Download Klas Eklund: The Green Economy

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Klas Eklund: The Green Economy*
Keynote speech, IIIEE Symposium, 2012-09-21
In the public debate, the concepts “economy” and “environment” for a long time
almost seemed to be opposing poles. Environmental activists saw economic growth
and consumption as the culprits causing environmental degradation. Economists and
business people, on the other hand, regarded environmentalists as dreamers.
However, the concept of a “Green Economy” has emerged over the past couple of
years as more decision makers, both in politics and business, agree that the world
needs a transformation to more environmentally-friendly production methods and
consumption patterns – while an increasing number of environmentalists realize that
the path forward must include economic tools to change the behaviour of producers
and consumers.
Already in the 1980s the Brundtland report1 spoke of “Sustainable Development”,
including a more environmental-friendly economic growth, but a crucial moment in
this rapprochement between environmentalists and economist was the 2006 Stern
Review2, which showed – in crass, hard numbers – that the cost of inaction exceeds
the cost of early investment in low-carbon technologies. Thus, it makes good
economic sense to start transforming our economies as early as possible. At the same
time, we need a well-functioning economy to create new jobs and hike the incomes of
the poor. Hence the increasing use of the concept “green economy”, not as a
contradictio in adjecto but as a whole.
But the concept of green transition is neither self-evident nor non-controversial.
There are zillions of definition of the green economy, several of which politically
contentious. Some representatives of emerging economies claim that a global “green
economy” may block their path towards higher income and wealth. As a response to
this critique, some proponents of the green economy claim that it is not only a path to
a more environmentally friendly world, but also is a more general way to advance
other social goals. “Green Economy in the context of poverty eradication and
sustainable development” was one of the themes discussed at the Rio+20 Conference
last summer.
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I would like to thank Karl Hallding, Petter Hojem and Martin Ådahl for comments. All
remaining confusions are my own
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My presentation here today will present the need for a green transformation. But I
don’t want to gloss over difficulties and contradictions. On the contrary. At the
rostrums of international conferences a green transformation may be seen as inclusive
per se. But that is simply not true; such a statement is just a sacrifice on the altar of
political correctness – a way to over-sell the concept. A green transformation will in
some respect be more inclusive, but in other respects it will create new tensions and
inequalities – different than in the old, black economy, but difficulties nonetheless.
To gloss them over is to actually make it more difficult to solve them. Instead, they
must be taken out in the open and met, face value.
My presentation will cover the following topics:
1. Why a green economy?
2. What is a green economy?
3. Economic tools
4. The need for better measurements
5. Competing strategies
6. Is the green economy inclusive?
7. The need for buffers and cushions
8. A strategy for Sweden.
1. Why a “green” economy?
Let me start with the case for a green economy. The main reason we need a transition
to a green economy is dramatically changing conditions for providing well-being and
stability. This development started in the 1950s as population and economic growth
picked up steam and has accelerated since.
Up until then, economic development took place in an era defined by affluence in
resources. Human population and the scale of production were still limited in relation
to the natural capital. Under those conditions it did not matter that economic
development was based on a simplistic view of economic circular flows that did not
account for the use of natural resources, ecosystem services, or the negative effects of
pollutants or waste. We lived in a “cowboy economy”; regional depletion of
resources just meant we moved “further West”, to new virgin lands.
Since then the global economy has grown exponentially. Mankind is now so active,
so numerous, so waste-producing and so resource-demanding that our behaviour
changes biological and climatological processes at such a scale that some geologists
talk about a new era – the “Anthropocene”. This era will be different than the
temperate Holocen that has been so benevolent to us humans.
Much of this change is for good. The most obvious improvement is that hundreds of
millions of people have escaped bleak poverty and starvation. Life expectancy has
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improved, as has women’s education. But as the process of exponential growth
continues, the environmental risks increase. The global GDP level of today took
10,000 years to reach, from when we climbed down from the trees and began to
cultivate the land. But now we double global GDP every 15-20 years, courtesy of
population growth and the fact that income levels now are rising rapidly in several
populous countries. Should this continue, in 30-40 years global GDP will have
quadrupled.
This would do much to eradicate poverty – but it would also entail an immense
increase of resource utilization, waste, etc. Forest exploitation, mining, construction,
transportation etc etc – on a scale which might be more vast than the biosphere can
handle. Already, emissions of CO2 are on a path that may lead to dangerous global
warming, air pollution is lethal in many cities, biodiversity is threatened (not least
among the fish we catch for food in the oceans), desertification is rapid and extreme
weather events are on the rise. When some economists and optimists still say “so far,
so good” they simply haven’t factored in the future absolute consequences for our
resources – which cannot be replenished with the same exponential speed as
economic growth.
These new demand and supply dynamics pose fundamental challenges for the global
society, nations and business already in the coming decade. We are increasingly
stretching the limits of our planet. Johan Rockström of SEI and some of his
colleagues claim that humanity is dependent on nine biophysical processes – access
to clean water, fresh air, fertile soil etc. They mention the coal cycle, the nitrogen
cycle, the ozone layer etc.3 They see the planet as a system where these processes
interact and claim that we are getting closer to the ”planetary boundaries”; we’ve
already broken through a couple of them (biodiversity and the nitrogen cycle). The
planet is approaching tipping points where systems start to interact in dangerous
ways. Just during the past year this has been visible as the ice cap of the Arctic has
melted to historically low levels.
