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Climate and Growth

Climate and Growth

BY MILAN BRAHMBHATT 08/10/2015

We appear to face a moral dilemma about economic growth. Growth is essential to improve human welfare today, most notably that of poor people in developing countries. But, as presently structured, it also contributes to escalating climate risk, which could have a catastrophic impact on the welfare of future generations. If the only way to protect future generations from climate risk is by reducing welfare today, then it is the present that will likely win: future generations might be left to take their chances with climate change. This grim outcome could be avoided if, as we argue, there are avenues for countries to take substantial climate action while protecting or even increasing the welfare of their own citizens right now.  But taking up such opportunities is not necessarily easy: difficult institutional or political economy challenges will often need to be tackled.  

The goodness of growth

The first decade of the 21st century saw the largest, fastest improvement in human welfare over any comparable period in history. The proportion of people in developing countries living in extreme poverty – below the $1.25 a day level – fell from 36 percent in 1999 to 17 percent in 2011. The number living below the almost equally appalling $2 a day level fell even more, from 58 percent to 36 percent (World Bank, 2015). The annual decline in the $2 a day rate was more than twice as fast as in the preceding couple of decades. Without these declines there would have been 1.2 billion more poor people below $2 a day in 2011 than in fact there were.

“Global CO2 emissions growth in 2000-10 more than doubled to 3.2 percent a year from 1.5 percent in the preceding two decades.”

More rapid economic growth was the dominant force powering faster poverty reduction in the 2000s. Per capita GDP growth in developing countries jumped to 5.1 percent a year in 2000-10 from merely 1.9 percent in the preceding two decades.  Policies to reduce inequality and promote inclusiveness have also played an important role in reducing poverty in some regions, particularly when they complement growth. Greater inclusiveness increases the impact of growth on poverty reduction. Faster growth reduces political obstacles to more inclusive policies, by making redistribution less of a zero sum game (Ravallion, 2013).

Looking forward, it is clear that economic growth will remain a crucial instrument for improving human welfare for a long time yet. This is clearest in developing countries, where around 2 billion people still subsist on less than $2 a day.  One can also make a strong moral case for the importance of continued growth in developed countries (Friedman, 2005). That is why the slowdown in global growth since the 2008-09 financial crisis is a matter for concern.

Growth and climate risk

The growth boom in the first decade of the 21st century wasalso linked to faster growth of CO2 emissions – and with a continued accumulation of climate risk.   Global CO2 emissions growth in 2000-10 morethan doubled to 3.2 percent a year from 1.5 percent in the preceding two decades. This acceleration was driven by developing countries, where emission growth spiked to 6.5 percent a year, driven by surging demand for energy, and by a rise in the already dominant share of energy provided by fossil fuels, notably coal. CO2 emissions from developing countries now comprise two thirds of the global total (Figure 1). Global emission growth does appear to have slowed to a little under 2 percent a year in the post-recession period 2011-2014, in part as world growth has slowed (Table 1).  But such afall in emission growth rates, while welcome, will have only a limited impact on the growing concentration of greenhouse gases (GHGs) in the atmosphere, which are primarily affected by the already high level of emissions.  

Where are GHG concentrations headed?  Consider the International Energy Agency’s 2014 New Policies Scenario, which assumes that governments implement their climate policy commitments as of 2014 (IEA, 2014). In this scenario world CO2 emissions growth falls to only 0.9 percent a year over the next several decades, far lower than the recent historical record.  Yet GHG concentrations would still rise by the year 2100 to 700 parts per million (ppm) of CO2 equivalent (CO2e), up from around 450-470 ppm at present, and about two and a half times pre-industrial levels.   

It is possible to identify only a broad range for the ultimate rise in global temperatures that would result (IPCC, 2013). A recent study by Wagner and Weitzman (2015) estimates a median long run rise in global temperatures of 3.4°C with a 700 ppm concentration – “which alone would be a profound, earth-as-we-know-it-altering change.” Even more worryingly, it estimates about a one in ten chance of a more than 6°C rise, entailing catastrophic climate change of a scope difficult to imagine. With a concentration of 800 ppm that probability would rise closer to one in five. Estimates of economic losses in a 6°C scenario can only be speculative. Wagner and Weitzman (2015) observe that one can generate losses of 10 percent, 30 percent or 50 percent of world GDP from simple, equally plausible technical changes in the economic damage function used.

Present versus future?

If recent gains in human welfare were linked to faster growth in CO2 emissions, is the reverse also true? Does reducing emissions and climate risk necessarily entail slowing improvements in welfare today? If it does then the likelihood of meaningful climate action is not great.

