3 IGE-text-book

INCLUSIVE
GREEN ECONOMY
Edited by Derek Eaton & Fulai Sheng
POLICIES AND PRACTICE
Copyright © Zayed International Foundation for the Environment & Tongji University, 2019
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Citation
Eaton, D., & Sheng, F. (Eds.) (2019). Inclusive Green Economy: Policies and Practice. Dubai, Shanghai: Zayed International Foundation for the Environment & Tongji University.
Acknowledgements:
Editors: Derek Eaton (Technopolis group), Fulai Sheng (UN Environment)
Assistant Editors: Elena Antoni (UN Environment), Verena Balke (former: UN Environment, now: Accenture), Zhengzheng Qu (former: UN Environment, now: Green Climate Fund)
Project Focal Point, Tongji University: Dr. Jing Zhang, Tongji University, College of Environmental Science and Engineering
Project Focal Point, Zayed International Foundation for the Environment: Dr. Meshgan Mohammed Al Awar, Director, Research and Studies Center, Dubai Police Academy, Secretary General Zayed Foundation
Language editing: Chloe Hill
Design and Layout: Altus Impact
Authors: Cameron Allen, Elena Antoni, Meshgan Mohammed Al Awar, Steve Bass, Derek Eaton, Moustapha Kamal Gueye, Haripriya Gundimeda, Guoyong Liang, Gunnar Köhlin, Wilfried Lütkenhorst, Anna
Pegels, José Pineda, Zhengzheng Qu, Jacob Michael Salcone, Kristin Seyboth, Paul Steele, Thomas Sterner, Zhou Xin, Aiora Zabala, Simon Zadek, Eduardo Zambrano, Jing Zhang
Reviewers: Sarwat Chowdhury, Michele Clara, Marcel Crull, Devika Iyer, Joy Kim, Benoît Lallemand, Mireille Martini, Albert Merino-Saum, Bruno Oberli, Sadamitsu Sakoguchi, Tim Scott, Ben Simmons,
Lizhen Xu
Student reviewers: Verena Balke, Jonas Bannert, Patrick Lindner, Nadia Mondini, Kira Lynn Mullally, Jannika Mumme, Carolin Scheil, Kerstin Wonka, Alberto Zambon.
In addition, we would like to thank the following individuals for their contributions, without whom the completion of the book would not have been possible: Stacey Andell, Claudia Assmann, Christy Box, Loreine
Dalmeida, Friederike Doebbe, Mohamed Elharati, Emily Frankling, Abdul-Majeid Haddad, Claire Harasty, Colm Hastings, Cameron Hepburn, Sai Konda, Anna McIntosh, Hannah Parry, Siaka Salami, Olga
Strietskallina, Kiia Strömmer, Halima Tahikheli, Bereket Tsegav, Mito Tsukamoto, Karin Valverde, Dimitri Zenghelis, Yimin Zhou
Special thanks also go to: Mohamed Ahmed Bin Fahad, Zayed International Foundation for the Environment, Asst. Commander, Academic & Training, Dubai Police Gen. H.Q, Fengting Li, Professor, and
Executive Deputy Dean of UN Environment-Tongji Institute of Environment for Sustainable Development, Iyad Abumoghli, Regional Director and Representative of UN Environment in West Asia 2012-2017,
and Steven Stone, Chief of UN Environment’s Resources & Markets Branch (R&M), as well as all other colleagues from UN Environment, Tongji University, and the Zayed Foundation, who have made the
completion of this book possible.
FOREWORD
The United Nations Environment Programme (UNEP) launched a Green Economy Initiative in 2008, which aimed at encouraging investment in improving the
environment as a new engine for economic growth. The initiative resonated with policy makers such that “green economy” was adopted as a major agenda item
for the 2012 United Nations Conference on Sustainable Development.
Governments and businesses are intuitively attracted to the notion that investing in clean technologies, clean water, and clean mobility, etc. can improve the
environment while creating jobs and markets. Some of them acted upon this notion accordingly, such as in China and the United Arab Emirates. For the green
economy model to sustain beyond anecdotal examples, however, it needs a systematic framework that speaks to policy advisers and business executives, as
well as the graduate students who will step into those positions in the coming years.
This textbook attempts to offer that systematic framework for the green economy model. It builds on and extends from the traditional economic growth model by
articulating the contributions to productivity from investing in natural capital, clean technologies, and green skills, enabled by fiscal, finance, trade, and labour
policies. It also addresses the importance of institutions and progress measurement for ensuring that transition towards a green economy is pro-poor, inclusive,
fair, and just. We hope that this textbook will inspire the students of today and prepare them to shape the Inclusive Green Economy of tomorrow.
Prof. Dr. Mohamed Ahmed Bin Fahad Prof. Wu Jiang

Chairman, Zayed International Foundation for the Vice President of Tongji University,
Enviroment, and Asst. Commander, Academic & Training, President of Global Universities Partnership on En-
Dubai Police Gen. H.Q vironment and Sustainability (GUPES)
CONTENTS
CHAPTER 1 : SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY
CHAPTER 2 : THE MACROECONOMICS OF A GREEN ECONOMY
CHAPTER 3 : NATURAL CAPITAL
CHAPTER 4 : GREEN TECHNOLOGY
CHAPTER 5 : A JUST TRANSITION TO GREEN ECONOMIES: EMPLOYMENT & SOCIAL ISSUES
CHAPTER 6 : INSTITUTIONAL REFORM FOR INCLUSIVE GREEN ECONOMIES
CHAPTER 7 : INCLUSION, POVERTY REDUCTION & GENDER EQUITY FOR A GREEN ECONOMY
CHAPTER 8 : FISCAL POLICY FOR AN INCLUSIVE GREEN ECONOMIES
CHAPTER 9 : GREEN INDUSTRIAL POLICY: DIRECTING PRIVATE INVESTMENT
CHAPTER 10 : THE GREEN ECONOMY PROGRESS MEASUREMENT FRAMEWORK: A DIDACTIC

INTRODUCTION
CHAPTER 11 : GREENING THE FINANCIAL SYSTEM
CHAPTER 12 : INTERNATIONAL DIMENSIONS OF GREEN ECONOMY

CHAPTER 1: SUSTAINABLE DEVELOPMENT
& THE INCLUSIVE GREEN ECONOMY
CHAPTER 1:
SUSTAINABLE DEVELOPMENT &
THE INCLUSIVE GREEN ECONOMY
Cameron Allen
LEARNING OBJECTIVES
This chapter aims to enable its readers to: University of New South Wales
Cameron Allen is an international sustainable development expert who worked
• Outline the main challenges facing humanity and analyse their drivers; for several years with the United Nations on inclusive green economy and
the development and implementation of the Sustainable Development Goals
• Articulate how the inclusive green economy model seeks to address these chal- (SDGs).
lenges; and He is currently a consultant and researcher at the University of NSW in
Sydney, where his research focuses on evidence-based approaches to policy
and planning and the application of systems analysis and modelling to support
• Understand the major characteristics that underpin national strategies on national implementation of the SDGs.
inclusive green economy, the related analytical tools, key actors and initiatives He has published a range of academic journal papers in this field, and
as well as the critical role of public policy in turning the inclusive seen economy continues to engage with the UN on a range of projects relating to the inclusive
model into practice. green economy and SDGs.
CHAPTER CONTENTS profound across all dimensions of life. The richest one
per cent of the world’s population now control close Box 1: The planetary boundaries
1. Main challenges and drivers to 50 per cent of global assets, while the poorest half
concept
owns a mere one per cent (Stierli et al., 2014). About
2. The ‘Inclusive Green Economy’ model one in eight people still live in extreme poverty, nearly Considerable research has been done in the past decade to better
understand and measure planetary biophysical limits, with increasing
3. Turning the new model into practice 800 million people suffer from hunger, 1.1 billion people attention towards delineating safer limits or thresholds for human activ-
are living without electricity, some 2.5 billion people lack ity. Among the most comprehensive efforts to delineate such limits is
4. Concluding remarks basic sanitation facilities, and water scarcity affects the work on establishing nine planetary boundaries, which represent a
safe operating space for humanity [zotpressInText item=”{BS33HN7F}”]
5. Appendices more than 2 billion people worldwide (United Nations, (Rockström et al., 2009, Steffen et al., 2015).
2016; World Health Organization & UNICEF, 2013). While The nine planetary boundaries concept, which was introduced in 2009
economic development and globalization have brought and has been influential in global sustainability policy development,
immense progress and advancements, they have also aims to define the environmental limits within which humanity can safely
1. Main challenges and drivers

operate. These boundaries include: global freshwater use, extinction
led to the loss of jobs in many sectors and geographi- rates, CO2 concentrations, the quantity of phosphorus and nitrogen
cal regions, and increasing vulnerability of employment flowing into the oceans, amongst others (Figure 1).
worldwide (see also Chapter 7) (Felbermayr et al., 2011; Their analysis suggests that humanity has already transgressed three of
1.1 Persistent poverty and inequality Davis & Harrigan, 2011; Lee & Vivarelli, 2006). these boundaries (climate change, biodiversity loss and nitrogen) and is
well on the way to crossing several others.
In the years leading up to 2015, significant progress was In Figure 1, the green zone shows the safe operating space, the yellow
zone is the zone of uncertainty, where risk is increasing, and red rep-
made across a range of development objectives agreed 1.2 Overstepped planetary boundaries resents the high-risk zone. The planetary boundary itself is located at the
under the Millennium Development Goals (MDGs), intersection of the green and yellow zones. The grey wedges represent
including addressing poverty and hunger, education, Economic growth has indeed driven an increase in processes for which global-level boundaries cannot yet be quantified.
gender equality, and health outcomes in the low-income household income in both high- and low-income coun-
world (United Nations, 2015). This progress has taken tries along with a reduction in extreme poverty and
place in the context of a quadrupling of the global pop- expansion of the middle class. This growth, however, has
ulation to well over 7 billion people over the last 100 been accompanied by rapidly changing consumption
years, during which time global economic output (mea- and production patterns, with steeply rising environmen-
sured by GDP) has increased more than 24-fold (UN tal impacts and pollution on a global scale (Figures 1-4,
Environment, 2012; Maddison, 2003; Krausmann et al., over the page). Over the past century, primary energy
2009) (Figures 1 and 2). Continued economic develop- use has increased more than ten-fold, while water use
ment and growth in low-income regions is seen by many has increased more than
as the key mechanism for addressing remaining social Key term:
six-fold (Figure 3). Global
development challenges and leaving no one behind. Primary energy material consumption rose
Energy that has not been to 70 billion metric tonnes
However, despite the gains made, inequalities remain transformed in any way from its
original form. in 2010, with two-fifths of
CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.1

all global raw materials extracted solely to enable exports to other countries (Figure 4)
(Wiedmann et al., 2015). This is projected to reach 140 billion tonnes by 2050 (UN Envi-
ronment, 2011a; Bringezu et al., 2014). At the same time, inefficiencies, extremely low
recycling rates, for example in the case of special metals for modern technologies and
applications, and a lack of resource productivity targets means that many resources are
wasted (Graedel et al., 2011).
Scientific assessments of global trends highlight that development gains made in recent
decades are now under threat as a result of declining natural resources and environ-
mental damage (Millennium Ecosystem Assessment, 2005; UN Environment, 2012;
UN Environment, 2011a; Intergovernmental Panel on Climate Change [IPCC], 2014;
UN Environment, 2016). There is growing evidence that
Key term: humanity is harming biophysical systems and exceeding
Anthropogenic climate
change safe planetary limits or thresholds (Box 1) (Rockström
Climate changes influenced by the et al., 2009; Steffen et al., 2015). In particular, there is Figure 2: (above) Global trends in population and GDP 1750 to 2010 (Steffen et.al, 2015)
actions of humans, in particular
emissions of greenhouse gases ongoing anxiety over anthropogenic climate change
from fossil fuel combustion and and its economic, social and environmental conse-
deforestation. Figure 3: (below) World Real GDP (in billions at purchasing power parity (PPP) in US$) 1950 to 2015
quences (Hansen, 2010; Stern, 2008; IPCC, 2014). (World Economics, 2017) and Poverty Headcount Ratio at US$1.90 a day (percentage of the popula-
tion living on less than US$1.90 a day at 2011 prices at PPP) (World Bank, 2018)
1.3 The ‘take-make-dispose’ model

The growing evidence of natural resource depletion, environmental decline and inequal-
ity demonstrate that our traditional economic model and policy approaches have not
provided a foundation for sustainable development. From an economic perspective,
the dominant take-make-dispose model is a major driver for the challenges described
above. This model is based on decreasing prices, increasing throughput and consumer
demand, and growing ecological and environmental footprints (UN Environment, 2015).
The production of goods for consumption, for example, requires energy and materials
– minerals, water, food, and fibre – and our current economic model relies upon these
materials and energy being easily accessible, cheap and available in large quantities.
Most economic development and growth strategies have encouraged rapid depletion
of these natural resources and degradation of the ecosystems that underpin them. The
scientific evidence also highlights that impacts on the environment often disproportion-

ately burden the poorest and most vulnerable in society (see also Chapter7).
The problem of overuse of environmental resources is further driven by the failure of the
market to fulfil its purpose of price discovery and efficient resource allocation towards
maximising public welfare. For the most part, market participants, those participating
in the market by producing, selling, providing services etc., have taken little account of
the negative externalities of their activities. Investment horizons, for example, are gen-
erally shorter than the lifetime of the underlying assets
Key term: and the environmental impacts that they create (UNEP
Negative externalities
A negative externality is a cost suf- Inquiry, 2015). Also, nature provides several key eco-
fered by a third party as a result of an nomic functions, including the provision of resources,
economic transaction. In a transac-
tion, the producer and consumer are life support systems, and a sink for wastes and emis-
the first and second parties, and third sions (see also Chapter3), which are in general, inad-
parties include any individual, organ-
isation, property owner, or resource equately reflected in financial terms (Ghisellini et al.,
that is indirectly affected. 2016), and thus not recognised by market forces pri-
marily operating on the basis of price.
Figure 4: (above) Global trends in energy and water consumption 1750 to 2010 (Steffen et al., 2015)
In many cases this leads to the unsustainable use of these resources with resulting Figure 5: (below) Material Footprint (billions of tonnes) 1990 to 2010 (UN Environment, n.d.)
public loss, as in the case of fossil fuel investments and climate change. Market failure
is often reinforced by policy failure, i.e. misaligned incentives and antiquated institutions
guiding investment and economic activity (UN Environment, 2015). The concessions,
licenses, subsidies and incentives provided by governments provide a key driver for
investment, innovation and economic growth. However, these incentives have been
geared largely towards a ‘brown economy’ founded on fossil fuels and intensive use of
natural resources.
2. The ‘Inclusive Green Economy’ model
2.1 The need for a new model

The scale of the challenges over the coming decades is clear. We will need to meet the
needs of a growing population of between 9 and 10 billion people by 2050 in terms of

employment, income, energy, food, water, minerals and on expanding options and choices for national econo- resources, as well as addressing negative external
other materials, while keeping resource consumption mies, using targeted and appropriate fiscal and social effects (or ‘externalities’) arising from economic activi-
and environmental impacts within the Earth’s natural protection policies, and backed up by strong institutions ties by placing a price on the environment (e.g. through
limits or carrying capacity (UN Environment, 2011a). that are specifically geared to safeguarding social and taxes or property rights) (Ayres & Warr, 2010). Some of
ecological floors” (UN Environment, 2015, p.6). The the earlier milestones in the evolution of the IGE concept
According to expert predictions, food demand is contours of a macroeconomic framework for an IGE are are highlighted below in chronological order.
expected to grow by 50 per cent by 2030, energy con- elaborated in Chapter 2 of this book. Subsequent chap-
sumption will increase by 45 per cent and the need ters then focus on further characteristics, policies and
for water by 30 per cent— all the while supply is being approaches for building an IGE. 2.2.1 Origins
increasingly limited by environmental boundaries (Global
Sustainability Panel, 2012). This IGE model can be traced decades back. The In 1989, building on economic traditions, the term ‘green
environment and its natural resources have not histori- economy’ was first coined in a pioneering report for
Many of these challenges are interlinked and have been cally had a strong footing in the traditional model of the the Government of the United Kingdom by a group of
integrated into the 2030 Agenda for Sustainable Devel- economy, despite the emergence in the 1970s of two leading environmental economists, entitled Blueprint
opment and the Sustainable Development Goals (SDGs) major sub-disciplines of economics that looked more for a Green Economy (Pearce et al., 1989). The report
adopted by the international community in 2015. This closely at the natural environment, namely environmen- was commissioned to advise the UK Government on
is a promising start. However, the integrated goals and tal economics and resource economics (Pollitt et al., whether there was a consensus definition on the term
targets cannot be achieved with the same take-make- 2010; Costanza et al., 2014; Shogren & White, 2007; ‘sustainable development’, as well as on the implica-
dispose model and traditional ‘siloed’ approach to policy Tietenberg & Lewis, 2016) (for an in-depth discussion of tions of sustainable development for the measurement
and planning that we have used in the past. Current economics and the envi- of economic progress and the appraisal of projects and
policy frameworks and governance arrangements will Key term: ronment, see Chapter 2). policies. The report interprets sustainable development
need to be adapted to adequately address the magni- Environmental economics
These sub-disciplines as “non-declining human welfare over time” – that is, a
A field in the discipline of economics
tude, range, interconnectedness and urgency of these which investigates the relationship tend to adopt economic development path that makes people better off today
challenges. between the economy and the en-
traditions and incorpo- without condemning the people of tomorrow to a lower
vironment based on the extraction,
use and waste of natural resources. rate the environment and standard of living. A key message of the report was that
(Adapted from https://environmental- economics could and should come to the aid of environ-
its associated problems
2.2 The search for a new model science.org/)
into existing economic mental policy.
Responding to these challenges requires a fundamen- concepts, preserving as
In 1991 and 1993 the authors released sequels to the
Key term: much of the conventional
tal economic redesign and transformation towards what
Resource economics first report entitled Blueprint 2: Greening the World
economic thinking as
we call the inclusive green economy (IGE), an economy A field within the discipline of eco- Economy (Pearce, 1991) and Blueprint 3: Measuring
possible (Söderbaum,
which is “low carbon, efficient and clean in production, nomics which analyses interactions
Sustainable Development (Pearce, 1993). These sequels
but also inclusive in consumption and outcomes, based
between the economy and nature 2008). Their primary
by looking at the supply, demand, extended their previous message to global problems –
on sharing, circularity, collaboration, solidarity, resil- and allocation of natural resources. focus is on the efficient
climate change, ozone depletion, tropical deforestation,
ience, opportunity, and interdependence. It is focused
(Adapted from https://wikipedia.org/) use of non-renewable
and resource loss in the developing world. All reports

built upon research and practice in environmental eco- ment could kick-start a green economy (Atkisson, 2012).
nomics spanning back several decades. The authors As a result, several governments were inspired to imple-
argued that because today’s economies are biased ment significant green stimulus packages as part of their RIO+10 CONFERENCE
towards depleting natural capital to secure growth, sus- economic recovery efforts. In October 2008, UN Environ- Responding to these challenges requires a fundamental economic
tainable development is unachievable (UN Environment, ment launched its Green Economy Initiative to provide redesign and transformation towards what we call the inclusive
2011b; Allen & Clouth, 2012). analysis and policy green economy, an economy which is “low carbon, efficient and
clean in production, but also inclusive in consumption and out-
Key term: support for investment comes, based on sharing, circularity, collaboration, solidarity, resil-
In 1992, an international agreement on sustainable Green Economy Initiative
Green Economy Initiative: A UN Envi- in green sectors and for ience, opportunity, and interdependence”.
development known as Agenda 21 gave global rec- ronment initiative designed to assist greening resource- and/
ognition to environmental challenges, such as climate governments in greening their econ-
or pollution-intensive
omies by reshaping and refocusing
change, biodiversity decline and pollution, but failed policies, investments and spending sectors.
to gain much traction or influence in development and towards a range of sectors, such as
clean technologies, renewable en-
economic policy. In 2000, the adoption of the MDGs As part of this initiative,
ergies, water services, green trans-
provided stronger impetus for policy change and invest- UN Environment commis-
portation, waste management, green
buildings and sustainable agriculture
ment that was sharply focused around a limited set of sioned one of the origi-
and forests. Adapted from https://
goals and numerical targets, and succeeded in cata- greeneconomycoalition.org nal authors of Blueprint
lysing international cooperation and investment towards for a Green Economy
social objectives. However, the goals were limited in to prepare a report entitled a Global Green New Deal
scope and failed to adequately address interlinkages (GGND). The report was released in April 2009 and
with environmental and economic dimensions of devel- proposed a mix of policy actions that would stimulate
opment. It is exactly the linkages between the environ- economic recovery and at the same time improve the
mental and economic dimensions of development that sustainability of the world economy. The Global Green
is creating the very shocks we see today in the form of New Deal called on governments to allocate a significant
volatile world markets, resource scarcities and disasters share of stimulus funding to green sectors and set out
(Geoghegan, 2013). three objectives: (i) economic recovery; (ii) poverty erad-
ication; and (iii) reduced carbon emissions and ecosys-
tem degradation. It also proposed a framework for green
2.2.2 Revising the green economy concept stimulus programs, as well as supportive domestic and
international policies (United Nations Environmental
In 2008, the green economy concept was revived in the
Management Group, 2011).
context of discussions on the policy response to multiple
global crises. Amidst the unfolding global financial crisis The Global Green New Deal significantly influenced gov-
and concerns of a global recession, UN Environment ernments’ response to the financial crises and economic
championed the idea of green stimulus packages and recession through the adoption of expansionary policies
identified specific areas where large-scale public invest-

that incorporated a green fiscal component (Barbier, the energy supply (Houser et al., 2009). It also helped to economic model and values underpinning them (Inter-
2010). Almost the entire global green stimulus was made boost manufacturing capacity and the renewable energy national Institute for Sustainable Development [IISD],
by G20 countries, with measures including support for supply chain. Combined with the economic downturn, 2010).
renewable energy, carbon capture and sequestration, this contributed to a decline in CO2 emissions and
energy efficiency, public transport and rail, improving carbon intensity. Estimates indicated positive employ-
electrical grid transmis- ment effects. 2.2.3 The Green Economy Report of 2011
Key term: sion, as well as other
Carbon capture and se- In June 2009, in the lead up to the UN Climate Change In November 2011, UN Environment released its Green
questration public investments and
Conference in Copenhagen, the UN released an inter- Economy Report. To develop the report, UN Environ-
Carbon capture and sequestration: incentives aimed at envi-
The processes of capturing the CO2 agency statement. Included, was the hope that the ment partnered with think tanks and commercial actors
emitted from industrial uses and its ronmental protection. Of
economic recovery would be the turning point for an (including Deutsche Bank and the Millennium Institute),
storage in appropriate facilities or the US$ 3.3 trillion allo-
underground. Adaopted from https:// ambitious and effective international response to the lending credibility to its economic analyses (Atkisson,
www.iea.org cated worldwide to fiscal
multiple crises facing humanity based on a global green 2012).
stimulus over 2008 to
2009, US$ 522 billion (around 16 per cent) was devoted economy (UN Environment, 2009).
to green expenditures or tax breaks, amounting to 0.7 Importantly, the report also provided a working
In March 2010, recognising the critical link between
per cent of GDP (Robins et al., 2009; Barbier, 2010). economy and the environment, governments adopted definition of green economy which has
‘green economy in the context of sustainable develop- since been widely cited – “one that results in
At the national level, the Republic of Korea’s Green New
Deal plan allocated a remarkable 95 per cent of its US$ ment and poverty eradication’ as one of the two themes improved human wellbeing and social equity,
38.1 billion fiscal stimulus to green initiatives, making for the 2012 UN Conference on Sustainable Develop- while significantly reducing environmental
ment (Rio+20), leading to a great deal of international
up 3 per cent of its GDP. China assigned one-third of risks and ecological scarcities. It is low carbon,
its US$ 647.5 billion fiscal stimulus plan to green mea- attention and research. This resulted from the growing
recognition that achieving sustainable development resource-efficient, and socially inclusive”
sures, also totalling 3 per cent of its GDP. While the Euro-
pean Union dedicated more than half of its spending rested heavily on ‘getting the economy right’ (UN Envi-
ronment, 2011b). Indeed, the global financial shocks, (UN Environment, 2011b).
to low-carbon investments, the total amount spent was
rather small: US$ 22.8 billion, or 0.2 per cent of its GDP. as well as other crises such as climate, water, and
This definition is considered consistent with the broader
In the United States, 12 per cent of the US$ 787 billion food, were at the forefront of discussions leading up to
concept of sustainable development, recognising its
American Recovery and Reinvestment Act and 0.7 per Rio+20. These crises highlighted the fact that the insti-
holistic character (economic, social and environmen-
tutions and policies put in place to address sustainable
cent of GDP were invested in green initiatives (Barbier, tal) and focus on inter-
development were not only weak, but had mostly been
2010). A review of stimulus policies aimed at renew- generational equity
able energy technologies in the USA concluded that the directed to tackle the symptoms rather than the sources Key term:
Intergenerational equity (Ocampo, 2011). The
stimulus programs had a positive effect on the renew- of environmental degradation. These sources were to be To consider the needs of future gener- report emphasised that
able energy sector, including significant and immediate found in government and corporate fiscal, tax, budget, ations in deciding how to use current
natural resources. Adapted from economic growth and
growth in investments, installations and contribution to trade, energy, agriculture and other policies, and in the https://stats.oecd.org environmental steward-

ship can be complementary strategies, challenging the interrelated but different terminology and concepts (see the concept of green economy to address concerns
still commonly held view that significant trade-offs exist Appendix 1 for related concepts), a lack of clarity around over equity and inclusiveness and better strengthen the
between these two objectives. Through quantitative a green economic model, associated business models notion of ecological thresholds. The reformulated inclu-
analysis and modelling, it demonstrated how investment and policy measures, as well as missing experience sive green economy integrated a broader range of con-
in the environment can be a key strategy for economic in the design, implementation and review of the costs cepts such as equity, sharing, circularity, collaboration,
growth and job creation. For instance, with investments and benefits of green economy policies (Allen & Clouth, solidarity, resilience, opportunity, and interdependence
in renewable energy, water and energy-efficient tech- 2012; Ocampo, 2011; Khor, 2011). Another concern (UN Environment, 2015).
nologies, sustainable agriculture production techniques, voiced by civil society was that a green economy could
and waste minimization and reuse technologies. be viewed as a means for the commoditization of nature In 2015, the adoption of the 2030 Agenda for Sustain-
(see Chapter 3) and risked a sell-off of natural resources able Development and the Sustainable Development
A range of other influential international organizations to large corporations (Wilson, 2013). Following many Goals (SDGs) provided a new development vision for
followed suit, publishing reports and resources on the months of difficult negotiations, it was agreed that the all countries based on a framework of timebound goals
green economy in the lead up to Rio+20, and showing green economy should be conceptualised as an import- and quantifiable targets and indicators. The SDGs are
the scale of momentum behind the approach. These ant tool for achieving sustainable development. While comprehensive and integrated, and encompass social,
included the Green Economy Coalition, a coalition of some general guiding principles were agreed (mainly for economic and environmental dimensions of sustainable
organizations from different sectors, including NGOs, addressing perceived risks), a universal definition was development, underscoring the interlinkages between
research institutes, UN organizations, businesses, not adopted. these dimensions. They offer an opportunity to reframe
and trade unions; UN Department of Economic and economic policy around sustainability, including sustain-
Social Affairs (UNDESA); the UN Conference on Trade Although there remains no internationally agreed defi- able consumption and production, equitable outcomes
and Development (UNCTAD); the International Labour nition for the green economy, a range of definitions has and human wellbeing, leaving no-one behind, integra-
Organization (ILO), the World Bank; the Organization been published in the literature. For example, the Green tion and synergies, and investment in the environment.
for Economic Cooperation and Development (OECD); Economy Coalition succinctly defines green economy These represent the core elements of an inclusive green
the Global Green Growth Institute (GGGI); Stakeholder as ‘a resilient economy that provides a better quality of economy.
Forum; and the Green Growth Leaders, amongst others. life for all within the ecological limits of the planet’ As
concluded by Allen and Clouth (2012), these definitions The success or otherwise of the SDGs, however, will
are broadly consistent and, as was the case with sus- largely depend upon implementation by governments,
businesses, civil society and a broad range of stake-
2.3 Inclusive green economy and the Sus- tainable development, there would be little added value
holders. While the SDGs help to set the destination, it
tainable Development Goals now in attempting to arrive at a single universal defini-
tion. It is the implementation and application of the green remains to be seen whether countries and businesses
Despite the growing international interest in the green economy that is more important. will be able to overcome the key implementation chal-
economy, negotiations among countries in the lead up lenges that have limited progress on sustainable devel-
to Rio+20 were challenging. This was partly due to the After Rio+20, UN Environment and its collaborators (ILO, opment in the past. These include the lack of a sustain-
lack of an internationally agreed definition or universal UNIDO, UNDP and UNITAR) launched a Partnership able design for our economy, as well as sustainable
principles for the green economy, the emergence of for Action on Green Economy (PAGE) and broadened business models that can drive investment and growth

in green sectors, jobs, technologies and products. IGE A central tenet of the green economy is that investing the transition and address any trade-offs.
provides an approach towards addressing these chal- in the environment not only safeguards our environment
lenges. It is an alternative model to achieve sustainable for future generations but that it also makes sound eco- There are a range of policy measures available to gov-
development and the SDGs, which refocuses on the nomic sense. It holds the promise of achieving inte- ernments to put in place the appropriate enabling con-
institutions, rules of the game, and policies and incen- grated or synergistic (“win-win”) outcomes that simulta- ditions. In most countries, the existing enabling condi-
tives that are shapers and drivers of markets, trade and neously link socio-economic benefits with environmental tions favour and encourage excessive use of fossil fuels,
finance (UN Environment, 2015). sustainability. By focusing on macroeconomic benefits, resource depletion and environmental degradation. For a
proponents of the green economy aim to mobilise central green economy pathway, these enabling conditions must
planning and finance ministries as well as the private be realigned to favour investment in green sectors and
sector to make green investments and policy decisions. the decoupling of the economy from the consumption of
3. Turning the new model into Decision and policymakers in central government min- non-renewable resources and the generation of pollution
and waste. For example, investment into the reuse or
practice istries with authority over the government’s budget,
finances and investments, may be interested in several recycling of natural resource inputs; primary reliance on
aspects of an inclusive green economy, including: renewable sources of energy; preservation of critical (or
With the increasing interest in adopting an IGE pathway,
non-substitutable) natural capital; and minimising pollu-
a considerable volume of research, tools and guidelines
• the prospects for enhancing economic growth, pro- tion and other environmental impacts – including green-
have emerged, which aim to support implementation at
ductivity and prosperity; house gas (GHG) emissions – so that they remain within
the national level. They clarify the objectives and under-
safe environmental thresholds. At the same time, policy
pinning characteristics of the inclusive green economy, • the potential for creating green jobs and generating measures must encourage broader socio-economic
offer operational principles for applying the approach, employment; objectives including economic growth, equality, employ-
detail policy options and measures available to govern-
• the possibility of gaining new areas of comparative ment, health and wellbeing, and poverty reduction.
ments and business, and provide advanced tools and
methods for practitioners to support analysis and evalu- advantage in the international market place; and Major challenges for turning this model into practice
ation (see Appendix 2 for a non-exhaustive list of tools to • the opportunity for diversifying economies away from do exist, particularly in terms of 1) the timeframe of a
guide green economy strategies). resource-intensive brown growth. macroeconomic transformation, 2) the current gaps in
underlying knowledge, 3) the lack of skills and technol-
To achieve such outcomes, building an IGE requires ogy, 4) the limited availability of information, finance,
3.1 Major characteristics of the inclusive macroeconomic structural transformations that change capacity and also 5) the political will to set the neces-
green economy the way economies grow, with increased green invest- sary changes in place (UN Environment, 2015). There
ment, production, consumption, trade, employment, etc. are winners and losers in all major transitions and a con-
The major characteristics underpinning existing national The macroeconomic framework for an IGE is elaborated siderable hurdle is to overcome vested and entrenched
strategies on the IGE and analytical tools are briefly in Chapter 2. There is, however, no blueprint. Decision interests, which may exert their influence to maintain
addressed here as an initial introduction, and are makers will need to be able to assess different options a brown economy status quo that they find beneficial.
covered in detail in the subsequent chapters of this based on their national circumstances, and put in place This represents a political and governance challenge
book. the necessary enabling conditions to guide and manage

for politicians as well as for leaders of business and civil (see also Chapter 9) which is required to decouple eco- and fiscal reform, and
Key term:
society. nomic growth from both the quantity of natural resources SMART failed to concretely set
consumed as well as environmentally damaging impacts out the expectations
Acronym for Specific, Measurable,
Achievable, Relevant and Time-
(UN Environment, 2011a). bound. for producers and con-
3.2 The role for public policy In The Future We Want and the 2030 Agenda for Sus-
sumers in the economy
(OECD, 2001; OECD, 2006; Dalal-Clayton & Bass, 2002;
Building an IGE depends crucially on the active role of tainable Development, governments agreed that there Swanson et al., 2004; Meadowcroft, 2007; European
public policy as a shaper and driver of the economic are multiple pathways to sustainable development and Sustainable Development Network, 2009; UN DESA,
and societal transition towards sustainable develop- the SDGs, and that each country must choose the most 2012). They consequently had limited success in forging
ment. This implies, first of all, a role for public policy in appropriate pathway according to its national circum- a pathway to sustainable development.
correcting misaligned incentives and market failures stances and priorities. The critical role of governments
and thereby establishing a level playing field. However, in steering the transition towards the SDGs is widely The promotion of Low Emission Development Strate-
beyond this, public policy does not only have a correc- acknowledged. However this will need to be done gies (LEDS) through the UN Framework Convention
tive but rather a crucially normative function: markets in partnership with business, civil society, consumer on Climate Change (UNFCCC) processes, as well as
themselves cannot make value-based decisions, such groups and other stakeholders. Achieving the SDGs Poverty Reduction Strategy Papers (PRSPs) in response
as deciding on issues like inequality or redistribution through building inclusive green economies is a shared to the MDGs, led to considerable methodological and
(UN Environment, 2015). These decisions rely on socie- responsibility, however governments will be critical institutional improvements, including sound economic
tal processes that can be facilitated, bundled and con- players in shaping a country’s pathway towards a green analysis, national ownership and engagement with the
vened by public policy. economy. The formulation of a national green economy private sector and civil society. The primary focus of
strategy, which is informed by a consultative multi-stake- these strategies, however, has been on promoting eco-
Furthermore, public policy can help to accelerate direc- holder process, can provide a useful mechanism for nomic growth, income, employment and energy secu-
tional change: the scale and pace of the economic articulating the preferred pathway, and setting out clear rity objectives while also reducing GHG emissions and
transition that is required over the next few decades is targets and expectations for producers, consumers and addressing climate vulnerabilities. As such, their scope
vastly greater than anything so far achieved in human other actors in the economy. has generally been too limited to take advantage of the
history, and will entail a much greater level of ambition broader set of opportunities that are presented by the
than envisaged in sustainable development strategies inclusive green economy.
that countries have enunciated to date (UN Environ- 3.3 National green economy strategies
ment, 2011a; Boston, 2011). Acting upon this level of The emergence of national green economy and green
ambition requires a strong role for the public sector as Early experiences with national sustainable development growth strategies has continued to advance national
a convener and an agent that sets the enabling condi- strategies (NSDSs) were generally connected to envi- practice in sustainable development planning, build-
tions to steer private sector investments and economic ronmental conventions and agreements without clear ing on experience with PRSPs and LEDS in terms of
activities towards green technologies, jobs and sectors. linkages to central economic planning (Swanson et al., approaches, tools and methods while also incorporating
As such, public policy can assume an important role in 2004). They lacked clear objectives and achievable a broader range thematic and sectoral issues, includ-
directing and accelerating structural economic change (SMART) targets, disregarded economic instruments ing objectives relating to agriculture, industry, natural

resources (e.g. water), transport, waste, and pollution 3.4 Tools to guide green economy strate- sis and implementation (Green Growth Best Practices,
(Allen et al., 2017). This more holistic and integrated gies 2014). It highlights that there is no single approach
scope is better aligned with the broad scope and intent to the green economy; however, common elements
of the SDGs and their targets. In recent years, a diverse A range of guidelines and toolkits has been developed, can be seen in the way countries are developing their
range of countries have embarked upon a national green which provide guidance for the preparation of national national strategies, policies and measures. It provides
economy pathway to sustainable development, and it is green economy plans or strategies, particularly in the a detailed manual and toolkit for the preparation of a
expected that this will continue in the context of national areas of integrated or sustainability assessment national green growth plan, focusing on eight interlinked
planning for the SDGs. (European Commis- elements or steps that are commonly used in analysis,
Key term: sion, 2009), low-car- planning, implementation and monitoring (Figure 6, over-
To achieve SDGs via an inclusive green economy Integrated assessment
A participatory process of combin- bon or climate resilient leaf). Initial steps focus on establishing national targets
pathway, governments and stakeholders need to adopt a ing, interpreting and communicating development (UNDP, and baselines (e.g. linked to the SDGs), assessing and
cohesive set of policies and measures that have a clear knowledge from various disciplines
2011), nexus-based communicating costs and benefits, and prioritizing dif-
in a way that a cause-effect chain –
influence on the flow of investment and finance (both involving environmental, social, and approaches (UN Food ferent options and pathways towards achieving national
new and existing, public and private) towards the green- economic factors – associated with
and Agricultural Orga- targets. The guide promotes a range of decision support
a proposed public policy, plan or
ing of key sectors in the economy. To be effective, this programme can be assessed to in- nization [FAO], 2014), tools to inform these initial agenda-setting and analytical
will likely require a combination of policy instruments and form decision-makers. Adpated from
and green growth or stages, including quantitative modelling and analysis.
https://unep.ch
measures, including economic and fiscal policy reforms, green economy (Green
norms and regulations, education and moral suasion, Growth Best Practices, UN Environment and PAGE have published a range of
and industrial and innovation policies (World Bank, Key term: 2014; UN Environment, resources and tools to support national green economy
2012; UN Environment, 2011b; OECD, 2011; Brand, Nexus-based approaches
2014b; UN Environment, planning and policy making. These include a Green
2012; African Development Bank et al., 2012; UN DESA, Approaches that examine the interre- Economy Toolkit for Policymakers, comprised of three
latedness and interdependencies of 2014c; African Devel-
2012; Barbier, 2011; UN Environment, 2015). Comple- environmental resources in order to opment Bank [ADB], publications that provide practical guidance on how
mentary measures will be needed to address risks and take into account the functioning and
OECD, United Nations & to formulate and assess policies, measure progress,
management of complex systems.
trade-offs associated with structural adjustments in the Adpated from https://flores.unu.edu World Bank, 2012; PAGE, and model future effects of the transition (UN Environ-
economy, such as the loss of jobs in traditional sectors. 2017b). Many of these ment, 2014b; UN Environment, 2014c; UN Environment,
The development of a national green economy strategy guidelines draw upon emerging concepts and analyti- 2014a). The toolkit sets out the five steps of a typical
has become an important tool for assessing the costs cal methods from economics and the sustainability sci- green economy policy assessment (Figure 7).
and benefits for different policy and investment options, ences, providing a step-by-step approach to national
whilst also bringing these measures together within a More recently, PAGE has produced additional techni-
development planning based on decision theory and the cal resources to assist with green economy analysis,
cohesive framework. Subsequent chapters of this book generic steps of the policy planning cycle.
describe the main policy frameworks and enabling con- including an integrated framework for green economy
ditions for building inclusive green economies. An early review by the Green Growth Best Practices ini- modelling as well as a progress measurement framework
tiative provides a global assessment of good practices methodology (PAGE, 2017b; PAGE, 2017a). A range of
and lessons learned in green growth planning, analy- training manuals, webinars and e-learning courses are

also available through PAGE to support the operationalization of their tools and publi-
cations. These range from introductory modules to more advanced materials on green
economy policy assessment and green jobs assessment, as well as greening of eco-
nomic sectors such as industry, agriculture, buildings, energy, transport, water and
waste.
A central foundation for developing a green economy strategy lies in the analysis of the
costs, benefits and impacts of different policy and investment options. Common deci-
Figure 6: Key elements for National Green Growth Planning (Green Growth Best Practice, 2014) Figure 7: The steps of a typical green economy policy assessment

sion frameworks include cost-benefit analysis, cost-ef- 3.5 Key actors and initiatives
fectiveness analysis and multi-criteria analysis. Quantita- Box 1.2. Green economy platforms and
tive modelling can be an important tool used to support The IGE has emerged as a strategic priority for many
such analyses. Models can be used to predict the out- governments and there is a growing catalogue of coun- partnerships
comes of different policy choices and development tra- tries with national green economy strategies, assess- Platforms
jectories and therefore build scenarios of what the future ments and other studies. Much of this work has been
• Green Growth Knowledge Platform (with its headquarters in UN
might hold, taking into account a range of factors and supported by international organizations and partner- Environment Geneva)
variables. ships. There are a multitude of actors involved in sup-
• Green Industry Platform (UNIDO, UN Environment
porting green economy initiatives worldwide, including
A broad range of modelling tools are available to governments, UN system organizations, NGOs and the • Green Growth on-line e-learning facility (UNESCAP)
support policy analysis, including macro-economic private sector, as well as platforms, partnerships, pro- • WIPO Green platform
models that enable an assessment of dynamics and grams, funds and other initiatives. • Climate Change Knowledge Portal (World Bank)
impacts across sectors of the economy (e.g. Comput-
able General Equilibrium models, and system dynam- A review of green economy partnerships and initiatives • Climate Information Platform (UNDP with several partners)
ics models), as well as sectoral models which enable a in 2013 reported that at that time there were around 60 • Reegle (REEEP and REN21)
more detailed assessment of a sector of interest (energy, different initiatives globally supporting green economy, • Sustainable Development Knowledge Platform (UN DESA).
agriculture, water etc.) through simulation and optimiza- green growth and low-carbon development, as well as Partnerships
tion at a sectoral level (e.g. partial equilibrium models over 30 donor countries and a broad range of imple-
or systems engineering models). For example, Allen et menting organizations including UN Environment, the • The Global Green Growth Institute, established in 2010,
brings together a range of national governments, research institutes,
al. (2016) reviews 80 different modelling tools that can Global Green Growth Institute, the World Bank, UNDP, intergovernmental organizations and private sector actors
support national policy assessment for the SDGs, many FAO, GEF, UNIDO, IFAD, UNFCCC, OECD, ILO, REEEP • The Partnership for Action on Green Economy (PAGE), established
of which have been applied in the development of green and REN21 (UN DESA, 2013). These actors continue to in 2012, is being led by UN Environment with its partners the
International ILO, UNIDO, UN Institute for Training and Research
economy and low carbon strategies. The LEDS Global provide support for the green economy through a mul- (UNITAR)
Partnership also includes an online toolkit which lists titude of platforms and partnerships (Box 2). Informa-
• The Green Economy Coalition is a global network of organizations
around 80 tools to assess impacts and linkages between tion about many of these initiatives can be located on from NGOs, research institutes, the UN, business and trade unions
national development priorities and low emission devel- the Green Growth Knowledge Platform which provides for information exchange, awareness-raising and research
opment strategies (LEDS Global Partnership, n.d.). a portal to a broad range of research, publications and • The Low Emissions Development Strategies (LEDS) Global
Partnership is coordinated through Open Energy Info (OpenEI).
data on the green economy.
These publications, guidelines and toolkits provide a • International Partnership on Mitigation and Measurement, Reporting
useful starting point for countries and stakeholders who Since 2008 through its Green Economy Initiative and and Verification (MRV), REEEP, and REN21
are embarking on a national green economy planning more recently through PAGE, UN Environment and its • World Bank’s Wealth Accounting and Valuation of Ecosystem
process (see Appendix 2 for a non-exhaustive list of partners (UNITAR, UNDP, ILO and UNIDO) have sup-

