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How innovation could deliver a virtuous green growth spiral

Author, Dimitri Zenghelis argues that innovation can tackle the looming resource crunch - it just needs intelligent policies if it is to be unlocked

I recently returned from the UNEP International Resources Panel meeting in Berlin where a familiar question was posed; can we really be green and grow? Setting aside for the moment the question of whether GDP growth is the only objective to aim for (clearly it isn't; but if one aspires to alleviate poverty, promote healthy, educated populations, and foster gender opportunities then neither should one ignore it) this question mostly misses the point. As the panel's work clearly explains, the debate about resource-efficient green growth is precisely about sustaining growth and delivering human wellbeing. It is not at the periphery of the growth story, articulating narrow concerns about polar bears and coral reefs; it is the growth story.

Indeed, the key driver of both growth and resource efficiency is what economists call total factor productivity (TFP). This is a catch-all concept that covers all the things that allow us to get more and more out of fewer and fewer resources. It is a proxy for innovation not just in technologies, but also in processes, institutions, and behaviours. So green and growth are two sides of the same coin - if we do not become more resource efficient we are destined to face constraints on key resources, which will push up prices at the same time as increasing the use of increasingly unconventional fuel resources destabilises the climate. With the welcome industrialisation of countries like India and China, global consumption is accelerating at an exponential rate. But the good news is that innovation and human ingenuity, as reflected in TFP, are also growing at an accelerating rate. Small changes in the rate of the latter relative to the former will determine whether we can decouple from material use and live within the Earth's resource envelope.

The challenge for us as a society is to recognise that innovation does not happen in a vacuum. Innovation is the human response to necessity. Some of this innovation will be driven by the market. Indeed, this process has already begun. Rising prices for commodities are already sending a price signal which will induce innovation, promote efficiency, and change behaviour. But without public intervention to address numerous market failures and information asymmetries (not least the failure to properly price scarce resources), the pace of this innovation is likely to be too slow to safeguard wellbeing. At the same time, vested interests will obstruct change in the interests of business as usual, delaying the transition to resource efficiency to the point where irreversible (or expensive to reverse) thresholds are reached, such as climate feedbacks, the loss of biodiversity, or the depletion of essential basic elements like phosphorous and potassium. The story of policy progress over recent decades, in the face of known risks, provides ample testimony to this risk.

In order to understand the risks of delaying action, it is important to understand the dynamics of human innovation. The development of ideas, technologies and behaviours are subject to mutually reinforcing path-dependencies which once set in train, can be difficult to break out of, but which can lead to very different outcomes depending on choices made at the start. For example, the path of technical innovation is not God-given. It is the cumulative consequence of choices made. Conscious investment in new equipment enables new ideas and induces bright ideas on how to use them. Investment in physical and knowledge capital drives increasing returns to scale in production, where more knowledge begets increased output and liberates resources for further investment: a virtuous growth spiral in which future output becomes "path-dependent". But the lock-in can also be psychological as well as technical.

Perhaps the most obvious exemplar of this is cities. As the World Bank and OECD and others have shown, cities of similar per capita incomes and similar populations can have vastly different resource calls (as proxied by greenhouse gas emissions per head). Many cities in North America such as Phoenix and Atlanta, built around a model of sprawling suburbs and extensive car use, have emissions which are up to five times higher than cities in Europe and Asia (such as Copenhagen, Amsterdam, Barcelona or Hong Kong) which are built on the model of dense residential concentration and extensive public transport. Yet infrastructural and behavioural lock-in now makes it hard to retrofit resource hungry cities. These cities are now at a major disadvantage as the costs of resources increase. Residents of such cities have little to gain from policies to discourage car use and provide cycle and pedestrian facilities, in contrast to denser cities where city authorities are held accountable, and rewarded, for the provision of such resource-efficient facilities. China will simply not be able to afford the profligate urbanisation based on extensive car use and suburbanisation. This explains why the Chinese government has set tough efficiency standards and championed green economic sectors in its twelfth five year plan.

The central role for public intervention makes it important that policies are carefully designed to avoid market failures being replaced by policy failures. Unconstrained public intervention can lead to inefficiency, market distortions, and scope for rent-seeking by vested interests lobbying to benefit from public disbursements. Designing policy to be non-discriminatory, making use of market instruments such as pricing which leave technological choice to innovators, limits the scope for policy failure. Yet strategic choices, for example involving research funding for specific sectors, will need to be made to induce specific innovation, so public decisions must be well-informed and transparent.

The toughest hurdles to building a resource-efficient economy are not economic or technological, they are cultural, institutional, and political. The losers from any change are easy to identify, but winners are diffuse (all of us), and in the case of technologies yet to be developed, potential. This means the former often shout louder and influence politicians more effectively than the latter. The need to tackle damaging resource-inefficiency has been known for decades, yet policy progress has at times been painfully slow. Change is easier to foster when it is made acceptable and profitable, with losers identified and compensated, retooled, and reskilled. In the nineteenth century, the whaling industry strongly opposed the electrification of lighting, because it provided the wax for candles and jobs and livelihoods were at stake. Such resistance is understandable, but it must not be allowed to hold society to hostage. The same logic applies today. The transition to a resource-efficient economy is inevitable and those countries, cities, and companies that manage that transition and remain open to change stand to benefit.

Entrepreneurs and innovators are waiting for a clear signal to develop the new technologies; if you don't ask you won't get they cry. As I have argued here before, there is no shortage of private money or ingenuity, yet there remains a shortage of perceived opportunity and a lack of confidence in the public sector's commitment to promote viable new markets. Without clear, coherent and credible policies, the private innovation, investment and creativity required to boost growth and jobs in a deflated economy and leave a lasting resource-efficient infrastructural and technological legacy and will remain elusive.


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