Introducing Green Capital

CHRISTIAN DE PERTHUIS AND PIERRE-ANDRÉ JOUVET

GREEN CAPITAL A N E W P E R S P E CTI V E O N G R O W TH

introduction

The Color of Growth

four thousand years ago, the fate of the Sumerians revealed that when growth is driven by capital accumulation that preys on the environment, it will eventually self-destruct. Thanks to their control of irrigation, the inhabitants of Sumer developed agriculture, writing, law, and the city; but because they were unable to master drainage, the indispensable complement to irrigation in arid areas, their civilization vanished as a result of the sterilization of the soil by salt. The inhabitants of Easter Island, who had also developed one of the ďŹ rst writing systems, experienced a similar fate.1 After felling the last tree, they abandoned their island with its huge granite statues and its now lunar landscape. In a mineral world, only stone can survive. Yet in cutting down the trees, the islanders not only exhausted a supply of resources, but, as Jared Diamond so brilliantly shows, they also destroyed the reproductive capacity of an ecosystem.2 As with the Sumerians and the Easter Islanders, the world’s economic growth is at risk of faltering. For millennia, things like the water cycle, ecosystems diversity, and the greenhouse effect have

Introduction

helped shape the conditions of life on Earth by freely providing what is required for the reproduction of resources. These can be thought of as “regulatory systems” that help protect and enhance our “natural capital,” that is, the stock of natural ecosystems that generates a flow of valuable goods or services. As they function today, markets are destroying these regulatory systems, and in recent decades there has been growing awareness of such threats.

In 2006, in a widely publicized report, the economist Nicolas Stern estimated the cost of potential losses to the world economy by 2050 as a result of climate change at up to 20 percent of gross domestic product (GDP). Some years later, the Sukhdev report (prepared for the Nagoya conference of 2011) estimated that the services provided by the diversity of ecosystems amounted to 40 percent of global GDP.3 Scientific reports all reveal the rapid loss of this biodiversity. Suppose that the services currently provided for free by biodiversity were reduced by a quarter between now and 2050; this would amount to a 10 percent decrease in global GDP, probably irreversibly.

Despite the supportive discourse of international organizations like the OECD and the World Bank, which has lent credibility to the idea of “green growth,” these new environmental concerns remain on the periphery of political and economic decision making. Worse, following the deep recession of 2008–2009, the outlook of decision makers has shortened: what counts now is a rapid return to growth and the reduction of unemployment. As for the color of growth, they seem to say, we’ll think about that later!

Barack Obama’s first presidential campaign in the fall of 2008 focused on two societal projects: the extension of health coverage and controlling greenhouse gas emissions. His 2012 campaign revolved around one point only: who, given the choice between the incumbent president and his Republican opponent, would be most able to stimulate the economy and create jobs? A few months earlier, the environment had likewise disappeared from the debate around the French presidential campaign. International life is in 2

Introduction

step with this restricting of the field of vision. In 2009, when the Copenhagen summit brought together many heads of state, climate change still seemed to be a major challenge for policy makers. The economic and financial crisis has since taken its toll. By 2013, the marathon sessions that counted were those that sought to save the euro or to defend the quality of one’s sovereign debt— in short, to repair the economic machine and quickly restore growth. Climate change, ecology, the color of growth: these are no longer on the agenda.

In adopting such an approach, the industrialized world is indefinitely postponing any ambitious action to address climate change and the challenges presented by the environment more generally.

With varying degrees of awareness, we are passing on the perils of global warming and loss of biodiversity to future generations.

But by buttressing ourselves with such narrow visions of a return to growth, we are at the same time depriving ourselves of the most appropriate way of emerging from the current economic depression. Everyone vaguely feels that emergence from the crisis will not happen by copying past formulas. This time, exit requires a new wave of investment and innovation that will reconfigure the economic structure, as has taken place historically with the advent of animal traction, the steam engine, electricity, the computer, and the Internet. It is our personal conviction that “green capital” will play a central role in the reconstruction of the economy. But for this to happen, it is essential to stop pushing it to the periphery, and instead to place it at the heart of economic debates. The aim of this book is to contribute to this process by providing the reader with an itinerary consisting of five main stages.

The first four chapters seek to refine the diagnosis of complex relationships linking natural capital to economic growth. Some forty years ago, the celebrated Club of Rome report, entitled The Limits to Growth,4 drew attention to the physical limits to growth imposed by the finiteness of natural resources. It is evident that human ingenuity and the capacity for innovation have disproven 3

Introduction

the report’s predictions. The pace of global growth has scarcely diminished since the end of the post-war boom;5 its center of gravity has simply shifted to China and newly emerging countries. Nor has growth been held back by any shortage of raw materials. Yet at the same time the impact of humanity on the natural environment has increased, threatening the major regulatory functions of natural capital such as climate stability and biodiversity. But these regulatory functions are incorporated into neither prices that calibrate values nor aggregates, such as GDP, that measure wealth.

