Is the Green Deal a card shuffle trick?

(NOTE; this is not an analysis of the US New Green Deal, it is about the "green growth" narrative with the European Green Deal as the point of departure.)

The European Green Deal is a ”growth strategy that aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use.” 

There are reasons to discuss if the vision of the European Green Deal is desirable: why should it be a goal to be “competitive” or ”modern”? But let’s buy into the narrative and ask: is the vision possible? Is ”green growth” as expressed in the Green Deal or the Sustainable Development Goals even possible?  

John George Brown (1831-1913), painterunidentified engraver / Public domain

In a recent paperin New Political Economy, Jason Hickel and Giorgios Kallis do a good job in illuminating many of the discussions and concepts involved in the Green Growth debate. Their overall conclusion is that ”green growth theory – in terms of resource use – lacks empirical support”.  They note three caveats of their own conclusions. First, it is possible that ”it is reasonable to expect that green growth could be accomplished at very low GDP growth rates, i.e. less than 1 per cent per year”. Second, conclusions are based on the existing relationship between GDP and material throughput, but one might argue that it is theoretically possible to break the existing relationship between GDP and material throughput altogether. Third, the aggregate material footprint indicator obscures the possibility of shifting from high-impact resources to low-impact resources. Meanwhile, Hickel and Kallis also point out that material footprints needs to be scaled down significantly from present levels; to be truly green, green growth requires not just any degree of absolute decoupling, but rapid absolute decoupling.

In this article, I want to get closer to the ground and discuss the various concepts which are normally associated with green growth. But first let’s clear some definitions.

When I write about “economic growth” I mean that which is measured by the GDP. It is important to understand that the GDP is not a measure of development or quality. If a company makes better products this is not reflected in the GDP; that my computer is (at least) 100 times more powerful than the computer I had 20 years ago has no impact on the GDP as long as the price is the same (the impact on the GDP, if any, comes from any increase in my productivity rather than from the price of the computer). “Development” is also not necessarily a result of economic growth. The world can become a better or worse place to live in with economic growth and it can be a better or worse place to live in without economic growth.

The Gross Domestic Product (GDP)

GDP is the total market value of the goods and services produced within a defined economy in a year. A more elaborated definition is that:

GDP = Consumer spending + Investments + Government spending + Export - Imports

This calculation of the GDP is the expenditure method. One can also calculate the GDP as the sum of the added value of all formal market based economic activities (the output method)or as the sum of income (the income method). In theory, all three measures should give the same result. The added value of an economic activity is the sales price minus the inputs in the production. If you make potato chips, the added value is the price minus the cost of the potatoes, the oil, salt packaging, electricity etc. Profit, depreciation and labor cost are part of the added value.

The work people do at home, e.g. cooking, cleaning, child care or growing potatoes for own consumption is not included in the GDP. Pro bono work, volunteerism or household sales of used products are also not included. Financial profits, e.g. sales of shares or real estate are not part of the GDP, but the fee of agents and others involved in the process will contribute to the GDP. Gifts, taxes or government subsidies and similar transactions are not part of the GDP as they do not create  any new value, but are essentially transfers between various actors.

See more e.g. on Economics Online 

“Green” in the context of green growth mostly refer to less use of natural resources and less pollution. Pollution is hard to measure and it is especially hard to make any kind of composite measurement for it, as we are talking about 350,000 chemical compounds released in modern human civilization. Therefore, the use of materials is more commonly the indicator used to measure the resource intensity of the economy. Domestic material consumption (DMC) is used by the European Union while others prefer the concept of material footprint. The DMC reports the actual amount of material in an economy while the material footprint measure the amount required across the whole supply chain to service final demand. A country can, for instance have a very high DMC because it has a large primary production sector for export or a very low DMC because it has outsourced most of the material intensive industrial process to other countries. The material footprint corrects for both phenomena. 

