Can we be green and grow?

rethink sustainability

Can we be green and grow?

Dimitri Zenghelis - Project Leader, The Wealth Economy, Bennett Institute, University of Cambridge

Dimitri Zenghelis

Project Leader, The Wealth Economy, Bennett Institute, University of Cambridge

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. 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’. The high cost of clean technologies in his model makes more ambitious emissions reductions prohibitively expensive. Many scientists view the levels suggested by Nordhaus as likely catastrophic.

 

Degrowth is amongst the most counterproductive

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’.

The world invested more in renewable energy than in fossil fuel-based power generation over the last decade. Yet no economist predicted either important development.

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. Though intuitively appealing, this is not a necessary condition. The theory of endogenous growth showed how investing in science, creativity and innovation allows us to get more out of the resources we have. In this way, increasing returns to ideas overcome diminishing returns to labour and physical capital and generate resources for further investment.

The theory of endogenous growth showed how investing in science, creativity and innovation allows us to get more out of the resources we have.

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 better placed to induce sustainability

 

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.

If the material economy attained a stationary state, our intellectual development would increase indefinitely.

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%.

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.

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 51% of consumer focused companies’ value relates to future growth at risk from sustainability concerns.

This intangible capital is highly vulnerable to the impacts of climate change, the rapid shift in technology requirements and the mounting threat of litigation.

Dematerialisation is a precondition for sustainability… 

Of course, the fact that we can grow without using more materials does not mean that we will. Pervasive environmental degradation and stress makes clear that dematerialising consumption is necessary to stem the depletion of natural capital and avoid dangerous climate change. This is certainly the case where there are no viable substitutes to things like land, accessible water, and renewable assets such as fish stocks, clean air, biota and biodiverse ecosystems. With fewer technological fixes to induce, nor alternatives to switch to, decoupling from depletion of these assets will be harder to achieve.

Pervasive environmental degradation and stress makes clear that dematerialising consumption is necessary to stem the depletion of natural capital and avoid dangerous climate change.

Even so, 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.

 

…but ‘degrowth’ will not deliver it

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. Cost saving improvements in the way we manage water, land and food are also available 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.

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.

Experience of degrowth is not promising

What matters for sustainability is not final consumption of goods and services, but intermediate consumption of primary resource inputs. The two can, but don’t always, move together. Indeed, 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.

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, degrowth reduces other environmental pressures not just carbon, yet targeted innovation is effective in preserving broader natural capital too.

Degrowth reduces other environmental pressures not just carbon, yet targeted innovation is effective in preserving broader natural capital too.

Degrowth 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.

Degrowth stunts innovation necessary for driving resource efficiency.

The problem with framing sustainability in terms of sacrifice and privation is worse than just a case of bad forecasts and bad politics. Their advocates, like their critics who claim sustainability is bad value for money, not only get the future wrong, they make the future wrong. To the extent that their ideas are believed, they become self-fulfilling by generating behaviour that delays our ability to steer and manage a sustainable transition. This generates what game theorists call an inferior Nash equilibrium, a steady state in which no participants benefit by changing strategy unless other participants change strategy too.

Their advocates, like their critics who claim sustainability is bad value for money, not only get the future wrong, they make the future wrong.

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. But this requires leadership.

Important information

This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.

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