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Green Economy: an ecological contradiction or a governance challenge?

The on-going crisis is revealing the unsustainability of the economic debt-ridden practices of the last decades. High public and private debts combined with high unemployment and low economic activity have put the EU in the most difficult situation since World War II. On the top of the economic unsustainability there is the ecological unsustainability which, although already felt in the form of high fuel and commodities prices and environmental disasters around the world, is still not properly addressed.

The management of the crisis by the EU leaders has been clearly deficient. What started as a financial crisis has been allowed to develop into a fiscal crisis which is to be attributed to the unfit EU governance structure and the lack of vision of its leaders. However, regardless of how different parts of the developed world addressed the crisis there is an underlying problem with the model of market fundamentalism; that is the inherent unsustainability  of a world economy fuelled by debt.

It is clear that a return to the way things have been before 2008 is not an option. The state has been coming back in the last 4 years to foot the bill for the financial disasters and convert private debt into public debt. Consequently the populations are now paying the price in social cuts. However a come-back of neo-keynesianism as suggested by Stiglitz or Krugmann to stimulate demand in a globalised economy rigged with ecological constraints will not work.  A new macroeconomic model needs to be created to bring the indebted countries and the emerging economies to a situation of stable wellbeing in harmony with the ecological boundaries.

It is also important to detect the right priorities and objectives for the current situation. The EU is a union of developed states whose current main problem is unemployment and sustainability, not underdevelopment. Whilst most of the emerging economies do need sustainable development to achieve European affluence levels, the EU’s new challenge is to achieve economic and ecological sustainability and redistribute wealth and labour to get to a level of sustainable wellbeing. These objectives need to be put at the core of the new macroeconomic policy in Europe replacing price stability and economic growth.

Einstein said that “we can’t solve problems by using the same kind of thinking we used when we created them” and indeed we cannot pretend to solve the ecological crisis with the same kind of thinking that has created it. So far sustainability in Europe has been associated with improving resource and energy efficiency and increasing the use of renewable energies but so far the “rebound effect” by which an improvement in the efficiency of a process can be offset by the increase in the consumption of that item has been unsurpassable; for instance cars have reduced their average CO2 emissions by 22% between 1995 and 2009 and hence are more efficient than ever but precisely because of that we have more cars than ever in the roads with an increase of 40% since 1991 (Eurostat), same logic applies for many of the other improvements.

Eurostat data for material flows shows how a decoupling between economic growth and material use is effectively taking place in the EU and the emissions decreased by 22% during last 20 years. However the environmental impact in absolute terms continues to grow if one considers the emissions off-settings, the loss in biodiversity and above all the delocalisation of production –and emissions!- which can be seen in the increase in trade deficit –EU imports doubled since 1999- with the rest of the world. Indeed, the only real factor that has reduced the environmental impact of the EU in absolute terms during last decades has been the economic crisis.

The alternative to put Europe on the sustainability track requires structural changes in several fields but before anything it requires a political class willing to take on the ecological challenge and a governance system that allows this change to be implemented. The current EU Green Economy project serves the purpose of improving resource productivity in the time of pre-ecological collapse but it only aims at decoupling economic growth from environmental impact, even when the environmental impact in absolute terms continues to increase. There is no plan to make the EU ecologically sustainable any time within the 21st century. The EU has pioneered the development of useful data, tools and knowledge around the sustainability issue and with proper political will it could steer the boat and start changing the economic paradigm and developing a new macroeconomic theory for the years to come.

If the EU wants to be serious in tackling the dilemma of sustainability it needs to break away from the model of consumption and production responsible for the most important period of material affluence but also environmental destruction and unsustainability in the history of humankind. However, economic history teaches how the change to a consumerist society had to be engineered and planned. It takes a lot of effort and planning to change the preferences of a society to, for instance, choose using plastic cutlery which involves extracting oil from the ground, shipping it to a refinery, turn it into plastic, shape it appropriately, bring it to a store, buy it and bring it home to dispose of it after some minutes of use instead of washing up and reusing cutlery. This could not have happened spontaneously; after the economic depression of 1929 the economics of a throw-away society were engineered to artificially boost the demand in order to avoid crisis for oversupply of goods. The physical boundaries of the planet are putting an end to the throw-away society but this doesn’t mean that sustainability is automatically waiting at the end of the street. The change to sustainability needs to be planned the same way as the break towards a throw-away society was engineered and implemented in the first half of the 21st century.

