Doubts about the mainstream economic system displayed on a Barcelona wall
The potentially catastrophic consequences of continued CO2 emissions at levels that exceed our planet's biocapacity are well documented. The economic cost alone could be the equivalent of around 20% reduction in consumption per head, according to the Intergovernmental Panel on Climate Change's ‘Fourth Assessment Report: Climate Change 2007'[1]. However there is debate on the appropriate policy responses.
On the one hand there are those who advocate pricing carbon emissions in conjunction with investment in low carbon emission technologies. On the other hand there are those who argue that the throughput of the advanced economies must be halted - a ‘no-growth option'.
The advocates of no growth argue that major changes to the way societies operate are required, including working fewer hours and distributing wealth more equitably. But considering recent literature across the field raises problems with the ‘no-growth' option. Arguably, the priority should be reducing carbon emissions by pricing carbon, and the other very important issues of inequality and overpopulation should be divorced from this, albeit pursued urgently.
Echoing earlier work by Sir Nicholas Stern [2], the 2008 Garnaut Report [3] analyses climate change policy options for Australia. Professor Ross Garnaut argues that an international agreement and a global system of tradable emissions are required. The supporting modelling indicates a reduction in growth in the first half of the 20th century and potentially an increase thereafter. Garnaut recommends that with an international agreement Australia should commit to proportional reductions of greenhouse gases, and in the absence of an agreement, to a 5% (25% per capita) reduction from 2000 levels by 2020.
A comprehensive emissions trading scheme (ETS) would be the principal measure to achieve this - supplemented by adaption measures and transfer measures to mitigate regressive effects. Low-emission technologies would be promoted, with particular emphasis on the energy sector. Implications for the form of cities and transport systems are identified. Biosequestration is promoted as a potential major contributor.In the 2011 update to his 2008 report, Garnaut reiterates the case for a discount rate to be used in the cost-benefit analysis. He argues that his original conclusions stand, even at the upper bound of feasible discount rates.[4]
Perspectives on the problem
The analytical frameworks adopted by both Stern and Garnaut are based in mainstream economic theory, used by economists such as David Weil, Professor of Economics at Brown University and author of ‘Economic Growth'.[5] Weil emphasises the role of prices in a market economy to encourage substitution of resources with a lower environmental impact, all enabled by ‘technological progress'. In this system, property rights over the resources involved are required.
Weil views a low-carbon atmosphere as a ‘resource' and the emission of CO2 at unsustainable levels as a case of ‘tragedy of the commons' (a metaphor for a situation where over-use arises as a result of free access). The solution is to assign property rights and to invoke a price on use of the resource. Hence a carbon tax is the recommended solution. In Weil's view, to achieve Kyoto targets the U.S. would not have to reduce its economic growth provided an (achievable) reduction in ‘resource intensity' (units of resources expended per unit of GDP) of 4.6% p.a. can be achieved.
An alternative view is provided by Professor Peter Victor of Toronto's York University.[6] He argues that in the developed economies growth has become a ‘mantra' with a fixation on GDP, which in turn is flawed as a measure of true welfare. According to Victor the root cause of the problem is the price mechanism, which does not account for externalities, and the GDP measurement system which ascribes value to ‘bads' such as military spending. At the same time ‘goods' such as voluntary work, leisure time and ‘happiness' are under-valued.
No growth
In his 2008 book ‘Managing Without Growth - Slower by Design, not Disaster', Victor argues that the ‘ecological footprint' of mankind has exceeded the biocapacity of the planet and that GDP growth must now cease in rich countries to leave room for poor countries to develop. He advocates a 60% reduction target for GHG emissions, which can only be achieved through zero GDP growth coupled with higher CO2 emission energy efficiency.
Victor argues that ‘status goods' and ‘conspicuous consumption' bring little in terms of welfare or happiness beyond basis needs fulfilment. He advocates a switch to investment in ‘public goods' which benefit society more broadly.
