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Towards a green economy

human development, but often at the expense of their natural resource base, the quality of their environment, and high greenhouse gas (GHG) emissions. The challenge for these countries is to reduce their per capita ecological footprint without impairing their quality of life.

Other countries still maintain relatively low per capita ecological footprints, but need to deliver improved levels of services and material well-being to their citizens. Their challenge is to do this without drastically increasing their ecological footprint. As the diagram illustrates, one of these two challenges affects almost every nation, and globally, the economy is still very far from being green.

Enabling conditions for a green economy To make the transition to a green economy, specific enabling conditions will be required. These enabling conditions consist of national regulations, policies, subsidies and incentives, as well as international market and legal infrastructure, trade and technical assistance. Currently, enabling conditions are heavily weighted towards, and encourage, the prevailing brown economy, which depends excessively on fossil fuels, resource depletion and environmental degradation.

For example, price and production subsidies for fossil fuels collectively exceeded US$ 650 billion in 2008 (IEA et al. 2010). This high level of subsidisation can adversely affect the adoption of clean energy while contributing to more greenhouse gas emissions. In contrast, enabling conditions for a green economy can pave the way for the success of public and private investment in greening the world’s economies (IEA 2009). At a national level, examples of such enabling conditions are: changes to fiscal policy, reform and reduction of environmentally harmful subsidies; employing new market-based instruments; targeting public investments to green key sectors; greening public procurement; and improving environmental rules and regulations, as well as their enforcement. At an international level, there are also opportunities to add to market infrastructure, improve trade and aid flows and foster greater international cooperation (United Nations General Assembly 2010).

At the national level, any strategy to green economies should consider the impact of environmental policies within the broader context of policies to address innovation and economic performance (Porter and Van der Linde 1995).2

In this view, government policy plays a

critical role within economies to encourage innovation and growth. Such intervention is important as a means for fostering innovation and for choosing the direction of change (Stoneman ed. 1995; Foray ed. 2009).

2. This point has been debated since at least the time of the initial statement of the Porter Hypothesis. Porter argued then that environmental regulation might have a positive impact on growth through the dynamic effects it engendered within an economy.


For some time, economists such as Kenneth Arrow have shown that competitive firms and competitive markets do not necessarily produce the optimal amount of innovation and growth within an economy (Arrow 1962; Kamien and Schwartz 1982).3

Public intervention

within an economy is therefore critically important for these purposes. This is because industries in competitive markets have few incentives to invest in technological change or even in product innovation, as any returns would be immediately competed away. This is one of the best-known examples of market failure in the context of competitive markets, and provides the rationale for various forms of interventions (Blair and Cotter 2005).

Examples of spurring growth and innovation can be seen from histories of many recently emerged economies. In the 1950s and 1960s, the Japanese and South Korean governments chose the direction of technological change through importing the technology of other countries (Adelman 1999). This changed in the 1970s when these economies shifted to aggressive policies for encouraging energy-efficient innovation. Shortly afterwards, Japan was one of the leading economies in the world in terms of research and development (R&D) investment in these industries (Mowery 1995).4 This pattern of directed spending and environmental policies is being repeated today across much of Asia. The cases of South Korea and China in particular are illustrative, where a large proportion of their stimulus packages was directed at a “green recovery” and has now been instituted into longer-term plans for retooling their economies around green growth (Barbier 2010b).

Thus, moving towards a green development path is almost certainly a means for attaining welfare improvements across a society, but it is also often a means for attaining future growth improvement. This is because a shift away from basic production modes of development based on extraction and consumption and towards more complex modes of development can be a good long-term strategy for growth. There are several reasons why this shift might be good for long-term competitiveness as well as for social welfare.

First, employing strong environmental policies can drive inefficiencies out of the economy by removing those firms and industries that only exist because of implicit subsidies in under-priced resources. The free use of air, water and ecosystems is not a value-less good for any actor in an economy and amounts to subsidising negative net worth activities. Introducing effective regulation and market-based mechanisms to contain

3. It has been known since at least the time of the seminal work of Kenneth Arrow (1962) and the structural work of Kamien and Schwartz (1982) that competitive firms and competitive markets need not produce the optimal amount of innovation and growth within an economy.

4. By 1987, Japan was the world leader in R&D per unit GDP (at 2.8 per cent) and the world leader in the proportion of that spent on energy-related R&D (at 23 per cent).

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