Towards a green economy

1 Introduction: Setting the stage for a green economy transition

1.1 From crisis to opportunity

The last two years have seen the idea of a “green economy” float out of its specialist moorings in environmental economics and into the mainstream of policy discourse. It is found increasingly in the words of heads of state and finance ministers, in the text of G20 communiques, and discussed in the context of sustainable development and poverty eradication.

This recent traction for a green economy concept has no doubt been aided by widespread disillusionment with the

prevailing economic paradigm, a sense of fatigue

emanating from the many concurrent crises and market failures experienced during the very first decade of the new millennium, including especially the financial and economic crisis of 2008. But at the same time, there is increasing evidence of a way forward, a new economic paradigm – one in which material wealth is not delivered perforce at the expense of growing environmental risks, ecological scarcities and social disparities.

Mounting evidence also suggests that transitioning to a green economy has sound economic and social justification. There is a strong case emerging for a redoubling of efforts by both governments as well as the private sector to engage in such an economic transformation. For governments, this would include leveling the playing field for greener products by phasing out antiquated subsidies, reforming policies and providing new incentives, strengthening market infrastructure and market-based mechanisms, redirecting public investment, and greening public procurement. For the private sector, this would involve understanding and sizing the true opportunity represented by green economy transitions across a number of key sectors, and responding to policy reforms and price signals through higher levels of financing and investment.

An era of capital misallocation Several concurrent crises have unfolded during the last decade: climate, biodiversity, fuel, food, water, and more recently, in the global financial system. Accelerating carbon emissions indicate a mounting threat of climate change, with potentially disastrous human consequences. The fuel price shock of 2007-2008 and the related skyrocketing food and commodity prices,

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reflect both structural weaknesses and unresolved risks. Forecasts by the International Energy Agency (IEA) and others of rising fossil fuel demand and energy prices suggest an ongoing dependence as the world economy struggles to recover and grow (IEA 2010).

Currently, there is no international consensus on the problem of global food security or on possible solutions for how to nourish a population of 9 billion by 2050. See Box 1 for further information on the population challenge. Freshwater scarcity is already a global problem, and forecasts suggest a growing gap by 2030 between annual freshwater demand and renewable supply (McKinsey and Company 2009). The outlook for improved sanitation still looks bleak for over 1.1 billion people and 844 million people still lack access to clean drinking water (World Health Organization and UNICEF 2010). Collectively, these crises are severely impacting the possibility of sustaining prosperity worldwide and achieving the Millennium Development Goals (MDGs) for reducing extreme poverty. They are also compounding persistent social problems, such as job losses, socio-economic insecurity, disease and social instability.

The causes of these crises vary, but at a fundamental level they all share a common feature: the gross misallocation of capital. During the last two decades, much capital was poured into property, fossil fuels and structured financial assets with embedded derivatives. However, relatively little in comparison was invested in renewable energy, energy efficiency, public transportation, sustainable agriculture, ecosystem and biodiversity protection, and land and water conservation.

Most economic development and growth strategies encouraged rapid accumulation of physical, financial and human capital, but at the expense of excessive depletion and degradation of natural capital, which includes the endowment of natural resources and ecosystems. By depleting the world’s stock of natural wealth – often irreversibly – this pattern of development and growth has had detrimental impacts on the well- being of current generations and presents tremendous risks and challenges for the future. The recent multiple crises are symptomatic of this pattern.