The Transition to a Green Economy

An Analysis for a More Sustainable Future

By
The Transition to a Green Economy : An Analysis for a More Sustainable Future - Gabriel Gordon-Harper

Abstract

Humans are exploiting the Earth’s natural resources at a rate which cannot sustain global economic growth in the long-term. In the last decade environmental economists, most multilateral institutions, and many national governments have announced their support for a transition to a more efficient market-friendly manner of conducting global economic affairs, a green economy. The International Chamber of Commerce defines the green economy as “an economy in which economic growth and environmental responsibility work together in a mutually reinforcing fashion while supporting progress on social development.”1 This paper offers an overview of what makes a “green economy,” proposes policies which can help achieve that model and analyzes the potential effects of a green transition on communities vulnerable to this economic change.

Introduction

It is becoming common knowledge that the global economy cannot maintain its positive level of economic growth if mankind continues to consume the world’s natural resources at the current rate. Only 20% of commercial fish stocks remain underexploited. Water supply is projected to satisfy only 60% of world demand in 20 years. Greenhouse gas emissions are predicted to warm the Earth’s average temperature between 3-10 degrees Celsius, the results of which will likely cost 7% of global GDP per annum to mitigate by 2050.2 In fact, 60% of ecosystem goods and services have been degraded or are unsustainably exploited.3 

Environmental economists blame these crises on a “gross misallocation of capital” and stress that it is imperative that the globe quickly transition to what they call a “green economy.”4 The motivation for this transition has gained traction amongst the majority of transnational institutions. The United Nations, World Bank and IMF all have created programs such as the Sustainable Development Goals and the Green Climate Fund in order to assist in the transition to a green economy. Meanwhile detractors, such as the new US President Donald Trump claim this move could cost the world trillions of dollars by depressing economic growth, particularly in certain economic sectors on which large communities of blue collar workers depend. Even amongst those who agree with scientists about the dire potential social costs of depleting the world’s environmental resources differ as to how government should intervene to ensure a well-managed, egalitarian transition. 

What is this so called “green economy”? What type of investment will this multi-industry global transition require and what role does government intervention play in this process? This paper aims to answer these questions by defining the green economy, reviewing, and analyzing the mechanisms that economists plan to leverage in order to implement the transition and critiquing the manners by which this transition will affect different sectors of society. 

Definition – The Green Economy

In 2011, the United Nations Environment Program (UNEP) published the seminal green economy report, defining the green economy and laying out a global strategy to achieve the transition towards such an economic structure. Entitled “Towards a Green Economy: Pathways to Sustainable Development and Poverty Eradication,” the report defines a green economy as an economy which results in “improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities.5 In its simplest expression, a green economy is low-carbon, resource efficient, and socially inclusive. In a green economy, growth in income and employment are driven by public and private investments that reduce carbon emissions and pollution, enhance energy and resource efficiency, and prevent the loss of biodiversity and ecosystem services.”

The world’s major transnational and private sector institutions have by now all contributed their own definitions to enhance or clarify UNEP’s definition. The International Chamber of Commerce sums up all definitions elegantly as “an economy in which economic growth and environmental responsibility work together in a mutually reinforcing fashion while supporting progress on social development.”7  

In a green economy, economists assign natural resources their appropriate and otherwise unaccounted for economic value based on the services that they provide to human society. Calculations also account for costs of environmental degradation which, rather than being externalized onto society, are added to corporate and national balance sheets.8 Taxes, subsidies, regulations, and public programs incentivize reallocation of global finances so that the cost of economic activity reflects the true social and environmental cost of doing business

Transition Toward a Green Economy

Protecting the environment is no longer a niche political issue. On the eve of the Great Recession, the annual Pew Research Center poll of top concerns for US voters found that environmental sustainability was tied with jobs and family incomes as the top two concerns, garnering 57% each. Decades of political movements, conferences, and fundraising have institutionalized the environmental movement. It is represented in civil society by myriad nonprofits like the World Wildlife Fund and the Environmental Defense Fund, codified into laws like the Clean Air Act and Montreal Protocol and enforced by government and multilateral organizations like the US Environmental Protection Agency and UNEP. As a result of the 2008 financial crisis, multilateral institutions, governments and corporations  became increasingly concerned with preventing long-term disasters, and the ability of the Earth’s natural resources to maintain their sustenance of human societies became a viable talking point both in the White House and on Wall Street.9 

