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I Climate Protection as an Economic Modernization Strategy

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1 Introduction

The central thesis of this study is that climate protection and economic modernization can be integrated at the political level. This however, is not possible without strong political will to ensure effective planning and implementation. The coherent integration of climate protection and economic modernization also requires the support of autonomous market forces, which in and of themselves, may require some form of regulation. Despite the scientific uncertainty, human-induced climate change is one of the most serious global environmental problems.

Every year, humans are responsible for the release of approximately 24 billion tons of carbon dioxide (CO2) into the earth’s atmosphere. Such emissions are the result of the combustion of coal, oil and gas. In addition, about 4 to 6 billion tons of CO2/a are released from the burning of tropical rainforests. These emissions undermine the ability of natural „sinks", such as soils, forests and oceans – to bind and absorb carbon dioxide. Climate research estimates the capacity of these sinks to absorb approximately 13 billion tons CO2/a. Nevertheless, there is a huge gap between the amount which nature is able to process and the amount which humans expect to emit. The consequence is that the amount of carbon dioxide that actually remains in the atmosphere – measured as CO2 concentration in the air – has been increasing continuously since the beginning of industrialization.

In principle, the presence of long-life carbon dioxide in the atmosphere presents no problem at all. Together with other trace gases such as methane (CH4), nitrogen oxide (N2O) and ozone (O3), it ensures the natural greenhouse effect, without which life on earth would not be possible. Without the greenhouse effect, the average temperature of the blue planet would not be 15 degrees Celsius above zero but rather 18 degrees Celsius below. The problem pertains to the increasing concentrations of naturally occurring trace gases and new synthetic substances, (for example, hydrochlorofluorocarbons and halogens). This additional man-made greenhouse effect alters the earth’s radiation balance, with the result that as a greater part of the sun’s radiation is retained in the greenhouse as heat, temperatures will therefore rise.

The Intergovernmental Panel on Climate Change (IPCC), the body of scientific experts advising the international climate negotiations, forecasts an increase in the global mean temperature of 2.5 degrees Celsius by 2100, if current emission trends continue (IPCC 1996). Temperature fluctuations may be even more drastic on a regional scale. In the past 10,000 years the earth has never experienced such a rapid pace of global warming. The consequences of climate change could be wide-ranging. Climatologists warn of seal level rises, negative effects on agriculture and forestry, biodiversity and freshwater availability, and increased migration, as well as territorial conflicts over dwindling natural resources.

The Framework Convention on Climate Change, which was presented for signing at the UN Conference on the Environment and Development (UNCED) in Rio de Janeiro, came into effect in 1994 and has since been ratified by 166 countries. It is hoped that the Kyoto protocol will contain strong reduction targets, around which the international community will pledge to protect the earth’s atmosphere.

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There are several important principles of international environmental law that must underlie such a pledge. One of the most important is the principle of the „common but differentiated responsibilities" of all parties to the Convention. This rather general wording conceals the fact that industrialized countries have been the major emitters of CO2 and therefore the primary contributors to the problem of climate change. By contrast, the contribution of developing countries to the problem has been negligible to date, although all forecasts indicate that their emission levels will increase dramatically over the new few years. Therefore, it is clear that the industrialized nations must assume a leadership role in combating the climate problem. But, they must also assist developing countries to avoid development processes that are energy intensive and to this end, they must provide the necessary financial and technological resources.

It is self-evident that a global problem such as the man-made greenhouse effect can only be effectively combated if all those involved work together. If, only some individual states act to protect the climate whilst others take no action whatsoever, the problem will not be abated.

There is nevertheless, a widespread fear that those countries who actively pursue strong climate protection measures will suffer certain disadvantages, such as loss of economic competitiveness, as compared to those states who take no action at all. After all, effective climate protection will require profound structural change in the key economic sectors of energy, transport, industry and agriculture. And changes in these sectors will certainly affect many vested interests.

Yet it is also true that progress can not be made in the area of climate protection unless states show a greater degree of leadership and exercise a greater degree of commitment by acting consistently in their own respective spheres of influence. However, if each nation ties its own activities to the existence of an international agreement, the process will surely stagnate, since states will always base their actions on the lowest common denominator. It is our conviction that climate policy is an important cornerstone of a forward-looking, dynamic economic policy. Such a progressive economic policy could: encourage and reward boldness in competition; contribute to a broad social consensus; stimulate considerable economic demand; and promote widespread technological innovation.

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2 The Economic Benefits

The political and social climate in Europe has changed considerably in the five years since the Earth Summit. The primary concerns are now job loss, economic competitiveness and social cohesion. By contrast, arguments in favour of environmental protection and in support of the special needs of developing countries are regarded with considerably less importance. For a long time, environmentalists reacted to the dominant forces in the forms of litigation, lobbying efforts and persuasive arguments that challenged unsustainable consumption and production patterns. They also highlighted the importance of protecting nature for its own sake, as well as the importance of acting in the interests of future generations, not to mention, the need to demonstrate solidarity with the people of the South who are particularly affected by global environmental crises.

