3Q with John Reilly: Green Growth and the Efficient Use of Natural Resources

3Q with John Reilly: Green Growth and the Efficient Use of Natural Resources

3 Questions with John Reilly

 

Q: What is the concept behind “green growth” and related ideas--are green growth policies effective?

 

A: “Green growth,” “green jobs” and the “green economy” have become popular buzzwords in politics because – especially in difficult economic times like today – they turn the negatives associated with environmental costs into positives by promising that a cleaner environment promotes jobs and economic growth.  In principle, well-thought out policies that effectively and efficiently correct environmental problems will have a positive effect on the economy.  But many measures pursued under the banner of “green growth” may not meet these criteria.  The key behind long-term economic growth is improved labor productivity (producing the same amount of goods with less labor).  The idea that we can create many millions of high-paying jobs to provide clean energy sounds good in our current situation where we face high unemployment.  But looked at another way, this is labor-intensive production with high-cost labor, and that is just another way of saying that source of energy is very expensive.  If we must utilize a large share of our labor force to supply energy, that is very costly energy, and leaves fewer resources to produce other goods--health care, food, entertainment. Relying on such a source would actually make us poorer--unless using it really meets a cost benefit test, and is the most efficient way to reduce an environmental problem. And often these concepts are used to defend subsidies of energy sources that may never be able to compete effectively without those subsidies, and so, will end up leaving us with an industry that cannot compete. These policies are often well-meaning, but somewhere along the line have lost their focus on identifying the most efficient way to tackle a problem.

Q: What challenges come with trying to apply "green growth" in practice?

A: The environment and economy are linked. Interest in "green growth" probably originates from the charge that the widely-used measure of economic activity, Gross Domestic Product (GDP), does not include resource depletion.  Indeed, that is true. The concept of Net National Product (NNP), which accounts for depreciation of capital, is the place to start in evaluating whether growth is sustainable. As currently measured, however, NNP does not fully consider depletion and degradation of natural resources.  A major advance would be to improve our national accounting systems to explicitly include resource depletion, and to expand the accounts to include valuation of household activities.  These are two important missing pieces in our current accounting system.  Without them, then indeed, apparent growth in GDP may be at the expense of resource depletion that leaves us poorer in the long run or may be simply the monetization of household activities that were previously not market activities.  

Q: What advances have economists made to confront these challenges?

A: With industrialization, economics has come to focus on labor, reproducible capital, and technical change as the main sources of growth.  In so doing, potential constraints on growth from natural resources such as land and mineral resources or environmental feedbacks from air and water quality have largely been ignored.  If we want to investigate the potential impact of resource limits, models that assume away these limits will not tell us anything.  Central to our work in the Joint Program, through the development of the Emissions Prediction and Policy Analysis (EPPA) model as a component of our Integrated Global Systems Model (IGSM), is the re-establishment of explicit links between the market economy, natural resources, and the environment.