It is estimated that US $6.6 trillion worth of environmental, social and governance related costs were externalized in the year 2008 globally. That is 11% of the US $60 trillion world economy. A study conducted in 2010 by UNEP FI and PRI predicted that between years 2008-2050, should business continue as usual, externalities will increase by 62% relative to the global economy. This is equivalent to 5.6% of market capitalization of companies represented in the Index, 56% of those companies’ earnings.10  

How can society and governments realistically change the global economy to prevent these external costs from being incurred?

Green Accounting

Green accounting is the process of quantifying the value associated with the goods and services that natural resources provide in order to: (1) Understand the economic implications of the depletion of natural resources; (2) Create effective policies and regulations that conserve natural capital for later use; (3) Calculate the quantity of investment required for a green transition.

To overcome the tragedy of the commons, green economists such as Partha Dasgupta recommend that a calculation of natural capital, or natural resources from which human society derives economic benefits, should be added to human and physical capital as one of three elements of the full total stock of capital employed by an economic system. This system is known as full cost accounting. Stocks of natural capital would then be factored into a nation’s gross domestic and national products. Thus, just as the depletion of an oil company’s reserves of crude reduces its value, the depletion of a nation’s natural resources reduces that nation’s GDP. After all, a nation with depleted reserves of natural capital has reduced its total capability for producing future economic output.11 

Green economists are not environmental conservationists. As explained by economist D.W. Pearce et al. in a “Blueprint for a Green Economy,” one of the first economic studies bridging the natural capital approach with the concept of sustainable development, economists understand that some natural capital must be converted to physical capital for economic activity and growth to occur. What matters to green economists is not the conservation of natural capital but rather maintaining a rate of natural capital substitution. This natural rate of capital substitution respects environmental thresholds, and thus a breach of this rate would limit future substitution and therefore prevent economic activity.12 

There is a vast value of natural capital on Earth. Diverse and extensive ecosystems, for example, provide recreation, water regulation and carbon storage to the human population. The value of avoiding greenhouse gas emissions by conserving forests is roughly US $3.7 trillion. An abundance of diverse species on earth provide food, fiber, fuel, and pollination of agricultural and natural capital plant life. The contribution of insect pollinators to human agricultural output is valued at US $190 billion per year.13  

Developing knowledge regarding the true economic value of the goods and services derived from natural capital allows economists and lawmakers to devise market tools, policies and regulations to effectively and appropriately incentivize economic behavior that minimizes the depletion of natural capital.

Finance

Green economists predict that the transition to a global green economy will require a significant investment of resources sustained over time. This investment will be necessary to fund the research and implementation of green technologies, the building of new infrastructure to support those technologies, and to soften the social losses incurred as unsustainable industries are phased out. In total, UNEP estimates that the annual financing required to transition to a global green economy ranges from US $1.05 trillion to US $2.59 trillion, which roughly represents 10% of all current annual global investment, or 2% of world GDP.14  

UNEP’s “Towards a Green Economy” provides detailed recommendations as to where these finances must originate and how their delivery can be incentivized. Most significant investments will originate from concentrated pools of assets such as the large pension systems, insurance companies, and sovereign wealth funds. Microfinance firms are already playing a critical role, by designing programs which enable the world’s poorest to invest in resource and energy efficient development strategies that increase their resilience to the pending risks posed by environmental degradation. Though the public-sector controls significantly less funds, it will play a vital role in freeing up the flow of private finance as well as directly funding the green transition.

In recent years, opportunities have emerged for large-scale financing of the green economic transition. Rapid growth has occurred in green capital markets while market instruments like carbon finance have increased their efficacy. Moreover, trillions of dollars of green and social investments were allocated as part of recession stimulus packages.15 

The trends for these investments are proving positive. Investment in renewable energy increased by a factor of four to US $162 billion between 2004 and 2009.16 Over the first three years of the operation of the European Union Emissions Trading System, between 120 million-300 million tons of carbon emissions were reduced.17 Long term public and private investors, banks, and insurance companies have increasingly acquired portfolios that capitalize on opportunities presented by the increasing profitability of green industries. This has been accompanied by a trend of advances in disclosure and sustainability reporting in the private financial sector, thus providing a strong public relations motivator for change in the industry’s investment practices. Of the US $121 trillion of total global financial assets, 7%, or US $8.5 trillion, exist in portfolios subject to considerations regarding environmental, social and good governance sustainability.18

Policy

In sectors of the economy where market mechanisms alone do not adequately incentivize the investments necessary to finance the transition toward a green economy, governments must collaborate with the private sector to establish stable and clear regulatory frameworks. 

