Economic growth and a healthier planet: are they compatible?

Economic growth and a healthier planet: are they compatible?

Think of life on Earth as a doughnut. In the middle are the foundations of a just and equitable human society: access to food, water, healthcare, education and so on. Around the outside are the delicate biophysical systems and growing environmental pressures inextricably tied to our planet’s prosperity: climate change, biodiversity, ocean acidification, ozone depletion, nitrogen and phosphorus cycles. The ring is the ‘sweet spot’– an appropriate term within this confectionery metaphor – in which humanity can thrive without endangering its environment.

The idea of ‘doughnut economics’ is the brainchild of Kate Raworth, a senior visiting research associate and lecturer at Oxford University’s Environmental Change Institute. Raworth proposed the framework in 2012, while working for Oxfam, to stimulate discussion around whether our constant desire for economic growth was pushing the world towards deepening inequality and ecological collapse. The goal, argued Raworth, should be ‘meeting the needs of all, within the means of the planet’.

The intersection between the economy and the environment is clearly a complex one. For Cameron Hepburn, Professor of Environmental Economics and Director of Oxford’s Smith School of Enterprise and the Environment, growth is not something to be shunned – but we need to find new ways of ensuring economic growth and planetary health are not mutually exclusive.

‘Economic growth can and must be achieved alongside climate mitigation,’ says Professor Hepburn. ‘Stopping economic growth is unnecessary, undesirable and indeed probably impossible. But we need a new economic model that enables humanity to prosper within planetary boundaries.’

The doughnut economic model

The doughnut economics model identifies a ‘sweet spot’ in which humanity can thrive without endangering the environment.

The doughnut economic model
Illustration of the model.

Professor Rick van der Ploeg, of Oxford’s Department of Economics, agrees. ‘Pessimists about technical change and the excessive consumption patterns in modern society argue that the only way to limit emissions and curb global warming is to shrink the economy. I think this view is overly pessimistic and starts from the premise that it is not possible to substitute clean for dirty production patterns and that it is not possible to move the direction of technical progress from dirty to clean research and development.

‘A better policy is to jump-start the green transformation by subsidising green R&D and making sure those sectors of the economy that use renewable energy grow, and other sectors that rely on fossil fuels shrink. It is thus possible to curb global warming without lowering the overall growth rate of the economy.’

Clean growth – increasing national income while cutting greenhouse gas emissions – is one of the four pillars of the UK government’s industrial strategy. Achieving continued growth is desirable, says Professor Hepburn, because 10% of the world’s population still lives in extreme poverty. And while the transition to clean growth in a post-carbon world won’t be easy for many sectors, the outlook for business is perhaps counterintuitively promising: a Smith School report on the connection between corporate social responsibility and profitability found that, in the vast majority of cases, sound environmental and sustainability standards lowered companies’ capital costs and improved stock performance.

There is historical precedent, too, suggesting that economic growth and green policies can go hand in hand. Ryan Rafaty, a postdoctoral researcher on climate policy and energy transformation based at Nuffield College, Oxford, points to the 1973 oil crisis, when Arab states introduced an embargo on the exporting of oil to countries deemed to be in support of Israel during the Yom Kippur War.

Are we being honest about our dependence on carbon-intensive imports? Is economic growth too much of a cherished dogma? Do we actually know what we mean by 'clean growth'?

He says: ‘Sweden and Denmark today provide dramatic evidence that the curve of growth can go up while the use of carbon- intensive energy goes down. Denmark also provides a strong historical example. During the oil embargo in the early 1970s by the Organization of Arab Petroleum Exporting Countries, the price of oil quadrupled within a year for many Western countries. Responses to this crisis varied greatly: France and Sweden began stepping up their nuclear energy programmes, while in the US there was a tension between the rationing of oil and the instinct for growth and deregulation.

‘In Denmark, though, there was a major political realignment. Being a small country dependent on oil imports, they were particularly affected by the shock and went into severe recession. But through a programme of Keynesian stimulus spending on an alternative energy sector, they were out of recession within a few years and had founded the Danish Energy Agency, which introduced a nationwide wind energy strategy. This state-led industrial policy, which included grants to farmers, cooperative ownership models and the first feed-in tariff, produced a domestic manufacturing industry that thrives today: Denmark still controls a large proportion of the global wind market. Crises bring about change, and the nature of that change depends on the character of a country at the time.’