Services (WAVES) Partnership, as well as the Economics of
Ecosystems and Biodiversity (TEEB) initiative led by UN Environment
tools). ported the preparation of green economy stocktaking with a range of partners
and scoping studies, national modelling or quantitative
assessments, green fiscal assessments, and national

green economy roadmaps and strategies. Country-level ment Policy Review, as well as the Going for Growth Papua New Guinea, Bangladesh, Rwanda and Kenya.
engagement includes green economy scoping studies annual report and the Green Cities Programme. These The Partnership on Transparency in the Paris Agreement
in 22 countries, green economy modelling or quantitative analyses cover advanced, emerging and other econo- provides a summary of global good practices in LEDS
assessments in 12 countries, and support for the devel- mies, and include several studies specifically focused implementation.
opment of national green economy roadmaps, strategies on green growth indicators and assessments in a range
or action plans in six countries (UN Environment, 2015). of countries.
A total of 12 developing countries are currently receiving
funding and technical support for green economy plan-
ning through PAGE, which aims to support 20 countries 3.6 Progress in countries’ transitions to
by 2020. inclusive green economy pathways Box 1.3. A selection of national green
Through its Green Growth Planning and Implementation economy strategies
Overall, UN Environment (2015) reported that 65 coun-
Division, the Global Green Growth Institute (GGGI) has tries had embarked on a green economy pathway or a • Cambodia’s National Green Growth Road Map (2009)
been working since 2010 with a range of partner gov- related strategy worldwide, with 48 of these developing • France’s National Sustainable Development Strategy: Towards a
ernments to support the development of national Green national green economy plans as the centrepiece of
Green and Fair Economy (2010)
Growth Plans. As of 2018, they had provided support to these strategies. Although much of this work remained at • Ethiopia’s Climate‐Resilient Green Economy Strategy (2011)
26 countries. Their approach involves macro-economic a scoping or early analytical phase, a number of coun- • South Africa’s Green Economy Accord (2011) and Green Economy
and sectoral analyses to identify green growth oppor- tries have published national green economy strategies Strategy (2014)
tunities as well as the design of sectoral and financing or roadmaps. The Republic of Korea was a front-runner • Rwanda’s Green Growth and Climate Resilience Strategy (2011)
strategies. To undertake this work, the GGGI has part- in these efforts, finalising its National Strategy for Green • Viet Nam’s Green Growth Strategy (2012)
nered with respective national governments as well as Growth and Five Year Plan in 2009. Box 1.3 lists some of
a number of other organizations, including UNESCAP, the related country strategies.
• UAE’s Green Growth Strategy (2012)
the Korea Institute for International Economic Policy, the • Chile’s National Green Growth Strategy (2013)
Korea Legislative Research Institute, the European Bank There is also considerable related experience with • Peru’s National Green Growth Strategy (2014)
for Reconstruction and Development (EBRD) and UN low-carbon development planning. Based on UNDP esti-
• Kenya’s Green Economy Strategy and Implementation Plan (2015
Environment. mates in 2017, around 88 countries have adopted some
form of LEDS in the context of UNFCCC commitments. • Malta’s Green Our Economy – Achieving a Sustainable Future (2015)
Based on the general framework outlined in its Green Over the past decade, several emerging economies with • Indonesia’s Green Growth Roadmap (2015)
Growth Strategy launched in 2011, the OECD has main- substantial GHG emissions (notably Brazil, China, India, • Fiji’s Green Growth Framework (2015)
streamed green growth into its national and multilateral Indonesia, South Africa and Republic of Korea) have
policy surveillance exercises in order to provide policy developed integrated strategies on climate change and
• Egypt’s Green Economy Strategy (2016)
advice that is targeted to the needs of individual coun- development or low-carbon growth. Moreover, a number • Jordan’s National Green Growth Plan (2017)
tries. These include its Economic Surveys, Environmental of the lowest-income countries have elaborated inte- • Uganda’s Green Growth Development Strategy (2018)
Performance Reviews, Innovation Reviews, and Invest- grated climate and development strategies, for instance

4. Concluding remarks in such technologies, which will build green economies tutions discusses in more detail the process of the insti-
over time. tutional change that is required.
This chapter has highlighted that the achievement of
the 2030 Agenda for Sustainable Development and As a result, there is a growing catalogue of case studies, The emergence of the inclusive green economy agenda
the SDGs will depend in large part upon getting the success stories, guidelines, methods and tools as well reflects a confluence of interests. For one, there was a
economy right. In practical terms, an alternative is as empirical evidence that can assist countries and growing sense among many in the sustainable devel-
needed to today’s dominant take-make-dispose eco- stakeholders in building inclusive green economies. A opment community that a new approach was needed
nomic model which generates widespread environmen- broad range of international organizations, stakehold- in order to engage with and influence economic policy.
tal damage, encourages wasteful consumption and pro- ers, think tanks and researchers have contributed to this Secondly, the financial and economic crises, which
duction, and drives ecological and resource scarcities. work through technical and financial support, as well as started in 2008, triggered awareness around the failure
the elaboration of operational principles, policy toolkits of conventional economic policy to address environmen-
Proponents of a green economy expect that this requires and methodologies that can be utilised by governments tal risks and inequality. This awareness has generated a
an approach focused on economic policy, and will entail and stakeholders to support implementation. growing demand for change. Thirdly, the growing mate-
far greater ambition than has been observed under the rial reality of climate change and resource degradation
banner of sustainable development. This requires a new Despite growing interest in a green economy, however, for business has generated recognition of the increasing
paradigm of economic development – one that focuses this agenda still remains on the margins of economic risks to their way of working, as well as new opportuni-
on improving human wellbeing and equality while also policy in most countries. Influential organizations such ties to be seized.
reducing environmental impacts and resource consump- as the OECD, World Bank and G20 have endorsed the
tion. This relies on major policy changes and depends green economy or green growth, but there has been An analysis of the political economy of a transition to a
significantly on investment, innovation and related tech- little mainstreaming into their core work programs and green economy is beyond the scope of this chapter, and
nological advances. economic policy advice. Indeed, the take-make-dis- indeed, of this book. Other chapters do provide frame-
pose economic model seems very much entrenched. works for thinking about how various areas of economic
A large and growing number of governments in both One pertinent reason for this are political and economic policy can address and support a green economy tran-
the high- and low-income world are now exploring a vested interests in existing economic assets. Develop- sition. As countries continue to develop green economy
green economy pathway towards sustainable developing new business models to support sustainable con- strategies and policies, the growing evidence base
ment and the SDGs, with some pursuing concrete steps. sumption and production may involve substantial disrup- and increased awareness will likely contribute to further
While there is yet to be a clear model of an IGE, there tion and “creative destruction” in many industries. The momentum.
are many examples of green sectors and technologies massive change in economic structures brought about
ranging from renewable energy, energy and water effi- since the turn of the millennium by information and com-
ciency technologies, organic agricultural production munication technologies provides some actual examples
techniques, and waste minimising or reuse technologies. of how quickly economic structures can be shifted. While
this has largely been a process undirected by govern-
Governments (at various levels – national, provincial,
ments or leading social coalitions, a green economy
municipal) and businesses around the world are putting
transition will require such guidance. Chapter 6 on insti-
in place measures to stimulate investment and growth

5. Appendices Concept Definition Main emphasis
Green Growth Concept closely related to green economy, which harmonizes economic Environmentally sustainable eco-
development with environmental sustainability, whilst improving eco-effi- nomic growth
5.1 Overview of related concepts ciency and enhancing synergies between environment and economy.
The emergence of the IGE as a model for achieving sus- Low Carbon Low emission development strategies (LEDS), which include national eco- Low emissions trajectories
tainable development has been accompanied (or pre- Development nomic development plans with reduced emissions and climate resilient eco-
ceded) by a range of related concepts, including green nomic growth.
growth, low carbon development, circular economy, Circular Economy Turning goods that are at the end of their service life into resources for Waste reduction, material reuse
steady-state economy, and bioeconomy, amongst others; closing loops in industrial ecosystems and minimizing waste through and redesigned value creation
others. These concepts have emerged from a range of material reuse, extended product life, repair, re-manufacturing or upgrading. from products and services
different disciplines and therefore have different epis- Steady-State An economy where the main biophysical stocks and flows are stabilized and Reduction in consumption and
temologies, ideologies, theoretical constructs, scales Economy and the flows of material and energy stay within ecological limits. production
of implementation, areas of focus, and usage of terms, De-Growth
which make them complex and sometimes difficult to Bioeconomy Where the use of biological resources (plants, animals, microorganisms) Improving environmental effi-
navigate. They also have different supporters and target plays a leading role and biotechnology has an important impact on eco- ciency of industrial production
audiences, and are at different stages of development nomic output.
ranging from purely theoretical to applied.
However, they also have a number of similarities in that green growth, for 5.1.1 Green Growth
Key term:
they recognise that today’s dominant take-make-dispose Material throughput the most part, these
economic model generates widespread environmental approaches can only be
Material throughput: A consideration The concept of green growth is closely related to green
damage, encourages wasteful consumption and produc-
of all the types of energy and ma-
considered desirable economy, but has gained impetus especially through
terials used in creating a product
tion, and drives ecological and resource scarcities. They characteristics of an
throughout every stage of the eco-
the Asia-Pacific Region. At the Fifth Ministerial Confer-
offer alternative approaches and tools to advance sus- nomic cycle from extraction to dispos-
inclusive green economy. ence on Environment and Development (MCED), held
al. Adapted from:
tainable development that does not rely upon the domi- They are generally not
http://www.sustainablescale.org/
in 2005 in the Republic of Korea, governments and
nant linear approach to development. They have similar economic models, and other stakeholders from Asia and the Pacific agreed to
objectives around improving efficiencies, minimising they do not offer a transi- move beyond the sustainable development rhetoric and
waste, internalising externalities, and decoupling growth tion pathway towards sustainable development. In recent pursue a path of green growth. To do so, they adopted
from resource consumption. They aim to tackle major years, key concepts and methods from these different the Seoul Initiative Network on Green Growth and a
sustainable development challenges, including decar- approaches have been integrated into the inclusive regional implementation plan for sustainable develop-
bonization and reducing material throughput. green economy approach, in particular the ideas around ment. This commenced a broader vision of green growth
circularity and sharing drawn from the circular economy. as a regional initiative of the UN Economic and Social
While some are very closely related to an IGE , e.g. Commission for Asia and the Pacific (UNESCAP), where

it was viewed as a key strategy for achieving sustainable the Green Growth Leaders. In February 2012, the World LEDS was put forward by the European Union in 2008,
development as well as the MDGs (UNESCAP, 2012). Bank along with UN Environment, the OECD and GGGI highlighting how information on planned low‐carbon
This was illustrated by the placement of the headquar- launched a new international knowledge‐sharing platform pathways can help to inform the international community
ters of GGGI in the Republic of Korea, which aimed at – the Green Growth Knowledge Platform (GGKP) – bring- about funding needs and priorities and to help gauge
helping the Asia and Pacific region to ‘leapfrog’ over the ing together, under the same roof, the major international the level of global climate change action (OECD & IEA,
industrialization patterns of the developed world, and organizations supporting and promoting both green 2010). More recently, the Paris Agreement in 2015 reiter-
avoid the trap of ‘growing first, cleaning up later’ (Atkis- growth and green economy. GGKP aims to enhance ated that all parties should strive to formulate and com-
son, 2012). GGGI is dedicated to diffusing green growth and expand efforts to identify and address major knowl- municate long-term low emission development strate-
as a new model of economic growth, with a particular edge gaps in green growth theory and practice, and to gies.
focus on energy and climate change. help countries design and implement policies to move
towards a green economy. The discourse of integrating climate change and devel-
With the publication of its Green Growth Strategy in opment builds on a large body of literature, which was
2011, the OECD became a key proponent of green assessed by the IPCC in its fourth assessment report,
growth, with several subsequent publications and pro- 5.1.2 Low Carbon Development and distinguished between the ‘climate‐ first’ approach
grams to support countries in assessment and imple- and a ‘development‐ first approach (Ellis et al., 2009).
mentation (OECD, 2011). The OECD shifted the empha- The concept of low carbon development has its roots in The concept of low carbon development takes a devel-
sis of green growth from a more traditional focus on the UNFCCC adopted in Rio in 1992, where it is com- opment ‐first approach which rethinks development
environmental impacts, towards a more coherent growth monly referred to as low-emission development strat- planning and proposes structural solutions, such as
agenda. egies (LEDS – also known as low‐carbon development alternative infrastructure, with lower emission trajectories
strategies, or low‐carbon growth plans). LEDS are gen- (Morita et al., 2001). It focuses on addressing and inte-
At the G20 Seoul Summit in 2010, leaders also recog- erally used to describe forward‐looking national eco- grating climate change with development objectives and
nized green growth as an inherent part of sustainable nomic development plans or strategies that encompass is therefore a useful approach for low-income countries.
development, which complemented efforts by UN Envi- low‐emission and/or climate‐resilient economic growth In practice, the plans are often combinations of new and
ronment and others to encourage a Global Green New (OECD and International Energy Agency [IEA], 2010). existing elements, all combined in a new way to address
Deal. Leaders agreed to take steps to create enabling Low carbon development is an important component of pre‐existing economic policy objectives along with the
environments for the development of energy efficiency a green economy or green growth agenda, with LEDS need to slow climate change and prepare for its impacts.
and clean energy technologies, which featured heavily as a tool for setting clear targets, assessing options and
in the response of G20 countries to the global financial ensuring policy coherence across key sectors with a A growing number of international organizations and
crisis. In 2012, the Mexican Presidency of the G20 intro- strong carbon footprint (e.g. energy, agriculture) or that consultancies have also been involved in low‐carbon
duced inclusive green growth as a cross‐cutting priority are vulnerable to climate change impacts. development programmes, including the UNDP, UN
on the G20 development agenda. Environment, the World Bank (including through its
LEDS have attracted interest in the climate negotia- Energy Sector Management Assistance Program),
A number of other international organizations, think tions as a soft alternative to voluntary or obligatory GHG ClimateWorks, the Climate Development Knowledge
tanks and academics have also turned their attention emission reduction targets in developing countries (Van Network, the World Wildlife Fund (WWF), the Euro-
to green growth, including the World Bank (2012) and Tilburg et al., 2011). The initial proposal to introduce

pean Union and a variety of bilateral donors. In 2011, damental characteristics of an inclusive green economy. and productive output.
Key term:
the LEDS Global Partnership was founded to facilitate Capital formation Nevertheless, concerns
peer learning, technical cooperation and information In contrast to a linear economy, the circular economy over resource security
Growth in total capital stock.
exchange to support the formation and implementation focuses on a continuous positive development cycle and negative externali-
of LEDS. that preserves and enhances natural capital, optimises ties such as carbon emissions are shifting perspectives,
resource yields, minimises system risks by managing with many seeing materials as assets to be preserved,
finite stocks and renewable flows and fosters system as opposed to continually consumed. Business models
5.1.3 Circular Economy effectiveness by designing out negative externalities that adopt a sharing approach are also increasing in
(Webster, 2015). In simple terms, a circular economy popularity, as evidenced by the popularity of companies
The conventional economic model is rooted in a linear turns goods at the end of their service life into resources such as Uber, AirBnB, and Mobility.
and unidirectional concept of production, which com- for others, minimizing waste and closing loops in indus-
mences with natural resources entering one end of the trial ecosystems. Circular economy business models In the past decade, countries such as the Republic
production process and economic products emerging can be divided into in two groups: they either promote of Korea, China and the United States have started
at the other (George et al., 2015). Market economies reuse and extend service life through repair, remanufac- research programmes to foster circular economies by
focus primarily on increasing the value of these eco- ture, upgrades and retrofits; or turn old goods into new boosting remanufacturing and reuse. The European
nomic products, with little regard given to the depletion resources by recycling materials (George et al., 2015). Commission adopted a wide-reaching Circular Economy
of natural resources and accumulating wastes. This This challenges traditional economic and business Action Plan in 2015. Japan, Austria, Germany and the
linear model relies upon large quantities of cheap, easily logic because it replaces production with sufficiency: Netherlands have also developed strategies compatible
accessible materials and energy and an infinite capacity reuse what you can, recycle what cannot be reused, with circular economic activities (Stahel, 2016). In China,
of the Earth’s natural systems to absorb the waste, pollu- repair what is broken and remanufacture what cannot the circular economy has been acknowledged by the
tion and environmental impacts associated with produc- be repaired (Stahel, 2016). A study of seven Euro¬pean central government as an important strategy for achiev-
tion. nations found that a shift to a circular economy would ing sustainable development (George et al., 2015).
reduce each nation’s GHG emissions by up to 70 per
As an alternative to the linear approach, the idea of a
cent while growing its workforce by about 4 per cent
‘circular economy’ was first developed in the 1960s 5.1.4 Steady-State Economy and De-Growth
(Stahel, 2016).
by a pioneer ecological economist who conceived the
Earth as a single spaceship with limited reservoirs for However, the concept has been slow to gain traction. Other concepts that have been influential in the dis-
extraction or pollution (Boulding, 1966). Environmen- Creating wealth by making things last focuses on pre- course around the need for an alternative economic
tal economists have further developed the spaceman serving physical stocks, and runs contrary to current model includes the ‘Steady-State Economy’ (Cobb &
concept by articulating the need for a shift from an business models as Daly, 1973; Daly, 2008; Czech, 2013; Dietz & O’Neill,
open-ended economic system to a closed-loop circular Key term: well as mainstream eco- 2013; O’Neill, 2015) and ‘Degrowth’ (Latouche, 2009;
Product throughput
economy (Pearce & Turner, 1990). The closed-loop, or The amount of a product a company nomics, which focus on D’Alisa et al., 2014).
circular approach, presents the opportunity to address can produce and deliver in a specific product throughput,
The concept of a steady-state economy was largely
how we create value in our economies and minimise the period of time. Adapted from https://
www.investopedia.com/
new capital formation
liabilities or externalities that they create, which are fun- developed by ecological economist Herman Daly in the

1970s (Daly, 1977), although its roots stem from classical economics community consider it a useful and prag- 5.1.5 Bioeconomy
economists. It describes an economy where the main matic vision of a sustainable society (Costanza et al.,
biophysical stocks and flows are stabilised, and mate- 2014). The concept of bioeconomy has its roots in the biologi-
rial and energy flows are kept within ecological limits. cal sciences and biotechnology sectors. As an important
Steady-state economics is one of the most influential the- Distinct to this, degrowth has been defined as an equita- input factor in many sectors of the economy, biological
ories in ecological economics for considering the interre- ble reduction of economic production and consumption resources cannot be ignored when attempting to solve
lated nature of ecological and economic systems. Eco- which increases human well-being and brings material the global challenges of a rapidly growing world popula-
logical economics takes major inspiration from the work and energy use within ecological limits (Schneider et tion, the depletion of fossil resources, and environmental
of Georgescu-Roegen (1977) and the Club of Rome al., 2010). Whereas the concept of steady-state advo- protection and climate change (OECD, 2009; Efken et
(Meadows et al., 1972), who argue that there are strict cates that market mechanisms can be used to stabilise al., 2016; McCormick & Kautto, 2013). The bioecon-
physical limits to growth which will inevitably end the resource use, degrowth is sceptical of commodification, omy is defined as all industrial and economic sectors
growth of the economy (Malmaeus & Alfredsson, 2017). and often even of capitalist institutions (O’Neill, 2015). and their associated services which produce, process
Although degrowth economists tend to emphasize social or in any way use biological resources, such as plants,
Daly (1996) outlines the features of a steady-state outcomes in comparison with their steady-state coun- animals, or even micro-organisms (Efken et al., 2016).
economy in some detail, based on a constant and sus- terparts, the two concepts are complementary (Kallis, These sectors include for example agriculture and for-
tainable level of physical throughput as a fundamental 2011). For example, if a sustainable economic scale has estry, the food industry, fisheries, aquaculture, parts of
boundary condition. This vision describes an ecolog- been exceeded, a process of degrowth may be neces- the chemical, pharmaceutical, cosmetic, paper and
ically sustainable economy that uses materials and sary before a steady-state economy can be achieved textile industries, as well as the energy industry.
energy within the regenerative and assimilative limits (O’Neill, 2015).
of the planet’s ecosystems (Pirgmaier, 2017). As we In a bioeconomy, biotechnology contributes to a signifi-
approach or overshoot the sustainable scale, the aim Overall, while both concepts provide useful theoretical cant share of economic output as it offers technological
can no longer be quantitative growth but qualitative insights into the characteristics of alternative economy, solutions for many resource and health-based prob-
development, leading to “an economics of better, not recent research suggests that no country in the world lems the world is facing (OECD, 2009). A bioeconomy
bigger” (Daly, 2008; Daly, 1996). has yet achieved a true steady-state (i.e. stable stocks involves three elements: biotechnological knowledge,
and flows at a level of resource use that is environmen- renewable biomass, and integration across applica-
By incorporating this concept of finite, or sustainable tally sustainable) (O’Neill, 2015). To place this in context, tions. Biotechnology
scale, the steady-state framework is different from the an inclusive green economy aims to offer an alternative Key term: can support sustainable
Renewable biomass
standard environmental economics solution of getting economic model and transition pathway which may con- A renewable source of energy derived development by improv-
prices right. However, others argue that if scale is set tribute to desired characteristics such as a steady-state from organic matter such as wood or ing the environmental
waste.
first, then there is nothing wrong with using the market of material throughput in an economy. efficiency of primary pro-
mechanism for determining prices that reflect relative duction and industrial
resource scarcity (Pirgmaier, 2017). Critique of steady- processing, and by helping to repair degraded environ-
state economics has been limited. Mostly ignored in mental resources such as soil and water. To place this in
mainstream economics, large parts of the ecological context, an inclusive green economy would drive growth

and investment in the sectors and technologies that
make up the bioeconomy.
Bioscience leaders such as the European Union, Japan
and the United States view the expansion of the bioecon-
omy as a means of reindustrialising and creating wealth,
while emerging indus¬trial economies such as China
and India view biotechnology as a nascent field of inno-
vation in which they can quickly compete (El-Chichakli,
2016). Countries such as Brazil, South Africa and Malay-
sia are also investing to add value to their vast biologi-
cal resources. This represents an emerging opportunity
where building an inclusive green economy can help to
drive investment.
Additional resources
Uncovering Pathways to an Inclusive
Green Economy
The UN’s Sustainable Development
Goals
Re-thinking Progress: The Circular
Economy

5.2 Appendix 2: Tools to guide green economy strategies
Policy tools Sectoral tools
Green Economy Toolkit for Policymakers Energy:
Lessons from Country Experiences (GGBP) Model of Energy Supply Strategy Alternatives and their General Environmental Impacts (MESSAGE)
Modular Applied GeNeral Equilibrium Tool (MAGNET) Indicators for Sustainable Energy Development
Inclusive Green Growth Toolkit Cost of Renewable Energy Spreadsheet Tool (CREST)
EC4MACS Clean Energy Emission Reduction Tool (CLEER)
Green Jobs Assessment Ventana’s Energy, Environment, Economy-Society model (E3S)
World Induced Technical Change Hybrid model (WITCH) Wien Automatic System Planning package (WASP)
De-risking Renewable Energy Investment (DREI) EnergyPlus Building Energy Simulation Program
Sustainable Energy Roadmap and Implementation Plans (SERIP) Model for Analysis of Energy Demand (MAED)
The Integrated MARKAL/EFOM System (TIMES) Derisking Renewable Energy Investment (DREI)
Low-Emission Development Strategies (LEDS) Tool Renewable Energy Data Explorer (RED-E)
Green Bonds for Cities: A Strategic Guide for City-Level Policymakers in Developing Countries Soil and Water:
Roadmap Model Soil and Water Assessment Tool (SWAT)
SimCLIM (CLIMSystems) AQUEDUCT
The CURB Tool: Climate Action for Urban Sustainability Agriculture:
Green Industrial Policy and Trade: A Tool-Box Predicting Ecosystem Goods and Services Using Scenarios (PEGASUS)
Resource Watch: Data for a Sustainable Future Agricultural Model Intercomparison Project (AgMIP) Tool
The Sustainable Asset Valuation Tool (SAVI) Agriculture and Land Use National GHG Inventory and Mitigation Analysis Software
Transportation:
Systemic tools Trip Reduction Impacts of Mobility Management Strategies (TRIMMS)
Threshold 21
Transport Co-benefits Calculator (TCG)
International Futures (IF)
Climate:
WorldScan
SDG Climate Action Nexus Tool (SCAN)
Integrated Green Economy Modelling Framework
Harmonized Emissions Analysis Tool Plus (HEAT+)
Green Economy Progress (GEP) Measurement Framework
Global Change Assessment Model (GCAM)
PoleStar
Adaption Support Tool (CLIMATE-ADAPT)
Regional Economic Models, Inc. model (REMI)
Energy-Environment-Economy Global Macro-Economic (E3ME)
Jobs and Economic Development Impact Models (JEDI)
Gender and Inclusion Toolbox: Participatory Research in Climate Change and AgricultureTool (ALU)
Global Change Assessment Model (GCAM)
2050 Pathway Calculator
Climate Change and Health: A tool to estimate health and adaption costs
Energy-Environment-Economy Global Macro-Economic (E3ME)
Integrated Global System Modelling Framework (IGSM)
Integrated Model to Assess the Global Environment (IMAGE)
Intertemporal Computable Equilibrium System (ICES)
MARKet Allocation (MARKAL)
Mitigation Action Assessment Protocol (MAAP)
Green Growth Indicators 2017
Sustainability Map
Resource Watch: Data for a Sustainable Future
The Sustainable Asset Valuation Tool (SAVI)
Trade and Environment Database (TREND)
Green Business Model Navigator

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CHAPTER 2: THE MACROECONOMICS
OF A GREEN ECONOMY
CHAPTER 2:
THE MACROECONOMICS OF A Derek Eaton
GREEN ECONOMY
Technopolis Group
Derek Eaton is an economist and currently principal consultant with

Technopolis Group. He has contributed substantially to the international
policy agenda on green economy, bioeconomy, circular economy, resource
efficiency, and associated measurement frameworks.
At UN Environment, he was an author and a member of the core production

team for the flagship report, “Towards a Green Economy”, published in 2011.
LEARNING OBJECTIVES He has advised a range of governments, business, international organizations
and NGOs. He holds a PhD in economics from Wageningen University, an
This chapter aims to enable its readers to: MSc in environmental economics from University College London and a BSc
from the University of Toronto.
• Appreciate the need for a clear and comprehensive macroeconomic framework
for research and policy analysis to support an inclusive green economy;
• Understand the concept of multiple capital stocks – including human, physical, Xin Zhou
natural, social, institutional – and their utility in advancing the inclusive green
economy; Institute for Global Environmental Strategies
Dr. Xin Zhou is Leader of the Strategic and Quantitative Analysis Centre at the
• Become aware of the limitations of existing modeling tools in macroeconomics for
Institute for Global Environmental Strategies. She has more than 20 years of
guiding the transition process and short-run macroeconomic policy; and experience in environmental policy analysis. She is now leading a couple of
research projects related to Sustainable Development Goals interlinkages and
• Appreciate the role of economic accounts and statistics in informing policy and, climate policy assessment, etc.
the benefits of developing and adopting extended frameworks of the System of
She led the development of a couple of practical tools supporting integrated
National Accounts. policy making for achieving sustainable development, including the SDG
Interlinkages Analysis and Visualisation Tool. Prior to joining IGES in 2007, she
was Director of Environmental Policy Research at the Policy Research Center
for Environment and Economy.
CHAPTER CONTENTS As is argued in chapter one of this publication, this calls possible implications for specific domains of economic
for a shift from a siloed approach, seeking to maximize policy are clearly articulated. This approach is intended
1. Introduction certain economic benefits, to an integrated approach to provide a unifying departure point for other chapters
covering broader aspects of sustainable development. in this book.
2. Origins of green macro-economic thinking Macroeconomics, the discipline concerned with the
3. The economy in pictures: Stocks and flows study of economy-wide
Key term: phenomenon, has in the
4. Growth Macroeconomics
Macroeconomics is distinguished past concentrated on 2. Origins of green macro-
explaining the dynamics
economic thinking
from microeconomics which con-
5. Growth in a green economy: Towards centrates on specific products,
of inflation, employment,
balanced capital stocks groups of consumers, firms and
markets. Readers wishing to growth, exchange rates, Economics – most broadly defined as the study of
deepen their understanding of
6. Short-run dynamics: Transforming the economics, and the treatment of etc. To guide an integrated “human behaviour as a relationship between given ends
sustainability and inclusion, should approach to policy-mak- and scarce means” (Robbins, 1935) – has a long tradi-
components of aggregate demand consider consulting online CORE
textbook, “The Economy” (CORE
ing towards an inclusive tion of looking at resource and growth concerns. Some
7. Models for policy analysis Team). See also https://www.you- green economy, a tran- classical economists were very much concerned with
tube.com/watch?v=MKO1icFVtDc
sition that affects almost the potential limits to improving people’s living stan-
8. Data and accounting every aspect of production dards, particularly as population increased. Malthus’
9. Conclusion and consumption in the economy, the discipline of mac- (1798) predictions that population growth would diminish
roeconomics itself needs to evolve (see, for example, the benefits of improved agricultural productivity resulted
Vines and Wills, 2018). in economics being labelled “the dismal science”. It is
typically claimed that Malthus failed to foresee the pos-
1. Introduction We argue that a fully suitable macroeconomic framework
sibility that technological change would outpace popu-
for addressing a green economy transition does not yet
The world today faces many unprecedented economic, lation growth and this indeed appears to be the case, at
exist, though there are many useful elements that can
social and environmental challenges. Whereas the spe- least in aggregate, over the past 200 years. Now, with
guide both research and policy. This chapter will review
cific nature of challenges may vary in different countries growing awareness of planetary boundaries, the basic
previous and ongoing efforts from a range of economic
and regions, the degradation of the global environment Malthusian idea is gaining renewed attention (Clark,
paradigms, recognizing their different contributions, as
is affecting all of the world’s regions and interrelates in 2007; Galor and Weil, 2000; Peretto and Valente, 2015).
well as the relevant weaknesses. Thus, our perspective
complex ways with our social and economic systems. is one that openly recognizes ongoing differences and Economists began early to look at the question of
Environmental degradation, as a result of unsustainable debates between competing perspectives on macro- how to optimally use natural resources, including both
lifestyles and systems of production and consumption, economics. The reader should take away an overview
have become an economy-wide phenomenon, with of these frameworks and signposts on where to find
far-reaching consequences on the welfare of the world more in-depth information. In pursuing this objective, the
population. chapter takes a policy perspective which means that the
CHAPTER 2: THE MACROECONOMICS OF GREEN ECONOMY 2.1

renewable and nonrenewable resources 1. This field of
research continues to advance, with many insights for Box 2.1: Models in economics perspective, developments in macroeconomic models. Some of these are
resource management where resources are examined mentioned in the chapter and are published in journals such as Ecological
Economics (for example, Rezai et al., 2018; mentioned in Section 5).
separately. This line of enquiry does not generally con- An economic model is a simplified version of reality that allows us to observe,
understand, and make predictions about economic behavior. This chapter
sider the situation where such resources are critically Simulation models
refers to many different economic models. For readers with limited back-
These are based on theoretical models which are calibrated to real-world
necessary, or almost irreplaceable, in providing life-sup- ground in economics, we provide a short overview of various types of models.
data. Simulation models are used to analyze how certain measurable vari-
port functions for society – and hence the economy. Theoretical models ables (such as, output, employment, productivity, emissions) will change
under different assumptions, typically concerning policy, technology, or
The “scale issue” refers to the possibility that economic These are by far the most common type of model in economics. Theoretical
demographics. These models are usually calibrated using historical data and
models tend to be fairly simple in terms of the amount of detail they capture.
activity reaches a level that threatens such support These models are intended to deduce analytical insights and propositions
should be able to replicate robustly the actual path taken by key variables.
Simulation models help to better understand which factors and mechanisms
functions on which it depends. In other words, the scale concerning some mechanisms and relationships between economic vari-
play an important role in how the economy will react to modelled changes
ables. In this chapter, essentially all of the models discussed in Section
issue concerns the question of how big an economy can 5, including the vast literature of economic growth models, are theoreti-
or shocks. Unfortunately, other stakeholders, such as policy makers, often
become, relative to the natural systems and environment cal models. One common question that such models have been used for
treat or interpret the numerical predictions of simulation models as precise
forecasts, which is not their intended use. Simulation models are discussed
in which it is embedded. Interestingly, macroeconomics is “under what conditions can economic growth continue, with fossil fuels
primarily in Section 7 of this chapter.
providing most energy, and the risks posed by climate change?” While it is
was initiated to address a different type of scale issue – not possible to prove that a theoretical model is “correct,” it is often possible
Econometric models
aggregate employment – not one of the environmental to compare the predictions of a theoretical model with historical data to see
These are statistical models that are most often used to estimate the parame-
whether this provides support for the model.
constraints. ters (such as an elasticity of substitution) of theoretical models. Econometric
In macroeconomics, there is a basic distinction between neoclassical and models can also test the propositions of a theoretical model. If an econo-
The development of macroeconomics as a separate Keynesian models (or new Keynesian models). The basic difference revolves metric model is judged to be fairly robust, it can be used for predicting, or
around whether supply (as in neoclassical models) or demand (as in Keynes- forecasting, the values of economic variables under different assumptions.
sub-discipline is generally credited to Keynes, who ian models) plays a more prominent role. Almost all of the long-run growth Given the business cycle fluctuations in macroeconomics, a specialized class
realized that the circumstances of the Great Depres- models discussed in Section 5 can be termed neoclassical. The aggregate of econometric models, the dynamic stochastic general equilibrium models,
demand framework presented in Section 6 is based on Keynesian models. have been quite widely used for predicting short-run changes in aggregate
sion could not be explained by prevailing theories of Macroeconomic textbooks (such as Burda and Wyplosz, 2009; Romer, 2011) variables. These models do not include environmental variables and do not
the time, which stressed the notion of equilibrium. In explain these differences in considerable detail. In addition, there are less receive much attention in this chapter (though they are mentioned in Section
7).
his General Theory, Keynes (1936) analyzed why an orthodox, but interesting and perhaps promising from a green economy
economy might remain in a period with less-than-full

employment of labour and other resources, and pro-
posed that the economy has systemic features (includ-
with stimulating a return to full employment in the short tions from economists and scientists in other disciplines
ing feedback effects) and thus behaves differently than a
run. This resulted in the stream of macroeconomics con- that have challenged the manner in which economics
series of inter-linked equilibrating markets 2. At the time
centrating on short-term fluctuations in economic activ- has treated environmental limits, or the scale issue.
of writing the General Theory, Keynes was concerned
ity and the potential to stabilize these. Subsequently a
second stream developed, examining longer term trends Modern macroeconomic models of growth (e.g. Solow,
1 Optimal usually refers in economics to maximizing net benefits, which are ben- and factors explaining growth in aggregate output and 1956; Swan, 1956; Ramsey, 1928), initially developed in
efits minus costs. In the context of natural resource use, benefits are simply the income
income levels. In the following sections, we treat these the middle of the twentieth century did not devote much
or revenues from exploitation of the resources. Hotelling (1931) developed a seminal
analysis for exhaustible resources, while Dasgupta and Heal (1979) provided a major long and short-term perspectives separately. But first, attention to resource or environmental limits. (Box 2.1
advance for renewable resources.
we briefly review a selection of the important contribu- provides a general overview of models found in econom-
2 Referred to as General Equilibrium Theory.

ics.) Nonetheless, growing awareness of environmen- of theoretical models that incorporated some form of Nardi, Fella and Yang 2017), they have not been a core
tal consequences of industrial growth prompted some resource constraint, either as an input, or as a sink for focus of macroeconomic models in general.
original thinking by certain economists, based upon the environmental pollution, as well as the important process
understanding that the economy was embedded within of innovation, which offer solutions for addressing such In parallel to these developments in growth theory, an
and dependent upon nature. Boulding (1966) promoted limits as the negative economic implications manifested alternative stream of literature has developed under the
this idea with the concept of the Spaceship Economy, themselves. broad area referred to as ecological economics. One
which sees the economy as a closed system, much like of the focuses of ecological economics has been the
a spaceship, with a requirement to manage all energy, A recent revival of interest in the ideas proposed by implications of limits to the overall scale of economy.
material and waste flows internally. Georgescu-Roegan Malthus examines under what conditions limits to growth, Additional work in this area has analyzed and proposed
(1971) analyzed the implications of the laws of ther- in terms of resource availability, might hold. Historical how economic patterns of production and consump-
modynamics for understanding the economic activity, analysis of living standards over the long term suggests tion need to change to respect these limits. In current
emphasizing the entropy principle and the conserva- that the Malthusian mechanism, by which population policy terms, these have manifested themselves in con-
tion of energy. Such contributions remained decidedly growth outpaces increases in production, is supported cepts such as low-carbon economy, circular economy
outside of the mainstream of economic thinking. Many by some evidence, even when incorporating the offset- (McCarthy et al., 2018) and bioeconomy (OECD, 2018),
economists indeed reacted critically to the publication of ting influence of innovation (Clark, 2007). Unified growth among others. These are however general, aspirational
the Limits to Growth in 1972, which proposed that limited theory begins to address more directly what can be concepts, as opposed to analytical frameworks. There
supplies of certain natural resources would constrain termed the scale issue: the size of the human economy is still little direct consideration of how to think about
economic growth, possibly within decades (Meadows, et in terms of population and the demand on limited macroeconomic dynamics, and the management of the
al., 1972). Having seen what happened to Malthus’ pre- resources (e.g. Ashraf and Galor, 2011; Peretto and economy to achieve economic objectives of employment
dictions, economists saw considerable potential for inno- Valente, 2015). There has however been little attention in and adequate living standards, while respecting the
vation to overcome such constraints (Solow, 1974). this work to recognize environmental limits or planetary scale issue in the form of planetary and local boundar-
boundaries 4. ies. It might be argued that unless and until this integra-
Interest in growth theory revived in the 1990s, with the tion takes place, economic policy will continue to devote
development of a new generation of theoretical models A similar challenge is apparent with respect to social insufficient attention to sustainability.
that incorporated technological progress as an outcome objectives concerning equality and inclusiveness. Since
of the economic system (as opposed to a process that its inception in the aftermath of the Great Depression,
simply took place on its own) 3. With growing aware- macroeconomics has generally concentrated on issues
ness of sustainability challenges, in particular, climate of full employment. While issues of the relative distribu- 3. The economy in pictures:
tion of labour income, or the earnings of labour relative
change, some economists expanded their models to
include negative economic impacts from GHG emis- to the return to capital, have also received some atten- stocks and flows
sions (Smulders, 1994; Smulders, 2005; Acemoglu et tion in specific analyses (Piketty 2014; Raval 2017; De
This section reviews some of the basic representations
al., 2012; Aghion and Howitt, 1998). This led to a range of the economy in graphic form. Although economics
has largely been developed using mathematical rep-
3 In technical terms, this is referred to as making innovation endogenous in a 4 One example is the modeling of limits to land and food production by Lanz, resentations and models of key concepts and rela-
model, rather than exogenous. Dietz and Swanson (2017).

tionships, there is also a strong tradition of presenting Conversely, exports (X) are income
figures and diagrams for essential frameworks. Indeed, earned by selling goods and services to
these illustrations can end up being more powerful in other countries. Thus, an economy’s total
terms of their impact, particularly with a broader audi- income is the sum of its consumption of
ence (Raworth, 2017). We begin with a traditional its own goods and services by house-
approach to macroeconomic flows and then progress to holds (C + I), its government expendi-
some more recent attempts to capture the relationship tures on goods and services (G), and its
between society and environment, and the importance net exports (equal to deducting imports
of capital stocks. from exports; X - Z). A government pays
for its expenditures through taxes (T) it
The conventional representation of the macroeconomy levies on the private sector. These are
concentrates on the circular flow of income, as depicted therefore deducted from total income
in Figure 1. The diagram is based on the simple idea (at the top of the diagram) to arrive at
that expenditure and income are related: one person or household and business income (the
firm’s expenditure is another person or firm’s income. private sector).
This basic accounting identity – total income equals total
expenditures – lies behind national income accounting This circular flow diagram arose out
(see Section 7 below). of Keynesian macroeconomics in the
aftermath of World War II. It has been
Figure 1 indicates how households, firms and the gov- a key feature of economics textbooks
ernment interact in this flow of income and expenditures. since then, beginning with Samuelson
In the circular flow diagram, Households and firms are (1948) 6. It is important to reiterate that
represented as the private sector, because in essence the diagram is based on an account-
households own firms through equity investments including relationship – that income equals
ing pension funds 5 Governments and the private sector expenditure. However, this representa-
together account for domestic expenditures (C + I + G), tion does little in explaining how these
which is equivalent to the total production of goods and components (for example, household
services. The national economy also interacts with other Figure 1: Circular flow diagram (Source: Burda and Wyplosz, 2009)
consumption, savings, investment, etc.)
economies – the “rest of the world” – through trade. are determined. Critically, it does little to
Imports (Z) are expenditures on goods and services pro- explain how these variables change over demographics) might explain changes in one or more
duced elsewhere (so they are another country’s income). time and how other factors (for example, population and of these flows. The circular flow diagram is thus more
a representation of flows in the economy, rather than
5 Note that the diagram does not capture the distribution of ownership of firms 6 Raworth (2017) credits Paul Samuelson (1948) with popularizing the circular a model of how the economy functions and changes.
among households, which is currently very unequal (see for example, Piketty, 2014; flow diagram in his comprehensive and widely-used textbook, and also provides an
Boushey et al., 2017). It also does not represent government-owned companies, which interesting perspective on the role of such diagrams in influencing how we have com- Nonetheless, the diagram is extremely important as it
can be seen as an important simplification. partmentalized the economy.

