Milan Marcus discusses the relationship between economic growth and reducing emissions to avoid catastrophic climate change
It may seem like half a lifetime ago, but before the Covid-19 pandemic spread, another global issue dominated the news: climate change. At their peak, protests saw millions across the world demanding their governments act to mitigate climate change. And governments were listening. An increasing number are committed to carbon-neutrality by 2050. The EU is determined to make Europe the first climate-neutral continent. In the UK, reaching net-zero by 2050 is enshrined in law. Scotland is more ambitious, setting its target five years earlier. This September, China’s president Xi Jinping surprised many at the UN General Assembly by announcing that his country intends to reach carbon-neutrality before 2060. Two of the three largest economies and polluters are devoted to reaching net-zero within 40 years. The goal is clear. But what are the appropriate means to get there?
Degrowth, or poor and greenish
One school of thought advocates achieving environmental goals through ‘degrowing’ (i.e. shrinking) our economies. The argument is as follows: Since the industrial revolution, rapid rates of economic growth have gone hand-in-hand with rapid increases in greenhouse gas (GHG) emissions. The two are invariably linked, so reducing the latter requires decreasing the former. Indeed, since the early 19th century, global GDP has grown by 10,000%. Simultaneously, global CO2 emissions have also increased – by a staggering 70,000%.
By this logic, economic degrowth seems a compellingly simple solution to reducing emissions quickly. History provides some clues on how well this works in practice. Following the collapse of the USSR, Russian real GDP per capita in 1999 was half that of 1990. Russia’s GHG emissions also decreased substantially, but not proportionally. Similarly, Zimbabwe’s real GDP per capita almost halved between 1998 and 2016, while annual emissions dropped by less than 10%.
These examples illustrate two important considerations. First, GHG emissions are likely to decline less than proportionally with degrowth. So, if a country is determined to decrease emissions by 30% in the next 15 years by pursuing degrowth, its economy would likely need to shrink by around 50%. Second, periods of sustained economic decline are always associated with hardship among the population. What was true for Russia in the 1990s and Zimbabwe under Robert Mugabe, is still true for Venezuela today.
Degrowth also doesn’t look like a sustainable way of reducing emissions when looking at how the Covid-19 pandemic (and lockdowns) affected the UK economy and emissions. According to the ONS, the UK’s real GDP was 21.5% lower in the second quarter of 2020 compared to 2019. CO2 emissions over the same period were an estimated 23.6% lower compared to last year. For enthusiastic supporters, this may confirm degrowth’s validity. Yet on closer inspection, the implications are shocking. Suppose we pursued our climate targets by degrowth at a rate similar to the largest shock to the global economy in decades. Reaching zero emissions would then imply reducing GDP to a minimal level, refraining from almost anything considered ‘economic activity’. The threat posed to people’s livelihoods would make such a strategy inviable.
The Covid-19 pandemic taught us more about degrowth: large-scale reductions in economic activity cause large-scale distress, financial and otherwise. This is especially true for low-wage sectors such as hospitality, where working from home isn’t an option. People are currently suffering gravely from ‘degrowth’ in the UK, where the government can support those out of work. They suffer even more in developing countries, where such support isn’t available. Radical societal change, in the form of rejecting current-day consumerism to allow large-scale declines in GDP, seems difficult to imagine even in developed countries. Such severe economic degrowth seems completely unimaginable in developing countries, with hundreds of millions still living in absolute poverty.
Solving our global environmental crisis cannot rely solely on shrinking economies. That position assumes that most people have the privilege to live with less. Instead, we need to transform our economies so that they are completely independent from GHG emissions.
If not less, then more?
On the other side of the debate are those arguing that a sustainable future necessitates more economic growth, not less. They point towards the Environmental Kuznets Curve (EKC). This inverted U-shaped relationship between a country’s per-capita income and environmental degradation predicts environmental degradation to rise with per-capita income up to a certain point, after which it falls. The assumption is that once people’s basic needs are satisfied, they care more about other issues like air pollution. Thus, proponents of this theory argue that poor countries simply need to grow quicker and reach the downward-sloping part of the EKC. Increased wealth would automatically lead to a better environment.
When something sounds too good to be true, it usually is. Wealthy countries have continued to become wealthier while increasing their emissions: US emissions peaked only in 2007, in Australia and New Zealand they continue to grow slightly, while in Qatar, which has among the highest per-capita incomes, emissions are skyrocketing.
Even the countries closest to resembling the downward-sloping section of the EKC provide no compelling argument for relying on growth alone. For decades, several EU-countries have experienced both gradual GDP growth and a gradual emissions decline. But if all developing countries were to first reach the wealth levels of Western Europe, and then experience a similar emissions decline by adopting more emissions-efficient technology, this would most certainly be far too little, far too late to ensure global warming remains below 2°C.
Decoupling, or the radical change we need
Keeping global warming below 2°C requires more than an emissions-efficient economy; it requires a decarbonised economy. Increasing emissions efficiency means burning fewer fossil fuels for the same unit of output – decreasing the ratio of emissions to GDP. But the climate is affected by total emissions, which can rise even when the ratio decreases. Therefore, absolute decoupling is needed: emissions should be on a steady path towards zero, regardless of economic trends.
To understand why efficiency gains alone aren’t enough, consider the aviation industry. Airbus and Boeing claim every new airplane model they release is the greenest yet, burning less fuel than its predecessors. Nevertheless, emissions from the aviation sector continue to grow (before Covid-19, of course). More efficient planes are excellent for airlines, because fuel is often their largest expense. Cheaper operating costs allow airlines to operate more flights. In the history of commercial aviation, the additional emissions of more flights have greatly outweighed the mitigating effects of more efficient planes.
Instead, economic activity needs to be completely independent from emissions. There are some hopeful signs. Electricity generated from renewable sources is increasingly able to compete on prices with fossil fuels. Accompanying the hype surrounding electric vehicles, Tesla overtook Toyota as the most valuable car company this July. Transport, electricity, and heat together account for almost three-quarters of global CO2 emissions. Decarbonising electricity and electrifying transport are big steps towards decoupling emissions from our economies.
But how do we ensure emissions reach net-zero by 2050? Perhaps surprisingly, we can learn some lessons from Econ 101. Environmental issues are a type of market failure: the natural environment is a public good without defined property rights. Moreover, GHG emissions arising from production and consumption are negative externalities, the cost of which (catastrophic climate change) is incurred by third parties.Luckily, measures to rectify these market failures already exist. Several countries and regions have introduced direct taxes on emissions, or cap-and-trade schemes (where polluters acquire and trade ‘pollution permits’). These measures are a good start, but so far, they haven’t cut emissions fast enough because they are, yet again, predicated on efficiency gains. A price on emissions incentivises polluters to reduce emissions only if doing so is cheaper than that price. A cap-and-trade scheme with annual reductions of permits until they reach zero in 2050 would be a more adequate mechanism. Providing a clear indication that emissions are no longer permitted after a specific date would incentivise businesses to adopt zero-emissions technology as soon as possible.
Simultaneously, the decarbonisation of electricity and transport requires massive investments into technological developments. These technologies need to be affordable, offering perhaps the most decisive argument why reaching net-zero emissions cannot rely on dismissing economic growth. With historically low interest rates, governments should provide funding for such developments wherever the private sector won’t. The Covid-19 pandemic has shown us that governments are willing and able to take on debt and act decisively to combat a crisis. It is high time that the climate crisis provoked a similar reaction.