Market Failure

Market Failure

A discussion between Brett Christophers and Adam Tooze, moderated by Kate Aronoff, about the climate crisis and the limits of capitalism.

The following is an edited transcript of Market Failure: The Climate Crisis and the Limits of Capitalism, a conversation held on October 26, 2024, at The New School for Social Research. An audio recording of the conversation is available here.

Kate Aronoff: Brett, can you describe some of the themes and arguments in your book, The Price is Wrong?

Brett Christophers: Most anthropogenic greenhouse gas emissions are carbon dioxide, and most of those carbon dioxide emissions come from burning fossil fuels. The largest source of fossil fuel emissions is electricity generation, so electricity generation is at the heart of the climate crisis. Electricity is going to become even more important because of the way the world is predominantly going about decarbonization: the basic idea has been to electrify as much as possible across transportation, industrial processes, buildings, heating, and so on while generating that electricity without burning fossil fuels. Electricity is seen as the solution.

How are we doing globally with respect to electricity decarbonization? From a glass half-full perspective, decarbonization is happening much faster than we thought. Charts show rapidly upward-curving developments in investment in new renewable capacity and the generation of electricity from renewables.

But electricity generation from fossil fuels is still increasing, irrespective of the growth in renewables. For a number of years, energy forecasters have said, “electricity generation from fossil fuels will peak this year.” They said it in 2021, 2022, 2023, and 2024, and it still hasn’t happened—for many reasons, not the least of which is growing global demand for electricity of any type. Therefore it’s difficult to suggest that we are globally succeeding at electricity decarbonization. I’m sure that electricity generation from fossil fuels will peak any year now, but even then, if it only decreases slowly, we are still failing. The International Energy Agency’s latest World Energy Outlook indicated that everywhere in the world, we are miles behind where we need to be in terms of the growth of renewables to hit net zero by 2050—and the goal of net zero makes all sorts of assumptions about the success of various negative emissions technologies.

Why is electricity decarbonization happening much more slowly than it needs to? First, when it comes to electricity decarbonization, we are betting the farm on solar and wind. There are countries in which nuclear, hydro, and geothermal energy are important, but those technologies will not do the bulk of the work of decarbonization. Solar and wind, however, are expected to grow from 13 percent of energy generation today to more than 50 or 60 percent by the middle of the twenty-first century.

Second, we are, for the most part, relying on the private sector to achieve decarbonization. That doesn’t mean that governments are doing nothing: governments design and regulate electricity markets and provide support and subsidies to incentivize private-sector actors to accelerate decarbonization. But governments are not, with some notable exceptions (China being the most significant of these), doing it themselves. They are not putting decarbonization on the public balance sheet through public-sector financing, investment, ownership, and operation of solar and wind farms. Instead, they’re letting the private sector do it, and helping nudge it in the right direction. That’s the approach being taken in most countries, including in the United States.

Third, we are relying on the private sector operating in its existing form. There has been no significant reform of electricity industries and markets for the last couple of decades; no significant move to redesign how electricity is bought and sold. These existing structures are increasingly liberalized and deregulated.

There’s a dominant narrative that the obstacles to faster decarbonization are of a political and policy nature, like slow permitting to get solar and wind farms up and running. NIMBY interests are too powerful in kiboshing new developments. Vested fossil fuel interests have too much power in shaping the decisions of transmission grid operators. Crucial to this narrative is the idea that the problem is not economic, at least not anymore. Twenty years ago, it was much more expensive to generate electricity from solar and wind resources than it was from burning natural gas or coal. But since the mid-to-late 2000s, the cost of generating technologies has come down far and fast, principally due to developments in China. By the mid-2010s, it was as cheap, if not cheaper, to generate electricity from wind and solar as it was from natural gas and coal. By that point, we had effectively solved the economics and achieved grid parity. Therefore, as it went, the remaining obstacles could only be of a political or policy nature.

In my book, I argue that this narrative is wrong. That is not to say that obstacles such as permitting and vested interests aren’t significant. But the economics are still a problem, and the problem is one of profitability. It’s unhelpful to look at renewables predominantly through the lens of cost. When we look at profitability, renewables deployment is not a particularly attractive or reliable business.

I’m talking not about the manufacturing side of the business, but rather about the development of wind and solar farms, the ownership and operation of those farms, and the selling of the electricity that they generate over the course of their useful lives (the equipment typically lasts twenty-five to thirty years). This aspect of the business has some thorny profitability characteristics, and that’s an issue insofar as we are relying on the private sector.