This leads me to three observations, which make up the starting point for the rest of
this presentation:
1. There is great uncertainty about how these systems interact and where
tipping points may occur. But, as The Economist said last year in a survey
of climate policy and the skeptics: ”The doubters are right that
uncertainties are rife in climate science. They are wrong when they
present that as a reason for inaction”. Uncertainty entails a need to take on
insurance policy – i.e to start acting to eliminate or at least reduce future
risks
2. We need to regard this as a systemic issue. Isolated, point actions are not
sufficient. Such isolated actions, as a tax increase on a specific pollutant,
may lead to local or temporary positive effects. However, if consumers
reduce consumption of one such dangerous good, they might increase
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consumption of similar but untaxed goods, Such “rebound effects” and
interactions erase most positive effects.
3. We don’t have much time. The clock is ticking.
2. What is a green economy?
So, we need a green economy. But what, exactly, is this animal? To me, the “green
economy” says that we need to produce and consume goods and services which do
not endanger the environment of our planet – i.e a more narrow concept than
Brundtland’s “Sustainable development”. But in the public debate, the “green
economy” has come to signify more than that. One of the preparatory sessions before
the Rio conference (in March this year) led to 80 (!) proposed paragraphs on what it
means and entails. The concept of a green economy has become something of a
catch-all phrase with many definitions and interpretations.4
UNEP’s Green Economy Report Towards a Green economy5 claims that the
greening of economies is a new engine of growth, that it is a net generator of
decent jobs, and that it is a vital strategy for the elimination of poverty. The report
defines a green economy as one that results in “improved human well-being and
social equity, while significantly reducing environmental risks and ecological
scarcities”. It is furthermore, “low-carbon, resource efficient, and socially
inclusive”.
The report from the UN Secretary-General’s High-level Panel on Global
Sustainability Resilient People, Resilient Planet6 recognises inclusiveness as an
important aspect of its long-term vision. The report uses the term green growth,
which is defined as: “to eradicate poverty, reduce inequality and make growth
inclusive, and production and consumption more sustainable, while combating
climate change and respecting a range of other planetary boundaries”.
UNDP’s Human Development Report Sustainability and Equity: A Better
Future for All7 focuses on the challenge of sustainable development and equity. It
argues that sustainability is not exclusively or even primarily an environmental
issue, but concludes that environmental degradation intensifies inequality and that
inequalities drive environmental degradation. In terms of green economy it claims
that the importance of equity and inclusion is already explicit in the objectives of
green economy policies, but proposes taking the agenda further.
A different approach is taken by OECD8, which concentrates on “green growth” –
“maximizing economic growth and development while avoiding unsustainable
pressure on the quality and quantity of natural assets. It is also about harnessing the
growth potential that arises from transiting towards a green economy”. This is a
narrower concept, since it does not include inclusiveness, concentrates on the OECD
and focuses on growth – not the wider “economy” as a whole.
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The Swedish Government’s Commission for the Future, of which I am a member,
has as one of its tasks to analyze the challenges and possibilities of a green
transformation for Sweden. Our work is still in progress (a final report is scheduled
for the spring of 2013), but at a two-day workshop in September, 2012, we agreed on
a working concept which defines a green economy as “one that is low-carbon,
resources efficient, and maintaining sustainable ecosystem productivity”. Thus, it
does not assume that inclusiveness necessarily is a characteristic of the green
economy.
To me, that is a good starting point. I will therefore first discuss the tools necessary to
transform our economy and make it greener; then I will revert to the issue of
inclusiveness and equity.
3. The tools of economic transformation
When an economist speaks about a transformation to a green economy, you should
not be surprised that he sees economic tools as crucial to achieve such a
transformation.
The basic strategy is to eliminate “externalities” by hiking prices of ”black” goods
and services. Externalities are such costs of production – like environmental
degradation – which are not included in the market price. Consequently, these
products are sold too cheaply and the resulting volume of production will be too big –
with ensuing environmental damage. If the costs of producing such goods included
the environmental damage (i.e the externalities were to be “internalized”), the market
price would rise, demand would diminish, as would production and the environmental
damage caused. Furthermore, companies would get an incentive to develop new,
more environmental-friendly technology.
The core of this strategy is to align the incentives of the individual consumer and firm
with societal needs. To reward the individual when she follows what is good for
society as a whole. This is necessary, because if the wallet comes into conflict with
the common good, the wallet usually wins…
This alignment can be achieved through taxes, fees or trading of emission permits.
Taxes and fees directly affect the prices while trading systems instead set a physical
limit for emissions, to which prices will then have to adjust. You should note that
economists in general do not see these actions as something which distorts the market
economy; on the contrary, they make it work better, since they reduce externalities.
Nicholas Stern even claimed that global warming is the biggest “market failure” in
the history of mankind. To correct it surely is a good thing. Taxes which eliminate
such market failures are called Pigouvian taxes – after the economist Arthur Pigou –
and have always been a favourite among economists: A tax which does not distort,
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but on the contrary helps markets function better, and as a positive side effect can
finance common goods.
