Lecture 10: Growth, Sustainability and Sustainable Development

Question 1

Types of Growth

Answer 1

1. Physical Growth: Growth in the am’t of matter/energy mobilised by economy; Can’t have infinite physical growth
2. Economic Growth (GDP): Growth in money flows/incomes/value-added/expenditure; no theoretical limit her
3. Human Welfare growth: Dependent on sustaining environmental functions & employment; Complex relationship b/w this & econ growth

Complex relationships b/w all of these growing together

Question 2

Decarbonisation and Economic Growth (at odds?)

Answer 2

Decarbonisation will decrease econ growth if: Zero carb energy more expensive than fossil fuels or decarb slows tech progress
But lots of materials already exist if we know how to use them, and R&D at all time high, so no reason for econ growth and resource use to be in conflict…BUT they are

Question 3

Basic Production Function

Answer 3

A function that computes all of the factors of production to yield the ultimate output/income

Y = f(K, L, T, M, En, Env)
where Y = output/income; K = manufactured capital/stock; L = labour; M = materials/resources; EN = energy and Env = environemntal quality

The last three used to just be designated as ‘land’ (now natural capital) but often just ignored bc of complexities.

Question 4

Cobb-Douglas Production Function

Answer 4

Y = AK^(alpha) L ^(beta)
A convenient mathematical function but not realistic
- A = total factor productivity (tech change); K = manufactured capital; L = labour; alpha and beta = elasticities of output (If alpha + beta = 1 then constant returns to scale)

Question 5

Other Production Functions

Answer 5

• Cobb-Douglas (not super realistic but mathematically good)
• Constant Elasticity of Substitution Model Production Function: Y = A[alphaK^Y + (1-alpha)L^y]^1/y
• OECD Environmental Linkages Model: Generates output and estimates elasticity
• FEEM Nested CES Production Function: Similar to above

Question 6

Growth Models

Answer 6

Use the production functions but differently and different factors are explained within them. Some main ones:

1. Ramsay Model [classical]: Y = f(k) where K = aggregate of capital stock per worker
2. Harrod-Domar Model [derives expression for exponential growth]
3. Solow Growth Model [a EXOGENEOUS model that introduces labour and tech but says growth is driven by factors outside of the model e.g. tech progress is assumed not explained]:
   Y = AK^alpha * L^(1-alpha)
   Also predicted that economies would converge in incomes but this didn’t happen
4. Endogenous Growth Model [growth is driven by factors in the mode, explained by economic decisions, e.g. tech progress is result of investment in knowledge/R&D]:
   Y = A K ^(alpha) per person

Question 7

Rebound Effects

Answer 7

With increased efficiency, society may end up using more of a resource than less
- Direct Rebound Effect: Use more in activity w/ efficiency gain (e.g. warmer homes when efficiency up)
- Indirect Rebound Effect: Spend dollar savings from efficiency gain

This can be a problem to the growth models as instead of efficiency bringing down use of something, it could go up

Question 8

Macro-Economic and Forecasting Models

Answer 8

1. Computable General Equilibrium (CGE): Neo-classical econ-based
2. Macro-Econometric: Post-Kenysian theory-based; markets do not necessarily clear
3. System Dynamic Models: Limits to growth model, Interactions modelled b/w different variables; no prices in it just stipulated relationships; found most variables grow until resources depleted (then collapse)

Question 9

Types of Sustainability/Sustainable Development

Answer 9

1. Economic Sustainable: Maintenance of productive power
   - Borrow systematically; trust gov’t; maintain stocks of capital
   - Need to consider how wealth relates to natural environment
2. Social Sustainability: Maintaining social resilience (hard to track)
3. Environmental Sustainability: Maintenance of important environmental functions and natural capital
   - Non-substitutable - At a certain scale, physical growth = counterproductive

Question 10

Core Issues of Sustainable Development

Answer 10

• Issues of maintenance; increase in human welfare requires capital stock
• Issue of sustainability b/w capitals: weak v. strong
• Issues of benefit valuation and valuation of stocks
• Diff b/w environmental, social, and economic sustainability

Question 11

Decoupling

Answer 11

A decline in ratio of amount used of certain resource to amount generated.
- Unit = weight per unit of value
- Could be relative or Absolute
- Could be resource or impact decoupling
- Need absolute of both

Question 12

Relative Decoupling

Answer 12

In growing economy, ratio of resource use OR environmental impact to GDP decreases

Question 13

Absolute Decoupling

Answer 13

In growing economy, the resource use OR environmental impact falls in absolute terms

Question 14

Are countries decoupling?

