When markets fail, all generations must work together

“Markets are on the whole efficient, but they also fail due to monopoly power or poor consumer information” according to French economics professor and Nobel Prize winner Jean Tirole. “The absence of equal opportunity, the breakdown of mutualisation of health risks and strong inequality are other instances of market failures, as there is no reason why the market will deliver outcomes resembling a harmonious society designed behind the veil of ignorance".

Market failures underlie government intervention, and, if the state fails as well, individual and corporate social responsibility. While it is frequently expected, according to Tirole, that the state will correct market failure, this is frequently not the case. Socially responsible businesses can then do well by doing good, conditional on either taking a long-term view or by doing philanthropy on behalf of their stakeholders (consumers, investors, workers).

Tackling global warming

An important illustration of market failure is global warming, with Tirole saying there is a high level of urgency to tackle the problem: "We cannot continue to delay serious policy negotiations and have excessive emissions in the meantime." Many of those who will be most affected by global warming either don't vote or have not been born as yet. Innovation is vital in the sector, said Tirole, as there has been a failure by both the market and the government.

The carbon price

Tirole, the honorary chairman of the Jean-Jacques Laffont - Toulouse School of Economics Foundation recently told the audience at the Lombard Odier Generations Summit of a simple solution for tackling the problem of carbon emissions. "There should be one price for carbon for all - regardless of the sector, country or who emits: the effect of a carbon emission is the same whether it is in Beijing or Venice," he said. On the other hand, while economists agree that carbon should be priced, how this should be achieved (a carbon tax or a cap-and-trade system) has not been agreed upon.

Carbon pricing is necessary, but it can hurt the poor and the less developed countries, and its implementation will require compensating transfers. Poor and emerging countries, which will be large emitters looking ahead, should be compensated for hitting their CO2 targets, he said.

Focusing on the solutions

The eminent academic, whose work focuses on industrial organisation, game theory, banking and finance, and economics and psychology, outlined his views at the inaugural summit hosted by Lombard Odier where thought leaders were invited to find concrete solutions to conquer the climate crisis. Also speaking at the event was Nicholas Flanders, who talked about converting CO2 into valuable produce and architect Alfredo Brillembourg who builds cities for communities.

Get global

One of the key ways in which climate change needs to be addressed is on a global, not local, level: otherwise the virtuous countries will see their carbon-intensive industries locate their activity abroad, and the readily available narrative of free-riding will undermine the determination of its citizens to fight climate change.

Like for other policies, those that address climate change should not address symptoms or propose miracle cures but should be impactful. It is important to engage with younger generations on the matter, so that all generations work together to tackle the problem, he said.