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Written on 9 Apr 2021 by Dimitri Zenghelis

Can we assess the costs and benefits of environmental sustainability?

We all prefer to live in a healthier environment with reduced climate risks and vibrant biodiversity. But at what price? In particular, how does environmental sustainability square with the requirements for growth and development, especially in those parts of the world which have yet to industrialise on the back of cheap energy and where hundreds of millions of people remain mired in poverty? Dimitri Zenghelis explains.

It’s often asserted that, for developing countries in particular, environmental sustainability is a luxury that must await a more prosperous future: better to focus on growth now and clean up later. In a recent paper with Paul Ekins, we argue that this is inconsistent with the evidence on economic performance and counterproductive for both environmental sustainability and economic progress. As the world transitions to a low-carbon and resource-efficient economy, delaying investment in sustainable assets is likely to become a major liability.

We also argue that a conventional cost-benefit analysis cannot be used to weigh up such trade-offs. This reflects the substantial risks, uncertainties and irreversibilities related not only to climate change but also to technological and behavioural pathways associated with environmental sustainability. Cost benefit analysis was not designed to evaluate these large risks and transitions.

The recent UNEP GEO-6 report, on which we both worked (Paul as co-chair) articulated a variety of potentially catastrophic outcomes for humanity if societies maintain their current development paths. The threat posed by complex adaptive systems surpassing critical thresholds and irreversible tipping points is immense. For example, Renewable natural capital assets, such as biodiverse and healthy ecosystems, forests and fish stocks, or balanced greenhouse gas levels in the atmosphere, are prone to systemic collapse when depleted. These critical natural assets are very difficult or impossible to substitute with other forms of capital in order to sustain well-being. Climate and resource depletion damages can then mount much more quickly as productivity growth is eroded through endogenous effects of devalued and destroyed capital.

At the same time, the economics of innovation and productivity means the cost of meeting various decarbonisation and resource-management pathways depends on decisions made today in changing behaviour and generating innovation. There can be a virtuous cycle of innovation, investment and falling costs of green technologies. By contrast, lock-in of resource- and carbon-intensive infrastructure, behaviour and institutions increases the cost of attaining sustainable pathways.

We show how conventional modelling approaches generally understate the risks from unmitigated climate change and overstate the costs of a low-carbon transition. This is because they miss out the permanent damage caused by environmental degradation and the cumulative gains from path-dependent innovation. 

No cost benefit analysis can adequately answer the question ‘what will it cost to decarbonise in the long run?’. That is because the answer is ‘endogenous’: it depends on the choices and actions we take today and in the future.

One of the key reasons renewable energy generating capacity grew faster than expected was because costs fell sharply. But costs fell sharply because capacity expanded. Several key reinforcing or amplifying feedback mechanisms apply which, because of their inherent instability, are usually omitted in model projections.

Early action can induce creativity and innovation through learning by doing, economies of scale in discovery and production and network effects, where there is advantage in moving in tandem with others. As a result, the anticipated payoff to investing in environmental sustainability increases when others are expected to do the same. As I have argued before, expectations matter. A common understanding that a managed low-carbon transition is both imperative and affordable is the most effective way to induce a rapid transition at least cost.

Only when the opportunities associated with environmental sustainability are fully understood, are we likely to see the global collaboration, policies and investments necessary to deliver resilient and sustainable long-term growth. Effective leadership means clear messaging as well as targeted investment and credible policies.

Recent evidence suggests the short-term GDP impacts of well-designed environmental action could be positive, crowding-in rather than ‘crowding out’ the drivers of future growth. This is especially true following the COVID pandemic, a time of dislocation and change where the economy has an opportunity to lock in to new pathways while creating durable and resilient jobs.

Understanding the processes which drive innovation, change social norms and build stronger institutions will help decision-makers steer growth in a manner that is not only cleaner and more secure, but also more innovative, competitive and productive. This means investment in a just transition, supporting overstretched consumers and reskilling and retooling workers to enable them to participate in the new economy and provide the jobs of the 21st century economy.

Policymakers and businesses are increasingly adopting risk management and hedging strategies that limit investment in conventional technologies and behaviours that may be rendered stranded or devalued. This is not the context of standard growth models, yet policy is needed to support and accelerate this momentum.

We are confident that sustainability and growth not only can go hand-in-hand, but reinforce each other. But our optimism is conditional. It requires credible and ambitious action in the near term to avoid catastrophic and irreversible environmental risk by overcoming continued inertia in unsustainable activities.

There is no room for fatalism and complacency. Using the wrong economic tools to assess the costs of systemic technological and behavioural transformation to address climate change delays action. Understanding the dynamic process of innovation, on the other hand, means putting investment, innovation and technical change at the heart of the sustainable transition.

  • About the author

    Dimitri Zenghelis, Special Advisor: The Wealth Economy

    Dimitri Zenghelis is a Senior Visiting Fellow at the Grantham Research Institute at the LSE where, from 2013-2017, he was Head of Climate Policy. In 2014 he was Acting Chief Economist for the Global Commission on the Economy and Climate (a.k.a The New Climate Economy). ...   Learn more

    Dimitri Zenghelis