As the economic tools are applied, production costs rise for the black products. As
green products become relatively cheaper, demand will rise and resources will be
shifted away from environmentally detrimental production into greener areas. As a
result, investment and R&D in green technologies will become more profitable. It
should be underlined, that this strategy does not confine itself to sector policies; it is a
strategy for transforming the entire economy, to affect behaviour all over – in all
sectors, in all companies, and for all households.
Green taxation is at the core of such a transformation. Sometimes, however, their
importance has been played down. A common objection is that such green taxes
cannot possibly be a stable source of government revenue, since they aim to destroy
their own tax base (pollution). That is undeniably true, but I don’t see that as a severe
problem. Firstly, their aim is not primarily to raise revenue but to affect behaviour.
Secondly, they will nonetheless give strong revenue streams during a transition
period of perhaps decades – and it is precisely during this period that we need new
green investments as well as new green jobs. The green tax revenues could be
earmarked for such purposes and thus give strong transformation effect in several
sectors, both on the demand side and on the supply side.
However, to set such taxes or fees is not as easy as it sounds. The decision-maker
needs a full cost-benefit-analysis over long periods, with the correct choice of
discount rate etc etc – in an uncertain situation where we don’t know future
technologies. This is analytically difficult.
Furthermore: Green taxes may backfire. Oil is a scarce resource. If we hike taxes on
oil (or CO2 emissions) in order to discourage demand simple economic theory says
this will depress the oil price (pre-tax) and encourage non-fossil technology. But that
overlooks the fact that oil is a non-renewable, scarce resource – and that those who
control its extraction may not have the same aims and targets as well-meaning
Western economists and ecologists. How do we know that Vladimir Putin and a score
of authoritarian African and Mid-East regimes will not answer by stepping up
extraction to milk out higher profits before the transition to a greener economy takes
place – with ballooning emissions as a result?
The answer is: We don’t. Which is the reason some economists have warned of a
“Green paradox” – that good intentions may lead to detrimental results.9
The remedy here would be to attack the supply of oil, through a global system of
trading permits – such a system would set a ceiling for extraction, under which
emission rights are traded. However, that proposal just leads to another question: If
it’s impossible to unite all countries around common taxes and pricing principles,
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how on earth can we then come to an agreement which is even more far-reaching and
closes out the loop-holes of taxes? Obviously, in real life policy must proceed via a
maze of small steps, negotiated among coalitions of nations willing to step further
than others, hoping to drag the others along. And we need to realize that some
authoritarian, oil-dependent states probably never will participate but on the contrary
may try to block the transition to carbon-free production.
Not surprisingly, climate policy a case study in difficulties and tangled arguments.
Theoretically it should be a piece of cake. The analysis is fairly straightforward:
There is one emission, it’s global, we know pretty well how fast we have to move etc.
Thus, the target price is ”easily” quantifiable. Still, it has been hellishly difficult to
implement. The main reason is that the issue at stake than “just” climate: 200
sovereign states cannot agree on strategy for development and distribution. And the
two biggest emitters of greenhouse gases – China and the US – both refuse to bend to
international resolutions. So, climate negotiations flunked at the Copenhagen summit
in 2009. After that, we have not seen much international coordination. Instead, we see
sub-optimal, costly non-coordinated plans – while global emissions continue to rise
along a path which is not compatible with the 2 degree target. True, CO2 emissions
from the US have fallen recently. However, this is not as the effect of climate policy,
but because the US has started to pump “shale gas” in great quantities, courtesy of
new “fracking” drilling technology. This is a double-edged sword. Shale gas does
indeed emit less greenhouse gases than oil – but makes it even harder to break the
carbon habit.
Even when there are instruments ready to use in a smaller, more coherent group of
coherent states, development tends to go sour. The European system for emissions
trading, ETS, has seen carbon prices collapsing to levels far below intended. The
reason is not only the recession which has caused production to stagnate, but also too
generous allotments of permits which has created a huge surplus. Also in the global
trading system, CDM (Clean development mechanism) prices have collapsed.
Other areas, outside the climate issue, are even harder to tackle. On the economics of
biodiversity and ecosystem an international project, TEEB, has set out to try to price
nature’s services. But analytically, this is a much more difficult task that pricing CO2,
and the political obstacles are huge. Nevertheless, there are experiments, and in some
cases clear progressive steps have been taken.
Despite all these troubles, it is hard to see any tools as powerful as the market forces
and the use of relative prices – if they are instigated. But, of course, the price
mechanism itself is not sufficient. We also need regulations for sectors where prices
are not sufficient, and in some cases subsidies. Regulation is often a good way of
signaling future directions for market pricing and innovations. R&D needs to be
beefed up and public infrastructure investments are needed in waste management,
urban planning and infrastructure – where the market time horizon often is too short.
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In financial markets, there are huge needs – as well as opportunities – for the creation
of “green bonds” and other new vehicles for funding environmental and clean-tech
projects. The market for trading in carbon emissions has had a rough start, due to
faulty designs of the ETS and CDM systems, and also because of the financial crisis
which has reduced demand. In the market for ecosystem services, there is an
embryonic system for reforestation (REDD), which is showing progress.