While public funds represent a significantly smaller proportion of global finance than the private sector funds, there are a variety of methods by which public funds can be leveraged to contribute to the green transition. Infrastructure and public services, such as mass transit and energy, often require government involvement and offer myriad opportunities to increase sustainability at scale.19 As part of its recession stimulus package the Korean government, for example, invested US $36 billion (3% of the country’s total GDP) with the goal of creating 960,000 jobs in public services and green infrastructure. Projects included the development of mass transit and railroads, low emission fuels and vehicles, energy efficient buildings, the improvement of water management, and protection of ecosystems.20  

Public procurement practices offer another opportunity for governments to encourage the development of the green economy. The public procurement process is typically high volume and long term. By increasing requirements regarding sustainability and equity, governments have the potential to support sustainable innovations by assisting green industries to create economies of scale, thus leading to the commercialization of green goods and services across the wider economy.21 

A green transition will also require the elimination of government subsidies for industries, which deplete natural capital, such as fossil fuel. These subsidies create a lopsided market which incentivizes waste and inefficiency while creating artificial market barriers against the profitability of, thus investment in, sustainable activity. To assist poor populations that rely on such subsidies, innovative short-term public support programs have met with great success.22 For example, after reforming fuel subsidies, Ghana, reallocated subsidy funds to eliminate certain school tuition fees and to increase healthcare services.23 

Even in the absence of subsidies, the market will continue to exhibit price distortion until negative costs are internalized by polluting agents. This can be accomplished by means of such market-based instruments as corrective taxes, lump charges, and tradeable pollution permitting schemes. Resulting increased costs on polluters will increase the competitiveness of alternative industries and firms, which do not produce the same external costs, thus influencing investment and land use decisions while enhancing the gains firms can attain by expanding their corporate social responsibility policies. 

In addition to market mechanisms, the transition to a green economy requires a cohesive regulatory framework, the result of which incentivizes green investment by increasing investor confidence in the sector. Regulations can set minimum standards for unsustainable activities and prohibit certain activities outright. They promote markets for sustainable goods and services, stimulate innovation in the field, and increase competition and efficiency. Regulations do run the risk of limiting market access for small and medium size enterprises, especially in emerging markets. However, measures can be taken to safeguard market access for these types of firms within a green regulatory framework. 

The transition to a green economy has the potential to create a significant number of net new jobs, as long as policymakers invest in training and workforce capacity building programs. Workers must be trained for new green industries, such as the renewable energy sector, as well as for new positions responsible for evaluating and increasing sustainability within the production cycles for current industries. Training for work in the information and communications industries is also imperative, particularly in least-developed countries. If unsustainable industrial activities around the world were to be digitalized, global greenhouse gas emissions could be reduced by 15% within ten years.24 Governments must also provide temporary programs that offer financial support and professional development training to aid workers who lose their jobs as a result of the transition.25 

As many environmental and social externalities have global, rather than local, effects, the actions undertaken by individual nations can produce negligible impact if not implemented in coordination with other nations. To resolve the resulting prisoner’s dilemma, multilateral institutions have hosted an increasing number of international negotiations with the intention of establishing the legal and institutional frameworks that promote coordinated international sustainable activities. For example, the 1989 Montreal Protocol on Substances that Deplete the Ozone Layer has since been ratified by 197 nations. Not only were harmful chemicals phased out on a global scale, but also in so doing, greenhouse gas emissions were incidentally reduced by roughly 11 billion tons, and 22 million new cataract cases for those born between 1985 and 2100 were avoided in the United States alone.26  

Sustainable Development

Equally important as environmental sustainability in a green economy is the reduction of poverty and social injustice. The concern is twofold: first, that international economic development in the current business as usual economy is utilizing a level of resources that cannot be sustained to support development over the long term; second, that degradation of the natural environment negatively impacts the world’s poorest populations in a disproportionate manner.

