A little over a decade ago, we published a short article in these pages reporting the results of our analysis of carbon emissions and real gross domestic product per capita for a group of developed and developing countries. (See “Not the Time to Cap and Trade,” Winter, 2009–2010.) We examined data from 1950 to 2004 for the Group of Eight (G‑8) countries (Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States) and the rising industrial powers of Brazil, China, India, Mexico, and South Africa. Those countries, then and now, account for about two-thirds of global carbon emissions. We argued then that, based on our analysis, proposals to reduce emissions through cap-and-trade policies were very costly, perhaps enough to outweigh public concerns about carbon, especially during that time’s housing-bust economic downturn. We argued instead that technological advances held hope for lower emissions and that government policies could and should provide incentives for developing those technologies.

We recently revisited that study in light of continued concerns about climate change and increasing calls in the United States for sweeping policies to reduce carbon emissions, including the so-called “Green New Deal” that would, among other goals, aim for 100% clean energy by the year 2030. Our updated study adds 15 years of data to our prior analysis, enabling us to see what has taken place in the same 13 countries. (Russia is no longer a member of the G‑8, now G‑7, but it remains one of the world’s major carbon emitters and so we kept it in our sample.)

An update / Since 2004, world carbon emissions have risen from over 28 billion metric tons to over 36 billion metric tons. In 2006, China surpassed the United States as the world’s largest emitter, and in 2019 it accounted for about 28% of total global emissions. The United States is now second largest, accounting for 14.5% of the total.

Figure 1 shows the relationship between annual carbon emissions and real per-capita GDP for the United States. Whereas our earlier study found that reducing emissions would entail substantial costs to the U.S. economy, our more recent study finds the country’s carbon emissions are falling even as income rises. In effect, the United States has passed “peak carbon.” This is not unique to America; the same is happening in France, Italy, Japan, and the United Kingdom, and Canada should reach its peak after just a bit more income growth. Although our estimates for Germany show some evidence of a slight uptick in emissions with income, we would need a few more years of income growth to have confidence in this trend.

The same cannot be said of China, as shown in Figure 2. Its carbon emissions continue to rise and seem nowhere near a peak. Our estimates indicate that its real GDP per capita needs to rise by about 50% before reaching a point where emissions might decline. China is not alone in this, among developing nations. Emissions in Brazil, India, Mexico, and South Africa are also on the rise, and each country is some distance from reaching its peak. Further, when we evaluate the relationship between tons of carbon emissions and real GDP per capita, we find that a $1 gain results in 56,000 fewer metric tons of carbon in the atmosphere for the United States, while a $1 gain for China is associated with an increase in carbon of 394,000 metric tons.

Similar analyses hold for most of the other developed and developing countries. But in those countries where emissions are decreasing, what may be driving the new-found reductions? Apparently, income-driven demand for environmental improvement is generating significant institutional change.

Market forces and policy changes / Since 2005, cleaner-burning and cheaper natural gas, extracted using advances in fracking technology, has increasingly replaced coal as the fuel of choice for generating electricity in the United States and other countries. Also, the falling cost of solar production technologies has, at the margin, reduced the amount of carbon emitted per unit of GDP.

In China, starting in 2009, the government began subsidizing the production of electric automobiles. In 2016, it decreed that by 2030 some 40% of its new fleet will be electric. In 2019, it established a limited cap-and-trade carbon control market that focuses exclusively on the power generating industry, with other industries destined to be included later.

The United States is employing similar policies on automobiles. First, tax credits and other incentives were introduced in 2009 to encourage the purchase of low- or zero-emission vehicles. Then, this past year, the Biden administration issued an executive order that 40% of the new U.S.-produced fleet will be electric by 2030.

We note that in 2016 the G‑8 countries met in Paris and unanimously agreed to individually institute carbon emissions cutbacks so that by 2020 real GDP growth would become carbon neutral. For several of those countries, little substantive policy change has resulted, while the United States withdrew from the agreement. Yet, because of market forces, the United States became a leader in cutting emissions, and other G‑8 nations have eclipsed peak carbon.

