By Prof. Mary Pieterse-Bloem, in response to the Piet Sanders Lecture of Prof. Katharina Pistor on 4 November 2021.
Too much arguing, too few actions
The remedy that Pigou proposed, government acting through a system of taxes and subsidies, has an important feature: markets should be left to their own devices, and the externalities that are created with it in the process should be dealt with after the externality occurs. The taxes levied on negative externalities serve, not so much to avoid, but to clean up the pollution.
Post-WWII reality is the dominance of neoclassical economic thinking and the growing free reign of markets. Its main opposite, Keynesianism left a central role to markets in economies but argued in favour of taxes and subsidies as a tool to reduce financial inequality. If done properly through fiscal policy levers pressed at the right time, it would also, in aggregate, lead to higher economic growth.
From the 1950s to the 1990s, most time was spend arguing about this latter role of the government, in specific about the government’s use of economic redistribution powers, rather than its first role, dealing with externalities to the environment. Few Pigovian taxes were actually implemented and as a result, pollution was rife.
This failing can indeed be partially attributed to economists who did not come forward with a mechanism where externalities are fully incorporated in the price of production and consumption upfront. That would have already shifted the game much earlier.
'The only way some kind of moral conscious can be incorporated in markets, and a different outcome can be obtained, is through human, financial incentives'
Providing an ethical compass
While markets are very efficient in distributing the produce of activity according to preferences, they are entirely mechanical. They do not have a soul, a moral conscious, or an ethical compass. The only way some kind of moral conscious can be incorporated in markets, and a different outcome can be obtained, is through human, financial incentives.
I believe that therein lies the solution and so do the green economists and green finance proponents. Fast forward from the 1990’s to the present day, we find this thinking increasingly embedded in mainstream economics. Carbon taxes is one concrete policy proposal in this domain. The carbon market, if set up properly, fixes two main problems of Pigouvian levies: it directly affects the producer of carbon gasses and it stimulates the transition of production to more carbon-neutral methods.
'If humans manipulate prospective returns, it can be made to use for good'
A market with a moral conscious
But there is more. Thrive from the New Economy school of thought that has just come out, is full of what I call value-economics. The challenge is how these high moral values are incorporated into the economy, and markets in particular, to (co-)determine price setting.
Finance as a distribution mechanism for private investments can play an important role here. If humans manipulate prospective returns, it can be made to use for good. Prof. Katharina Pistor’s proposal to stop all subsidies of fossil energy exploration falls into this category. So do proposals to subsidize renewable energy and R&D to discover a scalable form of green hydrogen and greater battery storage, to ban diesel cars from public roads, to tax air travel, to levy a larger VAT on the purchase of brown assets, etc.
The outcome is that business models will be either less or more profitable accordingly, returns will start to differ accordingly, and finance will be redirected accordingly. Investors and asset managers will not need any taxonomies if financial and sustainable returns are aligned. Credit ratings will also naturally adjust because the companies that do not green their business models are the ones left with stranded assets (such as oil fields) and stranded inventories (such as diesel cars) and these companies will be more default prone.
We can see in many places that this is already happening: just consider what the equity prices of fossil energy companies and the Tesla’s of this world have done relative to peers in recent years.
'The current failing is, in my view in the misalignment of the set of financial incentives that influence markets with the optimal societal outcome'
The power of green capitalism
I agree with Prof. Katharina Pistor that much more needs to happen if we want to meet the Paris climate goals. The current failing is, in my view in the misalignment of the set of financial incentives that influence markets with the optimal societal outcome. What Prof. Katharina Pistor, has shown to us in her lecture is that this failure is not just economic or political, but also knitted into our legal system. What I had in scope was the green economy but not the totality of green capitalism which very much includes the legal system. I consider this the greatest contribution of her address. I hope that my reflections sway her to believe that our different fields – economics, politics, law – can and should join forces to change the rules of capitalism and incentivise markets and finance to make it work for and no longer against the greater societal goals.
About Mary Pieterse-Bloem
Mary Pieterse-Bloem is Professor of Financial Markets at Erasmus School of Economics and Head of Investment Office at Rabobank since June 2021. Pieterse-Bloem was one of the members of the panel discussion that followed the lecture.