Building a Green Economy

Paul Krugman reviews the economics of building a green economy in this long-form article for the NYT magazine.

14 replies on “Building a Green Economy”

‘Green’ economy can be overstated and used to justify ineffective investments which only benefit the Suppliers of the ‘green’ equipment involved.

On the other hand you can be smart about ‘Green’ investment – I interviewed a number of companies who had awards for their ‘Sustainability’ and in all cases found that every ‘green’ feature that they flaunted had a positive NPV .

In one particular company run totally by accountants where they had flogged costs to the minimum and had no potential to find any further savings, they adopted ‘Sustainability’ as a marketing tool. Looking now at how to reduce carbon emissions, the new perspective suggested a different business model in their logistics area which yielded significant savings in cash, as well as a reduction in emissions.

So if you approach ‘green’ investment in the right way it makes good business sense.

@ Philip,

A recommended reference in my opinion – Ray Anderson’s, Adventures of a Radical Industrialist is a very well put together piece of writing and theory. Its a very solid reference indeed by someone who can combine business thinking and financial planning with many, many aspects to do with ‘green’ economics. BOH.

I left some thoughts about the economic management of the green economy from a European perspective in a blog entry, Anarchy in Research, based around a quote in a paper by K. Vela Velupillai, In Praise of Fostering Anarchy in Research and Teaching.

I think Philip Lane’s idea about a fiscal policy committe staffed by experts from abroad as well as Ireland, could be stretched a little bit somehow, to see how various countries in Europe could combine together to fund deeper and greater development of the green economy.

The section in this article headed “Environmental Econ 101” should be implanted in the brain of every politician – and aspiring politician – everywhere. And it would promote rational policy-making in areas other than environmental policy.

Nice article that gives a good summary of the debate, though his eventual conclusion seems to be to ignore economic analysis and go the feel-good route with the Stern Review.

Also, I can’t help but be notice that he had to drop in a reference to healthcare and even another attempt to tax Chinese imports! I really wish he was a little less political at times.

Good article with a decent summary of where the debate currently stands. As Paul Hunt says would be no harm reading something like this to our TDs in their sleep.

Let’s just assume for a moment that it’s possible to ‘green’ capitalism.

How can it reward decision makers for taking decisions that may only be of ‘value’ decades hence? Replace a portion of salaries and bonuses with lucrative deferred reward schemes that depend on assessed long-term value 10, 20 or more years in the future?

How do you reward the precautionary principle?

And what about issues of the global commons? For example, I can see no real ‘business case’ for any individual or corporation to do anything about climate change before it’s too late.

@Pope Epopt

“How can it reward decision makers for taking decisions that may only be of ‘value’ decades hence?”

Investment in specific, long-lived assets will be forthcoming when there is a solid assurance that the quasi-rents (the return on, and of, this investment) will be recovered. As Prof. Krugman has outlined, the broad choices for governments are either to set the price for emissions (e.g., a carbon tax) and let the market decide the level of emissions or to set the emission volume, auction rights to emit (e.g., cap-and-trade) and let the market set the price. In either case the risk for investors is the flakiness of the policy commitment – expressed as an unwillingness to set the price high enough and to commit to increase it over time or to set the cap tight enough and to commit to reduce it over time – or capricious changes in either in response to popular pressure or lobbying by vested interests.

Eliminating the flakiness of the policy commitment is a challenge for politicians and policy-makers everywhere – but we elect them to make these decisions on our behalf.

@ Pope,

How can it reward decision makers for taking decisions that may only be of ‘value’ decades hence? Replace a portion of salaries and bonuses with lucrative deferred reward schemes that depend on assessed long-term value 10, 20 or more years in the future?

If you look at what the US buys from the BRICs – agricultural produce from Brazil (and biofuel going forward), software services from India, manufactured goods from China and fossil fuels from Russia/gulf region – the US has to balance its trade deficit somehow. The ideal way to do that is to sell back some form of green tech intellectual property and services. That is why all of the VC’s in silicon valley are funding the green economy right now. BOH.

Have a read of Ray Anderson’s book, which I mention above. All of the intellectual project is being developed in the US, in order to make waste from one process, the food for further manufacturing processes. An often quote example is from the days of Henry Ford – the timber of the crates in which the model T motor car shipped in, because the floor boards for the same car when it arrived to the purchaser! Obviously, what Ray Anderson, Amory Lovins and company have in mind is more sophisticated. BOH.

Our modern economies are built on a temporary foundation – easily accessible fossil fuels. Any curtailment in the use of these fuels will have a de-multiplying affect on all economic activities. So, all ye ‘Greenies’ or whatever, please be most careful for what ye wish/want/advocate in respect of a Green Economy. It effectively means zero economic growth in short to medium term and a gentle, annual declension in the long-term. If you have any doubts about this, then you need to catch-up on some aspects of energy and its inter-relationship with the nature of the sophisticated technology we currently deploy. We ‘nett’ about 115% output from the input of fossil fuels into that technology! So the decline in economic activity from a decrease of our use in fossil fuels will be significant.

The ‘Law of Marginal Rate of (Technical) Substitution’ is appropriate. However, there is no exact chemical substitute on this planet for liquid fossil fuel. Any that there are, are less energy dense, are less effective, and are less easy to use.

B Peter

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