So these are the kind of tools needed and generally discussed as central for a
transformation to a “green economy”. However, I want to add the all too often
neglected task of improving the general economic conditions for innovation and
entrepreneurship. The taxes, fees and relative prices mentioned above are instruments
which are supposed to change the behaviour of companies and consumers. But the
agent of change – he or she who actually changes production technology and updates
business models – is a person of flesh and blood, who searches for new business
opportunities, who needs to experiment and test new ideas. Once the general direction
towards a greener economy has been set (through carbon taxes, prices on biodiversity
etc), we must leave room for the entrepreneurs to transform the political decisionmaker’s abstract ideas into concrete business ideas and commercialize the new
technologies and business models necessary to transform the economy and make it
greener.
More specifically, this means, e.g, that taxation of own and borrowed capital should
be neutral and that the entrepreneur should be given possibilities of profitable exits
during the different phases of the company’s life. Starting up should be easy, as
should hiring and firing, to make it possible to grow the business and develop the
skills of the work force. This part of the equation – the micro and business
environment – is often forgotten when the “green economy” is debated in high-brow
seminars where hands-on sector policies, technology transfers and emission quotas
take all interest.
4. The need for better measurements
We need not only different relative prices and micro incentives, but also better macro
measurements. The national accounts need to be updated. The concept of GDP was
constructed in the 1930s and 40s, when production still largely was measured in tons
and hectoliters. Today, it is out of date:
Content is now much more important than volume – but that is hard to capture
with the old statistical tools.
The tertiary sector has outgrown the primary and secondary sectors, but the
measurement tools are still based on bricks and mortars. Furthermore, even
though the demarcation line between services and manufacturing is becoming
more blurry, the old sector definitions still stand.
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Human capital is not included in investments or the total capital stock.
And, of course, neither is natural capital – despite what was said earlier about
humankind leaving the Cowboy economy and entering the Anthropocene.
This means that the national accounts – including the GDP itself – are becoming
misleading. Just one example: In 2007, the World Bank claimed that almost half of
China’s recorded GDP growth that year – a hefty 12 percent – was depletion of longterm green capital. So, the sustainable growth was just 50 per cent of the official
growth performance; i.e GDP overstated real, sustainable growth by almost 100 per
cent. That is a big number – especially considering this pertains to the world’s second
largest economy and the big global growth engine of the recent decade…
Numerous attempts to improve GDP and national accounts are under way:
Nobel laureates Joseph Stiglitz and Amartya Sen participated in a much
publicized undertaking for the French government, called ”Beyond GDP”.
OECD has been working intensely with the already mentioned project ”Green
growth”, which has resulted in numerous ways to measure the “greening” of an
economy.
The World bank has started a broad project called ”The changing wealth of
nations”.
In Eurostat, a similar project, ”GDP and beyond”. is under way for the EU
countries, which will eventually lead to a common view among the union
members on how to measure production in a greener way.
Lots of important empirical material has been uncovered and a broad methodological
debate is taking place. In my mind the OECD has been more fruitful in identifying
”green indicators” and working on a more operational level. The Stiglitz/Sen project10
was spectacular but too broad; they did not separate the green issues from a wider
discussion of health, happiness, income distribution etc. Therefore, they were not able
to reach any meaningful, concrete conclusions.
Here, a general warning should be issued. The broader we want to make the
measurement the more difficult it will be to interpret – and the less useful it becomes.
Personally, I see the need for natural accounts to complement traditional GDP
measures, and eventually they may merge to produce a green GDP. But other aspects
of well-being – health, happiness, literacy etc – are better to have in separate indices.
To try to add them all into one coherent index is just unfeasible – and the result would
probably be impossible to interpret. And don’t forget that we for pure economic
reasons still need a measure of production (albeit green) since Central banks and
Ministries of Finance need to be able to make forecasts on the development of
potential and actual production, in order to shape stabilization policy.
Let me add: Measurements who are only ”green” miss out on other aspects. If we
only measure ”ecological footprints” our role models become countries like Burkina
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Fasso, Syria and Cuba. North Korea ranks higher than South Korea. This means we
may find “green” economies – but only poor and wretched ones – while we lose track
of sustainable development.
So, we need a broad set of economic tools for the green transition:
At the micro level to affect behaviour of individuals and companies.
At the macro level to be able to make the overall calculations of national and
international balance sheets more relevant.
My own conclusion is that today’s focus (and heated arguments) on ”growth” – both
from its proponents and adversaries – is wrong. What we want is employment,
income, strong social insurance systems, a sound fiscal balance etc. So let us set
targets for that and then let “GDP” be what it becomes. Don’t think that a poorly
measured and defined GDP should be a target to be maximized. And don’t believe
that de-growth measured in this paltry way necessarily is a good thing either. Set the
targets for sustainability, clean water, biodiversity etc, but don’t think that setting
limits on a poorly measured and defined GDP will help us reach the really important
targets in a good way.
5. Alternative systems
So far, I have kept to the mainstream economic tools and analyses. But there are
alternatives. There are plenty – albeit vague – critiques of the present growth norms.