Sustainable development is commonly defined as, “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”27 From an economic perspective, this means that per capita welfare must not decline over time because of development.28 The key features that determine a society’s full range of economic opportunities are the total stock of capital available and the quantity of that capital which is employed in the economic system. In a green economy, societies utilize their capital stock in such a manner as to increase economic activities and welfare of the present, while maintaining the discipline to save capital for the use of future generations.29 However, currently over 60% of global ecosystem goods and services are utilized at an unsustainable rate or have become degraded.30 

Economists are concerned not just with the quantity of capital employed in the economic system but also with its composition. At present, economic development in both wealthy and poor countries results in the rapid accumulation of human and physical capital at the expense and excessive depletion of natural capital. If natural capital is converted into human and physical capital at an unsustainably high rate then the process can become irreversible, with detrimental impacts on future generations, such as the stunting of economic growth.31 It was for this reason that Pearce et al. proposed their natural capital-based full cost accounting scheme. 

The concept of sustainable development refers not only to sustained long-term economic growth but also to poverty reduction because the degradation of environmental resources is linked to poverty. Over 600 million live on lands vulnerable to degradation, water stress, and ecological disruptions.32 Poor populations are also vulnerable to the coastal erosion, more frequent storms and rising sea levels that will result from climate change. In fact, 14% of the human population, including 21% of all urban dwellers living in developing countries, are exposed to climate change risks due to their habitation of coastal low elevation zones.33  

In addition to their vulnerability to environmental disasters, the world’s poor lacks access to basic ecosystem services on a daily basis. 20% of those living in developing countries lack clean water, while 50% of the developing world, or 2.6 billion people, lack basic sanitation.34 Protection of the world’s ecosystems improves the lives of the global poor, as does mitigating climate change and improving sustainable energy security. 

It is important to note that the transition to an environmentally sustainable economy will not reduce poverty in and of itself. Any green economy program must include at its foundation an orientation toward reducing poverty. The primary beneficiaries of ecosystem services payments, such as those dedicated to carbon sequestration in forests, must be poor forest communities. Sustenance farmers stand to benefit from the promotion of organic agriculture if complimented by extension and other support services.35  

A Critical Assessment of the Green Economy

Economic Growth

Critics of a concerted effort to transition to a green economy typically warn that such a transition would dampen economic activity, thus reducing income per capita. While they argue that all members of society would be vulnerable to economic harm, a central contradiction in the concept of a sustainable transition is that the poor in particular would suffer, as they are typically more vulnerable to economic fluctuations. 

The debate around carbon emissions regulations in the United States exemplifies these arguments quite well. The three most common arguments made against the passage of effective climate policy in the US are as follows: First, it is argued that workers and communities whose livelihoods depend on the fossil fuel industry would face significant economic losses due to the shuttering of the fossil fuel companies that employ them. Secondly, fossil fuel companies, which are significant and highly localized contributors to the US economic and political system, will incur significant losses, roughly US $3 trillion. Third, by removing fossil fuels from the energy mix, as well as the subsidies that keep them cheap, US energy costs will increase significantly.36 Additionally, many who are opposed to carbon emissions reductions in the United States also claim that by complying with international environmental agreements to reduce emissions and to offer financial assistance to developing countries to do the same, US competition in international markets will decline, thus further dampening economic activity. 

There is no denying that sectors within certain industries would suffer from a green transition, along with the jobs those sectors support. The United States coal industry, for example, currently employs 9.8 million people.37 The mining sector of the coal industry shed 38% of its jobs in the four years between 2012-2016. It is predicted that should the United States reduce carbon emissions by 40% by 2030, this would require a US $200 billion investment per year and cost the US fossil fuels industry 1.5 million jobs. The social effects of this transition are stark. In West Virginia and Eastern Kentucky, two regions that are heavily dependent on the coal industry, unemployment rates are double the national average and joblessness rates climb to 50% in some areas. Opponents of carbon emissions reductions policies in the United States point to these figures as the canary in the coal mine, so to speak, for how a green transition might affect the US economy as a whole.38  

