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Climate change and economic growth – full report

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Full report of our group's research carried out for the course "Basics of climate change: The science background and implications on technology & business" at Aalto University.

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Climate change and economic growth – full report

  1. 1. 1 CLIMATE CHANGE AND ECONOMIC GROWTH Arttu Saarinen, Atte Virtanen, Ekaterina Ohotnikova, Régis Frias
  2. 2. 2 Contents Economic Growth 3 Can exponential growth with finite resources be sustained? 6 Limits to growth 6 Even infinite is not enough 7 We have been warned but warnings were ignored 8 So where are we now 9 The current plan 11 Technology 11 Behavior 11 Policy 11 The feasibility of the plan 12 Pathways to sustainability 14 Conclusions 17 References 18 Climate change is arguably the biggest challenge facing humanity in the beginning of the 21st century. Its main cause is the greenhouse gases (GHG) emissions by industrialized and developing countries. But the challenge is tightly connected to the core of our current economic model: economic growth, as defined by gross domestic product (GDP). Current research suggests that economic growth is incompatible with sustainable development. A success in reaching the current 2ºC target proposed by the IPCC will most likely put pressure for the economy to grow in other natural resources and sinks.
  3. 3. 3 In its essence economic growth is an increase in a country’s productive capacity, measured by comparing its gross domestic product (GDP) annually. Some of the reasons for the occurrence of economic growth are increases in a nation’s capital stock, technological advances to produce more efficiently or improvements in the quality of people’s lives. Worth mentioning is the way quality of life works in relation to economic growth, where increases in GDP themselves in many circumstances lead to improved life circumstances. Hence GDP is a measure for the wellbeing of a nation’s citizens. For hundreds of year’s economic growth has been the systematic goal of every nation for multiple reasons. However the strive for growth has been executed at the expense of the Earth’s ecosystem, neglecting depleting resources, increased emissions and the Earth’s decreasing capability of sustaining and regenerating itself. Economic Growth It is arguable whether economic growth is necessary, as its concept can be considered to be detrimental to our planet. One of the simple reasons for seeking economic growth has been the exponential growth in the population. As more and more people inhabit the Earth, more resources and products are needed in order to at least maintain the current level of wellbeing humanity has achieved up to this point — at least within the mainstream economic framework. Another reason is the characteristic of modern western societies of wanting more. On average people always want to have and strive for more, whether it is wealth or goods. The rich want to become richer and the poor do not wish to be poor. This basic human nature has a direct influence on the population growth. If the global economy would not grow, the sum of all of the products of the world would need to be distributed more evenly. This would be in direct conflict with the wish
  4. 4. 4 ecosystem. Hence economic growth has not taken the costs it induces on to the environment into account — the so- called externalities. On average global economic growth has been hovering around the 2 % mark for the last decades, whilst the population on Earth has doubled over the last 50 years. Some nations have experienced more economic growth than others. However these numbers and GDP have not taken the costs on the environment into account. If a monetary value would be placed onto these costs and were taken into account, growth would actually be much less. It has been estimated that with the costs to the environment included into GDP, growth would be reduced by an average of 3%, which would abolish the material economic growth we have experienced completely. Additionally as GDP takes all of the for more, making others have less of what they had initially. In order to fulfill the need for more, more debt would have to be incurred on a personal level. Therefore economic growth has been the concept to fulfill these needs. In a direct effect more consumption leads to more production, which in turn leads to growth in resources used. The increase in production leads to more pollution and waste created. As the Earth’s natural resources are diminished, its capability to mitigate greenhouse gases and other pollutants reduces simultaneously, creating a vicious circle. The monetary view of economic growth has been kept separate from its effect on the ecosystem and climate, without recognizing how the economy is actually a part of the ecosystem itself. Instead of being its own entity, the economy and its growth relies on the resources and capital provided by the Earth’s GDP versus GPI, 1950–2004
  5. 5. 5 13 %. This demonstrates the direction global economies have been pursuing: producing more goods at the expense of nature and the climate, whilst not necessarily increasing the production of goods that develop wellbeing. Therefore a change in this mentality is a necessary step in order to prevent humans from destroying the planet, where GDP cannot be considered the true and only metric for the advancements of mankind and its sustainability in relation to Earth. Hence we as inhabitants on this planet must begin to question Goal 8 set by the Sustainable Development program, where the “promotion of sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all” is a goal we can truly achieve on the scale we need, given how our monetary approaches to life have led us to the detrimental effects on the ecosystem of our planet. goods produced into account, it does include goods that are of no concrete value to society, instead of only vital goods such as safety or health care. Worldwide many products and services, which are included in the GDP, create no advancements in the wellbeing of society and could even reduce it. An alternative to the GDP is the Genuine Progress Indicator (GPI), created by the organization called Redefining Progress (2015). According to them the GDP is only a shorthand indicator of progress, whereas the GPI considers only goods and products that create true value in the wellbeing of humans and takes the costs of the environment into account. An example of the difference between GDP and GPI can be seen in the U.S., where for the last 45 years GDP has grown by 70 %. However considering only important goods and services and the costs on the environment, the true growth as in terms of GPI has only been United Nation’s 8th Sustainable Development Goal
