40
I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T
BOX 1.4
Reducing vulnerability to oil shocks by increasing energy efficiency
The vulnerability of the world economy to oil shocks has diminished since the 1970s (Nordhaus 2007). Possible explanations for this decline include the decrease in the average oil intensity of world GDP; the increased flexibility of labor markets (in particular wages), so that pass-through infl ation is less likely for a given monetary policy; a change in the nature of oil shocks (the 1973 and 1979 shocks followed supply disruptions; the 2008 shock resulted from increased demand from emerging markets); and improved confidence in monetary policy, which stabilized inflationary expectations as a result of nearly three decades of low and stable inflation (Blanchard and Gali 2010; Gregorio and others 2007). Specific energy security policies drove the decrease in GDP oil intensity. In some countries, higher taxes on gasoline consumption reduced oil consumption. In others, norms and regulations reduced energy
consumption by cars, industries, and the residential sector. Over the longer term, climate policies may have similar results: by driving technological change and investment away from oil-intensive patterns, these policies reduce oil consumption and vulnerability to oil shocks (Rozenberg and others 2010). Climate policies can thus reduce vulnerability to oil scarcity and uncertainty over oil reserves. In particular, such policies might reduce the obsolescence of capital in case of large changes in energy prices. Cities that are denser, less dependent on individual vehicles, and less energy consuming are also less vulnerable to volatility in oil prices (Gusdorf and Hallegatte 2007). Climate policies and other policies aiming at higher efficiency in the use of natural resources can thus increase the security and resilience of the economy.
shocks (such as natural disasters) or economic shocks (such as oil shocks or spikes in commodity prices) (box 1.4).10 In so doing, they can stabilize output and consumption, increasing welfare if risk aversion is accounted for.
Trade-offs and synergies between green policies and growth Armed with this framework for green growth, how do policy makers weigh the trade-offs between the costs (possible reductions in investments, income, and consumption) and benefits (possible improvements on the environmental, social, and economic fronts)? Given that the net impact varies depending on the policy considered, the context, and the time horizon,11 a start is classifying the potential benefits of green growth policies, as done in table 1.1. In a green growth context, any new policy should be examined for ways to maximize the potential for short-term benefits while minimizing the costs.
Measuring the net impacts of green growth policies also requires capturing suboptimal conditions caused by market or government failures or nonrational behaviors. Models based on first-best assumptions (perfect markets, rational expectations, and so forth) can assess the costs of these policies in a perfect world; they cannot be used to estimate their benefits. The balance between costs and benefits will be affected by how they are defi ned. In a narrow economic framework, a policy to protect a mangrove forest has an economic opportunity cost (because it prevents shrimp farming or tourism development, for example) and no direct benefit. In contrast, in a framework that includes the valuation of ecosystem services, the policy also has economic benefits, including protection against coastal storms, the creation or maintenance of a breeding ground for fisheries, and the availability of wood for the local community. The “green accounting” approach incorporates the valuation of ecosystem services into national accounts, thereby providing a much