There is an ethical argument that the welfare of future generations ought not to be discounted relative to the welfare of people living today, one supported by many leading economists and moral philosophers (Gollier, 2013). But one can question how wide or deep is adherence to this stance among people at large. It is true that evolution has endowed us with instincts not only for selfishness but also for altruism. But it is a qualified altruism that tends to be greatest for family, kinship groups or communities that can largely be trusted to treat one fairly. It is also true that our so-called circle of moral concern has gradually expanded over the centuries, so that we care more than did our ancestors for the interests of, say, distant peoples, or other species (Singer, 2011). Still, it is doubtful how quickly our moral concern can expand to fully include the interests of faceless generations in the 22nd century and beyond – those most hurt by climate change, who are, however, unable to reciprocate costly actions we undertake on their behalf.

Disagreement about how to share present day costs also hinders global cooperation on climate action. Such cooperation is necessary because climate action is a global public good:  actions to reduce greenhouse gas emissions by one country are non-excludable (they benefit all countries) and non-rival (benefits for one country do not reduce benefits available to others). In a world of sovereign states there is an incentive for countries to free-ride, to enjoy the benefits of climate action without paying the costs – and this temptation increases with the costs that have to be shared among countries.  Such disagreements become even more intractable because of deeply felt concerns about the fairness of burden-sharing: developing countries emit the bulk of the flow of GHG emissions today, but it was developed countries that, over the last couple of centuries, contributed the bulk of the existing stock of GHGs currently in the atmosphere.

Brahmbhatt Fig 1

Present and future?

We can however question the premise that reducing climate risk necessarily entails slowing improvement in human welfare today. The recent New Climate Economy (NCE) project of the Global Commission on Economy and Climate (2014) stresses that “many of the policy and institutional reforms needed to revitalise growth and improve well-being over the next 15 years are also key to tackling climate risk,” and that “there is considerable scope for countries to press forward with reforms that both energise development and grapple with climate risk.”

The potential for such reform exists because, unlike the theoretical economic model of competitive general equilibrium, where welfare is already at an optimum, real world economies are rife with whole arrays of market failures, government policy failures and weak institutions, and so are generally operating well below their welfare potential. Correcting these failures can generate multiple benefits, including improvements in economic efficiency and the environment. Rapid technological innovation is also expanding the set of opportunities that yield both climate and economic benefits, witness the unexpectedly swift fall in renewable energy costs in recent years.

The NCE project adopts a framework in which reforms draw upon and work through three fundamental mechanisms or drivers of change: efficiency of resource use, infrastructure investment and innovation.  It stresses the need for progress in three key socio-economic systems that underpin much of the world’s economic activity and GHG emissions: energy systems, cities, and land use. It also emphasizes the distinct challenges facing countries at different levels of development, distinguishing between low, middle and high income countries. Interested readers can look at the NCE reports, where this ‘3 x 3 x 3’ framework is fleshed out in considerable detail. Here we only illustrate with a couple of examples.

Consider the massive distortions in energy pricing and consumption that arise from both policy and market failures, even leaving aside climate concerns. Fossil fuel consumption subsidies in developing countries totalled $548 billion in 2013, while fossil fuel exploration, production and consumption subsidies in OECD countries amount to $55–90 billion a year (OECD, 2013; IEA, 2014). These are policy distortions that cause multiple resource inefficiencies in terms of the allocation of capital and labour across sectors, methods of production and patterns of consumption, promoting excessive consumption of fuels that, in addition, generate large harmful spillovers (externalities), such as local air pollution and climate risk.

“There is considerable scope for countries to press forward with reforms that both energise development and grapple with climate risk.”

Eliminating fossil fuel subsidies would both increase economic efficiency and cut, though not eliminate, harmful pollution. Because market prices do not reflect the damage from externalities, there is a further case to improve welfare by increasing taxes on fossil fuels, ideally through some form of carbon pricing.  Crucially, this case does not depend only on the benefits of reduced climate risk, many of which would be in the distant future and would be enjoyed by the world at large. It depends more directly on the benefits of reducing local air pollution, for example particulate matter (PM) pollution, which causes a wide array of respiratory and other diseases. These benefits are available immediately to the citizens of the country taking the action, and in many developing countries they are huge.

Brahmbhatt Fig 2

In China, for example, PM2.5 pollution has been linked to 1.2 million premature deaths in 2010, or, put in monetary terms, annual damages equivalent to 10–13 percent of China’s GDP.  In India these health damages are estimated as equivalent to 6-8 percent of GDP. The health damages from local air pollution can also be expressed per ton of CO2 from fossil fuel combustion, an indicator of the potential health benefits per ton of CO2 abated. The median value of such benefits for the 15 largest CO2 emitters is estimated at US$73 per ton of CO2 in 2010 – more than twice the U.S. government’s estimate of the climate benefit of reducing a ton of CO2 in 2010 (Global Commission on the Economy and Climate, 2014).

