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Ross Garnaut: No Link Between Economic Growth and Pollution

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Last night I went to see Prof. Ross Garnaut speak on ‘China’s Energy Transition: Effects on Global Climate and Sustainable Development’. Me and Ross go back a long way. Not personally of course, but my career in economics has somehow become enmeshed with his. His report on ‘North Asia’s Economic Ascendancy’ was the first government report I read when I was a callow youth at university. It set out a path for Australia to exploit the economic opportunity of North Asia (i.e. Japan, South Korea, China and Taiwan). It wasn’t about resources, instead he said we should aim to be an exporter of ‘elaborately-transformed manufactures’ – i.e. advanced manufacturing goods that require significant use of Australia’s design expertise and creativity. It was a report that inspired me to think how economics could be used to guide governments.

Australia tried that path but I think it is fair to say that we have decided to revert to the resources and agricultural exporting model for our main exports. These industries still require significant human creativity, especially agriculture – such as in biotech, farm machinery, product development and waste recycling. But both industry and government are unwilling to support the investment needed to develop the future scientists and farmers that can make Australia’s farmers the most advanced.

Anyway, I digress. I will write about the future of Australian agriculture in a future blog post. What I wanted to write about in today’s post was about Ross Garnaut’s talk last night. I’m not going to go through his speech line by line (link). I wanted to concentrate on his point that China (and the world) need to break the link between economic growth and resource use to reduce global warming to a 2 degrees rise. He presented evidence that China was reducing its use of coal without seriously damaging economic growth (fig. 4 in his paper). He said this was all part of the Chinese Government’s attempt to change the economic model from an investment- to a consumption-lead one. An investment-lead economic growth model relies on constructing buildings and infrastructure for economic growth. This requires substantial use of resources to fuel the growth. Australia has obviously been a key beneficiary of China’s investment-lead growth.

Consumption-lead growth is centred on consumers increasing their consumption of goods and services. This requires less reliance on construction and therefore raw resources. Developed economies, such as the USA and Australia, have a consumption-lead economic model. The lower reliance on construction also means less resource- and carbon-intensive forms of production. Chinese manufacturers have already been adjusting to less resource-intensive use of manufacturing because they have an incentive to reduce input costs. For example, Prof. Garnaut visited a solar photo-voltaic factory that had reduced its use of resources by 80% in order to become more competitive. The Chinese Government has also been aggressively pursuing pollution-reduction measures such as the introduction of carbon taxes, emission trading scheme pilots (incidentally, based on Prof. Garnaut’s work for Australia) and ‘command-and-control’ regulation. So the Chinese economy is currently adjusting to this new economic model through a combination of competition and government policy.

I think this point that we can have economic growth and be less polluting is a hugely important one because it is often assumed that any form of environmental policy is going to destroy the economy. I have certainly heard this from many people, including a Chinese diplomat and business people. As a general proposition, environmental policy is not always anti-economic growth. Environmental policy may be anti-growth in some cases but a careful design of environmental policy can design incentives that open up opportunities for new sources of economic growth. The difficult part is convincing someone that there will be a new industry to replace the lost businesses and jobs from stronger environmental policy. I think we can safely say that there is evidence that there are businesses and investors waiting for governments to act on climate change before they commit the funds needed for renewables and other sustainability investments. So, to instinctively resist strengthening environmental policy may actually foreclose valuable economic opportunities.

Furthermore, Chinese manufacturing is likely to make renewable technologies even cheaper in the future. That could eliminate the argument that moving to renewable technologies will always be more expensive. Prof. Garnaut clearly thinks that China is likely to be part of the solution to climate change. Pity, that can’t be said for all governments.