Environmental Policies and Economic Performance

NAECShardul Agrawala, OECD Environment Directorate and Tomasz Koźluk, OECD Economics Department

A dirty, rundown environment has quantifiable costs for the economy and the well-being of societies. For example, the welfare costs of air pollution from road transport alone are estimated to amount to around 1.7 trillion USD in OECD countries, 1.4 trillion USD in China and 0.5 trillion in India. Without adequate policy action, costs will continue to increase, and can have tangible effects on economic growth, for instance via reduced labour productivity. Similarly, the prospects for long-term growth are under stress – for example, climate change is projected to decrease global GDP by 1 to 3.3 % by 2060.

These are of course, but a microcosm of all the environmental challenges we face. Yet, action to address environmental pressures often proceeds too slowly. Policymakers have long feared that stringent environmental policies may constrain competitiveness and growth. For example, a number of studies attributed a significant part of the 1970s productivity slowdown in the United States to the tightening of environmental policies. Such fears also underlie the so-called Pollution Haven Hypothesis, which sees a flight of industrial activity and pollution leakage to countries with laxer environmental standards. Moreover, arguments against tightening of environmental policies have re-emerged in the context of an increasingly globalised world with fragmented production and mobile capital.

At the same time, there are solid indications that the future is not necessarily a race to the bottom and that environmental protection and growth are not an “either-or” dilemma. A counter argument is that more stringent environmental policies will encourage changes in behaviour by firms and households, reduce inefficiencies, and encourage the development and adoption of new technologies that may be good for the environment, and for the economy as well. After all, growth did not collapse following the implementation of numerous environmental policies over the years. Moreover, when scrutinised, the claims of negative effects of environmental policies have found little backup in the data.

Empirical evidence from the OECD clarifies this. Based on analysis of two decades of data on the stringency of a subset of environmental policies and economic outcomes in 24 OECD countries, it shows that productivity has generally not been negatively affected by the introduction of more stringent environmental policies. Yes, there have been some temporary adjustments, but these tend to disappear within a couple of years.

To be clear, there will be winners and losers  The most productive and technologically advanced firms (and industries) tend to actually gain from tighter environmental policies, an outcome likely reflecting their superior ability to grasp the new opportunities by innovating and improving their products, but also potentially by relocating part of their production abroad. In contrast, the least productive firms – which generally use their resources less efficiently – may see a temporary fall in their productivity growth, possibly as they require more investments to cope with the more stringent environmental requirements. Some of the least productive firms may cease to operate. Still, if resources are swiftly reallocated to young and expanding firms, the overall impacts will not necessarily be negative and can be positive, both for the economy and the environment, particularly if policies are in place to enable entry and exit of firms into and out of markets and to support employment.

Follow-up work on international trade and environmental policies adds another perspective to this picture. Taking a global value chain perspective on the Pollution Haven Hypothesis, OECD work finds some confirmation of the hypothesis itself. However, there is no overall loss of competitiveness of economies attributable to environmental policies. More stringent environmental policies do have significant effects on comparative advantages – countries with more stringent policies tend to lose competitive edge in more pollution-intensive activities. However, this loss is compensated by a gain in less pollution-intensive activities – hence an overall shift in specialisation patterns. Still, while significant, the effects are very small, for instance with respect to those of trade liberalisation. They are in line with other recent evidence on competitiveness effects and on the potential of affecting countries’ specialisation in so-called environmental products – a rapidly expanding global market. Increased trade in such products can spur global improvements in environmental quality. In fact, when combined with stringent, well-designed environmental policies, open trade can form a vital channel for reducing pollution and spurring growth both globally and domestically.

Economic dynamism and flexibility are crucial to ensure such positive outcomes, and the design of environmental policies can do a lot to contribute. The keywords are flexibility and competition: market-based instruments, such as green taxes, that leave the choice to the firm as to which clean technology to use, tend to have more robust positive effects on productivity. On the contrary, while rules to spur markets are important, policies that lead to excessive and unnecessary “green tape” or provide advantages to incumbents, such as laxer norms or subsidies that prop up dirty and inefficient firms, can prevent both environmental and economic progress. One of the crucial findings of recent work is that in general there is no correlation between the stringency of environmental policies in OECD countries and the regulatory burdens they impose. In other words, more stringent environmental policies can be designed while limiting the burdens such policies may impose.

