7 June, 2022
Whether economic growth can be sustained while tackling climate change and staying within wider environmental limits is an area of ongoing debate. Different perspectives range from a view that economic growth is not bounded by environmental limitations to one that suggests sustained economic growth is simply not compatible with environmental limitations.
The well-documented catastrophic physical and social consequences that would result if the world does not tackle climate change would also create growing harm to economic growth and development. Therefore, when considering the different views in this debate, it is important to take action on climate change as the starting point and to evaluate the extent to which economic growth is compatible with that objective, rather than the other way around. However, it is also important to recognise that stopping economic growth may run counterproductive to tackling climate change; this is evidenced by recessions in the past slowing or even derailing efforts to adopt cleaner production methods.
Defining economic growth
How economic growth is defined in the first place is important when evaluating the extent to which it can run alongside efforts to tackle climate change. Economic growth is typically measured as the rate of change in output, or, more specifically, in real gross domestic product (GDP). Real GDP is a measure of the market value of all final goods and services produced in the economy for a given year, adjusted for inflation, and is used as an indicator of material living standards in a given country. However, these measurements omit the value of the natural environment to people, as well as other aspects of human wellbeing that are hard to measure and as a result alternative measures of wellbeing have been proposed.
Decoupling economic growth from greenhouse gas emissions
Since the Industrial Revolution, economic growth has generally been tied to increasing greenhouse gas emissions. A switch from fossil fuel-based to low-carbon energy sources can help sustain the same or even higher levels of production while reducing emissions, thereby enabling the decoupling of growth from emissions (see the Handbook on Green Growth). General technological development can also help decouple growth from emissions by reducing input energy or other material required for production in the first place. The ongoing digital transformation of the economy through the development of information and communication technology (ICT) may also have a positive impact on decoupling.
Over the past few decades, many high-income countries (see UK, Germany and US) have shown signs of decoupling their economic growth from emissions, even when taking offshored production into account. The reasons for this have included – to varying degrees in different countries – the transition away from coal and uptake of low-carbon energy, explicit climate change policies, and also a shift away from manufacturing to less carbon-intensive, service-based industries.
Overall, there is reason to believe that economic growth and tackling climate change are not inherently incompatible. However, it is uncertain whether positive signs seen to date in certain countries will become a continued trend; the recession following the global financial crash caused emissions to decline, associated with a decline in economic activity. Furthermore, to enact major reductions in emissions in the future, there will need to be more radical and far-reaching changes than a transition away from coal in electricity generation.
If low-carbon energy becomes significantly cheaper than fossil fuels, the emissions intensity of GDP could be lowered to the degree required for absolute decoupling of emissions from economic output. Availability of negative emissions techniques could also play a role here, especially in sectors where emissions are especially hard to mitigate such as agriculture and aviation, as long as these techniques complement rather than displace overall efforts for mitigation. Achieving absolute decoupling of emissions from economic output would be challenging and require major investment into low-carbon energy but it is not unimaginable given the dramatic cost reductions already seen in renewable energy technologies.
Labour as an input of growth
An increase in the size of the labour force could increase production and lead to growth (all else being equal). Compared with fossil fuel generation, renewable energy has been found to create on average three times as many gross jobs per million pounds invested, and for energy efficiency this rises to a five-fold increase (although the permanence of these jobs is not clear). In the short run, the higher labour intensity of low-carbon investments could create a net gain in the total number of jobs and generate growth if the economy has an ‘output gap’. However, in the long run, job creation would cease to be a meaningful indicator of growth as high labour intensity would imply lower labour productivity.
Understanding the true link between labour and growth along the low-carbon transition requires looking beyond the number of jobs, focusing on the quality of jobs too and how they enable workers to realise their productive potential. The possibility of large-scale job losses from high-emitting sectors would also need to be considered, unless a ‘just transition’ is achieved, retraining and reskilling workers in these sectors.
‘Sustainable growth’
Overall, there is strong evidence to suggest that achieving a net-zero-carbon economy can be entirely consistent with continued growth in GDP in the form of ‘sustainable growth’. In 1987, the United Nations Brundtland Commission defined sustainability as “meeting the needs of the present without compromising on the ability of future generations to meet their own needs”. Sustainable growth adheres to this principle to achieve environmental and social outcomes that can be sustained in the long run. This requires change on the supply as well as the demand side of production, including a shift towards more responsible consumption, especially among the affluent. It also requires that emissions embedded in imported goods and services (i.e. ‘consumption emissions’) as well as a country’s territorial emissions are accounted for.
The notion of sustainable growth is consistent with modelling by the Intergovernmental Panel on Climate Change which shows global GDP will continue to grow in pathways that are likely to limit average global warming to 2°C or less above pre-industrial temperatures. Global GDP in these pathways is a few per cent lower in 2050 compared with pathways where mitigation is not ramped up beyond current policies. But this assessment does not account for the significant economic benefits from avoided damages from climate change (e.g. see this study for the UK), nor from the reduced costs of adapting to climate change. It also does not comprehensively quantify macroeconomic implications of mitigation co-benefits, such as reduced local air pollution and consequent reduced healthcare spending.
The scope for sustainable growth can be broadened if we draw a distinction between the material economy (where physical limitations may arguably impose economic constraints eventually) and the intellectual economy. Consumption of non-material, or ‘intellectual’, goods – ideas, art, literature, music, psychological insight – generates value and increases wellbeing just as material consumption does, but without being bounded by the physical limits of nature. Since economic growth is measured in terms of the value of output as assessed by participants in the markets for goods and services rather than the physical mass moving through the economic system, sustaining growth indefinitely is conceptually possible driven by expansion of the value of the ‘intellectual economy’.
This Explainer was written by Esin Serin and benefitted from review by Alex Bowen and Roger Fouquet.