Often they are quite sympathetic in general terms – but fuzzy on the concrete
proposals. In recent years, the French slogan of “décroissance” (often translated as
“de-growth”), put forth by Serge Latouche and others, has caught on.11 The concept is
alluringly vague, implying a calmer, more spiritual life style, slower, more ecofriendly, in a totally different context than today’s GDP-driven economy.
It’s difficult to take this proposal at face value. Latouche et al do not specify what
tools to use. If the economy of décroissance is to be interpreted as an economy with
better measurements – where resource scarcity is reflected in relative prices and GDP
is measured in a better way, taking natural capital into account – I endorse it. But I
doubt, though, that this is what its proponents want. To be honest, I see this stance
mainly as a Gallic “philosophical” cloud of words without any concrete policy
implications.
Other critics of the mainstream economic view, like Tim Jackson12 agree that the degrowth approach is not a stable alternative. Jackson himself proposes a strategy which
works along several lines to slow down growth; a concerted push from manufacturing
to services, public infrastructure investments in alternative infrastructure, green taxes
and fees – but the centerpiece is cutting hours worked. That, Jackson claims, is the
only way to get to grips with the rebound effect. Green taxes and fees may have
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short-term positive benign effects, but in the long run increasing real income causes
demand to bounce back and eat up the environmental gains.
Jackson’s approach can be made operational and there are mathematical models that
demonstrate what a Jackson-like strategy would look like.13 However, I have serious
qualms – both political and ethical – about a strategy based on fewer working hours:
The first, of course, is what to do with those people who actually want to work a
lot; because they need the money or simply like their work. Should society
organize an “hours control authority” with plenipotentiary powers to check on
overtime in all companies, even the small ones? And how should we make the
demarcation between those who will be allowed to work more (researchers,
entrepreneurs, decision-makers, doctors?) and those who shouldn’t? The question
may sound rhetorical and sarcastic, but the Devil is in the details and to me, this
smells of too much statist control.
Secondly, fewer working hours, if enforced, would doom many people to be left
behind at low incomes, making it a lot harder to “work yourself up”.
An obvious side effect is increasing problems to finance public welfare. Today,
the public sector in all advanced economies relies on income taxes as the main
form of revenue. Shorter working time means lower tax revenue – in a situation
where the population is ageing and future pension and health care costs will rise.
Consequently, it would make the Scandinavian welfare states impossible to fund.
Finally, I find culling all kinds of work a very inefficient and roundabout way to
cut emissions and environmental degradation. Actually, if you think about it, it is
unreasonable to claim that all production and all work is evil. What about
production of solar panels? Malaria vaccine? Should they be regarded in the same
league as mining tar sands?
No, what we need to attack is not all production per se, but that production and
consumption which is detrimental to the environment. Which leads me back to
relative prices as the basic tool to stimulate some production while discouraging
other. Jackson’s observation that the rebound effect is strong is often correct – but my
conclusion is not that the relative price tool is impotent but that the doses prescribed
usually have been too small, and too often only one-off. For relative prices to work
long-time they have to aim at a moving target and constantly be adjusted. If this is
done, the rebound effect can be quelled.
6. Is the green economy inclusive?
So what about inclusiveness and distribution of a green economy? The high-level
reports (from UNEP and the UN Secretary-General’s high-level panel) quoted above
claim that a green economy is intrinsically inclusive. However, these statements are,
according to two critics, “negotiated products of the multilateral system”.14 The
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political efforts to paint a bright future means the bipartisan editing committees of
these summits circumnavigate the controversies in the international community. That
is why they hail a green economy as inherently inclusive.
In my view, the transformation to a green economy on the one hand, and
inclusiveness and equity on the other, should be regarded as two different goals,
which are to be attained by different tools. This would make the policy discussion
clearer, since the grand challenge then becomes to reach both these two goals and to
find a strategy which makes this possible – instead of taking it for granted that they
go together automatically. Hence, contradictions and synergies can be addressed
more critically and in a less generalizing way. In a sense, what we should strive for is
“sustainable development” à la Brundtland; the recent debate on the Green economy
just makes it obvious this strategy should consist of two elements – green policies and
policies for inclusiveness.
Sure, in some respect a green economy is inclusive. Projections up to 2050 from the
2011 Human Development Report suggest that the most disadvantaged people will
suffer most from further environmental deterioration. The inhabitants of low income
countries have contributed the least to global climate change, but they will experience
the greatest loss in agricultural production and livelihoods. A green economy will
correct that injustice.
At the same time, a transition to a green economy creates tensions. A green transition
entails what Joseph Schumpeter called creative destruction on a massive scale. Such
structural change is always painful to the companies, regions and workers who are on
the losing side. The transition involves upfront costs that will pay off only in the
longer term, as well as changes in the competitive advantages of countries and
businesses. “Black” production will be replaced by “green”, meaning that
companies, sectors, regions and perhaps even entire countries that are dominated by
“black” production will lose out.
But also some smaller “green” communities may suffer from the use of economic
tools described above; indigenous peoples living in agricultural or hunter-gatherer
communities may be hurt if ecosystems services and biodiversity are being priced and
become commercialised. Not surprisingly, NGOs who represent such groups
sometimes claim that the transfer to a green economy means sacrificing their culture
to a rapacious capitalism.