It is critical that environment and climate policy continues to confront both the private and public sectors of society with these moral imperatives. Despite the importance of these arguments, they alone will not suffice to promote the cause of climate protection. The basis must be broader, otherwise it will not be possible to forge the new alliances and partnerships that are absolutely critical. In many cases, alliances will in fact be forged between environmentalists and hitherto unlikely partners. In effect, these new allies are: the entrepreneurs in the environmental protection and resource efficiency sectors; the individuals whose jobs depend on ecological modernization; the engineers who are working to improve energy efficiency capacities; the consumers who make their choices on the basis of quality and responsibility; and the

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younger generation of academics who have committed themselves to the cause of ecology and who perceive their professional path and social commitment as inextricably linked.

Quite often in the economic policy debate, interested parties inappropriately exaggerate the energy costs, in particular in the context of ecological tax reform. The fact is that average energy costs for the whole of the economy account for around 3 to 4 per cent of production costs. In the area of energy-intensive industries, however, there are significant deviations from this figure. The share of energy costs in total production costs is in some cases more than 10 per cent.

There are two critical determinants for the economic competitiveness of a country which must be considered. They are the ability to innovate and the level of labour costs, in particular, non-wage labour costs. These two factors are particularly problematic in Germany, where high labour taxes and little technological innovation characterize the current situation. Responses to both these factors can be readily integrated with strong climate protection measures. In particular, the current political consensus in support of reducing labour costs, can be mobilized in support of the cause of ecological tax reform. The revenue generated from energy and environmental taxes would replace the revenue that would be lost from the repeal of labour taxes. This income would then be used to provide the social welfare system with the resources needed to continue to provide essential services. (Kohlhaas 1997, see also Chapter III/3.2).

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3 Cost Savings

There is considerable technical potential for energy savings in most European countries. For the federal states of the (former) Federal Republic of Germany, it is estimated that up to 45% of energy consumption and carbon dioxide emissions could be reduced if the best available technology were used in private households, industry, trade and transport (Enquête-Kommission 1995). Such technology is in most cases readily available. For example, considerable savings are possible in the construction industry, simply on the basis of greater use of proper heat insulation (Doggart 1997).

Investment in energy saving can yield considerable returns in a relatively short time. The IPCC estimates the potential return on energy-saving at 10 to 30% of total energy consumption in industrialized countries (IPCC 1996). In the EU, around 14% of CO2 emissions could be reduced at a profit by the year 2005 (Blok 1997). However, one caveat must be made in the argument for cost-saving through energy efficiency. In many areas of industry and society, the share of energy costs in total operating and household costs is so low that the energy-saving potential is not fully realized, although there is indeed scope for such savings to be made profitably.

The importance attached to energy costs by the key economic units – producers and consumers – is quite simply too low. It is therefore necessary to create markets for energy saving by ensuring the necessary enabling economic environment. Above all, it is essential to direct investment capital owned by third parties (banks, investment funds, contracting companies) into the energy-saving sector and to help transform energy-supplying companies into energy-service companies, which can assist their customers in the efficient use of energy. Their range of products could range from technical advisory services and financial services to assisting customers in investing in energy saving initiatives, as well as the maintenance of buildings, appliances and machinery. Therefore, the actual sale of energy thus becomes only one of the energy-service companies many areas of commercial activity.

However, the political enabling environment must also ensure that the promotion of energy conservation is economically lucrative for energy-service companies. As long as a company’s success depends on the volume of energy sold, it will be counterproductive for it to promote energy conservation. Creative public relations work on the part of energy-service companies, consumers associations and initia-

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tives by the energy regulatory bodies, is needed to highlight the positive dimensions of energy conservation. The use of inspirational language is also critically important in this regard.

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4 Stimulation of Technological Innovation

Economic arguments alone are insufficient to effectively promote a strong climate protection strategy. The potential for technological and social innovation must be equally stressed, otherwise the climate debate becomes mired in dry facts and figures. Given their positive appeal to young people, the important role of energy efficiency and solar technologies should be duly stressed, especially in terms of their potential for providing much-needed „pioneering technologies" that are forward-looking, viable, and appealing.

There are also many good economic arguments to be put forward in this connection. Empirical studies show quite clearly that energy efficiency and commercial success correlate positively in the long run. Energy-efficient economies are successful economies (von Weizsäcker/Lovins/Lovins 1995). There are many valid reasons to assume that this correlation will become even stronger in the future, especially if an international agreement is reached on the global reduction of CO2 emissions.

From the point of view of technology policy therefore, there are three principal reasons to be emphasized in support of strong climate protection policy:

  • Energy efficiency and solar technologies have a wide appeal to the public, especially young people (Allensbach 1992);
  • energy efficiency and solar technologies are genuine problem-solving technologies and not problem-shifting technologies like the „end-of-the-pipe" environmental technologies of the past; and
  • adoption of a technological path based on climate protection in one’s own country is the best way to enhance economic competitiveness in preparation for the global markets of the future („first mover advantages"). Denmark provides an excellent example in this regard. Today it possesses two-thirds of the world market for wind energy plants because Denmark had been systematically promoting this form of renewable energy for over 15 years (Danish Windturbine Manufacturers’ Association 1997).

