The growth dilemma

Emil Urhammer & Inge Røpke

Despite various criticisms, it is clear that economic growth, measured as GDP growth, is still the key objective of economic policy. However, since the financial crisis in 2008, it has become more common to talk about being on the brink of a systemic crisis in which economic and environmental crises occur simultaneously and are interwoven together in a variety of complex ways. The ecological economist, Tim Jackson, has said that we are in a dilemma – the growth dilemma – where economic growth, on the one hand, is undermining the environment through climate change and ecosystem destruction, while growth, on the other hand, is necessary to maintain prosperity, employment and the financing of the welfare state, due to the way our economic system is organised today.

In this video, you can listen to Tim Jackson talking about the growth dilemma

Decoupling
In order to overcome the dilemma of growth, growth supporters often put their faith in decoupling, which suggests that with the help of technological innovations and resource efficiency, it will be possible to disconnect economic growth from the environmental impact. However, in a critical analysis of the idea of decoupling, Tim Jackson argues that it is an unrealistic hope.

In order to understand Jackson’s arguments, it is necessary to distinguish between two different types of decoupling: relative and absolute. Relative decoupling means that the environmental impact per unit of economic output decreases. This does not mean that the environmental impact in itself is falling, but that GDP has increased more than the environmental impact. In contrast to relative decoupling, absolute decoupling means that the environmental impact has fallen in absolute terms, although GDP has increased.

 

The IPAT equation

The IPAT equation describes the relationship between, on the one hand, environmental impact and, on the other hand, population size, affluence and a technology factor, which denotes the environmental impact per unit of GDP. IPAT can be seen as a tool for understanding and discussing relationships between environmental impact, population size, affluence and technological ability.


The equation itself is as follows:


I = P × A × T (Impact = Population × Affluence × Technology).


Where I is the environmental impact (measured in different units depending on the environmental problem being investigated), P is population, A is affluence (measured in GDP per person) and T is a technology factor (measured in environmental impact per unit of GDP).


An example of the use of the equation could be to look at global CO2 emissions. In this case, I denotes global CO2 emissions given by:


CO2 (gigatons) = P (population) × A (GDP/population) × T (gigatons/GDP).


Where population is the total population of the planet, and GDP is the global GDP.


The equation can be used for several different problems, where I will often denote pollution or resource consumption.

The IPAT equation (see the infobox above) can be used to get a better sense of the difference between relative and absolute decoupling. If T, i.e. the environmental impact per. unit of GDP, becomes smaller, relative decoupling has occurred, while absolute decoupling has occurred when I becomes smaller. As a rule of thumb, one can say that absolute decoupling in a world where both the population and GDP per inhabitant is increasing can only be achieved if relative decoupling compensates for the effect of population and income growth. When adopting a global perspective, it is difficult to find any historical examples of something like this occurring.

To illustrate this, Jackson uses the IPAT equation to analyse global CO2 emissions, which means that I denotes global CO2 emissions, and T denotes CO2 intensity. CO2 intensity means CO2 emissions per unit of GDP. High intensity means that a large amount of CO2 per GDP unit has been emitted, while low intensity means the opposite. High CO2 intensity is, thus, the same as low CO2 efficiency.

Jackson points out that CO2 intensity has fallen by, on average, 0.7% per annum since 1990. However, this has been counteracted by an average population growth rate of 1.3% per year and an average income increase of 1.4% per year, which means that the efficiency improvements have not offset the effects of a growing world population. Instead, total CO2 emissions rose on average by 2% per year from 1990 to 2007.

Similarly, Jackson also examines the potential for absolute CO2 decoupling in the future. He concludes that with the official projections for the world population and income per person, the improvement necessary for T is of an order of magnitude that must be considered virtually impossible – in any case it has never been seen previously in history. In addition, including the idea of greater equality in income at the global level makes the challenge even more enormous. For example, if all people in the world are to have the same level of income as those living in Europe, by 2050, the world economy will have to be six times larger than it is now. If we are to stay within the IPCC’s limits for CO2 in the atmosphere, CO2 intensity will have to decrease by about 9% per year until 2050.

With a 0.7% drop in intensity per year, which we have seen since 1990, we can conclude that the challenge for efficiency improvements is quite significant. In response to this problem, Jackson suggests that we begin to consider whether continual economic growth is appropriate instead of hoping that technology will bring about the necessary improvements in efficiency. With regards to the IPAT equation, this means that Jackson suggests that we should begin to reduce A and P so that T is not the only factor that can reduce I, thus creating absolute decoupling.