We should not be surprised at effects like these. Countries vary in terms of natural
endowment, human capital and development level, thus the preconditions for moving
towards a green economy differ considerably. There is no general one-size-fits-all
blueprint for a green economy. The economist’s solutions will not be accepted by all,
since the economic policies have different distributional outcomes.
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The conclusion is that there is a need to build cushions for those groups who lose out
– not supporting them permanently but to help them to a better future, re-educating,
assisting in the transfer to new jobs in the growing green sectors. Consequently,
contested questions abound. How should global prices on emissions be set – to what
extent should rich countries compensate poorer countries for the setback in living
standards that sharp rises of fossil fuel prices would have? What international transfer
mechanisms are needed? What agreements with bearing on intellectual property
rights, trade and aid finance?
7. Necessary buffers and cushions
Structural transformation has been going on for centuries. Now we face a broad
transition, where “black” sectors are to shrink and green are supposed to grow. In
general, the effects on the labour market of structural transformation where old
sectors shrink and new expand depend on 1) employment intensities of different
sectors and 2) the functioning of the labour market.
The first factor should not be a big problem in this case, as green sectors generally are
more labour-intensive than black. Consequently, if the market is flexible and people
can move from black to green sectors, there is nothing a priori that says the transition
to a green economy will cause higher unemployment – on the contrary. But the labour
market is not perfect; often it performs quite sluggishly, with a lot of inertia. As some
sectors shrink, regional and sector problems will arise, especially if the transition is
broad and rapid. Consequently, social policies need to be developed. This includes
measures to ensure that those likely to be negatively affected are protected through
income support and access to alternative employment and income through retraining
opportunities and relocation assistance.
In the developed countries an active labour market policy is needed to help those who
become unemployed due to the green transformation. By this we mean that the
unemployed should be given possibilities to re-train and re-educate, and they should
be given protection while being at the labour market’s disposal. The practical
solutions come in many flavours and varieties; personally I have a penchant for the
Danish “flexicurity” system, which provides security while encouraging flexibility
through mobility, vocational training and support for job rotation.
Taxes can also be helped to smooth the transition. I have already mentioned the need
for a green tax reform with higher taxes on environmentally detrimental production
and consumption – coupled with lower taxes on employment. Such a lower income
tax switch may lower the thresholds to new employment.
14
Measures to help and protect the “losers” are needed also on the international scene,
where the developed countries should help those with less resources who risk higher
costs for the transition.
Emerging economies need technology transfers from advanced economies. Such
policies for green technology development should promote forms and mechanisms
for innovation and diffusion of technologies that are both efficient and inclusive.
Today, however, new subgroups of countries are emerging with the ranks of
previously poor nations. Innovation is increasingly already taking place in developing
countries with potential for radically new ways of providing for energy, mobility,
nutrition and shelter. Biofuels in Brazil, and wind and solar photovoltaics in China
are examples of world leading capabilities being established in emerging economies.
Similarly, large areas of the global south have considerable comparative advantages
in terms of bio, wind and solar energy potential.
Trade and competitiveness are major concerns. There are worries that a transition to a
green economy might open up for protectionist measures e.g through carbon taxes.
Moreover, trade policy can be used – unilaterally by single countries or bilaterally by
groups of countries – as a proxy for insufficient international agreements. Such a
development would risk starting trade wars which would make a green economy less
inclusive. Experience shows that protectionism – contrary to populist claims – hits the
poor hardest via inefficiency and corruption .
There is also an anxiety in some poor countries that the green economy will be used
as a tool to add new conditionalities on aid and other types of international finance.
Personally, I don’t see this as a problem, but a positive challenge; to rebuild old, often
inefficient aid programmes to make them help poor countries in their green
transformation.
In general, provision of international finance is one of the key policy areas on the
global level. Here, a number of new initiatives are under way. Inequality can be
addressed through fiscal transfers or direct investment. This is very much in line with
traditional economics, where an overall increase in income sometimes is reached
through measures that make some groups worse off – but where a part of the total
income increase is used to compensate the worse-off.
To sum up, a transition to a global green economy brings with it numerous difficult
issues bearing on fairness and equity. Consequently, we cannot assume that a green
economy by itself is inclusive; all the problems mentioned above – and several more
– need to be solved to really make the intended inclusiveness possible. But if we
succeed in that, the transformation will indeed be made politically easier. An
inclusive society, which protects and shelters the “losers” is likely to accept and
embrace change and transformation to a larger extent that non-inclusive societies.
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8. A strategy for Sweden
So, what would a transformation to a green economy look like in Sweden? Not in the
form of detailed roadmaps and milestones, percentage points and money – that is
outside the realm of this presentation – but in more general terms?
Two facts stand out as starting points. Firstly Sweden’s good preconditions; we have
already come far in our transformation to a green economy. Compared to most other
countries, Sweden is richly endowed with fresh water, clean air and land suitable for
forestry, i.e biomass. Sweden’s CO2 emissions per capita are among the lowest in the
world (given the high GDP per capita level). Electricity generation is practically
fossil-free, thanks to hydro, nuclear and biomass. This is a favourable position – but it
also means most low-hanging fruits have already been picked. However, social
cohesion and love of nature are both strong, which means it should be possible to
unite people around an ambitious environmental policy.
