Most key decision-makers in government and business have come to believe that responding to climate change will be expensive. To be more precise, they are adamant that capital allocated to lowering carbon emissions will mean that global GDP will be lower in 2030 and 2050 than if we had not made these investments. This simple little idea is the key reason why, after more than 24 years of UN-sponsored global climate negotiations, carbon emissions are rising faster than ever and well above what was modelled on computers just 10 years ago.
What if they are wrong? What if, on the contrary, investments in lowering carbon emissions make you richer? Even more controversially, what if reducing carbon emissions represented the only pathway by which global economic growth targets could be met? If this were true, and my research suggests it is, then instead of a race to the bottom where everyone fears reduced economic growth from high carbon costs, we move to a race to the top where reducing carbon emissions becomes the most attractive growth opportunity in history.
Using the same approach and applying the GPI to 17 of the G20 countries, a group of ecological economists reached the same conclusion last year—all of these large economies stopped growing decades ago.
I started my journey to refute the conventional wisdom on the high costs of addressing climate change by studying the dynamics of global economic growth. My review of the literature and economic data told me that growth is measured, surprisingly, by only one economic performance metric: gross domestic product.
Global GDP in 1970 was approximately US$18 trillion and it grew to US$54 trillion over the next 40 years to 2010. Not bad, I thought, a tripling of global economic output in just 40 years—the greatest increase in history. Then the penny dropped—global economic growth must be exponential for the entire system to function properly. If global GDP tripled between 1970 and 2010, then the increase over the following 40 years would have to result in much more than a tripling of economic growth.
I tried to calculate how big global GDP needed to be in 2050 in order to meet the growing aspirations of a human population expected to reach 9.5 billion. The OECD announced in 2013 that their estimate of the global GDP required in 2050 was US$305 trillion.
Imagine the UN gives you the responsibility for creating a global economic growth plan to take GDP from US$54 trillion in 2010 to US$305 trillion in 2050. I decided to start this exercise by looking at the factors that would constrain growth over the 40 year period in question.
You might be surprised to learn that global debt, both public and private, is approximately US$250 trillion today. This includes everything from student loans, auto loans, and home mortgages to the corporate debt of large companies and the sovereign debt of nations. This represents four years of global economic growth at today’s level and requires around three percent annual economic growth to pay off in a timely and efficient manner. Countries like France, now experiencing growth of around one per cent, are actually falling deeper into debt. As a point of reference, global debt in 1970 was equal to less than one year of economic growth at that time.
The next problem you would find while looking for factors constraining growth is the explosion in health care costs around the world. Most of the additional spending is going towards treating rapidly growing chronic diseases and deteriorating mental health. This trend is expected to continue for some time. This large and growing problem constrains growth both by keeping people away from work while they are sick and directing large amounts of capital towards negative-to-low growth activities.
A related constraint is the explosion of people now entering retirement age and the exponential increase in growth required to generate enough financial contributions to meet their related pension costs. Japan and the US, for example, are both going to find it very hard to meet these liabilities. In the US, underfunded pensions currently exceed US$800 billion and are rising quickly. A significant amount of growth will need to be directed towards solving this problem, leaving less capital to invest in activities capable of accelerating growth to the new levels required.
There are many other factors constraining growth, including the growing disparity in wealth and incomes and underinvestment in stationary energy, which the International Energy Agency has calculated now totals US$50 trillion through the year 2030.
The upshot of all these constraints on growth is that reaching US$305 trillion is going to be very difficult—even without any climate change damage. To have any hope of meeting this ambitious target, we will need to create numerous new economic growth platforms. History tells us that a great approach to lifting growth comes from investing in infrastructure, as this has the double effect of creating jobs and the new platform from which future growth can take off. Of all the large infrastructure projects one could imagine, nothing comes close to the scale of opportunity represented by a rapid de-carbonisation of the global energy system.
Even though the International Energy Agency estimates that the level of investment required to de-carbonise the global energy system is approximately US$1 trillion per year for the next 40 years, I believe the actual number is close to twice that amount, at US$2 trillion per year. The difference in the two numbers comes from my realisation that there are many large, long-lived, high carbon assets that must be shut down immediately.
