Why the Green Economy?

Posted by – 2011/11/15

A while ago, the French Cham­ber of Com­merce in Great Bri­tain invited me to write an art­icle for their magazine’s (INFO) spe­cial edi­tion on the Green Eco­nomy. Here’s the art­icle, updated (Feb 2013) and with links added to fur­ther information

Why the Green Eco­nomy? Summary

Mar­kets that exclude the impact on nat­ural cap­ital are dis­tor­ted. Mar­kets that exclude the costs of pol­lu­tion are dis­tor­ted. Mar­kets that allow the Tragedy of the Com­mons are dis­tor­ted. These dis­tor­ted mar­kets rep­res­ent eco­nomic effi­ciency, and leave us all worse off.

The polluter-pays prin­ciple cor­rects the mar­ket dis­tor­tion caused by unpriced pol­lu­tion. Joint-stewardship agree­ments allow us to sus­tain­ably man­age com­mon resources, pre­vent­ing the Tragedy of the Com­mons. Track­ing changes to the value of our nat­ural cap­ital base is just as import­ant as track­ing trans­ac­tion val­ues: both rep­res­ent changes to our wealth.

The Green Eco­nomy, in all those forms, is here because it fixes prob­lems that have been accu­mu­lat­ing for dec­ades. Why the Green Eco­nomy? Because in the long run, the Green Eco­nomy leaves us bet­ter off, envir­on­ment­ally and economically.

Back­ground to the Green Economy

The Green Eco­nomy is worth hun­dreds of bil­lions of pounds (euro / dol­lars) each year; it spans many sec­tors includ­ing the most fun­da­mental ones of energy, food and water sup­plies; and in the last fifty years, it’s gone from fringe to main­stream, grow­ing in value and cov­er­age each year. For example, in 2011, global invest­ment in renew­able energy was US$257bn; and there are elec­tric cars on the mar­ket that can out-run a Porsche.

But the Green Eco­nomy has been around for quite some time, and its aca­demic found­a­tions, in the “polluter-pays prin­ciple” dates back to the early dec­ades of the twen­ti­eth cen­tury. How­ever, more recently, the prob­lems have become global in scale, and the solu­tions have required inter­na­tional co-operation, for example in ban­ning the indus­trial pro­duc­tion of some of the worst ozone-depleting chem­ic­als. The next wave of prob­lems and solu­tions dwarfs what has gone before, requir­ing revolu­tion­ary changes to how we gen­er­ate elec­tri­city, how we heat our homes and offices, how we power our trans­port sys­tems, how we man­age our live­stock and fer­til­ise our crops. The eco­nomic risks (and oppor­tun­it­ies) are orders of mag­nitude greater than what has gone before.

But how did we get to this state?

The mar­ket encour­ages innov­a­tion, to bring down costs. One way to bring down costs, is to exter­n­al­ise them: that is to say, to get oth­ers to pay them, so that the costs are removed from the chain of pro­duc­tion that ends up as goods on the shelf. That way, the costs can be removed from the price that the cus­tomer pays at time of pur­chase, leav­ing a lower price and higher profit. If a change in pro­duc­tion would res­ult in lower costs and higher pol­lu­tion, then that change will hap­pen whenever that pol­lu­tion is unreg­u­lated and untaxed. Eco­nom­ists have a phrase for these exter­n­al­ised costs: neg­at­ive extern­al­it­ies. Profit-maximising must lead to costs being exter­n­al­ised wherever pos­sible, at least, inso­far as risks to cor­por­ate repu­ta­tion allow.

But these neg­at­ive extern­al­it­ies have con­sequences that are not just envir­on­mental, but eco­nomic too. When some costs are ignored, the res­ult is an inef­fi­cient alloc­a­tion of resources.

Envir­on­mental eco­nom­ics, a the­or­et­ical found­a­tion stone of the Green Eco­nomy, frames the situ­ation in terms of an addi­tional body of assets in addi­tion to the cap­ital found on com­pan­ies bal­ance sheets: these addi­tional assets are those com­mon to all of us – the oceans, the atmo­sphere, and so on – they are our nat­ural cap­ital. Just as with cor­por­ate cap­ital, nat­ural cap­ital has an eco­nomic value. And activ­it­ies that decrease the value of our nat­ural cap­ital, dam­age humankind’s bal­ance sheet.