Rebound effects
When dealing with the opportunities for decoupling economic growth from consumption of energy and resources, another challenge arises called rebound effects, which refers to the problem where energy or resource efficiency improvements often lead to additional consumption, which offsets the effect of the efficiency improvements. To take car use as an example: If you replace your old car with a newer, more energy-efficient model that can drive further per litre, what often happens is that the economic savings gained as a result of the increased efficiency are transformed into increased use of the car. In this way, efficiency improvements result in more driving instead of energy savings. This mechanism is also known from house insulation, where improved insulation can lead to higher room temperatures instead of decreasing energy consumption. Finally, rebound effects are also seen in connection with increased consumption due to the economic savings achieved by energy or resource efficiency improvements. To take the example of the car again: If you do not in fact start to drive more or further having purchased a new energy-saving car, you will save money. However, if this saving is then converted into additional consumption because, for example, you buy a new mobile phone, then a rebound effect in the form of an environmental impact will have arisen.

Green growth
An earlier section discussed how growth supporters put their faith in decoupling economic growth and environmental damage to solve the growth dilemma. This approach is often referred to as green growth and can be considered a political programme for solving the many economic and environmental crises of our time. In green growth, there is a particular focus on resource efficiency, investment in renewable energy and green innovation. With this focus, green growth is strongly linked to market-oriented solutions, which is also reflected in the idea of using price-regulating interventions, such as resource and environmental taxation, to change economic behaviour, increase resource efficiency and reduce the environmental impact. Furthermore, among some supporters of green growth, a desire to find a new measure for economic growth has also been expressed. The idea often involves supplementing or correcting GDP by means of other indicators that measure environmental and social effects which are not included in GDP.

Degrowth
In line with Tim Jackson’s scepticism about the possibility of decoupling, an international movement called degrowth has emerged since the financial crisis of 2008. Degrowth supporters argue that economic growth has reached its environmental limits and that it is, therefore, high time that a transition was made to a new economy, which is not based on economic growth. Degrowth is an extensive political programme that addresses many different aspects of the economy, where the solution to the growth dilemma involves transitioning to a non-growth economy that focuses on fair distribution of the resources of the Earth and global society. This does not mean that supporters of degrowth are against resource efficiency and innovation; it just means that they think much more is necessary to solve the growth dilemma. In a global economy that is characterised by resource and environmental constraints, it is also necessary that the limited resources are shared fairly between individuals and nations. In this way, the idea of equality is central to the degrowth movement.

In contrast to green growth, degrowth is a political programme that requires a radical break with the predominant economic logic of economic growth, public cutbacks and increased labour supply. Instead, it involves slowing growth, the fair distribution of income and resources, reducing working hours, and maximum and minimum limits for income, and the opportunity for an unconditional basic income for all.

Another important theme for the degrowth movement is the influence of large companies and super rich individuals on the economy and democracy. This influence is manifested in, amongst others, environmental conflicts where multinational companies attempt to take control and exploit natural resources such as drinking water, oil and fish stocks at the expense of local populations who have lived for centuries in the areas where these resources are present. Therefore, part of the degrowth movement’s intention is also to draw attention to these conflicts and to problematise the abuse of the rights of marginalised populations. In this way, degrowth also involves fighting against multinational companies and extremely wealthy individuals’ control of natural resources and their influence on politics.

A final point in relation to degrowth also needs to be mentioned, and that is that the financial sector is seen as a significant societal problem and as a central cause of economic instability and inequality. Therefore, for supporters of degrowth it is important that radical steps are taken to control the financial sector through comprehensive regulation, the breaking up of banks that have become too large, and greater government involvement in the financial sector’s activities in general. In this way, the financial sector will help the economy instead of being a sector that primarily focuses on how to make a profit from complicated financial transactions.

Growth agnosticisim
Closely related to the degrowth idea is the concept of growth agnosticism, which assumes that economic growth is just not the key socioeconomic problem of our time. For growth agnostics, there is no need to spend so much time discussing whether it is good or bad that GDP goes up or down or what a new measure of growth should look like as there are more important problems, such as climate change, unemployment and inequality, to solve. In this light, discussions and efforts to achieve economic growth are considered an unnecessary obstacle to solving society’s most urgent problems.