  6. 6. 6 Can exponential growth with finite resources be sustained? The attend to see whether exponential growth with the existing resource supplies would be possible, the research team of Massachusetts Institute of Technology (MIT) led by Dennis Meadows made a two year study which was published in 1972 under the name The Limits to Growth (LtG). The study was done on behalf of the think tank Club of Rome – an international group of distinguished business people, state officials and scientists. Together with Jay Wright Forrester – pioneering computer engineer, systems scientist and the founder of system dynamics, MIT team has built a computer model World3 based on the theory of system dynamics Limits to growth which is dealing with the behavior of complex systems. The model was based on a certain combination of interdependent exponentially and linearly growing parameters, accounts for positive and negative feedback loops, nonlinear relationships and response delays. The model took into account relations between various global developments and produced computer simulations for scenarios using different amounts of possibly available resources, different levels of agricultural productivity, birth control or environmental protection. The authors intended to explore the possibility of a sustainable The limits to growth 1972 edition.
  7. 7. 7 feedback pattern that would be achieved by altering growth trends among these variables in the frame of three scenarios: Business as Usual, Comprehensive Technologies and Stabilized world. The research presented and analyzed 12 model runs for the scenarios and showed other possible patterns of world development over two centuries from 1900 to 2100. In the end all of the Business as Usual and Comprehensive Technologies scenarios met overshoot and collapse by the mid to later part of the 21st century. And only Stabilized world scenario resulted in an equilibrium stability. The only scenarios which indicated human welfare could be sustained were ones in which growth was reduced. Even infinite is not enough The standard model included a doubled resource base of what was calculated to be available back in 1970s and some model runs included an assumption where natural, technological or energy resources were even infinite. However those model runs still result in overshoot and collapse from overgrowth of other variable factors. Increasing the availability of resources didn’t increase the lifetime of resource use in proportion but just insignificantly. “Unlimited resources thus do not appear to be the key to sustaining growth in the world system.” 1972 runs of the World3 computer model
  8. 8. 8 Common criticism of the LtG research was that technological innovation and market signals would allow growth to continue. It was argued that as resources became scarce their market prices would increase because of scarcity and this would reduce demand for them. Technological innovation would then find substitutes so that growth could continue. But according to the model runs even when very optimistic assumptions about technical innovation are made, limits are still reached and exceeded at some point. “We have felt it necessary to dwell so long on an analysis of technology here because we have found that technological optimism is the most common and the most dangerous reaction to our findings from the world model. Technology can relieve the symptoms of a problem without affecting the underlying causes. Our attempts to use even the most optimistic estimates of the benefits of technology in the model did not prevent the ultimate decline of population and industry, and in fact did not in any case postpone the collapse beyond the year 2100. We have shown that in the world model the application of technology to apparent problems of resource depletion or pollution or food shortage has no impact on the essential problem, which is exponential growth in a finite and complex system.” (Limits to Growth, 1972) We have been warned but warn- ings were ignored The purpose of LtG was not to make specific predictions, but to explore how exponential growth interacts with finite resources. The model runs clearly showed that by the year 2100 the world might be on a collision course with catastrophe if then current rates of growth in such areas as resource use, industrial output, food production and population expansion continued on their then current course. The projections for the values of the variables in each scenario were predictions only in the most limited sense of the word, and were only indications of the system’s behavioral tendencies. 1972 runs of the World3 computer model
