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Nations must embrace green economics

“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. “Governments can speed these changes up or slow them down but most of them are going to happen anyway.”

A good example of this is that more coal-fired power plants closed under President Trump than under President Obama. The former made anti-environmentalism part of his platform, while the latter sought to green the economy. Yet the winds of change are blowing strongly in favour in renewables and away from coal.

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 that many countries which have one,” he says. “They are a hard sell to consumers.”

Indeed, one of few effective carbon taxes is 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 is effectively invisible – and the proceeds are redistributed to all Swiss citizens via a rebate on healthcare.

The flipside of taxes is subsidies, and here progress needs to be made. Subsidies often remain on environmentally destructive industries and practices. The IMF estimates that globally fossil fuel subsidies cost about USD 5 trillion a year – over 6 percent of the world’s GDP. In 2009, the G20 and APEC committed to phase out fossil fuel subsidies 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 the third key way for governments to green economies. They can create an environment that supports innovation and fosters scientific and technological advances. In general, new technologies mean lower energy consumption, and the replacement of inefficient, polluting practices with cleaner ones.

Governments can do this, Rücker explains, by building innovation capability via institutions such as universities and technological research bodies, and a climate that leads to the commercialisation of discoveries. They can encourage clusters (such as Silicon Valley and Cambridge), hubs and specialisation, and support SMEs with measures such as tax breaks and grants. Here, they are effectively pump-priming certain areas of the economy – and these tend to be the high-value-added, future-proof areas countries should focus on anyway.

Looking ahead, Rücker says finance and financial regulation are going to have an increasing 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 shift towards sustainability.”

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,” he said, 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 see greener businesses as lower-risk and higher-return. They know that a shift to a sustainable economy is no longer optional.

Of course, some areas are tougher to improve. Making green shifts in areas like mining of minerals and metals is one example. But perhaps they don’t matter as much as they once did – not only is technology improving, but the world’s economy has also become far better using less and recycling more.

Besides, the lion’s share of growth in 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 there’s a high level of trust and low corruption.” Governments, he says, can affect all of these and make economies go green faster – “this is the future”.

Key takeaways

  • The greening of the world economy is already well underway. Forward thinking governments will seek to embrace these changes, rather than fight them.
  • Governments can encourage the industries of the future with tax breaks, subsidies and smart regulations.
  • Green economies tend to be high tech, high value-added. Governments that adopt green policies are future-proofing their economies.

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