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This article, written by Ian Johnson, Secretary General of the Club of Rome, was published in the pamphlet on Rio+20 ^[2] by the Green Alliance and RSPB “Rio+20 – Where it should lead”

As the Rio +20 negotiators gather in June they will face a broad agenda. High on that agenda will be the green economy: the need to redirect our economies and economic growth towards sustainability. The wording of the negotiating texts will be vague enough to find political support almost anywhere and this will sit well with ministries of finance, most of which will not attend the meeting and will feel little or no real commitment to its outcome. Efforts to mitigate the legitimate concern of developing countries, that the green growth agenda represents a new form of conditionality, will broaden the definitions and scope even further.  A text will, no doubt, be drawn up with sufficient flexibility to allow for anything to pass for green growth. Everyone will leave happy and satisfied with the result: another tick in the box of environmental diplomacy.

Yet we face an enormous challenge: that of redirecting economic growth away from the current unsustainable models to new and daring approaches that are both human centric and explicitly recognise that the planet is finite. Rio +20 is another key opportunity to sort out the idiocies and contradictions of the economic growth model that we have pursued for the past half a century. But unless bold moves are made, that opportunity will be missed. A lick of green paint here and there, an increase in renewable energy targets and marginal efficiency improvements will do little to change our current economic paradigm.

The foundations for modern economics were built when the world was dramatically different from today. Current economic theory rests on assumptions that were made over 200 years ago and many are no longer valid today. Economics has lost its way. It may not yet be broken, but it needs a serious overhaul and the sooner the better. It is neither supporting real wealth creation in the 21^st century, nor is it facilitating the creation of the markets, policies and instruments that will guide us towards long-term sustainability. It is timely to re-think and change our ways. Where might we start?

Recasting growth and wealth

Economics is based upon a false system of accounting that assumes all growth is good.  Current measures regard the economic benefits of war, pollution, crime, rising oil prices, terrorism, natural calamities, water scarcity and deforestation as equivalent to activities that promote better nutrition, housing, education, healthcare, physical comforts, social harmony, recreation and enjoyment. National accounts need to be re-engineered to address this.

We could make a start by ceasing to recognise factors that most of us would deem undesirable, such as crime, social unrest and war, as positive economic contributions and, in turn, recognise the economic value of factors that are perceived as highly desirable, such as the protection of natural habitats. With immediate effect, the costs of the depletion of natural capital should feature in economic accounting. If governments announced that within five years all would have new and more accurate national wealth and national income accounts we would have made a start. It can be done and it should be done.

Valuing natural capital

The wanton destruction of the earth’s natural capital can be attributed in large measure to the fact that if often makes short term financial sense. When ecologists began working with economists an important alignment was formed between ecologists worried about the physical depletion of the planet’s natural resource base and economists worried that the destruction was being accounted for as a positive contribution to wealth and growth. The major challenge is to incorporate the real value of natural capital into the public policy and investment decisions being made by the public and private sector.

Robust work in this domain has for too long sat on the shelves of academia, rarely reaching the desks of environment ministers and almost never those of finance ministers. Yet the consequences of using incorrect economic values for natural resources can be considerable. The under-pricing of water, for example, is leading perhaps to the largest single global economic subsidy in the world today. And we may be entering a new era of uneconomic oil, where the costs of extraction are far greater than its benefits, once we fully cost the associated environmental and social impacts.

It is time to change. A commitment by governments to start valuing their natural capital correctly would be a good start. Why not create Natural Capital Boards that could independently assess the real value to society of natural resources and then ensure that such values are used for all investment and policy decisions. It may not always be possible to price water at its real resource cost but we can at least take investment decisions that include its real value. The United Kingdom has made a promising start in this regard by establishing a Natural Capital Committee; an innovation that needs to be carefully reviewed in Rio.

The economics of pollution

Progress has been made over the past decades on integrating the costs of pollution into calculations of wealth, creating a precedent that efforts to value natural capital can build on. The health related impacts of pollution are now well understood and awareness of the associated economic impacts has also grown. This is having a significant effect on the calculations of real wealth in some countries. Indoor and outdoor air pollution in China, for example, was estimated to have increased morbidity rates and reduced real GDP growth by more than three per cent. Policy measures to establish standards, punish those who pollute through the polluter pays principle, and adopt preventive measures are now commonplace and can be traced to the impact of a better understanding of the economic impacts of pollution. Progress has been mixed but overall is rather positive in this regard and offers some hope. By contrast, climate change has been described as the largest market failure in our history. Correcting it requires enlightened global public policy at a level and sophistication never before seen in the world. Economic instruments are the cornerstone of ensuring an efficient transformation to a no-carbon economy. Setting clear price signals for carbon has been absent from the agenda for some time: both a discouraging and ultimately foolish omission.

 Beyond environmental economics

Our environment is precious but its management must be balanced carefully with the needs and aspirations of people. In other words, we must manage our natural, social and human capital in a manner that provides the basis for sustained prosperity and prudent management of the planet’s resources. Instead, we are witnessing a triple divorce that has disconnected economy from the fundamental role it is intended to serve.

