A world climate bank to the rescue? Transaction costs and the climate bargain approach

In this article, I discuss what I call the “climate bargain” approach to climate ethics as put forward by Broome and Foley. The central idea of this approach is that if the energy transition is to succeed, it must do so by enabling a win-win, or Pareto-improving, bargain between the current emitters of greenhouse gases and future generations, mediated via a “World Climate Bank.” I argue here that Broome and Foley's analysis ignores central insights in the economic literature on externalities. In particular, they fail to appreciate the importance of transaction costs, which suggest that an intragenerational Pareto-improving bargain is highly unlikely to succeed. We hence should expect that any effective climate policy approach will not only create winners, but also losers. As a result, we face a choice: Should the resulting losses be allocated such that inequality is increased or reduced? Broome and Foley argue against inequality-reducing climate policy, since they believe that any such policy will jeopardize the political feasibility of dealing with climate change. I argue contra Broome and Foley that once we take transaction costs explicitly into consideration, we have good reason to believe that effective climate policy will likely require us to reduce inequality.