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The Green Economy

Submitted by on 09 Mar 2012 – 11:48

By Bas Eickhout MEP, Member, Greens/EFA

“Today´s financial crisis can be a gateway to tomorrow´s environmentally responsible economy”, according to former Vice-President of the US Al Gore. But to take the path towards a financial, social and ecological sustainable economy, we should first of all move away from our current economic model that runs on debt.

In recent years, consumer debt has been used as an instrument to generate economic growth. By encouraging private debts to unhealthy and unsustainable levels, we unleashed a financial crisis. By moving this private debt to a public debt, the financial crisis has moved into the current Euro crisis. When private savings fall and government debt is on the rise, further lending will put countries increasingly in the hands of fickle international markets. While rising government debt levels to support consumption and growth could perhaps be justified in times of recession, it is most certainly not a sustainable strategy in general. The Institute for Fiscal Studies has estimated that if governments keep on borrowing at the level forecasted for the year 2015, debt would return to its pre-crisis level only towards the end of the 2030s.

The same can be said of our ecological debt. The burden we put on the environment and the wasteful way we use our resources are not sustainable in the long run. We are reaching planetary boundaries: Species are becoming extinct at an unprecedented rate that has not been seen since the last global mass-extinction event. The global atmospheric concentrations of greenhouse gases have reached record levels and we have therefore for example arrived at the point at which the loss of summer polar ice is almost certainly irreversible.

Our financial and ecological debts will put a heavy burden on current and future generations, hindering them in their development opportunities. While producers and consumers do not necessarily take the interest of future generations or the broader social impacts on board, politicians can and should correct for this. “Getting the prices right” by pricing pollution and resource use could capture the societal, but unvalued, impacts on public heath and the environment. The EU has been trying to do this, which has set a global precedent.

A good example of a pricing mechanism is our CO2 emission trading system, the EU ETS. This is an example in which the polluter pays for the damage of emitting greenhouse gases into the atmosphere, thereby contributing to dangerous climate change. Around half of EU´s total greenhouse gas emissions are covered by the scheme, including the emissions from power stations and big industrial plants.

The design of the scheme still has its faults and we are learning by doing. It turns out that the way CO2 permits have been handed out in the past, the lower demand due to the recession and the amount & quality of project credits from outside Europe have led to a situation in which by 2020 the oversupply of CO2 allowances could reach 2.4 billion (EC, 2012). As a result CO2 prices have been tumbling down to below €8 while carbon traders worry about a total collapse of the price. A quick fix of this cornerstone of our climate policies is urgently needed, but also within reach. Setting-aside and cancelling 1.4 billion allowances and a steeper yearly reduction of the cap on CO2 emissions are measures that could and should be taken soon.

But despite these beginners’ faults, the EU ETS is still the biggest CO2 emission trading scheme across the world and other countries are looking to Europe for guidance. As an example, a couple of weeks ago I spoke with high-level Chinese officials responsible for drafting China’s climate change law. They asked for advice on how to set up their own emission trading scheme and our experiences with the EU ETS. And if we look around to other countries, we see that South Korea is in the process of getting a cap-and-trade scheme, while for example New Zealand and Australia have already introduced it. The scope of ETS is also expanding: by including aviation into ETS we have captured the CO2 emissions of one third (!) of the global flights. Airlines need to buy CO2 permits under ETS for any flights landing in or leaving from European airports. Even though countries like the US and China are strongly opposed to the measure, Europe keeps the issue firmly on the table.

However, ´getting the prices right´ and moving towards a green economy entails more than just putting a price on CO2 pollution. At the moment labour is overpriced compared to other inputs. Labour productivity has increased twentyfold since 1850, mainly driven by rising wages (one could equally say that the increased labour productivity allowed for these rising wages to happen). Resource prices however have generally been falling over the last 2 centuries and this encouraged wasteful use.

Labour productivity allows companies to reduce costs and remain competitive. At the same time, it also means that one person can generate more economic output than before i.e. less people are needed for the same amount of output. If labour productivity increases and if a country wants to maintain the same employment levels, economic growth becomes a requisite.

One could argue whether or not wellbeing for all within planetary boundaries is possible with continuing economic growth. Never in the past have we seen an absolute decoupling between economic output and environmental pressures like CO2 emissions or resource use.

This is most and foremost a theoretical discussion however. A cyclical economy with a much larger service sector providing energy services instead of energy, mobility instead of cars, recycling, yoga classes etc will automatically reduce growth in labour productivity. There is a limit to how many people a hairdresser can cut in an hour for example.

It is difficult to imagine which policies, measures and behavioural changes are necessary to arrive at a cyclical, green economy. But we can be assured that lowering the price of labour, by lowering taxation, while increasing the price of pollution and resources, is a step in this direction. Shifting the taxation burden from labour to pollution and resources will shift the focus from labour productivity to resource productivity, reducing the need for economic growth, debts and pollution.

By getting the prices right and shifting the taxation burden, Europe will set its course on a path to a sustainable economy. We now have to gather some more speed. The current economic and ecological crisis is forcing us to move away from ever increasing consumption levels underpinned by ever increasing ecological and economic debts. Tomorrow is around the corner, so let’s start the move towards an environmentally responsible economy today.