other monetary flows and cannot be viewed as simply circular in nature. This suggests
that the economy should be seen as embedded within a natural system from which
energy and resources are obtained and which must also assimilate waste flows (which
include GHGs).
Figure 2 (left) is one representation of an embedded economy, which shows how the
economy is nested within the living world (Earth). In the centre, the circular flows of the
economy are now represented in a more simplified manner (as compared to Figure 1)
between state (government), households and businesses (the private sector), with an
additional representation of the shared or commons economy. The idea is that the circu-
lar financial flows are what is found in the centre. Most importantly, Figure 2 emphasizes
the two principal types of biophysical flows: energy and materials. In this framework, all
energy essentially flows from the sun. The economy uses energy, mostly stored by living
matter (recently or in the distant past) or more recently directly (through solar power and
thermal generation). The economy also emits waste heat to natural systems and addi-
tionally, there is a flow from the earth back into space, where living matter and mate-
rials flow into the economic system and waste matter flows back to the earth’s natural
systems.
Figure 2 also presents the economy as nested within society to emphasize the range
of social structures and institutions that support the economy. This also represents the
idea that the economy is a part of society. This presentation of the embedded economy
also portrays the spaceship earth idea mentioned above (Boulding 1966).
The nesting of the economy inside society within the natural environment is represented
Figure 2: Embedded economy (Raworth, 2017) in Figure 3 (overleaf), which connects each of these domains to the most relevant of the
17 SDGs. As with Figure 2, this suggests that the economy should meet social needs
provides the basis for thinking about such relationships and models. This means that but within environmental limits. This interrelated understanding of the various dimen-
the diagram plays a key role in determining how economists have then proceeded to sions of sustainable development contrasts with earlier representations of sustainable
study the macroeconomy. development as the intersection of three areas – economic, social and environment
– and the initial understanding of sustainable development as resting on three distinct
Ecological economists have criticized the circular flow diagram for not representing any pillars., which remained the most popular way of visualizing the concept since its emer-
energy, resource or waste flows. Some of these are included, for example, as household gence as a concept in the 1980s.
and business expenditures on energy and would be part of their total expenditures.
The problem though is that such flows, given their biophysical nature, are different from

Figure 3: The Sustainable Development Goals, according to biosphere, society and economy (Rock-
stöm and Sukhdev, 2016)
The emphasis then was on rebalancing the attention and priority given to competing
objectives, or goals. As stated, the nested model in both Figures 2 and 3 emphasizes
that the economy ultimately needs to operate within environmental boundaries, sug-
gesting that there are ways to align economic, social and environmental objectives. This
is the essence of the green economy. Figure 4: ‘The Doughnut’ economy (Raworth, 2017)

The concentric rings in Figure 3 are a visualization that has been employed by Raworth
(2017) in ‘The Doughnut’, presented in Figure 4. The Doughnut takes the nine plane-
tary boundaries, as proposed by Rockstrom et al. (2009), as an outer ring or limit for
humanity and its economy. The economy should not expand in scale – as measured by
resource and energy use, and waste emissions – beyond this ring. The inner ring rep-
resents social and economic goals.
The space between the rings – the doughnut – is the area representing a “safe and just
space for humanity”, in other words, for the economy. A regenerative and distributive
economy will be found in this space, meeting social and economic goals, while respect-
ing planetary limits. This figure calls for a reorientation of economic policy – with a focus
on moving the economy into this green Doughnut.
It should be noted that there is a difference among these figures. Figures 1 and 2 rep-
resent principle characteristics of how the economy functions. They are descriptive. In
contrast, Figures 3 and 4 explain how broad social, economic and environmental goals
are related to each other, and the place of the economy in meeting these. These figures
are prescriptive. The latter two provide a means for orienting the goals of policy and
action by government and other stakeholders. As discussed in Section 4, this reorien-
tation and alignment is a necessary component of an IGE agenda. The sections below
discuss some elements of this emerging model.
While Figure 2, of the embedded economy, emphasizes flows, as does the circular
diagram in Figure 1, other recent pictures have sought to represent important stocks
in the economy. Together, stocks and flows constitute the essential building blocks in Figure 5: The three capitals and wealth model (World Bank, 2017)
understanding how complex systems function, such as the economy. Economics has
conventionally concentrated on the stock of capital, which traditionally has referred to
physical capital in the form of machines, buildings and other structures, as well as the Natural capital can refer to specific natural resources stocks, such as forests, agricul-
stock of labour. Capital and labour are combined in a production function to produce tural land, fisheries, etc. It also represents the stock of ecosystems that supply eco-
goods and services. Classical economists in the 18th and 19th century recognized the nomically useful services, such as the absorption and neutralization of waste products,
importance of land as an important stock for economic production, primarily for agricul- including wastewater, hazardous chemicals, or gases, including CO2 or CFCs (ten
ture and forestry. Brink, 2012). Natural capital is a multi-level and complex concept, making it challenging
More recently, natural capital has been suggested to represent the stock of natural to measure and operationalize (see Chapter 3). This is however also the case for physi-
resources and ecosystems that provide a flow of goods and services for the economy. cal capital, and indeed other capital stocks.

pretation of the stock of labour, including also consider-
ations of skills, education, etc. The Bank’s ‘three capitals
and wealth’ model (see figure 5, right) demonstrates
how these forms of capital together comprise an econ-
omy’s total wealth (a stock), from which a flow of goods
and services (or national income) is derived and how it
corresponds to the economic statistic, gross domestic
product (GDP).
Related perspectives have added further categories of
capital stock. Figure 5 shows the Five Capitals Model,
which integrates social and financial capital. Financial
capital is especially relevant from a business perspec-
tive. Much of macroeconomics has tended to view finan-
cial wealth as a title or claim on other forms of wealth or
capital and therefore is not included as a separate type
of capital within its models and analytical frameworks.
For example, equity shares in a company represent
ownership of its assets, after satisfying creditors’ claims.
Since the 2008-2009 crisis, the need to integrate finan-
cial stocks into macroeconomics has been more widely
recognized.
Figure 6: Five Capitals Model (Forum for the Future, 2018) Social capital generally refers to collective and institu-
Figure 7: Six forms of capital (IIRC, 2013).
tional structures, at either a general value and belief level
(e.g. trust), or at a specific institutional level (e.g. rule
There are several other and similar frameworks that of law). There is a rich literature of economic research
describe the range of capital stocks. As an example, the on the importance of institutions in economic perfor- tual capital as an additional stock, which can be thought
World Bank has advanced work on wealth accounting mance 7. Figure 7 shows the six capitals framework proof as a stock of knowledge, including technologies.
at the national level (Lange et al., 2018), which has con- posed by the International Integrated Reporting Council As will be seen in Section 5, this concept has been given
centrated on the produced capital (also referred to as (IIRC 2013; GGGI 2016). This framework adds intellec- more attention in recent economic frameworks for under-
physical capital, or durable capital), natural capital and standing growth. Before moving on to a discussion of
human capital as the main stocks of productive wealth growth, we summarize this section by pointing out that
in an economy. Human capital captures a broader inter- 7 See, for example, Acemoglu (2009), Michalopoulos and Paapaioannou (2013), the different capital frameworks are similar. Many of the
and Alesina and Giuliano (2015).

frameworks here also present the idea of nested capi- perspective. The other argument advanced is that eco- As an example, green growth refers to absolute decou-
tals, with natural capital providing a basis for both social nomic growth should not be the primary focus of eco- pling. There is evidence that some OECD countries
and more purely economic (physical and financial) nomic policy, in the first place. These two lines are quite have already achieved some partial decoupling, where
capital. As will be discussed in Section 7, efforts have different in origin and implications. The first is based “partial” refers to decoupling of growth from some forms
progressed in how these various capitals can be mea- on considerations of environmental limits on economic of pollutants or natural capital (EEA, 2014).
sured. activity, while the second is concerned with how this
activity should be oriented and assessed. Both are dis- It is important, however, to distinguish between pro-
It may seem confusing that there is no definitive list of cussed in this section. duction and consumption perspectives, particularly in
the different types of capital, and that seemingly different using national-level data. The last few decades have
frameworks are used by different stakeholders. For the Beginning with environmental limits, it is clear that eco- seen major changes in the global economy with con-
purposes of considering a transition at a macroeconomic nomic growth has been characterized in the past by siderable growth in industrial production, particularly in
level to an IGE, the most important types of capital to increased resource use and emissions (OECD, 2011). China, India and other emerging market economies and
consider are produced, human and natural capital. The concept of green growth is based on the expecta- those that export to OECD countries. An analysis of the
These three categories have received the most attention tion that growth, in economic activity, can be completely resource use or emissions per capita, that is based on
in attempts to account for national wealth. Social and decoupled from material and energy use, so that the what a country’s consumers use, can indicate that the
intellectual capital are arguably equally important, partic- latter remain within local or planetary boundaries (OECD, associated impacts have simply been shifted from one
ularly in being able to produce a greater flow of benefits 2011). In terms of the different categories of capital, the producing area to another (EEA, 2014).
from the various capitals, but have received less atten- nature of growth would change as it becomes increas-
tion in analyses of national wealth, perhaps reflecting ingly costly to substitute physical capital for natural From a global perspective, there has been a geograph-
even greater measurement challenges. Financial capital capital, particularly forms of natural capital, such as eco- ical shift where resources are used or wastes emitted.
plays a greater role at the level of individual companies system services, which support many production and This suggests that decoupling and green growth ulti-
or households than it does at the national level. consumption activities, as well as human health. mately needs to be assessed from a global perspec-
tive, to reflect relevant planetary boundaries, such as
A distinction is made between relative and absolute GHG emissions and climate change. A consideration at
decoupling. Relative decoupling occurs when the rate national, regional, or local levels is still relevant for two
4. Growth at which resources are used increases more slowly reasons. One is that global challenges need to be dis-
than the rate of economic growth. This means that the aggregated to lower levels to develop goals, targets,
The scale issue that was referred to in Sections 2 and intensity of resource use, measured for example by the policies and programmes to achieve them. The other is
3 is often interpreted as questioning the pursuit of eco- amount of GHG emissions per unit of GDP, would be that various sustainability boundaries are more relevant
nomic growth. There are two general lines of argument declining. However, overall resource use would still be at other levels, such as in the case of freshwater man-
criticizing growth as an objective. One is that economic increasing, and is likely to be unsustainable over the agement, with local limits presenting challenges in many
growth simply cannot continue because it entails further longer term. Absolute decoupling, in contrast, occurs places.
increases in resource use and waste emissions, par- when the use of resources stops rising, and possibly
ticularly of GHG. This is the basis of the “de-growth” decreases, while economic growth continues to rise. The feasibility of absolute decoupling remains a subject
of debate. Some argue that growth inherently includes

increases in material and energy use, based on an anal- contains no information about how those components this might not be very equally distributed in society.
ysis of historical trends (Victor, 2012). One framework change over time. Proponents of green growth claim This suggests that growth is not sufficient and that addi-
that is often used to support this analysis is the IPAT that there are still many unexploited and unexplored tional policies, such as social security programmes and
equation, proposed by Ehrlich and Holdren (1971): possibilities for technological development, such as in income redistribution through fiscal policy, are necessary
the case of renewable energy, or circular manufacturing to ensure that the fruits of economic growth are shared.
I=P×A×T processes. Considering the potential energy sources Another perspective is that happiness and well-being
where I = impact, P = population, A = affluence and T = available on earth, the amount of freshwater available, are much less related to income and material standards
technology. and the potential agricultural production, among other of living, and more influenced by factors such as secu-
resources, it is not possible to conclude that decoupling rity and the strength of social relations, to name but a
The IPAT equation simply suggests that the total impact and green growth are unfeasible 9. From a macroeco- few. From this perspective, economic growth is not nec-
on the environment is determined by the interaction nomic perspective, it is not clear at all how long it might essary to improve people’s well-being. This proposition
between population size, average affluence (or income) take to reach such a state, as well as other features might be challenged in the context where people’s basic
and technology 8. Impact (I) can be interpreted in of the transition path. As discussed in the subsequent needs of food, shelter, water and health are not met, by
various ways, or dimensions of sustainability, such as section, some analyses are available, particularly con- some basic standards, such as the SDGs.
GHG emissions and climate change. It can also rep- cerning climate change, but much remains uncertain.
resent the use of other forms of natural capital or even As pointed out by Raworth (2017), this debate is very This reasoning is underpinned by a group of thinkers
specific resources. As affluence increases, which can be difficult, if not impossible, to settle as it involves beliefs that propose a redefinition of the concept of economic
interpreted as economic growth, resource use increases. about what is technologically and socially possible 10. progress, as one that does not necessarily involve
Technology also plays a role in determining the impact. growth (Jackson, 2011). In many ways, this involves a
Absolute decoupling would require that changes in tech- The other line of criticism around economic growth actu- measurement agenda, as there is certainly a broader
nology could more than compensate for increases in ally questions the pursuit of this growth as an economic consensus that the conventional measure of growth -
affluence (as well as population). In terms of the Dough- policy objective in the first place, indicating that this is increases in GDP - is flawed. Indeed, GDP was never
nut (Figure 4), absolute decoupling can be thought of neither necessary nor sufficient for the achievement of intended as a measure of well-being, even economic
as moving from outside the outer ring back towards the social goals such as increased happiness, welfare or well-being. Yet, it has become just that to many people,
“safe” band or space, particularly with respect to the equity, or reduced poverty. A growing body of research especially policy-makers. There is considerable analysis
objective of income and work, which is what GDP growth in the economics of well-being has found evidence that that illustrates the close – but not perfect – correlation
represents. measures of happiness and well-being are not highly between GDP and various social and economic indica-
correlated with economic growth. One interpretation is tors, and this is illustrated by its incorporation into the
The IPAT equation is useful for identifying the compo- that growth creates more income and wealth but that Human Development Index. The popularity of GDP might
nents of resource use and environmental impact. The be a result of its convenience, given the availability of
9 Hepburn and Bowen (2015) also use the IPAT identity to demonstrate that
equation is however more of an accounting identity and no-growth is also not necessarily going to deliver a level of greenhouse gas emissions data. This, however, is the result of substantial govern-
corresponding to little or no increase in average temperatures of the earth’s atmo- ment investment – a policy decision – in data collection
8 Note that the equation is not a precise mathematical model, although it can sphere.
be calibrated for particular impacts. For example, if I is total GHG emissions, and P is 10 Raworth (2017) describes this first view as “economic growth is no longer pos-
population size, A is GDP per capita and T is GHG emissions per unit of GDP, then the sible – and so it cannot be necessary”, which is opposed by a second view, namely that
equation “works” just as an accounting identity does. “economic growth is still necessary – and so it must be possible”.

and statistical offices to adopt the System of National 5. Growth in a green economy:
Accounts 11. Box 2.2. The Aggregate Production
towards balanced capital stocks
Some economists focus the need for solutions in Function
improved measures of economic activity and growth, The aggregate production function is a central concept in the economic
as discussed below in Section 5 12. Those who ques- 5.1 The production function and capital analysis of growth at the macroeconomic level. The production func-
tion growth prefer to see a focus on other aspects, and tion provides the amount of goods and services that can be produced
suitable indicators of progress, such as happiness

stocks given existing factors of production. Classical economists defined three
factors of production: physical capital, labour and land. The aggregate
among others, without directly considering whether Macroeconomics has two principal domains and asso- production function was introduced in the Solow growth model with only
physical capital and labour, corresponding to the stock of human capital.
such progress involves growth as measured by GDP ciated lines of analysis: one looking at fluctuations in The production function has been expanded to include natural capital
(van den Bergh, 2017). Raworth (2017) also suggests economic activity related to business cycles and shocks, (natural resources).
being “agnostic about growth”, arguing that resolving and another examining long-term processes of eco- In its most general form, the production function is written mathematically
the debate around growth is less relevant than devoting nomic growth. This latter area studies long-run struc- as:
more attention to such other goals. Ideas and frame- tural change in the economy, through a process called Y=f(K,L,R)
works such as the nesting of SDGs in Figure 3, and ‘capital accumulation’. Economists working on this topic,
Doughnut Economics presented in Figure 4, emphasize Where K represents the stock of physical capital, L the stock of human
attempt to identify specific factors that either promote capital (or labour), R the stock of natural capital (including resources,
the need to assess economic performance in terms of or inhibit growth with a particular focus on institutions though not limited to those), and Y is total production. Thus, in this
other outcomes and indicators. To formulate and guide and policies that concern, for example, education, simple sense, the production function embodies the technological possi-
bilities existing in an economy.
policy, it is also necessary to have frameworks – theo- trade and innovation 13. These determinants of long-
ries and models – that describe the functioning of the run growth have been studied by economists since the The general form of the production function above does not tell us how
much output can be produced. For that purpose, a specific function
economy in these terms. At the very least, frameworks 1950s. The core of this area of macroeconomics has needs to be used. Economists have used a number of different func-
need to integrate outcomes in terms of social and envi- been the aggregate production function, in which labour tions. One of the most popular is termed the Cobb-Douglas function:
ronmental considerations. The following sections will and capital are combined to produce goods and ser-
review long-run and short-run perspectives on the mac- Y=Kα×Lβ×Rγ
vices with the use of some technology, as in the original
roeconomy. It will be seen that there are a few limited Solow growth model (Solow, 1956; see Box 2.2) 14. These This includes three new parameters, or variables (αα,β,γγ), which deter-
macroeconomic frameworks that include some of the goods and services are either consumed or invested in mine how much the additions to the respective capital stocks will
increase production. The nature of the production function also deter-
issues. It should, however, be clear that these remain the production of more physical capital. The model has mines the degree to which capitals can be substituted for each other in
inadequate for the task of policy guidance and remain been used to assess under what conditions an economy the economy. Acemoglu (2009) provides a detailed discussion on the
aggregate production function and its use in economic growth theory.
an open and urgent field for research and development.
13 A comprehensive treatment is found in the leading graduate level textbook by
Acemoglu (2009).
14 The discussion here concentrates on “mainstream” neoclassical macroeconom-
ics. There are various other approaches and lines of research. From a green economy
11 Tily (2015) provides an account of how economic growth as an objective came perspective, “Keynesian” models have recently been developed to incorporate climate
to dominate economic policy making in the 1950s and 1960s. change, as well as income distribution and inequality issues (see, for example, Rezai
12 Hepburn et al., (2018) provide detailed arguments in favour of the green et al., 2013; 2018) and some other approaches have been proposed (Rezai and Stagl,
growth agenda. 2016).

reaches a balanced growth path, which is character- overcome the growing scarcity of natural resources. It collapse. There can be tipping points after which such
ized by constant growth rates in key indicators such as also relies, to some degree, on being able to substitute feedback effects lead to an acceleration of change.
output, capital stock, and capital per worker. The Solow other inputs, such as labour and physical capital, for Natural capital is a multi-dimensional concept – there are
growth model was developed to help explain observed natural capital. The nature and extent of substitutability many individual stocks of natural capital and some are
differences in growth rates across countries. The model between natural capital and other capitals is a critical nested inside others (natural resources inside ecosys-
proposes that such differences must arise primarily due issue for a sustainable economic development pathway. tems, for instance). Natural capital that provides envi-
to differences in the effectiveness of labour, and not due ronmental and ecological services to maintain the pro-
to differences in the amount of physical capital accu- In the aggregate production function framework, there is ductivity of other types of capital is an essential factor of
mulated. This resulted in considerable research into more than one combination of different types of capital, production. Therefore, it seems logical that in some ways
the many factors that can influence the effectiveness of together with other inputs, that produce a given amount natural capital is substitutable, but that in others it pro-
labour, including knowledge, education, infrastructure, of output. For example, machinery (physical capital) vides a necessary complement to inputs in production
institutions, such as property rights. permits the production of many goods using less labour from other capital stocks 16. Clearly, if natural and phys-
(human capital). Traditionally, physical capital has been ical capital were perfect substitutes, there would never
A major limitation of early growth models is that natural considered as substituting for natural capital in produc- have been a need to develop physical capital in the first
and environmental resources were ignored as inputs to tion processes. Agricultural crops, on the one hand, can place (Costanza and Daly, 1992). Empirical analysis of
production, as were the resulting pollutants that have be produced using either extensive techniques, employ- this issue suggests that the substitutability of natural
a negative effect on the stocks of natural, physical and ing more land with less mechanization and chemical capital is either low or moderate (Cohen et al. 2017),
human capital. The production function was based on inputs, or intensive practices, applying more of such although such conclusions are limited to understanding
only two capital stocks (physical and human), and did capital and inputs to a given parcel of land. There is thus history, based on past and current technology.
not explicitly recognize natural capital (Common and a certain degree of substitutability between the services
Stagl, 2005). Some opportunities have been exploited provided by different capital stocks. At the same time, There is a clear link between substitutability and tech-
to expand the types of capital included in these theo- there is still complementarity. Machinery, on the other nology. The substitutability and complementarity among
retical models. For example, Ayres et al. (2013) offer a hand, is combined with land and labour to produce various forms of capital is captured by the technology
particularly salient extension of the use of the production crops. This means that the process of industrialization in the production function 17. If natural capital is being
function in analyses of economic growth by including is traditionally seen as one in which stocks of natural depleted, which leads to negative consequences for
energy as an additional input to production. A version capital, such as minerals and forests, are drawn down the economy, then innovation and technological change
of the Solow growth model that integrates both land and through the production process while stocks of physical might be expected to adjust. In this way, the increasing
natural resources as two additional inputs into the pro- and human capital are built up (Acemoglu, 2009).
duction function is included in the opening chapter of 16 The extent of substitutability between natural capital and other capitals has
a popular graduate level textbook on macroeconomics Clearly, though this process has limits in the aggregate. led to the distinction between weak and strong sustainability. Weak sustainability
(Romer, 2011) 15. This analysis emphasizes the impor- Some stock of natural capital, for instance. is required assumes that natural capital can generally be substituted for by other forms of capi-
tal, while strong sustainability considers such substitution possibilities as being more
tance of the rate at which technological progress can in order to produce food. This suggests that there may limited. The multi-dimensionality of the concept of natural capital can give rise to
be a critical lower threshold for natural capital, and if such seemingly different perspectives. The possibility of substitutes for specific natural
resources is greater than for ecosystems providing essential life support services.
15 The model is based on work by Nordhaus (1992), as part of a critical review of
crossed, economic production would decline or even 17 In mathematical terms, the technology is represented by the function and its
the revised Limits to Growth modeling (Meadows et al., 1992). specific parameters (see Box 2).

scarcity of natural capital might prompt new production will improve with further growth. Interest in the EKC per unit of output and ultimately zero-pollution technolo-
methods that do not deplete natural capital stocks. This was motivated by a seemingly apparent observation in gies must emerge 19.
is the basis of an optimistic perspective on the potential empirical data at the national level (e.g. Stokey, 1998). In
for technology to solve sustainability challenges. Thus, essence, the question is whether economic growth could Technological progress is the source of long-term sus-
the degree of substitutability is dynamic and path-de- occur without decreasing environmental quality, and if tained growth in neoclassical theory, through enhanced
pendent. The technologies, and hence substitutability, of so, under what conditions 18. productivity. In the conventional growth model, inno-
tomorrow depend on the decisions made yesterday and vation and technological change provides profitable
today, particularly in which physical, human, and techno- The 2005 review by Brock and Taylor covers a wide opportunities for investing in new capital stock. The
logical assets investment is channeled. range of economics literature including the theory principal factor driving a shift in the long-run capital
of resource depletion and growth, the implications accumulation process towards an IGE is the amount,
of endogenous growth theories, and the relationship and also nature, of technological progress. To-date this
between environmental quality and national income technological change has largely been oriented towards
5.2 Theoretical growth models levels. Three mechanisms that determine the relationship ‘brown’ physical capital, embodying a relationship of
A large body of theoretical work has analyzed the pro- between economic growth and environmental quality substitutability with natural capital. Technological prog-
cesses of substitution and technological change in are discussed, namely scale, composition and technol- ress can modify the production function by changing the
the context of economic growth models, incorporating ogy effects. The scale effect reflects the simple direct degree of substitution among different factors, i.e. phys-
natural capital in the form of environmental quality. This relationship whereby increased production generates ical, human, and natural capital, which can help change
is a stock to be managed, given its effects on consum- more pollution. The composition effect refers to the rel- the production pattern (for example by producing with
ers’ welfare, while its implications for production are gen- ative shares of cleaner versus more polluting sectors in less emissions). Innovation and technological progress
erally indirect. The highly abstract and theoretical nature the economy. Thus, if growth in cleaner sectors is out- can also ease the constraint from a diminishing stock of
of these models does allow, however, an interpretation weighs growth in more polluting sectors, then the overall exhaustive but essential resources through the discovery
of environmental quality as a stock of natural resources increase in pollution will be less than when both types of renewable substitutes.
necessary for production. Brock and Taylor (2005) con- of sectors grow at the same rate. Technology effects
also achieve the same outcome, through improvements Brock and Taylor (2005) identified four types of growth
ducted a review of this research. One key interest at
in production processes, resulting in less pollution per models to examine the relationship between economic
the time concerned the relationship between economic
unit of output. In order for growth to not generate addi- growth and environmental quality and the role of scale,
growth and the environment, particularly the so-called
composition and technology effects. The first is the
‘Environmental Kuznets Curve’ (EKC). The EKC, which tional pollution, the composition and technology effects
must outweigh the scale effects. Brock and Taylor (2005) Green Solow Model (Forster, 1973; Solow, 1973; Stiglitz,
has been the focus of considerable analysis and debate
show that for a perpetual process of economic growth to 1974; Brock, 1977; Stokey, 1998; Aghion and Howitt,
(Brock and Taylor, 2005), proposes that environmental
continue, there must be continual reductions in pollution 1998; and Jones and Manuelli, 2011), in which reduc-
quality will first deteriorate with economic growth and
development, at lower levels of national income and in
the initial period of industrialization. However, once the 18 The EKC was criticized by many on economic grounds, such as ignoring the ef- 19 Some ecological economists would argue that zero-pollution production tech-
fects of international trade on patterns of pollution (e.g. Stern et al., 1996). There was nologies are not possible at an aggregate (economy-wide) level given the laws of ther-
service sector of an economy begins to develop and also criticism of interpretations of the EKC as an economic “law” instead of a pattern modynamics. This then calls into question the possibility of continual (never-ending)
incomes reach a certain level, environmental quality in empirical data resulting from policy decisions and choices, even if these were not economic growth. The neoclassical and growth analysis defends itself by not specify-
explicitly concerning environmental regulation (Swanson and Ziegelhofer, 2012). ing over what timeframe and extent of growth, this condition needs to be met.

tions in pollution emissions result from exogenous tech- The third type of model incorporates both the “source cal models to data, with a focus on GHG emissions and
nological progress made in the abatement process. The and sink” roles of nature: energy uses exhaustible fossil climate change. These models, known as integrated
model provides three results. First, the dynamics of the fuel stocks and also generates pollution emissions that assessment models, include a dynamic general equi-
Green Solow Model is sufficient to produce the EKC deteriorate environmental quality. With a constant inten- librium model of the economy, with a basic model of the
even with fixed abatement intensity. Second, the model sity of abatement (without technological progress), the global warming process. Such models include GHG
predicts that stricter environmental policy may cause dif- model shows that the economy can grow while reduc- emissions as an output of economic production, but this
ferences in income but does not have long-term effects ing emissions because of continuous changes in the also results in a direct feedback from climate change on
on the growth rate. The third result is that, although tech- composition of inputs. However, abatement cannot be both production and/or the welfare of consumers. The
nological progress in increasing production may result in achieved without a cost. Growth slows as the scarcity Stern Review (Stern, 2007) was a major contribution in
more emissions, improvements in environmental technol- of natural resources increases. These analyses suggest this area. One benefit of these calibrated models is the
ogies can deliver an overall mitigation of emissions. The that abatement or composition shifts alone are insuffi- possibility to analyze different scenarios for policy. The
technology effect outweighs the scale effect 20. Hence, cient to deliver long-term sustainable growth. Techno- Stern Review compared economic growth with mitigation
the Green Solow Model, with relatively simple assump- logical progress directly targeted at lowering abatement policies to a baseline, business-as-usual scenario.
tions including ongoing improvements to production costs can be expected to play a key role in determining
technology, allows the possibility of a decoupling of eco- growth and environmental outcomes. The fourth type of There is and never will be, a single theoretical model
nomic growth from pollution. model was developed based on the analysis of Brock that definitively answers the questions about the relation-
and Taylor (2005), emphasizing the importance of tech- ship between economic growth and sustainability. The
The second type of model, the Stokey Alternative, builds nological progress in abatement. The analysis highlights insights from this field of research need to be derived by
upon Stokey’s (1998) work on the limits to growth, by the value of including both the direction and rate of tech- examining the literature as a whole to identify common
incorporating increased abatement activities. When nological progress as outcomes of the model (rather findings that appear robust across varying assump-
abatement is modeled as a factor of production, similar than as assumptions). tions 21. What has emerged from these models is that
to Copeland and Taylor (1994), the analysis is similar economic growth with environmental sustainability might
to the drag on growth from the depletion of natural Theoretical growth models remain inconclusive about the well be feasible. Innovation and technology play a criti-
resources. When abatement is modeled as an economic feasibility of economic growth in the face of environmen- cal role in this process, with the support of policy, to shift
activity that uses scarce economic resources (capital tal deterioration. Brock and Taylor (2005) noted in their production towards cleaner (‘greener) sectors or indus-
and labour), increase in the intensity of abatement to review that “the relationship between economic growth tries, and to develop cleaner technologies 22.
maintain environmental quality will have a drag on eco- and the environment is not well understood: we have
nomic growth (Brock and Taylor, 2005). However, if only limited understanding of the basic science involved
abatement is characterized by constant returns to scale, – be it physical or economic – and we have very limited 5.3 Policy implications of growth models
a positive relationship between growth and environmen- data.” Research in this area continues to advance,
tal quality is still possible in this type of neoclassical including attention to trade and the international coordi- The research on reorienting economic growth to respect
model, although growth proceeds at a lower level. nation of policies (Acemoglu et al., 2014). environmental limits emphasizes two types of policy
21 This is indeed the purpose of the review by Brock and Taylor (2005).
20 Note that the Green Solow model consists of only one sector and production Other models have tried to calibrate the basic theoreti- 22 Recall that “cleaner” can be interpreted both as less polluting and as making
technology; so the composition effect is not relevant. less use of natural capital.

goals: the need to ensure sufficient maintenance of, and green economic activities and to research and devel- Growth models indicate that an IGE cannot be achieved
investment in capital stocks, and measures to promote opment (R&D) on cleaner technologies. From a macro- without policy support and institutional reforms. Funda-
investment in physical capital that is more complemen- economic perspective, investment is the flow that adds mentally, this is due to the externalities associated with
tary to natural capital (as opposed to being substitut- to the capital stock. Investment does not only change investment in the new generation of capital and techno-
able) 23. With respect to the first goal, Hartwick (1977) the quantity of the capital stock but can also effectively logical progress, as well as overall path dependency in
demonstrated that Solow’s (1974) analysis required adjust its structure – the types of capital. The role of the economy 24. Growth theory emphasizes several types
that natural capital depletion be matched by a corre- investment in increasing capital stock is obvious. For of policies to reorient investment:
sponding increase in physical capital investment – a net example, investing in workshops, machines as well as
savings rule known as the Hartwick Rule. This analysis inventories of raw materials and semi-products can • Adjusting relative prices, particularly through fiscal
assumed substitutability between an exhaustible natural maintain or increase the output of man-made capital; and market-based instruments (such as carbon
resource and physical capital. This framework has investing in medical care and health, culture, recreation pricing);
formed the basis of the comprehensive wealth account- and education can maintain or increase the quantity and • Setting regulations and limits to resource use and pol-
ing developed by economists working with the World quality of human capital; investing in pollution ‘preven- lution;
Bank (Hamilton and Hartwick 2014; Lange et al., 2018). tion and control’ as well as in ecological conservation
However, a related approach recommends that a broad can maintain or indeed increase the quantity and quality • Innovation policies to stimulate technological progress,
inclusive measure of wealth needs to be maintained of natural capital. particularly for clean physical and natural capital; and
(Arrow et al., 2012). This is the basis of inclusive wealth
Investment can change, or green, the industrial structure • Targeted public investments, particularly in infrastruc-
accounting developed by the United Nations University,
of capital – green sectors relative to brown sectors - in ture.
UN Environment and partners (UNU-WIDER, 2012). Both
approaches indicate that policy should measure either two ways. First, investment can change the production
As implied by the preceding discussion, growth models
the stocks of the different types of capital, or changes in processes for existing goods and services. Second,
emphasize the role of incentives in investing in innova-
those stocks, and ensure that the capital asset base, or investment can shift from the production of traditional
tion. Thus, R&D policies play a particularly important
wealth, grows, or at least does not decline. This requires products to that of green ones (e.g. shifting from vehi-
part in addressing environmental externalities in addition
accounting frameworks to be in place at the national cles with internal combustion engines to vehicles with
to conventional information externalities.
level (see section 8). It should be noted that these hybrid engines or electric vehicles). Investment directed
approaches, in general, make few or no recommenda- to green sectors and green technologies will gradu- The last type of policy in the above list results indirectly
tions on the substitutability of physical capital for natural ally promote the greening and cleaning of the industrial from the models, which generally do not include a dis-
capital. structure, driving green growth through composition and tinction between public and private investment. In partic-
directed technology effects. These green technologies ular, growth models pay relatively little attention to infra-
The second policy goal concentrates then on mea- are both “hard”, such as renewable energy technologies,
24 Path dependency here refers to the idea that the relative prices of investment
sures to shift the composition of production to respect and “soft”, referring to social and institutional innova- and production processes are affected by earlier decisions and the nature of capital
environmental limits, by directing investment towards tions, which can be seen as part of social capital. The that has been accumulated. For instance, the existing stock of physical and intellectual
capital in fossil-fuel technologies is much greater than that in renewable energies,
next section further elaborates on how investment fits given past history. This means that the additional cost of adding energy generation
23 This is out of the recognition that substitutability is more limited than has into a short-term framework. potential is often lower for fossil fuel technologies. For this reason, we refer to a tran-
conventionally been assumed, as discussed above. sition to a different path.

structure, which can also be seen as a form of physical environment while ignoring the issue of inclusion and central role. Changes in aggregate demand are import-
capital. Infrastructure, however, tends to be owned or social equality. There is a separate line of research that ant because they are correlated to some extent with
managed by the public sector and is generally comple- has incorporated inequality among workers into growth changes in employment and inflation. The policy focus
mentary to privately-owned physical capital in support- models (e.g. Grossman and Helpman, 2018). This is on growth – in aggregate output – is based on interest
ing the production process. Infrastructure, which is the part of the increasing attention to inequality in econom- in the implications for employment and inflation. Under-
result of government decisions, also determines the rel- ics (e.g. Piketty, 2014), with theoretical research working standing how the components of aggregate demand are
ative profitability of alternative types of physical capital to develop models that explain patterns of increasing changing provides insight into the source and possible
– such as brown versus clean – and hence influences income inequality 25. It is too early though to assess the duration of changes in the overall total.
the innovation and investment processes. For example, main findings of this area of research.
much of the energy system, particularly electricity gener- The main components of aggregate demand are pro-
ation and distribution, can be considered as part of infra- vided in the circular flow diagram in Figure 1: consump-
structure, and similarly for transport. tion (C), investment (I), government spending (G), and
6.
Short-run dynamics: net exports (exports minus imports; X – M). This is typi-
The types of energy and transport systems clearly affect cally represented by the conventional accounting iden-
the environmental impacts of many economic activi- Transforming the components tity,
ties. Much investment in the economy is undertaken by of aggregate demand Y=C+I+G+(X-M)
public sector actors (governments or semi-public agen-
cies), and this public investment needs to be targeted to Most attention, both by researchers and policy-mak- where aggregate demand (the right side of the equation)
support the transition to an IGE. Infrastructure exhibits ers, concentrates on short-run macroeconomic issues is equal to aggregate supply (Y). In conventional mac-
network economies which creates a bias towards lock-in such as the trends in macroeconomic indicators and roeconomic analysis, attention is focused on the level
with a given technology. One example is the grid, which especially their deviation from steady paths due to busi- and change in these components, and their contribution
is designed to distribute electricity from a limited number ness cycle fluctuations or other shocks. The frameworks to aggregate demand. It is also relevant to break down
of large generating plants. Newer technologies, offer- that are used to understand these movements and the some of these components into sub-components. For
ing distributed solutions, face an initial period of resis- possible effects of policies include neo-Keynesian and example, consumption is commonly divided into durable
tance, which reflects the sunken?? investment costs in real-business cycle models. These models focus on and non-durable goods. In the case of investment, the
the existing infrastructure. Tipping points can, however, the role of fiscal and monetary policies in avoiding or industrial sector that is undertaking these expenditures
be reached beyond where old networks are replaced by minimizing temporary downturns in employment and can also be of interest 26. Similarly, exports are usually
new ones (Zenghelis, 2016). output. Aggregate demand analysis, which is concerned disaggregated by major commodity or service sector.
with the overall level of activity in the economy, plays a
Investment here also refers to investment in human 26 The circular flow diagram (Figure 1) illustrates the dynamic relationship
capital. The knowledge and skills required for a green 25 Some recent research has referred to the idea of “directed technical change” between income and investment. Current investment forms a part of current income,
(Acemoglu, et al., 2012), as an explanation for reduced demand for unskilled and semi- which depends in part on the production capacity created due to past investment.
economy transition are also necessary to support tech- skilled labour, relative to skilled labour. This has been suggested as a principal mech- Investment thus plays two roles in determining economic growth. In the short term, in-
nological progress. Our discussion of the economics anism accounting for increased income inequality in a number of developed countries. vestment requires the use of man-made capital, human capital and natural capital, and
Note that “directed” refers to the nature of technological change that the economy may cause environmental deterioration. Investment is therefore an important factor
of growth has concentrated on the relationship with the has pursued, and not to a process that has been consciously directed by governmental influencing total demand. In the long-term, increases in production capacity contribute
policy. to a greater supply of goods, thus increasing output and income.

