The dream of a sustainable economy

In a perspective of sustainability the correct answer is to increase green taxes and a ceiling on the material consumption to secure that the distribution of environmental impacts is reasonably fair.

In March 2010 more than 300 social scientists were gathered in Barcelona to discuss if sustainable development and economic growth can be reconciled. From the very beginning of the conference it was set high on the agenda, whether economic growth, as we know it today, can continue unchanged in the future? This question was rather quickly answered by a clear and unequivocal 'no'.  The explanation is quite simple, because it is undisputed that there is a strong correlation between economic growth and a continued environmental degradation in the form of resource depletion and increased pollution, which in physical terms cannot go on. Hence, the actual development is unsustainable.

The question is, therefore, not whether production as we know it today can continue to grow, because that is not possible.  The relevant question is rather whether the current level of production can be maintained in.  Also that question has to be answered negatively, because even an unchanged level of production reduces every year the physically available quantities of resources, especially  fossil fuels and increases simultaneously the concentration of pollution.  

This finding exposes undeniably the next question. How can it be, that despite these undeniable facts actual economic policy undertaken by all governments is based on the premises that economic growth can continue and should even go on at a higher growth as though natural resources were unlimited and accumulation of pollution does not have a negative impact? 

This political ignorance and short-sightedness seem to arise from a number of factors which together apparently are so strong that they have hitherto been able to short-circuit the sustainability debate and then to paralyze the political ability to act effectively both nationally and internationally:
 1.  population growth
 2.  productivity increases
 3.  greed 

Let us take the arguments one by one.

1.  Earth's population grows by just above one percent a year, equivalent to approximately 80 millions more people each year. Assuming unchanged distribution and living standards this increase in population would require a growth in production of an equivalent one percent.  Of course,  a decrease in the rich countries' population would dampen the speed with which resources are exhausted and create environment space for an improvement in the poor countries’ living standard.

2.  Productivity increases are both a curse and a potential.  Curse is it, because increased productivity within the existing market economic system makes people unemployed, unless there is a corresponding increase in production. Hence, productivity increases are within the market economy the mother of growth.  Historically, these productivity gains have been around  2 percent  per year.  This has the implication that as soon as the annual growth fell below 2 percent,  unemployment began to rise - and the cry for higher growth began to sound in the corridors of power - not least from finance ministers.  The cry becomes irresistible, if growth just one year become negative. This was experienced in 2009 as unemployment jumped in the air,  and no one dared to challenge the requirement for ‘growth’.

3.  Human greed seems to know no bounds.  If something is good, then more by intuition is better.  'Enough' seems never to be 'enough' on the individual level.  When saturation of all material needs cannot be taken for granted, and then it feels better and safer to gather for a rainy day. Especially when you see that other people have a higher consumption than yourself; why should I renounce on my consumption?  Inequality in income, wealth and consumption, both nationally and internationally, is apparently the hotbed of insatiable consumption.

Green taxes
Could these unsustainable outcomes of the market economic system be changed, in such a way that the negative environmental impact of the above three factors were reduced, perhaps even reversed to a positive effect?

In countries with little or no welfare state a great bunch of children is necessary old age insurance.  But barely had the number of children in western welfare states started to shrink until growth-economists shouted the alarm, for the declining labour force (i.e., fewer hands in production) would make it impossible to finance the changing demographics - more older people outside the workforce - without increasing taxes, because increased welfare has to be financed.  Hence, many growth-economists recommend a reduced welfare state to prevent higher taxes – they see the public sector as a fetter on the growth process. In a perspective of sustainability the correct answer to the demographic challenge is to increase green taxes, which simultaneously would reduce the environmental pressures. Green taxes could even to larger extent finance the welfare state and at the same time make private consumption less resource intensive.  The only unfortunate consequence of imposing green taxes is the negative distributional balance, because the heaviest burden is carried on the weakest shoulders.

Investment in green productivity 
Similarly, productivity gains could be a positive effect by targeting green technologies.  Not least, the research-efficiency improvements could help reduce resource consumption, rather than merely reducing the use of labour.  Such a development could be ensured through a comprehensive 'green' planning in research and innovations and by introduction of new, green technology in the production process. Productivity increases should primarily result in a reduced environmental load per  produced product unit.  This reduces the usually political reaction that increases of productivity should be matched by a corresponding growth in production in order to avoid unemployment. 

