Greenpeace, a prominent environmental protection group, has declared that economic growth must cease altogether to ensure environmental sustainability [1]. When amendments to the Clean Air Act aimed at reducing acid rain were proposed, “the electric utility industry warned that they would cost $7.5 billion and tens of thousands of jobs” [2]. And, in the midst of a prolonged jobless recovery to the Great Recession, certain politicians and pundits are highly critical of any additional environmental regulations on similar economic grounds.
The “Limits to Growth” report predicted a collapse in economic output and natural resources as pollution increases [10].
Claims like these are not uncommon in the public discourse surrounding environmental policy and regulation, and beg the following question: Is sustained long-run growth compatible with regulation aimed at protecting against environmental degradation and the depletion of natural resources?
As an aspiring academic economist, I view the importance of growth as self-evident. Economic prosperity is a near-necessary condition for the advancement of human welfare, but so is environmental health. Hence, if the two are incompatible, important tradeoffs must be made.
This is not to say that GDP is a perfect metric for human welfare, as Greenpeace seems to suggest is the dominant view in the economics profession (it is not) [3]. But, as first put forth in Lipset’s (1959) modernization theory, which has received inconsistently but generally positive empirical support [4, 5, 6], sustained GDP growth often brings with it societal characteristics – such as democracy and political openness – that we hold in high moral regard [7]. Even in the short-to-medium run, prolonged unemployment is understood to have substantial economic costs (through, e.g., job-market hysteresis) and be dehumanizing along non-economic dimensions (see, e.g., Amartya Sen’s “capabilities” theory of welfare).
Nor is this to say that environmental health should be valued solely through its services to human production and welfare. Even if methods and criteria for carrying out such non-market valuation were widely agreed upon (to my knowledge, they are not), it seems clear on both intuitive and philosophical grounds that environmental health should be “valued” for its own sake, if it can be “valued” at all. But, thinking in purely economic terms at least provides a lower bound on the level of environmental protection that should be instituted, and is therefore, I believe, a useful starting point.
How, then, can we intelligently address the question at hand? Careful economic theorizing provides an internally consistent way to attack the problem, so let’s see what this literature has to say.
Much theoretical work on joint economic and environmental dynamics is based on variants of the neoclassical growth model, in which agents’ key decision is how to invest in capital goods. Since capital growth drives output growth in this model, the key endogenous variable is the after-tax rate of return on capital (the real interest rate), which determines incentives to accumulate. The somewhat pessimistic conclusion of these models is that, since regulations such as carbon taxes drive down the real rate, there is a fundamental tradeoff between environmental quality and economic prosperity.
I favor a view of the world that both better captures the production dynamics in industrialized economies and largely eliminates the tension between environmental quality and continued economic growth. A recent paper by Acemoglu et al (2010) [8] determines the optimal environmental regulations in a model of directed technical change. Without delving into the taxonomy of endogenous growth theories (which posit that firm-level innovations drive aggregate output growth), models of directed technical change capture the intuitive and realistic idea that firms can be incentivized to undertake qualitatively different types of innovation.
This paper shows that, if we take the idea of directed technical change seriously, immediate interventions – in particular, an optimal combination of carbon taxes and research subsidies for “green” technologies – are optimal, and continue to be optimal even at “high” discount rates. Importantly, these interventions need only be temporary. The intuition is that the policy instruments direct innovation toward the “green” production sector, and that after a certain duration, this sector is sufficiently large that firms will choose to undertake green innovation and production even in the absence of taxes and subsidies. Robust growth survives in the long run.
Is this view too optimistic? Perhaps, but it provides yet another argument that carbon taxes are the way to go.
The bottom line? If we have faith in industry’s capabilities to innovate, immediate and decisive – but temporary – regulatory measures can reconcile continued growth with environmental health. Carbon taxes are a powerful instrument to this end, if only political incentives could align with their implementation – an event that may not be likely in the near term [9].
[3] http://www.greenpeace.org/international/Global/international/publications/RioPlus20/Beyond-GDP.pdf
[4] Barro, R.J. (1999). “The Determinants of Democracy.” Journal of Political Economy.
[5] Benhabib, J., Corvalan, A., Spiegel, M. (2011). “Reestablishing the income-democracy nexus.” NBER Working Paper.
[6] Murtin, F., Wacziarg, R. (2013). “The Democratic Transition.” Journal of Economic Growth.