While adverse effects on particular job markets certainly result in a painful readjustment period for individual households, these numbers tell only half the story. New green technologies tend to produce significantly more jobs than the legacy industries they replace. Investment in the renewable energy industry produces 135% more jobs per dollar than investment in fossil fuel industries. In South Africa, that number is 113%, in Indonesia, 350%. In fact, should the United States reduce carbon emissions by 40% by 2030, it can be calculated that US would lose 1.5 million jobs in the fossil fuels industry while gaining 4.2 million jobs in the environmental goods and services sectors and the supply chains that support them. This is a net gain of 2.7 million jobs for the US economy and a reduction of US net unemployment of 1.5%. On a global scale, it is predicted that the 2015 Paris climate agreement will result in a net gain of 0.5-2% of current total global employment, 15-60 million additional jobs.39  

One of many reasons that investment in sustainable sectors results in net employment gain is that green technology is still in development. Thus, these industries require large quantities of infrastructure, as well as the development of supply chains and other supporting industries through their deployment phase. Fossil fuel technology has not changed dramatically in previous decades, apart from becoming increasingly automated, thus it requires less maintenance, less research, less infrastructure, less new supporting industries to be built, and less human capital.40 

Artificial Prices

Detractors of policies that support the transition to a green economy also claim that current economic equilibriums offer the greatest efficiency. This ignores three important factors. 

First, this claim does not factor in the cost of the externalities that these production cycles emit. Unless a full cost accounting regime is enacted, which quantifies environmental and social externalities as well as the value of ecosystem goods and services, the cost of unsustainable production will remain artificially low. Meanwhile society will continue to bear the US $6.6 trillion worth of environmental, social and governance related costs.41  

Second, unsustainably produced goods and services across the world, particularly in the conventional energy and agriculture industries, are subsidized by local governments. This occurs because energy and agriculture offer core necessities to poor populations, while also providing essential ingredients for economic growth. Ignoring externalized costs, conventional energy and agriculture do produce cheaper products than the more sustainable competition; however, subsidies only further artificially depress the cost of production. In the long-term the economy will stagnate from the burden of climate change, local air particulates, pesticide run-off, etc. As mentioned previously, it is the poor who are most vulnerable to the adverse effects of these externalities. Should a government determine that subsidies are politically or economically necessary, governments should transfer these subsidies to other necessities that benefit the poor, such as health or education services. Subsidies also have a greater economic impact when invested in sustainable industries, such as renewable energy and organic agriculture. Such industries have been proven to create more jobs and, in the case of agriculture, improve the lives of the rural poor who work in the fields. 

Third, while the U.S. coal industry has suffered due to environmental regulations, the main cause behind the industry’s current collapse has been the rapidly decreasing cost of renewable and low carbon emission fuel. In some U.S. regions, solar and wind energy are now price competitive to coal, meanwhile natural gas, which emits significantly less carbon than coal, has out-competed coal on price since the shale revolution began in 2008.42  

A Disruptive Transition

The question that must be resolved is how to minimalize the disruptive effect of the transition to a green economy for communities who rely on unsustainable sectors for economic stability. Workforce retraining programs are commonly suggested to prepare these workers with the skills necessary to succeed in the green jobs market. A green job is typically defined as a job which contributes to environmental or social sustainability. A recent study claims that many coal industry jobs require relatively similar skills as do new opportunities in the solar industry, which is creating jobs at a rate 12 times faster than the US economy as a whole. The study recommends that the government and civil society donate the funds to assist workers retrain for comparable solar jobs, a cost of between US $180 million – US $1.8 billion.43 Green jobs retraining already has been codified into national law. Former President Barack Obama’s Power Plus Plan earmarked US $75 million for job retraining and economic diversification programs in the coal rich Appalachian region of the U.S. The program also guaranteed pensions and health-care benefits to retired coalfield workers whose former employers had become bankrupt.44

Unfortunately, studies have shown that job retraining programs typically only succeed when participants are young and willing to move, which is not the case with many US legacy industry workers, such as coal miners.45 The solution to minimalizing the disruption of green transition in communities reliant on unsustainable industries requires much more comprehensive community development programs. Former US presidential candidate Hillary Clinton campaigned with such a plan, which offered US $30 billion to job retraining programs, continued President Obama’s pension and health-care guarantees, funded redevelopment projects of abandoned mine and power plant sites, and invested heavily in regional infrastructure to support the development of new industry, particularly clean energy.46 This type of holistic development plan, which complements job retraining with regional development, economic diversification, and expansion of social services, has been proven successful for assisting economic losers during transition. 