Apart from an empirical approach to the green growth debate, one can have a theoretical approach. I believe there are theoretical reasons for why green growth actually is impossible, at least in a capitalist market economy. I have written about it earlier and plan to come back to the issue soon again. There is also a middle way to approach the issues and that is to look at what the various concepts and ideas that dominate the green growth agenda will lead to. How will they impact resource use as well as the factors which make up the GDP, i.e. market price, consumed and produced volumes, investments etc? It is only if a concept simultaneously delivers economic growth and lower absolute resource use that it can be considered as a part of a green growth strategy.

Services as green engines for growth

The value added in services is big and in most developed economies its share of the economic value added is two thirds or more. Services do, however, use more resources than most people believe. The travel industry is a very good examples where air travel, hotels and cruise ships all are much more resource demanding than many industries. Other services are actually a direct part of industrial production, mining, forestry or farming. In most industries big chunks of the work have been outsourced to service contractors. When a job is done within a manufacturing firm it is seen as part of manufacturing, but when the same job is bought in externally (i.e. outsourced) it is classified as services. Finally, a big portion of services is trade and distribution and their link to resource use is quite obvious as it is the huge flow of goods that necessitates all those services. After all, it is only because Walmart, Carrefour or Amazon sell a lot of stuff that they can employ a lot of people.

Personal services, such as household cleaning, hairdressing or massage, constitute a very small share of services. It is apparent that such services are dependent on wage inequality as it is basically impossible for most of those who provide personal services to buy personal services themselves. In relation to growth, personal services contributes very little to  economic growth and it is quite easy to realize that there will be no growth in an economy made up of personal services.

One can therefore not claim that services in general are less resource demanding than manufacturing. There is also no relationship between a country’s material footprint and the share of services in the GDP. Services constitute 77 percent of the GDP of the USA and 66 percent of the GDP of Sweden, while the material footprint of the American economy per capita is considerably bigger. In China, services doubled their share in the economy from 1970 to 2013 while its resource use per capita increased nine times.

Reuse, recycle, longer lasting product and circular economy

While a circular economy certainly is commendable, it is very hard to see how it could contribute to economic growth.

If a household sell used products to other households there is no economic growth, and there is no value added, money and goods just change hands. The household selling will perhaps use the money to buy new stuff and the household buying may perhaps use the money “saved” by buying something cheaply to buy other things as well. That may drive growth, but it equally drives resource use. It works quite similarly with longer lasting products. For GDP growth it is negative that consumer products last long. Meanwhile, the money saved will lead to more consumption so the overall effect on resource is neutral at best.

If recycling of materials in the industry is easy and cheap it will reduce the cost of production and if competition works as it should it will also reduce the price and the effect on GDP will be none. The main effect is that consumers get more cash to use for other consumption, which can grow GDP as well as resource use. Meanwhile, the company producing virgin raw materials will close or reduce its production and lay off people, which reduces the GDP unless they get a new job in which they will use other resources. If recycling is complicated and costly, things will play out differently, but also in this case it is likely to either be neutral or negative for economic growth.

A circular economy is needed and desirable and it can surely be profitable for certain economic agents. But there are neither convincing theories nor examples showing how it also can generate or sustain economic growth. Notably, the economy before the industrial revolution and global capitalism was mostly circular and mostly stagnating. It was (linear) resource use, such as mining and colonialism that gave the impetus for growth.

The sharing economy

There is rapid growth in the sharing economy segment. But that rapid growth sis no indicator of that a sharing economy supports economic growth across the economy. If 100 persons refrain from buying a car/an electric drill/a sailboat and instead share it with 10 others, hopefully, the same needs have been fulfilled, but clearly the GDP will be reduced and less people will manufacture these items. It is most likely that they will get new jobs in the production of something else which will both contribute to the GDP – and use more resources. Also from the consumer side the effect is likely the same. People sharing stuff will have more money left to consume more stuff (resources).  

