🇪🇺Will degrowth save us?

Letter from Europe … #13

The Story


My dictionary doesn't know the word. 

It describes a movement. Proponents argue that we all have to reduce production and consumption to stop climate change. Jason Hickel, an economic anthropologist, is one of its prominent proponents. In his book "Less Is More: How Degrowth Will Save the World", he defines the word "degrowth" as "a planned reduction of energy and resource use designed to bring the economy back into balance with the living world in a way that reduces inequality and improves well-being." 

I like that. Tell me more.

The idea behind it: Economies cannot grow infinitely on a planet with finite resources. So more growth means more resource consumption, more pollution, more greenhouse gas emissions. 

It makes sense. But is less growth realistic?

The crucial question is: Can growth go along with fewer resources used and a climate-friendly life? Proponents of the degrowth movement argue that there is no historical evidence that gross domestic product (short: GDP) can be decoupled from material resource use.

Can it?

In theory, definitely. Growth comes in many ways. By people working longer. By more people working. By the use of more (finite) resources. By innovation. Not every way uses more natural resources. Think of innovation. That is, for example, finding ways to generate more output with the same input. 

In general, countries with high GDP also have high resource consumption, right?

So it was. But that doesn't necessarily have to be the case in the future. The problem is not growth per se, but resource consumption and pollution. So if you want to fight climate change, you have to address these issues directly. First step: Understand why there are too many greenhouse emissions. Second step: Repair the failure.  

First step first.

The primary reason for the climate change crisis is that since the use of fossil energy, those who used that energy were never held responsible for what they have caused. In economics, this is called negative externalities.

Negative externality?

We speak of negative externalities when the production or consumption of a product or service results in a cost to a third party. That is the case with emissions. The emission of greenhouse gases damages others at no cost to the agent responsible for the emissions. Why should factory owners cut emissions when emitting is for free? Why should car drivers drive less when they are not charged for their negative externalities? Some people try to quantify these externalities. According to the International Monetary Fund (IMF), the hidden global costs of fossil fuels amount up to about 5 trillion US-Dollars a year. That is equivalent to 6.5 per cent of global gross domestic product (GDP). So externality leads to too high greenhouse gas emissions because - without regulations - polluters don't bear the pollution costs.   

How to make people pay?

Most economists agree that the best way to reduce greenhouse gas emissions is to put an explicit monetary price on carbon emissions. There are two ways of doing so: a 'cap and trade’ system or a carbon tax: In a 'cap and trade’ system, a maximum level of pollution (a 'cap') is defined, and manufacturers need licenses to emit carbon. The costs of these licenses are determined by a trading system. The price of a license increases as emissions approach the cap. The second option: a carbon tax. This is simply a levy that is applied to all goods and services, which lead to carbon emissions in their production.

Governments might install this on a national level. But emissions don't stop at borders.

Next to negative externalities, this is the other problem. It is called the free-rider problem. Because the climate is a global commons, the benefits of reducing emissions that are undertaken in one country will mostly accrue outside its borders. As a result, countries acting in their rational self-interest are incentivised to minimise their mitigation efforts and free-ride on those of others. In the end, global efforts to reduce climate change are insufficient. 

What can be done?

To solve the free-rider problem, you have to found a club. William Nordhaus, the winner of the Nobel Memorial Prize in Economic Sciences in 2018, is known for this idea. That is how he explains the club idea: "So what is a club? Although most of us belong to clubs, we seldom consider their structure. A club is a voluntary group deriving mutual benefits from sharing the costs of producing a shared good or service. The gains from a successful club are sufficiently large that members will pay dues and adhere to club rules to gain the benefits of membership."

The club members we are talking about are countries, right?

Right. In this case, a club is an agreement between countries to reduce greenhouse gas emissions and penalise those who are not club members. The idea behind it: If a country is not part of the club, it will, on the one hand, benefit from the activities of the club members; on the other hand, the non-member will be penalised by the members for not becoming a member (for example, by paying high tariffs on imports into a club country). If the penalty is greater than the benefit of inaction, that country has the incentive to become part of the club. 

So the Kyoto Protocol and the Paris Agreement are in a way clubs, aren't they?

Not exactly. The difference with the club idea is that currently non-members cannot be penalised. Those who do not participate in the Paris climate protection agreement do not have to fear any disadvantages. 

Got it. Didn't you want to talk about growth and degrowth?

What can supposedly be achieved with degrowth can be better achieved by internalising external costs and solving the free-rider problem. 

How is Europe doing? 

Set up in 2005, the EU ETS (EU Emissions Trading Scheme) is the world's first international emissions trading system. A cap is set on the total amount of certain greenhouse gases. That cap is reduced over time so that total emissions fall. The problem: Only about 40 per cent of the greenhouse gas emissions in Europe are covered, that is, electricity and heat generation, energy-intensive industry sectors, and commercial aviation within Europe. Gas emissions from homes, cars, small businesses and agriculture are not included. Yet annual total CO2 emissions have been falling for several years.










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