How tackling climate change can boost growth

Action to reduce carbon-dioxide emissions and mitigate climate change has long been viewed as fundamentally opposed to economic growth. Indeed, the fragility of the global economic recovery is often cited as a justification to delay such action. But a recent report, “The New Climate Economy: Better Growth, Better Climate” released by the Global Commission on the Economy and Climate, refutes this reasoning. Far from being a detriment to economic growth, the report concludes that efforts to combat climate change could boost growth considerably – and relatively soon.

Anyone who has studied economic performance since the onset of the financial crisis in 2008, understands that damage to balance sheets – such as excess debt and unfunded non-debt liabilities – can cause growth slowdowns, sudden stops, or even reversals. And those familiar with growth in developing countries know that underinvestment in human capital, infrastructure, and the economy’s knowledge and technology base eventually produces balance sheets that cannot support continued growth.

Climate change is not very different from these unsustainable or defective growth patterns. It, too, is essentially a balance-sheet problem, based on the stock of CO2 in the atmosphere

On its current trajectory, the world has only 3-4 decades (or less) before atmospheric CO2 reaches levels that disrupt climate patterns, with catastrophic consequences for the environment and, in turn, economic and social systems. Allowing the world’s “natural capital” – the resources and ecosystems that underpin these systems – to be depleted is essentially another form of destructive underinvestment.

The massive amount of scientific evidence supporting current climate projections makes it unlikely that the world will forego adjustment entirely. But solving the complex coordination and distributional problems that such adjustments will generate will not be easy, and, convinced that we cannot afford an aggressive mitigation strategy at a time when we are faced with so many other pressing challenges, policymakers could be tempted to defer action on the ground.

“The New Climate Economy” argues that this would be a very bad idea. The report’s thorough assessment of recent research, experience, and innovation led to the unambiguous conclusion that acting now would be far less costly than waiting. In fact, acting now is barely costly at all.

Low-carbon paths of economic growth do not look all that different from high-carbon paths – until the latter veers sharply to the precipice of catastrophic failure. Put another way, the net costs of reducing CO2 emissions – in terms of growth, income, and other measures of economic and social performance – are not all that high in the short and medium term. Given what we know now about the consequences of the high-carbon path for the natural environment and, in turn, health outcomes and quality of life, those costs could actually be negative.

But there is an important proviso: action must be taken urgently. The economic costs of action to mitigate climate change rise non-linearly as action is delayed. If those costs are deferred for 15 years or more, mitigation targets will be impossible to achieve, at any cost.

So how do we move onto the low-carbon path? The report points out the benefits of constructing the energy-efficient buildings and infrastructure needed to underpin the low-carbon global economy of 2050, incorporating low-carbon strategies into municipal-planning processes, and tapping the efficiency-enhancing potential of the Internet. Add to that the declining costs of alternative energy sources and relentless technological advancement, and the world’s carbon-reduction goals do not seem so distant – or costly.

After evaluating the technologies, policy options, and analysis included in the report, one might conclude that low-carbon growth paths may be slightly flatter in the short term than their high-carbon counterparts, with higher investment and lower consumption. Nonetheless, it would be difficult to deem them inferior, given their medium-to-long-term advantages.

The report also sheds light on another important question in the climate debate: Is global cooperation critical to mitigate climate change? For a given economy, does acting alone yield distinctly inferior growth paths – say, by damaging the competitiveness of its tradable sector? If the answer is yes, international policy coordination would seem to be a necessary precondition for progress.

This does not appear to be the case. A substantial portion of a national policy agenda that supports an individual country’s shift to a low-carbon growth path (boosting energy efficiency, for example) will not produce an economic slowdown; such an effort might even lead to higher growth rates than remaining on a high-carbon path would have delivered. On a first approximation, low-carbon paths are the dominant strategies, implying a completely different and far more favorable view of the incentive structures at work.

This means that, though international coordination will be an important factor in the long-term success of action to mitigate climate change, its complications need not – and should not – hold progress hostage. Given the difficulty of developing and implementing a global strategy, that is good news.

Scientific evidence has eliminated legitimate doubts about the scale of the risks that climate change poses. Now, the Global Commission’s analysis has largely refuted the economic arguments for inaction. Add to that growing public concern about climate change, and the conditions for decisive action may have arrived.

Published in collaboration with Project Syndicate

Author: Michael Spence, a Nobel laureate in economics, is Professor of Economics at NYU’s Stern School of Business.

Image: Power-generating windmill turbines are seen near Port Saint Louis du Rhone, near Marseille, May 7, 2014. REUTERS/Jean-Paul Pelissier