3 Economic theory and political recommendations for environmental sustainability

Climate change can now be regarded as the greatest market failure in the world, which results in negative externalities, information asymmetry, inconsistency in time, the tragedy of the commons and failure stemming from network effects. Climate change causing market failure supports the position that the government must play a role in environmental protection, while the relation between climate protection and economic growth is not clear.

The results of economic approaches and impact assessments analysing the effects of climate change vary on a wide scale, and give entirely different answers with regard to the need for climate policy. While according to the results of the classic Nordhaus economics, growth can be maintained even without an active climate policy, and moderate carbon reduction can solve the problems, the school applying the Stern approach – nowadays regarded as consensus-based – perceives the economic damages as being enormous and proposes a new green industrial revolution to support green growth. Green growth policy emphasises the need for a global solution to emissions restrictions. The latest and most radical response to climate change is given by the macro ecological degrowth theories, according to which sustainability can only be achieved with a significant moderation in economic output, which also involves changing consumer habits and reducing market competition.

A state with a targeted mission may successfully appear in the sub-markets of high market risk and high capital intensity, focusing on environmental sustainability, thereby diverting the market toward the subsequent, sustainable green development scenario it deems desirable. Transition to the green growth scenario may be fostered by directed technological change, both in economic policy and at business enterprises. Directed technological change is a series of complex economic policy steps that include the diversion of the factors of production (capital and labour) and innovation towards the green economy. In the aforementioned model, the role of the government is to adjust market failures, hinder – via tax policy – innovations resulting in higher greenhouse gas emissions and foster the development of green industries by elaborating a complex subsidy scheme. The empirical results of directed technological development show that from the corporate side, taxes have a positive effect on the suppression of harmful technologies and subsidies on the spread of pure innovations. Regulatory measures targeting the general public are generally high in societal costs and do not focus well enough on the target groups. If the regulator does not know enough about the population's price elasticity and willingness to consume, the programme can easily become ineffective.