1050x300-FGI-In Conversation with Michael Spence-On the New Climate Economy

In Conversation with Michael Spence: On the New Climate Economy

Author(s): Asia Global Institute

Date: Nov 4, 2014

Theme(s): Sustainability

Insights: In Conversation With

Academic Council Chair Michael Spence was part of the groundbreaking study on The New Climate Economy; he shares his thoughts on the need to invest in the natural capital.

Q: What sets The New Climate Economy apart from previous studies?

Anyone who has been paying attention to economic performance, during and after the financial crisis, is familiar with the notion that damage to balance sheets in the form of excess debt and unfunded non-debt liabilities, can cause growth slowdowns or sudden stops or even reversals in growth patterns.

This report persuasively argues that addressing the mitigation challenge, that is reducing the rate of buildup of CO2 and other green house gases in the atmosphere, is not only a threat to the fragile global economy and its recovery, it may be the reverse.

Q: How will this report likely be received by developing countries, some of which may perceive climate change to be the domain of developed economies?

Those familiar with growth in developing countries will also know that underinvestment in human capital, infrastructure, and the knowledge and technology base of the economy eventually produces national balance sheets that are insufficient to sustain a growing and richer economy. Growth stalls out.

Such paths involves running down one key asset, what has come to be called natural capital, the natural resource and environmental part of the foundation of modern economic and social systems.  It can be thought of as another form of destructive underinvestment.

Q: The report identifies key time frames… How did you come across these figures?

From decades of scientific research, we know that proceeding forward on a high energy, high carbon growth path will a produce a terrifying buildup in atmospheric CO2 that will change climates all over the world and catastrophically disrupt growth, and economic and social systems and performance.  The time dimension for this is 3 to 4 decades – maybe sooner.

Q: How do you get the buy-in of developing nations who may feel addressing climate change concerns is the domain of wealthier economies?

It turns out that the costs of acting now are small and perhaps even negative and the costs of waiting are high so we might defer action on the ground, since there may be the idea that there are more pressing problems and we can’t afford an aggressive mitigation strategy now.  The idea is that the implicit liabilities embedded in inaction have long maturities; they won’t hit is for a while, so we can wait.

But the longer the delay the worse it gets.  The report suggests that a 15 year delay would put the mitigation targets out of reach at any cost.  They key underlying point is that we are choosing paths by action or inaction.

We can act now. Much of the infrastructure of the global economy of 2050 has yet to be built, (largely in cities in developing countries), the large positive effects of properly planned cities and their transportation systems, the rapidly declining costs of so-called alternative (meaning non-fossil fuel) energy sources, the efficiencies achievable with the internet of things,  and much more.

Q: Does everyone have to act together for this to work?

For a given country, how dependent are the trajectories of low carbon paths on what others are doing?  If for example, acting alone yields distinctly inferior growth paths than acting together (for example because of loss of competitiveness in the tradable sector of an economy), then collective action, though difficult to accomplish, is a necessary condition.

It looks like a fair amount of the policy agenda (though not all) supporting a low carbon path, produces growth paths that are similar to or even superior to the high carbon ones, independent of what other countries are doing.  Much of the energy efficiency agenda appears to have this property.  So while international coordination is a key ingredient for success in the longer term, it need not hold up the whole parade.

It is a major step forward. This report deserves to be widely read and debated as part of creating a shared understanding of how to get this done.


Suggested Reading:

Please click here to access Michael Spence’s piece “Growth in the New Climate Economy” which ran in Project Syndicate on October 31, 2014.

Please click here to access the Executive Summary and highlights from “The New Climate Economy”.