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Shrink emissions, not the economy!

This is a guest post by Linus Mattauch1, Alexander Radebach2, Jan Siegmeier2, and Simona Sulikova1.

1Institute for New Economic Thinking, Oxford Martin School, and Environmental Change Institute, School of Geography & the Environment. University of Oxford.

2Mercator Research Institute on Global Commons and Climate Change Berlin.


Public debates on climate change frequently exhibit a misunderstanding – namely that decarbonisation of our economies necessarily conflicts with economic growth. Ironically, the proponents of this claim come from two antagonistic camps. On the one hand, there are those who believe that addressing climate change must take priority and that this requires an organised diminution of economic output (termed “degrowth”). On the other hand, there are those who believe that economic growth and the social stability that comes with it should be prioritised: concerning oneself with climate policy should not be a priority if it impacts competitiveness.

The technological feasibility of decoupling emissions

One key distinction to elucidate the debate is between the technological and the political feasibility of “decoupling” of emissions from growth. Decoupling can be relative (when rates of economic growth are higher than rates of emissions growth) or absolute (when emissions fall in absolute terms even as the economy continues to grow). A further question only indirectly related to climate change mitigation is whether human well-being itself can be decoupled from economic growth.

This post focuses on the technological feasibility of absolute decoupling. Any cogent claim about appropriate responses to environmental problems must start with a normative benchmark, which for climate change mitigation is provided by assessments of optimal technology deployment and demand restructuring. Whether or not the optimal mix of relevant technologies is politically feasible is a different question entirely, but the two must be distinguished clearly for coherent policy advice.

Indeed much sophisticated modelling has been carried out to show that the transformation to carbon-free economies is technologically feasible.1 The 2014 IPCC Report on the Mitigation of Climate Change has assessed this relevant modelling and finds that on average scenarios limiting warming to 2° C costs 0.06 percent of annual economic growth.2 This is a small number compared to projections that the world economy will continue to grow at 2 percent per year, although in the order of the costs of any other major political reform. Furthermore, a substantial part of decarbonisation of the European Economy by 2030 is already economically cost-effective.3

Global decoupling is not yet happening: Although annual global emissions have been stable in 2014-2016, they rose again in 2017.4 However, it would be premature to draw conclusions about the future based on past trends.

Emission-intensive sectors are only a minor part of the economy

Our data5 illustrates one major reason behind the modelling consensus that decarbonisation and economic growth are compatible: in rich countries, sectors contributing most to economic output typically do not contribute to emissions significantly (Figure 1). Further, in many sectors absolute decoupling has been happening (Figure 2). This is true across such diverse economies as China, Germany and the United States (as shown in the three charts of Figure 1).

Figure 1: Contribution of individual sectors to net economic output and total country emissions in 2009. Sectors above the line contribute more to the value added than emissions of the country.

So if the most powerful economic sectors are not emissions intensive, then regulating emissions need not affect economic prosperity or output in developed economies. The virtual economy and high-skilled jobs have grown disproportionately faster than heavy industry (Figure 2) in the recent past. Even in China, the service sector has grown from contributing 24% to total economic output in 1995 to 33% in 2009, when most of the emissions “exported” from high to lower-income countries went to Chinese manufacturing. In the United States the service sector contribution has increased from 52% to 58% and in Germany from 50% to 55%. This growth in services has arisen mostly at the expense of heavy industry (which fell from 17.5% to 14.7% and 27% to 23%, in the USA and Germany, respectively), in addition to a fall in China's agricultural contribution. This is particularly notable in China, a country to which polluting industry has often been exported; the vast majority of all sectors have experienced much faster growth in economic output than in emissions. Thus, relative decoupling is a technical feasibility.

Figure 2: Gross Domestic Product (GDP) and CO2 emissions growth of individual sectors between 1995 and 2009 (adjusted for inflation). Sectors in the top left quadrant have decoupled their emissions from economic growth - whilst their emissions fell, their economic value grew.

On the other hand, Figure 1 shows that the sector that contributes by far the most emissions is energy and electricity generation, in Germany in 2009 it accounted for 51% of emissions and less than 3% of value added. Decarbonisation of the energy sector would thus contribute greatly to the decarbonisation of the economy without significantly affecting overall economic output, as a first approximation. Clearly, supply chains connect the growth and size of economic sectors. For instance, the digital economy requires a notable amount of electricity and material infrastructure. Yet, decarbonising the supplying sectors allows economic growth of the whole sectoral chain without a parallel growth in emissions.

