Modern Climate Policy: Moving Beyond the Market-Liberal Paradigm

by Tom Krebs


10. JANUARY 2023

Traditional climate policy is based on the market-liberal paradigm that relies on carbon pricing, a belief in self-regulating markets, and transfer payments for the so-called “losers” of the transfor- mation process. The market-liberal approach to climate policy is bound to fail because it is based on a theory of society that is far removed from reality – it neglects adjustment costs in the transformation process and economic power relations in the labor market. In contrast, modern climate policy takes into account these features of real societies and can deliver green and inclusive economic growth. It is built upon the idea of a forward-looking government that creates pro-worker, green institutions and uses pro-worker, green industrial policy to support people and companies in the transformation pro- cess. The US Inflation Reduction Act (IRA) is an example of modern climate policy in the sense that it includes several elements of a pro-worker, green industrial policy. However, the US currently lacks the institutional structure to implement successfully a pro-worker climate agenda. European countries should embrace the general US approach to climate policy and develop their own, improved version based on their institutional strengths.



During the high point of market orthodoxy, economists argued that the most 'efficient' way to combat climate change was to simply let markets determine the price of carbon emissions. Today, there is a growing consensus that prices need to be regulated and that a carbon price on its own might not be enough.