Going greener

business and industry, economy, finance, science and technology, sustainability

Author(s):  Will Straw, Andrew Pendleton, David Nash
Published date:  01 Oct 2011
Source:  Public Finance

It is increasingly widely agreed that growth is neither the only, nor even the most important, indicator of economic success. But in the current economic system, prosperity and environmental protection without growth is neither possible nor desirable.

Heading for his summer holiday, Ed Miliband was photographed carrying a pile of 10 weighty books. Towards the top was Prosperity without growth by Tim Jackson, Professor of Sustainable Development at the University of Sussex.

Jackson’s argument is essentially that a continually growing economy will destroy the planet since it is a myth that economic activity can be ‘decoupled’ from natural resource use, and in particular from carbon emissions. His book claims that the only way to cut greenhouse emissions to levels low enough to prevent dangerous climate change is by reducing economic growth to zero and bringing about a no-growth or ‘steady state’ economy in which society can flourish within ecological limits

Jackson is not the only progressive critic of growth. Others – most famously Wilkinson and Pickett in ‘The Spirit Level’ – argue that a relentless focus on growth does little but make a society’s citizenry unhappy as they join a race for status that can only end in disappointment with someone else always further up the greasy pole. These arguments have their merits but miss the wood for the trees.

Growth in economic activity – more jobs and more output – can be consistent with a society that values environmental sustainability, happiness, and greater equality. The problems that our society has faced in recent years – rising carbon emissions, increased dislocation and insecurity, rising inequality – have not been caused by growth per se. They are caused by the use of dirty and old technologies rather than modern, low carbon alternatives; the lack of a carbon price to deter polluters; a failure to find salient policy solutions that raise wellbeing, and a failure to change the UK’s economic model so that the gains from growth are more evenly disbursed. Another world is possible but it will almost certainly involve economic growth.

Just as classical economics has deified growth, so Jackson and his ilk are demonising it. Yet both camps risk simply paying it too much attention at the expense of the underlying factors that really matter. These are investment in clean technology, the creation of jobs, and the narrowing of the inequality gap.

The critical question is not so much the level of economic activity but its type. More sustainable growth would be a lot better for people and planet than less or zero unsustainable growth. Debt-fuelled consumption by government or citizens, and carbon-intensive energy or transportation are increasingly understood as unsustainable forms of economic activity. But consumption paid for by income and activity powered by renewable forms of energy are far more sustainable. Economic theory outlines that increased productivity, accumulation of human capital, and technological change are all critical to increasing economic growth. If focused in the right direction this means that economic activity can reduce carbon emissions. It also means that if we invest in the development and use of new, sustainable technology and these take off, then a bi-product may be economic growth.

Indeed, given the doldrums in which the global economy currently finds itself, much will be lost without more economic activity. Britain currently faces a series of monumental challenges. How best should the budget deficit be reduced? Where will new jobs come from to replace those lost by the recession and spending cuts? How can our education, health, and housing systems cope with changing demographic pressures? And how will we finance the technological innovations necessary to decarbonise our energy and transport systems and achieve a low-carbon economy?

Growth is a critical part of the answer to all these questions. It increases the exchequer’s tax take, reduces the need for welfare as recipients find their way back into work, and increases the size of the economy against which the debt and deficit are measured. Further, growth results from of the creation of the new jobs that provide consumers and government with goods and services. Once the budget is in balance, growth provides the basis for the increases in public spending which are necessary to pay for improved public services and infrastructure. Without growth, the path back to prosperity and economic security will be far steeper.

Developing countries also have little prospect of raising living standards without growth. Jackson does not argue that developing world economies should cease their growth, so unless we learn fast about how to decouple energy use from emissions (and the use of other resources), saving the planet will be impossible even if industrialised economies stop growing. After all, the grand growth in emissions in the past decade has come not from the industrialised world in which an argument about appropriate growth is legitimate, but from China and, to a lesser extent, India.

As developing countries grapple with questions about poverty and inequality, the onus is on industrialised countries to lead the way and demonstrate that it is possible to decouple economic success from resource use while increasing wellbeing and prosperity. Britain is already developing a comparative advantage in both offshore wind (notwithstanding a recent decision by an American wind turbine manufacturer to pull out of the north of England) and low-carbon vehicles. Until, the Coalition reduced the number of planned demonstrations from four to one, Britain was also among the leading nations on carbon capture and storage.

