The energy transition: “creative destruction” at play

Written by Peter Capsanis, CCL member from the Federal Electorate District of Reid, NSW

The transition to cheaper and cleaner sources of energy is threatening the fossil-fuel industry. This type of conflict is nothing new. It is but the latest example of the economic concept of “creative destruction”: a fundamental feature of competitive free-market capitalism. In short, it will be argued that action on climate change is  not inconsistent with the basic principles of free-market capitalism.

Origin of the term

Joseph Schumpter

The renowned economist Joseph Schumpeter (1883-1950) – who was also finance minister in post-war Austria – coined the term creative destruction to describe a process of intense industrial transformations, which completely revolutionise the economic structures of capitalism from within. In doing so, those processes completely destroy old industries and structures, and replace them with new, more efficient ones. Since the new can only be brought about by the destruction of the old, the transition of technological improvement is termed “creative destruction”. Schumpeter thought that this disruptive process is at the heart of the ability of capitalism to keep on sustaining economic growth, even as it destroyed the value of established industries and companies.

Processes of creative destruction have been happening time and again since at least the First Industrial Revolution (late 1700s) to the present day. For example, in late 18th century England, steam power allowed for the creation of new textile machinery, that displaced skilled workers in that same industry. Many of these workers (pictured in the 1812 print at the top of the page) responded to the consequent job loss by destroying the machines, which were perceived as threatening their livelihood. They were called Luddites –a pejorative term that is now used to mean anyone opposed to technological change.

In more recent times, the digital revolution has wrought enormous changes. These are too numerous to even adequately mention. Some examples would be e-commerce and online shopping, internet publishing and advertising, web-based streaming services, to name but a few.

Traditionally, the argument of free-market liberals has been that we can’t prop up the old industries: this will only lead to generalised stagnation and decay. This idea has been one of the key tenets of the neoliberal political thought that became mainstream since the governments of US President Ronald Reagan (1980-1988) and British PM Margaret Thatcher (1979-1990). They have readily used Schumpeter’s thesis of creative destruction to argue that opposing the decline of the old “sunset industries” would preserve the wellbeing of a few at the cost of that of the society at large. The fight of PM Thatcher against the coal workers’ unions is perhaps the most iconic application of these ideas.

Creative destruction also applies to the fossil-fuel industries

When it comes to the fossil fuel industries, many supposedly free-market liberals are strangely silent. No one talks about creative destruction anymore. They even turn a blind eye to state sponsored protection. Of course, there are notable exceptions, such as, that of the climate-action supporter Dr John Hewson, who was leader of the Australian Liberal Party from 1990 to 1994, and of course Margaret Thatcher herself.

Fossil-fuel industries are in decline not only because of environmental factors, but also economic ones. The relative costs of renewables have fallen dramatically and is projected to continue to fall, especially given imminent technological breakthroughs in the storage and transmission of clean energy. They have become “sunrise industries”.

According to the International Energy Agency (IEA) “the past decade has seen strong growth in the deployment of renewable energy technologies, with the power sector leading the way to sharp cost reductions for solar photovoltaic and wind power”. Furthermore, according to the IEA, wind and solar power will provide more than half of the additional electricity to 2040 (if existing policies continue), or even almost all its growth (if sustainable climate-action policies are enacted instead).

Meanwhile, coal in particular continues its long term decline. Indeed, right throughout the EU almost a half of coal plants are running at a loss, with many EU states preparing to close their coal plants by 2025. Some have already done so.

Politics and the fossil-fuel lobby

Defying economic logic, the fossil-fuel industries are protected by governments with generous tax breaks and subsidies. Many politicians turn a blind eye to this protectionist behaviour that abrogates basic fundamental market principles. Clearly, the fossil-fuel industries continue to exercise significant political, social and economic leverage in Australia. The IMF estimates that in Australia annual fossil-fuel subsidies total US$ 29 billion (AU$ 44 billion) (a staggering 2.3% of our GDP). On a per capita basis, this amounts to approximately US$1,200 (AU$ 1,800) per person. Meanwhile, renewable subsidies get slashed.

Conclusions

Margaret Thatcher, UK Prime Minister between 1979 and 1990.

The thesis of creative destruction and the basic principles of free-market economics need to be more systematically deployed against the fossil-fuel industries and their supporters. It should be noted here that Margaret Thatcher’s government in the 1980s used the Austrian School of free-market economic thought to stop subsidising the unprofitable coal industry. Only in our hyper-partisan political debate the quest for favouring the energy transition is considered a left-wing goal. In fact, several notable right-wing world leaders – like German Chancellor Angela Merkel, British PM Boris Johnson and French President Emmanuel Macron – are actively supporting the transition to a zero-emission economy.

It is important to stress that for sunset industries and especially for their workers, there must always be planned phasing out and adequate re-training programs, as well as redundancy packages for mature workers, followed up by regional industrial development programs. In this sense, we should aim at not repeating the mistakes made by PM Thatcher. No one should be left behind.

Once again, we will have to relearn the lesson of the Luddites. The creative destruction of technological progress cannot be tamed, but it must instead be managed to everyone’s advantage.

Creating the political will for a liveable world