When we think about electricity decarbonization, what happens in the Global South is more important than what happens in North America or Europe. The power sectors of countries across the Global South are much more fossil fuel intensive than the electricity sectors of countries in the Global North. Reasonable projections suggest that the bulk of future global growth in electricity demand will be concentrated in the Global South, where the most needs to be done and where the economic and financial challenges are greatest, not least due to the higher cost of capital.

Aronoff: What I found so useful about The Price is Wrong is how it offers a way to understand the broader approach that policymakers in the United States and the European Union have taken, most notably in the United States through the Inflation Reduction Act. The IRA was an attempt to court private investment through about $400 billion in tax incentives for a broad suite of green technologies, on the premise that many elements of decarbonization can be transformed into assets. The case of electricity helps us think through what that looks like in other sectors.

Former National Economic Council head Brian Deese, who was an advisor to the Kamala Harris campaign, described the legislation as aiming to “encourage private investment in clean energy. Tax incentives make the investments attractive,” he explained, “but businesses, along with rural cooperatives, nonprofits and others, must judge whether investing their own money in a hydrogen factory or a wind farm will pay off. In the end, the law will only be as successful as their appetite to invest at a scale that will meaningfully reduce the emissions warming the planet and increase the nation’s energy security.”

It’s nearly three years since the passage of the IRA, and the EU has adopted is own versions of it. How would you evaluate this period of the green industrial policy zeitgeist? How effective are the IRA and similarly imagined green industrial policies as tools for decarbonization? Are they just too small to work, or do they have fundamental design flaws?

Adam Tooze: One of the great things about Brett’s book is that it’s truly a global account. He situates the dilemma that he’s positing against the backdrop of the history of global energy regulation policy since the 1990s. This book should be taught on courses about neoliberalism. While some of the more disaggregated models of electricity provision in the United States and the United Kingdom became examples for other countries, this model separates generation from network and retail distribution, which are where many of the incentive problems are located. Part of the dilemma in the Global South is that its movement toward further disaggregation continues, whereas in much of the rich world we’re headed in the other direction because the problems with disaggregation are so evident. That’s the messed-up matrix within which policy must operate.

Brett brilliantly outlines the business models of NextEra Energy and other players in the U.S. system, which are crucial to understanding the politics of the IRA. He explains the self-contradictory logic of green energy development and investment. New investment in highly efficient, low-cost green energy drives declining rates of profit within the sector—in part because of the upfront costs, while the marginal costs after that are near zero, and in part because of the way electricity is priced in wholesale markets. The sector is self-cannibalizing: generators install more and more efficient capacity and lock themselves into race-to-the-bottom auctions in which they sell electricity at cost plus some increasingly diminishing fraction.

The real issue with these projects is that they are capital intensive. How do you finance them up front? No one in their right mind would lend billions of dollars on an asset whose value essentially depends on the highly uncertain outcomes of bargaining over electricity pricing. As a result, it’s very difficult to get funding for these projects. Even if the levelized cost looks great, gas plants still win out in terms of funding because their revenue flow is more predictable and their profit margins are more stable.

Policy must be evaluated in terms of whether it fixes this problem. Does the IRA address any of these basic problems? Because it was designed by lobbyists and players within this system—as all legislation in the United States is—it does help in various ways, especially with stability. I’m an IRA skeptic, but IRA defenders have schooled me on the fact that the crucial aspect of the policy is the predictability of the flow of subsidy. From the point of view of renewable energy investors in the United States, the IRA looks like a long-term public commitment to a larger tub of more predictable subsidies. That in and of itself changes the game. It’s not a glorious move into a post-neoliberal future, but it does tweak the subsidy system. The results are undeniable. For instance, while there would be powerful reasons to build the Texas renewable pipeline (a project that’s not yet finished) without subsidy, the subsidy makes the project more bankable.

With this subsidy regime, the U.S. government is beginning to arbitrate an intra-corporate, intra-elite bargain. Real stabilization for expensive renewable investment projects is achieved through corporate-to-corporate deals, with agreements by Google, Amazon, and their ilk to commit to buying a certain amount of power at a certain price. Once that’s assured in a project, an investment banker or a private equity financier will say, “This is a risk we can take, and the rest we can hedge out, or some subsidy system will absorb it.” It’s in the mechanisms through which these contracts are risked and de-risked that there has been some change.

Aronoff: Brett, I’m curious what you’ve heard from people within the industry as to what has changed with the IRA. What have been the shifts in the last few years, and how many of them are a result of this policy?

