In this week’s blog, NERI economist Paul Goldrick-Kelly discusses the challenge posed by the necessary effort to decarbonise and what it might mean for economic growth.
Economic growth is the dominant concept informing government policy around the world. Economic policy is structured around fostering growth through – among other things - education, technological advance and encouraging the spread of the same to encourage widespread take up of more efficient production techniques.
Efficiency is the key concept for most theorists of economic growth, particularly when referring to long-term growth. You can increase the value of completed goods and services by throwing in more inputs – or what economists call factors of production - in the form of working people and the stock of assets they use to produce. This is known as extensive growth.
The problem with extensive growth is that it runs into limits. A country only has so many people it can add to the workforce for example. Recognising this, most economists emphasise intensive growth, which is about the search for efficiency or techniques to get more out of a given combination of inputs. Increasing your workforce by 10% can increase output, but so can introducing machinery to increase productivity.
So far, so straightforward. However, it is becoming increasingly clear that economic activity must respect environmental limits. The planet is finite, and ecosystems can only bounce back from so much damage before they are destabilised. This is pressing, as we look to have stepped beyond a number of planetary boundaries which set out a safe operating space for our societies.
This presents a problem for the pursuit of economic growth. What is required is decoupling – severing the historically fairly stable connection between increases in (measured) economic activity and environmental impacts.
What is more, the scale matters. Relative decoupling won’t suffice. You could see a reduction in the environmental impact of a given amount of output (relative decoupling) while the total impact rises. In terms of emissions, a decline in the carbon intensity of output could be overwhelmed by the scale of economic growth. An economy which doubles in size while decreasing emissions per unit output by 20% will still increase the stock of greenhouse gases in the atmosphere.
This implies that we need to achieve declines in resource use/environmental impact in absolute terms. In decoupling terms, if economic growth is to be tenable, the fall in impact for a given output must be greater than economic growth. For overall emissions to fall in our previous example, that economy which doubles in size has to more than halve its emissions intensity.
We can construct a simple model to (imperfectly) demonstrate the challenge. If we take the Environmental Protection Agencies estimates of emissions for 2019, just before the pandemic crisis hit, emissions in the territory amount to just over 61 million tonnes of carbon dioxide equivalent. If we apply the government’s stated aim of average reductions of 7% each year through the 2020s (including this year), by 2030 emissions will have halved.
Notwithstanding the economic impacts of the current pandemic crisis (and possible environmental disruption later in the decade if we aren’t careful), most economists assume that economies tend to hover around an average growth rate over longer stretches, bouncing back more quickly after crises for example and converging on that average rate.
If we take modified gross national income (stripping out the effects of globalisation and tax planning) in 2019 and assume that it grows by about 3% on average, we end up with an economy that is more than a third larger in 2030.
If the overall emissions reductions aimed at are to remain consistent with that average rate of economic growth, the carbon emissions per euro need to fall from around 300 grams/€ to less than 100 grams/€ by 2030.
It seems fairly clear that we cannot achieve this by way of extensive growth – increased use of factors of production almost necessarily implies increased resource use with associated environmental impacts of various kinds.
Intensive growth at least, does not preclude the possibility of this absolute decoupling. But, as we can see, it amounts to a significant challenge in terms of the scale of efficiency required. At bare minimum, the rate of decline needed suggests a need for a significant shift from business as usual, likely not limited to tweaks here and there but tied to fundamental shifts in the way we live and work.
The evidence to date on the historic success of “absolute decoupling” is not encouraging. Environmental systems can’t be negotiated with, so if efficiency gains are insufficient, we will have to reconsider our relationship to economic growth as such. This would necessitate a confrontation with the commonly invoked relationship between wellbeing and growing output/incomes, a relationship that appears to be fraying in many places.
A key part of the puzzle could be an improved social wage in the form of universal basic services, providing useful services and potentially improving living standards without necessarily increasing our demands on nature. A shift from individual to collective consumption – encouraging public over private affluence – might square the circle.
Regardless of your position in this debate, it is clear that we face a significant challenge. Any discussion of what to do with the Irish (and global) economy in the coming years will have to confront some tough environmental maths.