First is the rift discussed above between economy and ecology. The blind pursuit of more production and consumption without regard for the consequences, and unbridled growth that takes no account of associated ecological costs, is acting like a cancer, rapidly destroying the foundations on which human life depends.

Second is the widening rift between production and employment. The aim of raising labour productivity has given rise to an obsession with eliminating labour altogether from the production process, creating a world with ever growing production capacity, while severely limiting the number of people with the purchasing power necessary to avail of it. As a result, global unemployment remains the major social ill of our time. The inability of our current economic paradigm to provide remunerative work for the vast numbers coming onto the job market will result in an erosion of social capital, social dislocation and increased poverty on a scale we have never seen before.

Third, is the rift between finance and economy resulting in a divorce of financial markets from the real economy.  Markets have shifted out of the real economy and into illusory wealth creation with disastrous results for all but a handful of lucky speculators. Investment in the real economy to build the next generation of no-carbon infrastructure and provide much needed jobs has been curtailed. Yet $4 trillion a day of currency trades float around the world, making money for those involved but offering little real world impact. A Tobin style tax on such activities, which would simultaneously dampen speculation and create resources for investment in the real economy, should not be seen as so controversial that some countries have sidelined it. The revenue would provide a much needed boost to the development of new energy technologies. Financial markets must become the servant of economy and the economy must fulfil its original purpose: serving humanity and enabling the production of goods and services that create a more liveable and peaceful planet, and one that is in line with its natural carrying capacity.

A new economy must heal these rifts, re-engineering the fragmented economic system into a single, understandable and comprehensive whole that works for people and for the planet. We need to question the assumptions that underlie current economics and alter the system of metrics by which we assess progress, ensuring that valuations reflect the real contributions and the full direct, indirect and inter-temporal costs to human and environmental welfare. The irrational, unsustainable, inequitable and often uneconomic ways in which we deploy, utilise and consume resources must be eliminated. And the policies by which we establish the relative prices of various forms of capital, natural and social, must be changed. We need to review and revamp our concepts and models of growth to ensure they meet the needs of both present and future generations, with particular attention to the future of work and the maintenance of our indispensable and high value natural systems.

A new world

We face a new world. One with increasing demands from those who have not been given the chance to be part of mainstream economic life and have little wealth, real or illusory, to share. One where risk and uncertainty will prevail and where discontinuities and non-linear events will become commonplace, whether in our natural systems, through changes in our climate, or in our social systems, through the continuation of gross inequity. This new world will require us to understand that humans are an integral part of nature and to accept the limitations this will impose. And it is one in which we are all global citizens: what we do affects the world and what others do affects us. The subtle differences between public and private policies and ownership will erode.

To address these challenges, we need a new economy and new economics to guide us through the 21^st century. An economy that is fit for purpose. Tinkering at the margin will not move us forward in the direction or at the pace needed. And as we reflect upon the key elements of a new economy, we will discover the need for new institutions to support us: markets that provide the real goods and services that people need and can reflect the full value to humanity of the natural capital we use and protect; economic activities that find meaningful, remunerative employment for all; enlightened public policy that embeds within the public good nature of much of our actions; and a society that sets priority on meeting needs, not through avarice, greed and speculation, but through enlightened self interest and progressive action. That is the economy of the future.

Those gathered in Rio to celebrate twenty years of change must reflect upon the seriousness of the challenges before them. Indeed, if challenges are opportunities, then never before have the opportunities been so great, for never before has humanity faced challenges comparable in magnitude and complexity to those that have emerged in recent times. A major overhaul to current economic thinking and a willingness to move to a new generation of enlightened institutions should be the agenda for Rio.

Sadly, it may not turn out that way. As governments haggle and wordsmith over well worn, meaningless texts, the opportunity will be lost once more. A new document will be produced and heralded, but largely ignored.  We can do better. We could seize the century. Those at Rio could announce the start of a new progressive dialogue on a new global economy and they could agree practical changes in that direction. It would be a start.

This article, written by Ian Johnson, Secretary General of the Club of Rome, was published in the pamphlet on Rio+20 by the Green Alliance and RSPB “Rio+20 – Where it should lead”

See below for further information:

“Rio+20 – Where it should lead ^[2]“

The Rio+20 Earth Summit, coming during a prolonged global economic downturn, was a rare opportunity to reconnect with our hopes for the world. It was a chance to think beyond the acute phase of the financial crisis about how we want to embed sustainable development and stability into the decision making of governments, businesses, and civil society.

As delegates headed to this historic event, RSPB and Green Alliance have asked leaders from politics, business, NGOs, economics, science and the youth movement, including Club of Rome Secretary General Ian Johnson and Deputy Prime Minister Nick Clegg who represented the UK, to give their views.

Although progress has been made since 1992, sustainable development has not gained the traction those at the original summit would have hoped. The authors give opinions about why this is, the lessons we have learned and where we go next. Taken together they make a powerful case for sustainable development being at the centre of any new settlement that emerges from the current economic crisis.

Read the pamphlet “Rio+20 – Where it should lead” here ^[2]