Finally, countries can also do much more to align policies across many different areas, such as taxation, investment, land-use or sectoral policies, to be more consistent with environmental goals . Obviously, this is not easy, and more work linking the environment, environmental policies and economic outcomes is on the way.

Useful links

Pollution havens: Just a delusion? Christina Timiliotis, and Tomasz Kozluk, OECD Economics Department, on the OECD Ecoscope blog

Environment and trade: Do stricter environmental policies hurt export competitiveness? (Data, articles, interactive presentations)

Koźluk, T. and C. Timiliotis (2016), “Do Environmental Policies Affect Global Value Chains? A New Perspective on the Pollution Haven Hypothesis”, OECD Economics Department Working Paper N°1282

Sauvage, J. (2014), “The stringency of environmental regulations and trade in environmental goods”, OECD Trade and Environment Working Papers 2014/3

Smarter, greener, healthier and more productive: The new old

A more cheerful outlook
A more cheerful outlook

Today’s post is by Tobias Vogt and Fanny Kluge from the Laboratory of Survival and Longevity at the Max Planck Institute for Demographic Research, Rostock, Germany

Ageing populations are a threat to the sustainability of modern societies. This is a dominant line of thought in the political, public and scientific discussion that warns us about the consequences of demographic change. It refers to the concern that the needs of an increasing share of older people have to be met by a decreasing number of younger members of our societies. These warnings must be taken seriously if current conditions prevail. The changes in the age structure will bring major challenges to public finances and the demand for an adjustment of current social policies, in particular, in countries with large public welfare programs for the elderly. Yet, the demographic future may not look as bleak as we generally think. The greying of a population may even embrace certain advantages simply because of the natural transformation of the age structure. This thought was the starting point for a, so far rare, project that focused on the potentials and chances of demographic change. In this case study (downloadable from PLoS One) we focused on Germany as the second oldest country worldwide in terms of its population’s median age of 44.3 years and identified five different areas that may benefit if observed trends of the past continue into the future.

To understand the anticipated challenges as well as the opportunities of demographic change one has to keep in mind that they only result from a change in the age structure of a population. If we depict the current age composition in Germany or in most industrialized countries, it looks rather more like a tree than the usual population pyramid. Yet, this illustration will also only be a snapshot as the over-represented older age groups will become smaller and eventually disappear in the coming decades. Despite ongoing low fertility and a general population decline, this will result in a more stable age structure after 2040 than in the decades when the large baby boom cohorts reach retirement age. In the last decades the share of Germans above age 65 rose by 2 to 3 percentage points. Between 2020 and 2040 this share of Germans will increase by 10 percentage points from 23% to 33%. In the following two decades it will remain stable at this high level and go up slightly.

One major concern of this population structure is that fewer and older individuals are expected to be less productive. This assumption ignores the fact that certain productivity determinants among older individuals like education and health will not remain constant but change over time.

During the last decades participation rates in higher education have increased from cohort to cohort which is reflected in the share of individuals in the labor force with tertiary education. In 2008, every fifth individual in the age groups 25-29 and over age 50 attained tertiary education. These shares will rise considerably. After 2050, every third individual in the respective age groups will have a tertiary education. If current labor force participation rates among these groups remain as they are, this would mean that 46% of the German labor force will hold a higher education degree compared to 28% today.

These changes in educational levels are accompanied by an improvement in individual health. Over the last 30 years, the age at which Germans report worsening subjective health has become later and later. If we forecast this trend into the future we find that not only average life expectancy as such will increase but also the number of years we live in good health. Already today Germans can expect to spend up to 60% of their life in good health. By 2050, this share will increase to 80%, which suggests that most of the years of gained life expectancy may not necessarily be years of bad health. Of course, this scenario is based on past developments and neglects potential future health threats like the consequences of increasing obesity levels and rising cognitive impairments at older ages. Nevertheless, fears of productivity losses may be partially absorbed by the improvements in individual health and education.

A smaller and older population may not only be more productive than expected but even cause less environmental pollution. When we observe individual consumption patterns and their ecological consequences, we find that over the life course younger individuals travel and consume more and, thus, cause higher CO2 emissions than individuals at retirement age. This implies that if today’s consumption behavior prevails, older and smaller populations may generate substantial CO2 reductions. We found that the change in population size and consumption preferences led to a 30% increase in emissions between 1950 and 2020. In the following decades, emissions could decline even to pre-1950s levels.