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5 Job-Creation

Various studies have shown that measures taken to reduce CO2 can lead to the creation of new and long-term jobs (Schlegelmilch/Ostertag 1996). The job-creation effect on the economy as a whole is clearly positive. This of course depends on the measures adopted. And it is also important to note that such positive effects should not be overstated.

As a rule-of-thumb it can be stated for the Federal Republic of Germany that one petajoule of energy saved creates 100 new jobs per year. Highly optimistic estimates suggest that in Germany alone 1.5 million new jobs can be created if CO2 emissions are reduced by 25% by 2005, especially if a revenue-neutral CO2 tax is implemented (Meyer 1997). In a study commissioned by Greenpeace entitled „Ökosteuer – Sackgasse oder Königsweg?" („Ecotax – A Dead-end or the Highway to the Future?"), the Deutsche Institut für Wirtschaftsforschung (DIW 1994) also revealed a significantly positive job-creation effect as a result of a strong climate policy. Up to 800,000 new jobs were calculated for the year 2005. Studies commissioned by the Enquête-Kommission „Schutz der Erdatmosphäre" („Protecting the Earth’s Atmosphere") show more moderate, but equally positive job-creation effects (60,000 to 90,000 new, long-term jobs by 2020) (FhG ISI/DIW 1994). With just a few exceptions (e.g. Hildebrand 1996), practically all of the scenarios produce positive employment effects as a consequence of an effective climate protection policy.

However, there are intertemporal, interregional and intersectoral effects. One of the political concerns is, for example, that the new jobs in

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the so-called „winners’ sector" will only be created at a later stage, whereas the old jobs in the „losers’ sector" will disappear immediately or in the near future. The first sector category includes, for example, the construction trade, plant engineering and construction, the ceramic, metal and wood-processing industry, as well as the service sector. The losers include mining, refineries and various energy-intensive industries such as basic-substance chemistry. But there is an aggravating factor and that is the fact that the losers are frequently already in a process of rapid structural change, they are favored politically to a high degree (in the form of direct and indirect subsidies) and are often locally concentrated.

The political challenge is to support the ecologically-sound industries (i.e. through energy taxes combined with clear and stringent environmental standards) to enable them to create new jobs. But it is equally important that the energy-intensive industries are provided with time to adapt (i.e. in the form of temporary exemption from energy taxes). Irrespective of such transitional arrangements, the fact must be faced, that industries who cannot conform to the new norms of climate protection policy will not have a future, and industries with no future cannot provide jobs in the future. Above all, subsidies which are both environmentally harmful and questionable from the point of view of structural policy must be scrutinized at the political level. The removal of such perverse subsidies will not be pain-free for some sectors, however the removal of these subsidies is essential for several reasons, including long-term competitiveness.

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6 Benefits at the Regional Level

The oil consumed in Germany is almost wholly imported. Whereas three-quarters of the natural gas is imported, principally from Western Europe, Russia, North Africa and the Middle East. Such a high level of dependence on the import of fossil fuels is problematic indeed and should be gradually reduced.

From a macroeconomic perspective, the improved heat insulation of domestic homes, the use of energy efficient appliances, machines and vehicles, combined with the increased use of renewable energy sources simply means that the reliance on energy imports will be replaced with the domestic stimulation of engineering knowledge, industrial output, skilled labor and services within the domestic sector. The job-creating effect – especially in the heat insulation industry, will be primarily at the local level and will in turn, strengthen the regional economy. The overall result is that a large part of the real net output will remain in the regional economy, thereby decreasing domestic vulnerability to external market shocks and price fluctuations.

A regionally oriented strategy of creating value added is by no means the first step towards economic isolation, as the advocates of economic globalisation so often intimate. Rather, it is economic and environmental common sense. To convey it in the simple words of John Maynard Keynes: „Let us produce goods and services at home wherever possible."

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7 Avoidance of the Future Costs of Climate Change

The world’s leading scientists who have been advising the international climate negotiations, warn that an increase in the global mean temperature of 2.5 degrees Celsius can be expected if current emission trends continue. The resulting consequences for agriculture, forestry, coastal townships, the water supply, biodiversity, migration, and extreme weather patterns will differ from region to region, but their effects will be significant overall.

Existing attempts to quantify potential losses have revealed such a wide disparity that they provide a rather limited basis for political decision making. In this regard, it is essential that sound information be made available to counter dubious economic arguments. Reliance by economists on such conventional analytical tools

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as discounting (which disregards future interests) has led them to systematically exaggerate the present costs of climate protection (Loske 1996).

The response of the insurance industry has been far more appropriate. In particular, many of the world’s leading re-insurance firms have long since called for strong climate protection policy fearing the increasing claims that will result from climate change-induced natural disasters (Berz 1996). Rising risk premiums will only be a matter of time. Even the real estate sector is beginning to realize that property located in coastal regions faced with a risk of flooding or hurricanes will lose considerable value in the face of extreme weather patterns.

© Friedrich Ebert Stiftung | technical support | net edition fes-library | Februar 2000

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