Light Green Growth

by Thorvald Moe

Thorvald Moe (Norwegian, born 1939) has a PhD in economics from Stanford University. He worked for almost forty years in the Norwegian Ministry of Finance as director general, chief economist, and deputy permanent secretary. He has been Norwegian ambassador (1986–89) and deputy secretary general (1998–2002) to the OECD in Paris.

Historically, economic growth has increased both consumption levels and the loads on the environment. The question now is whether consumption growth can continue while we reduce the human ecological footprint. And, especially, while we dramatically curtail climate gas emissions.

Today, in the framework of sustainable development, some argue that continued growth in GDP may be compatible with avoiding an environmental disaster. A recent example of this rather optimistic way of thinking appears in a report from the OECD.

A green growth strategy is centered on mutually reinforcing aspects of economic and environmental policies. It takes into account the full value of natural capital as a factor of production and its role in growth.

It focuses on cost-effective ways of attenuating environmental pressures to affect a transition toward new patterns of growth that will avoid crossing critical local, regional, and global environmental thresholds.

So, if this report proves true, good policies could save us from crossing “critical environmental thresholds” before 2052, even if we continue our quest for increased consumption. Yet is that likely?

The Climate Challenge

After the Rio conference in 1992, climate change gained prominence as one of the most important future threats to economic development and human welfare—the most critical environmental threshold, so to speak.

Since then numerous economic models have been developed to study the interaction between economic developments and emissions of greenhouse gases (GHG) under alternative assumptions. Among them are two alternative scenarios presented by the OECD and based on one of their economic forecasting models.

One scenario, which charts business as usual, assumes no new climate mitigation policies over and above those already in place in 2010. With such assumptions, CO2 concentrations would increase to about 525 ppm and overall greenhouse gas concentrations to 650 ppm CO2 equivalents in 2052. The concentration would continue to rise thereafter, causing average temperature to increase by much more than 2°C by 2052, by at least 4° to 6°C by 2100, and more in following decades.

The other scenario assumes a binding global climate agreement that limits warming to plus 2°C over preindustrial levels. The scenario assumes this cap will be achieved in a cost-effective way, through global pricing of carbon and by other policy measures. According to OECD’s calculations, the economic costs would be relatively modest.

For instance, stabilizing long-run CO2 concentrations at about 450 ppm20 in 2052 would reduce world GDP by 4% relative to the business-as-usual scenario, which assumes no further agreement on climate policy.

But this cost should be seen in its proper perspective. The OECD expects world GDP to rise by more than 250% over the same period. But it still amounts to a reduction of the total pie by 4%, and in order to achieve this restructuring of the economy the price of CO2 emissions must be increased tenfold: from less than 30 dollars per tonne of CO2 in 2008 to around 280 in 2050.

My Scenario: Green Growth with Further Warming

My educated guess is that neither of these two scenarios will actually happen over the next forty years. We will get further growth, some shift toward a greener (less climate-intensive) economy, but not enough to cut emissions enough to get the world on a path toward plus 2°C.

A number of countries will certainly agree to and implement a number of policy measures. In the developed—and perhaps in part of the emerging—economies these measures will lead to some decoupling of greenhouse gas emissions from GDP growth. In other words, the greenhouse gas intensity of GDP growth will decline—through technological change and gradual restructuring of the economies as they mature (and develop away from “dirty” industries toward services). This is already happening in a number of developed economies.

The result will be greener growth, with lower energy use and lower greenhouse gas emissions per unit of GDP. But absolute global energy use and absolute greenhouse gas emissions will continue to rise, so that the 2°C target is likely to be overshot by 2052. Global negotiations to agree on coordinated climate gas reductions have been conducted under the auspices of the UN since 1992. So far relatively little has been achieved, and I do not expect much to happen soon.

There are legal obligations to reach limited cut targets by 2012 through the Kyoto protocol. But there is not yet any agreement beyond 2012. The political system in the United States does not seem to be able to deliver a consensus on climate policies for a long time to come, and the US economy is presently characterized by weak growth and high levels of debt and unemployment.

A number of European economies are in even deeper problems in the wake of the global financial crisis in 2008. GDP in China and India and other emerging economies may, on the other hand, grow by two-digit numbers for another couple of decades. This is good for poverty alleviation but will contribute to increasing global energy use and greenhouse gas emissions—despite ambitious plans for energy saving in these countries.

So although a climate agreement would be relatively cheap, and although it would be rational to implement a reasonably cost-effective global-climate agreement, my educated guess is that the global political system will not achieve such an agreement in the near future. We will muddle through, following a “light green” growth path toward 2052. The costs and benefits of this development will be unevenly distributed across countries.

Growth will become greener with relative, but not absolute, decoupling of energy use and greenhouse gas emissions from GDP in many countries. The jury is out on whether such a development path over the next forty years will prevent us from “crossing critical local, regional and global environmental thresholds,” as the OECD green-growth report suggested.

Some well-functioning developed countries will further integrate sustainable development and climate policies in their long-term economic strategies and successfully develop low-carbon economies with high employment. A number of developing countries, on the other hand, will experience increasing problems as they try to sustain economic development and reduce poverty in the face of temperature increases and other environmental problems such as water scarcity, rising energy costs, and damage to ecological productivity.

Globally, the balance of economic and political power will continue to change toward the big emerging economies, notably China. Only a sudden and highly visible resource collapse or climate crisis will be able to kick the public and key politicians into believing in the need for strong action. This could lead to an ambitious and binding global climate agreement under the auspices of G-20 countries. But I remain doubtful that action will be soon or strong enough. As energy expert David Victor says, “Even with diligent efforts greenhouse gases will accumulate, the planet will warm, and climate will change.”