Green growth has been in the news lately with much talk about greening the fiscal stimulus for a triple bottom line. Yet there are worries and the question remains as to whether green growth means slower growth with resources diverted to cleaning up the growth process. And what would happen to countries who unilaterally decide to impose domestic environmental regulations and/or a carbon price?. Will this lead to jobs moving abroad—to poorer or less-green countries that would become pollution havens?
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Unfortunately much of the green growth discussion has been of the proselytizing or the scare-mongering kind, with not enough analysis of the potential trade-offs between greening and growing, and not enough thought devoted to ways of minimizing these trade-offs.
In this context, a new paper by Philippe Aghion, Daron Acemoglu and two Harvard graduate students, on “The Environment and Directed Technical Change” (pdf) is a much needed contribution. It also makes for a fascinating read: do not let the large number of equations scare you off! As in all of Aghion’s work, the key insights of the papers are fully captured in crisp writing in the first few pages of the paper.
In his presentation at the World Bank on March 8, Aghion explained the motivation of the paper: most economic models looking at the trade-offs between acting aggressively or not on climate change assume technical change is exogenous—i.e., does not respond to changes in energy prices (for example through a carbon tax) nor to environmental regulation (like a cap on emissions). This results in green growth being slower than dirty growth, at least if the negative impacts of climate change are small, and/or results in the need for permanent subsidies.
In a rather tongue-in-cheek summary of the economics of climate change, Aghion and his co-authors describe the conclusions of the models with exogenous technological change:
• The “Nordhaus” approach which concludes that only limited and gradual efforts are needed to manage climate change;
• The “Stern/Al Gore” viewpoint that extensive and immediate interventions are needed and will need to be in place permanently
• The “Greenpeace” view that green and growth are fundamentally at odds with each other.
However, the paper shows that if innovation responds to prices, it is possible to attract innovation to the clean sector through a combination of carbon taxes and research subsidies for clean technology. The growth cost is relatively small and short lived and, most appealing of all, the subsidy may only need to be temporary.
Why two instruments? To tackle two externalities: the environmental externality and the knowledge externality. Advances in dirty technology make future innovations in that sector more attractive and easier to achieve (as Aghion points out, there is evidence that people like to continue doing what they are good at).
The same knowledge externality -- working this time in reverse -- explains why subsidies may only be required for a short period of time: once a spark gets the engine of clean innovation going, further innovation in the sector will really take off on its own, as researchers “stand on the shoulders of giants” and benefit from the growing body of prior work. This assumes that the two technologies are reasonable substitutes, something which needs to be established empirically.
The paper also argues that the sooner the intervention, the lower the overall cost. This is because, as time goes by, the technology gap between dirty technology and the lagging clean technology becomes increasingly difficult to close, giving dirty technology a growing comparative advantage.
So what’s the bottom line of the paper? As my colleague Kirk Hamilton pointed out, it can be summarized as act now (or the costs increase and it all gets harder); act differently (give a push and a shove to clean tech); and perhaps even act together (the paper has a discussion of what this may mean for developing countries). Music to my ears of course, since these are the messages of the WDR2010!
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