Existing coal-fired power plants, for example, represent, on their own, 50 per cent of the total allowable carbon emissions over the next 36 years if we are to avoid the biggest climate change damages and keep surface temperature increases to less than two degrees—the current global target. The additional amount is required to pay the debt and equity holders of these assets to shut them down. To ensure that these payments would lead to growth, the recipients would have to invest them in low carbon energy assets.
The remainder of the US$2 trillion would be divided into four investment categories: First, a limited amount would be used for dramatic improvements in the efficiency of the existing fossil based energy system. This may seem counterintuitive, but is a very good use of capital, as many of the resulting reductions in carbon emissions would be achieved at negative cost (they generate more returns than the initial investment). Furthermore, we would need to keep the lights on while we shift to the new low- or zero-carbon energy assets.
Second, money would be invested in technologies that already exist at scale, including wind and solar energy projects. Depending on where they are located, this might also include investments in nuclear power stations.
Third, much more would be invested into proven technologies that do not yet exist at full commercial scale. This would include energy storage, smart grids and battery electric vehicles in large urban areas.
Finally, because there is a significant probability that the other three options may leave us short of our carbon reduction and economic growth targets, we would need to invest in game changers. These are technologies that are not yet proven but have the potential to lift dramatically the efficiency with which capital, energy and resources are utilised. These include artificial photosynthesis, integral fast breeder reactors, thorium reactors, new materials including graphene, and quantum computers. Important progress is being made in all of these areas—they only need to attract significantly higher levels of investment to accelerate their commercialisation.
Of course, the question is where the money comes from. The answer is that it would come from the same large institutional investors who financed all of the existing low efficiency, high carbon emitting activities. Pension funds and insurance companies are chasing higher and higher financial returns to meet their growing liabilities and this is moving them quickly into an area which had traditionally attracted less than one per cent of their capital—infrastructure. The fastest growing new asset classes are green bonds and climate bonds. Investment into low- and zero-carbon energy assets is advancing largely on the basis of key underlying trends in capital markets.
Of course, the most efficient means of transferring investment into highly efficient low- or zero-carbon assets is to launch a carbon tax. The Australian government did this in 2011 and some of the roughly $7 billion in annual revenue went to the Clean Energy Finance Corporation—also created by the Australian government. After two years in operation, Australia’s carbon tax had an inflationary impact of just 0.02 per cent, forced large carbon emitters to become more energy efficient and directed significant new capital to large renewable energy projects. Despite this clearly successful outcome, the new government has decided to scrap the carbon tax and all other legislation designed to move the Australian economy towards a more efficient and growth oriented future.
One cannot complete this discussion without some mention of the real shortcomings associated with the use of GDP as the key indicator of economic progress. GDP measures everything and nothing that matters. It counts as positive the costs of automobile accidents, divorce, treating type two diabetes and any other negative welfare event that requires expenditure to correct. It does not recognise enormous disparities in wealth and income and it absolutely loves inefficient economic activities—the more money that needs to be spent to deliver the same outcome the better. Despite these obvious deficiencies both governments and the market place enormous value on this perverse metric.
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In the last two years, the US state of Vermont has decided to stop using GDP as an economic measure and replaced it with a new standard known as the genuine progress indicator or simply GPI. The governor then ordered the state’s economic data to be revised back to 1950 using GPI instead of GDP. The result is absolutely shocking—the state of Vermont announced it stopped growing in 1978. Maryland has passed similar legislation and seven other states are considering doing the same. Using the same approach and applying the GPI to 17 of the G20 countries, a group of ecological economists reached the same conclusion last year—all of these large economies stopped growing decades ago.
It is not surprising, therefore, that despite historically low interest rates and large asset purchases by central banks over the last several years, we have not seen a return to the growth levels that preceded the 2008-2009 global financial crisis. Thomas Piketty believes we will not see a return to higher levels of growth for decades under the current economic system. It should now be abundantly clear that we cannot continue down the traditional path of inefficient investments that, by this definition, emit large amount of waste.
Our mistake has been to focus on the problems flowing from the waste including, most importantly, global climate change. We must rapidly de-carbonise the global energy system not because we are sufficiently concerned about the uncontrolled risks flowing from a climate system greatly modified by human activity but because, in the absence of this global infrastructure investment opportunity, we will never achieve sufficient growth to meet the needs of a global population on its way to 9.5 billion.
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