Anyone who believes in indefinite growth in anything physical, on a physically finite planet, is either mad or an economist.
This quote by Kenneth E. Boulding summarizes the fundamentally different viewpoints of physicists and economists on growth. While physicists rightfully believe that infinite resource-based growth is impossible, they often fail to recognize that growth does not only depend on resources. While the infamous 1972 “Limits to growth” report by the Club of Rome primarily attributes limits in resources as the main barrier for sustained growth, climate change brings a new dimension to the discussion.
If we want to limit climate change we have to decrease CO2 emissions, which are primarily caused by energy production and consumption. Therefore, one could say climate change is a limit to growth. So is climate change and economic growth really incompatible? Only if we fail to recognize the substitutability of the input factors that lead to economic growth. Economic growth happens when you take some input and use it to produce some output of higher value. Typically, this involves some form of energy. If you use more inputs (including energy), you can produce more output. But the other way around needn’t necessarily be true. You can also produce more output without increasing energy demand, by substituting the input factors.
As an example, Paul Krugman, a macroeconomist and writer for The New York Times cites the case of slow steaming. In his example, ships transported goods relatively slower in 2008 when oil prices rose sharply. Shipping companies found that not only did they save fuel, but the reduction in fuel consumption was more than proportionate to the reduction in speed. To make up for the slow steaming, shipping companies simply used more ships, supplying more capital and labor to the market. Output, here meaning shipped goods, did not change, but fuel consumption fell.
The opportunities for clean energy
So far, we have only considered energy as something bad per-se. But this is only true for “dirty energy” from fossil fuels. If we also take clean energy into account, dirty energy becomes easily substitutable by clean energy. But of course investing in clean energy now comes at a cost for economic growth, once again putting growth at risk by investing into climate change mitigation. This, however, holds only true for a limited time scale. We should also consider the temporal scale with which we are looking at growth. Energy is linked with growth in two ways: Directly, as an input for production and indirectly via negative impacts from climate change. If we were to only consider fossil fuel based energy production, we would see positive impacts on growth in the short term and negative impacts in the long term. The opposite is true for clean energy. While the initial redirection of funds into clean energy development negatively impacts growth rates, in the long run the transactions costs are diminishing. Therefore, it is important to look at the right time scale. In the short-term under our current energy mix, growth is increasing the burden on the environmental system, but in the long-run, if we manage to shift to renewable energy production, growth can become independent of increasing climate change.
Heterogeneity in growth across countries
Another point to be analyzed is the heterogeneity of development across the world. Green growth may not be a feasible pathway for every country, and even if it is, it still may not be the best pathway. Dell et al. (2008) find that during the past half century higher temperatures have reduced economic growth in poor countries but not in rich countries. Furthermore, higher temperatures have not just reduced output in poor countries, but also the growth rate. It is uncertain how investment in carbon abatement coupled with lower output will affect the difference in growth rates between rich and poor countries in the short- and long-run. Poor and rich countries have different marginal benefits and costs to dirty and clean energy use, climate-induced damages and abatement investment. Ethically, this presents a very difficult problem. Poor countries depend on further economic growth to reach an acceptable minimum level of life quality. Even the Paris agreement with its comparatively ambitious goal of limiting global warming to 1.5C acknowledges the fact that poor countries should sustain high growth rates. Therefore, the question becomes: in poor countries, should we seek the same standards of green growth as is hoped for in rich countries, or should there be some other standard that lies more closely to the (possibly) higher-growth scenario of “dirty energy”?
There is a great potential for poor countries to tunnel through high-emission energy generation to directly utilize clean energy production. However, to achieve this goal it will likely be necessary for rich countries to share their technological innovations. From a social planner’s perspective, this, coupled with the fact that carbon is a pollutant that doesn’t know country boundaries, would increase the internal rate of return for energy-efficient technologies and further support policies in rich countries that encourage innovation. How these policies would affect the green growth goal of rich countries is uncertain.
Moving forward in the climate debate, it will become increasingly important that physical and social scientists find some common ground. In my view, the strategy of simply providing anecdotal evidence and slinging mud across the scientific aisle is likely not the best way to achieving a high-growth, energy-efficient future. This common ground, I believe, can be found by together creating a more detailed definition of growth and coming to a mutual understanding of how growth, energy demand and climate change are linked in global climate-economy models. Or, as Nicholas Stern frames it:
If you turn it into a pissing contest between growth on the one hand and climate and environment on the other and say you’ve got to choose, you’re setting yourself up for failure.