Economic and climate crisis: interlinked problems and solutions

By Andrew Watt


The Guardian reports as yet unpublished figures from the International Energy Agency showing a record annual increase in CO2 emissions and a record absolute level in 2010. Climate experts warn that the agreed goal of keeping climate change within 2 degrees is rapidly becoming unattainable.

The new numbers confirm a number of things we already knew. In the short run the level of emissions is closely linked to economic output. It fell in the industrialised countries in 2008/09, but has begun rising again, if slowly. That is vital for employment and fiscal consolidation reasons, but puts emissions once again on an upward trajectory. The recession only briefly affected many leading emerging markets (China, India, Brazil), who rapidly returned to their former growth trajectory. It is these countries that are decisive for the size of the increase in total (not, of course, per capita) emissions.

From the perspective of European economic and employment policy, abstracting from a lot of detail, the following big-picture conclusions impose themselves:

  • For the next few years Europe’s needs decent rates of economic growth (say around 2.5-3%) to bring down unemployment and permit fiscal consolidation without destroying its welfare state. Subsequently it should grow at a steady-state rate that is considerably lower. For the sake of argument 1%. As the labour force declines in coming years, this could fall, perhaps to zero.[1] Achieving this requires a coherent policy that ensures a) a steady reduction in average working time and b) a fairer distribution of incomes (otherwise the less well-off will not be able to reduce their working time). At the same time, policy success needs to be measured against a broader range of indicators.
  • We need massive public investment in emissions-reducing and decarbonisation activities, in both effective, know technologies (retrofitting buildings, public transport with a large double dividend) and new technologies. (I tend to the view that that should include making nuclear power safe, but that is obviously controversial post-Fukishima.) We should immediately embark on such investment – which could in part be coordinated and financed at EU level – given low interest rates and massive unused resources. In the short and medium run this would underpin economic and employment recovery.
  • We need a major shift in private-sector economic incentives via a progressive and substantial increase in the price of carbon. And we need coherent policy initiatives to manage the structural changes in our economies and labour markets in a socially just manner.
  • Together these measures (alongside secular shifts towards services and ‘immaterial’ consumption) will ensure a steady decline in European emissions. The extent to which output can be decarbonised is unknowable in advance. It has been limited so far, but then the policy changes have also been limited. What we do know is that more public investment and a higher carbon price have a reliably positive effect on the rate of decarbonisation. Like a doctor with a new drug, we have to try, then measure, then adjust the dosage!
  • Lastly, but crucially, Europe needs to support climate-change avoidance and impact-mitigation efforts in poorer countries which, by virtue of their greater population size and their justified need for higher material living standards, will be decisive for the path of emissions in the coming years. At the same time, rather than futilely seek elusive global agreements, it should lever change in other countries by imposing a fair border adjustment levy on imports of goods from countries that do not tax carbon.

Europe cannot solve the climate-change problem alone. But it cannot use the behaviour of other countries to avoid effective action, to fiddle while the earth burns. In principle at least, there is a clear and simple six-point programme that Member States and EU institutions can and should tackle together: ensure recovery, boost public investment, raise the carbon price, implement just-transition policies, provide extra-EU support, introduce border adjustment. The new figures are an urgent reminder that much too little has been done to implement such a programme and that the economic crisis, while providing just one year’s emissions’ respite threatens to blow the more important medium and longer run policy agenda off course.

[1] It is a mistake to get hung up on precise figures here. The medium-run rate of labour productivity growth going forward is in probably excess of 1% (somewhat in the euro area, higher in central and eastern Europe); that is more or less a known known. There is nothing special about ‘zero growth’. For a given emissions intensity of output, the difference in emissions between growth rates of +1% and 0% and between 0% and -1% is the same. Given the huge uncertainty about the extent to which decarbonisation is possible, it makes no sense to draw up battle-lines over precise but arbitrary rates of ‘sustainable’ economic growth.