HC COOMBS POLICY FORUM Can the World Pay for a Green Economy?

Dr Sean Burges
Sean Burges is a Lecturer in International Relations and Senior Associate in the Australian National Centre for Latin American Studies at the Australian National University. He is author of Brazilian Foreign Policy After the Cold War (University Press of Florida, 2009)

With the cost of moving towards a global green economy estimated at somewhere between US$1.05 and US$2.59 trillion dollars, the obvious question is whether or not it is nancially feasible to make the transition without creating more severe economic dislocations. This question is particularly pressing given the degree and persistence of economic crisis in the United States and Europe, traditionally the two centres driving technological and industrial innovation. The purpose of this report is rst to set out some of the global nancial realities that might inuence the macroeconomics of pursuing a green economy. Attention will then be turned to different policy avenues that governments might pursue to move towards a green economy, focusing on the challenges to such a policy shift. Ultimately the paper will conclude that the economic and technological resources for a shift to a green economy do exist, but that making such a change is a question of political will. Direct state-based nancing? The proposition that world is in a state of nancial crisis appears selfevident if your news comes from major developed-country global media outlets. Greece, Portugal and Spain teeter on the nancial brink, threatening to bring Europe and the Euro zone down with them. The United States continues to reel from the aftershocks of its own nancial crisis. The depths of these economic challenges are perhaps best captured by looking at the debt to GDP (gross domestic product) ratios of a number of major economies. This gures captures the size of national government debt as a percentage of a countrys total annual income. Public Debt to GDP Ratios, 2011 (Economist.com/content/global_debt_clock) G8 Countries Remaining G20 Countries Canada 82% Argentina 52.3% France 87.4% Australia 22.5% Germany 76.9% Brazil 57.5% Italy 120% China 17.4%

Japan Russia UK USA

234.50% (2011 IMF est) India 55.2% 9.0% Indonesia 25.6% 84.90% (2011 IMF est) Saudi Arabia 13.4% 100.68% (2011 IMF est) South Africa 5.2% 3 Turkey 49.5%

While some of the gures are a bit suspect 9% for Russia and some argue that Australias should be closer to 15% the overwhelming picture is one that sees the G8 countries grappling with massive debt loads that limit their room for policy innovation and government stimulus. Clearly, issues such as the markets condence in the ability of a government to continue functioning with a high debt-to-GDP ratio mean that a country such as Canada or France can remain credible with a higher level of indebtedness. Nevertheless, the extremely high ratios seen in major economic engines such as the US and Japan combine with the anchor role of France and Germany in a struggling European economy to suggest that the G8 countries have limited space to publicly underwrite the move to a green economy. More signicantly, the need for the G8 economies to absorb international liquidity to roll over existing debts reduces the space that the other G20 economies might have to borrow for an environmentally oriented retooling of the national economy or to bridge nance rms seeking to develop new green economy technologies. Pursuit of a Keynesian economic strategy of state borrowing to fund the move to green economy alternatives is thus likely constrained by three factors. First, the major G8 economies will continue to absorb capital to roll over their debt and will likely see domestic economic actors repatriating capital to meet needs at home. Second, some of those countries with low debt-to-GDP ratios and the consequent space to engage in an aggressive program of debt-nancing the move to a green economy have small population bases and relatively reduced impacts on global environmental change. Finally, countries such as Brazil, China, India, Indonesia, South Africa and Turkey are seen as relatively larger credit risks because of their status as either developing economies or less-than-democratic societies, which will further reduce investor willingness to loan money in a time of global economic uncertainty. The ability of these countries to dedicate state funding to articulation of a green economy is further hampered by the need to address pressing socio-economic development issues as well as the challenge raised by a lack of the advanced science, engineering and technical centres necessary to move towards a green economy. An alternative is that the major emerging market countries might choose to invest some of their considerable foreign reserves in the transition to a green economy. Foreign Reserves, as of 6 October 2011, US$ billions (The Economist)

Brazil $351.4 Russia $496.4 Indonesia $120.6 Singapore $249.2 Taiwan $400.3 Saudi Arabia $517.3

China $3,197.5 India $290.8 Malaysia $134.5 South Korea 312.2 $ Thailand $180.3 Mexico $137.3

Again, the debt issues surrounding the G8 countries come into play because much of these foreign reserves are invested in US dollar or Euro denominated bonds. Furthermore, the current structure of global trade is such that all countries have an interest in supporting the US and European economies as anchor markets for the global production system, which effectively diverts funds that might be used for a Keynesian-style support of a transition to a green economy. A lack of domestic technical capacity is again a problem, too. Two Realities The dire picture painted by an examination of the state of the global economy masks the underlying reality that there are two different sets of processes at play. In the rst, most commonly found in the developed world, existing systems need to be retooled and habits changed, all of which bring considerable economic, social and technological costs. In developing and newly industrialized countries the situation is more positive, as demonstrated by the Chinese case. Where the US invested US$211 billion in greening key economic sectors between 2005 and 2010, China has an investment plan of US$468 billion for the 2010-2015 ve-year period, bringing annual green economy output up from US$166 billion 2010 to US $743 billion/year by 2015.1 A large part of the difference between US and Chinese expenditures comes from the respective stages of development of the two countries. In the US the infrastructure is already in place and must be converted. In China the infrastructure is only just being constructed in an effort to keep pace with economic growth. China thus offers a valuable lesson about choices and forward planning, demonstrating that accelerated growth can be pursued while keeping green considerations in mind. At the heart of the Chinese example is a phenomenon known as leapfrogging old technologies to newer approaches. This is perhaps most readily seen in the spread of cellular telephony in Africa, which has brought telephone connections to vast parts of the continent that lack the more expensive infrastructure of land-lines. Ongoing research into development and the energy sector point in a similar leapfrogging direction, suggesting that in many developing areas it may be more efficient and cost-effective to pursue micro and renewable electricity generation than traditional integrated energy-grid power generation systems. 2 The proposition that emerges from this is that the move to a global green economy is not hamstrung by the global nancial crisis, but is instead dependent on the sorts of choices that

