Treading the economic path to green growth

Taking on climate change can put us on the path to a green industrial revolution. Matt de Neef

Despite the poor outlook for the Earth’s climate, putting in place acceptable solutions is proving difficult. Mired in economic uncertainty, some countries are scaling back climate change efforts. But the economy and environment needn’t be opposed: our actions on climate change could see a shift towards a growing green economy.

Worldwide efforts, but many barriers

The European Union has been a world leader in mitigation, and has adopted a roadmap to reduce emissions by 80-95% by 2050. But it is consumed by recession, debt and the viability of the Euro zone.

In Washington, climate change is now off the agenda, at least until 2013 (after the 2012 presidential election) although initiatives continue in some states such as California.

In China the battle is well and truly joined between the old industrial economy and the new clean tech, services-oriented economy, but the outcome is far from clear.

At present China leads the world in both directions. Emissions are still growing very strongly (at about 6-7% per annum) but China is being very aggressive in terms of policies to develop clean technologies and prepare for the low-carbon economy. How and when the balance will shift remains uncertain.

In Australia the government has published an exposure draft of a new set of Clean Energy Bills to introduce a carbon price in July 2012, and will soon introduce them into Parliament. The bills are unpopular, with the Opposition committed to repealing them at the next election. And the economic context is difficult, both in terms of rising utility prices and a slowing economy.

Reducing emissions could bring a green industrial revolution

It is important to keep in mind the central reality of climate change: the world must reduce emissions sharply over the next few decades.

Achieving this will require a fundamental re-engineering of the world economy. We need revolutionary change in transport, building and other technologies to drive energy efficiency and the take-up of renewable fuels, and to reset the balance between goods and welfare-enhancing (and non-polluting) services such as health and education.

Such a transformation is comparable in its own way to the original Industrial Revolution, and will, if it occurs, drive rapid growth. Not the old emissions-intensive growth, but low-carbon growth better directed at meeting human needs.

The question, of course, is about getting there, about finding the path to this era of green growth. Each country faces this challenge, although the problems to be addressed vary. Many, such as China and some countries in Europe, recognise the potential of the low-carbon economy, and are determined to be leaders.

Australia’s path is littered with obstacles

For Australia, there seem to be several obstacles to smooth implementation of unpopular legislation by an unpopular government. I touch on just two here.

The first is that, in terms of prices, this is about the worst time possible to be introducing a tax which will increase energy prices.

Real electricity prices relative to the CPI as a whole have risen by 40% over the past five years. Real utility prices as a whole have risen by 35%.

This is a much more rapid rise than ever seen before in the available data, and is generating considerable concern on the part of households and businesses. Building a further increase of say 20% on this will generate fierce resistance, even if largely covered by compensation.

This is just bad luck in terms of timing, but is a problem that that the Government must explicitly address. The reasons for the 40% real increase over the past five years are far from clear, and there should be an overt program to understand and perhaps roll back some of these increases.

The second obstacle is the slowing Australian economy.

The Government’s climate proposals have been shaped, as have current monetary and fiscal policies, on the assumption that the resources boom will continue to drive the economy.

But it is now clear the net effect of the resources boom is turning negative, as the costs of the high exchange rate begin to outweigh the benefits of resource investment and higher terms of trade.

The prospect of a new “tax” may further stall the economy, when economic stimulation is needed.

This means the fiscal policy context of the clean energy proposals needs to be changed. The Government should abandon forthwith its outdated commitment to achieve a balanced budget by 2012-13.

It should bring its climate change proposals to Parliament together with a bold plan to stimulate the economy, involving a continuing deficit as necessary.

Professor Peter Sheehan is director of the Centre for Strategic Economic Studies at Victoria University, which hosts an international conference on Wednesday addressing these concerns.