Finally it could be acknowledged, that a possible rise in unemployment could be mitigated through a reduction in average working hours, which in itself would provide a better distribution of the working load and thereby increase individual welfare.
A ceiling on the material consumption 

When is the amount of material consumption really 'enough'?  At the individual level personal consumption will probably never be experienced as 'enough'.  The advertising industry in association with rising money incomes will make that very unlikely. In a market economy with a free choice of individual consumption, it is government's responsibility to determine the size of total consumption.  That has always been the case.  Previously, it was the consideration of the balance of payments or unemployment that was the arguments behind the political screw – up or down - on private consumption. 

For instance, during the war governments used rationing coupons to ensure a fairer distribution of the limited supply of goods.  Today (or in the nearer future) it could be the environmentally damaging consumption that had to be rationed. Such a policy could be practiced by assigning to each household a (electronic) rationing card that allowed a limited, but equally distributed consumption per person.  One could imagine that sometime in the future at European level such a 'rationing card' was awarded to all citizens. Each rationing card should give the permission of a certain amount of consumption. When these rations were added together, the limitation would ensure that a specific sustainable cap on environmental depletions was not exceeded.

In  some ways the system would have similarities to VAT, where all consumption is registered and a certain value added tax is paid. The electronic rationing card would only add a surcharge on consumption, if the household exceeds the environmentally defined limit. In practice it would function as a kind of marginal consumer tax on excessive and unsustainable consumption.  Of course, there could be an unlimited consumption on consumption with very little environmental impact e.g.  education, organic food, renewable energy and the like, but these exemptions could easily by administratively burdensome.

To ensure a certain element of individuality in private consumption the allocated rations could be made tradable. People with low income could sell their excess rations and hereby obtain a compensation on their below average environmental impact. On the other hand people who want to expand their consumption beyond the initial allocation have to buy extra rations, which make the marginal consumption more expensive. This trading system is already known from the CO2-cap and the selling and buying of these CO2-quotes. Alternatively, one should be allowed to put an unused ration into a 'bank', for future consumption.

From a planning point of view this aggregate sum of allocated consumption will secure that the overall goal with regard to the environmental pressures can be realised in a market-conform fashion. The ceiling can be decided on, say, every third year, which will make it possible to secure that Europe can stay firmly on a sustainable path. On the other hand the total of private consumption does not have to fall; it all depends on the environmental impact. Higher green taxes in combination with improved green technologies may change the composition of private consumption to such an extend that the environmental pressures is reduced sufficient to be on the sustainable track. In that case the aggregate ceiling on private consumption does not have to be reduced any further. One could say that the rationing cards are a kind of guarantee that the overall consumption does not run riot and to secure that the distribution of environmental impacts is reasonably fair.

It is quite often claimed that a ceiling on total production could be a severe blow to the functioning of a private market system. It is even sometimes argued that a capitalistic production system requires continued growth to be efficient. Of course, it is easier to create an increased profit within a growing system; but there seems not to be any practical (not to say logical) reason to make these claims. At the firm level business are competing with each other independently of the development of the overall size of the market. Moreover, one would expect the competition to be even fiercer, if the overall market is shrinking. In that case the competitive pressure on the individual firms will be even tougher than in a growing market. A stagnant market seems to create conditions for the most efficient firms to survive and even expand, which actually will strengthen the capitalist system, cardiac muscle. 

Making the economy sustainable 
Let me finally summarize how the 'dream of a sustainable economy' could be realized.  Firstly, higher green taxes to pay for the enlarged welfare state are often mentioned. Investment planning might target new technologies towards increased productivity that create resource saving. Thirdly, private consumption could be restricted over the next 30-40 years, partly through green taxes and partly by imposing an overall consumption ceiling that ensures a balanced compliance with environmental objectives within the EU. 
This is a combined recipe for how a market economy may be directed towards a sustainable development. This could still happen in a calm pace, where industry dynamics are not compromised, unemployment prevented and inequalities not increased. But is requires that the political narrow-mindedness is substituted by political realism and boldness.

Jesper Jespersen

Jesper Jespersen is professor of economics at Roskilde University.(
Member of the EMU committee appointed by the Council for European policy,2000, He has contributed at several Parliamentary hearings on EMU respectively in Januar 2009 and Februar 2012. Together with Dr. Bruno Amoroso published L’Europa oltre l’Euro, by RX-CastelVecchi, Roma, Settembre 2012,