Towards the end of 2019, the European Union presented its plan to become a sustainable economy in the form of the EU Green Deal. The Green Deal outlines the strategy to become carbon neutral by 2050, whilst decoupling economic growth from resource use and ensuring that the transition to carbon neutrality is just. The European Union is not the first to reference this phenomenon of “decoupling”. Governments across the board, hesitant to sacrifice economic growth, are endorsing the idea that through decoupling they can have growth without simultaneously destroying the planet.
What is decoupling?
Decoupling is the process of separating economic growth (measured by Gross Domestic Product, or GDP) from its environmental impacts, mainly in the form of carbon emissions and resource use. Throughout history, economic growth has been tied to an intensification of resource use. So, is it possible to grow GDP without depleting resources or producing carbon emissions?
Herman Daly says no
The question of decoupling is actually an age-old economic debate around the fundamentals of neoclassical economic growth theory: the production function. This is the assumption that output (economic growth) is a function of population growth, the rate at which people save, technological progress, labour and capital. Unfortunately, an explicit recognition of natural resources is omitted from this function as they are assumed to be substitutable for manufactured capital or increased efficiency in the form of technological progress.
This is an important assumption in the world of decoupling. If it holds – if indeed natural resources are perfectly substitutable for manufactured capital – then growth can occur independent of resource use. Herman Daly, the “father of ecological economics”, argues that leaving resources out of the equation is analogous to baking a cake without the ingredients. The production function, he argues, is better described as a transformation function, as its job essentially is to “use energy to rearrange matter into its more useful form”.
As such, all processes are subject to the first and second laws of thermodynamics. The former being that matter cannot be created or destroyed, and the latter that in an isolated system, entropy always increases. Also known as the entropy law, this means that any production process converts low entropic inputs of valuable resources (with available energy) to high entropic outputs of unavailable energy. This is “time’s irreversible arrow in the physical world“. Technology may increase the efficiency of this process, but there is no escaping the ultimate scarcity faced by a finite planet. Unfortunately, absolute decoupling is not possible when considering the physical laws and finite nature of the planet.
But what about the evidence?
Despite catchy (and pretty confident) headlines claiming “Decoupling of global emissions and economic growth confirmed“, conflicting evidence suggests that perhaps “confirmed” was a poor choice of words. Empirical evidence typically shows a positive trend between GDP and fossil fuel emissions, and when the relationship weakens or diverges – particularly in the case that GDP grows faster than the growth in emissions – it is used as evidence of decoupling. It is important to note, however, that there are a number of factors that influence these trends and they cannot be taken at face value.
In fact, what appears to be the case may not be so much a decoupling as it is a shifting. In the UK, big claims were made about its decoupling efforts, only to find that the decoupling excluded non-territorial emissions. When the emissions of imports was included, the UK’s growth was not decoupled from emissions. In other words, developed countries are able to shift their emissions onto developing countries. Measuring consumption-based emissions instead of production-based emissions weakens the decoupling evidence, particularly for richer countries.
Additionally, evidence of decoupling must be analysed cautiously. The case of GDP growing faster than the growth in emissions may be the result of the increased financialisation of economies. The growing number of complicated financial products and derivatives contribute to a ballooning financial sector and pump up GDP without placing proportional pressure on natural resources.
Furthermore, evidence from the Covid-19 pandemic illustrates the strength of the relationship between economic growth and carbon emissions. A recent study found that the decrease in global emissions that has occurred throughout the pandemic was entirely due to the forced reductions in energy demand. (While the largest reduction in emissions was attributed to the transportation and aviation industries, it would be interesting to see these estimates had the study included the fast fashion industry!). It is difficult to think of a world in which we have low carbon emissions, but high energy demand to meet the growth targets of nations across the board. While there are opportunities for efficiency gains in the movement to green energy, this shift remains subject to the laws of thermodynamics and will require energy, space and natural resources to fuel green growth.
Maybe we are focussing on the wrong thing
Perhaps the question, “Is it possible to grow GDP without depleting resources or producing carbon emissions?” is the wrong question to be asking. GDP itself is a bit of a faulty measure of growth or wealth of an economy, especially when considering that it does not take into account the environment. The environmental harm from economic activities is not accounted for when calculating GDP and is seen as an externality. To illustrate: GDP will increase when coal is mined and sold in the market, but there is no accounting for the loss in value and productivity of the land from which the coal was mined or the fact that an essential finite resource is now depleted. It is the same as measuring your financial growth by single-mindedly focusing on your interest earnings, without considering that your initial deposit may be decreasing. Are you actually getting wealthier if this core financial stock is going down? Resultantly, any “growth” seen through the lens of GDP is misleading as to the actual long-term wealth of society.
The insistence of policymakers that it is indeed possible to decouple economic growth from resource use is perhaps an attempt to cater to changing societal demands whilst indulging large business with the “business as usual” rhetoric. Unfortunately, the ‘trickle down effect‘ just doesn’t cut it anymore. Why the rigid focus on growth? Well, as Herman Daly says, it’s “probably because growth is our substitute for sharing as a cure for poverty.”
Regardless, it is clear that that the narrative of decoupling is not clear cut. As much as we would like to believe that we can both have our cake and eat it, the reality is that sacrifice is needed. Growth requires resources. Yes, technology can reduce the load on resources, but this fact remains the same. We are subject to the law of entropy on a finite planet. As soon as we can admit this to ourselves, we can turn our attention to the sacrifice we have been trying to avoid: growth.