Christophers: When the IRA arrived, there were already existing incentives of broadly the same type that the legislation introduced. But it came after a period of great uncertainty about whether existing subsidies were going to be retained. There was no long-term vision, which the industry found problematic. The IRA offers renewables developers both investment tax credits and production tax credits. It extended them for at least the next ten years or so and lifted the rate of credit back up to where it had originally been. Thus, in effect, the IRA reinflated profitability in order to attract investment.

When we look at the IRA that way, we shouldn’t have expected it to do a huge amount, because it didn’t fundamentally change the landscape. I suspect that what the IRA is—or isn’t—doing on the manufacturing side of the industry is more significant than its credits and subsidies for renewables deployment. How the IRA is changing incentives for renewable deployers in the United States to either buy from U.S.-based manufacturers or to continue importing from Asia is where the important changes are happening.

Elsewhere in the world, governments have mainly supported renewables development through feed-in tariffs, through which the government offers renewables developers a fixed long-term price for electricity. The developer then takes that promise from the government and goes to the bank and says, “Now you can lend me the money because you can see that I’m going to be able to sell my electricity for a price that would enable me to repay the debt.” That doesn’t happen in the United States, which is why corporate power purchase agreements are so important. Tax credits don’t offer long-term price fixing, but the corporate power purchase agreements do. Google and Amazon and Microsoft are filling the same role in the United States that the government does elsewhere.

Tooze: Your analysis disaggregates retail sales, network, generation, and funding into four separate steps that have four completely different groups of actors. Some of those are heart-and-soul energy project developers; then there are customer-facing people who have obligations to deliver power; then corporations like Amazon, who need to look green; and then regulating all of that is someone who needs to earn more than a 7 or 8 percent rate of return and they don’t give a damn which way they do it. They have teams of analysts who do the research, but ultimately, they can walk away, and that hangs over so many of the projects you describe. With a fully integrated system, which is what China has, there’s a connective, compelling urgency to massively expand power supply, which generates collective momentum within the system to fill the need for more power.

This leaves me with a question of comparison. If your ultimate argument is that renewables don’t get built because they don’t make money, my pushback would be: how the hell did fracking get done? No one made any money in fracking for years. Maybe I’m wrong, and someone critical did. But can you persuade me that gas is a safer bet than a wind farm?

When we pan back a little further and look at energy policy in the United States since 2008, the big story is not the IRA or renewables; the big story is that the United States became the world’s largest producer of fossil fuels. People poured billions down the drain into these holes, and it reduced the price of gas for everyone, but it didn’t make anyone any money. Maybe someone in the chain is making money and that’s why it goes on. In Europe, no one is investing in anything, whereas in the United States, there is a live experiment in world-transforming energy investment in fracking, along with a lackluster investment in renewables.

Christophers: That’s a great question, and I’m going to answer it in an unsatisfactory way because I don’t know enough about fracking. The argument I make is that there’s a real profitability problem with renewables that is standing in the way of faster rollout—yet nonetheless there’s a rollout, and that rollout can be understood in several ways.

There are actors who are quite satisfied with relatively marginal levels of profitability. In many cases—not necessarily with NextEra, but with smaller developers—there is a will to do something green, which we should not underestimate. Those developers, in many cases, are entrepreneurial entities that are willing to accept risk. As you said earlier, it’s the financial institutions that are not prepared to accept risk.

My research for this book only reinforced my view that so much of capitalism comes down to achieving reliable and defensible sources of monopoly or oligopoly power. One thing to note about electricity generation, and specifically renewable electricity generation, is that it’s unbelievably competitive to sell an undifferentiated commodity purely on price-based competition.

If costs have come down so far, why aren’t profits going up? If you’re a wind farm developer who has seen your generating costs come down 60 percent over the last ten years, you would think your profits would have gone up. But your ability to grow your profits is entirely dependent on your ability to capture or privatize the benefits of those cost reductions. That’s not what happens: those benefits get competed away and passed down the supply chain or all the way to consumers. Of course, that’s what consumers want: a green transition without their energy bills going up. Policymakers want energy bills to stay low because that’s what helps keep them in power, yet those low energy bills are counterproductive to the profitability that will incentivize further investment.

Tooze: That’s an explosively unpopular argument. You’re essentially saying that we’re taking the green dividend too soon, and instead we should be allowing green monopoly capitalism to accumulate more surplus so that it can keep powering investment. Then, we somehow arbitrate the social bargain so we don’t get fuel price crises—and we should do targeted low-income relief while gouging higher-income consumers.