The EU is facing the hardest crisis since the end of WWII; the growing indebtedness, emigration and unemployment rates of countries such as Greece or Spain actually are comparable to the effects of a war. Hence, it is pertinent to observe how structural planning played a vital role in the reconstruction of Europe in the aftermath of WWII. During the late 1940s, in times of poverty, hunger and social desperation a new system of social coverage that was called the Welfare State was developed. Despite some social services existed before WWII in countries such as Britain or Germany a proper “Welfare State” was created from the scratch which helped prevent social unrest and a return to totalitarianisms. All in all, the problems were detected and addressed with national or international plans. In Europe –and around the world- the plans for sustainability limit themselves to a myriad of sometimes contradictory initiatives that fail to address the root of the problem which is the need for a new paradigm of production and consumption.

This change of paradigm has huge implications for macroeconomic theory because traditional growth models involve increase in material consumption and the new paradigm would challenge the whole notion of growth. However, recognising the boundaries and living within one’s means, not spending what one doesn’t have is the message to take home from the current crisis. In this case what applies to finances also applies to ecology. Europeans need a plan to live within sensible ecological boundaries. In theory this means decreasing material use to sustainable levels, close the loop of materials and phase out waste, move from consumption of goods to consumption of services, leave behind most combustion-based sources of energy & mobility, shift taxation from labour (the abundant resource) to resources (the scarce resource) and change many perverse incentives. In practice this implies a coherent and consistent leadership and communication strategy which is credible about economic, ecological and social justice and sustainability.

The constant contradiction of the European leaders consisting in advocating for a Green Economy which is inherently unsustainable is confusing and self-defeating. However, can any political leader afford to be coherent when the industry is watching, the justification from the economic theory is lacking and the political legitimacy and credibility are insufficient to take such gigantic endeavour? An overarching cross-border European Plan for Sustainability is necessary to change the paradigm.

This plan for Sustainability would need to be based on 4 pillars:

1- Proper accounting of natural capital

In order to start a proper transition the EU has to have a good perspective as to what are the assets and liabilities of the Union, and a plan for Sustainability needs to include the natural capital in the balance sheet.

The importance of the natural capital as underlying asset of our economy means that is vital to value it properly and include it in the balance sheet of a country for it does say a lot about its sustainability and hence future social and economic stability. But valuing natural capital shouldn’t mean putting a price-tag on it and turning it into a commodity so that it can be financialised and subjected to speculation. The EU cannot trust the markets to do with public goods what they haven’t been able to do with private goods. Understanding and respecting the non-convertible and low-resilience nature of the natural capital is vital for successful policy-making. It is precisely because they are a strategic asset for any country that most of water, forests, biodiversity and any other natural capital have to remain a national -or international- reserve. Authors such as Jacques Attali have already advocated for the creation of a world accounting system for natural patrimony and its consumption.

2- Robust indicators

The current crisis demonstrates the importance of working with and on the basis of good indicators. The European Commission has been working since quite some time on the development of “Beyond GDP” indicators[1]. In fact, the Commission is pushing to have GDP/DMC (Domestic Material Consumption) as main indicator for resource productivity. This would be backed by other complementary macro indicators related to land, water and carbon use.

However, in order to shift the attention of policy-makers and economists to new complementary indicators it is necessary to insert them into a bigger picture frame for they are vital light-towers for the plan to make the EU economically and ecologically sustainable. An EU plan for sustainability is the best way to use the Beyond GDP indicators developed by the European Commission.

3- Economic resources and right economic and legislation incentives

The EU should have the economic resources to intervene in the protection of the EU natural capital and public goods but also invest in cross-border projects which demonstrate the added value of the European level. According to the subsidiarity principle, the European level needs to have the spending capacity of the same level of the ambition of the democratic decisions taken by citizens and member states. Unless the size of the EU budget is radically increased the EU is doomed to derail any national efforts towards sustainability. Taxing carbon and speculative transactions is a way to raise own resources that has been very much explored and it remains unexploited only for political reasons. The interest and potential of such measures to raise supranational funds is more than justified but it needs to go hand in hand with a change in governance structures in the line of the “no taxation without representation”.