While high-profile market and political actions have been at play, less visible market forces have affected carbon emissions reductions in substantial ways. Consider the rise of “Green” investment funds that enable environmentally concerned investors to put their money where their hearts and minds are. Known as “ESG” funds (for “environmental, social, governance”; see “ ‘ESG’ Disclosure and Securities Regulation,” Fall 2021) and accounting for just 1.1% of all mutual funds, ESG asset flows grew 72% in 2020 and amounted to 25% of all mutual fund inflows. As dollars flow into these funds, enterprise managers may pursue emissions reductions to reduce their cost of capital. BlackRock, the world’s largest fund manager, for example, now reports some $7 trillion in various environmentally sensitive holdings. The firm recently announced that it will impose much stricter environmental and social standards on corporations whose shares it might consider owning. It’s also vacating investments in firms that produce coal or have large carbon footprints and expanding holdings in firms committed to fighting climate change and other social challenges.

Figure 1

Regulation - v44n4 - Green New Deal Chart 1

Figure 2

Regulation - v44n4 - Green New Deal Chart 2

Evidence of this incentive is seen in news reports that half of the Fortune 500 are auditing and reporting compliance with self-imposed carbon emissions reduction goals. With reporting standards still in a state of flux, U.S. regulators are moving to develop more accountable reporting requirements. Treasury Secretary Janet Yellen is pushing for net-zero emissions from U.S. electricity producers by 2035 and has called for American firms to report climate change risks to investors. The Federal Reserve and the Securities and Exchange Commission are pushing similar regulations.

Finally, we should consider the rapid growth of carbon emissions markets that are now at work globally. According to news reports, the total value of the carbon emissions market rose 23% to $283 billion last year. Although the United States has not established a national cap-and-trade market, the United Kingdom, European Union, and multiple other jurisdictions have. Firms participating in these markets can produce transferable rights when they find lower-cost ways to reduce their own carbon emissions. For example, over the last two years, BP has earned as much as $100 million annually by trading carbon emissions. Such earnings should encourage firms like BP, Eni, Shell, and Total, which have set net-zero emissions goals for 2050, supported by investors representing $10.4 trillion in assets. Other evidence of industrial efforts to reduce carbon emissions is seen in an alliance between Mercedes and Swedish carbon-free steel producer H2 Green Steel for implementing a new steelmaking technology and in Chevron’s expanded investment in hydrogen production and carbon capture technologies.

Final thoughts / Given all this, there are at least three practical implications for U.S. carbon policy.

First and most obviously, U.S. carbon emissions are declining without grand initiatives like the Green New Deal. Since peaking in 2005 at 6,132 million metric tons, U.S. emissions have fallen by nearly 14% to 5,285 million metric tons. If the emissions–GDP trend continues and the United States manages 2% real growth in GDP per capita till 2030, emissions will fall to 3,931 million metric tons, according to our forecast. It isn’t the net- zero emissions goal that the Green New Deal targets, but it is substantial progress — and much more realistic.

Second, the problem is global. Whatever the United States or other developed countries do, our estimates suggest that carbon emissions from China specifically and the developing world in general will continue to rise. Further, countries’ Nationally Determined Contributions (NDCs) of carbon, according to the Paris Climate Accord, are not binding or enforceable, and Climate Action Tracker rates China’s NDCs as “highly insufficient” because of its reliance on coal.

Last, U.S. environmental policy has always been a “political football.” In recent years, carbon policy has shifted from the Obama administration’s Clean Power Plan to the Trump administration’s Affordable Clean Energy Rule, and will soon move to some version of the Green New Deal or whatever policies the Biden administration chooses to pursue. Who knows what future policy will be? Meanwhile, the free market works to the benefit of the environment — and the humans who inhabit it.