Economics and politics - comment and analysis
7. May 2021 I Heiner Flassbeck I Climate change, Economic Policy

Climate change politics lack economic rationale

Cross-posted from Brussels Morning (


The coronavirus pandemic is a setback for the environmental movement as it shows how governments can disrupting economic activity but fail to manage major economic transitions.

US President Joe Biden has brought new momentum to the climate change debate by calling on developed economies to scale up efforts to move away from fossil fuel-based economies. What he did not say, however, is how and whether the global community will reduce the scope for free risers to exploit this effort.

Without being specific, it is easy to declare good intentions and buy into the demands of climate research but such studies are only the beginning. Everything that comes after the realisation that humans are emitting more CO2 than the Earth requires is about economics. But there is a strange vacuum present with few if any voices seeking to use scientific economics to clarify whether what is so vehemently called for is workable.

How to get mass numbers of people to fundamentally change their behaviour is a profoundly scientific question. Identifying the conditions for such change and assessing its impact is now the task at hand. For nearly 200 years, the bulk of humanity has linked its intellectual energy almost indissolubly to fossil energy to raise the standard of living for the population. This association has resulted in a vast complex of interdependencies that even the American president cannot simply cut like a Gordian knot without causing new harm to people and the climate movement.

COVID-19 setback

The shock of the coronavirus pandemic was a masterclass in how not to respond to any economic shock, and arguably it has been the greatest economic shock for the world in peacetime. The resulting economic impact of restrictions imposed to help stem the virus is likely to set back the climate movement for many years to come.

There are some who see in the pandemic-induced shutdowns and lockdowns a less hectic and agitated world with no contrails from aeroplanes in the sky. But this is a grandiose misconception. Those who have enjoyed the standstill forget about others plunged into existential hardship due to inactivity, such as the entrepreneurs striving to keep their businesses afloat or employees losing their jobs.

The pandemic-induced shock imposed by the state also had its effects dampened by the state, albeit at an enormous cost. The event will go down in history as the classic example of how states create unhappiness and unemployment with unilateral interventions in the economy, without governments being able, even with the use of enormous sums of money, to prevent the worst from happening. Anyone who comes along in the future with the claim that the state must stop economic activity because it is environmentally harmful and detrimental to climate will be presented with the example of our current predicament.

Unemployment is the natural enemy of the environmental movement. Those who want to impose structural change at the cost of many individual jobs must provide employment elsewhere to make structural change bearable for the masses. However, the economic policy failures of governments in the coronavirus crisis and the subsequent rise in unemployment dramatically diminish the credibility of any policy that demands adjustment from the population while promising compensation from the state.

Structural change and pricing

Combating climate change requires a global economy deeply entangled with fossil energy to make massive changes toward a non-fossil fuel mode of production. However, this structural change does not simply fall from the sky or can be achieved through appeals and demonstrations. Changes with global impact require a global message to all economic actors delivered in a manner that leaves no room for misunderstandings. In a market economy, that unambiguous message is pricing.

Global prices for fossil fuels must rise sharply, for decades, and faster than average incomes, hindering consumers’ access to these energy resources. The world is currently far away from such real oil-gas-coal price surge compared to price levels over the last 50 years. The real price of oil, driven in part by financial speculation, is currently lower than in the early 1970s, not to mention the real price of coal. As long as this does not change, there is no need to even think about individual actions such as shutting down coal-fired power plants or switching to electromobility in one country or one region.

Anyone who believes that a person, a company, a country, or a region can make a so-called ‘contribution’ to improving conditions through individual activity is fundamentally wrong. One may soothe one’s own conscience by behaving in a climate-friendly manner, but one should not believe that this is a ‘contribution’. Scientific thinking on what makes a planetary impact will reveal such thinking as a grandiose error.

As long as there is no concerted worldwide action on both demand and supply level to override the current fossil fuel market, thinking we can go it solo as a nation with the help of small acts of altruism is illusory. If there is no global mechanism for fossil fuel management, every saving at home is an invitation for someone else in the world to consume more. What the world needs is nothing less than supply management in line with the world’s climate goals so that fossil fuels stay in the ground and real prices rise for many decades, redirecting demand without compromise. Less than that is too little.

The declaration of intent solemnly made by nearly every country in the world in Paris in 2015 was also clearly not enough. There was no willingness even to approach the hot topic of fossil fuel markets; there is no question at all of anyone trying to talk openly with producers about the issue of supply reduction. On a UN level, I have personally attended discussions over fossil fuel prices and their control. Whenever I brought it up, it was immediately wiped off the table because it seemed politically too ‘sensitive’ for those in positions of responsibility.

As the example of the yellow vests movement in France indicates, control over fossil fuel prices is politically possible only when the burden on lower-income households is managed to avoid a disproportionate contribution concerning their income. But this discussion is a political taboo among most political parties, so their political messaging must be put into perspective.

Whole greater than the sum

What macroeconomists consistently preach is that you cannot readily infer the whole from one part — that also applies to climate politics. If one cannot enforce global regulation on companies and consumers on fossil fuels, the individual is completely powerless. At first glance, this is frustrating because many would like to do something with their own resources to move things forward. But if many people focus on their personal circumstances, they will not be able to make a big impact. It is always better to get politically involved so that more people become aware of what is economically and politically necessary.

The moral of this appeal at the micro-level is completely inappropriate. Feeling better about oneself is one thing, but pillorying others for seemingly unecological behaviour is quite another. If we can’t all join together in forcing our state — along with the rest of the world — to behave differently for everyone, we’ve also all failed together, no matter how we’ve behaved in our personal lives. Ignorance does not protect against complicity.