For an IGE, it is important to understand where the these technologies, such as renewable energy for power the nature and amount of past investment flows. Thus,
potential to support a transition process exists among generation, effectively involve new economic sectors, or the role of policy is to shift the composition of a compa-
fiscal and monetary policy interventions, even if this at least a completely new physical capital stock, such ny’s investment. Relevant policy frameworks to achieve
process might take place over a longer period. In addi- as wind turbines, concentrating solar plants, etc. These this include fiscal policy (see Chapter 9 on fiscal policy
tion, the standard macroeconomic framework of aggre- sectors and their capital stock are more easily character- and Chapter 10 on the finance system), monetary policy
gate demand, linked to national accounts, provides ized as green compared to other technologies, such as and sectoral policies and regulations (see Chapter 12 on
a useful organizing principle for understanding other in energy efficiency, that contribute to the greening of an industrial policy). Fiscal policy could include incentives
aspects of the macroeconomics of an IGE, many of existing process or capital stock. These latter cases may in business taxation to favor green investment, operat-
which are treated in more detail in ensuing chapters. not lead immediately to a level of energy or resource use ing either directly on businesses or indirectly through
(or waste generation) that can be considered to be at a the financial sector, which provides investment funds
An IGE is characterized by methods and patterns of sustainable level. However, such incremental improve- to business. There is a wide range of sectoral policies,
production and consumption that are low, or even zero, ments can be viewed as part of a transition process. including incentives, standards and regulations, that can
in carbon emissions, resource-efficient and waste mini- Indeed, from an economic perspective, it is important influence green investment. In the energy sector, this
mizing. Another way to describe this is with reference to that this transition process takes place as smoothly could include such a diverse range as support of R&D,
planetary and local boundaries for critical natural and as possible in terms of disruption to employment and requirements for renewable content and incentives such
environmental resources. In an IGE, the activities of pro- income. as feed-in tariffs, to name just a few 27.
duction and consumption remain within these bound-
aries. In the aggregate demand framework, this would The transition process towards an IGE is characterized The overall level of investment is generally influenced
apply to each of the components. Thus, investment by an increasing share of green activities and sectors in by monetary policy, in particular by the level of interest
would be in physical capital for production technologies each of the components of aggregate demand: house- rates set by the central bank for deposits it holds on
and facilities that are green, following the above defini- hold consumption, government expenditure, investment behalf of commercial lending banks. The central aim of
tion. All the goods and services produced, and there- and net exports. Each of these components can be influ- monetary policy is typically to maintain an acceptable
fore either consumed (by households or government) or enced by specific areas of economic and public policy, level of price inflation and, depending on the country, to
exported, would also be green. in an effort to direct demand (Perez, 2016). Among the also aim for maximum employment. There are, however,
components of aggregate demand, investment plays a various means of deploying interest rate policies, as well
There are no existing examples of a ‘real’ IGE (as yet). key role, as this is how the capital stock accumulates. as other financial regulations by the central bank (e.g.
There are however emerging sectors and technologies Investment is therefore the component of aggregate concessional refinancing), to promote increased flows
that can be considered as greener than others, if not demand that will ultimately determine the future poten- of investment capital into clean physical capital (UNEP
entirely green. Examples include: renewable energy tial for green production and consumption by house- Financial Enquiry 2016; see Chapter 10).
technologies, energy efficiency technologies across holds, government and foreigners who purchase the
a range of uses and sectors (such as manufacturing, economy’s exports. This is achieved by investment, at Government spending (G) is also an important com-
transport, buildings), waste minimizing technologies in least in part, in clean physical capital, in contrast to only
production and processing, and agricultural production investing in conventional physical capital. Similarly, the
27 The wide range of sectoral policies is not covered in detail in this book, which
places more emphasis on the broad areas of economic policy. The report, Towards a
techniques with fewer emissions and pollutants. Some of current potential for green production is determined by Green Economy (UNEP 2012), takes a sectoral approach, providing a broad overview of
sector-specific policies to support a transition process.

ponent of aggregate demand for a green economy investment (I) decisions, meaning that fiscal policy is
Box 2.3: Discounting transition. In many economies, government spending influencing the greening of aggregate demand in these
accounts for over a third of aggregate demand, and in components, as well as government’s own direct expen-
The economic evaluation of public projects is undertaken using some cases, even approaches half of the total. Again, diture. Both spending and taxation by government are
cost-benefit analysis (CBA), which seeks to quantify, in monetary
terms, all the costs and benefits associated with the investment macroeconomic analysis tends to concentrate on the covered by Chapter 9 on fiscal policy.
under consideration. Many of the benefits, as well as a portion of overall size of government expenditures, but for an
the costs, will be generated in the future. In the case of infrastruc-
inclusive green economy transition, it is more relevant to Household consumption is the largest component of
ture projects, the relevant time period under consideration could
be many years, and in some cases, decades. In order to add look at the components of government spending. Gov- aggregate demand. In a green economy transition,
up these current and future flows of costs and benefits, a dis-
ernment spending can be broken down into two types: goods and services that are low carbon, resource-effi-
count rate is applied to future flows. This discount rate is typically
expressed on an annual basis, for example 5% per year. This rate regular government procurement and investment in infra- cient, waste minimizing and more sustainable, increas-
would mean, for example, that one dollar of benefits arising in the
structure. For the former, focus has been on the poten- ingly dominate consumption. In some ways, this follows
second year would be counted as $0.952 (when rounded to one-
tenth of a cent), and from the third year, as $0.907, and so on. In tial for government, given its large size relative to the from business investment in clean physical capital and
general, the present value, PV, of some future value V after t years,
economy, to promote economies of scale for green prod- government investment in green public infrastructure
given a discount rate of r, is calculated as follows: and that this type of investment makes greener goods
ucts and services through green public procurement 28.
PV=V/(1+r)t Investment in infrastructure was mentioned in the previ- and services available and accessible to households.
ous section, and the part of this investment devoted to There are also ways in which consumption can become
The discount rate, particularly the rate used from a social per-
spective, is not the same as the interest rate, which would typi- making public infrastructure more environmentally sus- greener simply through choice and behavior change.
cally be higher, even though the concept of discounting is similar
tainable, should be increased to support a transition to Thus, the greening of household consumption will repre-
to compounded interest. Discounting in the context of publicly sent the outcome of a range of such policies and activ-
financed projects or investments is justified on the basis of people an IGE. An important policy tool for this purpose is the
having a certain amount of preference for consumption today ‘social discount rate’ used for public projects (Gollier, ities to support sustainable consumption and produc-
over tomorrow, and the assumption that consumption possibilities
2012). There are strong arguments for using a lower rate tion (SCP), which is SDG12. From the perspective of an
are expected to grow in the future as a result of economic growth
(Gollier, 2012). than has conventionally been the case in many coun- inclusiveness it is relevant to examine the distribution of
tries, and also of using lower rates for benefits that arise consumption levels across individuals and households,
The practice of discounting has been challenged for promoting
unsustainable resource extraction and degradation, and as being further in the future, as is the case in some countries, to identify whether any are living below poverty levels.
unfair towards future generations, as their welfare is given less
including the United Kingdom and France (See Box 2.3). It is also relevant to examine the trends in the mate-
importance than that of the current generation (Common and Stagl,
2005). Economists generally view the practice as being justified, rial living standards of lower-income relative to higher
but that the appropriate rate needs to be calculated carefully Government spending is financed primarily through tax- income groups to ensure more equal outcomes and add
(Gollier, 2012, provides a thorough and advanced treatment).
Arrow et al. (2014) propose that a declining discount rate be used, ation of households and businesses. Fiscal policy, there- policy interventions where necessary.
based on incorporating the uncertainty of future growth, the risk fore, offers various possibilities for environmental fiscal
of catastrophic events, and the possibility that such risks might be
reforms as well as progressive taxation. This seeks to As with previous components of aggregate demand,
correlated with each other. the greening of the external account can also be con-
influence both household consumption (C) and business
sidered as shifting to a composition of goods and ser-
28 The European Commission has voluntary green public procurement guidelines vices that support reduced environmental impacts and
(http://ec.europa.eu/environment/gpp/index_en.htm). For a more global perspective
see the initiative of IISD (https://www.iisd.org/topic/public-procurement-and-infra-
social inclusion. This includes not only the goods and
structure-finance).

services exported to other countries (X), but also the and providing income-earning opportunities for labour – GHG emissions of individual economic sectors have
composition of imports (M). This perspective is some- is generally clear. been integrated into CGE models, which are then usually
what different from typical aggregate demand analysis, termed integrated assessment models (IAMs). Such
in which imports are deducted from aggregate demand. Macroeconomic policy analysis to support and inform models provide the tools applied for quantitative assess-
However, an IGE effectively involves a global transition. this transition process can draw on some existing prac- ment used by the Inter-governmental Panel on Climate
A given country may advance towards a green economy tical tools, but there are limitations. As was mentioned Change (IPCC, 2013) and also the Stern Review (Stern,
by transforming its own domestic production and con- in Section 5, growth models are generally theoretical in 2006). Some IAMs, for example the OECD’s ENV-Link-
sumption, in advance of other countries. Progress would nature, and are therefore not suited for guiding specific ages and ENV-Growth models (Chateau et al., 2013ab),
be somewhat diminished though if there is a corre- policies on how to promote the transition. Growth models have been linked with land use models to assess the
sponding increase in imported goods and services that suggest that innovation and industrial policy will play impacts of economic policy on agriculture and related
are less green. Therefore, it is necessary to examine how a strong role and other chapters address these policy sectors, such as forestry. This provides powerful tools
imports evolve and ideally to have policies and regula- areas in more detail. Much existing macroeconomic for assessing the interactions between the economic
tions that promote an increase in the share of those that analysis is based on general equilibrium models, such sectors dependent on natural capital and the rest of the
are green. This raises issues of trade policy, which are as computable general equilibrium (CGE) models, or economy. Such models, however, tend to be less useful
discussed in Chapter 11. dynamic stochastic general equilibrium (DSGE) models. for guiding policy at the national level, given their global,
DSGE models have been developed primarily for analyz- comprehensive coverage, which reduces the level of
ing business cycles and fluctuations, and the influence disaggregation of sectors and regions. Such models are
of the primary levers of macroeconomic policy, such as also less helpful in analyzing the growth of new sectors,
7. Models for policy analysis monetary or overall fiscal policy. They have very little,
if any, sectoral disaggregation, which effectively pre-
such as green sectors.
The sections above lay out the existing macroeconomic cludes their application to structural transformation pro- Indeed, the rebalancing of capital stocks envisioned
models of an IGE. A rebalancing of physical (manufac- cesses 29. in a green economy transition provides challenges for
tured), human, social, natural, and financial capitals is general equilibrium modeling approaches, particularly
a long-term process which is driven by transforming the CGE models have been developed with considerable with respect to the new technologies needed. An addi-
components of aggregate demand, particularly con- sectoral disaggregation and have been applied to tional challenge arises from the still limited means by
sumption, investment and government spending. The analyze the short and long-run effects of policies such which measures of natural, social and human capital
transition pathway is almost impossible to forecast accu- as taxes, subsidies and tariffs on traded goods, to name can be quantified and integrated into models. Models
rately due to the complex nature of economic systems, a few. The strength of these models depends upon their for the integrated assessment of development pathways
and the large degree of change required. In particular, emphasis on equilibrating processes of supply and have been constructed, generally relying on a system
the exact nature and specific direction of innovation and demand through the price mechanism. In addition, the dynamics methodology (UNEP, 2014). The T21 model
technological change is very difficult to predict, despite 29 Many macroeconomists are questioning the extent to which DSGE models are has been used to support the assessment of green
the fact that the overall nature of this process – towards valid tools even for understanding business cycles, particularly in the aftermath of the economy policies in several developing countries. This
2008-9 financial crisis, as the possibility of such a recession was not even foreseen in
technologies that are carbon-neutral, resource-efficient, such models. Some critical reviews of DSGE models can be found in a special issue model incorporates a range of indicators of natural
of the Oxford Review of Economic Policy (Vines and Willis, 2018; see in particular the capital, as well as of human capital. System dynamics
individual articles by Blanchard 2018, Krugman 2018, and Stiglitz 2018).

models tend, in their implementation, to underplay equil- ments for example, will support the emergence and nents to the SNA, including a number of flow accounts,
ibrating feedback effects, though this is not a limitation growth of green sectors and overall greening of other such as a production account, an income account, a
of the methodology. Some experience has been gained sectors. In addition, the assessment should also capture transfer account, a household expenditure account, and
in integrated modeling approaches that combine system likely effects on different income groups of workers and an external transactions account. There are also stock
dynamics with CGE (and input-output) models (PAGE, households. Although models are continually being accounts, including an asset account (balance sheet)
2017b). improved, a macroeconomic analyst needs to remain and an external balance of payments.
honest, transparent and cautious in terms of the potential
System dynamics models are one example of what can to offer robust quantitative advice for policy. This limita- The SNA tracks and generates various macroeconomic
be called non-equilibrium simulation models (Mercure et tion should not be an excuse to justify business-as-usual aggregate indicators, of which GDP is the most well
al., 2016). These start from a theoretical framework that in economic policy-making, even when there are stake- known and cited. GDP is a flow variable that represents
is grounded in dynamical processes, shaped by insti- holders who do not yet support the need for an IGE tran- the overall level of economic activity. The theoretical
tutions and policy, rather than equilibrium relationships sition. The macroeconomic frameworks do not give us framework behind GDP is one of macroeconomic equi-
(as is the case with DSGE and CGE models). This per- precise answers, but they provide sufficient justification librium between supply and demand, with a circular
spective also recognizes the important role of govern- for expecting this transition to be possible and prosper- flow between income, consumption and output. Thus,
ment policy in promoting new pathways. A related area ous 30. A final point is that modeling efforts are limited GDP can be measured in three different ways: the total
of research is developing increasingly sophisticated by available data and the next section discusses this level of final sales (as opposed to intermediate sales),
agent-based models of economic interactions and even important limitation. the total amount of value-added, and the total amount of
economies, though in highly simplified form (Haldane income to capital and labour.
and Turrell, 2018). Such approaches appear to be par-
ticularly adapted to incorporating insights and findings The specific definition of GDP contains a certain
amount of arbitrary choices, such as the extent to
from behavioural economics concerning non-rational 8. Data and accounting which non-market activities or transactions are included
decision-making (Kahneman, 2013; Thaler and Sunstein,
2009). Even more potential exists to incorporate insights A transition to an IGE consists of shifting the compo- (Lequiller and Blades, 2014). GDP should therefore be
from psychology, as well as history, geography, spatial nents of aggregate demand, as seen in Section 7. This seen as a pragmatic but imperfect implementation of an
planning, immunology and other areas to make eco- implies a need for appropriate data on the components elegant concept. As discussed in Section 5, GDP was
nomic models better suited to current challenges (Zeng- of aggregate demand to support the setting of policy never intended as a measure of well-being, but rather a
helis, 2017; see also Grubb, 2014). targets and monitoring their achievement. The principal measure of the overall amount of production or income
source of macroeconomic data is the System of National (which are two sides of the same coin) in the economy.
Thus the range of sophisticated quantitative tools avail- Accounts (SNA), which is an internationally agreed Nonetheless, it is generally assumed by many stake-
able still falls short of providing the information that a approach to tracking the level of economic activity holders that ‘more is better’. In other words, from an eco-
policy maker or analyst would like to have. This includes (Lequiller and Blades, 2014). There are various compo- nomic perspective, generally, a positive sign are higher
a detailed assessment of how a specific package of levels of GDP.
public investments and expenditures, combined with 30 This is not meant to ignore the different effects that certain groups or stake-
policy measures, such as regulations and fiscal instru- holders (among industries and households) will experience in any transition. Some The lack of integration of an environmental and resource
other chapters in this book give some attention to this issue of winners and losers (for
example, Chapter 7 on inclusion).
management perspective in the SNA has long been an

this pollution increases the incidence of chronic or fatal diseases among the surround-
ing population, this cost might not be captured in GDP. Perhaps in the future, the pro-
ductivity of the working portion of this population would be reduced, and GDP would
be lower. Moreover, if increased health costs are incurred, these would again represent
a positive contribution to GDP. In general, therefore, there is no assessment of whether
certain economic activities, as components of GDP, are more or less desirable from a
social point of view.
Another way in which the SNA and GDP fall short in providing an information base
for pursuing an inclusive green economy is the distribution of income and wealth. An
increase in national income does not indicate which group of households has bene-
fited. Perhaps much of a given increase was experienced only by the top 20% income
bracket of households. Such an increase might even outweigh a decline by house-
holds in lower-income brackets. The SNA does recognize the possibility of disaggre-
gating household income by level (UN, 2008). However, this presents various practi-
cal difficulties which, while not insurmountable, mean that the accounts are not (yet)
commonly calculated in this manner. Nor would that, of course, affect GDP. Due to
these limitations, various alternatives and extensions to the SNA have been proposed.
Extensions for environmental issues have been formalized in the System of Environ-
mental-Economic Accounting (SEEA). A core framework was adopted as a statistical
standard by the United Nations in 2012 (United Nations, 2014). These are effectively a
set of complementary (“satellite”) accounts to the SNA. The SEEA includes accounts for
physical flows in the form of physical supply and use tables (similar to the regular mon-
etary supply and use tables for regular production in the SNA – see Figure 8). These
can include natural resources and energy used in production as well as air emissions,
water emissions and solid waste. The SEEA also extends the asset accounts of the
SNA to cover stocks and flows of environmental assets, including mineral and energy
Figure 9: Basic form of a physical supply and use table in the SEEA (United Nations, 2012) resources such as: land, soil, timber, aquatic, water, and other biological resources. The
Note: Dark grey cells are null by definition. SEEA thus provides statistics to support an analysis of the direct impacts and depen-
dencies of the economy on environmental resources. These accounts can be con-
structed at various levels of disaggregation.
issue of concern (Coyle, 2015, Stiglitz et al., 2009). An example of the issues involved
is the generation of environmental pollution and possible activities to remediate the Section 7 emphasized that an IGE transition is characterized by an increasing share of
damage they cause to human health or other economic activities. A manufacturing green sectors in the components of aggregate demand. The SEEA can provide valu-
activity that generates chemical pollution represents a positive contribution to GDP. If

able information to monitor this transition, through two of extending the asset accounts proposed by the SEEA. in other capital stocks. The UK government, in contrast,
its components. These components, the environmental has established natural capital accounts that devote
protection expenditure accounts (EPEA) and the sta- The Inclusive Wealth Index, developed by UN Envi- more attention to the changes at the level of the different
tistics on the environmental goods and services sector ronment and the United Nations University (UNU), is forms of natural capital, valued in monetary terms. This
(EGSS), identify economic transactions such as produc- one approach to accounting for various capital stocks example illustrates the potential applicability of such
tion flows, where the primary purpose is to reduce pres- (Manage and Kumar, 2018). Presented in the Inclusive accounts to national assessment and policy, while the
sures on the environment or to make a more efficient use Wealth Report, the index calculates changes in the value international wealth accounting initiatives tend to con-
of natural resources. These are therefore green compo- of natural capital assets and human capital, in addi- centrate more on international comparisons. Accounting
nents of aggregate demand, particularly in final sales or tion to conventional physical capital 31. Natural capital for various forms of natural capital and its wide range of
government expenditure. is comprised of fossil fuels, minerals, forest resources, ecosystem services is a rapidly developing area.
agricultural land and fisheries. Adjustments to changes
These transactions form a fairly strict interpretation of in total wealth are also made for the social cost of In addition, there are a range of indicators of well-being
green sectors, but they provide a starting point and the carbon emissions (deductions) and improvements in that have been proposed, and in some cases, adopted
establishment of a framework that differentiates green total factor productivity (additions) 32. Almost all coun- by specific governments. These include the Index of
activities from non-green activities. The implementation tries have positive rates of capital growth, but only 109 Sustainable Economic Welfare (ISEW) and a subsequent
of the SEEA, and specifically these components, would countries have negative rates of growth in natural capital version, the Genuine Progress Indicator (GPI). These
constitute a major step forward in providing the infor- per capita. This illustrates the historical development indicators correct for some of the deficiencies in the
mation base for monitoring the transition to an IGE. As and growth path in which natural capital is depleted to GDP mentioned above, by adjusting for a wide range of
with the SNA, there is also potential to differentiate green support the accumulation of physical and human capital. environmental expenditures, externalities from emissions
transactions by household groups, where relevant, in A related comprehensive wealth accounting framework (e.g. CO2) and depreciation of natural capital assets.
order to capture aspects of inclusiveness. has been developed by the World Bank, providing esti- To a large extent, this is based on SNA and SEEA data.
mates of adjusted net savings for national economies. There are also other indicators of well-being, such as
A transition to a green economy also depends on the General Happiness Index, which focus more on
maintaining the capital asset base, or overall wealth, This approach is also promoted with developing coun-
tries through the World Bank’s WAVES initiative. direct measurement of well-being, or happiness. Such
as discussed in Section 5. Wealth accounting at the indicators are arguably measures of the ultimate objec-
national, or economy-wide level, provides a frame- Inclusive and comprehensive wealth accounting tive, as distinct from attempts to measure the state of
work for measuring the stocks of physical, human, and approaches assume substitutability between natural the economy, which should, of course, be interpreted as
natural capital. Wealth accounting is motivated by eco- capital and other forms of capital. Changes in various contributing towards such ultimate objectives.
nomic theory (Hamilton and Hartwick, 2014; Arrow et al., natural capital stocks are valued in monetary terms and
2012), and the perspective that economic well-being is aggregated together with monetary values of changes The macroeconomic analysis and policy advice of a
determined by the overall level of assets, or wealth, in transition to an IGE also requires macro-level indicators
the economy. It is therefore consistent with the different 31 The Inclusive Wealth Report (2012) was presented as an initial report piloting of the economy’s impacts and dependencies on the
capital approaches discussed in Section 3. Furthermore, the methodology developed by Arrow et al. (2012). Two subsequent versions have been environment. In particular, there is a need for measures
produced (UNU-IHDP and UNEP, 2014; Managi and Kumar (2018).
wealth accounting constitutes a specific approach to 32 Estimates of shadow prices are used to value the changes in capital stocks.
of the size of the economy – its scale – relative to both
This attempts to capture the social value, as distinct from the market value.

planetary boundaries and relevant environmental limits. forms of capital. The economic development process tion, consumption, and trade. These are treated in dedi-
This can be done using empirical tools, such as carbon, has traditionally been primarily viewed as the accumu- cated chapters in the rest of the book. An important role
ecological and material footprint measurements. Foot- lation of physical, manufactured capital. This traditional is played by measurement, not least with respect to the
print measures can also be disaggregated to a sectoral view did also implicitly include the development of growing importance of greener economic activities and
level, in the form of environmentally-extended input-out- human capital, although this was not given explicit atten- sectors. This issue and overall measurement of progress
put tables. These are also envisaged as a component of tion. Moreover, it was generally seen as acceptable that towards an IGE is also addressed Chapter 10.
the SEEA, referred to as an application, partly because this capital accumulation was based in part on a reduc-
input-output tables require considerable effort and anal- tion, or drawing down, of natural capital, in particular, the While some of the elements of a macroeconomic frame-
ysis, as opposed to simply measurement. use of nonrenewable resources or the conversion of for- work for guiding a green economy transition exist, a
estland for other uses. It has now become evident, with fully-coherent set of models and tools to inform policy
Yet, another innovation is the development of synthetic climate change and the loss of biodiversity and ecosys- processes is lacking. Macroeconomics should ideally
indices, which combine multiple indicators across differ- tem services, that this process is unsustainable. be extended and developed to address important goals
ent dimensions of economic improvement and sustain- of social and economic policy, such as meeting basic
ability. These are discussed in more detail in Chapter 3, A sustainable development pathway, in contrast, is char- needs while remaining within relevant environmental
which also presents the Green Economy Progress Index acterized by the accumulation of physical and human limits. An assessment that “the economy is doing well”
(developed by UN Environment; PAGE, 2017a). capital, based on technologies that maintain natural should be based on issues that go beyond aggregate
capital. These technologies are embodied in physical output growth, employment and inflation. This will require
In summary, macroeconomic frameworks require an capital, as well as in business models and organizational
extended set of national economic accounts that will integrating environmental and social issues into standard
processes. An inclusive green economy thus also devel- macroeconomic frameworks that form the basis of think-
support the monitoring of the growing importance of ops social capital, particularly in the form of new institu-
green sectors. Work on the necessary frameworks has ing for all economists, in contrast to the current situation
tional arrangements. Hence, there is a rebalancing and where they amount to extensions explored only by those
been ongoing for many years yet implementation still integrated development of the full range of capitals.
lags behind and needs to be a priority component of a with interest. Indeed all macroeconomists should be
macroeconomic strategy. The macroeconomics of this process is rooted in the concerned with whether the economy is sustainable. In
analysis of capital accumulation and growth, extending some ways, the shift in thinking required is similar to the
earlier frameworks and models to reflect other forms of macroeconomic revolution sparked by Keynes, which
capital, either directly or indirectly. The transition process placed thinking about unemployment and recessions
9. Conclusion in the short run consists of transforming the components at the heart of economics. As this chapter has pointed
of aggregate demand into greener forms of consump- out, one priority area is to consider the macroeconomy
This chapter has emphasized that an IGE policy agenda tion, investment and government spending. This will be in slightly more granular terms, for example, addressing
is fundamentally about a macroeconomic transition driven by measures in a wide range of policy arenas explicitly the development of greener economic activities
process, characterized by a rebalancing of different – such as in taxation and spending, investment, innova- and sectors.

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CHAPTER 3:
NATURAL CAPITAL
Aiora Zabala
CHAPTER 3:
Nature Sustainabiility
Aiora Zabala taught environmental economics and policy at the University of
NATURAL CAPITAL
Cambridge, UK, for several years. She gained her PhD at Cambridge, after
studying at Oxford University and the Autonomous University of Barcelona. Her
work has been published in Ecological Economics, Global Environmental Change
and Methods in Ecology and Evolution, among others. She is handling editor at
the journal Nature Sustainability, covering social sciences.
LEARNING OBJECTIVES Jacob Michael Salcone
This chapter introduces topics and concepts that are essential to further under- United Nations Environment Programme
standing of the current discussions and decision-making that are related to natural
capital. This chapter therefore will enable readers to: Jacob Salcone is an ecological economist consultant for The Economics of
Ecosystems and Biodiversity (TEEB), an initiative of UN Environment. With TEEB,
Jacob helps governments and researchers use microeconomic tools to quantify
• Articulate the concept of natural capital, why it has emerged, its importance, and value the human benefits of ecosystems and natural capital. He holds an
and how it differs from and relates to other relevant ideas; M.S. in Agricultural and Resource Economics from Colorado State University
and a B.A. in International Sustainable Development from the University of
• Describe a range of methodologies for valuing natural capital; California, Santa Cruz. He is currently modelling the land-use change impacts of
payment for ecosystem service programs in Mexico in pursuit of a PhD in Human
• Explain how natural capital is implemented in the public and private sectors; Dimensions of Natural Resources from Colorado State University.
and
• Articulate the importance of the labour market for a green transition and the Haripriya Gundimeda
resulting implications and effects on employment;
Indian Institute of Technology, Bombay
Dr. Haripriya Gundimeda is a Professor in the Department of Humanities and

Social Sciences, at the Indian Institute of Technology Bombay, India; and
the President of URBIO. Her main areas of research are green accounting,
mitigation aspects of climate change, energy demand and pricing, valuation of
environmental resources, and issues relating to the development in India.She
holds a masters degree in mathematics and a Ph.D. in Development Policy. She
works on various issues relating to environment and development economics.
CHAPTER CONTENTS resources—such as minerals—that are extracted, that cannot be augmented or depleted (such as solar
refined, and sold. Others, such as top soil that provides radiation), and also ecosystems (and their components)
1. What is Natural Capital? support for crops, can be renewable if managed cor- that can regenerate and provide a flow of services over
rectly. Some forms of natural capital are not immediately time depending upon their condition and health. Natural
2. Emergence and context of natural capital obvious. For instance, the proximity of wild pollinators capital is non-renewable, however, when its rate of gen-
as a concept to an agricultural field, where pollination contributes to eration is negligible at human scales (e.g. minerals).
crop yields. Natural capital, therefore, includes a diverse
3. The value of natural capital variety of assets that contribute to human well-being in
4. Valuing natural capital in practice myriad ways. 1.1 Natural and other capitals in the
5. Natural capital in the public and private The wide scope of natural assets becomes evident by production of goods and services
their classification into each of these broad categories
sectors (Ekins et al., 2003): air (atmospheric properties and
Early economic theorists, notably David Ricardo (1817),
proposed that three factors of production, financial
6. Conclusion climate processes), water (hydrological properties and capital (K), labour (L) and land (N), are combined to
processes), land (geological and soil processes), and produce goods and services (output or Y). These goods
habitats (flora, fauna and their dynamics). All of these
1. What is natural capital? have a critical contribution to human well-being and to
and services support human well-being via a system of
voluntary exchanges —the economy. In this traditional
Natural capital is the name given to natural stocks or the global economy, either directly or indirectly. triad land captures the value of natural resources, but
assets that contribute to human well-being via the pro- Identifying and accounting for natural capital is import- only to a certain extent. For example, the value of clean
duction of goods and services. Forests, for example, can ant for the transition away from current economic air and water, or of biodiversity, cannot be fully captured
be considered stocks that produce a flow of goods and systems toward more sustainable ones (Bartelmus, by the value of the land where these resources are held.
services for society, such as fuel wood, building mate- 2009). The degree of depletion and regeneration of For these early economic theorists, land was consid-
rials, non-timber forest products, carbon sequestration; natural capital and the link between its condition and ered a fixed or immutable factor of production that could
and also services such as climate regulation, recreation its contribution to human well-being are fundamental not be degraded, renewed, or exhausted. Accordingly,
opportunities and control of erosion and floods. This for appropriate natural it was commonly omitted from foundational economic
capital, also called natural income, contributes to human capital accounting but models of production (see Chapter 2). The predominant
Key concept:
well-being through the flow of these goods and services Substitution also for the success- belief that natural resources were abundant or even
(Costanza & Daly, 1992). Sometimes, more of one capital can ful management of the unlimited contributed to this omission.
compensate the lack of another
Although they are related, natural capital—a stock— capital required (e.g. good human economy (this is explained The only way that natural resources appeared in the pro-
is not to be confused with ecosystem services, which
skills can compensate limited finan- further in Chapter 10). duction function was in terms of the financial, physical
cial capacity). This ability to com-
are flows of benefits to society over time (their distinc- pensate between capitals is called Renewable natural capital or labour costs which were required to extract or make
tion is discussed further in section 2.4 of this chapter).
substitutability (also called compen- (e.g. forests) includes use of resources e.g. the costs of extracting a mineral
sability), a concept that becomes
The simplest examples of natural capital are extractive important later in section 2.2.
immutable resources, or of cutting and transporting timber. Therefore, the
CHAPTER 3: NATURAL CAPITAL 3.1

natural asset per se or its classifications of capitals, which give more nuance to for in economic estimations. These estimations often
Key concept:
Types of capital regenerative process did the definition of natural capital (for example, Chapter 2 guide important decisions, such as whether to open new
not have a price in eco-
Another modern classification, pop- tackles natural capital within the framework of five cap- extraction industries or to build large infrastructure. Con-
ular among economists studying
nomic accounting. For
the environment is that of natural (or itals, including social capital), but the classification of sequently, these decisions do not account for important
example, the existence
ecological/ environmental), human the three traditional capitals plus the natural one is suffi- contributions of nature, and likewise ignore a decision’s
and reproducible (or manufactured)
of the mineral ore (and its
capital (Arrow, Mumford, & Oleson,
cient to critically understand the fundamental theory that detrimental impact on the stocks and flows associated
2012). These can be viewed as depletion), the forest (and follows in this chapter. with nature.
equivalent to the traditional land,
labour and capital (Costanza &
its reduction) or natural
processes like decompo- Defining natural capital in contrast to other forms of Overcoming this caveat in decision-making has become
Daly, 1992). To these, some also
add the social (and organisational)
sition or nitrogen fixation capital can be misunderstood as if the human or physi- increasingly important in recent times, as highlighted
capital (Dietz & Neumayer, 2007;
were not accounted for. cal capital are not natural. In order to avoid this implica- in Chapter 1. The scale of the economy has expanded
Ekins et al., 2003). In essence, all
In other words, the price
variations of the typology of capitals tion of other capitals being unnatural, the term ‘ecologi- rapidly since the industrial revolution and our perception
are similar and overlapping, and
(and implicitly, the value) cal capital’ is proposed as a synonym for natural capital of nature as unlimited has dwindled. For example, clean
each may be more useful in specific
of these assets was zero
purposes. skills can compensate (Ogilvy & Costanza, 2016). However, this term is much water is scarcer in many places than it used to be, as is
limited financial capacity). This abil-
and degrading the asset less common and so, in this chapter, we will use the nutrient-rich soil. The Millennium Ecosystem Assessment
ity to compensate between capitals
was not considered a cost
is called substitutability (also called
most common version – natural capital. (2005) highlighted how humans have changed ecosys-
compensability), a concept that
for the economy. Consider tems extensively and rapidly due to economic develop-
becomes important later in section
2.2. a logging company and ment, causing the degradation of ecosystem services
its relationship to a forest 1.2 Why is natural capital important? Why globally, the substantial and irreversible loss of biodiver-
over time. The company is it overlooked? sity, and the increased vulnerability and poverty in some
may expect to pay for saws, trucks, and fuel; but not for regions.
soil, water, seed generation and pollination that enable Only some of the flows of goods and services derived
from natural capital are traded in markets and subse- To reverse this trend, the main motivations for con-
the reproduction and growth of trees. Consequently, serving nature, traditionally, were scientific, ethical, or
trees may be cut at an unsustainable rate, leading to a quently associated with a price (e.g. timber). For others,
markets are underway to correct market failures such as health-related. However, when significant trade-offs
scarcity of timber, an increase in lumber prices for con- occur between sustainability and immediate economic
sumers, and perhaps the failure of the business. negative externalities (e.g. carbon trading or payments
for ecosystem services) and to manage scarcity (e.g. development, these motivations appear insufficient and
The concept of natural capital (and derived ecosystem water “banks”). While there have been some successes, economic development tends to take priority. Ultimately,
services) was developed to account for nature’s role in it is not easy to integrate ecosystem services into a these motivations do not seem enough for economic
economic systems and avoid this deleterious outcome. market economy. agents to appreciate humanity’s inherent dependence
Attempts have been made to integrate the value of on ecosystems and natural resources (Turner & Daily,
natural capital into economic models so that resources As a result of not being bought and sold in a market, 2008) and the many benefits we obtain from them. As a
would be used prudently to assure sustainable eco- many of the benefits we derive from nature and the result, ecosystems continue degrading.
nomic output for future generations. There are several costs of depleting natural capital remain not accounted
Some natural resources that once were perceived as

abundant or unlimited, are now scarce. In econom- reduced or depleted, we run up a debt that must be
ics, when a good or service becomes scarce, unless Box 3.1: The economic costs of repaid through restoration.
substitutes are found, the price of that good or service
increases as does the value of the assets and inputs degraded natural capital The remainder of this chapter discusses the concept
used to produce the good or service. This perception Clear examples of missed economic opportunities due to the degra-
of natural capital theory and practice in more depth. It
of increasing scarcity of natural resources brings about dation of natural capital can be found in past natural catastrophes. For narrates how the concept emerged and how it relates to
example, one reason why hurricane Katrina had such a devastating other similar concepts, such as sustainable development
a need to rethink the concepts that underpin economic effect on coastal urban areas was the earlier degradation of the coastal
growth and development: wetland ecosystem that would have mitigated the floods (Barbier, Geor- or the green economy. It explains the methods used
giou, Enchelmeyer, & Reed, 2013; Day Jr et al., 2007). Coastal wetlands to quantify the value of natural capital so that it can be
form a buffer that weakens the force of incoming water. With the con-
“Wealth creation [combines] the four types of capital struction of infrastructure that degraded this ecosystem, such benefi- incorporated into decision-making and also why this task
(...) to give rise to flows of goods and services which cial service also diminished. This resulted in the impact of floods being is challenging and not without criticism. Finally, it gives
much greater than it would have been, had a healthy wetland ecosystem
people want, in such a way that the capital stocks and remained. an overview of how the concept has been implemented
the non-monetary flows of services from natural capital, in practice, both in national accounts and in the private
Likewise, Pakistan suffered catastrophic landslides in 2007 triggered
are maintained or enhanced in quantity or quality. If by high rainfall, killing dozens of people. While the main cause for these sector. The conclusion section synthesises key mes-
the capital stock is not maintained, then eventually the landslides was the destabilisation of slopes due to a deadly earthquake sages.
that occurred earlier that year, it was also found that forest cover sig-
flow of goods and services to which it gives rise will nificantly mitigated the impact of landslides (Kamp, Growley, Khattak,
decrease, i.e. any level of flow that is associated with a & Owen, 2008; Peduzzi, 2010; Sudmeier-Rieux, Jaboyedoff, Breguet, &
Dubois, 2011). In the period prior to these catastrophes, forests in the
reduction in the capital stock is unsustainable” (Ekins et
2. Emergence and context of
Kashmir area had been dramatically cut. These forests performed, sim-
al., 2003). ilarly to the wetlands in Louisiana, a buffering function against sudden
flows of water and mud, which would have mitigated the devastating
Growing concern about the impact of economic growth, effects of high rainfall. natural capital as a concept
the resulting degradation of natural capital and its poten- In both cases, the ecosystems had been destroyed after decisions (to
Understanding the origin of the idea of natural capital
tially devastating impact on the well-being of current and build infrastructure on the wetland and to cut trees) were made that did
not take into account the value of the ecosystem services provided by and its relation to (and distinction from) other concepts
future generations, has led increasing numbers of gov- these natural assets. An estimate of the economic value related to disas-
around the green economy may help the reader use and
ernments, businesses, and consumers to acknowledge ter mitigation provided by each of these ecosystems could be provided,
by comparing the actual damage costs with the lower costs of damages discuss this idea with precision and avoid common mis-
that nature is a vital asset to the economy and human if the wetlands and forests had been there to mitigate the sudden water understandings.
well-being. Thus, the concept of natural capital makes flows.
another fundamental motivation for conservation, one
that resonates directly with economic reasoning:
2.1 Brief history
“Natural capital produces a significant portion of the real This concept helps us recognise the many direct and
goods and services of the ecological economic system, indirect benefits that nature provides for economic The concept of natural capital may be attributed to
so failure to adequately account for it leads to major development and that otherwise remain largely ignored Schumacher, an economist famous for his 1973 book
misperceptions about how well the economy is doing” in economic decisions (see Box 3.1). It also allows us named “Small is beautiful”, (Gómez-Baggethun et al.,
(Costanza & Daly, 1992). to understand that, where natural capital stocks are 2010), but it was brought to the forefront of academic

or it was assumed that improved technologies could substitute for natural capital loss or
degradation.
2.2 Strong vs weak sustainability and natural capital theory

Much of the debate about integrating natural capital into economic models considers
whether the goods and services derived from natural capital can be substituted with
human-made ones, such as replacing nutrient rich soil with chemical fertilizer, or a
wetland with a water treatment facility. This discussion is central to this debate because,
if full substitutability is assumed, one could argue that natural capital depletion would
be acceptable insofar as other types of capital perform similar functions (Stiglitz, 1974).
The degree to which we believe that natural capital can be substituted by other forms
of capital leads to two views about sustainability: weak and strong sustainability (see
Figure1: Evolution of the use of ‘natural capital’ in publications in English (Source: Google Ngram a deeper discussion in Barbier, 2011). From a weak sustainability perspective, natural
viewer, 28 June 2018)
capital can be largely compensated by other forms of capital, and so diminishing
natural capital today would be justifiable, as long as it serves to generate other forms of
capital that provide the same flows in the future. Succinctly, weak sustainability means
debate in the 1990s by papers such as “Economics, equity and sustainable develop- “maintaining intact (...) the sum of human-made and total natural capital” (Costanza
ment” by Pearce (1988) and “Natural capital and sustainable development” by Cos- & Daly, 1992). This view emerged among neoclassical economists in order to solve a
tanza & Daly (1992). Indeed, the term ‘natural capital’ has been discussed as early as practical problem that was observed in the 1970s: non-renewable resources were used
the 18th century by several authors, albeit with a slightly different meaning (Missemer, for production, but they were exhaustible by definition. Therefore, it was necessary to
2018). In its initial conceptualisations, natural capital was mainly associated with land determine the optimal rate of extraction and of investment in other forms of capital to
because land was considered the principal natural asset. The phrase was then used ensure a balance of current and future income (Dietz & Neumayer, 2007).
to distinguish financial or manufactured capital from naturally occurring resources and
productive inputs. This distinction was needed because at the time, many economists A practical implication of assuming that all forms of natural capital are substitutable is
used the term ‘capital’ to refer only to wealth that had been produced by industry. that we can express their relative value in the monetary
However, this early usage of natural capital had no explicit regard for environmental Key concept: units (Ekins et al., 2003). This price information can then
The limits to be readily fed into decision-making processes regarding
degradation. technological innovation
Daly (1996) theorized: “technology the use, depletion, or restoration of natural resources.
The idea re-emerged in the 1980s and 1990s (Figure 1) as part of a broader trend of will have diminishing returns and However, the complexity of ecosystem dynamics, includ-
we will eventually reach a thermo-
increasing awareness about environmental and sustainability issues. Scholars became dynamic constraint, imposed by ing ecological tipping points and non-linear relationships,
concerned about nature not being incorporated in economic models of production. the physical limits of resources on make it very difficult to determine sustainable levels of
Earth, including solar radiation”.
Natural assets were either taken for granted and accordingly treated as inexhaustible, substitution (Ekins et al., 2003). In addition, manufactured

capital is built from natural capital, either from natural edge about biogeochemical cycles, complex ecological Natural capital and the ecosystem services derived from
resources directly or by using it as a sink for waste. dynamics, or effects on psychological well-being), it is natural capital may continue to be depleted and con-
Therefore, manufactured and natural capital could be wise to proceed conservatively in the use and degrada- sequently their value to the economy may increase as
considered complements in the long run, rather than tion of natural capital. they become more scarce. While determining the eco-
substitutes (England, 2000). nomic value of all natural capital is, for many, an impos-
sible task (see section 4.2), the relationship of increased
In contrast, under a strong sustainability view, the
degree of substitutability between forms of capital is
2.3 Applying the natural capital concept importance because of increased scarcity still stands
(Costanza et al., 1997) (See Box 3.2, overleaf).
low and some forms of natural capital are considered Currently, the idea of natural capital is a fundamental
irreplaceable. For example, biodiversity carries genetic component of efforts to incorporate concern for envi- However, the development of natural capital as a
information, which can provide new knowledge for ronmental degradation into mainstream economic deci- concept has not received universal support. While the
medicinal purposes in the future. If that biodiversity is sion-making. Referring to nature as an asset resonates concept was popularised in the 1990s, it also received
lost, the information therein is lost too and, arguably, with other economic concepts and makes the role of reasonable criticism (see, e.g. Gomez-Baggethun &
this loss cannot be replaced with other forms of capital. nature and natural processes explicit in productive Perez, 2011; O’Connor & Martinez-Alier, 1998). A major
This view discards the assumption that one can deplete human activities, a role that had been largely omitted in concern is that characterizing the importance of nature
natural capital as long as it is replaced with other forms economics thus far. The natural capital concept can also for human well-being in this functional, econo-cen-
of capital. link nature to economic measures of welfare and human tric way could lead some to think that nature’s value is
well-being. limited to its contribution to the economy. In other words,
Some flows provided by natural capital are less substi- to confuse the part for the whole. This risk of miscon-
tutable than others, particularly supporting ecosystem Conceiving nature as capital opens the door to estimat- ception is critical because it can lead us to ignore other
services (Barbier et al., 1994, in Dietz & Neumayer, ing the value and rates of return of conservation and values or reasons why nature is important (see more
2007). The most essential forms of natural capital - ones depreciation of natural assets, including (but not limited about different sources of value in section 3.2). As a con-
which cannot be substituted with other capitals - are to) their associated monetary values. For example, a sequence, we could still fall in the trap of undervaluing
called ‘critical natural capital’ (Ekins et al., 2003). These much-cited study by Costanza and colleagues (1997) nature and degrading it to our own detriment. Much like
are arguably the ones on which practitioners need to provided a minimum estimate of the value of the world’s GDP was created as an indicator of economic growth
focus most. ecosystems, which was remarkably higher than the and, as explained in Chapter 2 and other chapters in
global GDP at the time. Although the ability to accurately this book, from its specific initial intention GDP became
Key term: The precautionary prin-
Precautionary principle estimate the value of all natural capital is highly con- misused as an indicator of the broader, more complex
An excellent reference work with ciple is an additional
tested, this figure nonetheless highlighted how ecosys- concepts of progress and well-being. Some scholars
historical lessons about the pre- argument in favour of
cautionary principle is given in two tems are much more important to humans than conven- perceive the same risk with natural capital: a useful
works by the European Environment strong sustainability. As
tionally thought by economists (Costanza et al., 2017) concept for the purpose it was created for, but poten-
Agency (EEA. 2013). Late lessons our knowledge of the
from early warnings: science, pre- and by those whom they advised. This endeavour would tially harmful if used beyond this purpose.
contribution of nature to
caution, innovation. Copenhagen: be later expanded by the Millennium Ecosystem Assess-
European Environment Agency. human well-being remains This concern is particularly justified when a partial mon-
http://doi.org/10.2800/73322) ment (2005).
incomplete (e.g. knowl-

etary valuation is wrongly interpreted or represented
as if it were the full value of an ecosystem, instead of a Box 3.2: Including natural capital in the aggregate production function
minimum estimate. For example, if the monetary value
of timber or biodiversity habitat of a forest is estimated Environmental concerns emerging in the second half of the 20th century led degrades, it becomes scarcer
economists to reconsider the fundamental model (explained above), where Key term: relative to other capitals, therefore
in order to highlight its economic importance, one could natural capital was assumed to be infinite and therefore its contribution to Depreciation of natural investment in natural capital
conceive that, if the forest disappeared, the loss could output omitted. In response to Malthusian concerns about increasing pop- capital (e.g. conservation and resto-
ulation, many economists (notably, Stiglitz, 1974) proposed that technology Depreciation of natural capital was ration) should increase relative
be fully compensated by that monetary sum, which is could resolve resource scarcity and pollution, while staying within this eco- formalized by Pearce and Atkin- to investment in other capitals.
implausible. We see later that this forest may have value nomic growth model. However, this also assumed a high degree of substitut- son (1993) and developed into an However, the shift of investment
ability between manufactured and natural capital. from manufactured to natural
for future generations, for recreation and spirituality, empirical model of wealth accumu-
capital has been limited. This is
lation by Barbier (2017).
or for services which ecological dynamics are poorly Acknowledging that manufactured and natural capital cannot fully substitute because, among other reasons
each other makes a general model of economic output more complicated. and as mentioned above, natural
understood. All these values may not be reflected in To overcome this, England (2000) proposed that natural and other capitals capital is often free for people
a monetary estimation and therefore such partial esti- should be assumed to be complements, rather than substitutes. The author Key term: and businesses, even when it is
suggests that, over the long-run and despite technological advances, finan- Investing in natural scarce.
mation should be considered a fragment of the forest’s cial and physical capital demand ever greater amounts of natural capital, capital
total value. It is important to understand the difference either as inputs to production or as sinks for waste disposal. In this model, A clear example of the conse- An added complication to these
natural capital is required in increasing amounts together with financial or quences of depleting natural capital general economic models is
between the price being paid and the total economic physical capital, in order to increase output or for economic growth. This can while not investing in alternatives that natural capital includes
value (explained in section 3.2) for the natural capital be formalised as follows: is given by the recent history of diverse and complex systems.
Nauru. This Pacific island mined Each example of natural capital
concept to contribute to sustainability.
(Eq. 1) Y = min ( AnKn, AmKm ) and exported a globally-significant —e.g. forests, coral reefs or
amount of phosphate (necessary biodiversity— exhibits particular
Where economic output (Y) is a function of natural (Kn) and manufactured to make modern agricultural fer- dynamics whereby they respond
capital (Km), which efficiency of use is mediated by technology (A). For sim- tilisers), and enjoyed a brief period differently to degradation and res-
2.4 The relation of natural capital with plicity, labour is excluded from this model because its role remains the same. of wealth. But the income derived toration. Much research aims to
from exported natural capital was
other concepts Technology continues to be important for production, but does not permit identify the unique properties and
unconstrained substitution as in the previous model. Natural and manufac- not adequately invested and the dependencies between natural
tured capital are used together in the minimum amounts necessary (i.e. most economy nearly collapsed by the capital and human well-being
Here we situate natural capital with respect to closely efficiently) to keep output at level Y. turn of the century (see Gowdy & (Boyd & Banzhaf, 2007; Ekins,
McDaniel, 1999). 2003; Fisher et al., 2008).
related terms, such as ecosystem services or sustain- Under these models, savings and re-investment within the economy must be
ability, and also within the context of the green economy, equal to the degradation or depreciation of natural and other capitals, oth-
erwise the economy contracts and society suffers. Further, as natural capital
which is important in order to avoid common misinterpre-
tations.
Natural capital and ecosystem services (also called
environmental services) are closely related and often services are the flow of benefits derived from one type of tration are ecosystem services. The distinction between
discussed together, yet they are distinct. Both terms natural capital —ecosystems. Ecosystem services are ecosystem services and natural capital differs slightly
became popular in recent years with the common broad goods and services useful to humans that derive from according to the source (see Box 3.3 overleaf).
goal of highlighting the contribution of nature to human ecosystems, via ecosystem processes. For example, a
forest is natural capital, and timber or carbon seques- It is important to clearly understand the difference
activity. Natural capital refers to stocks, while ecosystem between natural capital and ecosystem services