He adds: ‘It is possible to reduce emissions while increasing GDP per capita, as the UK has done, but there are a number of complicating factors: how do we deal with or compensate the declining industries? Are we being honest about our dependence on carbon-intensive imports? Is economic growth too much of a cherished dogma? Do we actually know what we mean by “clean growth”?’

According to Professor van der Ploeg, who is also Research Director at the Oxford Centre for the Analysis of Resource-Rich Economies (OxCarre), a range of policies will be required alongside the much-discussed subsidies for green R&D. He says: ‘First, the IMF has calculated that the world subsidises fossil fuels to the extent of 6% of GDP. It is a no-brainer to scrap these subsidies immediately. This would include the exemption of carbon taxes for kerosene use by airlines, and for diesel use in shipping.

‘Second, there should be an immediate moratorium on the use of coal – including coal-fired power stations. Third, there should be a gradually rising tax on carbon to encourage industry and households to make the move to clean growth. If those policies are implemented, there is a reasonable chance of keeping temperatures below the internationally agreed ceiling of 2°C or 1.5° C.’

Subsidies for green technologies are an example of what Professor Hepburn and colleagues working on the Oxford Martin School’s Programme on the Post-Carbon Transition would call ‘sensitive intervention points’. ‘When it comes to stopping the climate crisis, the stakes are high and time is running out,’ says Professor Hepburn. ‘We can’t afford to chase down every seemingly promising idea or persist with standard approaches that are not working. Instead, we need a smart, strategic approach that identifies a portfolio of interventions to generate effective and outsized impacts. We call these sensitive intervention points, or SIPs: social, political and economic situations where a small action can trigger rapid or dramatic change.

‘Examples of SIPs include subsidies for renewable energy, which have enabled the real cost of solar photovoltaics to drop by around 10% a year since the 1990s, or one Swedish teenager kick-starting international protests. Changes to financial disclosure could be another SIP: most companies don’t currently properly account for climate change risk. If they were required to do so, this could cause a substantial repricing of fossil assets, reducing emissions and transforming the energy industry.’

Professor Hepburn and colleagues at the Oxford Martin Net-Zero Carbon Investment Initiative have proposed a series of principles to help companies and investors address the moral and ethical questions they face in the context of rapid environmental change. Professor Hepburn says: ‘The Oxford Martin Principles for Climate- Conscious Investment answer an urgent ethical question: should investors continue to fund fossil fuels or should they divest, sending a signal about the perceived illegitimacy of particular business models in a changing climate? The involvement of the commercial sector is essential to mitigate climate change. Divestment alone is not the answer, and indeed is potentially counterproductive – by definition if you sell, someone else buys, and the buyer is likely to care even less about climate than the seller. Instead, the principles provide climate-conscious investors with a science-backed framework to engage with firms and assess whether their investments are compatible with the transition to net-zero emissions.’

To comply with the principles, companies need to commit to reaching net-zero emissions, identify a plausible and profitable business model in a net-zero world, and produce quantitative mid-term targets compatible with their net-zero goals. Meanwhile, another Smith School concept – that of ‘stranded assets’ – is helping the business community get to grips with why environmental issues matter to the bottom line. With assets such as coal-burning power plants at risk of becoming devalued amid the move towards reduced carbon emissions, Oxford research is changing the way investors think about climate risk and helping shift capital flows away from environmentally unsustainable – and unprofitable – investments.

And when it comes to achieving those ambitious goals of clean growth, Professor Hepburn is optimistic: ‘The transition to a post-carbon world will necessarily involve structural transformation in many economic sectors, but this means huge opportunities as well as challenges. Increased investment in clean technology has a significant role to play, as does clear regulation on net-zero carbon emissions and the reallocation of capital away from fossil fuels. Over the coming decades a shift to sustainable economics will accommodate the growth of human prosperity alongside environmental protection.’