Secondly, our smallness; by 2050, Sweden’s population will be around one tenth of a
percentage point of global population. Sweden is also a member of the European
Union. Consequently, our policy options to a high degree depend on international
developments – political, economic and technological – outside our control.
This is clearly visible in the debate on climate policy. A large part of the international
debate on climate change has focussed on emission paths. In very general terms, the
scientific consensus has been that global emissions need to peak no later than 2020
and be cut by at least 50 per cent by 2050. A later peak means that tougher reductions
will be necessary at a later stage. For this overall target to be met, the advanced
countries will have to cut their emissions by at least 80 per cent by 2050. However,
this consensus view may not be sufficient, for two reasons. Firstly, at present the
global community is moving away from this desired path, as emissions are rising too
rapidly. Secondly, several scientists now fear that the previous 2 degree target
actually will bring us perilously close to several tipping points. Consequently, the
ideal policy development would mean more rapid emission cuts than those previously
advocated.
Unfortunately, that seems to be far away. At the UN meeting in Cancun in 2010, the
representatives of the advanced countries did agree to set up roadmaps to cut CO2
emissions. However, these did not have to be very specific. In 2011, the European
Union presented a roadmap, according to which its members need to cut emissions by
80-95 per cent until 2050.15 Consequently, Europe is by far the most ambitious
among the big emitters.
For Sweden, the target allotted from the Union actually was a bit lower than the union
average. As a union member, Sweden is bound by the common policy of the Union.
16
More specifically, we are part of the European trading system, ETS. We may choose
to move ahead faster. But as long as we are active in the ETS, more ambitious
national targets within the traded sector (mainly the export industry) simply mean that
others will emit more. For Sweden to move ahead more swiftly two developments are
necessary: 1) the ETS system as a whole must be sharpened, the huge surplus of
emissions right be brought down and the emissions ceiling must be lowered more
swiftly; 2) emissions must be cut in the non-traded sector.
To some extent this can be done by participation in the CDM market (Clean
Development Mechanism), where we pay emerging countries to cut emissions in their
respective nations. This is generally recommended by economists as this supposedly
gives more “bang for the buck”, i.e the same invested krona results in bigger emission
reductions than if it is invested domestically.
However, the CDM system is not working well. It is slow, bureaucratic and to some
extent even corrupt. Its transactions costs are high. If the receiving countries do not
accept future ceilings on their emissions, there is a risk that our paying for their
reductions within the clean development mechanism will simply make them emit
more in other sectors. And, of course, in the longer term, as emissions paths converge
(if they behave as supposed) the room for CDM markets will diminish. Even if
Sweden can fulfil a large chunk of its reductions quota through CDM in the next
decade, further down the road we need to cut emissions from our domestic
production.
This leads to the obvious conclusion that one important task for Sweden is to push for
better trading systems in international forums; this holds both for the ETS and the
CDM. While the CDM system is as inefficient as today, the theoretical economic
arguments about more “bang for the buck” do not hold fully.
Some therefore propose that Sweden should leave the CDM mechanism altogether
and already now make all necessary adjustments domestically. However, that is
jumping too far in the other direction. Such a proposal seems be based on a view that
a tough climate policy only bring benefits and entails no costs. Sometimes one hears
the claim – called the Porter hypothesis16 – that moving ahead of international
competitors through stringent regulations will push companies to develop new
technologies faster and thus become more competitive. Tough regulations would,
consequently, entail no costs, just benefits.
Unfortunately, there is no empirical evidence that we live in such a wonderful world.
Actually, for a small country like Sweden such a strategy would be risky. If we put
our efforts into technologies which later are outcompeted, and if other countries are
slow to follow, the perceived competitive gains could easily turn into losses. The
optimal strategy is to be a “lagom” leader – to be in the leading group and ride the
wave but not to run too far ahead. To me, this means strong efforts to bring down
17
domestic emissions, but also to use some of the CDM we are allowed to (while
working to improve the system).
Given this global environment, an important task is to try to influence other countries
to move ahead with agreements that create joint incentives for more ambitious
agendas towards a green economy. This could involve cooperation on financing and
technology development as well as fee trade arrangements for green products: a
“coalition of the willing” in environmental policy. In practice this means working
closely with our neighbours in Northern Europe, trying to influence the entire
European Union and other progressive nations.
As an EU member, Sweden also is supposed to provide a national roadmap, as part of
the grand EU strategy. Once we get down to the national level, however, it becomes
fiendishly difficult to be precise. The devil is – once again – in the details. Different
assumptions about technology, relative prices and sensitivity can give very different
outcomes.
Nonetheless, several government agencies are now working out what to do.17
Unfortunately, though, while a number of agencies and organizations work on
emissions paths and energy input-output tables, there is a sad lack of work on how to
preserve and improve eco-systems efficiency.