Increased efficiency

The impact of improved resource efficiency is a much discussed theme in the center of the debate on green growth. It is closely linked to discussions on rebound and Jevon’s paradox. In a working market economy, improved resource efficiency will inevitably lead to lower prices.  This will lead to increased consumption of the goods in question or increased consumption of something else, often a combination of both. If people increase consumption linearly, i.e. their spending is direct proportional to the increased efficiency, there will be no saving in resources and if labor productivity remains the same, more people are needed to produce the same value, hardly a recipe for economic growth. If consumption remains the same, people will have more money to spend on other things, i.e. other industries will grow and with that both the GDP and the resources used will grow.

Increasing labor productivity works a bit differently. Also in this case, prices will fall. If consumption increases the resource use will also increase at the same rate and there is growth but no green growth. If the consumption remains the same labor will be redundant, but this also mean that unless they will be long term unemployed they will engage or be engaged in other economic, and resource demanding activities. As a matter of fact, improved labor productivity (as a result of various factors but mostly with use of energy and technology of many kinds) is the primary driver of economic growth. But the mechanism is not that which most people believe. To produce more with the same effort and costs doesn’t create growth per se. It is actually the opposite as the firm’s contribution to the GDP is the value added in the production, and the added value per unit of production falls when labor cost per unit falls. In rare cases, in new industries, improved labor productivity doesn’t lead to falling prices but to higher profits for the firm. This will create growth.  The effect on resource use is uncertain, but most likely the profits will be invested in new production, used for increased consumption of goods or taken by the government as tax. In all three cases resource use will also increase.

The main mechanism by which improved labor productivity creates growth is that labor is freed up for other remunerative activities. Agriculture provides an excellent example of this. Nowadays, in most developed countries only a couple percent of the labor force is engaged in farming, compared to more than 70 % some 100 years ago. Measured as yield per hectare (area use efficiency) farming has increased productivity with a factor of 2-5. Meanwhile labor productivity has increased with a factor of 100, or even much more.  Despite this enormous productivity, the contribution to the GDP (i.e. the value added) from farming has remained more or less the same for a long period as prices have dropped. But all those people who earlier toiled in the fields have been employed in other industries, many of which didn’t even exist hundred years ago.

Digitalization

Because of the rapid increase in digital services and the abnormal valuations of some tech companies, one could be (mis)led to believe that they contribute much to the DGP. But if we talk about the services oriented to consumers that is normally not the case. Those services are normally just an interface between producers and consumers, quite similar to the work of agents or shops. That kind of digitalization save few resources. The main effect is that prices fall as a result of increased price competition, and consumption (resource use) increases. Another form of digitalization is dematerialization, e.g. audiobook instead of a printed book or streamed music instead of CDs. I guess that these services do reduce resource use (although some figures show that streaming takes a huge share of the world’s electricity). But these services also reduce the value considerably. The value of the music industry is now one third of what it was just 20 years ago, despite rapid increase in population.  By definition, this doesn’t contribute to the GDP.

Digitalization within industries has the main effect of saving work and is thus just another version of labor rationalization, which I discussed above.  

Investment in green technologies

This part of the green package is hardest to asses. Clearly there are possibilities to replace some use of fossil fuels with solar panels or shift air traffic to high speed trains. As investments are part of the GDP they will increase the GDP in the short term. They will, however, also considerablyincrease resource use as investment in new infrastructure is among the mostresource demanding economic activities (think cement and steel industries). Their long-term net effect on resource use is quite uncertain.

Summing up

Neither empirical evidence not the application of green technologies or practices discussed in this article support that economic growth can be combined with reduced resource demands. It is therefore irresponsible of institutions like the European Union, United Nations and the World Bank to promote green growth as a pathway for humanity. What is even more disturbing is that the same institutions claim that that economic growth is needed in order to reduce resource consumption and reach other environmental goals.

One can of course argue that the use of the GDP as an indicator is a problem in itself. Many have suggested other sets of indicators or indexes to measure human development (HDI, GPI) etc. I also believe that the GDP is quite inappropriate as a measure for human development. However, as a measurement of the activities within a market economy, the GDP is highly relevant as it measures exactly what the market economy is all about. Any critique against the prominence of the GDP must therefore also extend to a critique of the market economy. It is the market economy that drives growth and not the GDP. But this is the topic of a coming article.