rethink sustainability
Can we be green and grow?
Exaggerating the challenges to decarbonisation leads to misplaced policy
The world invested more in renewable energy than in fossil fuel-based power generation over the last decade. At the same time, the market for electric vehicles is reaching a tipping point. Whether we care about carbon, the world is set to get cheaper electricity and motoring than under conventional fuels. Yet no economist predicted either important development because conventional economic approaches overestimate the costs of adopting clean technologies.
In his Nobel Prize speech, William Nordhaus, one of the most influential economist modellers in this space, described global temperatures of 3 or 4 degrees above preindustrial levels the next century as ‘optimal’. Many scientists view the levels suggested by Nordhaus as likely catastrophic. Yet the high cost of clean technologies assumed in his model makes more ambitious emissions reductions prohibitively expensive.
What matters is dematerialisation not degrowth
Overstating adjustment costs has led some policymakers to question whether ambitious decarbonisation offers value for money. However, a second camp draws the opposite conclusion. If absolute decoupling of consumption from emissions is prohibitively expensive, they argue, then the only feasible way to avoid a planetary emergency is to cut consumption. These economists champion what is often termed ‘degrowth’.
To be clear, prosperity and wellbeing is about more than just GDP growth. But it is important not to mistake output growth with growth in material inputs such as fuels, minerals, ecosystem services and capital equipment. Doing so is intuitively appealing but wrong.
Efficiency improvements boost growth. If we can get more out of the resources we have by decoupling GDP from materials, we can become more productive. What matters for sustainability is not final consumption of goods and services, but intermediate consumption of primary resource inputs.
How can we decouple GDP?
At this point, degrowthers will counter that we have never managed a rate of decoupling fast enough to secure sustainability of the planet’s resources and avoid climate change. This is true, but fact is we have never tried.
Make no mistake, the task is enormous. Towards the final quarter of this century the world economy will have more than tripled in size. Yet preventing dangerous climate change means net emissions must fall close to zero. Without decoupling, GDP would have to do the same inducing mass starvation.
So, however you cut it, we rely on innovation to get more out the resources we have. The question is how do we achieve it fast enough?
The theory of endogenous growth showed how investing in science, creativity and innovation allows us to decouple. In this way, increasing returns to ideas overcome diminishing returns to labour and physical capital and generate resources for further investment.
Unlike material resources, knowledge begets knowledge and does not deplete when used. Knowledge is not exactly “weightless”, since it is created and disseminated by energy hungry digital infrastructure (which accounts for 8 percent of global electricity generation), but in general such innovation reduces material throughput for each unit of GDP value created.
Knowledge and innovation are key
This understanding is not new. John Stuart Mill argued that even if the material economy attained a stationary state, our intellectual development would increase indefinitely. Weitzman showed how bringing existing ideas together generates a potentially limitless supply of new ideas.
This is reflected in the increasing importance in national income of intangible, knowledge-products –software, new media, databases and libraries, creative copywrite and online services. Intangibles also make up an increasing part of the capital base necessary for production. The valuation of the world’s largest firms is now based mostly on their intangible capital and not the value of their people, buildings or capital equipment. In 1975 around 20% of the value of listed companies was intangible - the ideas, processes and networks the company has nurtured. By 2015, that level had risen to around 80%.
Securing sustainability will require curbs to our rapacious appetite for material goods and meat, but tastes and preferences are changing in lockstep with production possibilities. 75% of millennials now profess to prefer spending money on experiences over material possessions. At the same time, innovation in production efficiencies and material use, together with leasing, sharing, recycling and re-using allows us to get more out of the resources we have. More prosperity does not require more materials.
It’s worth noting that this intangible capital is highly vulnerable to the impacts of climate change, the rapid shift in technology requirements and the mounting threat of litigation as politicians and executives knowingly damage livelihoods. A recent study showed that that 51% of consumer focused companies’ value relates to future growth at risk from sustainability concerns.
We can be green and grow
Opportunities from dematerialisation include substantial health benefits from better and more efficient urban planning, reduced urban pollution and traffic congestion and increased energy and materials efficiency.
It’s not just about high-tech renewables and sexy electric vehicles. Imagine you sell your car and buy a bicycle. Certainly, the vehicle sector will suffer, but the restaurants you bike to with the money you saved on petrol and equipment will thrive. Those on the road will spend less time in congested jams and more time in the office or with friends and family boosting GDP and wellbeing.
Cost saving improvements are available in the way we manage water, land and food with opportunities even in aviation, shipping and industry. The Global Commission on the Economy and Climate found that at least half and possibly as much as 90%” of the global emissions reductions required to meet an ambitious climate target could generate net benefits to the economy. The IMF recommends fossil fuel pricing on economic grounds.
To advocate slowing or stopping growth as a means to attain sustainability seems premature when so many and opportunities to improve efficiency, productivity and wellbeing remain untapped.
Experience of degrowth is not promising
So much for theory, what about the evidence? First, it is clear that rich world spending on deployment and research has so far overwhelmingly made the biggest impact on emissions by revolutionising global electricity supply and cars.
Moreover, history suggests that declining economies are neither clean nor efficient in their use of resources. Two of the biggest examples of policy-driven, deliberate consumption reductions in recent memory are Allied rationing in World War Two and Soviet rationing in the Cold War. Neither induced an ecological renaissance. One can literally see the failure to preserve biodiverse forests in low consumption Haiti relative to high consumption Dominican Republic.
Indeed, economic contraction would be one of the most expensive solutions to the climate problem. Dividing world output by annual emissions means each tonne of CO2 is associated with an average US$2,000 of global output. An abatement technology that cost US$2,000/tCO2 would represent terrible value for money when many economists agree that a price of $10-$100/tCO2 would meet a 2 degree pathway. Of course, de-growth reduces other environmental pressures not just carbon, yet targeted innovation is effective in preserving broader natural capital too.
De-growth is politically counterproductive
Degrowth stunts innovation necessary for driving resource efficiency. From a practical perspective, it is also a hard sell. In rapidly developing parts of the world, growth is (rightly) seen as a primary means to eradicate poverty.
There is an inherent contradiction in the argument that because we have not managed to decouple fast enough, reducing growth is the only option. The main reason we have not decoupled is political resistance based on the cost of carbon technologies and infrastructure. This being true, just how politically likely is it that people will accept large cuts in their salaries, immediate travel bans and enforced veganism?
The problem with framing sustainability in terms of sacrifice and privation is worse than just a case of bad forecasts and bad politics. By claiming sustainability is bad value for money, this not only gets the future wrong, it makes the future wrong. To the extent that these notions are believed, they become self-fulfilling by generating behaviour that delays a sustainable transition. Society becomes trapped in what game theorists call an inferior ‘tragedy of the commons’ Nash equilibrium, a steady state in which no participants benefit by changing strategy unless other participants change strategy too.
Neither growth nor degrowth will alone deliver sustainability. But increasing returns to scale in discovery and production means there is no reason the future cannot be cleaner, quieter, safer, more efficient, productive and prosperous. This requires effort and leadership, not despondency.
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