No government can ignore the environment anymore. Instead, all their major decisions – from taxes to subsidies and more – will now have to have a global green economy at their heart.
“If you look at the greening of the world economy, it’s largely about structural changes that are happening,” says Norbert Rücker, Head of Economics and Next Generation Research at Julius Baer. “What governments can do in their countries is either speed these changes up or slow them down. But the point you need to understand is that most of these changes are going to happen anyway.”
A good example of this is the oft cited statistic that more coal-fired power plants have closed under President Trump than under President Obama. The former has made anti-environmentalism part of his platform, while the latter proactively sought to green the economy. Yet here the winds of economic and societal change are blowing strongly in favour in renewables – and very much away from coal. Trump couldn’t save coal if he wanted to.
But none of this is to say governments should stand idly by. Rather, they should push economies in the right direction – and to do this they need to understand what works and why. Here, Rücker says carbon taxes are an interesting example. “Although there’s widespread agreement that a carbon tax would be very effective, you don’t see many countries which have one,” he says. This, he explains, is because such a tax would be very hard to sell to the public. “If you look at one of the very few successful examples of a carbon tax, it’s the Swiss tax on heating oil.” This works because you don’t have to sell it to consumers. Most Swiss people rent their homes and heating is usually included in rent. Thus, the tax becomes a small element of the rent paid and is effectively invisible to members of the public.
But Switzerland has been smart in another way too. “The take from the carbon tax is redistributed to everyone via healthcare insurance, which is mandatory. On the yearly contract that the Swiss get for their healthcare insurance, there’s always a discount which is a redistribution of the carbon tax. Economically, that’s a textbook example of how you should do it, because you tax something you want to discourage and you redistribute the proceeds without bias to everyone in the country.”
However, the flipside of taxes is subsidies, and here progress needs to be made, says Rücker. Although subsidies can encourage clean power and help new technologies get off the ground, they often remain (for historical reasons) on environmentally destructive industries and practices. “Look at Germany. You had the VW diesel scandal and a big outcry, but Germany continues to subsidise diesel relative to gasoline. In fact, diesel subsidies never even came up in the scandal.”
Governments can do a lot to support innovation and the high-tech economy.
He adds that the Covid-19 recession may encourage short-term subsidies that may not be in the interest of the environment. Typically emissions will fall in a recession, but countries need to ensure that they structure incentives to ensure that when the rebound happens, emissions do not bounce back along with the economy. Germany’s Environment Agency said recently that earlier crises suggest that a temporary decline in emissions usually does not help the climate in the longer run.
The IMF estimates that globally fossil fuel subsidies cost about USD 5 trillion a year – over 6 per cent of the world’s GDP. In 2009, the G20 and APEC (the Asia-Pacific Economic Cooperation) committed to phase out fossil fuel subsidies, which encourage wasteful consumption over the medium term – but clearly there is much work to be done. Rücker says it’s important to understand that if fossil fuels are to be phased out, it won’t be because people are forced into it. Rather it’ll be because the renewables are so cheap that oil and coal are no longer competitive. “The way these problems are nearly always solved is that the new technology becomes the better option.”
This points to another key way in which governments can green economies. They can create an environment that supports innovation and fosters scientific advances. In general, scientific and technological advances mean lower energy consumption, less polluting practices, or the replacement of inefficient technologies with better methods. They do this, Rücker explains, by building innovation capability with institutions such as universities and technological research bodies, and a climate that leads to the commercialisation of discoveries. They encourage clusters (such as Silicon Valley and Cambridge), hubs, and specialisation, and they support SMEs with measures such as tax breaks and grants. “Governments can do a lot to support innovation and the high-tech economy,” says Rücker.
Here, they are effectively pump-priming certain areas of the economy. It’s worth mentioning that these tend to be the high-value-added areas anyway – the internet grew out of US Department of Defense research at universities, and the World Wide Web originated at CERN. So you are encouraging growth in the areas that successful countries want to grow in anyway. It’s pretty much the opposite of the resource curse. Indeed, many Middle Eastern countries are trying to diversify their economies away from oil.
Rücker says finance and financial regulation are going to have an ever larger role to play in greening the economy. “The EU Finance Regulation mandates that we have to be more transparent when it comes to environmental information in terms of investment. This is another way in which governments are trying to support the whole shift towards sustainability.” Again, it’s about pushing in the right direction.
A constant presence
Mark Carney, the former Governor of the Bank of England, recently said that climate considerations needed to be “embedded” in every financial decision. “In an ideal situation… professionals have the information they need to consider the impact of a company or asset on the transition to net zero and this becomes a natural way of judging its value,” adding that you cannot “wish away systemic risk”.
Increasingly, institutions ranging from lenders to insurers are taking these risks – ranging from companies’ contribution to climate change to challenges such as increased extreme weather – into account. Governments and organisations such as the UN are setting targets, some of which may be legally binding, and investors increasingly see greener ways of doing business as lower-risk and higher-return. They know that a shift to a sustainable economy is no longer optional – and they want to invest in the technologies that will deliver such a future because they are good investments and the right thing to do.
Of course, some areas are tougher to improve. Making green shifts in areas such as mining of minerals and metals are one example. But perhaps they don’t matter as much as they once did – not only is technology improving the situation, but also the world’s economy has also become far better at both using less and recycling. Mining and other less environmentally sound industries may be part of the future, but it is a small part. It is also likely to get smaller, as regulations mean that companies will be required to pay for all the costs they used to be able to externalise.
The lion’s share of growth in the years to come will be from economies that don’t rely on primary industries – the future looks like Singapore, not Russia. A green economy, says Rücker, is one that is competitive. “It has no over-regulation, little bureaucracy and few barriers to entry. It is inherently flexible, and business decisions can be taken fast. There’s a high level of trust and low corruption, and these are all factors that governments can affect. These economies will go green faster – and they are the future.”
Download Vision 'Green'
The latest issue of Julius Baer’s ‘Vision’ magazine is dedicated to exploring the many interpretations of the word ‘Green’. From embracing more sustainable ways of living, how to build ‘greener’ economies, and the power of nature in urban environments, to how one billionaire is pursuing his ecological dream and how the gemstone industry is responding to shifting consumer attitudes.