  9. 9. 9 Because of the fact that the model has no military sector to drain capital and resources from the productive economy, it has no wars to kill people, destroy capital, waste lands, or generate pollution, it has no ethnic strife, no corruption, no floods, earthquakes, nuclear accidents, or health epidemics, model representations thus are the uppermost possibilities for the “real” world. This probably makes scenarios highly optimistic So where are we now The conclusions presented in the research were novel and even controversial in 1972. At that time the world’s population and economy were still comfortably within the planet’s carrying capacity. The team found that there was still room to grow safely while we could examine longer-term options. However in 1992, this was no longer true. On the 20th anniversary of the publication of LtG, in the 1992 the team made an update in a book called Beyond the Limits. Already in the 1990s there was compelling evidence that humanity was moving deeper into unsustainable territory. Beyond the Limits argued that in many areas we had overshot our limits, or expanded our demands on the planet’s resources and sinks beyond what could be sustained over time. The most recent updated version was published on June 1, 2004 by Chelsea Green Publishing Company and Earthscan under the name Limits to Growth: The 30-Year Update. Donella H. Meadows, Jørgen Randers, and Dennis Meadows have updated and expanded the original version. In this update the study team point out some lessons they feel have been learned from their computer simulations, many of which explore assumptions about both technological innovation and resource substitution: • If one limit is removed but growth continues overall, then another limit will be encountered; they point out that there are layers of limits which are likely to unfold in successively multiple ways. Continued growth will only accelerate this process. • If a society is in fact successful in putting off limits through economic or technical adaptations, it runs the risk of later exceeding several limits at the same time. What such a society runs out of is the ability to cope. • Markets and technologies are tools that serve goals set by society; if the primary goal is growth these tools will be used in service of growth. • Adjustments by markets or technology also have costs, and as limits are approached these costs
  10. 10. 10 increase dramatically, making the adjustments unaffordable. • Markets and technologies operate through feedback loops with information distortion and delays; such delays facilitate overshoot. In 2008 Graham Turner at the Commonwealth Scientific and Industrial Research Organization (CSIRO) in Australia published a paper called A Comparison of `The Limits to Growth` with Thirty Years of Reality. It examined the past thirty years of reality with the predictions made in 1972 and found that changes in industrial production, food production and pollution are all in line with one of the book’s three scenarios so far that of ‘business as usual’. In 2014 Graham Turner concluded that “preparing for a collapsing global system could be even more important than trying to avoid collapse.” The study team published both a 20 year and a 30 year follow up, adding measures and making improvements in their computer simulation model. But the analyses came to the same conclusions as the original study – that continued growth would lead to overshoot and catastrophe for human civilization. In their original study in 1972 they warned that overshoot was a possibility; in the 1992 report Beyond the Limits they argued that overshoot had already occurred in a variety of areas, and that their original warning were even more urgent. The study pointed out that once overshoot of carrying capacity has occurred it will inevitably lead to collapse unless the process is reversed as well as further delays in recognizing and dealing with the overshoot issue would actually reduce the options available for returning the world to a sustainable state.
  11. 11. 11 The current plan As for now, the international community plans to restrict the global warming to two degrees Celsius by decoupling the CO2 emissions and economic growth from each other. By effective decoupling, the economy would grow practically at the same rate as before while the amount of emitted greenhouse gases would decrease to a sustainable level. The available tools to make the decoupling happen are technology and changes in behavior and policy. Technology According to the International Energy Agency (IEA, 2015), the needed decoupling for only a 2°C warmer future Earth can be achieved through the following technologies. The technologies in the chart are already economically reasonable with the exception of carbon capture and storage. Therefore we can conclude that we have the technological knowhow to limit the warming to 2°C although innovation would be of great help. The scope of implementation is what matters most. Policy The politicians have perhaps the most power to mitigate the climate change. If the policy makers were to set a price of $50 for a ton of emitted CO2 and increase the price 4% every year, the markets would change so significantly that the resulted CO2 emissions would warm the climate only by 2°C. At the same time the reduction in the economic growth would be as negligible as 1,6% over the time period of 2010 to 2050 (Schandl et al. 2015). The economic growth is explained by a large growth in the green technology sector. A government can induce the implementation of green technologies, change in behavior and increase in innovation in various other ways as well. Through legislation a country can for example create standards for things such as energy efficiency or the sorts of fuel used for transport. In addition to a carbon tax a government can help green technology companies by strategically distributed subsidies. Also direct investment, relevant education and influencing in international deals are instruments that governments can use to mitigate the climate change. Another way for rich countries to reduce the emissions is funding the climate action of developing countries. At best it cuts also the global income inequality as a side effect. Behavior To deploy the green technology, there must also be changes in behavior. For example to reduce emissions in transport people have to choose low carbon options such as public transport and electric cars. In addition to direct reduction of CO2 emissions changes in consumption make the green technologies cheaper and more available and it also influences the governments to pass policies that makes the use of those technologies easier. A larger demand for green technology increases also the amount of innovation in the field. Cumulative CO2 reductions by sector and technology in the 2DS to 2050.