Or consider cities, already home to half the world’s population, and the source of about 80 percent of global economic output, and around 70 percent of global energy use and energy-related GHG emissions. Compact, well connected cities facilitate innovation, productivity and economic growth through so-called agglomeration economies, while also encouraging energy efficiency and less pollution per unit of economic activity. But there are few automatic guarantees that cities will evolve in ways that maximize agglomeration economies while curbing pollution and congestion. Market failures, bad policies and weak urban institutions combine to make costly urban sprawl a dominant urban form in many countries. A recent study concludes that infrastructure investments in mass transit, urban freight systems, buildings and waste systems would yield global economic gains through 2050 with a net present value of over $16 trillion – quite apart from annual savings in CO2 emissions that would reach 8 gigatons by 2050 (Global Commission on the Economy and Climate, 2015, section 2.1).

Questions

How much could  such reforms (with immediate multiple benefits) contribute toward the large cuts in CO2 emission levels needed to reach the international goal of only a 2°C warming? While much more and continued research is needed on these questions, preliminary estimates suggest their contribution could be large. One scenario found that such reforms in energy systems, cities and land use (plus specific forms of innovation in manufacturing and services) could yield at least 50 percent of the emission cuts needed by 2030 to put the world on a 2°C path with 66 percent probability. In ideal circumstances, with strong political leadership and international cooperation, and with early, broad implementation, they could yield perhaps 90 percent of the emission cuts needed by 2030 (Global Commission on the Economy and Climate, 2014).

So such reforms may not get us all the way to a 2°C path. But, because of their potential to yield immediate benefits for citizens, governments should have an incentive to start implementing these actions right away. And with such actions countries will start to put in place the institutions and policies – for environmental pricing, innovation, urban planning, land use management and international cooperation – needed to create momentum and a foundation for the increasingly ambitious low carbon initiatives needed in the rest of this century.

Lastly, if there exist such attractive reforms with immediate welfare benefits, why have they not already been done? This is a reformulation of the classic (and valid) question asked by economists: “if there’s a $100 bill lying on the sidewalk, why has it not already been picked up?” (see Olson, 1996). But one could ask with equal justice, “Why are developing countries still poor?” The answer to all these questions is that reforms that are clearly valuable from a development or climate perspective are not for that reason necessarily easy to do.

“Strengthening institutions and building political consensus for reform are perhaps the core challenges in development, and they are the same challenges that face climate action.”

Reforms are often hampered by weak institutions and political economy conflicts. Eliminating fossil fuel subsidies, for example, often provokes vehement political opposition from incumbent beneficiaries. To succeed, governments need not only skilled political management and advocacy but to also put in place a raft of complementary policies, such as more social protection for the poor and those most vulnerable to subsidy cuts, the use of fiscal savings to cut other distorting taxes, and so forth. Strengthening institutions and building political consensus for reform are perhaps the core challenges in development (Acemoglu and Robinson, 2012), and they are the same challenges that face climate action. This is an important sense in which ‘doing climate’ and ‘doing development’ are one and the same.  The UN Climate Change Conference (COP21) in Paris in December 2015 provides a good opportunity for countries at all income levels to strengthen their cooperation on development and climate, to achieve lasting improvements in human welfare today and in the future.

 

References:

Acemoglu, A and Robinson, J. (2012), Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Random House Inc., New York.

Friedman, B. (2005),  The Moral Consequences of Economic Growth. Vintage Books, Random House. New York.

Global Commission on the Economy and Climate (2014).  Better Growth Better Climate. Charting a New Path for Low-Carbon Growth and a Safer Climate.  

Global Commission on the Economy and Climate. 2015.  Seizing the Global Opportunity.  

Gollier, G. (2013). Pricing the Planet’s Future. The Economics of Discounting in an Uncertain World. Princeton University Press.

IEA (2014), World Energy Outlook 2014. OECD, 2013. Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels 2013. Organisation for Economic Co-operation and Development, Paris. Available at: http://dx.doi.org/10.1787/9789264187610-en.

International Energy Agency (2014),  World Energy Outlook 2014. Available at http://www.worldenergyoutlook.org/publications/weo-2014/

IPCC (2013), Summary for Policymakers. In: Climate Change 2013: The Physical Science Basis. Contribution of Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change.  https://www.ipcc.ch/pdf/assessment-report/ar5/wg1/WG1AR5_SPM_FINAL.pdf

Olson, M. (1996), Big bills left on the sidewalk: why some nations are rich and others poor, Journal
of Economic Perspectives, Spring 1996, 3-24.

Ravallion, M. (2013), The Idea of Antipoverty Policy. NBER Working Paper No. 19210. July 2013.

Singer, P. (2011), The Expanding Moral Circle: Ethics, Evolution and Moral Progress. Princeton University Press.

Wagner G, and Weitzman, M. (2015). Climate Shock: The Economic Consequences of a Hotter Planet. Princeton University Press.

World Bank (2015), World Development Indicators Database July 28 2015. Available at
http://data.worldbank.org/data-catalog/world-development-indicators/

 

MILAN BRAHMBHATT

is Senior Fellow at the World Resources Institute and a researcher in the New Climate Economy project of the Global Commission on the Economy and Climate.

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