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THE POSSIBILITY OF A GREEN ECONOMY German statesman, Otto von Bismarck, famously remarked that ‘politics is the art of the possible’. For a long time proposals for more sustainable development actions did not succeed in the political arena, as there was little confidence that these would be technically, economically and socially possible. Pointing out that unsustainable development is inherently unsustainable has not been enough. More and more studies are, however, now emerging showing that sustainable economic development is technically possible, economically affordable in the short term and superior in the long term and has significant social benefits. The most important of the recent publications is Towards a Green Economy, i published by the United Nations Environment Programme (UNEP) under the project leadership of Deutsche Bank investment banker, Pavan Sukhdev. % 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 Figure 1: Projected trends in annual GDP growth | Source: UNEP Green Economy report 0,0 2010 2015 2020 2025 2030 2035 2040 2045 2050 Green investment scenario Business-as-usual scenario The report compared, by means of a macroeconomic model, the impacts of investments in greening the economy with investments in a business-as-usual (BAU) scenario. The results were measured not only in terms of traditional GDP, but also in terms of impacts on employment, resource intensity, emissions, and ecological impact. Overall the goal of the green economy scenario was to address persistent poverty and achieve the reduction of greenhouse gas (GHG) emissions, so that the atmospheric concentration will remain under 450 parts per million by 2050, a level essential for having a reasonable likelihood of limiting global warming to the threshold of 2˚C. The report concluded that an investment of about 2% of global GDP (currently US$1,3 trillion) per annum into ten broad areas can lead to GDP being 15,7% higher in 2050 than it would be in the BAU scenario. The green investments path will lead to faster economic growth within as little as six years. This is calculated by modelling the impact of the increasing scarcity of energy and natural resources, but without taking into account the potential negative impacts of climate change or a major loss of ecosystems. While the investment requirement of 2% of GDP per annum is a big number, it should be seen relative to gross capital formation, which stood at 22% of GDP in 2009. A quarter (US$325 billion) of the green investments is allocated to natural capital sectors: forestry, agriculture, fresh water and fisheries. Some of the specific measures proposed include paying forest land holders to conserve forests and investing in reforestation – annual investments of about US$15 billion that could raise the value added by the forestry industry by more than 20% compared with BAU. Annual investment of US$108 billion in green agriculture to shift to the efficient use of water, extensive use of organic and natural soil nutrients, optimal tillage and integrated pest control would lead over time to enhanced soil quality and an increase in crop yields of 10% above what is possible with current investment strategies. The investments in natural capital have a particular benefit for the poor, who currently rely on subsistence farming or lack access to fresh water and enough food. It also leads to a 21,6% decrease in total water demand, a 21% increase in total forest land and a 47,9% decrease in the ecological footprint-to-biocapacity ratio by 2050, compared with BAU. Just over 15% of the targeted investments is allocated to buildings and industry, mostly for energy efficiency. Investments in transport require the second highest amount, US$194 billion per annum, and include increased energy efficiency, using clean fuels, and modal shifts towards public and non-motorised transport. The area requiring the greatest investment is energy supply – US$362 billion per annum. This will allow the penetration rate of renewables in power generation to increase to 45% by 2050. An important feature of the Green Economy report is the value of an integrated approach as opposed to single interventions in energy, for example. The investment in agriculture and forestry improves those systems’ ability to absorb carbon, and thus lowers net emissions. Similarly, increasing urban density not only reduces the total energy demand from mobility, but can also, according to other studies, raise labour productivity and lower the cost of infrastructural development. i i 01 | Nedbank Sustainability Outlook
Financing the transition An important question arising from a report such as this is: how will the transition be financed Fortunately not all of the US$1,3 trillion is made up of additional investments – some of it merely requires a rechanneling of existing investments and expenditure. A first important source could therefore be reforming harmful subsidies. Fossil fuels consumption subsidies globally are about US$557 billion per annum and production subsidies another US$100 billion. Some subsidies such as South Africa’s favourable electricity pricing agreements with the aluminium and zinc industries, recently valued at about R6,5 billion, i i i are tied up in long-term contracts and cannot be cancelled, but can possibly be renegotiated. About US$19,2 billion of the subsidies to the global fishing industry is contributing to the industry’s contraction, so this could be reoriented to strengthen fisheries management and financing a reduction of excess capacity. A second potential element of funding the greening of the economy is fiscal instruments such as various types of ecotaxes. This could include carbon taxes, road congestion charges, higher tariffs for waste, and royalties on mineral and petroleum extraction. Many of these taxes can be complemented by measures to decrease the impact on the poor or on private sector investments. Another potential source of public funding is fiscal stimuli similar to those put in place in response to the recent financial and economic crisis. Out of the estimated US$3,3 trillion in stimulus funds, almost 16%, or US$522 billion, was initially allocated to green investments. The Chinese government’s 12th five-year plan period, starting in 2011, indicates that they will increase investment in green sectors to US$468 billion compared to US$211 billion over the last five years, with a focus on waste recycling and reutilisation, clean technologies and renewable energy (RE). Certain countries’ ability to use fiscal stimulus is, however, constrained by large deficits and the potentially negative consequences of the first round of fiscal stimuli is not yet clear. But, what is clear is that some new thinking is required to enable the financing of a green economy. Especially in terms of ways that public funds can be used to leverage the pools of private capital. The funds in the financial services sector can play a major role in funding the transition to a green economy if certain institutional barriers can be overcome. Insurers could play a pioneering role given the strong case that a green economy lowers risks from social instability, crop failures, extreme weather events and health risks. A risk-mitigation case can also be built for commercial banks that often finance property and plant for between 20 and 30 years. Long-term investors, such as pension funds, some mutual funds and sovereign wealth funds, are also important potential sources of funding. The green investment scenario’s lower GDP growth over the first five years is cancelled by the subsequent higher growth, and the cumulative effect becomes positive after just more than 10 years. One can thus, for example, see the development of structured products that discount increased future cashflows to enable longer term investments. Figure 2: Global assets in 2009 | Source: TheCityUK, Fund Management 2010 45 40 35 30 25 20 15 10 5 0 28 Pension funds 22,9 Mutual funds Growing green 20,4 Insurance funds in trillions of US$ 3,8 2,5 1,7 1 SWFs The UNEP Towards a Green Economy report, above all, disproves the notion that there is a necessary tradeoff between environmental sustainability and economic progress. It makes it clear that green investments can reduce persistent poverty and, over the long term, lead to greater job creation, while at the same time giving future generations the opportunity to prosper. Creating a green economy is economically and technically possible and should, accordingly, be compatible with the political goals of ensuring a better life for all. MISTIMING THE TIPPING POINT Charles Prince, the former CE of Citigroup, infamously remarked in July 2007, ‘As long as the music is playing, you’ve got to get up and dance’. This was only four months before he was asked to step down in response to the US$11 billion writedowns that his company had to make after the credit party came to an end. After the fact it is easy to laugh at Prince’s statement, but the reality is that, despite several people warning of a housing or credit bubble, few had the discipline to sit out the dance. As John Maynard Keynes once quipped, ‘A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox Private equity way along with his fellows, so that no one can really blame him’. iv Hedge funds ETFs 39 Private wealth 02 | Nedbank Sustainability Outlook
Page 1: June 2011 Edition 4 Researched by U
Page 5 and 6: One of the proposals currently tout
Page 7: References i www.unep.org/greenecon

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