For example, neg­at­ive extern­al­it­ies in power gen­er­a­tion have res­ul­ted in a situ­ation where the price of elec­tri­city has been cheap, rel­at­ive to its actual cost. Now, that’s small com­fort, when people are facing the com­ing winter with rising util­ity bills, but nev­er­the­less true: a large part of the cost of our elec­tri­city has been exter­n­al­ised, so that we don’t pay for it in our bills. We pay for it instead in envir­on­mental degrad­a­tion, in the dan­ger­ously rising emis­sions of green­house gases. And, as with any nor­mal product, under-pricing leads to over-consumption of that product, and under-consumption of the sub­sti­tutes. Which in turn leads to over-investment in its pro­duc­tion, and under-investment in pro­duc­tion of the sub­sti­tutes. In the case of power gen­er­a­tion, that means we’ve sys­tem­at­ic­ally under-invested in renew­ables and energy effi­ciency, and over-invested in the oil, coal and gas indus­tries. This is eco­nom­ic­ally inef­fi­cient, and has run up large debts on our envir­on­mental bal­ance sheet: we have depleted some of our nat­ural cap­ital (the finite reserves of fossil fuels), and degraded our atmo­sphere (again, redu­cing the value of nat­ural cap­ital). And those debts will have to be paid for, out of future eco­nomic productivity.

We risk los­ing all that we have built up to date, if we carry on with busi­ness as usual: the impact assess­ments for higher climate-sensitivities and higher impact-sensitivities show a loss of global GDP that could exceed 90%. We don’t know how likely these higher sens­it­iv­it­ies are: we are tan­go­ing through a mine­field. We do know that the costs of avoid­ing climate-change crisis, (even at much lower impact sens­it­iv­it­ies), are much lower than the costs incurred as a res­ult of such a crisis.

The eco­nomic imper­at­ives that lead to the spiralling of neg­at­ive extern­al­it­ies into an envir­on­mental crisis is well-documented: back in 1968, the “inev­it­able” tragedy of the com­mons was first writ­ten of in sci­entific journ­als: that a resource used by all but owned by none, would inev­it­ably be over-used until it turned to dust. Though this was not the first descrip­tion of the phe­nomenon; approx­im­ately 2300 years pre­vi­ously, Aris­totle wrote:

that which is com­mon to the greatest num­ber has the least care bestowed upon it.”

Eco­nomic solu­tions to eco­nomic problems

The inev­it­ab­il­ity of the tragedy of the com­mons became eco­nomic ortho­doxy. How­ever, more recently, Elinor Ostrom  doc­u­mented sev­eral cases show­ing that the tragedy of the com­mons was not inev­it­able. In many cases, com­munit­ies had formed joint-stewardship agree­ments to sus­tain­ably man­age com­mon resources, such as fish­ing grounds, ground­wa­ter sup­plies, and graz­ing com­mons. They used fre­quent mutual mon­it­or­ing and dis­cus­sions between them­selves to ensure that agree­ments were kept, and offend­ers were sanc­tioned with pen­al­ties determ­ined and agreed in advance by all. Ostrom won a share of the 2009 Nobel memorial prize in eco­nom­ics for her work.

This com­mon stew­ard­ship is one form of Green Eco­nomy – com­ple­ment­ing other solu­tions to the prob­lems of neg­at­ive extern­al­it­ies: those other solu­tions include tax­ing or impos­ing quotas on pol­lut­ants, sub­sid­ising cleaner altern­at­ives, privat­ising prop­erty rights, and nation­al­ising indus­tries that need clean­ing up. Even without a crisis, neg­at­ive extern­al­it­ies are eco­nom­ic­ally inef­fi­cient: when pol­lu­tion goes unpriced, we’re all worse off.

The Green Eco­nomy, in all those forms, is here because it fixes prob­lems that have been accu­mu­lat­ing for dec­ades. Why the Green Eco­nomy? Because in the long run, the Green Eco­nomy leaves us bet­ter off, envir­on­ment­ally and economically.

1 Comment on Why the Green Economy?

  1. Why the Green Eco­nomy? Because it’s simply smarter eco­nom­ics, that’s why http://t.co/MlJgosC7

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