EarthCheck

The Biggest Economic Opportunity in History

"Simply put, addressing climate change, sustainable food and energy production, and delivering more clean water are the only economic opportunities large enough to expand global economic output six-fold in the next 40 years. Many people now refer to this, the biggest economic opportunity in history, as the clean industrial revolution."

Michael Molitor, Climate Spectator.

Australia is now struggling with legislation that would introduce a carbon price in its economy through a new tax.  The opposition leader is claiming that the tax is a waste of time and will only create costs for Australians without any benefits-environmental or otherwise.  Most of the key emerging macroeconomic data is now pointing in completely the opposite direction. 

In the absence of a carbon price created by Federal legislation in Australia, it is unlikely that the Australian economy will be able to generate sufficient new growth to meet its economic aspirations between now and 2030.

In May of this year the OECD celebrated its 50th anniversary and it chose the topic of green growth as the highlight of the celebrations.  The OECD report on green growth released at that time made it clear that, in order to deal with the rapid expected increase in middle class consumers that will occur between now and 2050, global GDP will need to rise from around US$55 trillion today to US$300 trillion by 2050. 

This nearly six-fold growth requirement over the next 40 years is in dramatic contrast  with the three-fold increase that occurred over the last 40 years since 1970 (from US$18 trillion to US$54 trillion).

Equally important, the OECD report advances the view that the daunting challenge of doubling the global economic growth rate over the next 40 years is going be almost impossible without adequately dealing with a range of global environmental and resource constraints-including - most importantly - climate change. 

These challenges act as effective road blocks keeping us from reaching a global economy of US$300 trillion.  In response, we will need to both address these environmental challenges while simultaneously increasing resource productivity at least ten fold.  These are herculean objectives involving enormous capital and massive transformative and disruptive technologies.

Global Concerns

Fortunately, there is now considerable discussion around the world about how we will mobilize enough capital to deal with these global environmental and resource constraints. 

At the UN climate meeting in Cancun last year governments decided to create a large green climate fund with the capital being used to accelerate the de-carbonization of the developing world.  The G20 process led by France this year is also looking at climate finance. There are also efforts to use well-established capital market instruments to try and direct more money towards green initiatives-these include the creation of climate bonds and other green bonds
(even "reef bonds" to protect the Great Barrier Reef are under discussion).

Climate change and all other global resource and environmental problems are, in the end, capital markets activation challenges.  The dysfunctional global economy is driving all of these problems because the current rules give you credit for destroying ecosystems and fail to punish you when, for example, you emit large quantities of greenhouse gases into the atmosphere. 

Capital markets, as a result, direct enormous sums of money towards activities that undermine the planet's climate system, devour natural resources faster than they can be replenished, and produce goods and services at exceedingly poor rates of productivity. 

Simply put, the global economy directs more capital to wasteful and harmful activities than it does to activities that will ultimately allow 9-10 billion people to live well in 2050.

Tried May No longer Be True

There are two approaches to correcting the dysfunctional global economy so that capital changes direction and begins to focus on improving global economic and environmental sustainability. 

The first is to try and create a global regime that forces the market to incorporate the costs of the unsustainable economic activities-that is, try to make the system functional.  We tried this with 20 years of UN negotiations on climate change between 1991 and 2011.  The failure in Copenhagen in 2009 to reach a global agreement that would have put a global price on carbon emissions makes it clear that this approach has little hope of succeeding-at least on a
timescale meaningful to the problem of global climate change.

The other approach is to recognize that we have little hope of fundamentally correcting a dysfunctional global economy and to use the dysfunctional operating rules to achieve the results we require.  Under this approach the focus is on creating a better value proposition for green investments-that is, lower risks and, more importantly, better returns but without the policy interventions that would internalize the externalities.

What the OECD did not mention in its green growth report is that  not only will it be impossible to get to US$300 trillion by 2050 if we fail to address key environmental and resource constraints but, more importantly, the only growth platforms large enough to get us to US$300 trillion are these very same challenges. 

Simply put, addressing climate change, sustainable food and energy production, and delivering more clean water are the only economic opportunities large enough to expand global economic output six-fold in the next 40 years.

The biggest economic opportunity in history: the clean industrial revolution

Australia, one of the very best performing countries in the OECD, will struggle to achieve sufficient economic growth out to 2030.  At the moment, the key Australian growth activities include the export of coking and thermal coal, iron ore and, in the near future, large expected exports of LNG. These growth platforms are outstanding by current OECD measures yet they are insufficient to get Australia to 2030.  How then, do you begin to invest in new economic growth platforms today that will help get Australia to a prosperous 2030 and beyond?

Energy Minister Martin Ferguson recently made public the very large capital requirements to expand the stationary energy sector in Australia to meet growing demand for electricity out to 2030.  He suggested that the scale of investment was more than AUD$200 billion between now and 2030 and enormous investments would be required to both add new generating capacity as well as to expand the existing transmission and distribution networks.  In comparison to the large costs of the National Broadband Network, the energy system funding costs become the largest infrastructure investments in Australian history.

Countries wishing to stimulate growth and jobs through the clean industrial revolution will need to make transformative changes in the ways they produce and use electricity.  Although there are numerous policy approaches that can achieve this outcome, most economists now agree that the introduction of a robust carbon price is the most efficient means of doing so. 

Continuing to invest in inefficient centralized energy networks that rely on fossil fuels - mostly coal - will make it impossible to access the enormous growth platform provided by the clean industrial revolution. 

In other words, Australia cannot afford not to have a carbon price in place-it is the basis of one of the very few green growth platforms that will allow Australia to meet its future economic aspirations.

The future of economic growth is in greatly improved resource efficiency and environmental management. Distributed energy, smart grids, battery storage and the electrification of urban transport are some of the key job and wealth creating opportunities and they are already here in terms of proven technologies. 

A carbon price forces Australia to start on the road of improving resource efficiency immediately.  Although it is attractive to try and rely on the old growth models that rely heavily on inefficient energy technologies and fossil fuels, countries that continue to do so will be left behind.  Australia is one of the very few countries that can harness this pathway to growth and the AUD$23 carbon price is a big step in the right direction.

Source: www.climatespectator.com.au