Social Market Economy and Sustainability

Combating climate change and maintaining resource security are two of the most pressing global challenges of our time - and will remain so after the COVID-19-crisis. Addressing global warming amid a growing world population and ever scarcer resources requires more sustainable economic activity and development. This book aims to show that sustainable economic development should consider economic, ecological and social factors simultaneously and with equal value. Democracy and the values and principles of the Social Market Economy constitute a promising path to sustainable development.

Table of contents

Foreword

Social Market Economy and Sustainability

Combating climate change and maintaining resource security are two of the most pressing global challenges of our time – and will remain so after the COVID-19-crisis. Addressing global warming amid a growing world population and ever scarcer resources requires more sustainable economic activity and development. But what does sustainability entail – and how can we realise it?

In 2015, the UN passed 17 Sustainable Development Goals (SDGs), also known as the 2030 Agenda. They constitute “the blueprint to achieve a better and more sustainable future for all”. The SDGs apply to all UN member states, but also to its citizens. Yet in order to find a compromise between democratic and autocratic states, the UN Sustainable Development Goals are not committed to democracy. Democratic and market-based systems increasingly face competition with autocratic and centrally planned systems that claim superiority. In addition, some claim that the only way to a sustainable future is to prioritise ecological aspects at the expense of economic and/or social ones.

This book aims to show that sustainable economic development can only be realised by considering economic, ecological and social factors simultaneously and with equal value. For Konrad-Adenauer-Stiftung, democracy and the values and principles of the Social Market Economy are necessary to implement the Sustainable Development Goals. As both strive for economic development and technological progress that take ecological capacity and social justice or viability into account, the Social Market Economy and the UN Sustainable Development Goals complement each other.

Contributions to this book

Sustainability and democracy

In her contribution to this book, Sabina Wölkner explains Konrad-Adenauer-Stiftung’s perspective of sustainability and derives policy recommendations for the EU, Germany and other member states. The contributions of Ralf Fücks as well as Wolfgang Bretschneider and Sebastian Spiegel are a plea for a solution of climate change that is based on freedom, competition, innovation and technological progress. Contrary to claims that autocratic systems are better able to address climate change, Ottmar Edenhofer and Linus Mattauch show that democracies can afford ambitious climate policies: a reform offiscal policy that includes carbon pricing and a tax on land could decarbonise the economy, reduce inequality and thus promote economic growth and democratic institutions.

The Social Market Economy: the right model to combat climate change and ensure resource security

For Konrad-Adenauer-Stiftung, the Social Market Economy and democracy belong together and are two sides of the same coin. It is and remains the most successful as well as the most sustainable economic and social model. In contrast to a centrally planned economy, the Social Market Economy is based on a free market economy where demand, supply and competition ensure good quality for low prices. Yet the state has a more active role than simply being a “night-watchman”: it sets the regulative framework that protects freedom and competition, leading to economic growth, prosperity and social progress for all.

Yet in light of new challenges, the Social Market Economy faces calls for renewal. For Germany in particular, the Energiewende – the transition from fossil fuels to renewable energies – is a test and potential example for others to follow, yet its implication is difficult. The contributions of Arnd Küppers, Martin Schebesta and Hildegard Müller respectively show that the Social Market Economy, its values and principles are still relevant, if not even more relevant than ever. Küppers and Schebesta respectively explore the socio-ethical, historic and economic foundations of the Social Market Economy and how its application can address climate change, whilst Hildegard Müller applies the values and principles to the Energiewende and derives policy recommendations to increase acceptance of the Energiewende.

The bottom line of these three contributions is that as an evolving economic and social order, the Social Market Economy can and must constantly
be adapted to current challenges. Even though this economic and social model could not account for climate change at the time of its initiation, it is possible to derive policy recommendations from its values and principles. A renewal of the Social Market Economy in the sense of adapting the freedom-based regulatory framework is necessary. Carbon pricing to internalise the social costs of climate change into the price mechanism is the main tool to address climate change and ensure resource security. Even though states with a different political and economic model cannot and should not simply “copy” the Social Market Economy, carbon pricing is a promising policy tool that states of all type can implement.

Carbon pricing as the main policy tool

Yet the implementation of carbon pricing faces difficulties. As Anja Berretta, Daniela Diegelmann, Christian Hübner and Nicole Stopfer show in their overview over the state of carbon pricing across all regions but Europe, the level of implementation and popularity of carbon pricing clearly differs between developed and developing countries. They emphasize that carbon pricing always has a unique national character and that subsidies and low popularity impede the prospect of carbon pricing in developing countries. The latter require information on the benefits and challenges of using carbon pricing and institutional support.