Apart from the challenges and opportunities on the population level, demographic change will certainly influence our individual lives and our family relationships. On average, we will live longer in good health and need care later, but there will be fewer younger individuals in our family network to support their elderly parents or other relatives. Whether changes in time use can make up for these missing individuals is questionable. We find that if the current work and leisure patterns prevail, individuals will spend slightly more time on leisure and housework and the share of work time drops from 14.5% to 11.9%. Whether the young really spend the additional time they have with the elderly remains to be seen. One important question in this respect is also how valuable the elderly will be in terms of resources they can provide. The wealth they pass on to the next generation will have to be shared with a smaller number of siblings and thus younger family members might be better off.

Certainly this study does not solve the challenges we face in the future, but it sheds some light on potential opportunities that aging populations create. During the coming decades societal frameworks will change and individuals will adapt their behavior to new expectations. The magnitude of the future effects is thus unknown, but we should start to discuss this potential, and favorable adaptations in our society. The future is not too bright, but also not as dark as sometimes argued and we do have the potential to change it.

Useful links

Ageing (Un)equally? OECD Forum 2014

Working better with age OECD review of policies to improve labour market prospects for older workers

OECD health data

Why biodiversity matters

Mass murderer

In 1845, Belgian farmers discovered, too late, that a load of seed potatoes they had bought from America was contaminated with Phytophthora infestans, a Mexican fungus that had recently spread northwards. The blight caused by P. infestans rapidly spread from Belgium all over the continent, triggering the European potato famine. In Ireland, 1 million people out of a population of 8 million died of starvation and its side-effects, and another million emigrated. Social, economic and political reasons help explain why the country was so badly affected, but the main cause was that a third of the population was entirely dependent on the potato for food.

The Irish famine is a stark lesson in what happens when monoculture goes wrong, and why the resilience biodiversity brings is important to agriculture. But as we celebrate International Biodiversity Day, the outlook is not very encouraging. Around 12% of birds, 25% of mammals, and at least 32% of amphibians are threatened with extinction over the next century. Humans may have increased the rate of global extinctions by up to 1000 times the “natural” rate typical of Earth’s long-term history.

Plants used for food have been hard hit. Although humans ate around 10,000 plant species in the past, today’s diet is based on just over 100 plant species, a dozen of which represent 80% of human consumption, and four of which (rice, wheat, maize and potatoes) provide more than half of our energy requirements.

China has lost 90% of the wheat varieties it had 60 years ago. The US has lost over 90% of the fruit tree and vegetable varieties it had at the start of the 20th century. Mexico has lost 80% of its corn varieties, India 90% of its rice varieties. In Spain, the number of melon varieties has gone down from nearly 400 in the early 1970s to a dozen.

Biodiversity in itself is not the key to the production, recycling and other services ecosystems provide. What matters is the abundance of the species that are critical in maintaining habitat stability and providing those services. At a local scale, the loss of a species may have an adverse impact on ecosystem services, even if that species is not threatened globally.

In OECD countries agricultural land is a major primary habitat for certain populations of wild species, particularly certain species of birds and insects, in particular butterflies. For nearly all OECD countries, agricultural land area has decreased since the 1990s. Farmland has been converted to use for forestry and urban development, with much smaller areas converted to wetlands and other land uses. While little quantitative information about the biodiversity implications of converting farmland to forestry is available, the high rates of clearance of native vegetation for agricultural use in some countries are damaging biodiversity.

Biodiversity loss can have significant economic costs, but often they are indirect and longer term, while the benefits of the action that causes the loss are more immediate and measurable. For example, clearing mangroves to make room for shrimp farms raises incomes, but mangroves are important natural coastal defences, and the new farms, and the land behind them, are then exposed to destructive flooding that climate change could make even worse.

Most ecosystem services are externalities, meaning their benefits are not bought and sold commercially. This makes it hard to use market mechanisms to protect biodiversity, and governments have to take the lead. Most OECD countries and many others have implemented conservation programmes designed to protect and enhance the populations of endangered livestock breeds, and the number of breeds included under these programmes is increasing. Greater efforts are underway to conserve plant genetic resources useful for crop improvement.