Environmentally, it doesn’t really matter which country corners which global market in which technology as long as the market grows fast and the technology is developed accordingly. But it does matter to individual nations if they are to meet economic and social goals. In this respect, if Britain were to capture an important share of clean technology markets through innovation, this would contribute not only to the global environmental good but would also help boost growth, create jobs, and provide revenue at home: prosperity with growth.

The primary difficulty facing the sustainable growth agenda is public antipathy, and by extension, the risk of political intransigence. As a consensus has built up around Westminster that climate change is manmade, the public have become increasingly sceptical. Claims that this is ‘greenest government ever’ have largely fallen on deaf ears. According to YouGov, the number of people agreeing with the statement that climate change ‘is a serious and urgent problem and radical steps must be taken now to prevent terrible damage being done to the planet’ has fallen from 38 per cent in 2007 to 28 per cent in 2010. The challenge for policymakers is to decouple green politics from growth. Britain needs a strategy to encourage sustainable growth (encompassing reduced carbon emissions) rather than a green growth agenda that is separate from the rest of its economic strategy.

This strategy should start with an acknowledgment of the key barriers that have held back the pursuit of long-term, sustainable forms of growth in the UK in recent decades. At the top of this list are chronically low levels of business investment that plague growth and hamper innovation in productive parts of the economy. Here the government should extend the admirable principles behind its decision to set up a Green Investment Bank and – like in Germany, France and the Scandinavian countries – use state-led finance to support a wider range of investments which corporate lenders consider too risky to fund alone. This would mean a state-backed infrastructure bank that is green rather than a green investment bank.

With £15 billion in upfront capital, a ‘British Investment Bank’ could raise an extra £200 billion on the commercial markets to drive investment into a more diverse range of high-value sectors and infrastructure projects. These would have to be compatible with other key objectives, such as decoupling energy use and carbon emissions, and reducing the use of other key resources. Renewable energy, smart grid, and low-carbon transport infrastructure would be an ideal focus for such an institution as each is capital intensive but also a marketable asset. This means that the service can be sold to the private sector, generate a return on investment for the Treasury and, therefore, have a positive net impact on the government’s balance sheet. By spurring investment across a wider range of sectors, it would help reduce our dependence on financial services and property bubbles and help achieve the rebalancing to which policymakers of all hues currently aspire as well as reducing carbon emissions.

Good growth and productivity stem from businesses’ propensity to constantly innovate and to do so successfully, whileinnovation is also crucial to reducing emissions from products and processes. Yet, Britain lacks the powerful strata of highly innovative firms of the sort that is a characteristic of Germany’s Mittelstand, with fewer than 46 per cent of companies undertaking product or process-based innovation compared to a reported 80 per cent in Germany and 50 per cent in France. The government can take steps to address this, and should start by reconfiguring enterprise zones into more ambitious ‘innovation zones’. Rather than simply trying to lure firms with lower business rates and relaxed planning procedures, these zones would have a specific remit to stimulate firm-level innovation, foster R&D activity, help commercialise new products, and support market access for start-ups in key sectors – including low-carbon industries, such as wind power and electric vehicles.

Finally, sustainable growth will not be possible without a highly skilled workforce. Faced with increased competition for global markets, Britain will have to move higher up the value chain if it is to compete for business. Fortunately, this is where low-carbon sectors are particularly strong as they offer opportunities at that level. For example, in the design, engineering and consultancy professions.

But despite improvements in recent years, Britain still suffers a severe skills deficit with too many adults lacking any qualifications at all, not to mention those that are of value to employers. Policymakers must now aim to put in place a robust, fully inclusive and high-standard system of post-compulsory education and training with an emphasis on creating a competitive, sustainable economy. These should work far more closely with business to forecast and plan for future skills gaps, including in highly technical low-carbon professions. They must also look to countries like Denmark on how to manage the trade-off between the desire for labour market flexibility and the need to retain and develop human capital.

It is increasingly widely agreed that growth is neither the only, nor even the most important, indicator of economic success. But in the current economic system, prosperity and environmental protection without growth is neither possible nor desirable.

Tim Jackson and his followers in the environmental movement may have a sophisticated political strategy to transform the whole capitalist system, but it is not yet clear what this is. In its absence, the primary goal must be to decouple growth and resource use. If instead we focus our energies on changing the economic system then ecological tipping points are likely to have been exceeded before we are successful. Avoiding this will mean focusing instead on massive investment to decarbonise our energy, communication and transport systems. If successful, this should result in jobs and prosperity and, almost inevitably, GDP growth too.

 
 

Our people

Will Straw, Associate Director for Climate Change, Energy and Transport