Christophers: Part of this is my frustration with the argument that we shouldn’t de-risk capital. If energy markets and finance systems remain as they are, and then if we don’t de-risk, there will be no investment. If the choice is between providing subsidies that guarantee a certain percentage of returns for BlackRock on renewable energy investment with the result of a rapid energy transition or, on the other hand, rejecting de-risking capital with the result of no energy transition, I’ll take the first option every time. The problem is that, politically, we’re limited to that set of options.

Aronoff: In the United States, we’ve heard some impressive figures about the renewables rollout while we’re producing more oil and gas than ever before, mostly due to the shale boom. We could see the United States decarbonize to some degree domestically, at least in the power sector, while continuing to export fossil fuels.

Emily Grubert and her colleagues have called this the “mid-transition”: the fossil fuel system is in a period of uncertainty, which imposes constraints on the rise of a cleaner energy system. This is a messy time, and with less planning, it gets even messier.

Tooze: That mid-transition stuff is flagrantly teleological: we know there’s a transition, so we define our current position in relation to the fact that we’re halfway through. It’s an extraordinary construct of the mind in light of the trends we’re seeing. We haven’t even started with decarbonization at the global level.

As far as I can see, the U.S. policy consists of aiming for a slow transition, which means that the country never has to face the yawning gulf between being serious about climate and doubling down on marginally viable fossil fuel assets. If Asia and Europe turned demand off quickly for fossil fuels, there would be a massive stranded-asset problem. One can imagine, as you said, a kind of bifurcated scenario in which the air conditioning in Texas is powered by renewables, but everyone continues to drive giant trucks and we still export huge amounts of oil and gas—maybe for petrochemicals in China (though China will not buy a lot of oil for fuel in the foreseeable future because electrification is happening quickly there).

Christophers: Part of the economic obstacle with renewables is simply the level of profitability. But returns are always relative, because all capitalist actors have an alternative set of investment opportunities available to them, even if that investment alternative is simply leaving money in the bank or putting it in risk-free government securities. A 5 to 8 percent internal rate of return, which is broadly what renewables offer, might look attractive to certain actors at certain moments.

The obvious constituency to which it hasn’t looked attractive is the big oil and gas companies, which, in their core upstream oil and gas business, haven’t gotten out of bed for an expected return of less than 15 percent in recent years. It makes no sense for them to transition to a business generating returns less than half that level—as long as they believe that they’ll continue to have those existing levels of returns. If they believe that something is going to happen—such as regulatory action—that would impair that profitability within the short or even medium term, then of course they would consider transitioning.

In Europe, there was a moment around five years ago when BP and Shell actually believed, even feared, that something was going to be done that would render their core businesses less secure in the medium term. In 2020, they announced that they were going to transition. Their transition plans were fairly modest, but they said they were going to reduce their oil and gas output, spend more money on renewables, and so on.

In May 2021, the International Energy Agency put its stake in the ground and said, “If we’re going hit net zero, there must be no new oil and gas developments licensed for approval and no new coal mines.” But within a week, twenty new oil and gas fields had been approved for development. New licenses showered like confetti around the world. The BPs and the Shells saw that and decided that governments weren’t remotely serious about taking any of the action that they had feared, and they rolled back their transition plans. When I started looking at energy seriously in the late 2010s, I heard a lot about stranded assets. But nobody really talks about them anymore, because it’s clear that none of them are going to get stranded anytime soon.

Aronoff: The IRA and the European Green Deal are both concerned with protecting legacy carbon-intensive industries—especially cars in the United States and Germany. The United States is corralling other countries to reject cheap Chinese solar panels and other cheaper imports for some elements of decarbonization. Where do we go when the United States is trying to build a multilateral alliance against China?

Tooze: Brett’s book has a simple, but therefore brilliantly illuminating approach: he narrows the problem down to electrification, solar and wind generation, and whether they can be made profitable for investors. The book’s argument kicks in during the 2010s, when we have already identified the technological solution—we are betting the house on this now, and it’s too late to do anything else. But with electric vehicles, that’s not the case, and it’s not the case with other areas of decarbonization that are hard to abate.

We used to think of environmental disaster as a tragedy of the commons. There are too many sheep and no demarcations, so the sheep graze everywhere and eat all the grass; if we had property rights, we would end up with better management of the sheep and the grass. But what if the real problem is how quickly we can breed a bunch of sheep that don’t eat grass? What are the incentives necessary to create sheep that don’t eat grass?