  12. 12. 12 The feasibility of the plan Historically, the global CO2 emissions have increased almost yearly regardless of the realized decoupling. Basically the only times when emissions have been reduced are during depressions when the economy has grown only little or it has shrunk. Only exceptionally strong decoupling like China’s reduction in the use of coal in 2015 have been able to reduce the global emissions. The continuation of the year 2015’s trend is unclear (Jackson et al. 2015). On top of that, the current alleged decoupling is not properly accounted. The developed countries’ domestic material consumption (DMC) seems to be decoupled from economic growth, although that has been far Global CO2 emissions from fossil-fuel use and industry since 1990 and emissions intensity CO2/ GDP. Relative changes in total resource use (MF and DMC) and GDP-PPP-2005 between 1990 and 2008
  13. 13. 13 from making the case for decoupling in OECD countries. The aforementioned strategies could bring this down to the desired levels, but the actual material footprint (MF) in these countries is following the GDP growth hand in hand. Also, this doesn’t take into account that the economic growth requires the so called clean energies’ consumption also increases. And each of the alternatives (hydro, wind, solar, CCS) have a clear and known limitation. Therefore we don’t have solid historical evidence for the decoupling plan to work which exposes the plan to surprises. Another weakness of the plan is that it allows economic growth to happen even though it increases emissions or in this case the need for decoupling. Obviously it’s harder to decouple more than less. Hence, it’s useful to consider other ways to mitigate the climate change as well.
  14. 14. 14 The previous sessions demonstrate that even if the proposed strategies to reducing CO2 emissions succeed, that doesn’t mean we have a safe framework to sustain human prosperity throughout the 21st century. That is because prosperity has been defined as — or at least tightly linked with — economic growth. The ultimate solution to our environmental crisis is then to redefine prosperity. As Jackson (2009) points out that economists and policymakers have, for most of our recent history, focused on GDP growth, even though it has “delivered its benefits, at best, unequally”. He explains that (id. ibid.): Growth in the GDP is taken for granted. Reams and reams have been written about what it’s based on, who’s best at making it happen and what to do when it stops happening. Far less is written about why we might want it in the first place. Pathways to sustainability The myth of growth has failed us. It has failed the 1 billion people who still attempt to live on half the price of a cup of coffee each day. It has failed the fragile ecological systems on which we depend for survival. It has failed, spectacularly, in its own terms, to provide economic stability and secure people’s livelihoods. Tim Jackson
  15. 15. 15 The same plot a hundred years later (below) clearly shows that more income actually increases life expectancy. Beyond about U$ 20,000, increment in income has little to irrelevant impact on life expectancy. From that point other factors are more important than GDP for a nation’s prosperity. Tim Jackson (id. ibid.) points out that [p]rosperity is not synonymous with material wealth. And the requirements of prosperity go beyond material sustenance. Rather, prosperity has to do with our ability to flourish: physically, psychologically and socially. Beyond mere subsistence, prosperity hangs crucially on our ability to participate meaningfully in the life of society. There is “growing recognition that, beyond a certain point at least, continued pursuit of economic growth doesn’t appear to advance and may even impede human happiness” (id. ibid.). Gapminder world plotting life expectancy and income per person in 1995 and in 2005 In developed countries the most important element to predict health and social problems is inequality: the more unequal, the worse the indices (Wilkinson & Pickett 2011) Part of the explanation lies in the fact that up until a point economic growth does bring more prosperity. The chart below (Gapminder, 2015) is a plot of life expectancy as a function of income per person in 1915 (bubble size represents population size). If policy is focused on GDP growth, when the economy shrinks, governments urge the population to consume more. This is part of a perverse mechanism that puts materialism ahead of prosperity in policies and our lives. An element that plays an important role in prosperity is income inequality. Wilkinson and Pickett (2011) show, in a series of comparisons between rich countries the relationship between social problems and income inequality.
