Inside Story

An idea whose time has come

Mainstream economics is beginning to recognise the opportunities alongside the climate threat, writes Michael Jacobs

Michael Jacobs 24 June 2011 2101 words

Economists including Nicholas Stern (above) argue that we are on the verge of a “new industrial revolution.” European University Institute/Wikimedia

ARE we witnessing the birth of a new Big Idea? Fat reports from the staid and determinedly respectable Organisation for Economic Co-operation and Development, the economic think tank of the developed countries, don’t generally merit that label. But the publication in May of Towards Green Growth, the OECD’s comprehensive study of how environmental policy can be good for the economy, may mark a significant moment. It follows hard on the heels of an even larger report, Towards a Green Economy, published by the United Nations Environment Programme, or UNEP. Recent months have also seen a consortium of governments establish a new centre of excellence, the Global Green Growth Institute; the announcement of an intergovernmental Global Green Growth Forum to take place in Denmark later this year; the launch by a series of countries – led by South Korea – of national Green Growth Strategies and Low-Carbon Growth Plans; and the release of China’s latest Five Year Plan, built around the concept of “green development,” which will determine that country’s economic direction over the next half-decade.

All these terms – green growth, low-carbon growth, the green economy, green development – are being used to convey a simple but potentially radical idea: that environmental protection and the reduction of carbon emissions need not be at the expense of economic growth but can actually contribute to it. This is hardly a new concept; a small group of environmental economists first argued this two decades ago. (I confess I was one of them, in a book, The Green Economy, published in 1991.) But when nations worldwide are struggling to boost rates of economic growth while facing a multiplying set of environmental problems, the emergence of “green growth” in mainstream economic analysis and government-sponsored discourse is worth noting.

The theory works at a number of levels. At its most basic it derives from the recognition that a key route to protecting the environment is to use resources – energy, land, water or whatever – more efficiently. This is essentially a form of productivity improvement: getting more output for less input. So long as this is done at a relatively low cost – particularly by using market mechanisms to encourage firms and consumers to change their behaviour – it should help growth not hinder it. It’s true that the growth generated by raising resource productivity can lead to new emissions and more environmental impact, but the evidence shows that the total impact almost always remains environmentally beneficial. Overall, most estimates of the costs of tackling climate change show that if done efficiently, the rate of economic growth may slow slightly but will remain strongly positive. Typical was the study by the US Congressional Budget Office in 2009, which showed that a national emissions trading scheme would cut no more than 0.09 per cent from annual GDP growth in the American economy between 2010 and 2050.

A striking conclusion of both the OECD and UNEP reports is that the economic benefits of protecting the environment would be even more pronounced if the national accounts took proper notice of the loss of natural assets that occurs when the environment is degraded. If a business made money simply by selling off its assets, we wouldn’t say that its income is a good measure of its profitability, since it is clearly unsustainable. Yet when economies run down fish stocks, or farm so intensively that soils are degraded, or cut down forests without replacing the trees, that’s exactly what happens: the income earned is counted towards GDP, but the loss of the “natural capital” that can sustain this income into the future is ignored. As both the OECD and UNEP reports insist, if national accounts were properly adjusted to record this, the contribution made by environmental protection to “real” growth would be even greater.

Of course, much environmental policy is expensive, not least cleaner forms of energy. Wind, solar and biomass remain in most places more costly than coal and gas (though the costs are coming down and, as Ross Garnaut has noted, are often exaggerated). So it’s generally argued that more aggressive climate policy focused on green technologies (not simply energy efficiency) will slow growth in comparison to the alternative uses towards which these extra costs could be put: that’s the principal reason why cutting emissions has proved so politically difficult.

But here the green growth theorists take a Keynesian turn. Where the economy is not running at full strength, investment in clean energy, or better water management, or protecting biodiversity, can generate new economic activity and jobs. This was why so many countries introduced “green stimulus” packages during the economic crisis of 2008–09: 12 per cent of the US stimulus, one third of the Chinese, 60 per cent of the European Union’s and fully 78 per cent of the Korean stimulus package went towards environmental spending. These policy responses were informed by a new body of “green growth” evidence, which showed that the employment content of environmental spending tends to be higher than in other industries. The location-specific nature of many environmental industries – from insulating buildings to installing wind turbines – means that (in many if not all cases) more jobs tend to be created by “green” than by “brown” economic activity.

Though the immediate rationale for “green Keynesianism” has receded over the last year, the wider economic case for environmental spending has remained in those economies, particularly in Europe and North America, struggling to restore growth. Economists have long recognised the importance of infrastructure in providing the platform for economic growth. The claim now is that, when consumption is low and saving rates high, directing those savings into investment in a new wave of low-carbon infrastructure would provide exactly the engine for long-term prosperity the economy needs. It is this argument, for example, that underpins the creation in Britain of a new Green Investment Bank, which will use public funds to leverage private sector investment into a major program of offshore wind generation, associated transmission grids and other low-carbon projects.

