Finance and greenhouse gas emissions

The world faces three particularly awkward economic issues over the next fifty years:  how global living standards can be maintained with lower greenhouse gas emissions; how poor people in countries that still have high population growth rates can be brought out of poverty; and how the impact of population ageing in higher income nations can be managed.

In this post I will discuss how the solution to these three issues can be linked. In a follow up I’ll use the example of New Zealand to show how policy settings may be making the third issue worse than it needs to be.

Before getting started, it is useful to discuss the three issues in a bit more detail.

The first issue concerns the way the world economy will function if global emissions of greenhouse gases significantly decline – although a low emission economy may be preferable to allowing the concentration of emissions to increase. The necessary decline in global emissions may require a decline in the goods and services produced – maybe not by as much as some fear due to technological change – and lower growth will mean the global economy will be allocating fewer resources than it currently anticipates.

The second issue is the way the incomes of one or two billion people who live in poverty (or who will live in poverty, as many of these people are not yet born) can be significantly increased. By 2050 a majority of these people will live in South Asia, the Middle East and Africa, the last countries with rapidly rising populations. Lifting these people out of poverty will require more material resources and greater energy use.

The third issue is the way the economies of western countries and East Asian countries such as China, Korea, and Japan deal with a process of population ageing that is likely to see a reduction in the population of several countries. For a discussion of these issues that I’ve found particularly informative see Macroeconomic implications of population ageing and selected policy responses or Some macroeconomic aspects of global population aging.

This ageing process influences not only what goods and services are demanded by these populations, but also their willingness and capacity to work as well as the type of assets they are willing to invest in as part of their general saving for retirement.

Put this way, these three issues are clearly linked. 

The first two issues are linked because the people in the poor countries located around the Indian Ocean want to develop, but this has always taken vast quantities of capital and energy, and in the past this has always meant coal, gas, or oil – and CO2 (see Ayres and Warr, 2009). Is it possible for half of the world’s population develop without massively increasing the amount of CO2 in the atmosphere?  The answer is ‘Maybe’ .

Technological breakthroughs in renewable energy and storage technologies mean the lifetime costs of renewable electricity are now competitive with gas-fired electricity and cheaper than coal (Geoffrey Heal (2018) Financial & Technological Prerequisites of the Energy Transition). This means poor countries could develop and increase their energy usage without a massive increase in carbon usage. Simultaneously, these technologies will help currently rich countries reduce their reliance on carbon emitting energy sources.

One of the difficulties with this solution is that renewable electricity has much higher up-front costs than carbon-based electricity, even though it has much lower ongoing costs. It is expensive to build renewable energy plants, an expense most developing countries will struggle to meet because they are capital poor. 

But this provides an opportunity for the older people in western and east Asian countries, whose ageing populations wish to accumulate capital for their retirements. Recycling this capital from ageing countries to young countries to enable green development is possibly the greatest development and climate-change opportunity of our time. 

However, there are two major constraints. 

The first is ensuring the recipient countries have the appropriate political and institutional structures that encourage investment without expropriation. This is no small task. No one wants to invest in an undeveloped country if they believe the country is too corrupt to operate properly, or is likely to take the proceeds of their investment. But change can occur, even if it is one country at a time. 

For example, Morocco, where I am currently visiting for a year, is actively encouraging investment in green energy plants financed by Germany and other countries, and has ambitious plans to build solar and wind energy plants to reduce reliance on gas. 

The second constraint is to ensure the savings of current and future generations of middle-aged people living in rich countries are productively invested. In a follow up post I will use the example of New Zealand to explain this issue in greater detail. As we shall see, a key issue is to design savings institutions for young cohorts that will enable their savings to be used in a manner that is consistent with the environmental situation they want to live in.