conserving natural capital is not sufficient to secure sus-
Box 3.2: Ecosystem services and nature’s contribution to people tainability. However, many also argue that conceiving
nature as a form of capital is instrumental to ensure that
Ecosystem services are a specific derivation from natural capital where the Ecosystem services have perhaps gained more traction than natural capital economic production systems contribute to achieving
natural capital is biotic (derived from ecosystems) rather than abiotic (lifeless and developed into a full interdisciplinary field of inquiry. Both terms have
subsoil assets and physical flows). Natural capital is sometimes used as a been criticised for a variety of reasons. Natural capital is criticised because sustainable societies. In this latter view, sustainability is
synonym of ecosystems, but natural capital includes assets other than eco- it resonates with capitalist and market-oriented perspectives, and therefore understood as the characteristic of a system whereby it
systems, such as mineral stocks. Ecosystems perform certain functions and brings to the forefront the risks associated to commodifying entities for which
processes (biophysical phenomena), some of which do not necessarily affect no market existed before. These risks are related to incorrect pricing, or to maximises well-being and ecosystem health over a long
humans. When these functions and processes provide a benefit to humans, the crowding out of intrinsic motivations to safeguard the natural resource time period. Maintaining natural capital over time is a
these become ecosystem services. When these function and processes have or ecosystem (see section 4.2.c). Ecosystem services have been criticised
a negative impact on humans (e.g. floods or landslides), they bring about an (although less strongly and only recently) because the term appears to imply necessary but not sufficient condition for this goal.
ecosystem disservice. a hierarchy, whereby nature provides the services and therefore is subservient
of humans. Sustainable development emphasizes intergenerational
Ecosystem services are therefore the ecological functions that contribute to
human well-being (Millenium Ecosystem Assessment, 2005). These services As an advance to overcome these criticisms, the phrase ‘nature’s contribu- equity, implying that we should ensure that future gen-
are grouped into four broad categories (see a more detailed explanation in tions to people’ has emerged particularly around the developments of the erations enjoy the same welfare level as current gener-
Costanza et al., 2017): provisioning (providing material such as food and Intergovernmental Platform on Biodiversity and Ecosystem Services (IPBES).
fuel), regulating (maintaining important variables within a useful range, such For its proponents, this term better comprehends the many reasons why
ations, for example, by securing enough capital stocks
as clean water or a stable climate), supporting (e.g. soil substrate) and cul- nature matters, than does the phrase ‘ecosystem services’. The usefulness for them to obtain this well-being. This leads to some
tural (or amenity) services (contributions to recreation, spirituality or mental and impact of this new concept is still to be seen. Some early critiques of this important but unresolved questions: What will be the
well-being, which are less tangible). Ecosystem services can also be classi- latter phrase argue that it might be ambiguous, which complicates its legal
fied into resources, sinks, and processes (Pearce & Turner, 1990). interpretation. needs of the future generation? Should we preserve
all capitals in their present stock, or can we prioritise
some for using them in the present, assuming that future
generations will be able to satisfy their well-being in dif-
because this commonly triggers confusion. As an illus- healthy marine ecosystem is the natural capital, whereas ferent ways? If so, what types of capital should be pre-
tration, the presence of bees (pollinators) is the natural reproduction and growth of fish is the ecosystem func- served in favour of current and future generations? If
capital, the activity of tion and the fish we harvest is the ecosystem good. natural capital is so fundamental, should we consume or
bees travelling from plant expend it at all?
Key concept:
to plant is the ecosys- The incorporation of natural capital in economic
Ecosystem services
Not all benefits from natural stocks tem function or process, accounts and in management decisions is a useful step Costanza and Daly (1992) provided some principles
are ecosystem services (e.g. mine
whereas the pollination towards a green economy. However, natural capital is to guide these questions that remain useful in present
ores aren’t derived from living
ecosystems). They may be simply that results from this one component, among several, of the green economy. times. Here the distinction between renewable natural
raw minerals for human use, but
process is the ecosystem The green economy encompasses a broader suite of capital (e.g. forests) and non-renewable (i.e. at human
they don’t come from living ecosys-
tems, they come from other sorts service. It is pollination theoretical concepts and practical aspects, as seen time scales, e.g. minerals) becomes important. They
of natural capital. The idea of an
that provides the direct throughout this book. argue that we should exploit renewable resources at a
ecosystem is a concept that tends
benefit for humans, not the rate similar to which they are renewed, and that their
to be much clearer to ecologists While the general idea of sustainability is commonly
than to economists, hence many existence of the pollina- stocks should never be depleted, so that they can con-
environmental economics texts use agreed, this term is also infamously ambiguous and
tors. In another example, a tinue regenerating. Non-renewable resources can be
the terms imprecisely. open to interpretation. Depending on the interpretation,

exploited, according to the authors, at a rate similar 3. The value of natural capital of shocks, such as a drop in the price of a crop or an
to the rate of creation of renewable substitutes. For extreme weather event. This is because households with
example, for an economy to be sustainable, the use of low monetary income can obtain goods and services
oil and gas could be justified as long as the gains from 3.1 Important for poverty alleviation and from their surrounding natural capital, such as food,
their use are invested in developing renewable energy building materials, or medicinal plants. For example,
alternatives (this simplified example excludes other envi- progress forests provide timber and non-timber forest products
ronmental damages from oil extraction and use, such as Natural capital supports rural livelihoods worldwide, (NTFPs) and contribute to the provisioning of water.
biodiversity loss or carbon emissions). either directly or indirectly, and provides fundamental A comparative analysis of nearly 8,000 households in
inputs to the economies of all countries’ (timber, miner- 24 developing countries (Angelsen, Jagger, Babigu-
This definition of sustainable development as intergen- mira, Belcher, & Wunder, 2014) found that households
erational equity has been echoed countless times. A als, fisheries, soil, water resources). However, the ways
by which natural capital contributes to human well-being obtained 28 per cent of their income from extracting
definition of the same phrase that is much less known, non-cultivated goods from their environment, such as
but particularly useful to our chapter, is that of Pearce vary.
firewood or medicinal plants. Of this, 77 per cent came
(1988). This scholar defined sustainable development In low and lower middle-income countries, the primary from forests, and these shares were higher for lower-in-
as “the constancy of the natural capital stock”. Pearce sectors (based on natural resources) provide a majority come households (see a more in-depth discussion in
went further and argued that sustainable development of income and employment opportunities, and so natural Chapter 7). On the other side of the spectrum, many
encompasses both intergenerational and generational capital is directly related to economic benefits. In the rural households in higher-income countries increas-
equity, economic resilience and uncertainty about how absence of industry, service and finance sectors, most ingly rely upon tourism, which also depends on healthy
natural systems contribute to social ones. This set of people are directly dependent upon natural capital, for natural surroundings.
principles is still at the core of contemporary interpreta- example, farming or fisheries. However, gross domestic
tions of sustainable development. At the same time, it product (GDP), a commonly used national barometer of Accordingly, reductions in natural capital can increase
makes the concept very broad and, for many, ambigu- economic strength does not include changes in natural household vulnerability, particularly low-income rural
ous. Therefore, the specific implications of sustainability capital, and therefore does not reflect the extent or households. For example, diminishing flows of food and
are open to interpretation —although some argue that health of ecosystems and natural resources in a country materials can make such households more dependent
this definitional ambiguity is a reason why the concept is (as discussed above, and in more detail below in section on markets to satisfy basic needs, especially food secu-
widely accepted (Dietz & Neumayer, 2007). 5.1 on national accounts). A resource-rich country may rity. Ecosystem degradation and subsequent increasing
appear very poor in GDP terms, despite having exten- reliance on markets makes households dependent upon
sive, healthy natural resources. income to pay for those goods. Environmental degra-
dation may generate a vicious cycle of food, water or
Low-income and rural households are often partic- energy shortages, leading to poverty traps.
ularly dependent upon natural capital and sensitive
to its changes. The abundance and diversity of local However, the relationship between natural capital and
natural stocks reduces vulnerability among low-income poverty is not linear. Does investment in natural capital
households and increases their resilience to a variety alleviate poverty? Does poverty alleviation lead to natural

capital investments? While investing in natural capital recycling, which sup-
may prevent households from falling into a poverty trap, plies a small proportion
it may not necessarily reduce poverty (Barrett, Travis, & of total material needs),
Dasgupta, 2011). Dependence upon natural resources for instance, rare earth
is linked to persistent poverty, a phenomenon called “the minerals for the produc-
resource curse” (Sachs & Warner, 2001). On the other tion of communication
hand, advocacy for environmental conservation often devices. These benefits
comes from poor communities who are heavily reliant of natural capital through
upon natural capital (Martinez-Alier, 2014). international connec-
tions are particularly
From a globally-integrated perspective, natural capital complex to trace, and
fundamentally supports well-being and production in rarely incorporated into
industrialised countries through virtual flows (flows of national accounts on a
ecosystem services embedded in goods, e.g. the irriga- country by county basis.
tion water needed to grow vegetables for export). Even
for countries where the economy is strongly based on Figure 2: Total economic value (Source: DEFRA)
services or technology, the natural flows embodied in
internationally traded goods are critical. For example,
food imports rely on healthy water sources in the coun- 3.3), this framework can be applied to natural capital
tries from where they are imported. Cheap food imports
3.2 Different sources of value of nature more generally.
are the result of healthy soil and abundant water and As explained in preceding sections, marketed ecosys- This framework helps us define how natural capital can
abundant land and labour in the food-producing country. tem services are a fraction of nature’s essential contri- be valuable for humans and for the economy, and pro-
As an illustration, soya produced in Brazil feeds cattle butions to human well-being. Measuring the value of vides a useful starting
consumed in the US and China. In order to produce nature’s contribution to human well-being can be a very point to distinguish val-
soya, Brazil needs to have arable land and suitable soil complex task (valuation is dealt with in section 4.1), Key concept:
Total economic value
uation methods (a topic
to support plant growth (fodder). because nature may be valuable for diverse reasons and A more complex version of this discussed in section 4.1).
to diverse beneficiaries. framework can be found in TEEB
According to this frame-
Manufacturing sectors are also dependent upon natural (2010) chapter 5. The Economics of
capital inputs, such as cobalt and lithium, used in bat- Disentangling the variety of reasons why humans may Ecosystems and Biodiversity: Main- work, nature’s importance
streaming the Economics of Nature: to humans may be derived
teries for mobile phones. Much of the world’s cobalt for value nature helps understand the complexity of valua- A synthesis of the approach, con-
electronic devices comes from the Democratic Republic tion. A useful framework to map sources of value is the clusions and recommendations of from two broad aspects:
of Congo, one of the world’s poorest countries. Produc- Total Economic Value (TEV) framework (Figure 2) (origi-
TEEB http://www.teebweb.org/pub- use and non-use values.
lication/mainstreaming-the-econom-
ing such components depends on the necessary mineral nating in the work of Pearce (1992). While typically asso- ics-of-nature-a-synthesis-of-the-ap- Some versions of this
resources available (unless these are sourced from ciated to ecosystems and ecosystem services (see Box
proach-conclusions-and-recom- model add a third cate-
mendations-of-teeb/
gory of intrinsic values.

Each of the categories of use and non-use values sub- Table 1: Range of uses of valuation of ecosystems (source: Costanza et al., 2017)
divides further. Some versions of this model add a third
category of intrinsic, non-human values. Use of valuation Appropriate values Appropriate spatial scales Precision needed
Raising awareness and inter- Total values, macro-aggregates Regional to global Low
The most intuitive subcategory is direct-use value, est
whereby the value of a natural asset is signalled by a
National income and well-be- Total values by sector, and macro-aggregates Medium Medium
price in existing markets, for instance, timber. Use values
ing analyses
are those accrued to us using a natural asset or service,
either now or in the future (option value). Indirect-use Specific policy analysis Changes by policy Medium to high Medium to high
values are associated, for example, to urban parks Urban and regional land-use Changes by land-use scenario Regional Low to medium
where we may spend our leisure time, but for which we planning
do not pay, or to regulating services such as carbon Payment for ecosystem ser- Changes by actions, due to payment Multiple, depending on Medium to high
sequestration or soil formation. Option values relate to vices policy
having the opportunity to use something in the future. Full cost accounting Total values by business, product, or activity Regional to global, given Medium to high
For example, a natural park that we may wish to visit and changes by business, product and activity the scale of international
someday, or an ecosystem for which we are not currently corporations
receiving goods or services, but we believe may offer Common asset trusts Totals to assess capital and changes to assess Regional to global Medium
future benefits. income and loss
Bequest value derives from the belief that someone else
might use the natural asset or flow in the future. This
source of value is conceptually at the threshold with use asset has value for its own sake (non-human or intrinsic 4. Valuing natural capital in
values described in Section 4.2; not shown in Figure 2).
values (and some other representations of this frame-
work place it within use values). This is because bequest Intrinsic values cannot be valued in monetary terms, practice
values do not refer to one’s own use, but rather to that of but rather are ethical and moral considerations for the
Quantifying the multi-dimensional values of natural
another person. (As a consequence, when aggregating protection of nature which go beyond the scope of the
capital (and ecosystem services) and transforming those
the values of several individuals, bequest and existence natural capital concept and this chapter.
values into monetary terms can facilitate a more com-
values can lead to double accounting.) The TEV framework maps the values or benefits we prehensive evaluation of costs and benefits of natural
associate to nature. The next section describes the eco- resource use. For this reason, there has been significant
Further, people may value a natural entity simply
nomic methods that quantify and put in monetary terms impetus in developing methods to quantify the monetary
because they know it exists (existence value). For
these different types of benefits to humans. value of non-marketed natural assets and services, but
example, people can value polar bears in the Arctic for
not without controversy.
their mere existence or symbolic meaning, despite the
fact that few believe that they will ever see polar bears The controversy stems, among other reasons, from the
in their native habitat. Finally, one might believe a natural fact that there are large data uncertainties and meth-

odological challenges associated with estimating such been developed during the last decades. For example,
values. Quantifying natural capital beyond use values is expenditures on homes can be used to estimate the
Box 3.3: Economic valuation methods
challenging, as explained below in sections 4.1 and 4.2. value of adjacent natural space, and travel costs to esti-
Therefore valuation can exclude the portion of value that mate the value of protected areas. Non-market valua- A) Market valuation methods (observed in markets):
corresponds to non-use value, and estimations of the tion methods are commonly used to estimate values for • ◦Replacement/ substitute costs
value of natural capital tend to underestimate the total cost-benefits analysis • Opportunity costs
economic value (this caveat has led to some of the main Key term: (CBA). Other uses of these
Valuation methods • Damage cost avoided
criticisms of the concept, as explained above in sections A long-standing introductory re- methods are to explore or
2.3 and 3.2). source for such valuation methods project human behaviour B) Non-market and indirect market valuation methods:
is available at https://www.eco-
systemvaluation.org/ by King and and to assess damages in
In the absence of economic valuation, however, busi- Mazzotta. court cases. Valuation is • Revealed preferences (use value)
nesses and policy makers often implicitly assign zero also used to compare or • ▪Travel cost (typically for recreation values)
value to non-market benefits. While monetary esti- monitor changes in stocks
Key term: • Hedonic pricing (typically for property prices)
mates of natural capital may not reflect its full value, the Cost benefit analysis of natural capital, evaluate
process of valuation and integration of natural processes Cost Benefit Analysis is a
trends and steer policies.
• Stated preferences (use and non-use value)
popular approach to make deci-
and economic processes is useful to increase our per- sions about prospective policies or • Contingent valuation
ception of the costs of degrading nature, and to give it projects. In a CBA, the costs and Non-market and indirect • Choice modelling
higher policy priority. An example of this communicative the benefits of an intended policy methods are grouped into
or project are listed and quantified,
and agenda-setting role was the Stern review (Stern, and they require that all costs and two broad categories: C) Benefit transfer (extrapolating values estimated for another similar
entity)
2007), which brought climate change to the forefront of benefits are expressed in monetary revealed and stated pref-
terms.
public and policy attention by estimating the economic erences (see Box 3.3).
costs that climate change would bring to a national The choice
economy. Table 1 summarises the distinct reasons why Key concepts: of a spe- value a place they visit (e.g. a national park), by cal-
Valuation tools
valuation can be useful, in terms of uses that depend on Some examples of valuation web-sites are: cific method culating the costs of travelling from their homes to the
context and policy needs. https://www.evri.ca/Global/Splash.aspx depends on place.
http://www.environment.nsw.gov.au/envalueapp/
http://www2.lincoln.ac.nz/nonmarketvaluation/
the type of
http://www.gevad.minetech.metal.ntua.gr/home.php natural capital Researchers use hedonic pricing to analyse the influ-
4.1 Economic valuation methods http://www.beijer.kva.se/valuebase.htm
or ecosystem ence of natural environments on property prices, for
service to be example, by looking at properties next to urban parks,
A wide variety of economic methods can be used to esti- evaluated, its context and data availability. Revealed and comparing their prices to those of similar properties
mate the economic value of nature, including values not preferences methods estimate the value of a natural but which are located far from green spaces.
represented through market prices. As most of nature’s entity indirectly, through the prices of related items
contributions to humans have no real market, a range observed in real markets. For example, researchers use Stated preference methods ask individuals what they
of indirect or non-market valuation techniques have the travel cost method to estimate how much people would choose or how they would behave in a hypothet-
ical situation. In these methods, since values, expen-

ditures or transactions are not directly observed, we of features, how much people value each of the features. access and benefit-sharing rules. This estimate may be
rely on what people report they would do in a situation. For example, we may use several criteria when choosing different from one under different conditions. Also, one
These are usually conducted with surveys. The sim- food, such as strawberries, e.g. organic (or not), season- natural capital stock may offer many present as well as
plest version of such methods is contingent valuation ality, travelled miles (local) and price. Respondents are potential or future ecosystem services. Accordingly, it is
where researchers ask how much money someone is presented with several options that vary in these attri- fundamental to take an open and pluralistic approach
willing to pay (or to accept) for conserving (or degrad- butes: strawberries that are local but not organic, straw- (Costanza et al., 2017).
ing) a natural entity. For example, how much a person berries that are seasonal but come from the other hemi-
would donate to conserve a bird species, or how much sphere, characteristics about their size, colour, and cost, Beyond the methods explained above, spatially-explicit
they would be willing to accept if the forest nearby was etc. None of the options presented should appear best modelling of natural capital and ecosystem services
destroyed. These studies yield estimates of the will- in all characteristics, i.e. there is no obvious best choice has advanced remarkably in recent years, contributing
ingness-to-pay, the willingness-to-accept or willing- because each option presents trade-offs. Respondents importantly to valuation efforts. Some significant tools
ness-to-trade (usually in terms of time) for something. are asked to choose or rank their preferred options, for such spatial modelling are InVest, Aries, or platforms
Existence values can be estimated by asking individuals implicitly revealing their preferences for certain attri- developed for specific countries (such as Bateman et
to rank their willingness-to-pay or trade for the existence butes. With the appropriate study design and analysis, al., 2013 for the UK; or Strand et al., 2018 for Brazilian
of nature among a collection of other goods and services such a choice modelling exercise can tell us how much Amazon).
for which they are accustomed to paying (Pascual et al., money people would pay for having, e.g. organic versus
2010). This is most challenging for communities that non-organic strawberries, and how much more impor-
use little money, where they can only be asked what they tance they give to the features of local versus seasonal. 4.2 Challenges and criticisms of valuing
would be willing to trade to protect nature. natural capital
These methods can be used to quantify the value of
More sophisticated forms of contingent valuation surveys both natural capital and ecosystem services. Often, Although the importance of nature for human well-being
aim to make the contingent question(s) as realistic as data about benefits to humans represents the benefit is widely acknowledged, operationalising its importance
possible and to minimise potential biases (see more flow (ecosystem services and goods) in a time period raises much controversy. This is particularly the case
on biases below). For example, inferred valuation asks (such as one year). This data is used to calculate the net when attempting to associate monetary figures with
individuals about the willingness-to-pay of other people present value (NPV) of the natural capital that supports natural capital and ecosystem services, so it is useful
—rather than of themselves— as a way to minimise indi- the provision of an ecosystem service over time. The to understand the main methodological challenges and
vidual biases such as social desirability and hypothetical NPV is the sum of present and future benefits, where the conceptual criticisms of valuation methods found in the
bias (Lusk & Norwood, 2009). latter are discounted, assuming that future benefits have academic literature. Most notably, data and knowledge
less worth now (see text box on discounting, in Chapter about ecological processes are often insufficient to esti-
Choice modelling (also called conjoined analysis) is a 2). Accordingly, valuation methods apply almost indis- mate an exact economic value. The methods rely on
set of methods where respondents are shown options tinctly to both natural capital and ecosystem services. strong assumptions too, e.g. that individuals do have a
with different characteristics, and they are asked to However, when benefits derived from ecosystem ser- preference for the goods or services under consideration
choose one or to rank them. This is particularly useful vices are used to estimate the value of natural capital, and that they can assign a discrete value to them. Also,
when we want to know, from a given good with a series this estimate represents current demand under certain valuation may be criticised on ethical grounds because

of unintended behavioural consequences of associating us a false impression of what reality is. The literature it provides, air purification, home for birds that people
economic values with nature. We discuss each of these identifies dozens of potential biases (see, e.g., Mitchell & enjoy listening to, and the market value of its timber
three challenges in separate subsections below. Carson, 1989). should it be cut down.
Four further caveats deserve mention in this over- Now we discuss in more detail the first three challenges These information challenges can be disaggregated
view. First, the external validity of stated values is often identified at the beginning of this section. into more specific issues (Barbier, 2013). First, where
unknown. This means, for example, that it is not possi- a service is derived from a complex landscape (e.g.
ble to confirm whether the stated values for hypothetical including forest and rivers, etc.), it is difficult to associ-
scenarios are truly how all individuals would make trade- i) Information ate the service to a single natural capital. For example,
offs or spend their money. Second, there are unresolved are hydrological services derived from the forest that
A set of fundamental and largely unresolved challenges
conceptual issues, related to discounting future benefits captures rainfall, or from the river that transports them?
are due to imperfect information. Scientific knowledge
(discussed in earlier chapters) and to the aggregation of Second, it is difficult to delineate all the benefits accrued
about ecosystems and their contribution to humans is
separate components of value. Questions of aggregation from a natural asset, because there may be many ben-
considerable, but it is also far from complete (Banzahf &
consist on whether the different values that each person efits, for a multitude of individuals and during differing
Boyd, 2005). Ecosystem processes are rarely linear or
associates to a natural entity add up, overlap, or multiply periods, making it a challenge to account for all of them.
made of few components (Kremen, 2005). Rather, multi-
to compose its total value. For example, a forest can have economic value in the
ple factors interact in ways that are often complex, such
timber it produces, in the air it cleans, or in the water it
Third, nature often provides benefits with characteris- as with cumulative or interactive effects. For example, a
helps purify.
tics of a public good. This means that access to these lake ecosystem may at first not react to increasing con-
benefits cannot be restricted (i.e. anyone can obtain this centration of pollutants, but once a threshold concentra- Third, there is risk of double counting, because natural
benefit, such as clean air). The costs of conserving or tion is achieved, it may degrade rapidly. capital can contribute both directly and indirectly to
providing these benefits, however, are often borne by humans. One capital may contribute indirectly whilst
This complexity brings methodological challenges for
one agent, for example, by a forest landowner or by a another contributes directly to the same flow that
natural capital valuation. It also implies that quantifying
factory that must filter smokestack emissions. In these humans use. If one counts both the indirect and the
the contribution of natural capital to human well-being
instances, the sum of public benefits of environmen- direct contribution for each capital respectively, the
(and the magnitude of its degradation) will inevitably
tal stewardship may be much greater than the costs of benefit may be accounted for twice (Barbier, 2013).
present uncertainty and likely fall short of its true value.
neglect, but when the benefits accrue to many and the Continuing with the previous example, to estimate the
The size of the error margin largely depends on the
costs are born by few, valuation is not sufficient to make total value of the forest, one would add the value of the
paucity of data about the particular stock or flow anal-
decisions or set regulations. hydrological services derived from it. To estimate the
ysed. For example, the value of a river for a hydroelectric
value of the river, one could add the value of the same
Fourth, biases introduced alongside data design and dam can be estimated quite clearly in terms of its con-
hydrological services, to which the river contributes more
collection in surveys are an important concern, particu- tribution to electricity production; engineers know how
directly than the forest. In such a situation, one may be
larly for the case of stated preference methods. Biases much water is needed to produce a given unit of output.
accounting for the value of hydrological services twice.
distort responses in ways that are not random, and so The value of a tree in the street for the local inhabitants
This issue of double-counting becomes important in the
are difficult to detect and handle statistically. They give can be more complex, it includes the value of the shade

aggregation of values of natural capital, for example, large enough to replace it. For example, in the absence two distinct capitals. If two assets are incommensura-
when attempting to include it in national accounts. of a forest that keeps air clean, humans could obtain the ble, they are also likely not substitutable with each other.
same service of air purification by means of physical In cases where a decision involves trade-offs between
Finally, even when we can measure asset quantities and capital such as machinery that performs this function non-substitutable assets, decision tools different from
changes in physical units, translating from physical units (technology is a versatile way of substituting capitals). CBA may be used (see further in Gasparatos & Scolo-
to monetary units may introduce additional uncertainty big, 2012; Martinez-Alier, Munda, & O’Neill, 1998).
and therefore diminish precision in the quantification. The question of substitutability sparks an important crit-
For example, we can quantify with some precision, how icism in valuation. Essentially, measuring things in the One of the main decision-making support approaches
many tonnes of CO2 a forest captures. However, in con- same units (money) inherently implies that they can be that goes beyond monetary cost-benefit analysis (CBA)
verting tonnes of CO2, a relatively well-known value, into substituted. For example, if the value estimated for a is multi-criteria analysis (MCA). MCA is a very diverse
USD, we may introduce a degree of imprecision. This small forest were US$10,000, and that of a wetland were family of decision support tools. In essence, it is used
is because our knowledge about the factor to transform US$80,000, one could think theoretically that we can to compare different project options, based on a suite
CO2 into USD may have an error margin. When trans- replace the wetland (and the flows thereof) with eight of criteria (such as cost, environmental impact, social
forming the units, this error propagates and amplifies. of these forests. This is unrealistic: the wetland purifies impact, etc.). The advantage of MCA approaches is that
As a result, we go from a relatively well-known value water, whereas the forest purifies air (among many other each criterion needs not be measured in the same units,
(although with its own ecological uncertainties), to a services), and so the air purified by eight forests cannot i.e. they do not need to be all expressed in monetary
value with a wider uncertainty range, which is likely to be replace water provided by one wetland, and vice-versa. units as in CBA. However, MCA involves other complex-
less informative to make decisions. ity in terms of how much weight is given to each crite-
While values for natural capital cannot be compared, rion, and how to aggregate the criteria in order to rank
the value of the same ecosystem services often can. For options.
ii) Substitutability and comparability example, the value of a tonne of carbon sequestered by
a forest is the same as if it were sequestered by a peat
The above are knowledge-related challenges that could bog. Each of these ecosystems (the forest and the peat iii) Ethics and behaviour
arguably be addressed through further inquiry. However, bog) may have a distinct total value as natural capital,
another set of fundamental challenges in valuation refers because they provide further ecosystem services. Some critics of economic valuation argue that associat-
to assumptions about the qualities of nature as a capital, In addition to substitutability (or replaceability), two other ing a monetary figure to a natural entity transforms what
specifically, whether (and if so, to what extent) the flows concepts are important to understand this criticism more motivates us to value it. The entity shifts from something
derived from nature could also be derived from other thoroughly: commensurability and comparability. Com- with intrinsic or moral values to something with utilitarian
forms of capital. mensurability refers to whether two capitals can be mea- value. This shift can have ethical and moral implications
sured in the same units, or in units that are directly com- and, more importantly, could lead people to care less
We mentioned earlier that one type of capital can about the environment than when they associated intrin-
parable. Comparability refers to whether two capitals,
be substituted by another in some cases. This idea sic value to it, hence changing behaviour in a detrimen-
despite not being measurable in the same units, can still
becomes important because, taken to a theoretical tal way (Bowles, 2008).
be compared quantitatively. Conversely, incommensu-
extreme, one could argue that natural capital depletion
rability is the lack of common units of measurement for
would not matter, as long as other types of capital are A phenomenon increasingly studied in the behavioural

sciences is that of crowding out versus crowding in determine how much the polar values its own life, at ment these approaches in the last few years, mostly
intrinsic motivations where a market is created for previ- least not in monetary terms). during the 2010s. In current practice, the main refer-
ously non-marketed goods and services (Ezzine-de-blas, ence works to implement natural capital accounting are
Corbera, & Lapeyre, 2015). This has strong implications Given that environmental harm persists despite strong the UN’s System for Environmental-Economic Account-
for environmental conservation. Put simply, an individual ethical motivations for sustainability, it is important to ing (SEEA; UN, 2014) and the Natural Capital Protocol
may be motivated to protect a patch of forest on their acknowledge and consider the diversity of worldviews (ICAEW, 2016), for national accounts and for businesses
land because they enjoy it, or they think it is a good thing that stem from different paradigms, and that no spe- respectively.
to do. If someone starts paying them to take care of the cific worldview may be superior to others in helping us
forest, motivation crowding out occurs if the individual’s toward sustainability. Researchers have advocated for
openness to a pluralistic approach to best understand
motivation to take care of the forest shifts from inherent
how value paradigms can inform decisions about nature
5.1 Attempts to incorporate natural wealth
enjoyment, to the expectation of being paid for doing accounting in national accounts
so. This would mean that, if the payment stops, the indi- (Chan, Satterfield, & Goldstein, 2012; Small, Munday, &
vidual might stop caring for or cut down the forest if the Durance, 2017) There are two broad approaches to integrate natural
intrinsic enjoyment faded away when the main motivation capital in national accounting (explained in more detail
became the external payment. The payment is an exter- in Chapter 10). One approach is to make adjustments to
nal incentive, the enjoyment is an internalised motivation, standard macroeconomic indicators (adjusted economic
which is suggested to be more durable, though not nec- 5. Natural capital in the public and measures), such as to the GDP, by incorporating natural
essarily stronger (Davis et al. 2018). Crowding in occurs private sectors assets and their depletion in the calculation. The other
if an individual continues a behaviour after the incentive one is to create new indicators altogether (composite
payment has stopped, such as when an individual con- In addition to methodological and theoretical challenges indicators), including indicators in units other than mon-
tinues recycling glass after the discontinuation of a bottle of valuation highlighted above, the implementation of etary, such as area of land or volumes of material used
return incentive. Other critiques of linking payments to natural capital encounters two further challenges (Daily in the economy. The former approach tends to be more
conservation that lie somewhere between ethics and & Matson, 2008), which are common to most policy-mak- readily adopted by existing statistical records, while the
behaviour are the risks involved with commodification of ing. One challenge concerns innovative governance latter approach has led to a much wider variety of indica-
nature (McCauley, 2006). systems that are needed to facilitate the transition to a tors that are, arguably, more comprehensive. An exten-
sustainable economy, including new finance and regula- sive literature discusses the pros, cons and assumptions
Going beyond the framework of the Total Economic tory frameworks. Another challenge concerns the meth- of each indicator proposed (see McGillivray, 2007; and
Value (section 3.2), nature can be important for its own odologies and governance systems that are needed to Neumayer, 2005 for a comprehensive treatment of the
sake (intrinsic value) (Pascual et al., 2010). For some, adapt to different social and ecological contexts in order topic). Further approaches include dashboards (collec-
quantifying the monetary value of nature seems like an to succeed. tions) of indicators and combinations of index and dash-
aberration or trivialisation. Some would argue that nature boards (see Chapter 10). None of these approaches,
has intrinsic value, that is, it has value in and to itself Academic efforts to measure and value natural capital
and ecosystem services span a few decades. However, thus far, have become the most accepted one among
regardless of whether or not humans exist, and there- academics, although the SEEA is gaining wide accep-
fore quantification of value is impossible (i.e. we cannot the public and private sectors have only started to imple-
tance among practitioners. The SEEA framework encom-

passes accounting of physical flows (in physical units Living Planet Index, Genuine Progress Indicator and advisory entity with the aim of introducing a value of
such as volume of waste, quantity of energy etc.) as Sustainable Net Benefit Index. Many of these indica- natural capital in national GDP accounts. South Africa
well as of monetary values estimated for certain stocks tors are included within the family of indicators derived has a National Plan for Advancing Environmental-Eco-
and flows, and therefore combines features of both from the Index of Sustainable Economic Welfare (ISEW). nomic Accounting from 2015, and now Chile, Indonesia,
approaches. From within these, some important indicators use Mexico, Vietnam and Mauritius are also drafting their
solely physical units (rather than economic ones), for own.
Regarding adjusted economic measures that adapt example, the Ecological Footprint (the amount of land
existing macroeconomic indicators, efforts have been necessary to sustain a human or a city, etc.) or Mate- The inclusion of natural capital into national accounts of
made to understand how national accounting indicators, rial Flow Accounts. These indicators are often intended wealth fundamentally changes the measures of coun-
such as GDP, can measure an economy’s sustainability. to express progress or changes in well-being. For this try-level well-being and sustainability (Arrow, Mumford, &
Especially, how national accounting measures can be reason, discussions on indicators about the natural Oleson, 2012). Recent comparative studies reveal unex-
expanded or adjusted to reflect accurate information environment sometimes include the family of happiness pected results in terms of which countries demonstrate
on the changes in natural capital stocks and wealth. indicators (a topic discussed in Chapter 2), which aim to most sustainable resource use, for example, Vietnam
One fundamental change that natural capital entails for measure human well-being in a more holistic manner. and Sri Lanka have not transgressed many biophysi-
national accounting is capital depreciation (the loss of cal boundaries as measured by a group of scientists
value in the stocks). In standard accounting, depreci- The MEA and TEEB were milestone global assessments (O’Neill, Fanning, Lamb, & Steinberger, 2018). More
ation is estimated for manufactured capital (buildings, that highlighted the importance of natural capital and inclusive measurements and initiative to adopt them
machinery, etc.), but not for the natural environment ecosystem services. Soon after, the SEEA was devel- continues to evolve through a mix of government regula-
(Barbier, 2014). For example, destruction of wetlands is oped among several international institutions, and is tions, academic initiatives, and citizen movements.
not counted as capital depreciation in national accounts, nowadays the flagship framework to incorporate natural
hence giving an incomplete picture of the wealth of a capital in economic decision-making. The UN Statistics
country. Some examples of adapted standard macro- Division created “experimental ecosystem accounts as 5.2 Businesses incorporating natural
economic indicators, discussed later in Chapter 10, are part of the revision of the [SEEA]” (Guerry et al., 2015). capital
the environmentally adjusted or green net national (or Simultaneously, the World Bank-led the Wealth Account-
domestic) product, Genuine Progress Indicator, Adjusted ing and Valuation of Ecosystem Services partnership There is growing awareness among some business
Net Savings, or Sustainable National Income. Through (WAVES), aiming to boost the implementation of the groups about the importance of preserving natural
developing these new indicators, the interest has SEEA methodology. assets, ensued by some important initiatives (see Box
reverted to accounting wealth instead of money, which 3.4). This is so despite fear that businesses will put
requires a more open approach toward what is quanti- At national scales, important efforts are underway in themselves at a competitive disadvantage to those
fied and how. the policy and practice arenas in order to fully incor- that do not account for natural capital impacts. Without
porate natural capital into decision-making and their global standards that apply to all competitors, there
The family of composite indices is very diverse — mea- national accounts, e.g. in China (Ouyang et al., 2016) is often little incentive to individually invest in natural
surements created aside from mainstream macroeco- and the US (Schaefer et al., 2015). In 2012 the UK gov- capital. As an alternative, businesses engage in collab-
nomic indicators. It includes indicators such as the ernment created the Natural Capital Committee, an orations through initiatives such as the Natural Capital

do not perceive the direct benefit of their actions, unless
Box 3.4: Two popular approaches: payments for ecosystem services and ecological res- they have assurance that other firms will not break the
rules. Some actors may “free-ride” on the environmental-
toration ly-friendly behaviour of other actors, reaping the benefits
Two main ways to enhance natural capital are 1) restoring degraded ecosys- are based on certain theoretical foundations, such as the fact that buyers without bearing the costs. Without strong governance,
tems and 2) preserving the existing capital (where it is under threat). Resto- and sellers need to be easily identifiable, the resource to conserve needs to
ration is otherwise often seen as an expense with no net benefits. However, by have clear boundaries, and the transactions need to have low costs. In other
the motivation of businesses that actually decide to
including the value of ecosystem service benefits from an increase in natural words, these schemes may work well in some cases, for example in the case invest in natural capital is often beyond profit maximiza-
capital into the accounts, restoration may demonstrate net benefits. A study of hydrological resources with downstream users and upstream providers, tion motivations, and depends on a variety of other prac-
analysing over 200 cases of a variety of ecosystems found that the internal where they can easily communicate to negotiate and complete the transac-
rate of return was positive for most projects, and as high as 59 per cent for tion. tical and ethical motivations.
some grassland restoration projects (Groot et al., 2013).
Whether these schemes have net positive impact (particularly in the long The motivations of businesses to incorporate environ-
In order to preserve existing natural capital, several policy instruments are term) has been intensively researched in recent years (Porras, Greig-Gran,
available. The most well-known is direct regulation, e.g. establishing pro- & Neves, 2008; Samii, Lisiecki, Kulkarni, Paler, & Chavis, 2014) Sometimes it mental concerns in their behaviour are an important line
tected areas where impacts are restricted. Another instrument that has is difficult to attribute observed improvements to the payment scheme itself, of inquiry. In some situations, profit-maximising firms do
become popular is payments for ecosystem services (or environmental because these improvements might have happened for any other reason.
services; PES), whereby a seller (those who safeguard the natural capital) Other times, there is no observable improvement, other than increased not have incentives to over-comply with environmental
receives money from a buyer (those who enjoy the service provided by income that contributes to alleviate poverty (where the goals of conservation regulation if there is no net benefit. However, environ-
that capital). Over 500 schemes of PES have been inventoried worldwide and poverty alleviation are joined together).
(Salzman, Bennett, Carroll, Goldstein, & Jenkins, 2018), and they vary largely mentally-conscious behaviour in firms is observed in,
in their scale, their private or public nature and, of course, in the resource or The consensus appears to be that these schemes may be effective insofar such as with sustainability certifications (e.g. Natural
service they pay for (predominantly biodiversity, water or carbon capture by as their impact is monitored and the payments are conditional to the sellers
forests). taking conservation actions or to actual improvements being detected Capital Protocol, Certified Organic, or Forest Steward-
(Wunder et al., 2018). While intuitive, these two aspects of monitoring results ship Council Approved) or voluntary initiatives in many
The effectiveness of PES has been widely discussed. These programmes and of conditionality of payments are infrequent in PES schemes.
variants (local, international, by individual companies or
in cooperation with others).
Kolstad (2011) presents a useful classification of what
Coalition. have a dynamic effect on the private sector. As prices he terms voluntary measures for pro-environmental
start to shift consumption patterns, businesses that are business behaviour, exploring why firms do so. Such
Firms seldom fully grasp the importance of natural able adapt to minimise natural capital costs would have
assets for their own business. Accounting for the voluntary actions can be classified as market-driven
a comparative advantage. This dynamic response of and as regulatory games. Market-driven actions are
impacts of natural capital can help to internalise the decoupling revenue from natural capital degradation
externalities of the business. Full internalisation of exter- those motivated by either demand from consumers for
would further enable a shift towards a green economy. green products, or the belief that the green manage-
nalities may be achieved if the price of the final product
reflects the true costs to nature and society. If prices of Natural assets are, as mentioned above, often public ment of companies also signals good management more
goods and services actually reflected their total envi- goods, meaning that they can be accessed or enjoyed broadly leading to an increased confidence among the
ronmental cost, consumption of environmentally harmful freely by everyone. Their conservation depends on the stakeholders with which they interact, such as investors
products would thus decline, helping with the transition joint action of a number of actors. These reasons lead to or other companies. These drivers may not bring more
towards sustainability. Such true-cost pricing would also problems of collective action, whereby individual firms profits, but might increase the likelihood of a fruitful busi-

ness (a market niche or securing relations respectively). 6. Conclusion
Regulatory games are voluntary agreements, pro- Box 3.5: Reference initiatives to imple- In this chapter we have defined natural capital as the
grammes and pre-emptive actions where the gov- ment natural capital in the private sector natural stocks that contribute to producing goods and
ernment is involved to some degree. Involuntary services that benefit humans. Examples of natural
• Coalition for Private Investment in Conservation, launched in 2016 with
agreements, additional environmental regulation the aim to find investments in conservation that provide economic returns capital include extractive resources, (e.g. minerals),
would increase the costs of companies and be diffi- to private investors.
renewable resources (e.g. fish) and ecosystems (e.g.
cult to implement. Accordingly, governments offer a • Natural Capital Coalition, a partnership of multiple stakeholders to forests or wetlands). Natural capital is not to be con-
support businesses in incorporating natural capital in their decisions,
less-than-optimal, but voluntary, option to reduce envi- established in 2014. Their Hub section contains a wealth of resources, fused with ecosystem services: from natural capital
ronmental impact (e.g. a lower pollution standard than including case studies.
stocks humans derive flows of benefits or income, where
socially desirable). The advantage is that a voluntary • Natural Capital Finance Alliance, provides tools for financial institutions, derived from ecosystems, these flows are ecosystem
measure tends to be easier for businesses to implement mostly for risk assessment. It follows the 2012 Natural Capital Declaration
services.
launched at the UN CSD. They also provide several case studies.
rather than direct restrictions, hence more likely to be
implemented from the viewpoint of the government. In • Natural Capital Impact Group (formerly Leaders Platform), a global
network of private companies supported by academics, mostly focused
The concept of natural capital was developed in order
voluntary programmes, governments present a scheme on developing metrics to help businesses understand their impact on the to overcome an important caveat in the traditional eco-
environment.
with guidelines and goals with a modest incentive, which nomic production function. This production function
companies are free to join. The incentive is not econom- • Natural Capital Project, a global partnership of academic and not-for- included financial capital, labour and land, but implicitly
profit institutions developing tools to account for nature’s contributions to
ically sufficient on its own for companies to participate, society, since 2006. assumed no value for the natural resources and eco-
but it helps in combination with other incentives, such • World Forum on Natural Capital, biannual conference of academics,
logical processes that contribute to or enable economic
as recognition or technical support. With pre-emptive business and policymakers, held since 2013, supported by UN Environ- productivity, other than the costs of extraction or access.
ment, IUCN, WBCSD.
action, companies somewhat reduce their environmental As a result of not having a price or economic value,
impact before a restriction is established, in a strategy natural systems and natural capital have been degraded
to prevent regulation that might be harder for them to by economic expansion with little regard to the sever-
comply with. support through increased innovation in institutional ity of the impacts of this degradation to the economy or
arrangements, investment models and partnerships human well-being.
In addition to these reasons why the private sector can
be environmentally proactive, we also observe important among different stakeholders. To meet this gap and Natural capital is highly valuable for low-income house-
international initiatives that are stimulating the incorpora- enhance support to and within the private sector, several holds in rural areas that depend directly on their envi-
tion of natural capital into private business decision-mak- international initiatives have emerged in recent years ronment, as well as for countries at higher levels of
ing. These are often driven jointly by the private sector, (Box 3.5). development that depends upon natural resource inputs,
academia, and other non-profit organisations, not nec- domestically or imported. Even though a country’s eco-
essarily involving the public sector and not strictly driven nomic wealth may seem loosely related to ecosystems,
by market motives in their appearance. With growing essential natural resources required for production and
awareness and interest, the private sector seeks further staple consumption products, such as food, are brought
via international trade from other countries, which in

turn need healthy natural capital to export such natural natural systems, ideally in monetary terms. Accord- vices, ethical criticisms and concerns over unintended
resources or food. ingly, a variety of methods have been developed to behavioural consequences of estimating economic
estimate the value of natural capital and ecosystem ser- costs.
Natural capital gained importance in academic debates vices: market, indirect market and non-market valuation
in the 1990s, together with a broader trend of increas- methods. The total value of such items can be disaggre- In conclusion, understanding the importance of nature
ing awareness about environmental and sustainability gated and defined using the TEV framework, which dis- through the lens of natural capital proves useful for
issues. However, this way of overcoming the caveats of tinguishes marketed values, non-marketed values, exis- a transition to a green economy. This lens increases
traditional economic thinking regarding the environment tential values and other components of the overall value awareness of nature’s importance for the economy and
is not without criticism. One key criticism is that, by con- of a natural assets or their flow of services. The choice human well-being. Its positive impact is observed in
sidering nature a capital next to other types of capitals of the method for estimating such values depends on the actions of both governments and the private sector,
(human, financial, physical), some may understand that the type of the value to be estimated, the type of natural e.g. through national economic accounting (further in
these capitals are interchangeable. This understand- system, and the data available. Chapter 10) and business initiatives regarding natural
ing is coined as weak sustainability, and assumes that capital or the green economy.
the depletion of one type of capital (natural) can be Valuing natural capital and ecosystem services can be
fully compensated or substituted with another capital useful for different purposes, from full-cost accounting to
(e.g. financial capital or technology). Because nature informing decisions about natural resource management
is complex and our understanding of it is limited, this to raising awareness and interest about the importance Additional resources
assumption is not realistic, and so strong sustainability of nature. Operationalising natural capital and estimat-
proposes that some forms of nature’s degradation are ing such values also has caveats and challenges. Some What is natural capital and why is it
irreversible and/or irreplaceable. key challenges refer to the lack of sufficient knowledge
about complex ecosystems, the assumptions and poten-
important?
An important implication of natural capital is that it tial biases underlying valuation methods, the quality of
fosters efforts to quantitatively estimate the value of the public good of many environmental goods and ser- Natural capital: Tony Juniper