The three main arguments why growth and decarbonisation are compatible

However, is this argument about the separation of economically important and emission-intensive sectors naïve?  After all, in the past, sustained economic growth has always coincided with growth in emissions. This objection is intuitive, but equates a correlation from a time with little political effort in climate protection with causation. We next revisit the main conceptual arguments behind why modelling consistently shows decarbonisation and economic growth are compatible under optimal policy.

Beyond our simple plots that disentangle value added and emissions by sector, three further arguments make the equivalence of economic output growth and increasing emissions implausible. First, the fast development and high deployment of renewable energy technologies has brought down their production costs so far that for the first time, deploying solar and wind renewables is cheaper, on a life-cycle cost basis, than building fossil power stations.6

Second, economies have been remarkably reactive to price signals and easily overcame substantial constraints in the past.7 As resources become scarcer and prices increase, opportunities for substitutes arise. On an individual level, substantial price changes, even on fuel, do reduce demand.8 One can thus be optimistic about the development of low-carbon production technologies if substantial carbon prices are put in place. Historically, higher rates of economic growth have also been correlated with higher rates of innovation.9

Third, low-carbon substitutes for some goods are indeed difficult to conceive at the timescales required to successfully address the world's climate targets, including reaching carbon neutrality within the 21st century. Meat consumption and aviation are highly emissions-intensive activities for which this is a case in point — 'artificial meat' and 'electric planes' may take too long to become marketable to achieve these goals. However, as Figure 1 shows, these sectors are relatively small in terms of value added in developed economies. Therefore, reducing meat consumption and air transport, albeit partly controversial, should be feasible without large economic losses. One might go even further and question the interlinkage of consumption levels from these goods/services and societal well-being.10 However, the last point raises intricate questions about what really matters for quality of life and what the 'good' society looks like.1112

These arguments have a significant implication for what governments should focus on in order to tackle climate change: curtail emissions in the highly emitting sectors! This can be achieved by levying a significant and reliable price on anthropogenic carbon dioxide emissions - either through a tax or an emissions trading scheme. It will imply that appropriate low-carbon alternatives are developed.  If done well, this can even increase productivity and create additional economic growth, as a recent article shows: aggregate investment is channeled from fossil resources into additional productive capital.13 Alternatively, an outright ban on the most emissions-intensive economic activities, such as burning coal, would achieve equal results in terms of emissions reductions, but forgo some of the economic benefits of decarbonizing the economy by appropriate price signals. In countries in which strong mitigation policies are in place, such as Sweden and Switzerland, emissions are declining. It is true that a portion of these reductions may be attributed to carbon leakage – emissions are partly outsourced as production shifts to poorer or less environmentally regulated countries.Yet if just a limited number of countries decarbonise, carbon leakage is only an obstacle to emission reductions as long as national economies do not impose tariffs on the carbon content of products they import.

Individual responsibility and sufficiency

While society at large has better alternatives to slowing growth, this is not necessarily true at the individual level. But what should an individual do about climate change? While governments can target various sectors, consumers are limited to choose between already existing products. Information about emissions along the entire supply and production chain (including potential carbon leaks) are also typically lacking. Moreover, motivated individuals typically care about other dimensions of environmental sustainability, such as biodiversity and water use. Missing information and multiple objectives make product choice by individuals a different decision-making problem. Thus, at the private level, a more general sufficiency strategy of reducing material consumption overall may be appropriate.14 Nonetheless, focusing on the most emissions-intensive activities such as road and air transport or meat consumption would make a certain contribution to climate change mitigation. Reducing material throughput is also strategy applicable at the economy-wide level; an example is the European Union Circular Economy policy. However, this has the purpose of creating innovation and redesigning waste contributing to energy efficiency.

Implications for climate policy

We conclude that contrasting climate protection with economic growth, as is so frequently done, is misleading. Economic growth emerges from individual instincts for improvements from billions of talented humans. Slowing down economic growth would mean suppressing that instinct, at enormous losses of individual freedom. So climate protection can only be successful by redirecting these instincts towards carbon-free production processes, creating a different sense of what is considered an improvement and, in rare cases, forgoing some benefits of irreplaceable high-carbon consumption options. Rather than emphasizing potential competitiveness concerns, debates about climate policy should focus on implementability of policy, political will and responsibility of actors, including private individuals.

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