If you’re Volkswagen, that’s your problem: where is it that we are most likely to find the environment in which we will somehow solve the mysterious problem of making an electric vehicle? In Europe, they failed. It must be in China, because the company know it’s the only learning environment in which they will actually be in the next phase of automobile production.

U.S. policy for sealed-off, non-Chinese electric vehicle manufacturing will only work if it offers a credible scenario that fits with corporate strategy, and right now that’s an impossible sell. Local players are opting out. Ford isn’t a car company, anyway; all it does is trucks. GM is facing an existential choice. Stellantis is essentially a European firm. The question is not just “How profitable is this in a portfolio?” but “What is our viable corporate future?” That requires a much more elaborate process of collective envisioning. Green steel? How are we going to do that? No one knows yet. But what we do know is that China makes half of the world’s steel. In the ecosystem of Chinese steel, some genius engineers may be working on this issue, perhaps linked with green hydrogen. If you buy the American ticket saying, “That’s not for us,” you’re taking a huge risk.

Americans say it’s about de-risking and profit margins; they’re not understanding the seriousness of the strategic choice. The fact that Boeing can no longer make safe airplanes, or that Intel can no longer make high-end chips, is not a simple matter of rate of return. Or rather, because they thought it was a matter of rate of return, they can’t do any of those things anymore. If you’re in the business of high-end manufacturing, why would you be in the United States?

Christophers: In the United States and Europe, incumbent corporate players have shown basically no interest in mitigation technologies, or they have rolled back commitments to those technologies. The only real interest that those incumbents show is in negative emissions technologies. Oil and gas companies are investing a heck of a lot in carbon capture and storage in Louisiana, explicitly to avert the need to transition. How is policy interrelated? In the case of the United Kingdom, the new Labour government seems supportive of the trend toward negative emissions technologies.

Tooze: The Gulf of Mexico will be a hub of negative emissions technologies, because the United States already has a critical mass there. The hydrogen pipeline network down there is far more sophisticated than anywhere else in the world. It’s not a coincidence that Brian Deese’s “Clean Energy Marshall Plan” specifies geothermal, hydrogen, carbon capture, and nuclear, which are all bona fide areas in which the United States has an advantage: nuclear is military industrial, and the other three are directly linked to fossil fuels. Americans are very good at drilling, so it should absolutely be a world leader in that arena.

Aronoff: Deese argues that the United States will create new markets for cutting edge clean energy technologies abroad—he focuses on fledgling technologies like hydrogen and carbon capture. How confident are you that these will become big export sectors for the United States?

Tooze: There’s an argument in the background here with Daniela Gabor’s critique of “de-risking” as a central way of understanding the current moment. There are two different ways of thinking about that. Brett’s approach is the most direct, which is to say, “We can do de-risking right and think hard about the distributional questions, since we literally don’t have any other tools.” My humanities-inflected take is that maybe it’s all bullshit. When they say we’re going to have a Green Marshall Plan, it sounds like it’s coming from the right place, but then the numbers and the concrete analysis show that it’s orders of magnitude too small—no one in their right mind can be taking it seriously.

The more modest question is whether the United States could become a major hub for innovation in those frankly fringe elements of the green energy transition. Of course it could. You find a first mover and incentivize them; you scare everyone else into thinking that if they don’t innovate, they’ll be screwed; and then you build a stable market. You need a timetable of ten, fifteen, twenty years. That will require subsidies. You need to be clear-eyed about it and figure out the distributional bargain, not just for equity’s sake, but because subsidies are only credible if the distributional bargain is explicit. Otherwise, people will imagine you’re going to take it away again. This was one thing the Germans did right with nuclear: they built collective consensus around it. The industry was only pissed off with Angela Merkel because she accelerated the program.

The United States really is the world leader in sophisticated fossil fuel. This is why the Shells and the BPs of this world are always looking for alternative strategies—they have an inferiority complex because they know that Exxon is the big daddy. U.S. companies have much better safety records and are better than European operators at keeping their workers alive; they are also quite strict about corruption. So the United States could be a huge leader in this aspect of the energy transition, but it would take a lot less bullshit and a more sustained push.

Brett Christophers is the author of The Price is Wrong: Why Capitalism Won’t Save the Planet, and a professor of geography at Uppsala University.

Adam Tooze is a professor of history at Columbia University.

Kate Aronoff is a writer for the New Republic, a fellow at the Roosevelt Institute, and a member of the Dissent editorial board.