There are also some multilateral initiatives to address biodiversity issues, including the International Treaty on Plant Genetic Resources for Food and Agriculture, also known as the International Seed Treaty. This is a comprehensive international agreement in harmony with Convention on Biological Diversity, designed to guarantee food security through the conservation, exchange and sustainable use of the world’s plant genetic resources for food and agriculture, as well as the fair and equitable benefit sharing arising from its use.

Could a tragedy similar to the Irish famine happen again? Traditional threats to crop production are either acute and of relatively short duration, such as extreme weather events. Chronic threats such as desertification or urban sprawl develop slowly. Strategies for dealing with these exist or are being developed. However, a new disease affecting a major food crop (such as rice), that appeared suddenly, spread easily and resisted known treatments could pose a serious threat if it persisted over a few growing seasons. New viruses and other pathogens appear all the time spontaneously. The vast majority of them die out immediately. Occasionally though, a strain that may have been around for centuries mutates and takes advantage of present day conditions. This is probably what HIV did, and as we discussed last week, recent years have seen the sudden emergence of potentially catastrophic viruses.

Lack of alternatives to infected species and the high mobility of people and goods enabled the 19th century potato blight to spread, and both of these factors are much stronger today.

Useful links

Economics and policies for biodiversity: OECD’s response

Biodiversity Chapter of the OECD Environmental Outlook to 2050: The Consequences of Inaction “Globally, terrestrial biodiversity(measured as mean species abundance – or MSA – an indicator of the intactness of a natural ecosystem) is projected to decrease a further 10% by 2050.”

Environmental journalist Simran Sethi explains what she thinks we all can do to ensure the security and sovereignty of our seed and food:

Sustainable buildings: Does the OECD practice what it preaches?

This is what it won’t look like by the end of the year

Today we’re publishing the last in a series of three articles by Liisa-Maija Harju, Environmental Coordinator in the OECD Operations Service on the OECD’s environmental performance.

Did you know that the Eiffel Tour is going green? The planned €25 million investments will improve the landmark’s energy performance by 30%. The Eiffel Tour will start to generate its own electricity and hot water by the end of 2013. Solar panels and small, vertical wind and hydraulically-powered turbines will be installed 57 metres above the ground. Ninety-five per cent of the new lighting will be of LED-type that has a longer lifespan and consumes less energy than conventional eco light-bulbs.

Small, individual investments like this are needed because the building sector contributes up to 30% to annual global greenhouse gas (GHG) emissions and consumes up to 40% of all world energy, according to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC). Not to mention that the big clock is ticking: the World Meteorological Organization announced that the amount of GHGs in the atmosphere reached a new record high in 2011.

Fortunately the building sector offers the largest potential for climate change mitigation at low-cost in all world regions, and sustainable building practices are becoming popular. In these types of buildings natural resources like energy and water are used efficiently; emissions, pollution and waste production is minimized; and occupants’ health and employees’ productivity are improved.

To tackle the climate challenge, private sector investments in buildings, transport and energy infrastructure will need to be shifted toward low-carbon options. Choices made today about the types and location of critical infrastructure will lock-in costly future emissions and the vulnerability of our economies to a changing climate. The OECD has developed a Green Investment Policy Framework which identifies how governments can improve the conditions to shift and scale-up private investment towards greener infrastructure.

The International Energy Agency’s Sustainable Buildings Centre (IEA-SBC) agrees, and recommends a holistic approach for lowering buildings’ energy consumption. Aiming for net-zero energy consumption, improving the energy efficiency of existing buildings, applying for building energy labels or certificates, as well as improving energy performance of building components and systems are some of the most cost-efficient ways to save energy in buildings. Appliances and equipment used within buildings should also be selected according to these guidelines. The Eiffel Tour is definitely on the right track!

But building occupants’ consumption habits can also have a significant impact. The results of an OECD survey on “Greening Household Behaviour” show that government policies and mixes of instruments can encourage the best changes towards occupants’ sustainable consumption habits. Regulations can incentivise building owners and services providers to offer an infrastructure and services that support positive behavioural changes. The presence and quality of collection services for recyclables, for example, is found to increase recycling participation and intensity. Providing the right economic incentive has also proved to be useful: price-based incentives encourage energy and water savings.

We at the OECD’s Operations Service have listened to these recommendations. One of the main goals we have set for ourselves within the Organisation’s internal greening strategy is to obtain the French High Environmental Quality (La Haute Qualité Environnementale® Exploitation, HQE®E)- environmental certification for the five major buildings in which we operate in France.