government and business make as new infrastructure and industrial projects are rolled out. Public policy vision becomes critical, pointing to a need for leaders in industry and government to actively seek out new, more environmentally sound and efficient methods rather than relying on traditional techniques. The challenge here is that this can cost more in terms of time and resources in the short-term, which presents a considerable barrier in the face of pressure for immediate results. The Chinese example also points to an implicit shift in accounting practices and planning horizon. Current approaches to measuring economic performance do not encompass the medium and long-term impact of pollution, resource depletion, failing ecosystems and the resultant impacts on the population in general to remain productive. A central challenge to implementing green economy technologies is that it is often more expensive over the short-run as technologies are being developed and scaled up. The quarterly planning horizons of the stock market and the looming electoral pressure of democratic political systems all mitigate against incurring an immediate elevated cost in order to avoid a potentially signicant long-run savings in terms of avoided environmental costs. These pressures are notably reduced in the Chinese case where central planning, leadership and inuence creates a buffer that allows for a longer return on investment horizon. Similar insulation can be found in the industrial policy of the market-based democracy of Brazil. Contemporary Brazilian biofuel programs are grounded in 1970s decisions that did not begin to pay out until the late 1990s and were the result of state-supported research. Cane-based ethanol is now a critical part of Brazils energy matrix. Similar changes can be found in some of the projects being undertaken in the energy and construction sectors, which are partially protected from shareholder pressure by the large stock holdings of government and state employee pension funds in the countrys leading industrial companies. Driving the Green Economy Change The inability of G8 and European governments to directly underwrite a Chinese style move to a green economy does not mean that such a shift is impossible in the developed world. Both the economic resources and the technical capacity are present, but seated in a freely operating market place, not in government controlled funds and institutes. Shifting to a green economy is a question of policy planning and regulatory encouragement, all of which points to the real cost for developed countries seeking to move to a green economy: political will. In 1970 the US passed the Clean Air Act, which required that emission levels from new automobiles be dropped to a set level by 1975 irrespective of existing technological capacities. The result was the forced adoption of technologies such as the catalytic converter and three-way catalyst, both of which contributed to air quality improvements and global changes in

automobile design and manufacturing. 3 The strategy employed was one of technology-forcing regulation, which involves announcing a new standard which manufacturers will have to meet by a predened future date. Other examples of this strategy can be found in the push to eliminate chlorouorocarbons globally and change the disposal of electronic appliances in the EU. From a political point of view, technology-forcing regulation can be expensive because it creates dislocations in the market and can spread costs to consumers that do not offer an immediately obvious return. An alternate policy is to introduce scal or tax incentives for the uptake of new technologies or the implementation of new strategies. This approach has proven reasonably successful in countries such as Australia, Canada and Germany with the uptake of solar panel on residential dwellings. The trick is setting the compliance standards sufficiently high that it impels technological innovation in the private sector and creates demand from the consumer. It also brings the danger of imperfect implementation and failures from parallel regulatory processes, as was the case with the home insulation rebate program in Australia and the failure to ensure that tradespeople were adequately qualied. Again, an important element of the cost is political will revolving around a governments willingness to create, implement and sell the need for a program to the public. A third element is for governments to change their subsidy and assistance structures to stop supporting products and processes that are harmful to the environment. Again, the political cost can be substantial if such policy changes involve removing support that has been either supporting or facilitating important industrial sectors. The contradictions involved in this approach can be seen in the Canadian approach to the use of the carcinogenic ber asbestos, which is domestically banned, but still actively marketed and exported by Canada. 4 Conclusion The central challenge in the conversion to a greener economy is not economic, but one of political will. Current economic challenges in North America and Western Europe as well as the developmental prerogatives driving public policy in the global South are generating a large number of pressures on politicians for immediate results. Measures that imply a shortterm cost for a possible future gain are a hard sell. While suggestions that it is in a countrys long-term interest to be on the leading edge of green economy technologies are accepted in the abstract, implementing the necessary immediate policy and business changes to get ahead of this wave still results in difficult choices and dislocations and thus creates a thorny political challenge. This is particularly true when it comes to questions relating to global commons goods such as the environment where, for the average person, there is no immediately obvious feedback loop between

national action, international change, and future national benet. From a political point of view the sales job of some green economy policies becomes harder still because the underlying logic and science is complicated and not amenable to the fteen-second sound bite. Political will thus emerges as the central barrier. Despite the economic challenges facing the Europe and the G8 economies, the necessary economic and technological resources do exist on a global level and nationally in some countries. Marshalling them towards this end remains a serious political challenge on a local, national and international level.
November 2011

HC COOMBS POLICY FORUM

1 2

http://www.unep.org/greeneconomy/portals/88/documents/advisory_services/China.pdf

http://siteresources.worldbank.org/EXTENERGY/Resources/336805-1157034157861/ ElectrificationAssessmentRptSummaryFINAL17May07.pdf
3

David Gerard and Lester B Lave (2005), Implementing technology-forcing policies: The 1970 Clean Air Act Amendments and the introduction of advanced automotive emissions controls in the United States, Technological Forecasting and Social Change 72: pp 761-778.
4

http://www.twnside.org.sg/title/deadly-cn.htm