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CHAPTER 4:
GREEN TECHNOLOGY
CHAPTER 4: Jing Zhang
GREEN TECHNOLOGY Tongji University
Following a Ph.D. in environmental science, Dr. Jing Zhang has been working
at tongji University since 2010, focusing on low carbon development and
green economy.
She has coordinated and implemented the translation of the UN Environment

Green Economy Report into Chinese (2012); participated the international
LEARNING OBJECTIVES evaluation of Chongming eco-island (2011-2014) and the assessment on
Beijing Capital International Airport, cooperated with UN Environment.
This chapter aims to enable its readers to:
• Articulate the meaning and implications of green technology;
• Outline green technology’s main contributions to the green economy transition; Meshgan Mohammed Al Awar
and
Research & Studies Center, Dubai Police Academy and
• Understand the policies and practices that enable the development of green Zayed International Prize for the Environment
technlogy. Dr. Meshgan Mohammed Al Awar, Director, Research & Studies Center, Dubai
Police Academy and Secretary General, Zayed International Prize for the
Environment, is considered among the top women achievers in the United
Arab Emirates (UAE). She received her PhD in Physical Chemistry from the
University of Wales, United Kingdom (UK).
Dr. Al Awar has been recognized both locally and internationally as she
has received multiple awards and appointments from various UN bodies,
including UNESCO, UNIDO, ECOSOC, UNOSSC and others. She is also a
certified UNIDO Expert in the use of Contaminated Sites Management Toolkit
for POPs and a Co-Chair in the WISDP initiated by UNESCO Hong Kong
Association.
CHAPTER 4: GREEN TECHNOLOGY 4.2

CHAPTER CONTENTS policies can help prevent this market failure and promote nature and behavior, technology instead refers to the
green technologies. application of scientific knowledge in order to deal with
1. Understanding Green Technology the “how to do” questions. It can thus be considered a
1.
Understanding green practical application of scientific knowledge. Technology
2. Green technology supporting the transition (more specifically, science and the knowledge behind
technology a certain technology) tends to be non-rival in use,
towards an inclusive green economy
What kinds of technology should be considered green? which implies that it is non-depletable, and can thus be
3. Developing green technology: policies and To set the stage, we briefly review some common reproduced and transferred (Dosi & Nelson, 2010).
practices features of technology and its influences within Second, technology reflects people’s desires and
4. Transition management an economy-environment nexus. We then discuss intentions. Technology is usually designed to fulfill a
the implications of green technology for economic certain purpose. At the same time, it is stochastic
5. Summary development and countries’ transition to green – unpredictable in its
economies. Key term: outcomes – and thus not
Stochastic
Foreword Random; having an element of un- necessarily matching its
predictability as opposed to being intended, or originally
The chapter starts by providing insights into technology’s 1.1 The nature of technology deterministic. Adapted from: https://
stats.oecd.org/ desired outcome.
influences within an economy-environment linkage
Technology refers to the application of knowledge Third, when we speak
and then discusses the meaning of green technology.
through human-designed means for achieving specific about a technology, the term may relate to a device such
Section 2 discusses the role of green technology in
ends (Dosi & Nelson, 2010)., In the following paragraphs as a mobile phone, a method such as cloud technology,
advancing the green economy transition, from the
we will further unwrap this description, in order to better or a way of manufacturing such as 3D printing.
greening of individual sectors to industrial upgrading
understand the essential characteristics and nature of Technologies are inextricably linked to all activities along
and from creating new-generation capitals to driving
technology. the product line, from design and resource extraction
the techno-economic paradigm towards sustainable
consumption and production. New technologies are First, technology is knowledge-driven and science- to production and waste management. As a result,
often in an unfavorable position in the initial phase. based. Together, science and technology shape the any produced good or service can be considered a
Due to knowledge spillovers and environmental lifestyles of the majority of the world’s population today. combination of a set of technologies. Indeed, the power
externalities, market forces do not provide sufficient These two concepts, often paired, are intrinsically-linked of technology has now gone beyond the production
incentives for developing and mutually reinforcing. Science studies the nature and process and has increasingly become present in our
Key term: or adopting green behavior of natural things, which is a verified approach daily life. For example, mobile internet is transforming
Knowledge spillover
technologies. Section to knowledge. business and social interaction. This has led Dosi
Where information, ideas and
knowledge is exchanged among 3 then examines how and Nelson (2010) to submit that technology can now
individuals, potentially leading to Based on a body of scientific knowledge that answers be regarded as all-encompassing; as final products,
innovation.Adapted from: https://
www.philadelphiafed.org/
the fundamental “what” and “why” questions of

recipes entailing a design for a product, or routines of technology on the linkage between the economy and the
making or doing things. environment.
Lastly, technology can be considered a means to an In the traditional economic paradigm, rapid economic
end. Ecological economists Daly and Farley (2003) growth and wealth accumulation have generally been
described a spectrum with one end representing considered the main route or even the only path
ultimate goals of development and the other end towards achieving enhanced well-being, while largely
representing ultimate means. Technology has the ignoring planetary boundaries. Within this paradigm,
potential to satisfy intermediate ends, such as health, technologies have mainly been developed for the
safety or comfort, with different means, e.g. resources or purpose of enhancing productivity, and this has resulted
energy. in considerable technological progress and increased
material prosperity. For example, in the United States
However, in the pursuit of specific total output has grown more than tenfold over the last
century (Samuelson & Nordhaus, 2013), while in the last
economic or social objectives, the ability to two decades alone economic growth has lifted a billion
make use of resources and energy by way people across China out of poverty (The Economist,
2014). In this respect, the predominant role that
of technology has resulted in profound technology has played in stimulating economic growth Figure 1. Long-term circles of economy and technological innova-
environmental impacts. has been demonstrated by economists such as Solow tion (Weizsaecker et al., 2009).
and Schumpeter (see also chapter 2).
This calls for interdisciplinary knowledge to evaluate
More specifically, certain technologies that are widely innovative application, these technologies have shaped
potential benefits and costs, as well as any uncertainty
applied across a range of sectors, known as general entire economic periods. In this respect, Kontratiev
and risks related to technological innovation.
purpose technologies observed long economic cycles of 40-60 years,
Key term: (GPTs), have contributed known as the Kontratiev wave or long wave, which was
General purpose
technologies uniquely to both economic closely associated with major technological innovations
1.2 Technology’s influences in an Technologies that can affect or growth and economic (as shown in Figure 1);
economic-environment linkage alter an entire economy. Examples
include information technology, transformation, in turn Key term: forming the basis for the
steam, electricity and internal com- leading to far-reaching Economic cycle concept of the “techno-
Chapter 2 of this publication discussed the role of bustion. Adapted from https://link. The fluctuation of the economy
societal transformations between periods of growth and economic paradigm
technological progress in enhancing productivity, and springer.com/
that extend beyond pure recession. Factors including GDP, (TEP)” (Dosi & Nelson,
economic growth. This chapter will expand on this interest rates, employment levels,
economic productivity. Examples of GPTs include the 2013; Freeman & Perez,
perspective by considering the role of technology for spending can help determine the
steam engine, electricity, computers, and the internet. current stage of the economic 1988).
countries’ transition to inclusive green economies. cycle. Adapted from https://www.
Based on the disruptive effects that accompanied their
For simplicity, we will first look at the influences of investopedia.com/

Considering the techno-economic paradigm, as based Thus, technology can be considered as both a
on the Kontratiev wave, Weizsaecker argued that the source and solution of environmental issues related
first five long waves of innovation were characterized to anthropogenic activities. However, for innovation to
by technological change that was driven by short-term be a driving force for sustainable development in what
economic benefits, instead of focus on the long-term Weizsaecker now calls the ‘6th wave of innovation’, it is
optimum. Innovative capacity since the 18th century crucial that the right questions of “how” and “what for”
has focused heavily on enhancing labor productivity are applied. This, again, calls for a profound change
and, as a result, labor in both development philosophies and technological
Key term: productivity has systems.
Labour productivity
Labor productivity measures the increased twentyfold
hourly output of a country’s econ- over the last two
omy; it charts the amount of real
gross domestic product (GDP) pro-
centuries. Today, labor 1.3 Implications of green technology
duced by an hour of labor. Adapted is no longer the limiting
from: https://www.investopedia.com
factor of growth, and As described in the Green Economy Report (UN
additional jobs are in Environment, 2011), a green economy encourages
fact needed to achieve full employment (Weizsaecker positive interactions between the economy and the
et al., 2009). However, economic activities increasingly environment, and ideally establishes synergies between Figure 2. Green technology: integrating environmentally friendly
the economic, societal, and environmental pillars. In technology into economic activities (by author).
place pressure on the natural environment because,
in focusing on short-term economic benefits, previous this context, integrating new, greener technologies into
waves of innovation failed to address the more holistic economic activities of production and consumption
paradigm environmental
and longer-term effects of economic processes on can be a key driver in advancing the green economy Key term:
Paradigm technology-focused on
natural systems. At the same time, technology also plays transition.
remediation and was often
A paradigm can be a typical ex-
a crucial role in pushing the boundaries of economic As shown in Figure 2, these technologies can be
ample of something, or as in this
situated at the end-of-
case, a way of describing a set of
growth. Energy-efficient technologies and renewable integrated into each stage of the economic activity pipe, in a green economy,
ideas that can be used to describe
energy technologies process. At the initial stage, renewable energy can
something, like a dominant under-
technology can better
standing. Adapted from: http://www.
help to meet the growing substitute the use of fossil fuels as a ‘clean’ energy macmillandictionaryblog.com/ understood as a means to
Key term:
Environmental
global demand for energy, source. Production and consumption processes ensure the integration of
remediation while physical, chemical, can utilize energy conservation equipment, while environmental protection
Removal of pollution and contam- and biological recycling
inants from the environment e.g. downstream stages can green their processes through processes into all stages of economic activities.
from soil, surface water and so on, and remediation the adoption of air purification or carbon capture and
in order to restore the environment technologies are storage (CCS) technology. In this way, green technology
As was mentioned in section 1.1, technology by its
and to protect human health where
essential in the fight own nature is a means to achieve an end. Designing
it may be at risk due to contami- is, in fact, environmental technology in a broader
nants. Adapted from: https://www. against pollution. green technologies therefore requires a whole-systems
bls.gov/ sense. While under the take-waste-dispose economic
approach, as Weizsaecker et al. suggest (2010),

in which we first set related to energy flow and carbon emissions, circular and services were in
Key term: Key term:
Environmental proper objectives, and economies target the flow of materials and waste (see Natural capital abundance. However, in
protection then identify effective Box 4.1 in this Chapter as well as Chapter 1, Appendix, the context of economic
The world’s natural assets i.e. soil,
Activities which attempt to conserve air, water, living things – from natu-
or restore the state of the environ- technological solutions. and Chapter 2, Appendix) (Sheng & Zhu, 2015). growth, natural capital
ral capital humans obtain ecosys-
ment through preventing/reducing has gradually become
tem services which make human life
In considering the pursuit
the presence of pollutants going The third important path towards the realization of a possible e.g. food, water, materials
the limiting factor in
into the environment. Adapted from: for fuel, medicines and building
https://stats.oecd.org/
of economic growth within green economy is cleaner production, which is defined materials. Adapted from: production rates. As
planetary boundaries by UN Environment as “the continuous application of https://naturalcapitalforum.com/
such, with the economic
and capacity-carrying an integrated preventative environmental strategy to logic of investing in the
limits, the concepts of circular economy and low- processes, products and services to increase efficiency limiting factor in mind, it is submitted that technological
carbon economy have been alternatively developed as and reduce risks to humans and the environment.” efforts and policies must change accordingly to increase
important pathways towards the realization of a green (Vieira & Amaral, 2016). As such, cleaner production natural resource efficiency (Daly & Farley, 2003).
economy. The two concepts have different foci within the focuses on the production process as a means to
scope of production and consumption; while the low- reducing environmental damage and pollution. At the technology level, there is an abundance of
carbon economy concept aims to address the problems These three concepts require a cluster of technological opportunities to improve the efficiencies of use of water,
innovations (Figure 3). It should also be noted that these land, and other natural resources. For example, the
pathways largely overlap in practice. For instance, agricultural sector currently accounts for approximately
Figure 3. Green technologies supporting an IGE (by author). cleaner production overlaps with the other two concepts 70 per cent of total water consumption worldwide.
in terms of production processes, while circularity is Therefore, the application of high-efficiency irrigation
key for the achievement of climate change goals. In the techniques has the potential to greatly reduce water
following paragraphs, three core objectives of green consumption when compared with traditional flood
technologies will be introduced. irrigation processes. However, the objective of
achieving far-reaching
Key term: de-materialization and a
Irrigation
1.4 Increasing resource efficiency Artificially moving water
substantially higher level
onto land - either spraying the water of resource productivity
Economic logic tells us to maximize productivity of the or pumping it onto the land - to
requires systematic
help with crop and pasture growth.
limiting factor by investing in its increase. This explains Adapted from: https://stats.oecd. considerations, such as
why technologies to achieve economic objectives org a shift from the traditional
have historically been designed to serve the main linear economic paradigm
purpose of increasing labor productivity and enhancing to that base on a circular
Key term:
stocks of human-made capital. At the early stages of Dematerialization economy. (Box 4.1 details
economic development, human resources and human- Reducing the amount of materials
this transition.)
used. Adapted from: http://sk.sage-
made capital were scarce, while environmental goods pub.com/

1.5 Addressing climate change
Box 4.1: From a linear economy to a circular economy Economic growth over the last century was largely realized through dependency on
The strong emphasis that has historically been placed on economic growth as a goal in its self, contributed to ever- fossil fuels as a source of energy. However, energy generation from fossil fuels releases
increasing throughput of materials and energy within a linear economy, with low entropy resources moving through the
economy and finally returning to the global ecosystem’s sink as high entropy wastes. Such linear throughputs threaten
carbon emissions into the atmosphere, which is one of the key drivers of climate
the former abundance of environmental goods and services, which in turn means that the goal of infinite growth in a change. Green technologies that help prevent and address the effects of climate
finite system will eventually fail. To achieve truly sustainable development, we must, therefore, redesign the economic
system, shifting from a linear economy to one that is more circular in design.
change can be divided into three categories, which will be elaborated below.
Circular economy organizes economic activities into a closed-loop, and is based on whole-system thinking. Initially,
circular economy focused predominantly on waste recycling, which did not significantly change the patterns of
consumption and production. However, today’s notion of a circular economy extends far beyond recycling, and Cleaner energy supply technologies
encompasses new modes of production, new business models and new types of lifestyles, embracing innovation.
These practices depart radically from those adopted in a take-make-dispose linear model (UN Environment, 2015). A radical departure from hydrocarbon-based energy
Key term:
In the book Waste to Wealth, Lacy and Rutqvist (2015) introduce ten key technologies that bring disruptive influences Hydropower generation requires a shift towards more environmentally
to the economic system and support the shift towards a circular economy. Those technologies fall into three broad Power sourced from water. The en- friendly energy sources. Currently, the most widely
categories: digital technology, engineering technology, and a blend of these two (Hybrid technologies), such as ergy from flowing water is convert-
Machine to machine communication, 3D printing or advanced recycling technology. ed into electricity. Adapted from:
applied renewable energy sources include solar, wind,
https://www.studentenergy.org hydropower, biomass, and geothermal energy, and
It should be noted that while these technologies present good opportunities by which enterprises can move towards
a circular economy, they cannot be considered inherently green. Innovations beyond technology are therefore while these are gradually substituting coal and oil as an
necessary to optimize their application and to develop their full potential, so as to ensure that they have a positive
Key term:
energy source, they remain a long way from dominating
effect on the environment. This encompasses social and societal innovations, and a shift towards sustainable
consumption and lifestyles. Biomass global energy systems. With the levels of atmospheric
A renewable source of energy, carbon dioxide already at a record high and continuing
There is still a long way to go in the process towards becoming a circular society, with a recent publication reporting organic matter that comes from
that our world has only achieved 9% circularity to date (The Platform for Accelerating the Circular Economy, 2019). plants/animals. Biomass contains to increase, the technology that generates negative
One of the key elements in realizing this shift from a linear economy towards a circular model therefore lies in energy stored from the sun; when emissions, such as carbon capture and storage, could
understanding technology trends, and their potential to disrupt existing value chain, as well as support the creation of it is burned the chemical energy
new ways ones. stored in the biomass is released as play a key role in reducing carbon concentrations in the
heat. Examples include: Wood, ag- atmosphere.
Source: Lacy and Rutqvist, 2015; The Platform for Accelerating the Circular Economy, 2019; UN Environment, 2015. ricultural crops, food, sewage etc.
Adapted from: https://www.eia.gov
Energy conservation technologies

Key term:
Conventional energy Improving the efficiency of conventional energy use
Energy sources such as coal,
oil, gas. They tend to be damag- is another important factor in the context of climate
ing to the environment i.e. due to change. Energy conservation technologies should be
greenhouse gas emissions and
are non-renewable. Adapted from: implemented and applied at a large scale, and across the
https://www.environmentalleader. building, industry, transport, and household sectors. In
com
high-income countries, energy consumption and related
carbon emissions mainly result from everyday human

activities, with the contribution from industry being much our urgent and particular attention. Environmental low-carbon, and clean economic development, and
smaller. In these countries then, energy conservation in technologies, in general, require the engagement of which benefit the environment in the long-term.
the household or private transport sectors is of particular a wide range of sectors, activities, and branches of
importance. On the other hand, in low-income countries science, in order to improve environmental quality in
most of the energy-saving potential remains in the the short- or long-term.
industrial, building, and transportation sectors. Key term: 2. Green technology supporting
Environmental qualityArmed with a foundational
State of conditions in the environ-
ment, understood in relation to
understanding of green the transition towards an
Adaptation technologies technology, let us
environmental quality standards.
Adapted form https://stats.oecd.org
now turn back to the
inclusive green economy
Adaptation technologies also have a crucial role to play issue of technology’s This section discusses why green technology is
in mitigating the effects of climate change, and this is influence on the linkage between economy and important for supporting the transition towards an IGE.
particularly so in certain sectors and areas. Adaptation environment. As the above examples have served to The transition towards an IGE takes place in two different
technologies encompass products and processes demonstrate, if green technologies were to be applied ways. Firstly, it is achieved by “greening” traditional
that are resilient or resistant to changing climatic and within an optimal system design, negative interactions industries in all sectors of the economy, to enable
environmental conditions, as well as tools to understand between the economy and the environment would be economic growth while improving environmental quality
and insure against climate risks. In the agricultural significantly reduced. In addition, the transition to a and social inclusiveness. And secondly, through the
sector, for instance, the development of drought-resistant green economy presents ample opportunities to create fostering of environmental industries, environmental
cultivation practices or the selective breeding of seeds economic activities around technologies that benefit the products and services that benefit the environment can
for more arid and saline soils can bring about higher environment and, in turn, create economic value and be developed to generate a new source of economic
yields in more extreme climatic conditions. Since climate green jobs. The opportunities arising in the context of an growth. Green technologies play a key role in both of
change makes extreme weather events occur more inclusive green economy indicate positive interactions these paths, while from a more broader perspective, the
frequently, improved early-warning systems can also between economy and the environment can be green transition will also require profound changes to be
help reduce the damage caused by natural disasters expected, and achieved. effected in both the way that we produce and consume
(Dutz & Sharma, 2012). goods.
In brief, then, green technologies can be understood
as a continuously evolving group of methods, materials,
Improving environmental quality products, or services that support resource-efficient,
2.1 Generating green capital
Environmental degradation is threatening the very Inclusive green economy is a framework which
well-being and survival of our planet’s living creatures, advocates for a new generation of capital. This includes
including humans. While the transition to a green clean and low-carbon human-made capital, critical
economy requires a radical departure from all modes of natural capital, human capital that is well-educated
the current economic paradigm, the current ecological possesses the skills needed in a green economy, and
crisis dictates that environmental issues demand

fundamental, albeit unquantifiable, social capital (Sheng However, from a macro-perspective, technology cannot technological opportunities presented by the green
& Zhu, 2015). While technology is not an independent be relied upon to provide suitable replacements to economy transition.
factor of production, it plays a unique role in creating natural resources such as water. The finiteness of natural
new-generation capitals when combined with other capital will therefore inevitably constrain economic
types of factors. For instance, human-made capital growth, and the key lies in shifting towards a greener Greening resource- and energy-intensive sectors
can be ‘greened’ through the application of green techno-economic paradigm, one that extends beyond
Historically ‘brown’ sectors such as energy generation,
technology, such as carbon capture and storage. Those the technology level.
manufacturing, buildings, and transport are now key
with a strong knowledge and understanding of green
sectors in which the transition towards IGE, through
technology processes can also be considered green
social inclusion and environmental protection, can
human capital. In its various forms then, green capital 2.2 Promoting the greening of traditional be achieved. UN Environment (2011) reports that
can lay the foundations for the greening of production industries the buildings sector is responsible for one-third of
processes by increasing efficiency and mitigating
all global energy end use and 40 per cent of solid
environmental damage and pollution. The Green Economy Report, issued by UN Environment
waste generation worldwide. The transportation sector
in 2011, made a strong economic case for investing
One of the most visible contributions of technology to consumes more than half of all global liquid fossil fuels,
1-2 per cent of global GDP in the greening of a number
economic development is that it helps overcome the and is responsible for nearly a quarter of all energy-
of key sectors. These included sectors derived from
immediate constraints presented by exploiting natural related carbon emissions and 80 per cent of the air
natural capital, such as agriculture and fishing, as
capital. First, technological progress continuously pollution present in cities in low-income countries (UN
well as historically ‘brown,’ material- and energy-
improves the resource efficiencies of material, energy, Environment, 2011; International Energy Agency, 2013).
intensive sectors such as buildings and transport (UN
water, and land use. Second, technological innovations As such, these sectors provide great opportunities for
Environment, 2011). Indeed, otucomes from modeling
can provide alternative input materials to natural energy and resource savings. For instance, we will now
exercises indicate that investment in the greening of
capital, allowing for the macro-replacement of a certain draw on the transport sector to briefly illustrate how
major economic sectors at the global level can be
production factor by another factor or another type of green technologies can provide environmentally friendly
expected to lead to efficiency improvements, resource
capital (e.g. replacing wood with biodegradable plastic). solutions that also satisfy the mobility needs of society.
conservation, and carbon mitigation, advancing the
Accordingly, with technological advancement different transition towards more resilient, long-term economic The overall growth in demand for transport has
production factors can be substituted in order to balance growth. translated into even heavier burdens being placed
the exploitation of different capital stocks (Sheng & Zhu,
on the environment: through resource depletion, land
2015). In this way, natural resource abundance is not The next section will take two examples, with agriculture
grabbing, and air pollution, etc. (UN Environment, 2011).
geologically predetermined, but instead technologically as a natural capital sector and transportation as
Transforming the transportation sector therefore requires
and economically constructed. And third, technological a human-made capital sector, to demonstrate the
innovative solutions that enable people and goods to
progress can reduce environmental risks by improving
move in a resource efficient and environmentally friendly
production processes or developing more environment-
way. Mobility, and the movement of people and goods,
friendly products, such as unleaded gasoline or chlorine
also has fundamental social benefits, providing access
free bleaching.
to jobs, education, recreation, and healthcare. Green

mobility is therefore consistent with the wider concerns based. It is important to redirect both public and private loss, and waste limiting agricultural efficiency (Lundqvist
of sustainability, and these sector-specific goals can investments away from brown, resource- and energy- et al., 2008). In this respect, small investments in simple
be broken down into main sub-objectives, as shown in intensive technologies, and to direct these towards storage technologies could reduce food waste by a
Figure 4 (overleaf). investments that encourage the diffusion of existing substantial amount. According to the International
“greener” technologies. Assessment of Agricultural Knowledge, Science,
Different strategies can be adopted for achieving the and Technology for Development, the Return on
transformation to safe, clean and inclusive transportation Investment (ROI) in agricultural knowledge, science, and
systems. First of all, measures may aim to reduce the Greening sectors derived from natural capital technology is on average as high as 40-50 per cent (UN
demand for mobility, including by way of behavioral Environment, 2011). Therefore, technological innovation
change or consumer information, or better sustainable Inclusive green economy lays special emphasis on
is key to improving productivity and sustainability in the
planning. Measures may also aim to incentivize the use the safeguarding of natural capital, which forms the
agricultural sector.
of more environmentally friendly modes of transport, basis for production and is crucial for maintaining
such as bicycles and public transportation. Another ecosystem services and biodiversity (for a more Today’s agricultural activities are mainly organized in
area for intervention can lie in regulating energy use detailed introduction to natural capital, see Chapter 3). two different ways: small farm agriculture, mostly found
and efficiency of vehicles or other modes of transport, Key economic sectors that are directly derived from in low-income countries, and industrial agriculture in
for example by switching from regular fuel to electricity natural capital include agriculture, fishing, forests, high-income countries. Both types have the potential to
from renewable and clean sources. By following such and water. The greening of such sectors is particularly deplete natural capital. Industrial agriculture achieves
strategies, energy efficiencies can be improved, the important for people with low incomes, since their high productivity through high levels of input, such as
use of renewables increased, cleaner public and non- livelihoods and security are directly dependent on chemical fertilizers, pesticides, water, and excessive
motorized transportation provided, and innovative them. For example, there are about 2.6 billion people, use of farm machinery. By comparison, small farm
agriculture uses limited off-farm inputs and has lower
Figure 4. Technologies to support green transport goals via alternative pathways (by author). productivity. The farming practices used on small
farms are based on traditional knowledge, and the
yield derived from small farm agriculture is particularly
susceptible to environmental change.
travel demand management systems created. All of mostly living in rural areas, that depend directly on
these strategies need to be supported by a cluster of agriculture as a means of sustenance (UN Environment, The general objectives behind the greening of the
technologies, as shown in Figure 4 (above). 2011). Underdevelopment, or the application of brown agricultural sector is the need to provide food security
technology in these sectors, leads to low levels of in the context of a growing global population and to
In sectors that are based on human-made capital, efficiency and widespread pollution, ultimately resulting build resilience against the effects of climate change,
technology design and development should, in the in the deterioration of natural capital. while using natural resources in a more sustainable
long-term, aim at radically decreasing material and way to avoid social and environmental collapse. Major
energy consumption. This can be achieved by shifting to For example, it is estimated that households consume challenges and technological opportunities for greening
economies that are service, sharing, and infrastructure- only about half of all global agricultural production, with the agricultural sector are shown in Figure 5 (overleaf).
factors such as harvest loss, animal feed, distribution

Box 4.2: Innovation in agriculture systems in the digital
age
The Global Innovation Index 2017 focused on the agricultural and food sectors. The report analyzed
possible entry points for the greening of agricultural systems using data-driven strategies and digital
technologies, such as sensors, drones, robotics, and digital communication tools, as well as data
generation and analytics enabled by remote sensing and geographic information systems.
Digital technologies provide tools for the precise management of water and nutrients, thereby providing
agricultural products of a better quality. Implementing digital technology in an agricultural system may
take on different forms. For example, cloud-based services enable continuous and real-time monitoring
of production environments, enabling farmers to correct any problems before they become detrimental
to yield. So called ‘Cloud-based nitrogen advisors’, for instance, allow farmers to align nutrient additions
more precisely with crop needs. On-farm experiences of using cloud-based services have thus
highlighted the win-win effect of increased profit and decreased environmental impact.
For example, in Bulgaria, this advanced field equipment has been widely adopted, and associated
products and services are now offered by technical service providers. The increasing use of advanced
digital technologies within the agricultural sector has created opportunities for precise farming practices
and promoted the efficient utilization of natural resources. Digital technologies, such as remote sensors,
are also used to provide information on yield loss and risk management.
Source: Dutta et al., 2017.
Since many of the challenges facing the agricultural sector are

interdependent, transforming the sector will require an integrated, whole-
system approach. For instance, it has been reported that 80 per cent of
all agricultural water use could be prevented through the implementation
of systematic designs and effective strategies that include crop selection,
technological progress, irrigation planning, and sustainable management
of water (Weizsaecker et al., 2009). Innovative irrigation techniques could
simultaneously increase yields and reduce energy demand. The development
of better food processing or packing technologies would not only reduce post-
Figure 5. Technologies for greening agriculture sector (by author)
harvest food waste, but also provide new business opportunities and create
higher skilled and better paying jobs. Advances in the digital world would
also bring new opportunities for improving the sustainability of agriculture, as
shown in Box 4.2, above.

Unfortunately, in sectors that are directly derived from i.e., undertaking the economic activities that result in In spite of its emerging nature, the environmental
natural capital, investment in technology is generally products for environmental protection and resource industry is still often not identified as an independent
lacking, leading to the inefficient use, and waste of, management” (for a more thorough discussion of the industry classification, and is instead split across the
resources such as water, energy, and food. Investments EGS industry and the definition of EGS, please refer to various traditional sectors with which it integrates. In
in technologies that support sustainable development in Chapter 12). Germany again, many green technology companies
these sectors, therefore, have a high economic return, have their roots in traditional branches of industry, such
and can generate significant environmental and social Products created by the environment goods industry as the mechanical or automotive industry, electrical
benefits. can include instruments and materials for environmental engineering, or the chemical industry (Federal Ministry
protection, or environmentally friendly products, such as for the Environment, Nature Conservation, Building
solar panels. Environmental services provided can range and Nuclear Safety, 2014). The environmental industry
from environmental monitoring, consulting services
2.3 Environmental Goods and Services on resource efficiency, environmental auditing and
therefore naturally overlaps with a broad spectrum
(EGS) industries of industries and sectors. As such, the industry’s
certification, environmental evaluation and assessment, development presents good entry points for the greening
The increasing international acceptance of green and ecological restoration and protection. of a wide range of sectors, and can be considered a
economy as a sustainable economic model is boosting By providing new products and services, the EGS catalyst for advancing the overall transition to IGE.
worldwide demand for green products and services. industry generates new growth for the global economy.
This increasing demand is pulling technological This potential has been augmented by the expansion
Moreover, in many countries, such as Germany, the of international trade in environmental equipment and
innovation in a greener direction and opening up new United States, and China, the contribution of the
green business opportunities. As the preceding sections environmental services, and particularly with respect to
environmental industry to GDP is growing rapidly. In environmental technology and technical standards. A
have shown, environmental technology development Germany for instance, the environmental industry’s
and industrialization is a key aspect in the transition competitive market for green technology development
contribution to national GDP amounted to 13 per cent in is already developing, and both high-income and
towards IGE. Green economy seeks to strengthen 2013, and this figure is expected to exceed 20 per cent
positive interactions between economic development low-income countries are now striving to seize the
by 2025 (Federal Ministry for the Environment, Nature opportunities presented by the techno-economic
and environmental protection, and developing the Conservation, Building and Nuclear Safety, 2014).
Environmental Goods and Services industry. presents paradigm change – to upgrade their industries and
Being a new and emerging sector, the environmental reshape the competitiveness of their economies through
such a win-win opportunity. industry can also provide social benefits through new the uptake of green technology, R&D and adoption.
Economic activities in the EGS industry have job and employment opportunities (for an in-depth
environmental technologies at their core. According to discussion of employment and social issues, see
Chapter 5). In Brazil, China, and the United States
the recent Environmental Goods and Services Sector
alone, the waste sector employs 12 million people,
2.4 Shift towards a greener techno-
Accounts: Practical Guide published by Eurostat economic paradigm
(2016), the environmental goods and services sector, or most of them from extremely poor backgrounds (UN
“environmental industry”, is considered to comprise “all Environment, 2015). Technological innovation is a key driver of industrial
entities in their capacity as environmental producers, upgrading. As social demands change, different

industrial sectors present technological opportunities for
Box 4.3: The fourth industrial revolution industrial progress. With labor and capital flowing into Box 4.4: Innovation driving the energy
those sectors characterized by higher productivity and
Today’s technology is changing the way that we work, the way that rapid growth, these sectors can then drive an evolution transition
we live, and the way that our economies function. The Economist and
engineer Klaus Schwab, Founder of the World Economic Forum, has of the industrial structure. For instance, the historical An energy system value chain includes phases of energy generation,
energy transportation and distribution, energy consumption, and energy
argued that the speed, scale and impact of these transformations rapid emergence and growth of the textile and the steel storage, as shown in Figure 6.
represent the coming of the fourth industrial revolution.
industry was driven by a cluster of technologies, and
Energy consumption continues to increase, driven by factors such as
The third industrial revolution, driven by electronic and information particularly GPTs, which find use in many economic population growth, industrialization and urbanization. Meanwhile, it is
technology, represented the first step of digitization. The fourth industrial
revolution, rather than being a simple digitization, instead builds on this sectors. In a similar way, today’s technological estimated that 1.2 billion people in the world today still lack access
and is based on a combination of technologies. Mobile internet connects breakthroughs in the digital, physical and biological to electricity. More than 80% of the global energy mix is still based on
billions of people to each other, and provides access to knowledge on fossil fuel extraction, while the share of renewable energy remains small.
a scale never seen before. Technological breakthroughs in new fields realms, and the fusion of these technologies, are driving Energy consumption and production accounts for around two-thirds
such as 3D printing, artificial intelligence, biotechnology, and materials the fourth industrial revolution (Box 4.3, overleaf). of the global GHG emissions, and a transition towards a sustainable,
science, are both fusing, and eliminating the barriers between, the secure and inclusive global energy system is therefore required. Within
this system, technological innovations can play a key role in each stage
physical, digital, and biological worlds.
In line with the long wave of the energy system value chain.
These technologies underpin the fourth industrial revolution, and are Key term: theory, the 5th Kontratiev
having profound impacts not just in individual sectors, but also on Long wave theory Renewable energy and energy efficiency are at the core of this transition,
business modes and lifestyles. Physical products and services can Nikolai Kondratiev’s concept of
cycle that began in the and represent up to 90% of the potential global emission reductions
now be enhanced with digital capabilities, in order to increase their cycles in capitalist economies, with 1980s is considered that can be achieved. The decarbonization goal agreed by States in the
value. Technology enabled platforms that combine demand and supply cycles lasting between forty and Paris Agreement requires accelerated improvements in energy efficiency
have now become a new form of business organization of their own,
to be the information across all sectors, keeping the total primary energy supply at the same
sixty years consisting of alternat-
that may promote the shift towards a circular economy. Each of these ing periods of high and then low and communications level between 2015 and 2050, while the world economy grows threefold.
In addition, the development and wide diffusion of renewable energy
developments possess potential long-term gains in efficiency and growth. Adapted from: technology (ITC) cycle technologies, and at a global scale can push the economy to move away
productivity. https://corporatefinanceinstitute.
com (Weizsaecker et al., from its dependence on fossil fuels. By 2050, it is expected that two-
According to Schwab, ‘the possibilities of such a connected world are 2009). As already thirds of the total primary energy supply will come from renewables.
unlimited’. It creates opportunities for businesses and firms to further
advance their technologies by incorporating external ideas, including mentioned, green Source: Dutta et al., 2018
those of consumers, through a systems of open innovation. Harnessing technology (requires interdisciplinary knowledge of the
these opportunities, while proactively managing any new risks that the
fourth industrial revolution brings, will help us to accelerate progress environmental impacts of any technology use. When
Figure 6. Stages of energy system value chain (Adapted from Dut-
towards the sustainable development goals, and the transition towards considering the 5th cycle, ICT by itself cannot be ta et al., 2018)
IGE.
considered a ‘green technology’ per se but much rather
Source：: Schwab, 2016. has certain characteristics that may be considered more
or less green, also depending on use and context.
ICT does exhibit some sustainable characteristics.
It presents opportunities to improve efficiencies in
energy and material use, with digital products such as
e-books and digital music de-materialize production and