Next to the economic resources it is important that the legislation is coherent and the right incentives are in place to push the market in the right direction. For instance in the EU the Directive on Renewable Energy (2009/28/EC) rewards energy generation from burning waste of biogenic origin such as paper. At the same time there is no economic incentive or reward in place at EU level to recycle it despite recycling being higher up in the waste hierarchy in the Waste Framework Directive (2008/98/EC) and this way avoid the disposal. Like this, burning what could be recycled causes all the emissions associated with the extraction, transport, production and consumption of a new product which means higher environmental and economic impact and less sustainability. Contradictory incentives and accounting tricks in the emissions –such as not considering emissions associated to delocalisation of production of goods imported to the EU- need to be changed and aligned in a coherent direction.

Finally, taking inspiration in the Delors Report from 1993 there needs to be a clear turn in the fiscal treatment of the basic resources of the European economy. Since the industrial revolution the scarce resource has been labour and as such it was charged with taxes in order to protect its exploitation whereas raw materials were considered abundant and free. What was expensive was the labour to extract and process the raw materials. The population growth linked to a technological progress which has boosted labour productivity has created a situation in which the scarce resource are the materials and the abundant resource –as the current unemployment rates show- is labour. A change in taxation from labour to resources is vital to decrease the cost of labour –and hence increase employment without having to reduce real salaries- and make more visible the situation of resource scarcity –which will trigger more sustainable use of materials and force a move away from a society based on consumption of goods to consumption of services- (Stahel 2010). Another crucial advantage of this shift in taxation would be the possibility to involve the supranational level in the management of the funds and could open the door to European-wide social coverage financed by taxes on resources which is something a lot more difficult to achieve if using taxes on labour.

4-    A democratic Europe to achieve sustainability

All in all, we have argued that the tools are at hand but a new plan for sustainability is necessary.

In order to do that a new accounting system that includes natural capital will need to be developed, new indicators will have to be used, new economic tools and incentives have to be implemented and a certain return of the state is necessary in order to do what markets have not proven capable to do; provide sustainability, employment, wealth redistribution, stability and wellbeing. From history we know that it is desirable that this transition is driven by planning rather than by collapse but we also learned that planning transitions requires above all committed citizens, visionary leaders and political will. It is an illusion to believe that resource productivity and the invitation to change personal behaviour are enough to achieve sustainability.

The EU is caught between several fires and vicious circles. Facing phenomenal economic challenges national leaders who are elected to take care of the national interest find themselves having to take care of European interests whereas the illusion of a sovereignty long gone is blinding member states who are doing everything possible to stop the creation of a United States of Europe. The existence of a common market and a common currency complemented with the most advanced integrated environmental and industrial legislation in the world means that it only makes sense to launch the European Plan for Sustainability at European level.

A supranational European Plan for Sustainability would be better -and easily- implemented if the EU would have a proper budget, an economic government and other complementary governance tools. However, one of the biggest challenges remains; the creation of a supranational democracy which can scrutinise and legitimise highly potentially controversial political decisions such as the implementation of a European Plan for Sustainability with all its implications on the labour, industrial and trade policies. Currently no President of the European Commission or European Council, not even the German Chancellor or the French President  can decide to steer the EU enough to be able to implement a plan for a change of consumption and production paradigm for such a measure it would require unanimity among the 27 member states. The reform of the current treaties that will be necessary to further economically and politically integrate the EU to address the current economic crisis will for sure address the current EU decision making process. This should provide the EU with mechanisms to more promptly undertake radical changes in the EU structure, be it the reform of the European budget or the creation of a European Plan for Sustainability as presented above.

Therefore, the institutional reforms that are needed for the EU to properly tackle the current economic crisis are likely to reform the EU in a way that will help to implement a European Plan for Sustainability. To this effect an European Convention should be called in the near future and it would be most convenient to include a discussion as to how to change the articles that from Maastricht to Lisbon embody a clearly obsolete macroeconomic policy and an impossible decision-making system. The stakes are high and so far the political will is not yet in sight; one more year suffering the effects of the current policies will help open some minds to look for new options.

After all, the question remains; will Europeans plan a smooth transition to sustainability or will they repeat the mistakes that led to the current crisis and wait for the collapse before starting to act? The resilience capacity of an economic crisis compared with that of an ecological crisis speaks in favour of the first option.


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