Chapters 5 through 9 show how it is possible to move from a quantitative notion of the limits to growth based on the scarcity of natural resources to a panoptic outlook concerned with the preservation of the regulatory systems of natural capital. Rather than a representation deeply rooted in an economic concept of natural capital as a stock of scarce resources, there is a shift to a systemic view of natural capital, understood as a complex system of regulatory functions. Because nature is not a commodity that can be traded in a market, it is not possible to assign it a value, as is done for other components of capital. On the other hand, the deterioration of natural systems of regulation has a cost that reects the use made of natural capital. We therefore include the cost of pollution in the production function because it contributes in the short term to the supply potential of the economy, although simultaneously weakening its long-term growth path. In the short term, pricing pollution changes the preexisting combination of production factors by attributing to the use of natural capital part of the supply previously attributed to labor and capital. By pricing pollution, green capital thus affects the short-term equilibrium and becomes a factor of production in which it is necessary to invest for long-term expansion. There are many ways of doing this. Adding a factor to the production function gives rise to an apportioning problem: Should it be capital or labor, the bluecollar worker or the boss, high-income countries or low-income countries who are obliged to cut back their revenue to pay for 4

Introduction

this new component of the natural capital that is progressively destroyed if a value, and hence a price, is not attached to it? This approach is consistent with the theoretical extensions that have progressively enriched the standard growth model developed in the 1950s by Robert Solow.

Chapters 10 through 13 present the assessment methods available for moving from the previously constructed growth model to an understanding of the concrete conditions for the transition to a green economy. This transition is still only in its infancy, with the first moves to introduce the value of natural capital into the economy now being taken. With regard to the climate system, the value collectively attributed to its preservation is measured by the costs associated with greenhouse gas emissions, more commonly termed the “carbon price.” The methods for introducing this price into the economic system are now well known, but both nationally and internationally their implementation comes up against the need to manage the associated distributive affects. With regard to biodiversity, developing appropriate methods for pricing its uses is all the more complex because there is no equivalent to the “CO2 standard” used for the climate. Various decentralized innovations and new economic research models will be needed to gradually incorporate into the economy the values that people want to attach to biodiversity. Without claiming to be exhaustive, this book attempts to identify, following pioneers like the British economist David Pearce,6 the groundbreaking experiments that are opening up new fields for investment and thus growth.

Chapters 14 through 17 look in greater depth at the energy aspects of the transition to a green economy. First, various energy transition models are discussed: the U.S. energy revolution driven by the large-scale exploitation of oil and gas shale is a very different option than the low-carbon strategy adopted by Europe or the long-term diversification aimed at by oil-producing countries and the major emerging economies. The catalyzing role of energy pricing, and its climatic and environmental impacts, is then 5

Introduction

examined, along with the specific issue of nuclear power: though a non-CO2-emitting primary energy source, it nonetheless gives rise to many other questions, as is shown by the French example.

There follows an analysis of the various innovations that will accompany the energy transition: innovations in technology, of course, but also innovations in social organization, land management, and the way people live, along with innovations in terms of governance and the conduct of public affairs, without which public debates run the risk of being all talk—not having any real impact on policy decisions.

The final two chapters return to the concrete conditions required to foster growth based on the ascription of value to green capital, leading eventually to a self-reproducing, fully functional economy.

The forces to be set in motion will emerge neither from spontaneous market action nor from deliberate action by planners.

Instead their guiding principles will be the large-scale deployment of environmental pricing, reorientation of public support toward research and development, new choices in terms of infrastructure, and the introduction of greater intelligence into networks, as well as training, the organization of professional retraining, and social acceptance, without which a collective transition project cannot be constructed. These guiding principles are compared to the strategy adopted by Europe, followed by an exploration of the ways in which the European Union could become a real crucible for the ecological transition.

By way of conclusion to this itinerary, we investigate what type of radical shifts will result in the integration of green capital into the economy. Present-day economies are comparable to the situation of a shepherd on a mountainside shearing sheep on behalf of their owner. Making use of water from a stream running through the pasture, the shepherd produces a regular supply of fleece, thus enabling the owner to get a return on his capital and to pay the shepherd a wage. Capital and labor have been remunerated. But suppose that because of pollution, the water from the stream can 6

Introduction

no longer be used and the shepherd’s productivity falls by half.

This implies that natural capital was contributing free of charge to half of what was produced. The problem that arises is then very simple: who will pay for the shortfall corresponding to the loss of production? The shepherd, in which case, by extension, the wage rate in the economy declines? Or perhaps the owner, in which case the rate of proďŹ t falls? Toward which new economic paradigm does this book lead? Green capital or green capitalism?

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