This is not the place to try to set up any detailed or quantified path to the green
economy. But in more general terms this could be said: Besides the need to influence
the international community along the lines mentioned above, a Swedish strategy
would include taxes and fees; the carbon tax has been a success and the lessons need
to be implemented in more sectors. The base should be gradually broadened. Sweden
also has a decent chance of reaching a target of 100 per cent renewable energy by
2050, courtesy of our access to biofuels. The joker in this pack is nuclear power; as
costs are rising rapidly, the chances of brand new nuclear plants being built are
slimming. Grids must become smarter. Forestry can develop into a bigger carbon
sink. Construction must be much more energy-efficient. A big challenge is to decarbonise the transport sector via electricity and biofuels. For this, big infrastructure
and systems investments are necessary. Another – often over-looked – challenge is to
cut emissions from agriculture, where they are the result of food production per se
(methane) and not of waste or fossil energy. Both in transports and agriculture,
technological leaps are needed.
The surveys produced so far to a large extent discuss trajectories for different sectors
in tonnes and per cent. Personally, I would like to see a more thorough discussion on
how to stimulate green entrepreneurship and innovation on a grand scale. As
previously stated, changes of relative prices and subsidies to R&D are not sufficient.
These signals must be channelled into new technologies, business models and goods
and services that can be commercialised. For this, general taxes and regulations on
18
business must be reformed in a way that stimulates entrepreneurs to take on the green
challenge.
Finally, Sweden already has an active labour market policy and strong social
cohesion. It is imperative not to lose this strengths as we move into a phase of intense
creative destruction. Social cohesion will make the green transition smoother.
As an economist – and a former employee of the Ministry of Finance – I also would
like to see the Finance Ministry to take a more active role in the green transition.
Taxes and subsidies are in the MoF domain, as they directly affect the state budget. I
hope that the MoF and the “Green” authorities find a way to work together, not
fighting turf wars, to create an economy which is both green and efficient.
To summarise: A roadmap for a green transition in Sweden is something much wider
than just sector policies and R&D support. It must include
an active policy to speed up the international community’s commitment,
continuous and strong usage of economic domestic tools like green taxation,
long-term stimulus to green entrepreneurship,
and a socially inclusive policy to protect those who lose out from the green
transformation.
Conclusion
The world needs to meet the environmental challenges. But we must not do that by
forgetting economic efficiency. Humankind needs an efficient economy, to fight
poverty, build resources, create a safer planet. But we don’t need traditional, badly
measured GDP growth. We need sustainable development. To get that we need new
ways to measure balance sheets, for companies as well as nations, we need strong
incentives on the micro level, and we need policies to maintain social cohesion
through turbulent times.
We need to nudge and steer the profit motive into fostering sustainable growth and
unleash the strong entrepreneurial spirits of private business into creating new,
sustainable business models. Thus, we need a green economy.
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Notes
1
World Commission on Environment and Development (1987), Our Common Future, United
Nations
2
Stern, Nicholas et.al (2006), The Stern Review on the Economics of Climate Change, HM
Treasury
3
Rockström, Johan, Steffen, Will, Noone, Kevin et.al (2009), A Safe Operating Space for
Humanity, Nature 461
4
Hallding, Karl and Ådahl, Martin (2012), Inclusive Transition to a “Green Economy”,
unpublished discussion paper from SEI
5
UNEP (2011), Towards a Green Economy: Pathways to Sustainable Development and
Poverty Eradication, United Nations
6
United Nations Secretary-General’s High-Level Panel on Global Sustainability (2012),
Resilient People, Resilient Planet: A future worth choosing, United Nations
7
UNDP Human Development Report (2011), Sustainability and Equity: A Better Future for
All, United Nations
8
OECD (2011), Towards Green growth, Paris
9
Sinn, Hans-Werner (2012), The Green Paradox. A Supply-side Approach to Global
Warming, MIT Press
10
The Commission on the Measurement of Economic Performance and Social Progress
(2009), The Report of the Commission on the Measurement of Economic Performance and
Social Progress, Paris
11
Latouche, Serge (2007), “De-Growth: An electoral Stake?”, The International Journal of
Inclusive Democray 3. A short Swedish summary can be found in Latouche (2012),
“Nedväxt”, Fronesis 38-39
12
Jackson, Tim (2009), Prosperity Without Growth. Economics for a Finite Planet, Earthscan
13
Victor, Peter (2008), Managing Without Growth – Slower by design Not Disaster, Edward
Elgar, includes attempts to formalise a Jackson-like zero growth model.
14
Hallding, Karl and Ådahl, Martin, ibid. Parts of this section and the next are inspired and
sometimes outright borrowed from that paper
15
European Commission (2011), A Roadmap for Moving to a Competitive Low Carbon
Economy in 2050, and (2011), Energy Roadmap
16
Named after the economist Michael Porter, who studied competitiveness and productivity.
17
Some starting points for a discussion on the principles of a Swedish roadmap are found in
Naturvårdsverket (2012) Underlag till en svensk färdplan för ett Sverige utan klimatutsläpp,
and LETS (2011). There is also a list of a number of other studies working with different
aspects of the roadmap, from NGOs and several sector agencies. One interesting report,
which also discusses institutional governance, is Vägval 2050 – Styrningsutmaningar och
förändringsstrategier för en omställning till ett kolsnålt samhälle, Lunds Universitet