[7] Friedman, B. (2006). The Moral Consequences of Economic Growth. Vintage.
[8] Acemoglu, D., Aghion, P., Bursztyn, L., Hemous, D. (2010). “The Environment and Directed Technical Change.” Working paper.
[10] Meadows, Donella, et al (2004). The Limits to Growth: The 30-year Update.
This is an interesting perspective on the relationship between economic growth and the environment. I am a bit confused as to why Greenpeace would release a statement claiming that economic growth must disappear in order to ensure environmental sustainability. The statement is not what you’d call politically palatable, and I think it will only further radicalize any legitimate claims Greenpeace makes regarding economic development and sustainability.
All this aside, I do feel that traditional measures of economic development and growth need to incorporate measures of environmental evaluation or harm. You mentioned the recent criticisms of GDP as the “perfect” measure for gauging human development and growth; I too agree with this criticism. However, after reading Mis-measuring Our Lives (a book about the shortcomings of GDP with regards to measuring quality of life, economic development, and sustainability), I think that (maybe) GDP–when adjusted for environmental costs–may be a sufficient device to generally measure economic development. Mis-Measuring Our Lives provides a few examples of a “Green GDP”: the Index of Sustainable Economic Welfare (ISEW) and the Genuine Progress Indicator (GPI). These measures incorporate some costs of water/air/noise pollution and account for wetland loss, natural resource depletion, CO2 damage, etc. Both ISEW and GPI tend to remain constant with GDP until they cross a certain threshold, implying that GDP (i.e. economic growth) and environmental welfare are parallel to a point–past which the increase in one proves to be a detriment to the other. (Perhaps this clarifies Greenpeace’s statement?)
In response to what Patrick posted, the opening line of this piece is a tad misleading/innacurate. Greenpeace has not released statements saying they believe economic growth should cease, and it is not their platform in any way. In reality, the statement comes from a BBC interview in 2009 with the former director of Greenpeace, where he said “We will definitely have to move to a different concept of growth. … The lifestyle of the rich in the world is not a sustainable model…” (among other things). Aside from the fact that it was the director of Greenpeace and not a formal Greenpeace platform, the post’s opening statement isn’t even accurate. In the interview, he doesn’t say growth must “cease” just that we need to reshape how we view it.
I would also like to point out the source listed, climatedepot.com, is a notorious climate change denier and propaganda-style website. If you don’t believe me just go to their homepage and read some of the headlines; it’s like HuffPo’s evil twin on steroids.
I agree with much of what was mentioned in the two previous comments. The opening line of article really sets a tone and starting with misinformation, to some extent, delegitimizes a well written article. I think that it is a very important topic to discuss, especially on a campus like duke where the general student body is highly fiscally and economically minded.
I also think Patrick’s point about a readjusted is an interesting one. But along with what he said, I think that certain projects that are directly linked to climate change, for example, should have that incorporated into pricing.
The previous comment brings up another very important lesson that can be learned not just for environmental policy articles, but generally: check your sources and make sure you know the background of the site or place from which you are getting your information.
I think this is a really interesting topic and I’m glad you chose to write about it. I’m sure this is obvious to you, but I still think its important to note that while economic growth is indeed an important part of human welfare, environmental goods and services also contribute to human welfare. If there is a tradeoff between environmental protection and economic growth, it’s important to understand that the environment has value inasmuch as it affects factors like human health that influence welfare.
Furthermore, it’s also worth noting that inadequate environmental protection could adversely affect economic growth. Climate change is projected to increase the prevalence of infectious diseases like Malaria. Higher rates of morbidity and mortality due to Malaria could decrease productivity, especially in developing economies across Africa that are more dependent on human labor for production. Increased rates of natural disasters due to could also affect capital stocks and consequently drive down rates of production. At the end of the day, I don’t think there is a clear relationship between economic growth and environmental protection.
Pesticides are one of the most important issues we face as a society today. All of our food is treated woth them. My friend cannot eat raw produce in the U.S. Becuse she suffers an allergic reaction and her mouth and throat swells up. Pesticides are not good for human health. Not only are they harmful when ingested, but they also increase the rates of resitance. More pests are resistant to pesticides and also more virilant. This is a danger going forward as large monoculture operations are already at risk for pests to tear through entire fields. People need to utilize practices like polycultire farming to mitigate pest damage and maximize yields.