To Grow or Not to Grow?
Rethinking Economics, 2020
To Grow or Not to Grow?
Environmental catastrophe looms large over politics: from the young person’s climate march to Alexandria Ocasio-Cortez’s Green New Deal, increasing amounts of political space are devoted to the issue. Central to this debate is the question of whether economic growth inevitably leads to environmental issues such as depleted finite resources and increased waste, disruption of natural cycles and ecosystems, and of course climate change. Growth is the focal point of the de-growth and zero-growth movements who charge that despite efficiency gains, increased GDP always results in increased use of energy and emissions. On the other side of the debate, advocates of continued growth (largely mainstream economists) believe that technological progress and policies can ‘decouple’ growth from emissions.
At the core of this debate is an empirical question: do emissions necessarily rise with growth or not? This question can only be answered with a solid grasp of the data, the science of climate change and energy, and the appropriate use of theory and simulations to make predictions into the future. In this edition of the pluralist showcase I will try to faithfully represent both sides of the debate. And if you suspend the looming sense of dread that comes with this topic, it is fascinating and filled with nuance. Interestingly, all participants agree on the science of climate change and also that active policy is necessary to prevent it; they just disagree on the extent of the threat and the scale of intervention required.
Although this debate has rekindled over the past decade it is far from new. The modern environmental movement arguably began with the 1972 book Limits to Growth by the Club of Rome, which argued that economic growth would inevitably run up against environmental limits. Making a point which would recur time and time again, Limits noted that although energy efficiency improves with growth, overall resource usage and emissions still rise. This is known as the ‘Jevons paradox’ after William Stanley Jevons, who noticed in 1865 that although the efficiency with which coal was being used was increasing overall coal use was also increasing due to increased demand. In Limits they expanded this argument to resource constraints and the climate as a whole, arguing that if growth was not curtailed then humanity would face environmental disaster.
The book was not well received by mainstream economists. William Nordhaus, who has gone on to become one of the most recent Nobel Prize winners, charged that it was “measurement without data”. Although he eventually acknowledged that this was untrue – the book contained plenty of data - his subsequent work is representative of the direction of travel of environmental economics since then. Economists such as Nordhaus and Richard Tol, another influential figure, doubt the magnitude of environmental damage to the economy compared to the predictions of scientists and ecological economists. In Nordhaus’ prize-winning DICE model there is environmental damage to the economy at an increasing rate with global warming, but the damage is limited even as temperature increases reach 6 °C, far beyond the point where climate scientists predict disaster. As the manual to the model admits, it “does not include sharp thresholds or tipping points”, the type of which are a serious concern with climate change.
For mainstream economists growth is actually a positive force which will help to offset the damage from climate change through higher incomes and technological progress. After winning the prize Nordhaus starkly reiterated this message to his students, saying “don’t let anyone distract you from the work at hand, which is economic growth.” The necessary policies - carbon taxes, cap and trade and regulation – will aid the substitution of non-polluting technologies for existing ones so growth can continue while environmental damage declines. While the late Alan Krueger is known largely for his pioneering work in microeconometrics, he cut his teeth on empirical demonstrations of this point. In a 1995 paper he tested the Environmental Kuznets Curve (EKC), the idea that emissions rise with early stages of development but fall as economies become rich. Looking at four measures of pollution and contamination he and Gene Grossman found the predicted relationship, with environmental damage starting to fall at around $8,000 GDP per capita.
The paper leads us to a crucial distinction: between emissions from consumption and those from production. Richer countries are generally able to reduce their emission from production but they often do this by relocating the more pollutive industries to poorer countries, which can give the appearance of an EKC even though they are effectively exporting their emissions. If you instead measure emissions from consumption within rich countries, they are undoubtedly rising across all stages of development, with global emissions at record levels today. Indeed, unlike much of his other work Krueger’s paper has not stood the test of time. For example, 2004 survey showed that the modern evidence for an EKC is limited, especially if you look at consumption rather than production.
Late last year INET hosted a debate over the possibility of green growth in which all of these issues came to the fore. Enno Schroder and Silvaas Storm argued that efficiency gains have historically failed to compensate for the increased emissions from growth and that even under extremely optimistic assumptions for the future, growth would have to be very low to keep emissions below 1.5°C, widely regarded as the last chance for ‘business as usual’. According to their data “global CO2 emissions increased by 1.93% per year during 1971-2015…only partially offset by downward pressure from higher energy efficiency (energy intensity declined by 1.35 per annum)”. They simulate what they deem a “very ambitious (i.e. historically unprecedented)” 85% decline in global emissions up to 2050 and find that per capita growth would have to be only 0.45% a year, compared to the 1.93% rate from 1971-2015.
Michael Grubb’s response made the case for ‘Conditional Optimism’ based on the logistic curve shape of technological progress. The basic idea is that a new technology will advance slowly at first until it reaches a ‘penetration point’, after which it will accelerate until it saturates the market. According to Grubb, simulations by those such as Schroder and Storm underestimate the rate of technological progress by assuming it will be linear. He illustrates with a number of specific examples how quickly energy-efficient technology can progress: solar energy in Germany has seen its costs fall by a factor of over 10 in less than a decade, while it has grown at 30-40% per year. Similarly the UK was about 80% coal – the dirtiest fossil fuel - in 1990 but nowadays is under 10%. In their rebuttal, Schroder and Storm doubted that these examples actually demonstrated the speed or scale required to meet emissions targets by 2020.
One thing that strikes me about this debate is whether the focus on growth is really necessary. As ecological economists themselves are often keen to point out, GDP is filled with uncertainty and somewhat arbitrary methodological decisions including adjustments for quality, depreciation and rent, the financial sector, and (perhaps most importantly) price indices. Is it sensible to base climate policy on whether this number goes up or down? Would it not be better to target the environmental indicators themselves, within whatever economic and social constraints arise? That seems to be one interpretation of Kate Raworth’s Doughnut Economics, which specifies the ‘safe and just’ living space for humanity as that which fulfils social and economic needs (interior) without overshooting environmental bounds (exterior):
With this in mind I don’t see that we’d lose much from ejecting GDP from this discussion altogether. Indeed, when considering such a potentially catastrophic outcome for humanity GDP seems like a secondary concern. Again, this is a point made frequently by ecological economists themselves so it’s odd that they implicitly buy into the focus on GDP by making the possibility of green growth the centrepiece of the debate. Perhaps the empirical question asked at the start of this article is, in fact, the wrong question entirely.