In addition, there are different ways to implement carbon pricing. Jasper Eitze and Martin Schebesta provide an overview over the advantages and disadvantages of the most common ones – i. e. raising a carbon tax and introducing an emissions trading system (“cap and trade”). Both have their merits and are preferable to the status quo of a complex and partially incoherent policy mix – yet a comprehensive Emissions Trading System (ETS) is preferable, not least because it seems to offer better prospects for climate policy integration. Luca Taschini explores the benefits and barriers to linking ETSs and how to overcome them, whilst Christian Hübner explores the potential of blockchain technology for setting up a global ETS.

Global climate policy: prospects and challenges

In general, global, multilateral solutions and approaches are necessary to combat climate change. This also applies to global carbon pricing:
Ultimately, a global carbon pricing regime would be an ideal or “first-best” approach, but faces many hurdles. Beyond carbon pricing, increasing the sustainability of global supply chains is also crucial. Tanja Gönner argues that a global institutional framework is necessary to implement common social and environmental standards across global supply chains. Veronika Ertl and Martin Schebesta explore the prospects, advantages and disadvantages of statutory regulation of corporate due diligence.

Yet across the board, multilateral initiatives such as the Paris Agreement seem to struggle. Louis Mourier examines the prospects of minilateralism in global climate policy and emphasizes the need for a “second generation of climate minilateralism”: a minilateral climate regime that is closely aligned with the Paris Agreement, creates significant benefits for its members and involves relevant actors that control sufficient resources to make club-membership increasingly attractive. The EU should lead the way to such a regime.

Sectors up close

In order to increase the sustainability of economic activity and development, it is also crucial to look at key sectors and consider sectoral approaches. For developed countries, the industrial sector plays a more prominent role in reducing carbon emissions and increase sustainability. In his contribution, Joachim Lang argues for a market-based and technology-open approach in line with the principles of the Social Market Economy. He presents a proposal of the Federation of German Industries on how industrial carbon emissions can be cut by at least 80 percent until 2050. Germany and other G7 countries can lead by example when it comes to decoupling economic growth from greenhouse gas emissions, as Jasper Eitze and Maximilian Pretzel show in their contribution. Given that ecological standards in the G7 states are high, industrial goods should also continue to be produced in these countries on a large scale after the COVID-19-pandemic. Another way for industrialised countries to become more sustainable after the pandemic is expanding the circular economy. Joachim von Braun introduces the concept of bioeconomics and explores its relation to the vision of a circular economy. Although both are promising and complementary approaches, economic regulation is necessary to make both sustainable.

The agricultural sector is also significant to build more sustainable economies, particularly in developing countries. Christian Hübner, Nicole Stopfer and Anja Berretta provide an overview over the state of the agricultural sector in Asia, Latin America and Africa. They show that climate change undermines food security and requires investment, the inclusion of the broader population, fair trade agreements and education. Julia Klöckner argues that sustainable agriculture is an inherent duty of Christian Democracy and requires not only considering economic and social factors jointly, but also taking the interests of farmers as well as consumers into account. Franz-Theo Gottwald argues that sustainable agriculture must ensure at least three aspects: food security of a growing population, climate protection and protecting biodiversity. Using the benefits of digitalisation and 5G would also make the agricultural sector more sustainable.

Where to go from here? Synthesis of recommendations

Given the vast array of factors and sectors to consider, policy-makers face a huge challenge. Yet as Kai Whittaker, himself a Member of German Parliament, argues, policy-makers need to just start acting. The perspective of sustainability has to become a reference point for policy-makers across the board. Especially Western countries need to prove that liberal democracy and the Social Market Economy constitute a functioning system for others to follow in order to combat climate change and successfully realise sustainable development.

Although the contributions to this book differ in terms of authors, content and original date of publication, they all agree on at least three messages:

• All three aspects of sustainability – economic, ecological and social – are equally important and should be considered simultaneously.
• 2. Liberal democracies and the values and principles of the Social Market Economy still constitute a successful – if not the most successful – path to sustainable economic activity and development.
• Carbon pricing is key to sustainability, ideally implemented on a global scale. Yet other policy approaches might also be necessary, also depending on the sector in question. Reconciling the local, national and international or global levels is also key to more sustainable economic development.

Although we cannot claim to have found a one-size-fits-all solution, we hope that this volume encourages thought and ideas on how to get closer to a more sustainable world.

Berlin, December 2020