Our buildings have indeed a significant impact on total GHG emissions of OECD operations: in 2011 the overall GHG emissions of our operations were 8,535 tCO2e, an 8% decrease from 2010. Due to the nature of our work, travel on missions is the main contributor to this GHG footprint (64%), followed by buildings (20%) and commuting (16%).

The HQE® is the most frequently applied building certification scheme in France. It is a voluntary approach aiming to limit the short and long-term environmental impact of a building’s operation and maintenance, while guaranteeing healthy and comfortable living and working conditions for the occupants. The certificate’s 14 indicators are used to measure and manage buildings’ quality in four areas: construction, management, comfort, and as well as health. In addition to energy and emissions the indicators are used to measure topics like green procurement and waste management.

We are approaching our HQE®E-certification goal: two of the five buildings are now HQE®E – certified, and we are working towards certifying the OECD Conference Centre and Château de la Muette as well as one more building in which our employees work. These successes were made possible thanks to the support of the Secretary-General of the OECD, the know-how of all operations service teams involved, and the engagement of our employees.

While our strategy has so far proven to be successful, it should be remembered that HQE®E and other buildings’ environmental certificates available on the market only encourage the buildings’ owners and service providers to improve buildings’ environmental quality and performance. The certificates do not yet allow for the measurement of resilience. How do buildings react to impacts or risks, such as extreme weather events, caused by the environment?

Useful links

 OECD at the UN Climate Change Conference in Doha (COP 18)

OECD Environment Working Paper: Testing the effect of default on the thermostat setting of OECD

French HQE Association

GE crops: good for farmers, good for the planet?

What was the 18th century French historian Pierre Jean-Baptiste Legrand d’Aussy talking about when he said : “The pasty taste, the natural insipidity, the unhealthy quality, which is flatulent and indigestible, has caused it to be rejected from refined households and returned to the people, whose coarse palates and stronger stomachs are satisfied with anything capable of appeasing hunger.”

Well done if you recognised the potato, newly introduced into France at the time.

Comments like Legrand d’Aussy’s raise a smile today, but in fact we’re far more conservative about food now than in previous generations (when was the last time you knowingly ate a crow?). For example, over the years, most of the 7000 or so edible plants farmers have cultivated have been marginalised, and a few major crops and animals assure most food supplies.

The big difference is in the variety of ways ingredients are processed by the food industry, and, more recently, in new ways of producing food.

The most controversial of these is genetic engineering, GE. Supporters see it as continuing a long line of technical innovations that have boosted agricultural productivity and contributed to improved food security. Opponents argue that we don’t know enough about the consequences of GE crops and it’s foolish to push ahead, especially when so many other solutions to food security are underused. 

The National Research Council of the National Academies has just published a report on the economic and environmental impacts of GE crops looking at the impacts of GE in the US. (In other OECD countries, notably in Europe, consumer hostility means that GE crops are less widespread than in the US.)

According to the NRC, there are significant environmental benefits.

Insecticide use has declined since GE crops were introduced, and farmers who grow GE crops use fewer insecticides and herbicides that linger in soil and waterways. In addition, farmers who grow herbicide-resistant crops till less often to control weeds and are more likely to practice conservation tillage, which improves soil quality and water filtration and reduces erosion.

There are economic benefits too. In many cases, farmers who have adopted GE crops have either lower production costs or higher yields, or sometimes both, due to more cost-effective weed and insect control and fewer losses from insect damage.

It sounds great, but the report also issues a number of warnings.

Gains aren’t guaranteed. For instance, insect or weed resistance could render genetically engineered crops ineffective and force farmers to resume using more toxic chemicals. The NRC says that more needs to be done to slow the evolution of resistant weeds, such as spraying more than one kind of chemical.

Although farmers have gained economic benefits, more research is needed on the extent to which these advantages will change as pests adapt to GE crops, other countries adopt genetic engineering technology, and more GE traits are incorporated into existing and new crops.

Industry mergers and the dominance of a few players might stifle competition, an issue the Department of Justice is examining.

What do you think?

Useful links

OECD report on Biotechnologies in agriculture and natural resources to 2015

OECD Agriculture homepage

FAO on biotechnology in food and agriculture

20 questions about GM food answered by WHO

Greenpeace says no to genetic engineering

ISAAA says share the benefits of crop biotechnology

Avaaz would like more research, and a ban until it’s done