Pension funds should urge governments to support new products and habits to reduce CO2 emissions
Trust that humanity can win the battle against climate change is evaporating in the summer heat. The blame game is already starting. Institutional investors claim a shortage of good projects (a familiar refrain). Governments are complaining that the financial sector isn’t doing enough. Here is an attempt to start a discussion.
Governments work with constraints. The budget and the public interest are the most important ones. Unfortunately, politicians have a self-imposed constraint also: time left until the next elections. This leads to sort-term thinking, often ending in static analysis: the ceteris paribus assumption theoretical economists make to keep their thinking systematic, even while acknowledging that in reality, the assumption does not hold.
To illustrate the constraint, only a decade or two ago, solar and wind energy were shrugged off as alternatives for fossil fuels as way too expensive.
Today, both solar and wind energy are cheaper than fossil fuel. These technologies achieved scale advantages. They could do that because of government support – subsidies, seed capital or the legal obligation to treat consumers fairly when they overproduce energy.
The instrument mix varies from country to country. In a dynamic analysis, with growth having an influence on price, the support policies to new technology were a smashing success, while static analysis predicted disaster.
The new technology had an effect on CO2 emissions, but also provided new jobs and lowered the cost of energy.
Today, there are many similar cases. As one example, cultivated meat (meat grown in a laboratory from a few cow cells) is admitted only in Singapore. Why is a product that is considered safe in Singapore considered potentially dangerous in the EU, US and Japan?
If a new medicine is found against a lethal disease, terminally ill patients may be granted access to it before all tests are completed. Now that mother earth is sick and lives are also at stake, why is there no similar exception?
The inconvenient truth is that markets are imperfect and political dogma has no problem accepting the consequences of permanent climate change: death, fugitives, damage and disruption, as long as they occur after the next elections.
Honest economists have known before they went to university that demand and supply curves are a tool for (static) analysis only. They do not exist in reality. Even where they do exist, they don’t work because of factors like quality issues, marketing, snobbism, inertia or uneven distribution of the goods.
Why would anyone buy mineral water when tap water is at least as good?
Moreover, one type of political dogma holds that the state should do as little as possible, which is a recipe for inefficient markets. New technology is a good example. Present market players always have a strong incentive to throw up high barriers to entry for new players, including those offering new technology.
That is not in the public interest. Therefore, the task of the government to keep artificial barriers at a minimum and promote new technology.
An easy way to do this is legislation. If concrete can be made carbon-absorbing by mixing in biochar (oxygen-less produced charcoal from biological waste), central and lower government should be obliged to use such concrete only and private concrete plants should be obliged to buy biochar from their clients at a fair price.
Governments can and should influence consumption. Think of an account that gathers points when you take a long-distance train and loses points if you take an airplane.
Or imagine the colour of cars’ licence plates indicating their fuel: brown/copper for diesel and petrol; white/silver for hybrids; yellow/gold for non-fossil fuel. A score for the energy efficiency of houses should legally be included in real estate sales offers. Food labels ought to indicate CO2 emissions caused by the product.
In August 2022, research conducted by the Pew Research Center found that a median of 75% in 19 countries across the world label global climate change as the most important threat, beating fake news, cyber wars, the economy and contagious diseases.
Politics is running behind that thinking. Now that governments need institutional investors to finance the struggle against this major concern, there is an opening for pension funds, through their national organisations, to let their own government know what they need – policies for scaling up new technologies and creative measures to steer consumption.
Peter Kraneveld is an international pensions adviser at Prime BV