a change in the model, as occurred in Germany where labor participates in management.
Economic elites, what is your next move? Drifting towards a free rider or doing something that maybe your children could live with?
Bruenig M. 2019, June 14, 2019. People’s Policy Project.
CDP 2019, Carbon Disclosure Project, Major Risks or Rosy Opportunity?, Report 20.
Gilens M. and Page B.I. 2014, Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens, DOI, published online by Cambridge University Press: September 18, 2014.
Parrique T., et al., 2019, Decoupling Debunked, Report of European Environmental Bureau, June 2019.
REN21 2019, Renewables 2019 Global Status Report, ISBN 978-3-9818911-7-1.
Valdmanis R. 2014, Reuters US, September 8, 2014.