  16. 16. 16 Inequality is also a great driver for climate change. The Equality Trust, 2015: The most important obstacle to achieving sustainability is consumerism and the opposition to any policy which appears to be an obstacle to the maximisation of personal incomes and consumption. A very important part of what fuels consumption however is status competition - keeping up with others, maintaining appearances, having the right clothes, car, housing, education etc, to compare favourably with others. All these pressures are intensified by greater inequality. As a result people in more unequal societies work much longer hours to keep up appearances. They spend more, save less, get into debt more and aspire to ever higher incomes. The Sustainable Economies Law center proposes a description of some of the elements of a sustainable economy, one that doesn’t rely on economic growth just to stay alive: • Food “is produced locally and/or by small-scale, sustainable, community- owned enterprises” and provides “more opportunities for people to create rewarding livelihoods working in the production of food.” • Cooperatives: they propose a society where “enterprises and assets are owned and controlled by the communities that depend on them for livelihoods, sustenance, and ecological well-being.” • Grassroots Finance: “any project or enterprise can obtain financing from members of the local community, and where the majority of businesses in a community are locally owned and locally financed.” • City Policies: cities have “a diversity of micro-enterprises, urban farms, community markets, transportation- sharing, co-housing communities, shared housing options, cooperative enterprises, and a wide variety of economic solutions developed at the grassroots level.” • Community Currencies: “communities can create diverse and satisfying means for people to provide for and exchange with each other.” • Community Renewable Energy: “break barriers to the formation of community-owned renewable energy enterprises.” • Rethinking Home: “world where every person can live in economically sustainable homes without stressful financial burdens and without diminishing the housing and land resources available to others.” • Work in the New Economy: “every person has satisfying options for making their livelihood, including through participation in cooperative enterprises, micro-enterprises, social enterprises, nonprofit enterprise, low-profit enterprises, and gift-economy enterprises.” This is is, of course, by no means comprehensive, but is a set of foundation values for a society that doesn’t rely on GDP growth to exist.
  17. 17. 17 The climate change is a real and important challenge, but it is a symptom of a deeper problem: the impossibility of continued exponential growth. As long as we depend on economic growth to be able to maintain our lifestyle, mitigating global warming is a side issue (albeit a huge one). The main point is that the end of GDP growth doesn’t have to mean the end of prosperity. Quite the contrary: the end of growth could mean a healthier nature as well as a healthier human society, with less work-related stress, conspicuous consumption anxiety, inequality and more. GDP is a very questionable proxy for wellbeing and it is cracking while we approach (or cross) the Earth’s resource and sink boundaries. Hence the remaining question is whether we as mankind are able to take a step towards such economics. Conclusions
  18. 18. 18 Club of Rome, 2015, Club of Rome. http:// www.clubofrome.org. Gapminder, 2015, Gapminder World. www. bit.ly/1HOxjzc. Jackson, Tim, 2009, Prosperity without growth: economics for a finite planet. London: Earthscan. Jackson, Tim et al. 2015. Reaching peak emissions. Meadows, Donella, J. Randers and D. Meadows, 1972. Limits to Growth. New York: Universe Books. Meadows, Donella, J. Randers and D. Meadows, 1992. Beyond the Limits. White River Junction, VT: Chelsea Green Publishing Co. Meadows, Donella, J. Randers and D. Meadows. 2004. Limits to Growth: The Thirty Year Update. White River Junction, VT: Chelsea Green Publishing Co. Wilkinson, Richard & Pickett, Kate, 2011. The Spirit Level: Why Greater Equality Makes Societies Stronger. New York: Bloomsbury. The Equality Trust, 2015. The Equality Trust. https://www.equalitytrust.org.uk/ equality-and-global-warming IEA, 2015. Energy Technology Perspectives. http://www.iea.org/etp/etp2015. Turner, Graham. A Comparison of ‘The Limits to Growth’ with Thirty Years of Reality. CSIRO Working Paper Series 2008-09, http://www.manicore.com/fichiers/ Turner_Meadows_vs_historical_data.pdf Turner, Graham & Alexander, Cathy, 2014. Limits to Growth was right. New research shows we’re nearing collapse. In: The Guardian http://www.theguardian.com/ commentisfree/2014/sep/02/limits-to- growth-was-right-new-research-shows- were-nearing-collapse. Redefining Progress. 2015. Redefining progress. http://rprogress.org/ sustainability_indicators/genuine_ progress_indicator.htm Schandl et al. 2015. Decoupling global environmental pressure and economic growth: scenarios for energy use, materials use and carbon emissions. Wiedmann, Thomas O. & Schand, Heinz & Lenzen, Manfred & Moran, Daniel & Suhf, Sangwon & West, James, and Kanemoto, Keiichiro. 2013. The material footprint of nations. Procedings of the National Academy of Science of the United States of America. http://www.pnas.org/ content/112/20/6271.full References

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