Nowhere is there a wealthy country that consumes only a little energy, or a poor country that consumes a lot

All economic theory since the middle of the 18th century starts with an important assumption: that either labour or capital or some combination thereof is responsible for most of the world’s productive output, thus largely ignoring the role of land, resources and energy.

By excluding or minimising these factors, modern economic theory is effectively blind to its reliance on unlimited cheap sources of energy to drive economic growth and productivity.

Economist Steve Keen, a critic of neoclassical economics, notes any economic theory that violates the second law of thermodynamics (which states that entropy increases in a closed system over time) is essentially a “fallacy”, since it “pretends” that outputs can be produced without inputs from nature, and without waste.

It does not take much effort to see that our world is awash with those wastes, including discarded materials, heat, greenhouse gases and other pollutants, and that the decoupling of energy and resource use from growth has yet to materialise, especially in globalised economies such as the European Union.

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The economic fix to these fundamental errors is to treat those wastes and environmental impacts as “externalities” that can be priced and bargained away under market conditions with minimal transaction costs. The problem is reframed as a technological and pricing challenge of managing greenhouse gas emissions instead of ending our reliance on fossil fuels, and designing energy systems that respect limits to growth. It is for this reason that we have been subjected to the mantra that market-based instruments such as carbon taxes, emissions trading and offsetting are the most efficient policies for tackling climate change, instead of doing the obvious by leaving fossil fuels in the ground.

This is where ecological economics departs from neoliberal economics. As Keen points out, if you don’t explicitly capture the role of energy in production in your economic theory, “your economic model is wrong, both empirically and theoretically”. Nevertheless, decision-makers can be quite attached to the “wrong” theories because they feel familiar and sound good, and they definitely help some of our friends.

Keen’s summary is profoundly unsettling: “Rather than capitalists exploiting workers, as Marx argued, or capital and labour jointly causing a rise in utility over time, as neoclassical [economists] assert, humanity’s social classes compete for a share in the useful work created by the exploitation of pre-existing energy – primarily, the planet’s fossil fuel reserves.”

It is possible that all three of those forces are operating in tandem. Exploitation, inequality and injustice can and do coexist beside a rise in overall welfare after all. Nevertheless, the reliance of modern economies on energy is evidenced by the strong correlation between GDP and energy consumption. Income and energy consumption are tightly correlated on every continent and across every time period for which data exists.

Nowhere in the world is there a wealthy country that consumes only a little energy, or a poor country that consumes a lot, though this linear relationship does mask historical sources of inequity lurking behind the energy data. The arrow of causation travels in both directions: higher levels of economic growth lead to higher rates of energy consumption. Similarly, more energy use in turn drives economic growth. A great deal depends on the cost and quality of the available energy, but the incontrovertible truth is that there are no low-energy rich economies.

While investments in clean energy now outpace fossil energy, it is galling that financial institutions are still profiting from planetary destruction

How does the world break this cycle? More importantly, how does the world wean itself off fossil fuels and at the same time provide energy-increasing economic opportunities for developing countries? Firstly, it is important to acknowledge that the world has become dependent on fossil fuels because that is where investment was directed and where the most profits were to be found.

According to a recent blog by the International Monetary Fund (IMF), there are still insufficient incentives to encourage investment in green private productive capacity, infrastructure and research and development. At the same time, investments from both public and private sources continue to pour into carbon-intensive activities such as oil and gas exploration.

Decarbonisation will require a transformation in the underlying structure of financial assets – a process that is hindered by several deficiencies in the way markets function. The IMF notes that most investment strategies do not adequately assess climate risk, and private profitability considerations trump the social value of low-carbon investments. According to the IMF, corporate governance models may amplify financial “short-termism,” while constraints in capital markets can lead to credit rationing for low-carbon projects.

It is striking that, decades after climate scientists have warned about the dangers posed by climate change, more than $1,000,000,000,000 was spent on fossil fuels in 2023. While investments in clean energy now outpace fossil energy, it is galling that financial institutions are still profiting from planetary destruction. Capital markets are failing to align the capital allocation process with the ending of the fossil fuel era, exposing the owners of fossil fuel companies – their shareholders – to potential stranded assets and the rest of us to dangerous climate change.

In an important move, Barclays bank has announced it will stop direct financing of new oil and gas fields and restrict lending more broadly to energy companies expanding fossil fuel production. The move follows intense pressure from campaigners and activist shareholders, including some pension funds, over the bank’s energy policy. It is too much to expect Irish banks to follow suit?

Sadhbh O’Neill is a senior climate adviser to Friends of the Earth Ireland

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