Lancaster University Management School - 54 Degrees Issue 14

FIFTY FOUR DEGREES | 41 it was cheap to pollute and not very profitable to reduce your emissions. As more countries have made dramatic pledges to cut emissions, and energy prices have soared owing to Covid-19 related dynamics, the price of carbon has increased. While this is welcome news from an environmental point-ofview, European politicians are already calling for price caps over national economic and global competitive concerns. The brief history of the ETS tells us that when left to the vagaries of market mechanisms, carbon prices can become too cheap or too expensive, both of which do not bode well for a sustainable and timely transition to a low carbon economy. The transition agenda should come from a broad political, economic, and societal consensus applied through market and non-market mechanisms. Market mechanisms, including abatement markets, are too embedded in a predominantly profit-driven system that has long ignored what is happening with the environment. Amarket designed to make it cheaper to reduce emissions might thus actually make reducing emissions unnecessary. IN NEEDOF A NEWSOLUTION Both abatement markets and SRI have gained institutional ground despite falling short in reversing adverse environmental effects. They will gain more momentum and take on a broader scope in the coming decades, yet they are embedded in a system that prioritises economic and financial returns. Our economic system can be reprogrammed through a new consensus about our future and that of the Earth System, which is no easy feat. Yet, we should have faith in our political systems to address the issues as much as we have in the markets. A key step will be a more effective incorporation of Earth System realities into the dominant economic theories and practices. A good place to start is our own institutions, where we educate current and future finance practitioners. If and when the financial system starts processing Earth System realities properly, there will be a real, across the board incentive for businesses to create a plan, and the decarbonisation of the economy will be more effective despite being market-driven. Dr Emre Tarim is a Lecturer in Behavioural Sciences in the Department of Marketing. This article is based on Modern finance theory and practice in the Anthropocene, published in New Political Economy.