Of course, in economic terms this argument could equally well justify high-carbon infrastructure. What gives it its extra green force, in Britain and a number of other countries, is the hope that low-carbon technologies will also provide new industrial growth sectors for economies desperately looking for a way out of the financial crisis. It is no coincidence that since Britain announced its offshore wind program last year, six of the world’s largest wind turbine manufacturers have announced plans to build assembly plants and R&D centres on its eastern seaboard. Both the previous Labour and the present Conservative–Liberal governments have justified their strong climate change targets (Britain recently committed to a 50 per cent reduction in emissions by 2025) on the grounds that meeting them will create a series of new low-carbon industries and their associated high-skill manufacturing and service jobs – not just for the British market, but for export as well.

The models commonly cited for this kind of industrial green growth strategy are Denmark and Germany, which have built world-leading wind turbine and solar panel industries on the back of strong domestic renewable energy policies. And the latest exponent is China, which has made the creation of export-oriented clean technology industries one of the core strategic priorities of its new Five Year Plan. Of course, not everyone can follow that path: there isn’t room for every country or region to develop green industries for export. But the prospects are attractive enough – and the global environmental markets potentially big enough – for a number of governments, from California to Korea, to be trying.

And it’s here that the theory of green growth gets really ambitious. For the argument now being made is not just that new jobs can be created in environmental sectors, but that the development of new clean technologies will stimulate a whole new wave of growth across industrial economies as a whole. Economists such as Nicholas Stern, author of the Stern Review, argue that we are on the verge of a “new industrial revolution” in which low-carbon technologies will lead to a transformation of production and consumption in the same way that the development of the steam engine, the railways, the internal combustion engine and information technology transformed industrial economies and societies in the past. In the long run it is innovation which generates economic growth, and it is innovation which is required to tackle climate change and other environmental problems. So, goes the theory, we can expect to see environmental technologies generating not just solutions in their original sphere, but also spin-offs throughout the economy, as new materials and industrial processes generate productivity improvements and new consumer products. It is in the coupling of new energy sources with IT systems, as “smart” grids, homes and offices monitor and control energy use, that the pervasive innovations will occur.

The argument, of course, is not that this will happen automatically. It will require environmental policy to stimulate the initial technological advances. So the significance of “green growth” theory is not really about whether the “new industrial revolution” claim is right. The evidence on that is not yet in – and probably never will be, until we decide to go along that path and find out. The real argument is about whether societies are prepared to pay the higher initial costs of the environmental investment – notably in the reduction in carbon emissions – which are required to start the green growth ball rolling.

For economic sceptics, the counter-argument is very simple. Sure, green spending can stimulate growth. It just stimulates less growth than the brown alternative. Low-carbon energy is more expensive, so the costs will be higher and the returns less.

But here the proponents of green growth have a crucial riposte. The argument that high-carbon growth is also higher growth rests on a premise that has rarely been questioned, but which can no longer be taken for granted. That is that high-carbon growth will look the same in the future as it has in the past. For when economic models posit a “reference” or “base case” of the growth that would occur in the economy in the absence of climate or environmental policy, they rarely include in it the impacts of the environmental and climate change that can now be expected. The assumption is that growth will continue much the same as it has done before. So green growth inevitably looks like slower growth than business as usual.

But what if there is no “business as usual”? If – as is now widely expected, and indeed may already be happening – failure to take action on climate and the environment in practice leads to effects such as rising oil and fossil fuel prices, greater water scarcity, lower agricultural productivity, declining fish stocks, more frequent extreme weather events, and so on, then the base case against which the green growth path needs to be compared may be rather different from generally assumed.

Helpfully, UNEP’s green economy report puts this thesis to the test. Rather than using a conventional base case, it models the economic impact of various resource scarcities and losses of natural capital which could be expected in the absence of policy change, and then compares the resulting global growth rates to those arising from a green policy path. The results are instructive. The “green investment” scenario starts off generating slower growth than the base case. But by the second half of this decade this has reversed, as growth rates in the base case start to decline under the impact of environmental pressures. By 2030 and beyond the “growth dividend” of the green investment scenario becomes quite marked.

Not much should be read into one modelling exercise, of course. But the point is well enough made. And as the plethora of green growth reports and initiatives show, it is beginning to attract mainstream economic and government recognition. “Green growth” provides a useful body of theory and evidence around which to build a positive economic narrative of the benefits of tackling climate change and environmental damage. But just as importantly, it points up the fact that economic growth under “business as usual” may turn out to be less usual than we thought. •