Secretary Clinton lost the 2016 election and, as of publication, the Trump administration has yet to provide a succinct economic development plan for coal dependent regions like Appalachia. Instead, the fledgling administration has pledged to return jobs to the region by cutting back Obama-era climate regulations in order to increase coal production.47  Though politically popular, it is unlikely that this approach will meet with great success at decreasing poverty levels in coal dependent regions ,as the industry owes its decline as much due to competition with lower cost US natural gas as it does to green economy regulations. Policymakers must resist the populist temptation to fight the green transition. Rather, the transition to a green economy can and must be leveraged as an opportunity to enact forward-focused holistic policies to diversify fossil fuel-dependent regional economies and retrain workers for new sustainable labor intensive industries. 

International Competition and Enforcement

Those that claim that the green transition makes countries less internationally competitive fail to understand two factors. First, while the concern that other countries will renege on international agreements is legitimate, the success of the Montreal Protocol has proven that this prisoner’s dilemma is not guaranteed to scuttle international cooperation. The Montreal Protocol owes its success to the economic growth that resulted in investments to create Ozone friendly products. A more general green transition would also result in economic growth, due to the high growth, high profit, labor intensive nascent industries which will drive sustainability in the green economy, as well as recovered losses resulting from no longer emitting externalized environmental and social costs. 

It could help increase confidence in green investments if an international agency with the authority to enforce green agreements were to exist. The United Nations has the authority to host climate conferences and levy sanctions when members of the Security Council agree to it, but the organization does not have the authority de facto to enforce international environmental treaties. The World Trade Organization has the mechanisms, influence, and experience of enforcing international agreements as they relate to international trade, but green regulations and policy are outside of the scope of the World Trade Organization. The creation of an authoritative international green economy institution could certainly increase the success of the transition, but as proven by the success of the Montreal Protocol, this is not necessary for the transition to lead to greater economic growth. 

The Way Forward

The research is clear that a transition to a green economy will result in significant net gains for the economy and society as a whole, even though trillions of dollars of investment will be required and some jobs will be lost as industries adjust. In order to facilitate the transition to a green economy, natural capital must be assigned economic values so that externalized environmental costs and benefits can be accounted for in the economy. Investment funds must be made available by the public sector, and policies and regulations must be implemented to incentivize private sector investment into sustainable industries. Recent successes, such as the passage of the 2015 Paris climate agreement, the positive economic effects of the Montreal Protocol, and the plunging cost of renewable energy point to an optimistic future for green economic growth. While conservative policymakers like Donald Trump are capable of slowing the progress toward a greener future, international momentum and economic trends appear to suggest that the transition will occur regardless. The question is whether humanity can achieve the transition before the world’s natural capital has been irreversibly depleted. 

Recognizing the intricate link between sustainability and eradication of poverty, in 2015 the United Nations established twelve “Sustainable Development Goals”. These goals will organize and direct significant sources of funding toward such aims as affordable and clean energy, climate action, decent work and economic growth, and good health and well-being. By linking environmental sustainability and poverty eradication in its economic development plan so directly, the United Nations has likely played a significant role in advancing the global green economy agenda. With research, economics, multilateral institutions and the momentum of initial success on its side, it appears likely that the world might just transfer to a green economy before it is too late. 

Gabriel Gordon-Harper enrolled at Johns Hopkins SAIS to study global environmental governance after becoming disheartened watching his hometown turn brown in California’s withering climate-caused drought. He is most interested in climate change diplomacy, market-friendly approaches to sustainability, and the intersection of environment and poverty. Gabriel most recently managed the global learning and development program for Curvature, a sustainable telecommunications company based in Santa Barbara, California. Previously Gabriel opened and managed a hostel in Morocco, and designed social justice oriented educational programming for US-bound migrants in central Mexico as well as for low-income California high school students through Americorps.