Written by Daniel Sleeman - University of Cambridge, BA Economics
The optimal level of economic growth required to prevent climate change is being urgently questioned. While some maintain that economic growth and climate action cannot coexist, I believe that an innovation-driven ‘green transition’ will mitigate climate change while posing no overall trade-off with economic growth in the medium to long term.
“Capitalism Is Not and Cannot Be Stationary” - Schumpeter
In the short-term, economic growth will be muted. There will be immediate depressive impacts on the greatest greenhouse gas emitters through high carbon taxes, diminished subsidies, more stringent regulation, and increased prices for greenhouse gas emissions on Emissions Trading Systems. Given the value of the oil and gas industry, which has seen average profits above $1.5 trillion in recent years (Reuters, 2023), alongside its importance for providing energy to many households and firms, recessionary tremors may ripple through economies, potentially reducing short-term economic growth especially in the West.
Source: The Conversation
However, the size of such policies will be adapted to each country’s immediate clean energy and infrastructural capacities since some energy generated by fossil fuels may immediately be required to power initial infrastructural developments. Thus, trade-offs will vary between countries.
Simultaneously, government action in the form of mission-oriented industrial policies involving large green subsidy packages and tax breaks (as seen in Biden’s $370 billion package of climate investments (McKinsey, 2022)), alongside job relocation schemes will spur research, development, and growth in green arenas.
The green sector’s growth will initially be most subdued due to the ‘learning by doing’ mechanic, and consequent time lags in the transmission of investment to productivity and output growth. There are parallels with developing technologies in the pre-Industrial Revolution period, where productivity gains of new technology, such as metallurgy, were initially low and only in following decades was high productivity growth seen as new entrants utilised improved production procedures (Juhász, 2020). Once technological breakthroughs occur, the most intense period of the green transition will be reached.
A Schumpeterian Revolution Economic growth will increase dramatically across the medium-to-long term as the Schumpeterian Green Revolution intensifies.
Close private-public sector cooperation will increase the investment attractivity of green firms to key capital market actors (Stern, 2021). Further public-private partnership will be required to facilitate the transfer of excess savings, in the large ‘savings gluts’ of the rich, into green investment (Mian, 2021). Green investment incentives may also extend to polluting companies who may seek to commit to this accelerating train of growth. After all, green technologies greatly exceed fossil fuels in terms of cost reduction potential (Stern, 2021).
Investment could meet or surpass the Energy Transitions Commission’s target of $3.5 trillion of annual capital investment by 2050 (ETC, 2023). Investment in clean energy already surpasses fossil fuels’ stagnant levels, with this gap set to increase (Figure 1).
Figure 1 - (International Energy Agency, 2023)
As investment rises, green firms will experience efficiency gains as enlarged scales of production and new production techniques induce downward shifts in long-run average cost curves. For example, green hydrogen production costs are forecast to decrease by approximately 50% by 2030 (PwC, 2022). Productive capacities will increase, while more firms will enter global markets, intensifying competition. Cost reductions will transfer into lower prices, benefiting the consumer.
In accordance with Shiller’s Narrative Economics (Shiller, 2019), new innovations may further improve economic perspectives and strengthen incentives to invest for non-participants.
Moreover, the ongoing Digital Revolution will complement the green transition’s quest for productivity gains. For example, large language models will be instrumental in the research and development of new technology.
The False Dichotomy of Development
The conventional idea that the future of developing countries rests on a choice between development and environmental conservation is a false dichotomy centred on the premise that rapid development can only be driven by polluting industries. As the green transition develops and climate action is globalised, there will be less scope for high-emitting development, for example due to cross-border carbon taxes or changing consumer preferences. Furthermore, it will be harder to attract loans and expertise for polluting activities.
These countries will face a choice - either remain bound to soon-outdated technology or embrace green growth and development. Factor endowments like high light intensity will make countries, such as in Africa, effective locations for renewable energy generation.
Spurring Development through Nurkse’s International Demonstration Effect
Poorer countries may follow the current technological route of richer ones (Nurkse, 1953) with some traditional development steps ‘leapfrogged’ by advancing directly to more efficient technologies. For example, countries in Sub-Saharan Africa skipped telephone landlines entirely by utilising mobile phones, avoiding high intermediary infrastructural costs (Tagliapetra, 2020).
Richer governments and global bodies will have a key role to play in the provision of financial aid to overcome upfront cost barriers, and diffusion of technology and information to help them be part of the green transition.
A Net-Zero World In the long term, preventing climate change will be virtuous for economic growth. Several models, such as Nordhaus’ damage functions (Nordhaus, 2000), clearly highlight the lower costs incurred by preventing climate change. A stable climate will mean less costly weather whilst cleaner air will nurture a healthier and more-productive population - a one μg/m3 decrease in particulate matter (PM2.5) increased worker productivity by 0.82% in China between 1998 and 2007 (Fu, 2021).
Harnessing Innovation
This process will be challenging on a multipolar geopolitical stage, where tensions threaten to inhibit trade and cooperation. However, the immense green investment opportunity, constrained fossil fuel market, and risk aversion of human nature will likely propel green policies up the agenda.
Source: Adobe Stock
Regarding the décroissance movement, innovation is unmatched historically as a mechanism of overcoming crises. Advocates, such as Serge Latouche and Jason Hickel, would simply be forcing gravel into the vital gears of innovation whilst social cohesion deteriorated around.
Conclusion
Climate change prevention will inevitably incur trade-offs for the growth of polluting sectors. However, by weaponizing innovation and new technologies as the only viable way of preventing climate change, green economic growth will follow. This will greatly exceed the reduction in output of polluting sectors, meaning that beyond the short term, there will be no overall trade-off between preventing climate change and economic growth.
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