As the discussion serves to illustrate, it is hard to societal and economic value, predicated on a profound
identify and measure all of the environmental impacts change in production and consumption patterns.
of ICT, which is also true for many other technologies.
ICT is continuing to have a significant impact on our
economies. Perhaps more importantly, many new
technologies have been enabled and enhanced by ICT, 3. Developing green technology:
such as the Internet of Things (IoT). Interdisciplinary
evaluations and prudent considerations of the
policies and practices
environmental impacts of emerging technologies should New technologies often find themselves in an
therefore be taken. unfavorable position in the initial phases of development
and marketing, and it is therefore important to
Meanwhile, the global scientific and technological
encourage the development and market diffusion of new
system is becoming ever more complex. Cross-
green technologies. This section will examine market
disciplinary integration is accelerating, new disciplines
failures that inhibit and prevent the success of green
continue to emerge, and scientific frontiers keep
technologies, and will introduce the policies that are
expanding. Significant breakthroughs are either being
necessary to overcome these.
made or are anticipated in basic scientific fields. In
this context, technologies that support a green energy
system are briefly introduced in Box 4.3.
Figure 7. Green technology supports green economy transition at
different levels (by author)
3.1 Market failure related to technological
Green technology can therefore support the transition green innovation
towards IGE at different levels (Figure 7, overleaf).
At the individual technology level, the greening of Market failures prevent financial markets from allocating
distribution processes. It also has a profound impact on technology refers to the invention and innovation of and directing the necessary amount of financing and
economic structures and societal behavior patterns. The specific technology, and the integration of new technical resources towards the development of new technologies
now habitual use of email, electronic documents, and skills into the production process. At the sectoral at a level that would be
the internet (i.e. remote working) has radically reduced level, a cluster of technologies can contribute to the Key term: optimal for society. For
the need to travel for work and meetings. However, at the Market failure
greening of individual sectors, based on the integration A situation in which the free market this reason, policies that
same time it has been suggested that ICT has led to an of heterogeneous areas of knowledge with focus on a becomes ineffective due to dis- facilitate research and
increase in long-distance travel, through the facilitation whole-systematic approach. Once these have been
tortion in the market, for example
development (R&D),
when supply is not equivalent to
of global economic activity (Plepys, 2002; Berkhout & achieved, a paradigm shift to a green techno-economic the demand. Some factors that may and market uptake of
Hertin, 2004). Evaluating its far-reaching environmental paradigm requires the building of a new sense of
contribute to distortion in the free
new green technologies
market include government regula-
impacts is therefore difficult. tions, monopoly of power, minimum are essential. The most
wage etc. Adapted from: https://
corporatefinanceinstitute.com
common examples of

market failures in this context are
Box 4.5: The diffusion of innovation outlined below.
Innovations are not taken up by everyone at the same speed. Market

diffusion proceeds in user groups, starting with lead-users, who initially
develop the first prototypes of innovative products, and ending with Knowledge externalities
laggards and change skepticists, who are the final group to uptake and
adopt a new technology. The development of new technologies
The lead-user theory was originally developed by von Hippel in 1986. requires companies or businesses to
He observed that some users experience technology needs at a much make significant financial investments
earlier stage than others. Those users will then develop prototypes to
satisfy their own needs, which will then only later be experienced by the upfront. Moreover, whereas a single
mainstream majority of the population (Franke et al., 2006, von Hippel, company might have financed
1986). In this respect, it is only once lead-users have developed the
prototypes and first commercial versions of products that the market
the generation of new knowledge
adoption process of innovative products and technology begins. completely alone, it cannot then reap
According to Rogers (1962), the theory of innovation diffusion splits the
all of the financial benefits that this
consumer market into five different groups. Since innovations are not new knowledge creates. While patents
taken up by everyone at the same speed and rate, it is then important to are intended to protect innovations
understand the technological needs each of these consumer groups in
order to identify what could potentially promote or hinder an innovation’s and intellectual property rights, they
market diffusion. Each of these groups are briefly introduced below cannot fully exclude other companies
(adapted from LaMorte, 2018; For more detailed information, refer to Figure 8: The lead user concept (von Hippel, 2005)
Rogers, 1962): from exploiting and benefitting
from this new knowledge. Market
• Innovators: The earliest adopters of a new innovation or
technology. They generally take risks because they are interested in competition will then further reduce the new technologies, and the potential that it might have
developing new ideas. value of new technology, creating a positive externality in on the market. However, since they are often in a
• Early Adopters: Opinion leaders who embrace new opportunities. the form of lower consuming pricing. These “knowledge position of trying to generate funding for their project,
They are aware of consumer needs, which lead-users have already spillovers” disincentivize companies from investing in they have an incentive to overstate either the value or
experienced and identified, and are comfortable with adopting new
ideas. innovation or the development of new technologies the expected success of their product (Golove & Eto,
(Jaffe et al., 2005). 1996). For investors, it can then be difficult to judge
• Early Majority: Not innovation leaders, but still embrace new ideas
at an earlier stage than the majority of the population. They observe that whether these expectations are realistic, causing them
an innovation works and are then willing to adopt it.
to either underinvest or to demand a premium for their
• Late Majority: Generally sceptical towards innovation. They will Incomplete information
only adopt an innovation once it has been proven to work by the majority
of a population. Information asymmetries between the developers of new
• Laggards: Conservative users that are very sceptical of
technologies and investors can mean that insufficient
innovation, and are therefore usually the last to adopt new products and money is allocated to the research and development
technologies. of these new products and services. Developers,
generally, have a greater understanding of their own

investment, which negatively influences the development of new technologies (Jaffe et
al., 2005). Box 4.6: Case study: Green innovation in the United Arab
Emirates
Adoption externalities In October 2014, the United Arab Emirates’ Government launched its National Innovation Strategy with seven
innovation priority sectors (The United Arab Emirates’ Government, 2018): Renewable energy, transport, education,
Adoption externalities do not refer to the development of new technology, but instead health, technology, water, and space.
to its subsequent diffusion. The Theory of Technology Diffusion identifies three stages: Within the renewable energy sector, the UAE has since made great progress, recording an astounding 29-fold
“invention” – the first technical implementation of an idea; “innovation” – the first increase in renewable energy investment of US$2.2 billion in 2017. This investment was concentrated on two
Photovoltaic (PV) projects, the two largest such projects developed anywhere in the world: Sheikh Mohammed Bin
commercial introduction of a new product or business method; and “diffusion” – the Rashid Al Maktoum Solar Park Phase III installation, at 1.2GW and US$899 million, and the Marubeni JinkoSolar and
gradual adoption of a new way of doing things by multiple actors (Schumpeter, 1942). Adwea Sweihan plant, at 800MW and an estimated US$968 million (FS-UNEP Collaborating Centre, 2018).
At the diffusion stage, technology develops as more users adopt it, as initial previous In order to guide the formulation of its national innovation strategy, as well as the activities of both the private sector
users share information on its existence and its usage. As this process develops, and and civil society in advancing the UAE’s Green Economy transition, a number of initiatives were established. The
UAE Green Business Toolkit is one such example. The Toolkit is intended to inspire the private sector to make their
as new compatible products are developed, the value of the technology increases. businesses eco-friendlier and more socially responsible, and to guide them in this process. The Toolkit provides
These adoption externalities are important to understand the market diffusion process guidelines on how to green existing businesses, or to start your own business as a green entrepreneur, focusing on
three key areas:
of a new product or technology (Jaffe et al., 2005), and Box 4.5 introduces the concept
of diffusion of innovation in greater detail. • Green office: Focusing on typical office uses of energy, water, and other material goods and resources, the
Toolkit presents examples of how to green offices by making small changes in how these goods and resources are
used.
• Green procurement: This area focuses on procurement practices, including improving energy efficiency,
Coordination Failures lowering emissions, avoiding hazardous materials, and increasing recyclability. It also takes social aspects into
account, such as ethical conduct and community development.
Coordination within and across sectors and industries is essential when new
technologies attempt to change entire socio-technical systems. Companies and • Green products: This area focuses on enhancing the sustainability of produced goods and services, through
reducing the use of resource materials, energy, and water at the input stage, and then by minimizing waste and
businesses will not financially commit to major projects unless related investment needs emission outputs (UAE Ministry of Climate Change and Environment, 2018).
can be guaranteed. For instance, the development of offshore wind-farms requires the Dubai, as a leading smart innovative city both within the UAE and the wider Middle East region, has also developed
construction of underwater steel structures, the presence of electricity grids, and a a number of green technology initiatives. For example, in November 2015 His Highness Sheikh Mohammed bin
synchronized outlay of wind turbines. In the absence of such coordination, companies Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai launched the US$27 billion
Dubai Green Fund in November 2015, as part of its broader Dubai Clean Energy Strategy 2050. The strategy aims to
and businesses will not commit to investing in the development of the necessary provide 7 per cent of Dubai’s energy mix from clean energy sources by 2020, 25 per cent by 2030 and 75 per cent by
technology (Altenburg & Pegels, 2012). 2050, eventually making it the city with the smallest carbon footprint in the world (UAE Ministry of Climate Change and
Environment, 2017).
In addition to these market failures, environmental externalities (see Chapter 1) also
have the effect of distorting financial markets. In order to achieve a socially optimal
level of green technology development, both kinds of market failures therefore have
to be addressed. While environmental regulation works to internalize the effects of
environmental externalities, policy instruments that promote both the development

and market diffusion of green technology need to be comprising of fifteen ‘frontrunners’ representing different
implemented and applied. societal institutions. These can be companies, non-
governmental institutions, governments, knowledge
institutions, and intermediaries (e.g. consulting
firms). ‘Front-runners’ can then be experts or thought
4. Transition management leaders, who are committed to investing time into the
innovation process. Once a concrete transition issue
While the development and implementation of a has been identified, these front-runners develop a
supportive policy framework is essential to promoting shared transition agenda with objectives, projects, and
green technology, a single policy instrument alone will instruments, with the final outcome being a jointly agreed
not be sufficient to bring about the desired economy- transition vision. Within the context of this vision, projects
wide changes. Instead, the development and adoption and experiments designed to give effect to this transition
of a set of coherent and harmonized policies is are then carried out.
required to steer the economy in the right direction.
The transition management approach can be used Successful experiments and projects repeated and
to coordinate such policies, and to overcome any scaled up. In this regard, each phase of the transition
market failures which limit the development and market management cycle is to be thoroughly monitored and
diffusion of green technology. Transition management evaluated; first, to capture new knowledge that has
is a governance approach that aims at “accelerating been created within the process, and then to both
structural transformation of the whole economy or of identify which projects have been successful and which
Figure 9: The transition management cycle (Loorbach, 2010,
important sectors by utilizing innovation opportunities p.173).
elements of the process need to be amended in order to
and designing policies that foster private investment into achieve the transition vision within a continuous policy
those opportunities” (Never & Kemp, 2017, p.89). The learning cycle (Loorbach, 2010). In this respect, one
transition management approach can thus accelerate in its processes, it is then possible to develop an significant challenge lies in the ability of institutions,
the transition towards an IGE. understanding of any possible opportunities and within the transition management cycle, to carry out
limitations for directing this change. Once this analysis such projects and experiments independently and
In this context, Box 4.6 introduces the integrated national has been undertaken, the actual implementation outside the scope of vested interests (To understand
innovation strategy of the United Arab Emirates (UAE), of strategies to guide the transition towards a new how institutions can be reformed to support the green
within which key priority sectors were identified and a economic model is based on the transition management economy transition, see Chapter 6).
number of innovation initiatives developed and applied. cycle, which is provided in Figure 9 overleaf (Loorbach,
In order to effect economy-wide changes, it is first 2010).
necessary to analyze the dynamics of the overall According to Loorbach (2010), the transition
economic system that you wish to change. By examining management cycle takes place in a transition arena.
the behavior of the economic actors that are involved This arena is first established as an innovation network,

4.1 Policies promoting innovation as one increases, so does
the other (as shown by the
The transition management approach requires the green lightbulb).
implementation of harmonized policies which promote
innovation. Market-based environmental policies, In building an enabling
such as cap-and-trade, are designed to internalize policy and innovation-
the true costs of environmental externalities such as friendly environment,
by increasing the prices for environmental inputs. intellectual property
This then sends a price signal to consumers and rights represent a key
companies, which can indirectly support the adaptation and central element.
or development of green innovations (Jaffe et al., 2005). Intellectual property laws
While this is indeed beneficial, such policies alone are give value to intellectual
not sufficient to ensure the research and uptake of green products which, in turn,
technology. In addition, targeted policies that promote provides an incentive
green innovation are required on both the supply and for the development and
demand sides of the market in order to correct market diffusion of technology.
failures, redirect public and private investment into green They also protect the
technologies, and to understand the impact different transfer of technology
environmental policies have on green technology and innovation, which is
diffusion. particularly important in
the context of small and
medium-sized enterprises Figure 10: Technology development by country (Source: OECD, 2015)
Supply side (SMEs) dealing with large
corporations. In doing so, this
On the supply side, policies designed to foster green According to the OECD (2012), common supply side
protection facilitates the development of joint inventions
technology share the same characteristics as those that policies and measures to promote green technology
(Brant, 2014).
promote technology in general. Policy environments that include:
promote and protect innovation, such as through patents Policies which strengthen entrepreneurship, and
• Public funding for R&D,
and clear intellectual property rights, will similarly the ability of smaller and local firms to innovate also
facilitate the development of green technology (OECD, encourage new knowledge creation as well as its • Venture capital funding for green start-ups,
2012). As Figure 10 overleaf serves to illustrate, in most subsequent commercialization. Which sectors should
countries there is a positive correlation between the be the focus of such policies is country-specific, and • Investment in research infrastructure, and
number of technology patent applications made and the dependent on factors such as its level of technological • Investment in higher education facilities and human
number of applications that relate to green technologies; sophistication and capacity to implement such policies. resources.

of the actual R&D process, interdisciplinary teams from enhancing the ability of R&D ‘staff’ (i.e. researches and
Box 4.7: Support for small and medium- different societal institutions are generally better suited developers) to learn, digest, and innovate, as well as
to identifying problems and creating novel solutions their efficiency during the R&D process. Possessing
sized enterprises (OECD, 2012). This is a particular focus of the transition strong R&D staff is important, as it often corresponds to
In high-income countries, SMEs generate approximately 50 per cent of management approach (Loorbach, 2010). a company’s ability to technologically innovate.
national Gross Domestic Product (GDP) and employ 60 per cent of the
national work force. In low-income countries these numbers are slightly In order to encourage the development of such In this context, Song et al. (2018) have established
lower, with SMEs contributing 40 per cent towards GDP and 50 per cent
of the employment (OECD & EU, 2014). Besides the creation of jobs partnerships and interdisciplinary teams, policymakers modalities by which to improve staff quality as a means
and wealth, SMEs also play a valuable role in fostering innovation and must create an enabling environment where regulation to enhancing company R&D performance. First, they
social inclusion. However, the World Bank has estimated that 19 to 23
per cent of SMEs in developed countries, and between 26 to 32 per and intellectual property rights clearly facilitate the suggest that R&D training activities should be practical,
cent in developing countries, are either unable or only insufficiently able transfer and sharing of knowledge (the importance combining a formal technical education with practical
to acquire funding from the formal financial sector (Stein et al., 2013).
This lack of funding significantly limits their ability to invest in R&D. To of intellectual property rights in this process was experience acquired through on the job training.
address this, Verdolini et al. (2018) propose a trilogy of measures that considered above). Policy environments that force the Second, R&D activities should encourage collaboration
can be employed to both engage SMEs in the green innovation process,
and to reduce the financial risks of investing in SMEs. These measures transfer and sharing of knowledge have a counter- across different divisions, information communication,
are: productive effect, because it removes the incentive and the sharing and transmission of ideas; improving
for companies to invest in R&D and discourages company efficiency and fostering the development of
1. A reporting system that can help monitor the scale-up of green- collaboration (Brant, 2014). In this respect, Box 4.7 knowledge and experience. Third, the R&D process
technology SMEs;
overleaf introduces possible measures designed to should be considered as a continuous learning process,
2. The use of public funds to signal innovative green-technology SMEs to
investors; and
engage SMEs in the green innovation process and one in which knowledge is accumulated over time.
This can be fostered by continuous on-the-job education
3. The inclusion of SMEs in the design of green finance platforms. Cooperation between public and private investors, and training. Finally, while stressing the importance of
sometimes in the form of public-private partnerships, confidentiality, companies should not close themselves
also play a key role in this process. While an important to developments in the outside world. Current
source of investment, public funding for public research advancements in technology, and the competitive
In this regard, funding facilities can have the effect of crowding out private
Key term: advantage that is enjoyed by firms that hold these
Venture capital and investment should investment opportunities. With up to 80 per cent of
be spread across the
When investors provide financing technologies, often means that internal R&D is driven by
or perhaps expertise to companies/ global R&D funding in green technology development external developments and the activities of competitors.
board. No single field of
businesses that are starting up and currently coming from the private sector, ensuring that
science can be identified
that have the potential for growth
there is sufficient incentive for companies to innovate is
in the long term. Adapted from:
https://www.investopedia.com as being a sole driver for crucial (Brant, 2014).
the development of green Demand side
technology, and public Investment in education and human resources is Demand side measures are designed to increase the
funding is thus best directed towards investments to another crucial component in the development of market diffusion of green technology. This diffusion can
enhance scientific research in general and to develop green technology R&D. High levels of knowledge be achieved indirectly, such as through market-based
quality education facility and research centers. In terms and professional competence are key in this regard, environmental policies as mentioned above, or through

the implementation of direct policies. According to the markets: the Leadership in Energy and Environmental as well as the development of minimum performance
OECD (2012), common direct demand side measures to Design (LEED) standard in public procurement, for standards among producers (OECD, 2012).
increase the diffusion of green technology include green example, has now been taken up by the private
public procurement, regulation, and standards. sector (Simcoe & Toffel, 2014). In this example, public
procurement has led to the development of a technical
Key term:
Public procurement standard. However, in most instances governments 5. Summary
Green public refers to the purchase of and public sector entities have limited autonomy to
procurement goods and services by Innovative green technologies and products represent
Refers to the power that purchasers do so, with most of these being set and agreed at the
the government or other
have in contributing to sustainable international level. And even if they did have such an essential component in advancing the transition
development through choosing to public sector entities autonomy, the rate of development within the green towards green economies. They satisfy both personal
buy environmentally friendly prod-
ucts or services. Adapted from: (Hommen & Rolfstam, technology sector would raise questions regarding the and company needs without causing irreversible harm
http://ec.europa.eu and https://2009). In OECD countries, suitability of governments or other public sector entities to the environment, and they can therefore increase the
www.youtube.com/watch?v=7c-
gmt6MSWg
public procurement to determine future technological development paths. speed with which economies become more sustainable.
accounts for up to 15 per The effects of regulation, meanwhile, are not as In this regard, they do not only make prevailing sectors
cent of total GDP, and straightforward, and more industry and sector-specific. more environmentally friendly, but can also lead to the
thus plays a significant role in R&D and the diffusion of Energy efficiency regulation in the EU, for example, establishment of completely new industries, as was the
green technology. In this respect, the internet and the has catalyzed huge progress in the development of case with renewable energy. However, due to a number
Global Positioning System (GPS) are just two examples energy-efficiency technology. Indeed, compulsory of market failures (such as knowledge externalities,
of technological innovations that were originally energy efficiency targets have had the complimentary incomplete information, adoption externalities, and
developed for use by the public sector – in these cases, effect of reducing prices for kitchen appliances while coordination failures), the fact remains that both the
for the US military (OECD, 2012). increasing their energy efficiency (Pelkmans, & Renda, public and private sectors are failing to sufficiently
2014). However, this is an individual case, and Pelkmans invest in the R&D of green technology. The adoption of
Green public procurement can stimulate green a transition management approach by policymakers
innovation by shaping market competition and, with the and Renda (2014) have found that, in general, “more
prescriptive regulation tends to hamper innovative can play a key role in addressing these failures, and in
government or other public sector entities as a powerful directing the transition towards a green economy. Within
lead-user, both drive the development of new technology activity, whereas the more flexible […] regulation is, the
better innovation can be stimulated” (p.1). On the other such an approach, the development of harmonized
and establish early markets for its diffusion, overcoming policies on both the supply and demand sides can
an otherwise fragmented demand (Hommen & Rolfstam, hand, the OECD has concluded that when applied within
an enabling policy environment alongside green public foster an enabling policy environment which promotes
2009, Rainville, 2017). the development of innovative green technology and
procurement policies, environmental regulation can help
Research has shown that green public procurement to establish customer confidence in new technology, facilitates its market diffusion.
can also engender positive spillover effects to private

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1-14.

CHAPTER 5: A JUST TRANSITION TO GREEN
ECONOMIES: EMPLOYMENT AND SOCIAL ISSUES
CHAPTER 5: A JUST TRANSITION
TO GREEN ECONOMIES:
EMPLOYMENT AND SOCIAL ISSUES
LEARNING OBJECTIVES Moustapha Kamal Gueye et al1
This chapter aims to enable its readers to: International Labour Organization
• Articulate the importance of the labour market for a green transition and the Moustapha Kamal Gueye is Coordinator, Green Jobs Programme, at the
International Labour Organization. Previously, Kamal served as Head, Green
resulting implications and effects on employment; and Economy Advisory Services at the UN Environment Programme and as Senior
Programme Manager at the International Centre for Trade and Sustainable
• Formulate strategies and policies to overcome negative developments in the Development in Geneva.
labour market to enable a just transition. Earlier, Kamal spent twelve years across Asia working at the Institute for
Global Environmental Strategies in Japan. He holds a Ph.D. from Nagoya
University, Japan; DEA and LL.M from Dakar University; and Executive
Certificates from the World Bank Institute; Columbia University; Foundation
for Advanced Studies on International Development, Japan; and Integrated
Research and Action for Development, India.
1
This chapter is largely based on an ILO technical paper titled “A just transition to climate-resilient economies and
societies: Issues and perspectives for the world of work”, prepared by the author with contributions from Claire
Harasty, Olga Strietska-Ilina and Mito Tsukamoto (ILO, 2016).
CHAPTER 5: A JUST TRANSITION TO GREEN ECONOMIES: EMPLOYMENT & SOCIAL ISSUES 5.2
CHAPTER CONTENTS workers, the potential for growth in environmental goods It does so by articulating the concept of a ‘just transition’
and services industries can be hampered. as a principle of social justice and a practical guiding
1. Introduction The adjustment parameter reflects policy objectives
framework to connect growth and economic policies with
social objectives.
2. Natural capital degradation: Risks to that recognize that the structural, economic and social
decent work changes that green economies entail will benefit The chapter highlights that while most research
some, while impacting negatively on others. Unless suggests that the potential job creation of a transition
3. Investing in human capital for a just deliberate social policies are put in place to minimize to a greener economy outweighs the risk of job losses,
transition to a greener economy negative social impacts, green economies will not be and positive labour market outcomes can be expected
inclusive or just. Of equal importance, concern about overall, specific policies to ensure an active engagement
4. Conclusions the implications for jobs can be a powerful factor of in the world of work, social dialogue, and social
resistance with far reaching political consequences. In protection are indispensable for a just transition that
some cases, countries have lowered, limited or simply leaves no one behind.
1. Introduction cancelled environmental policies, including international
commitments, on the grounds of the negative effects that
This chapter discusses the importance of human these policies have on employment.
capital and a proactive labour policy in the transition 2. Natural capital degradation:
The chapter sets out by examining the consequences
towards greener economies (ILO, 2016). Human capital
can be defined by a broad interpretation of the labour that degradation or loss of natural capital has on Risks to decent work
stock, which includes skills, knowledge, education employment. It focuses on phenomena such as
The risks arising from environmental degradation, and
and research. In the pursuit of more environmentally climate change, natural disasters and heat waves, as
climate change in particular, range from economic and
sustainable economies and societies, human capital, on environmental impacts that bring shocks to the economy
welfare losses, damage to health and labour productivity,
the one hand, acts as an ‘enabling condition’ and, on the and have immediate consequences for enterprises and
and forced labour migration (Jessoe et al., 2018). The
other hand, as a ‘parameter of adjustment’ to achieve workers.
interrelation of these various types of risk translates into
fair and acceptable social outcomes. Secondly, it discusses how a transition to greener significant challenges for decent work. It is estimated
economies and subsequent structural changes in the that 1.2 billion jobs depend on a stable environment and
The enabling dimension can be thought of as a
economy and technology-related developments will have ecosystem services. Therefore, a healthy planet and
required input in green economic transformation and
various effects on labour markets. The chapter will then a stock of natural capital are necessary conditions for
production processes, whereby its absence can become
discuss four principles channels of change, which may decent work, productive enterprises and sustainable
a constraint for green growth. For example, unless
be observed in the literature and via country experience. livelihoods (ILO, 2018). In many instances, jobs in
investment is made to build skills, retrain and requalify
sectors characterised by informality and deficits in
Finally, the chapter discusses why investing in human decent working conditions are further undermined by
capital is not only a condition for success, but also a climate impacts due to higher vulnerability of workers
required building block in the shift to a greener economy. and communities in sectors such as agriculture.
2.1 Economic losses 2.2 Impacts on labour productivity
Current resource and energy-intensive economic growth Box 5.1: Physical impacts of climate Labour productivity is usually understood to mean
models combined with the increased frequency and change on jobs the quantity of production obtained per unit of labour.
intensity of natural disasters have economic costs. Facing an average of 20 typhoons a year, the Philippines is the third This can be represented by the number of hours
Although debates about the scale economy remain most disaster-prone country in the world. Storms have been getting worked or the number of employees. Improving
stronger and more deadly in recent years. In 2014, Typhoon Hagupit,
open, there is growing locally known as Ruby, damaged and interrupted the livelihood of labour productivity has been a key focus of economic
Key term: evidence that uncontrolled 800,000 workers overnight. About 370,000 of these workers were in productivity. Resource productivity measures the
Scale economies vulnerable employment, living in poverty and accepting whatever work
Microeconomic concept that de-
climate change, scarcity was available to them.
efficiency in using natural resources when producing
scribes a reduction of production of vital resources, such as goods and services. A recent study by Stocker (2015)
costs due to an increase in the pro- In response to the impact of Typhoon Hagupit, development cooperation
duced quantity. Adapted from:
fertile land, clean air, and agencies such as the International Labour Organization (ILO) provided
examined the relationship between resource and labour
https://dictionary.cambridge.org water may have negative emergency employment and sustainable livelihood support. Emergency productivity with a conclusion that resource productivity
employment programmes guarantee a minimum wage, extend social
impacts on the economy security, health and accident insurance coverage, and ensure safety at
and employment are strongly linked. High levels of
and jobs. For example, a decade ago, the Stern Review work through the presence of on-site medical support and provision of employment tend to also be accompanied by high levels
(Stern et al., 2006) suggested that in a business-as- personal protective equipment, such as masks, helmets, gloves, boots of resource productivity (Stocker, 2015).
and protective clothing.
usual (BAU) scenario, long-term climate change would
reduce welfare by an amount equivalent to a reduction Apart from bringing much-needed cash into the affected areas, this Studies by the ILO have suggested that the resource-
in consumption per head between 5 and 20 per cent
support helps workers to develop new skills, earn a decent wage and intensive development model of the past will result
access better working conditions, including social protection coverage.
globally. Economic sectors most impacted by climate These are not just labour rights but also basic human rights, which in rising costs, loss of productivity and disruption
change include agriculture, forestry, energy, transport,
need to be taken into account in times of crisis and disaster. Such of economic activity. Estimates based on the ILO
programmes are designed and implemented in close cooperation with
manufacturing and building and construction (Planet national governments, employers’ and workers’ organizations and the Global Economic Linkages (GEL) model suggest that
Forward, 2014). Together, these employ more than half Humanitarian Country Team of the United Nations (ILO Newsroom, productivity levels in 2030 would be 2.4 per cent lower
2014).
of the global workforce. For instance, agriculture alone than today and 7.2 per cent lower by 2050 in a business-
provides jobs to 1.3 billion people, most of them working as-usual scenario. This is in line with the findings of a
poor, which is close to 40 per cent of global employment number of studies, which analyse economic damages
(ILO, 2016). workers, many of whom were forced to migrate (see because of environmental degradation and loss of basic
Box 5.1, right, for more detail). Also, the 2011 drought ecosystem services (ILO & IILS, 2012).
One billion people live and work in low-lying flood in East Africa affected 13 million people, mainly farmers
prone areas directly affected by the rising sea-level and Generally, economics has historically focused on
and pastoralists, with devastating impacts on local improving labour productivity rather than progress
flooding. The World Bank estimates that due to global incomes, jobs and livelihoods (ILO, 2016).
flooding, damage and loss of life will increase from on energy and resource productivity. For example, it
US$6 billion in 2005 to US$52 billion a year by 2050, is estimated that in Europe, over the past 50 years,
causing massive labour migration. For example, in 2014, labour productivity has grown nearly four-fold while
Typhoon Hagupit hit the Philippines, affecting 800,000 energy productivity increased by less than 25 per cent.
Achieving a circular economy will require bridging this
gap between labour productivity and resource projected temperature-rise particularly in agriculture,
productivity (see Chapter 1, Annex, for more which can result in several medical conditions, including
information on circular economy). exhaustion and stroke. The report calculates that 2 per
Figure 1. Percentage of working hours lost due to heat stress under a cent of hours worked globally will be lost due to sickness
1.5°C scenario, 1995-2030 One dimension of environmental change, which from heat stress (ILO, 2018).
Note: Due to warming temperatures, some areas will become too hot to work. Under is likely to have significant consequences
a conservative scenario of warming at 1.5 degrees, 1.9 per cent of work hours will be on employment and productivity, although it
lost by 2030 (up from 1.3 per cent in 1995). Agriculture and construction will be hit the
receives little attention in policy and science,
hardest.
is the rise in global temperatures and its
2.3 Employment shifts in the transition
Source: ILO calculations based on ILOStat and HadGEM2-ES and GFDL-ESM2M
climate models. impact on the workforce. Excessive workplace towards a greener economy
heat is a well-known occupational health and A global transition towards a low-carbon and sustainable
productivity danger: high body temperature or economy entails both positive and negative impacts on
dehydration causes heat exhaustion, heat stroke employment. Generally, output and employment in low-
and in extreme cases, death. A worker’s natural carbon industries and services will grow, while energy
protection is to slow down work or limit working and resource-intensive sectors, on the other hand, are
hours, which reduces productivity, economic likely to stagnate or contract. Yet, evidence suggests
output, pay and family income (Kjellstrom et overall job growth resulting from the transition process
al., 2016). The IPCC’s 5th Assessment Report (ILO, 2016).
confirmed that labour productivity impacts could
result in output reductions in affected sectors From a conceptual perspective, employment will be
exceeding 20 per cent during the second half of affected in four different ways as green economy policies
the century. Overall, the global economic cost reorient the economy toward greater environmental
of reduced productivity may be more than US$2 sustainability.
trillion by 2030 (Kjellstrom et al., 2016). As the
IPCC report suggests, “Particularly at risk are Firstly, the expansion of greener products, services, and
agricultural and construction workers as well infrastructure will translate into higher labour demand
as children, homeless people, the elderly, and across many sectors of the economy, thereby leading to
women who have to walk long hours to collect the creation of new jobs (ILO, 2016). Examples include:
water.” (IPCC 2014, p.71) Beyond productivity jobs in renewable energy and energy efficiency (in
losses, there are also impacts on human health. manufacturing, transportation, building construction and
These effects are dominated by malnutrition, operations); organic agriculture; various employment-
diarrhoea, malaria and heat-related cardio- intensive adaptation measures intended to protect
respiratory disease. A more recent study by the and restore ecosystems and biodiversity; and in
ILO found that heat stress would increase with
infrastructure and green (public) works, intended to As is the case with job creation, there are indirect and possible through the pursuit of climate policies (ILO &
adapt to climate impacts and build resilience. induced effects. IILS, 2012). Most of the studies indicate net employment
gains of 0.5–2 per cent, or 15–60 million additional jobs
Improving rural infrastructure, through the development Finally, many, and perhaps most, existing jobs (such as globally.
of irrigation schemes, flood prevention measures, plumbers, electricians, metal workers, and construction
soil stabilization, reforestation works, rural transport workers) will simply be transformed and redefined as A more recent study by the ILO examines the potential
maintenance and improved land tenure may enhance day-to-day workplace practices, skill sets, work methods jobs implications of pursuing the goal of the 2015 Paris
agricultural productivity and contribute to the world’s and job profiles are greened. For instance, plumbers agreement on climate change to limit global temperature
food supply and local energy production. In addition and electricians working in the ‘brown economy’ can, in increase (ILO, 2018). The report finds that with the right
to direct jobs are those in the supply chain (indirect principle, be reoriented to carry out similar work in the policies to promote a greener economy in place, 24
jobs). As the incomes generated are spent across the green economy. Automobile workers will produce more million new jobs will be created globally by 2030. In the
economy, they create further employment (induced fuel-efficient (or electric) cars. Farmers will apply more process of limiting global warming to 2 degrees Celsius,
jobs). climate-appropriate agricultural methods, and therefore the report estimates that the jobs created will more than
have a lesser impact upon natural capital such as fresh offset job losses of up to 6 million, and generate a net
Secondly, some existing jobs will be replaced as a result water, or a lesser impact upon global greenhouse gas gain of 18 million jobs globally.
of shifts in the economy from less to more efficient, emissions.
from high-carbon to low-carbon, and from more to The report further projects that, at the regional level,
less polluting technologies, processes, and products. Predictions of positive net effects are often based on changes in the production and use of energy will lead
Examples include a shift from truck-based transportation assumptions of perfect labour markets, where workers to a net job creation in the Americas, Asia-Pacific, and
to rail, from internal combustion engine manufacturing are mobile between jobs and locations and where Europe, representing some 3 million, 14 million, and 2
to electric vehicle production, or from landfilling to there is sufficient supply of labour with the necessary million jobs respectively. However, regional differences
recycling and refurbishing. These shifts can be gradual skills. But this is not the case in the real world. In reality, do exist:, a dependence on fossil fuel and mining may
or sudden, and will likely take place both within and workers are not always mobile and do not necessarily lead to net job losses in the Middle East (-0.48 per cent)
across different industries. have the right skills. Without policies to address these and Africa (-0.04 per cent), if current trends continue
issues, net employment effects of the transition to a (see also Figure 2, overleaf).
Thirdly, certain jobs may be eliminated, phased out green economy may be negative.
or massively reduced in numbers, without direct The energy sector stands out with rising investment
replacement. This may happen where polluting and and falling costs that have been the drivers behind an
energy- and materials-intensive economic activities expansion of renewables, with wind power and solar PV
are reduced or phased out entirely. The continuation of
2.4 Job gains and substitutions being the most dynamic sectors. Global employment in
large-scale mining and the burning of coal, in particular, Most studies that have investigated the net impact on the renewables energy sector has grown substantially in
are both incompatible towards a stable climate. Greater employment of environmental policy measures suggest
energy, materials, and water efficiency (along with it is positive. A review of 30 studies (covering individual
boosts in recycling of materials and reusing of products) countries and economic regions) finds that meaningful
could lead to substantial job losses in the primary sector. employment gains have either been achieved or are
Figure 2 – Employment in a green energy scenario, 2030, compared to BAU, by recent years; reaching an estimated 8.1 low-impact (organic) farming methods tend to be more
region (ILO calculations, based on Exiobase and IEA scenarios (ILO, 2018)) million jobs1 in 2015 (IRENA, 2016). labour-intensive than conventional farming, opening
an opportunity for new workers to be absorbed into
Most renewable energy employment agricultural jobs at least in the short to medium term.
is found in China, Brazil, the United At the same time, agriculture and forestry also open
States, India, and members of the EU. up opportunities to build on traditional knowledge and
It is important to note that this growth empower communities that face several socio-economic
has, to date, supplemented jobs in the vulnerabilities, including indigenous and tribal peoples.
fossil fuel sector, due to the additional For example, as part of a global assessment, Herren
energy needs of emerging economies, et al. (2011), ran a macroeconomic model simulating
rather than replacing them. This may green investments in
well change if GHG emissions are cut as Key term: the agriculture sector
strongly as called for by climate science, Macroeconomic model
and concluded that the
in other words, if there is a comprehensive Analytical tool describing the be-
transition to sustainable
haviour and operation of the ag-
transition from fossil fuels to renewables gregate economy within a country agriculture could create
(and to energy efficiency) (UNFCCC, or a region. Adapted from: https://
over 200 million full-time
en.wikipedia.org
2016) jobs across the entire food
The potential for jobs creation is production system by 2050. Another study by (Morison
not confined to the energy sector. et al., 2005), with a sample of 1,144 organic farms in the
Agriculture, the biggest employer in United Kingdom and the Republic of Ireland, concluded
the world, offers many opportunities that organic farms employ 135 per cent more full-time
both in the context of mitigation and equivalent jobs per farm than conventional farms
adaptation to climate change, through
climate smart agriculture. Evidence
from various countries 2.5 Job transformation and redefinition
Key term: strongly suggests that
Climate smart The majority of jobs will neither be lost nor newly created
agriculture
‘Climate smart agriculture’ (CSA)
but redefined in terms of their occupational qualifications
1 The estimates reflect annual
incorporates a combination of data collection efforts based on a and profiles. This highlights that the greening of
traditional and modern techniques,
which is one of the most cited and
wide range of sources, including economies through public and private investment in
government agencies, industry the context of sustainable development and poverty
promoted techniques aimed at
mitigating, and adapting to, climate and NGO studies, academic
reports, and interviews with eradication will rely on a mix of macroeconomic,
change. See FAO: Climate Smart
Agriculture: Sourcebook (Rome, experts. Inevitably, the underlying
2013). methodologies vary, however, and
data gaps remain.
industrial, sectoral, labour market, and skills policies 2.6 Job losses
(ILO, 2016).
Box 5.2: Energy efficiency in It is important to note that changes due to greening
One example is the buildings and construction sector, initiatives and climate change policies make up only
which is already experiencing job transformations on buildings in Europe and the United some of the several factors that can lead to job losses. In
a large scale. Buildings are among the biggest users States fact, to date, greening initiatives for example has actually
of energy, water, and materials, and they are the single In the EU, an assessment of the potential impacts of the 2010 been a minor factor (ILO and IILS, 2012). The principal
largest emitter of GHGs. the same time, the sector has Energy Performance of Buildings Directive for the period 2011– causes of declining employment in industries such
2050 concluded that an accelerated pace of renovation could
an enormous potential to improve energy efficiency, generate 0.5–1.1 million jobs annually (Buildings Performance as mining, fossil energy, or iron and steel have been
which lends it a leading role in the green transition (see Institute Europe, 2011). A US study found that energy efficiency relative; absolute price changes, increasing automation,
retrofits of pre-1980 building stock could reduce electricity use
also Box 5.2). Worldwide, building construction employs by 30 per cent and create more than 3.3 million cumulative job- and rising labour productivity have been occurring over
at least 110 million workers in formal jobs, plus an years of employment (Deutsche Bank Climate Change Advisors & several decades. For example, hard coal mining in
unknown but much larger number of informal labourers, Rockefeller Foundation, 2012).
France, Germany, Poland and the UK simply became
including migrant workers (ILO, 2016). The renovation of too costly to be profitable (see Box 5.3).
existing structures and the construction of new energy-
efficient buildings will require a significant number of An expansion of green economy and climate policies
workers with additional new skills in green technology energy-related emissions (IEA, 2014). China’s 13th Five- will need to bring about a fundamental change in the
practices to realize the large potential of economic Year Plan for 2016-2020 seeks a further 18 per cent global energy mix in coming years and decades. The
and employment benefits. For example, the benefits reduction in carbon intensity compared with 2015 levels result will be further job loss in the fossil fuel sector—in
of enhancing skills in plumbing for solar water heater by 2020 (Climate Home, 2016). These measures point to coal mining, exploration and production of oil and gas,
installation, masonry for using alternative construction a growing realization that decoupling economic growth and among fossil fuel-powered power plants. Coal, as
materials (such as compressed earth blocks), and the from pollution is possible the dirtiest and most CO2-intensive fuel, will need to
installation of rooftop photovoltaic panels In addition, Key term: while creating jobs along bear the brunt of the changes to come along with the
building renovation will not only directly create and Decoupling
the way. To achieve high- implementation of the Paris Agreement (see Box 5.3,
The separation of the rate of re-
transform jobs in the construction sector, but also in source productivity from the eco- performance efficiency overleaf).
supplier industries that produce insulation materials and nomic growth rate, meaning that
goals for buildings, The experiences of countries undergoing job retention in
more can be achieved with less
energy efficiency equipment and materials, as well as resources. Adapted from: http:// working conditions the coal sector highlight obstacles but also encouraging
in energy services requiring additional skills (Syndex, S. www.resourcepanel.org and skill levels need policy lessons.
Partner & WMP, 2009; Trabish, 2011). to be improved for the
construction sector to create decent, well-paying jobs
Employment dynamics in the building and construction
(ILO, 2016). 2.7 Job quality
sector are mainly driven by government incentives
and policies. China achieved significant improvement
As noted by the ILO (2016), a dimension that is equally
in energy efficiency leading to important reductions in
important as the number of jobs created, lost, or
such risks is the shifting towards renewable energy
which would avoid many of the severe health dangers
Box 5.3: Transition in the coal mining lesson that emerges is that a successful transition takes time, a strong
vision of the future, and adequate resources. Worker co-determination (as
associated with coal mining, even though some new
industry: Germany part of a cooperative tripartite structure) has been an important factor in hazards need particular attention. For example, workers
the coal sector, facilitating solutions that embrace a range of labour market producing solar PV panels are exposed to a number
The case of the German coal mining industry underlines the need for well policies.
planned, well designed and socially fair transition strategies, including of toxic substances and electrical hazards; thin-film
active labour market policies, social protection, retraining efforts, and For instance, for thousands of coal workers an early retirement plan was and emerging nanotech-based solar technologies may
economic diversification of regions most dependent on the coal industry. developed by the state government of North Rhine-Westphalia (NRW) in
Total employment in Germany’s coal mining industry has dropped from 1972, with transition payments for up to 5 years, to bridge the time until prompt health and safety-related concerns that will
about 753,000 in the late 1950s to about 33,500 in 2014, an astounding workers became eligible for pension payments. For younger workers, need to be addressed proactively. (SVTC, 2009 & 2014;
96 per cent decline. From the 1950s to the 1980s, automation eliminated efforts were undertaken to find other jobs, with the help of personnel
jobs even while production held roughly steady. But the plunge in development centres and agencies specializing in employment promotion EASHW, 2011).
production from the 1990s and beyond accelerated job loss (Statistik der and training. As a result, in
Kohlewirtschaft, 2015). establishing higher-education
Key term: institutions and technology
Knowledge-based
Galgóczi (2014) examines the transformation of the Ruhr region, Germany’s economy
centres, the region did manage
to lay the foundations of a
2.8 Drivers of change: Technology and
prime hard coal-producing area, for general lessons in managing the
transition challenges inherent in such a steep drop in coal employment.
Economy that heavily relies on
knowledge and information as cat-
knowledge-based economy other factors
Even though resource depletion, automation, and rising competition from as an alternative to the coal-
alysts for growth and productivity. and steel-centred economy
imports were the main driving factors, the lessons of dealing with this crisis Adapted from: https://www.oecd. (UNFCCC, 2016).
Transitions towards a greener economy are driven by a
are useful to consider in the context of climate-driven transitions. A key org variety of factors. Some drivers relate to environmental
and resource constraints that gradually lead to the
integration of such dimensions in economic and growth
policies. Other drivers are related to innovation and
transformed, concerns the quality of employment. Jobs by migrant workers who lack social protection. There are technological developments that enable economic
that do not offer decent work today, may or may not often complex subcontracting arrangements, particularly growth to continue while the pace and scale of
become more decent or among informal workers, which makes for extremely environmental impacts are minimised. Yet other drivers
Key term: greener with the structural hazardous employment conditions (Poschen, 2015). are purely linked to policy goals and objectives that aim
Decent work
Decent work means opportunities transformation. Again, to redirect investment and growth trajectories towards
policies are critical in this The ILO (2016) also notes that a shift in economic
for everyone to get work that is pro- greater environmental sustainability.
ductive and delivers a fair income,
respect. For instance, practises will affect a variety of areas linked to
security in the workplace and social
protection for families, better pros- construction workers employment, including social protection, safe working Among these drivers, technology plays a central role
pects for personal development
generally face poor conditions, workers rights, and the ability of workers’ in the transition to greener and more resource efficient
and social integration. Adapted
working conditions that to assume a meaningful voice in decision-making. economies (please refer to chapter 4 for a detailed
from https://un.org
are among the most Generally, research indicates that effects will be positive. discussion on the role of innovation and technological
hazardous in terms of work accidents and occupational For example, occupational health and safety risks tend change for a green economy). Digitally enabled
diseases, even in the formal sector. Jobs are often to be lower with a move towards a low-carbon economy automation and artificial intelligence (AI) bring
temporary rather than permanent and frequently filled (Poschen, 2015; Renner et al., 2008). An example of significant benefits in the form of new jobs and increased
productivity (McKinsey technology can and will be substituted for human capital been labelled “the Fourth
Key term: Key term:
Digitally-enabled Global Institute, 2017). in the transition to a greener economy. The nature and Techno-pessimism Industrial Revolution,”
automation However, the shift to a scale of the technological development and its impact The overestimation of security (Schwab, 2015) there is an
Digital transformation process threats and risks associated with
which describes the incorporation new economy also calls on employment have been studied for many decades. technological developments. accelerated automation of
of digital innovation and supporting for large-scale reskilling Adapted from https://scholar.har- occupations.
infrastructure within existing busi-
and a socially responsible A common assumption has long been, for the right or vard.edu
ness processes with the purpose of
increasing efficiency. Adapted from transition, which poses the wrong, that technological progress, by gradually A new dimension in
https://www.techradar.com/news/
challenges to employers, leading to a substitution of human labour by machines, the debate on technology and jobs, are environment-
what-is-digital-business-automation will translate into an overall loss in employment. A related technological innovations and their impact on
employees, and policy
makers alike. Among review of the literature (ILO ,2016), reveals that a simple employment. This question may be approached through
Key term: these challenges is the answer does not exist.. The empirical evidence finds that a variety of angles. This chapter considers two aspects:
Artificial intelligence
increased labour market impacts vary, depending on the waves of technological job displacement and job creation.
Simulated intelligence in machines
which are designed to think like polarisation, where low change (see also chapter 4). Based on an extensive
human beings while rationally literature review on technological progress and In South Africa, for example, some 70,000 jobs in the
taking the most plausible actions to and middle-skill jobs are electricity-power generation sector were lost between
achieve a specific target. Adapted more likely susceptible to employment, Nübler (2017) observes that technological
from https://www.investopedia.com change is inevitably a dynamic process, which 1980 and 2000, at the same time electricity generation
automation while digital, increased by more than 60 per cent. Similarly, in the
entrepreneurial skills will involves: (a) both job destruction and creation; and (b)
transforming existing jobs, particularly in how work is European Union, an estimated 300,000 jobs in the
Key term: be in high demand in electricity-power generation sector were cut between
Labour market the labour market of the organized, supporting Schumpeter’s notion of ‘creative
polorization destruction’ (Schumpeter, 1942). 1997 and 2004 (ILO & IILS, 2012). Overall, evidence
Simultaneous increase in high- future. points to the fact that technological innovations have
skilled and low-skilled jobs com-
Digitalisation affects
bined with a decreasing share of Nübler (2017) argues that debates on the impact of played a much more significant role as a driver of job
employment in middle-skilled occu-
existing organisational and technology on jobs, which started as early as 1930 displacement than green-economy-relevant policies (ILO
pations. Adapted from http://blogs.
worldbank.org management structures in when John Maynard Keynes introduced the concept & IILS, 2012).
companies and touches of technological unemployment, are still relevant
today. This is owing to the fact that “unemployment, With regard to job creation, there is also evidence to
on issues related to legal responsibility, data protection suggest that innovation in the environmental sector has
and work safety rules. due to our discovery of means of economising the
use of labour… is…outrunning the pace at which we stimulated job creation. For example, in the case of the
From the perspective of employment, technological can find new uses for labour,” (Keynes, 1930, quoted European Union, ‘eco-industry’ companies were found
change raises many questions that have yet to be in Nübler, 2017) – still persists today. She concludes to employ over 4.2 million people in 2013, a figure well
answered: The first concerns its effect on employment, that historical experience to date tends to discredit above car manufacturing, textile or chemical industries.
of course. Another question relates to its implications arguments of techno-pessimism when it comes to the
considering substitutability with other forms of capital. overall employment outcome. The question that arises,
In particular, a key question that arises is to what extent subsequently, is whether, in the context of what has
3. Investing in human capital goods and services sectors, whereas skill shortages or workers and communities that depend on fossil fuels
inadequacy can hamper such expansion (ILO, 2016). in in the United States. They concluded that a rough
for a just transition to a greener high-end estimate for such a programme would
Second, the greening of economies will engender both
economy job creation and job losses, although most studies point
require a relatively modest US$600 million per year, to
pay for income, retraining and relocation support for
The concept of human capital has become an accepted to a net job (ILO & IILS, 2012). However, the picture is workers facing retrenchments; pension guarantees for
concept among economists following early writings by much more complex as a result of factors due to delays employees in affected industries; and effective transition
authors such as Gary Becker (2013). Human capital in time and geographical shifts of industries - new green programs for communities depending on fossil fuels
describes the stock of knowledge and attributes, jobs are not necessarily created where other work is (Pollin & Callaci, 2016).
including creativity, that materialize in the ability to lost, or maybe provided right when new employment
perform labour in order to generate economic value. It opportunities may be required. Responding to the need to identify and create
is also referred to as the stock of skills possessed by the appropriate and integrated solutions for a green
In addition, it is essential to look at the underlying transition, the International Labour Organization (ILO)
labour force encompassing the notion of investments in assumptions that scientific studies employ. Some
people (e.g., education, training, health), which increase has formulated a guiding framework for a just transition,
economic models assume perfect labour market which will be discussed below.
an individual’s productivity (Goldin, 2016). dynamics whereby labour mobility enables those who
lose jobs to immediately enter occupations in growing
green sectors. In reality, transitions in labour markets
3.1 Conceptualising Human Capital in the are more complex than economic models make appear.
3.2 Policies for a just transition
Inclusive Green Economy Environmental Goods and services industries that might A green economy transition implies important structural
be expanding do not necessarily require the same transformations that will affect national economies,
In the context of the green economy transition, two qualifications as declining, ‘brown’ industries, and enterprises, foreign and domestic workers and their
observations can be made. First, the transition to green workers who have lost jobs may have neither the skills communities, thereby inherently creating (new) winners,
economies affects labour as an input to production, nor the means to take up new job opportunities in new but also potential losers. To respond to potential
by way of a change in aggregate demand that leads locations. adverse impacts of the green economy transition on
to more demand for green products. This will require
some, the notion of a ‘just transition’ aims to ensure that
enterprises and a labour force to obtain the right skills Investing in human capital and social policies is
the transition is fair and maximizes opportunities for
and qualifications to deliver such goods and services. essential to bridge this disconnects. Transition policies
economic prosperity, social justice, rights, and social
As discussed in the sub-section on training and skills can support workers and enable them to take advantage
protection for all, and leaves no one behind.
development below, the availability of a skilled workforce of new jobs created. That calls for coordinated and
contributes to the expansion of the environmental integrated approach to a just green transition, which At the International Labour Conference in 2013,
includes social protection measures. This, of course, governments, workers’ and employers’ organizations
relies on appropriate planning and investment of discussed and adopted the key guiding principles for
financial resources. For example, Pollin and Callaci a just transition towards environmentally sustainable
(2016) have estimated costs of a programme to support economies and societies (International Labour
tripartite meeting of experts produced draft guidelines to labour market restructuring, communities affected by
for a just transition towards environmentally sustainable climate change and other environmental disasters, and
Box 5.4: Guidelines for a just economies and societies for all, with the ILO Governing population groups disadvantaged by green policies
transition Body successfully adopting a decision on the guidelines (ILO, 2016). According to the ILO (2016), labour market
in November 2015 (ILO Governing Body, 2015). The policies are comprised of regulations and policies
Policy coherence and institutional arrangements for mainstreaming
sustainable development and ensuring stakeholder dialogue and Guidelines cover a broad range of policy areas, as also that influence labour demand and supply, and the
coordination between policy fields; shown in Box 5.4, above. interaction between the two. These regulations and
• Establishing mechanisms for social dialogue throughout policies influence the conditions of the labour market,
policy-making processes at all levels;
The concept of a just transition has been particularly upon which the employment effects of the transition
prominent in the context of global negotiations and to a low-carbon economy depend. Whereas ‘passive’
• Employment-centred macroeconomic and growth policies;
policy addressing climate change. The Paris Agreement labour market policies are concerned with the provision
• Environmental regulations in targeted industries and sectors; on Climate Change adopted in December 2015 of replacement income during periods of transition, i.e.
• Creating an enabling environment for sustainable and recognizes “the imperative of a just transition of the joblessness or the search for employment, ‘active’ labour
greener enterprises; workforce and the creation of decent work and quality market policies refer to labour market integration through
• Skills development to ensure adequate skills at all levels to jobs in accordance with nationally defined development demand- or supply-side measures (Auer et al., 2008).
promote the greening of the economy; priorities”. In addition, the 21st Conference of the Parties Active labour market policies encompass five broad
• Occupational safety and health policies to protect workers (COP21) in Paris, adopted a work programme on the types of measures:
from occupational hazards and risks; impact of the implementation of response measures (to
• Social protection policies to enhance resilience and climate change), comprising two areas: (1) economic (i) Training schemes that consist of vocational and
safeguard workers from the negative; impacts of climate change, diversification and transformation; and (2) just transition on-the-job programmes that target the long-term
economic restructuring and resource constraints;
of the workforce, and the creation of decent work and unemployed, laid-off workers, youth and other
• Labour market policies that actively pursue job creation, limit quality jobs (UNFCCC, 2018). vulnerable groups along with special incentives for
jobs loss and ensure that adjustments related to greening policies
are well managed.
apprenticeships;
In the sub-sections below, a few employment and social
(ILO, 2016) policies based on the ILO Guidelines are discussed with (ii) Job subsidies, which include measures to
illustrative country applications (please note that material protect jobs, such as work-sharing schemes and
not cited specifically is based upon (ILO, 2016). interventions that promote hiring, including social
security exemptions and one-off payments for hiring
long-term unemployed;
Labour market policies
(iii) Public employment programmes that cover not only
Conference, 2013). The conclusions and resolutions on Labour market policies are critical to ensure that the traditional public works programmes, but also the
sustainable development, decent work and green jobs, employment effects of the transition to climate-resilient
adopted by the Conference, lead to a framework that economies are positive for everyone: the workers
could be used by policy-makers. In October 2015, a negatively affected by green economy policies linked
new generation of public employment schemes and life). Question and answer sessions were then provided construction and maintenance industry. Around 95 per
employment guarantees; between industry specialists and pupils as well as cent of car industry skills are transferable, which shows
information events within the local schools. Another that building upon existing human capital can be very
(iv) Entrepreneurship incentives that typically consists trend is the emergence of web job platforms for green successful in developing new industries. In this case,
of a combination of entrepreneurship training and industries, such as the renewable energy industry the retraining helped foster the development of a cluster
microcredit; and platform. of industrial maintenance industries in the region (ILO,
(v) Job search 2016).
Key term: Training schemes aim at improving employability and
Microcredit assistance and other reducing skill mismatches between the skills of workers Job subsidies aim at supporting labour demand by
Small financial loans granted to
impoverished borrowers who strive
intermediation services (supply-side) and the requirements of the job market. preventing lay-offs or encouraging hiring. They can be
to start their own business. Adapted that are provided by Whereas such training schemes are important, as they effective in encouraging green job creation in locations
from http://www.businessdictionary.
com
public and private build the human capital required for the transition to be with high levels of unemployment and/or low levels of
employment agencies. successful they must be matched by appropriate short- activity. They are, however, expensive and can have
(ILO, 2016) run support schemes that can support workers in times deadweight/substitution effects.
of crisis (such as passive employment schemes). This
Job search assistance and job counselling aim at may also mean that short-term skill gaps are difficult to Key term: Typical examples of
improving the match between demand and supply address. Whereas longer-term planning would, of course
Deadweight effects those effects include
Cost to society which arises due
of labour and preventing long-term unemployment. be desirable, forecasting job skills which will be needed to an inefficient use of resources. cuts to social security
They are relatively cost-effective, but require efficient in the future is challenging.
Adapted from https://www.investo- contributions for green
pedia.com
employment services, are difficult to implement in times start-ups.
of crisis and are more suitable for formal jobs. Public Generally, however, longer-term trends like an economy-
wide transition from fossil fuels can already be Entrepreneurship incentives aim to promote
employment services (PES) can inform and stimulate entrepreneurship as a way out of under- or
interest in green careers among future workers and the anticipated by regulators and supported. For example,
a number of training centres are delivering vocational un-employment. They are an effective means of targeting
unemployed by providing information on vocational poor, vulnerable groups, however only a minority of
training and study routes, businesses and professions training for workers in targeted green industries, such as
the China Wind Power Center. Dismissed workers from new enterprises are usually successful (Patel, 2015).
in green sectors, as demonstrated by the project In the United States, a growing number of business
“Meine Energie hat Zukunft” (My energy has a future) in disappearing industries are retrained in order to place
them in green industries. This retraining is happening incubators are specifically designed for green start-ups.
Germany [available online]. In this project, the PES of For example, the Green
the German town Bielefeld joined forces with a network at the initiative of local public employment services in
cooperation with local businesses. This was also the Exchange in Chicago
of 120 companies, higher education institutions and Key term:
provides retail, office
learning providers, as well as the Association of German case of the Le Mans region in France where workers, Business incubator
Organisation that aims at boosting
Engineers to lead experiments and workshops on solar who were dismissed from the declining car industry, the growth of start-ups and early
energy, designing virtual wind farms, as well as taster were retrained as mechanics and electro-mechanics stage companies, i.e. through sup-
porting access to capital. Adapted
events in physics (offering an insight into university - so that they could work in the newly created wind from https://www.entrepreneur.com
and live-work space as well as a variety of marketing of green technologies through technical education and environment ministries and vice versa, education and
services for green businesses. vocational training (ILO, 2016). training institutions are typically not involved in shaping
climate policies. Safety and health issues are typically
Public Employment Programmes aim to provide income addressed separately, as well.
to the poor/vulnerable while increasing employability Training and skills development
and supporting labour demand by creating direct jobs. Besides the need to ensure that enough labour market
These programmes can be effective in situations of Skill shortages already pose a major problem for the entrants acquire the skills needed in the economy
effective post-crisis, disaster, and measures linked to transition to greener, climate-compatible economies and of tomorrow, retraining of existing workers provides
season-specific risks, to protect incomes and prevent thus for job creation. Moreover, this is a problem that is another challenge. Retraining may be difficult for older
poverty. As such, Public Employment Programmes offer likely to grow in the coming years. Poschen (2015) warns workers and especially for low-skilled workers, or also
indirect benefits to households, but they do not provide that with a lack of skilled and motivated workers in green migrant workers (again linked to skill-level or language),
long-term employment. Green works refer to either growth sectors, hopes for creating a climate-compatible due to their challenge to ‘skill-up’ and compete for new
both infrastructure and related employment-intensive economy may not materialize. Shortages are the result jobs. Another challenge is linked to spatial shifts, in that
approaches that have direct environmental benefits or as of a number of factors, including: underestimation of the green economy jobs may be created in locations very
a response to a specific environmental context, including pace at which certain green sectors grow; a general different from those suffering job losses.
changes in climate and extreme weather events. They shortage of scientists and engineers; a low reputation
focus on forestry, irrigation, soil and water conservation or limited attractiveness of some economic sectors; and National education and training efforts therefore need
and flood protection. shortages of teachers and trainers proficient in fast- to be linked with a regional (development) approach to
growing sectors such as renewable energy and energy ensure a just transition policy. Disadvantaged workers
The transition to low-carbon and climate-resilient efficiency (Strietska-Ilina et al., 2011). and communities require targeted assistance, which
economies and societies is best conceived as a can encompass the integration of skills building,
driver of structural economic change. This process of Strietska-Ilina et al. (2011) explain that “the challenge for vocational training and retraining into regional
structural transformation is likely to involve imbalances skills development policy is to integrate environmental economic development strategies. This also applies
in the number and types of jobs available. Labour awareness and the right technical training for green to larger socio-cultural perceptions and systems of
market policies play an active role in addressing these jobs into education and training provision”. Marrying thought: For instance, with regard to agriculture and
imbalances and ensuring a just transition for all. They these two objectives is essential, but difficult. Country forestry, indigenous peoples’ traditional knowledge
help workers and employers to make the transition with studies compiled by the global report on skills for green is increasingly being recognized for effective climate
a smooth reallocation of jobs revealed that while coordination between climate/ action and livelihood security, but non-recognition of
Key term: workers from declining environment and skills policies can be comprehensive traditional skills continue to be an important challenge.
Eco-innovation
Innovative business approaches to growing firms/sectors, in some country cases, it is fragmented or practically
that foster sustainability along the to reduce the adjustment non-existent in others. One observation made was a lack A number of efforts have targeted the renewable energy
entire life cycle of a product while
costs for displaced of cross-ministerial coordination (for more information sector, motivated by the desire to overcome problems
promoting a company’s competi-
tiveness and overall performance. workers, and to foster eco- on institutional challenges and reform, see Ch.6). linked to the crises in older industries or a lack of
Adapted from: https://www.unenvi-
innovation and diffusion Efforts by educational authorities to anticipate, identify, economic diversification. Examples include the United
ronment.org
and provide skills do not typically include inputs from States, where wind energy development has been
seen as a way to inject new life into many abandoned are often inadequate (ILO, sectors such as coal mining, fossil fuel energy
Key term:
“rustbelt” industrial facilities in Pennsylvania and Ohio, Informal employment 2016b). production, industry that currently feature a low-level of
though with somewhat mixed results. Employment in the informal sector energy efficiency, while new green low-carbon sectors
Informality, is common
includes all jobs in informal sector
may benefit. In these cases, formulating accompanying
enterprises or all persons who,
Critical to the success of education and training efforts during a given reference period,
in the majority of the policies through social protection, including
is effective coordination and constructive dialogue sectors most affected by
were employed in at least one infor-
unemployment insurance and benefits, social security
mal sector enterprise, irrespective
between all actors, including the government, trade climate change impacts,
of their status in employment and portability, skills training and upgrading, workforce
unions, and employers. Whereas countries’ education such as agriculture,
whether it was their main or a sec-
redeployment and other appropriate measures to
and training systems in different countries face varying ondary job. Adapted from https://
fisheries, forestry or
www.ilo.org support enterprises
challenges and some may incorporate climate and tourism. Migrant workers Key term: and workers in sectors
environmental considerations into training programmes are overwhelmingly Workforce redeployment
negatively impacted by
more readily than others, a multi-layer approach, with represented in these sectors, as are low-skilled national The act or strategy of reassigning
the transition should be
employees to a new position, for
action taking place at the levels of enterprise, industry, workers, and vulnerable groups, such as indigenous example in another geographical part of the policy mix.
nation and region, is essential for success. and tribal peoples, which makes them exposed to location, within a different work unit
or by changing tasks and responsi-
discrimination and exploitation. This is also a very bilities. Adapted from: Another example where
frequent phenomena in economic sectors that are https://www.ofm.wa.gov social protection policy
Social protection and security essential to achieve a low-carbon development, such is instrumental is in
as waste-management and recycling, construction and the field of fossil fuel
Social protection constitutes one of the pillars of a
small-scale industries in all industrial sectors. Thus, subsidy reform. According to ILO (2016) estimations,
just transition framework. Only around one quarter of
providing access to social protection measures to between 2010 and 2015 overall, 100 governments in
the world’s population has adequate social security
these workers should be an integral part of any climate 78 low-income and 22 high-income countries reduced
coverage and more than half do not have any coverage
change policy. or removed subsidies, predominately on fuel, but also
at all. A majority of the world’s economically active
on electricity, food and agriculture. These adjustment
population do not benefit The fifth IPCC Report (2014) highlights the importance
Key term:
measures were implemented at a time when food and
from any protection in of assessing the synergies between social protection
Economically active energy prices were hovering near record highs; if basic
According to the definitions of the cases of unemployment, policies, social development strategies, disaster risk subsidies are withdrawn from beneficiaries without
International Labour Organisation work-related injury, or reduction strategies and climate policies. In addition,
(ILO) for the purposes of the labour adequate social protection mechanisms in place, this
market statistics people are clas- maternity. Nearly half of all there is a growing body of evidence that linking social can lead to a situation in which food and energy become
sified as employed, unemployed people over pensionable protection and climate change policies plays a double
and economically inactive. The unaffordable for many households, in particular, but not
age do not receive a role of enhancing the resilience of workers and their
economically active population is only, the poorest ones.
the sum of employed and unem- pension, and for those families in times of climate disasters and facilitating the
ployed persons. Inactive persons
are those who, during the reference
who do, pension levels ability to cope with climate consequences. In low and middle-income countries, public and private
week, were neither employed nor financing that supports national public employment
unemployed. Adapted from https:// In addition, mitigation policies may have a negative schemes are not only extending the social protection
ec.europa.eu
impact on businesses and workers in highly emitting
floor, but in some cases, they are also contributing to result, where negative to coordination of the implementation of a specific policy,
Key term:
restoring and protecting the productive capacity of Tripartism socio-economic impacts to reaching binding agreements.
lands, building resilient infrastructure, and at the same Refers to a form of economic policy are addressed;
time, creating livelihood and income security for the most
which relies on tripartite collabo- It can be noted that for social dialogue to be effective,
ration between employers, unions
vulnerable often particular at risk of being impacted by (iv) Taxing natural
and the government. Adapted from:
two elements should be developed (ILO, 2016): 1)
climate change. Investment in physical, financial, natural https://en.wikipedia.org resource extraction offers providing technical capacity and adequately updated
and social capital is not only necessary, but also has a great potential for many information to stakeholders taking part in the dialogue
significant potential to contribute to climate resilience developing countries. process; and 2) ensuring that consultations take place
and disaster risk management. Norway’s approach of taxing oil profits and storing on an on-going basis.
To design successful climate related social protection the revenues in the Government Pension Fund
Global is perhaps the best-known case (see Chapter According to the Guidelines for a Just Transition (ILO,
systems, it should be considered that: 2015), governments should actively promote and
8, Section 1.2.2).
(i) Developing a social protection system takes a long engage in social dialogue to discuss the best means to
time, particularly in countries where institutional implement social, economic and environmental goals.
capacity is limited. Therefore, mitigation actions with Consultation and social dialogue The Guidelines also recommend for social partners
potential social impact, “to promote active participation in social dialogue
Key term: Consultation and social dialogue among those who are at enterprise, sectoral and national levels to assess
should only be taken once
Institutional capacity most affected by climate change impacts and policies opportunities and resolve challenges posed by the
Generally referring to the the potential affected
that attempt to tackle these impacts are at the core of transition” (p.10).
capability of institutions to perform population are protected
effectively and efficiently, for in- the just transition framework.
stance through adequate manage- and compensation
ment of shocks or through skills of through adequate social The role of dialogue to reach decision by consensus,
human resources.
protection measures are in
Adapted from: http://www.undp.org
place;
identify new business and employment opportunities,
and the potential challenges, as well as adaptation of
4. Conclusions
current skills and retraining, has placed consultation Natural capital supports jobs in many economic sectors
(ii) The large cost savings resulting from mitigation
and tripartism as an essential element of labour relations such as agriculture, forestry, tourism and industry. The
policies should allow countries and regional bodies
around the world. In the context of climate change, degradation of natural resources and changing climatic
to develop comprehensive social protection systems
social dialogue has been identified as an essential tool and environmental conditions represent threats to
and agreements;
for anticipating and managing the effects of greening on employment, while resource and energy intensive forms
(iii) Mitigation policies may have complex social quality of work and employment (Aumayr-Pintar, 2015). of production will result in declining productivity over
impacts that need to be properly assessed and time. This makes climate change and environmental
Social dialogue can take place at the regional level, at
discussed within the framework of national dialogue. degradation a topic that relates directly to jobs. By
the national level, through cross-industry consultation or
Involving tripartite constituents in the definition tackling these structural problems, a transition to an
at the sectoral and company level. It also varies in terms
and implementation of social protection measures
of the purpose of the dialogue, from merely consultation
is a key element to ensure a fair and efficient policy
inclusive green economy can secure and safeguard to manage distributional impacts of green growth and the actors of the world of work to identify new green
jobs. ensure a just and fair transition for all. business and employment opportunities and the means
to address any challenges in the transition process.
More than that, the transition to green economies As noted in the ILO (2016) analysis, for a transition
interacts with jobs and employment policy in various towards greener and climate-resilient economies to Promoting labour market policies is critical to ensure
ways: First, a successful transition relies on the be successful it requires accompanying and enabling that the employment effects are positive for everyone.
availability of a workforce that has the required skills policies that address the social and employment Enhanced training for skills building and retraining,
and qualifications, for example to enable the production dimensions in order to maximise the positive including better management and more efficient use
of environmental goods and services. Labour can thus employment effects of the transition. of energy and material resources, is key in order to
be understood as a required ‘input’ and ‘condition’ fully take advantage of the opportunities presented
for a successful transition to a green and sustainable Assessing the labour market implications at macro through economic and industrial changes and
economic structure. At the same time, green growth by and sector level can provide a very solid knowledge unleash employment potential, notably by supporting
default is not sufficient to deliver social inclusion and base to inform the policy making process. It is essential entrepreneurship development. Besides, social
positive labour market outcomes. Dedicated investment that policy coherence is promoted at all levels so protection policies should not be overlooked as they can
in human capital along with social policies is needed that greening policies are integrated in other policy enhance the resilience of communities most dependent
areas and efforts are coordinated amongst different on natural capital for their livelihoods, and safeguard
stakeholders through effective social dialogue. workers from the negative impacts of environmental
Indeed, social dialogue is a fundamental pillar of the change, economic restructuring and resource
just transition policy framework that brings together constraints.
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CHAPTER 6: INSTITUTIONAL REFORM FOR
INCLUSIVE GREEN ECONOMIES
CHAPTER 6: INSTITUTIONAL
REFORM FOR INCLUSIVE GREEN
ECONOMIES
LEARNING OBJECTIVES Steve Bass
This chapter aims to enable its readers to: International Institute for Environment and Development
• Appreciate the institutional challenges of assessing, planning and implementing Steve Bass has worked in sustainable development since 1982, in
inclusive green economy approaches; international policy processes and in developing countries, notably Africa
and South Asia. With natural science degrees from Oxford and Manchester,
• Articulate the institutional spectrum of organizations, rules, and norms that he has held senior roles at DFID (Chief Environment Advisor) and the
International Institute for Environment and Development (Director of Forestry,
are needed to sustain and grow green economies, and the change processes of Programmes, and latterly of Sustainable Markets).
needed to arrive at them; and
Steve co-founded the Green Economy Coalition, chaired the 8-year UK
• Apply practical frameworks to analyse the institutional reforms required for inclu- programme Ecosystem Services for Poverty Alleviation, and is on advisory
boards of the Cambridge Conservation Initiative, Cancer Research UK,
sive green economy. Fundação Amazonas Sustentável, and UN Poverty Environment Initiative.
CHAPTER 6: INSTITUTIONAL REFORM FOR INCLUSIVE GREEN ECONOMIES 6.2

