The link between climate care and fiscal growth

These days, any political adviser worth their mettle would make sure their candidates spout off “It’s the environment, stupid” as an election slogan at every opportunity.

The question is whether the two are mutually exclusive — or whether economic growth and climate protection are two sides of the same coin. The first major environmental protection rules hark back to the 1970s. Since then, a debate has raged about their potentially damaging impact on economic growth and competitiveness. One train of thought says countries that adhere less stringently to environmental policies have a production and trade advantage over those nations that are taking climate action measures to reduce emissions. The concern in those countries is that their own emission-heavy industries will be put at a competitive disadvantage. This so-called pollution haven hypothesis predicts that if competing companies diverge only regarding the severity of environmental regulations they face, then those that are bound by relatively stricter measures will lose competitiveness. On the other hand, the so-called Porter hypothesis concludes that more stringent climate rules should encourage investment in developing new pollution-saving technologies. If these technologies lead to energy savings, they may help in turn to offset some of the climate protection costs. Then, there is also the issue of how much it might cost if we fail to mitigate climate impacts. At first glance, using GDP as a measurement tool is an obvious choice to provide a cost-benefit analysis. The question is to what extent it provides an adequate measure of growth and prosperity.

“It is the most developed indicator. But many of these damages that are associated with climate change are not internalised. This means that we as a global society will probably have costs due to lost biodiversity, for example, which are not directly reflected in the GDP,” Wilfried Rickels, director of the Global Commons and Climate Research Center at the Kiel Institute for the World Economy, told DW. In a National Bureau of Economic Research paper, analysis showed without countermeasures, an average global temperature increase of 0.04°C per year could reduce global GDP by 7.22% by 2100. If, however, countries abide by the Paris Agreement to limit the temperature increase to 0.01°C per annum, GDP loss is reduced to 1.07%.

“That’s why at some point in the Paris climate agreement they said: ‘We are setting a fixed limit.’ Picture yourself running towards a slope that might be covered in fog; at some point, you have to say, ‘I’m not going any further,’” said Rickels. According to the Coalition for Climate Resilient Investment, a consortium of companies, governments and multilateral organisations, financial losses could be as high as $69 trillion by 2100 if nothing is done to mitigate the impact of climate change.

Can economic growth and climate protection go hand in hand? That depends on the perspective. Twenty years ago, the consensus was that it was crazy to invest in solar energy, for example, due to the enormous costs. However, down the line, that investment has paid dividends — not least because the development of new and innovative technology has led to creation of new jobs and has helped to cut energy costs, which in turn benefits the economy. “Now it has become a technology that is applied even in countries that don’t necessarily use climate policies because it’s the cheapest energy source,” Karsten Neuhoff, who leads the Climate Policy Department at the German Institute for Economic Research (DIW Berlin), told DW. Taking action on climate change will ultimately boost economic growth, particularly as new technologies come into play that open up new job possibilities. The data currently available suggests that countries need not sacrifice sustainability for economic security or vice versa.

This article was provided by Deutsche Welle