Victor acknowledges that reducing consumption in aggregate will result in fewer throughputs in the economy and hence lower investment, leading to reduced employment. The solution is a shorter working week resulting in increased leisure time. Hence the available work will be more evenly shared to maintain a 4% level of ‘frictional unemployment'.
This ‘no growth' model includes high taxes on capital to fund poverty alleviation and literacy advancement, plus a range of social welfare measures. There would be a substantial carbon tax to raise revenue to develop ‘green technologies'. Trade is to be curtailed to reduce employment loss and worker exploitation, and migration would cease. New technologies will require environmental assessments. To support this approach, Victor provides modelling of an alternative economy; albeit acknowledging its limitations and explaining that it is the ‘insights' gained that are important rather than the quantitative results.
Green growth
Jonathan M Harris, from Tufts University, provides another perspective on the problem, questioning whether ‘no growth' is essential to achieve ecosystem balance.[7] At a time when ‘no growth' as a political solution is untenable, he believes large scale eco-Keynesian policies based on ‘green growth' could provide a way forward. He advocates a new approach to macroeconomic policy where the three major sectors of consumption, investment and government spending are broken down into subsectors representing material goods, services, resource-intensive and resource-conserving investment and investment in human capital. He concludes there is "...plenty of scope for growth in economic activity".
Harris's new macroeconomics would emphasize ‘activist government policy' and fiscal policy. There would be market incentives such as ‘green taxes' and ‘ecological subsidies', configured to be revenue-neutral. Harris is optimistic about the potential for future ‘green growth' for a number of reasons. Stabilisation and ageing of the world's population will reduce pressure on the environment, thus creating employment in services to the aged. There will be growth from investment in renewable energy. Carbon trading schemes will create opportunities for poorer nations to participate in carbon storage schemes and environmentally beneficial projects. Social investment in education, health services and related human capital development programmes will create employment with little or no adverse impacts on the environment.
Some problematic issues in a no-growth economy
A fundamental underpinning of Victor's no-growth model is the assumption that the unemployment created by reduced throughput in the economy will be compensated by increased leisure time, and moreover that ‘happiness' will be unaffected by reduced consumption.
Certainly, ABS statistics indicate that there is a high proportion of ‘discouraged workers', less than full employment and a large and growing pool of part-time workers who seek more hours [8]- yet at the same time there is a segment of the workforce who may be classified as ‘over-employed'. It is the over-employed segment where reductions in hours may be feasible. However, for this to occur voluntarily there would have to be substitutability of leisure time for income, a problematic concept.
In his 2004 book ‘Hooked on Growth: Economic Addictions and the Environment'[9], Douglas E.Booth
proposes another answer to the unemployment issue, by suggesting that all workers would take a reduction in hours. He coins the term ‘economic speed limit' based on the growth rate of the labour force and labour productivity that together produce full employment. He also coins the term ‘environmental speed limit' based on the growth rate of sustainable environmental productivity. In the latter case full employment is not assured and is more likely to be unattainable.
However the ‘across-the-board hours reduction' idea can be criticised on several points: moving self-employed people on low incomes closer to poverty; increasing unemployment in small family-run businesses reliant on long working hours, who have minimal capacity to enjoy the resultant time away from work; and reducing hours in areas that produce social benefits (like health and education) so reducing the flow of benefits to society. Also, rather than reducing work in ‘green industries', it would seem more logical to focus on reducing employment in ‘black industries' that operate above the environmental speed limit.
The role of consumer expectations is another problem with the no-growth concept. In the final analysis a market economy is driven by consumption and investment and the multipliers that link these variables to output, and hence to growth. Consumption is affected by consumer ‘expectations' about future labour income, real interest rates and taxes. Investment is similarly affected by expectations of future profit, real interest rates and taxes. Victor's model is arguably unrealistic in that it does not accommodate the key variable of ‘expectations' and assumes that past consumer and business confidence levels will persist.
