“Green” is not an economic growth strategy

By Robert D. Atkinson

Dr. Robert D. Atkinson is President of the Information Technology and Innovation Foundation and Director of the Canadian Centre for Innovation and Competitiveness.

Many governments, particularly in the West (including Canada and the U.K.), have put the green transition at the center of not just of their energy and environment policies, but of their economic policy. Under the now widely repeated framing, fighting climate change is the silver bullet to restoring lagging economic growth.

But by and large it is not. Organizing national economic policy around the central organizing principle of green growth (GG) – as opposed to growing productivity and ensuring export competitiveness, especially in high-value added industries – is not the path to Canadian growth, as noble as such a goal might sound.

One might forgive Canadian leaders for embracing the idea of green as growth, given how much this notion has been relentlessly pushed by “thought leaders” and other policymakers.

Harvard’s Green Growth Lab proclaims that “decarbonization will radically transform global production. It presents a defining opportunity for growth by creating new industries, markets, and paths to economic development.”

The World Economic Forum embraces GG wholeheartedly: “Moving to a green growth model is also crucial to increasing productivity without which living standards cannot be sustained.”

The European Parliament states “increased investment, for example in low-carbon technologies, would potentially boost productivity and economic growth in the long term.”

What is striking about these statements is that empirical evidence and even logic for them is utterly lacking. They just assume that everyone agrees.

Some even go further, wanting a “Green New Deal” to transform capitalism the way FDR’s New Deal transformed U.S. capitalism. Perhaps the leading proponent of this kind of thinking is U.K. professor Mariana Mazzucato who writes:

“The Green New Deal needs to radically transform capitalism . . . The only way to do this is through reorienting the economy around mission thinking. This means redesigning financial systems, public-private partnerships and public policy to align with the Sustainable Development Goals. Only then will we build a more innovative, sustainable and resilient economy.”

But as with virtually all advocates of GG, Mazzucato never explains how a green economy is more innovative or how it reduces income inequality and boost growth. But such handwaving has become the order of the day.

At least green growth is better than the nonsensical and almost criminal idea of “green degrowth” which would impose vast amounts of pain on billions of people. But that’s a low bar: an overarching GG approach risks green stagnation.

It would be one thing if those who embraced this idea were only doing it to make the needed “castor oil” of shifting away from dirty energy more palatable to voters. After all, what voter wants to only eat spinach; better to tell them that all these green policies, including carbon taxes, are actually a sumptuous dessert. They can have it all.

Mazzucato actually advises the U.K. labor government to just tell the voters that “there need not be any tradeoff between climate action and economic growth.”

Why reorienting economic policy around green growth is a mistake

To see why it is a mistake to reorient economic policy around green growth, consider the drivers of growth in an economy, as they relate to new technology, including clean energy tech.

First, is the use of technology in the economy. For example, tractors increase yields of farms per worker hour, raising productivity. Likewise, artificial intelligence should boost some kinds of office output relative to the same amount of work.

However, it is highly unlikely that new kinds of clean energy technology will drive productivity growth. One reason is that energy is a very small part of GDP (less than 6 percent of U.S. GDP and less than 10 percent in Canada), so even if policy would reduce the cost of clean energy to even 75 percent of dirty energy (something that appears highly unlikely), the national savings would be minimal (a one-time increase in Canadian GDP of less than two percent). But the evidence suggests absent some radical breakthroughs, such a cheap  nuclear fusion, a clean energy system will be cost more than a dirty energy system.

This is why the most promising avenue for green to contribute to growth is not by moving away from dirty fuels (although we need to do that to address climate change) but by helping all industries reduce energy, through things like a smart electric grid (including micro-grids), smart buildings, and other technologies to boost energy efficiency across an array of Canadian sectors.

This can be an area of win-win. Just like Harvard Business School professor Michael Porter argued 25 years ago that pollution prevention can sometimes pay for itself, today energy efficiency can often pay for itself. But we have to realize that not all energy saving pay for themselves.

A second way energy contributes to GDP is from the production of it.  But this is only true if energy production has a higher value-added per work hour than the national average. Products that have high value-added lead to more wealth/productivity than products with lower. 

But clean energy is likely to have lower value added. The solar panel industry is not likely to have as high a value added per worker as oil and gas. In 2016 the Canadian oil and gas sector labor productivity was six times higher than the overall Canadian average.

In the United States, oil and gas industry workers earn on average $49 per hour, while solar industry panel installers earn just $23 per hour. The reality is that moving from oil and gas to solar will lead to reduced productivity, at least with the current technologies in both industries.

That is why policymakers should be highly dubious when they hear claims that the green transition will create hundreds of thousands or millions of jobs. Replacing mechanical harvesters with scythes would produce lots of Canadian jobs, as would requiring all elevators to have human operators. But both would reduce Canadian GDP. By definition, unless energy use expands, more energy jobs mean lower energy sector productivity.

Moreover, policymakers need to firmly reject distorted Keynesian thinking that holds that any spending which creates jobs creates economic growth. If the Canadian economy had not created jobs in installing wind turbines, they would have created them in oil and gas and coal. The goal of economic policy should not be jobs, but higher living standards.

This leaves exports. If a nation can gain advantage in the production of a particular clean energy product/service and it can export it (or reduce imports of it), it can get some growth, especially if those exports have a higher value added than other exports. 

To be sure the clean energy production industry will grow, and to the extent nations produce some of the products (e.g. wind turbines, geothermal equipment, etc.) they can export. As such Canadian economic policy should have some focus on growing export industry output and some of these will be green industries.

But that should not mean losing sight of the importance of other industries, such electronics, aerospace, machine tools, biotech, and AI. Moreover, given the U.S. Democratic party’s all-in bet on Inflation Reduction Act clean energy production tax credits, it’s not clear Canada is in a very good position to compete head-to-head with the United States in clean energy industries, at least until the Republicans take control of Washington, at which time they are likely to scale back the program.

Finally, none of this is to say that on net investments in clean energy could not lead to higher global GDP relative to the negative impacts on global GDP from climate change impacts. But that is a different argument. Climate costs are global, but the expenditures of a particular country for green growth are local. So the climate benefits to Canada from its own green growth expenditures are likely to be quite small, while the costs are not.

This does not mean that nations should not be working to develop clean energy alternatives, but the only way to spur widespread decarbonization is when clean energy is cheaper (without subsidies) than dirty energy, and the best way to do that is to support clean energy innovation, especially research.

While Canada is spending more as a share of GDP on clean energy innovation than many other nations, it still fell woefully short of reaching the goals of “Mission Innovation” to double its clean energy R&D. The best thing Canada can do to help with global climate change is to reach its Mission Innovation target.

In summary, green growth should not the center of countries’ economic strategies. Those countries that make so are likely to be deeply disappointed.

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