Answer 14

• EU has had absolute decoupling since the ’90s (not enough to meet targets but still some)
• Other countries have had some relative decoupling

Question 15

Enviornmental Kuznets Curve

Answer 15

Environmental pressures (e.g. pollution) first increase with a country’s income then decrease in a downward facing bell shape.
Because:
- As people get $, environmental preferences are stronger
- Richer societies usually more democratic so political pressure works
- Economies go from agriculture -> industry (more pollution) -> Services (less pollution)

Question 16

Issues w Environmental Kuznets Curve

Answer 16

• As countries get richer, they export more pollution so still polluting
• Actual relationship is b/w environmental quality and regulation and link b/w income and regulation is unclear
• Need stringent policy to decouple
• Countries should focus on improving economy, not just assuming it’ll happen w exponential growth

Question 17

Types of Productivity Measurements for the Kuznets Curve

Answer 17

• Energy Productivity: GDP/Energy; Energy Intensity is other way around
• Carbon Productivity: GDP/Carbon; Carbon Intensity is other way around
• Carbon Emissions: Population * GDP/Capita * energy/GDP * Carbon/energy

Question 18

IPAT Identity

Answer 18

Identity that environmental impact = product of population affluence and tech
Environmental Impact (I) = Population (P) * Affluence (A) * Technology (T)

Note: P, A, T not independent

Question 19

What would optimistis v. pessimists say about costs of increasing resource productivity and climate change mitigation?

Answer 19

• Optimists: Really investments contribute to GDP increase; Number of tech is nearly available; Learning curve means tech price will fall
• Pessimists: Constraining resource use = constrained growth; cheap, abundant energy = fundamental to development

Question 20

Marginal Abatement Benefits Curve

Answer 20

• Wedges: Intervention delivering 1 Gt of carbon reduction/yr.
• Graph from New Climate Economy study in 2014 shows marginal abatement benefits curve that more benefits than costs
  > Evidence that actually costs of abatement are low and perhaps even negative (could actualy benefit more than costs)
• E.g. of wedges are phase out, reduced demand, improved efficiency, etc. But required pretty large wedges

Question 21

How we estimate macro-economic costs of carbon reduction

Answer 21

Models!
- These show that to reduce CO2 to stabilized state is just a 1% reduction in GDP and could be +/- 3% (Stern)
- But also need negative emisisons to achieve 1.5C warming
- So shows that macro-economic costs are small of carbon reduction

Question 22

Objections to carbon reduction costs models

Answer 22

People argue:
- Haven’t seen required decarb rates in the past
- Rebound effects could undo gains
- Just ‘model projections’
- They assume economic growth when maybe can’t be assumed

Question 23

Objections to ‘degrowth’

Answer 23

Some argue that if we want to achieve sustainability, this requires a degrowth of the economy but PE strongly disagrees:
- In current economy there’s no chance that degrowth would supplyl the investment needed in low-carbon economy
- Saying decarb = poorer gives fuel to climate deniers arguing that decarbonisation is expensive
- Would need a ‘command economy’ which is unlikely

Question 24

Relationships of Costs of Climate Change Mitigation and Growth Impacts

Answer 24

1. No evidence that strong action to mitigate CC will have higher costs or halt economic growth
   - Actually GDP costs of mitigation are at worst low and at best negative
   - And costs are low compared to health & insurance risk
2. Fossil fuel importing countries w abundant renewables will experience immediate benefits and security benefits too
3. Development of renewable tech is essentially limitless 0 MC electricity for the future
4. ETR is a key policy for fostering sustainable growth and innovation and should be supported by complementary policies

In all - the choice is clear from a cost-benefit perspective to mitigate climate change at anything other than highest discount rate
- Econ costs are low and there are benefits so why is it so difficult to achieve carbon reduction –> Politics!

Question 25

Is economic growth desirable in rich countries?

Answer 25

-Yes: It increases avg. income, tax revenues, business profits, and employment (so big political support) - No: It does not increase social welfare, dominates over real policy priorities and runs up against social limits to growth, promotes individualism and destroys environment - More $ does not necessarily = more happiness but also no short-term policy will pass on decreasing $

Question 26

Cost/Political Feasibility Paradox

Answer 26

Tech for large scale climate change mitigation is available at an affordable cost BUT need government funding of R&D to increase dramatically and this might not impact GDP but need lower consumption - NOT costs or tech that are constrianing sustainability but POLITICS - attachment to consumption and myopic POV