Potentially, a government announcement of ‘no growth' policies may impact on consumer and business confidence, causing a sudden contraction in aggregate demand and contraction of the type experienced in the Great Depression. It is likely the geopolitical environment [10] would obstruct development of the complex mechanisms that would be required to compensate the losers from any collective action taken. This would likely constrain Victor's preferred solution.
How to move forward?
In exploring policy options for dealing with no growth, Victor argues that migration robs poor countries of skills and creates a growth imperative in the host country. He argues for a focus on limiting throughput in the economy to take pressure off resources and the waste-receiving environment. Regulations are seen as a partial solution, with existing polluters often exempt. Carbon taxes as opposed to cap-and-trade schemes are said to be superior on the grounds that a tax raises revenue for developing ‘green technology' and governments have more experience with taxation regimes. Victor accepts that ‘no growth' won't appeal to many people, and individual countries cannot go it alone in a global economy.
Booth, in contrast to Victor, succinctly summarises how a cap and trade emissions reduction scheme would work. This ‘lowest possible cost option' involves placing an annual cap on (global) emissions and selling or giving away tradeable emissions allowances. Potentially this could be on a per capita basis world-wide, with the effect of giving developing nations an advantage.
Booth believes that such a scheme would be costly for developed nations, but the environmental benefits would far exceed the costs. There would be a shift away from fossil fuels facilitated by ‘European-like' urban areas with mass-transit systems, which in turn have fewer environmental impacts than ‘urban sprawl'. Reduced reliance on fossil fuels will reduce global military conflicts. The ANU's Dr Jack Pezzy's 2009 submission to the Australian Parliament [11] also favours ‘cap and trade' to create a carbon price.
The case for reduction of greenhouse gas emissions is well made and it is gaining political support in the developed world. However, advice to governments on the means to achieve this end is somewhat confused. In academia there are many and varied approaches, including ‘no growth' and ‘green growth'. Macroeconomic modelling is unconvincing. Notions that unemployment in a no-growth scenario can be addressed by sharing the available work across all workers are simplistic. In the short-term the focus should be on the main objective, which is to reduce global greenhouse gas emissions, and the priority must be instigating a price on carbon.
This article was sourced from a more comprehensive review of economic literature about economic concepts, issues, modelling and policy responses to global warming. The full paper "Green growth versus no growth, a review of concepts and issues" can be found at www.sgsep.com.au/publications
Footnotes and references
1. IPPC (2007). IPCC Fourth Assessment Report: Climate Change 2007, Intergovernmental Panel on Climate Change (UN)
2. Stern, Sir Nicholas (2008). Stern Review: The Economics of Climate Change, United Kingdom
3 Garnaut, Ross (2008). The Garnaut Climate Change Review, Cambridge University Press
4. Garnaut, Ross (2011). Update paper 1, Weighing the Costs and benefits of Climate change Action, The Garnaut Climate Change Review
5. Weil, David (2005). Economic Growth, Addison Wesley
6. Victor, Peter (2008). Managing Without Growth - Slower by Design, not Disaster, Edward Elgar
7. Harris, Jonathan (2010). The Macroeconomics of Development Without Throughput Growth, Tufts University
8. Australian Bureau of Statistics (ABS) (2010).1377.2 State and Regional Indicators, ABS
9. Booth, Douglas (2004). Hooked on Growth: Economic Addictions and the Environment. Lanham, MD: Rowman and Littlefield
10. as discussed by de Wilde in De Wilde, Jaap in Smith, Philip (Ed) (1994).The World at the Crossroads - towards a sustainable, equitable and liveable world / a report to the Pugwash Council. Earthscan
11. Pezzy, Dr Jack (2009).Submission to the Parliament of Australia's Senate Select Committee on Climate Change.
Conspicuous consumption... bringing little in terms of welfare, should it be replaced by investment in public goods?
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