CHAPTER CONTENTS Key definition:
tions to demand, deliber- ronmental authority needs to be able to influence eco-
Human Development ate, decide on and deliver nomic and social behaviours governed by the Depart-
1. Introduction - Why institutions matter for Index a green economy. ment of Trade and Industry or the National Chamber of
index developed by the United
Nations Development Programme Business. The people who have prepared these plans
inclusive green economies (UNDP) to provide an alternative
In spite of a proliferation often privately admit that the biggest barriers to their
measurement of development of debates, initiatives, and implementation are institutional – at many levels, from
2. The definition and scope of ‘institutions’ alongside economic growth. It in- projects related to green
cludes key human dimensions such fundamental beliefs to political will to practical issues of
3. Institutional barriers to green economy as health, knowledge, and standard economy, to date, institu- capacities and incentives.
of living. Adapted from: http://hdr. tional issues have been
4. Analysis - Institutional reform for inclusive undp.org
somewhat neglected and Much more attention needs to be given to identifying,
green economies there is little recent lit- mobilizing, and investing in quality institutions to drive
Important erature on the subject. wide-ranging green economy reforms. The principle of
5. Conclusions note:
International support “strong institutions that are specifically geared to safe-
There has been earlier
academic work. A notable exam- tends to focus on national guarding social and ecological floors” has become
ple is Daly’s propositions for three
green economy plans and established as a central pillar for the design of an inclu-
1. Introduction: Why institutions institutions needed for a steady-
state economy that would reconcile projects, and globally, sive green economy or IGE (UN Environment, 2015,
matter for inclusive green
efficiency and equity: (1) an insti-
tution to stabilise population; (2) an
65 national strategies or p.19) but institutions that can ‘do more good’ and not
institution to stabilise the stock of plans have already been only ‘do no harm’ are also needed. As the challenges
economies physical assets and keep through-
put below ecological limits; and (3)
developed. This is good facing countries become increasingly complex, achiev-
progress, but most of the ing success becomes a tougher task and institutions
Institutions - a major component of social capital - are a ‘distributionist’ institution to limit
inequality in distributing constant plans assume that the need to evolve, or indeed transform. This requires a
a significant determinant stocks among the constant popula-
tion (Daly 1992). institutional setting and much more nuanced understanding of the complexity of
Key definition: of national success. They
Social capital capabilities to create and the existing institutional landscape in a country, region
have at least as much
Networks together with shared implement them are effec- or sector, recognising that there is no single institutional
norms, values and understandings impact on GDP and the
tively in place; at best they may provide for capacity blueprint for a green economy transition. It is important
that facilitate co-operation within Human Development
or among groups. Adapted from: building, but not structural reforms. Yet, without reform- to understand why the prevailing institutions are often
https://www.oecd.org Index (HDI) as a country’s
ing or strengthening institutional and legal frameworks, not up to the task, and how they can change. It is also
resource endowments
the green economy transition is likely to be slow or unin- a question of identifying which institutions, perhaps the
and geography (Rodrik
spiring in terms of its outcomes (UNECA, 2016). least-usual suspects, are best placed to make the transi-
& Subramanian, 2003, Acemoglu & Robinson, 2012).
tion towards a green economy.
Good institutions make investments attractive, enable For example, a national green economy strategy might
participation, recognition representation, and distribution be developed without being integrated into the existing This chapter explores the institutional spectrum of orga-
among different groups, and ensure that environmental institutional structures. Any national plan for a transition nizations, rules, and norms that are needed to sustain
sustainability is considered. As such, we rely on institu- towards a green economy initiated by a country’s envi- and grow green economies, and the change processes

required to arrive at them. formal legal rules as well as informal social norms that
Key definition:
Organization It describes the charac- govern individual behaviour and structure social inter-
teristics of the institutions
A group of people, typically in a actions (North, 1991). Efforts towards green economy
given sphere such as government,
that we should be looking
business or civil society, who are to date have addressed institutions mainly with a tech-
bound by a common purpose. for and encouraging. As nocratic focus, hence viewing institutions as formal
green economy is not yet structures, rules and regulation and pinning hopes on
fully mainstreamed in a specific models and capacity development-oriented
large number of countries – i.e. there is not yet a clear towards these specific models (Section 4.1.4. provides
institutional landscape emerging – we draw on evidence more information on capacity development). Those pro-
from the evolution of sustainable development and its moting the transition to a green economy have thus often
growing legacy of institutions that integrate economic, focused on finding the ‘magic bullet’ – the one, promis-
environmental, and social objectives. ing model of how institutions should look like for bring-
ing about the necessary change. However, institutions
While institutions have often been neglected on the level must be understood within, and indeed cannot be neatly
of national strategies, in principle “strong institutions distinguished from, their context. As a result, it is useful
that are specifically geared to safeguarding social and to conceive of institutions in relation to the ‘institutional
ecological floors” have been established as a central spectrum’, ranging from individual through to society.
pillar for the design of an inclusive green economy or This spectrum includes specific organizations, formal
IGE (UN Environment, 2015, p.19). From a theoretical and informal ‘rules of the game’, meta-institutions such
perspective, it is thus clear where the journey will go, but as ‘economy’ or ‘gov-
with regard to practical implementation, the reasons for ernment’ and underlying
Key definition:
institutional reform and how it can be achieved, too often Meta-institutions norms, values and beliefs.
remain in question. The chapter aims to clarify such Meta-institutions: Set of organiza-
Taking into account the
tions together with a range of formal Figure 1: The institutional spectrum
issues. and/or informal rules and norms entire institutional spec-
that determine social and economic
interactions at a broad level. Exam- trum is useful in mobilizing
the term ‘institutions’ includes other elements of the
ples: government, economy, media, institutions in the transition
civil society. institutional spectrum, most frequently meta-institutions
towards a green economy.
2. The definition and scope of and organizations (the orange circles in Figure 1). When
we speak of ‘institutions’ in this chapter, we refer to
‘institutions’ Figure 1 represents a
nesting of elements of the institutional spectrum, which this broader definition, which includes both formal and
Academic disciplines vary in what they consider to be range from individuals to specific organizations, right informal structures, both organizations and rules, both
institutions, but there is a more common interpretation of up to the broader concept of social capital. Institutions government and non-government spheres, both tradi-
the term (Leftwich & Sen, 2010). Institutions, as defined occupy a central, mediating position between the indi- tional and modern approaches, and both new institu-
in economics, are the ‘rules of the game’ and include vidual and society as a whole. Used in a broad sense,

Whenever we consider the role of organizations, we must bear in mind that organi-
Box 6.1: Descriptions of key institutions zations themselves are shaped by the institutional spectrum and that informal social
Key definition:
Audit authority
norms shape the functioning of organizations at least as much as formal rules and pro-
• Central government – ministries of finance, development, planning, pro- A national, regional or local pub- cedures. This becomes clear when we contemplate questions such as:
ductive sectors, social sectors and environment; statistics and audit lic authority bodies which are in
authorities charge of evaluating and verifying • How are organizations defined by social context?
the effective and proper functioning
• Local authorities – municipalities, devolved natural resource authorities,
of a system based on given stan-
traditional authorities
dards and rules. Adapted from: • How do wider laws and norms impact upon the functioning of organizations?
• Economic organizations – fiscal, banking and investment, insurance, com- http://ec.europa.eu
modity markets, stock exchanges, resource-mobilising institutions • In what ways does the underlying organizational culture and the wider societal
• Resource management organizations – producer associations e.g. in
context limit or enable organizational change?
agriculture, forestry and mining, comprising community members and/or Key definition:
businesses Commodity markets Such questions reveal the necessity of considering informal social norms and the broad
trading place, either physical or vir-
• Businesses – companies, associations, finance and service providers, tual, for hard commodities (typically institutional context when considering the role of organizations in institutional reform.
informal producer and resource management organizations natural resources like oil or gold)
• Civil society – environment and development Non-Governmental Organi-

and/or soft commodities (typical- The part of the spectrum most pertinent to institutional reform towards a green economy
ly agricultural output or livestock)
zations (NGOs), Community-Based Organizations (CBOs), campaigning Adapted from: https://www.investo- are meta-institutions or institutional frameworks, underpinned by societal values, shared
groups, consumer associations, watchdogs pedia.com narratives, beliefs and culture that can appear quite distinctive and fixed, changing only
• Academic and professional bodies – universities, think tanks, professional slowly over time. While the drivers of transition to a green economy are found among
associations, training institutes
Key definition:
individuals, organizations, and institutions, these agents are not always aligned. To
• Media – news and entertainment, public and private Stock exchanges aspire to an IGE is, in practice, to take on the challenge of meta-institutional alignment
Strictly regulated financial markets
• Political institutions – parliamentarians, parliamentary committees and
for bonds, notes and shares. Stock
and change at the level of the economy.
audits
exchanges follow the law of supply
• International organizations – development, environment, aid and trade and demand. Adapted from: http:// Institutions are an important component of social capital. Social capital interacts with
www.businessdictionary.com/ other forms of capital to enable society to develop and function effectively; it both alters
these other capitals through interactive influence, in our case potentially mobilising
them for a green economy, and as a result, is shaped by them.
tions designed specifically for green economy and existing institutions that may evolve Several observations can be made about institutions (defined in the broad sense) that
towards a green economy. are relevant for green economy.
Organizations receive significant attention in discussions on institutional reform toward First, there is no ‘magic bullet’ institutional solution. Institutions are shaped by their his-
a green economy, in part due to the number and variety of organizations involved in torical, geographical, political, cultural and other contexts and can be very diverse. For
the transition process (Wiggins & Davis, 2006, Carter, 2014a). Box 1 provides a list of example, French and British colonial influences remain strong in the institutions of gov-
the most relevant ones. These organizations are shaped by institutions and in return ernment and law in ex-French and ex-British colonies and they are quite distinct from
propose changes to ‘the rules of the game’, thereby influencing institutions. each other. Chinese historical and cultural references are extremely strong in the institu-
tions that are now driving green economy in China – ancient traditions of harmony with

nature and circularity, and more recent policy initiatives, actual decisions and behaviour are informal institu- Fifth, institutions evolve to suit the changing context,
have become married in the notion of ‘ecological civili- tions. They reflect human psychology, culture, habits, but can find it difficult to change fast enough when the
sation’ (Weng et al., 2015). Effective institutions, there- and customs – and so can context changes significantly. Active harm or disrup-
fore, draw from the wider context and fit well with it. Their Key definition: often be more efficient for tive change may be required to achieve a meta-insti-
Informal institutions
function matters most, but their form may differ widely, Socially-shared but generally un-
achieving certain social tution that is ‘fit for the future’ (Lustick, 2011). Scoones
hence it is impossible to find a ‘one size fits all’ institu- written societal rules, norms, and purposes. For example, (2016) notes that today’s
tion, instead ‘second-best’, ‘good-fit’ approaches are traditions that tend to be created, pastoralists understand hybrid, multi-level gover-
Key definition:
communicated, and enforced out-
better suited to find customized solutions (World Bank, natural cycles and the Active harm nance in the sustainable
side of officially sanctioned chan-
For example, to return Japan’s
2017). nels (Helmke and Levitsky 2004). need to move livestock economy back to prosperity from its development field has
and temporary settlements decline in the 1990s, policymakers experienced a quiet evo-
Second, three characteristics of institutional function according to changing
would have had to adopt policies
lution, including by way
that would cause short-term harm
determine the effective delivery of any policy (such water and grazing availability – their rules are often to the Japanese people and gov- of gradual institutional
as IGE), according to the World Development Report more nuanced and effective than – though sometimes in ernment. Japan had become stuck
displacement, layering,
on “local maxima,” by gradually
2017: (a) enabling credible commitment, consistency conflict with – the formal ‘fixed fences’ rules of land use increasing its fitness level to suit the drift, conversion, and
and continuity of policy over time; (b) inducing coordi- planning. economic landscape of the 1970s
exhaustion or redun-
nation through aligning beliefs and preferences; and and 80s. Without an accompanying
change in institutional flexibility, Ja- dancy, but fundamentally
(c) enhancing cooperation through good uptake and Fourth, institutions arise, develop and function through pan was unable to adapt to chang- meta-institutions have not
reducing free-riding – any gaps among these ‘Cs’ con- social self-organization that may well be beyond the ing conditions, and even though
yet changed. The World
experts knew what changes the
strain progress (World conscious intentions of the country needed, they were power- Development Report
Key definition: Bank, 2017). In develop- Key definition: individuals involved. They less to enact those changes (Amyx
Free riding Social self-organisation 2004). (2017) suggests that insti-
A person who, or organization ment work, however, it is A complex, dynamic, productive,
are social constructions, tutions tend to change
which, benefits (or seeks to ben- common to look at insti- evolving process that links hu- artefacts of a particular most significantly through
efit) in some way from the effort of man actors and social structures.
others, without making a similar tutions simply in terms of Definition adapted from: Fuchs,
time, culture and society Key definition:
three distinct types of
Disruptive change
contribution. Adapted from https:// their technical mandates, C. The self-organization of Social that are produced by col- A reference to ground-breaking stakeholder involvement
en.oxforddictionaries.com/ Movements, Systemic Practice
i.e. what they should do lective human choice. technologies, processes or strat-
– elite bargains, citizen
and Action Research, Vol. 19, No. egies that lead to substantial and
rather than how they do it 1. Available at: http://fuchs.uti.at/ Any significant distinction innovative improvements of both engagement, and inter-
and with whom. wp-content/uploads/SM1.pdf between periods of history efficiency and efficacy. For exam-
national influence (World
tends to be associated ple, 3D printing is disrupting the
Bank, 2017).
Third, informal institutions can matter as much as with systemic changes in
production industry by lowering the
demand for global transportation of
formal institutions. Modern economies are character- the institutions governing a society, e.g. from monarchy goods, thus, reducing CO2-emis- In conclusion, institutions
ised by formal institutions for fiscal, banking, invest- to republic (or in a green economy context, perhaps the
sions. Adapted from OECD (2018).
currently have multiple
Financing Climate Futures: Rethink-
ment, insurance, commodity market, stock exchange, shift from the fossil fuel age to the age of renewables). ing Infrastructure. http://www.oecd. dimensions in place,
and resource-mobilising purposes that are explicitly set org/environment/cc/climate-futures/
which are imperfect in a
synthesis-financing-climate-futures.
forth with relevant authority. Yet even here, what governs pdf time of significant change.

There is a need to identify and mobilize the critical social several case studies from Germany, Brazil, South Africa,
capital for the transition towards an IGE such as: and India. Box 6.2: Institutional innovations for
• Catalytic organizations, networks and alliances that green economies
can drive institutional change – which may come from
government, business, or civil society;
3.1 An overview of institutional progress 1. Sustainable development law
towards green economy 2. Revision of constitutions or national statements

• Coordinating institutions that can ensure coherence 3. Environmental authorities
across separate endeavours – which may be govern- Green economy is a relatively new policy goal, following
mental, professional or multi-stakeholder; three decades of endeavour aimed towards sustain- 4. Increasing market acceptance
able development (UN Environment, 2008). There is a 5. Holistic frameworks
• Mandated authorities responsible for sustainable growing understanding that the ‘engine’ of sustainable 6. Multi-stakeholder development processes
development and/or green economy – which are prin- development will be inclusive green economies.
cipally central and local government. (see Chapter 1). It is, therefore, instructive to examine 7. Sustainable production codes and standards
the institutional foundations that have been deployed, 8. Interdisciplinary approach for sustainable science
We explore these further in Section 3 below.
strengthened or built for sustainable development. Build- 9. Recognition of holistic institutions
ing on an earlier twenty-year stock-take of the sustain- 10. Future-facing mechanisms
able development legacy (Bass, 2007), we can point to
11. Development of sustainability networks
3. Institutional progress to green several core institutional innovations leading the way.
Many will prove to be important institutional assets,
economy – baseline, drivers, which will enable countries to develop a green economy.
barriers Firstly, a recognised body of sustainable development
law has been built (see Box 6.2). Brundtland’s report development, and now for an IGE. Among the more influ-
This section takes stock of the ‘meta-institutional’
(1987) identified 22 sustainable development principles, ential examples are legal principles such as Polluter
context, the key institutional components, their readi-
many of which have come to be widely adopted in legal Pays, Precaution, and Free Prior Informed Consent,
ness for the transition to a green economy, the institu-
form. Initially embodied in multilateral environmental which are now applied routinely and effectively.
tional barriers to this transition, and the kinds of institu-
agreements, this body of sustainable development law
tional reform that have already taken place. This section
has come to be interpreted and enacted in most national In addition, some countries have enshrined sustainable
begins by depicting three decades of institutional evolu-
jurisdictions, together development into founda-
tion for sustainable development, followed by the more Key definition: with the three pillars of tional national documents
recent and rapid development of several international Three pillars Key definition:
More properly expressed today as sustainable development Polluter pays (see innovation 2 in Box
initiatives that have been influential in researching, pro- three indivisible, interwoven strands concept, – which offered This principle entails the responsi- 6.2). The 2012 synthe-
moting and planning for a green economy. The extent rather than pillars – reflecting the bility of polluters to pay for the envi-
‘indivisibility’ now asserted by the principles for building ronmental degradation they cause. sis of national reports
to which issues related to green economies have been
SDGs. institutions for sustainable Adapted from: http://www.lse.ac.uk to Rio+12 revealed how
mainstreamed at national and local levels is explored in

countries such as Bolivia, mandate, most environment authorities have developed early 2000s were idealistic and isolated planners’ exer-
Key definition:
Precautionary principle Ecuador, Costa Rica, and cross-sectoral mandates with powers to demand infor- cises, lacking clear priorities, with little influence on bud-
This approach underscores the Nepal, had “gone so far mation and to enforce environmental safeguards. In geting, investment and public institutions (Dalal-Clayton
importance of preventing serious or
irreversible environmental damage. as to integrate sustainable some countries, the environment lead is now taken by & Bass, 2009). Nowadays however, sustainable devel-
The principle, which is enshrined development into their a sustainable development ministry with a cross-cutting opment strategies are experiencing a revival through the
in the Rio Declaration on the Envi-
ronment and Development (1992)
constitutions”, while many mandate in addition to an environment sector mandate, imperative to implement the sustainable development
asserts that cost-effective measures others have incorporated as in Malta, Mauritius, St Kitts Nevis and Sri Lanka – goals nationally. This large-scale - implementation calls
shall not be postponed in the face
of potentially irreversible damage,
sustainable development perhaps reflecting island governments’ acute aware- for accompanying mechanisms to gain societal support,
even in if absolute scientific evi- into national visionary ness of environmental and social limits to growth (Grove, to budget for, implement and monitor them. For example,
dence is lacking. Adapted from: statements, including Tan- 1990). Colombia, the DR Congo, France, Georgia, and most of the twenty countries supported by the UNDP-UN
https://www.cbd.int
zania, Zambia, Vietnam, Montenegro, among others, have also made similar Environment Poverty-Environment Initiative have seen
Jamaica, Bangladesh, progress in establishing sustainable development minis- close involvement of finance authorities, at least in
Key definition: Mauritius, Pakistan, and tries (UNDESA & UNDP, 2012). asking questions about relative costs, benefits, and
Free, prior, informed
consent Timor-Leste. However, risks of environmental management and tackling climate
This principle is derived from the institutional fragmenta- While these environmental authorities first had to ‘push’ change (PEI, 2015, Westman et al., 2017).
Declaration on the Rights of Indig-
tion has been noted as a green issues, finance and development authorities,
enous Peoples. It provides a legal
framework requesting states to common barrier (UNDESA as well as market players, have increasingly leaned The increasing involvement of a variety of authorities
inform, consult with and cooperate
& UNDP, 2012). towards ‘pulling in’ green institutions (see Innovation 4 in and market actors has made multi-stakeholder devel-
with indigenous people in good
faith before taking any decision
Box 6.2). The introduction of green economy potentials opment processes the norm (see innovation 6). In most
More commonly, environ-
that may affect indigenous groups. has hastened this, as financial institutions are attracted countries, it is now considered unthinkable that devel-
ment authorities, or some-
Adapted from: https://www.ohchr. by the notion of green jobs (see Chapter 5) and reve- opment decisions should be the preserve of experts
org
times even dedicated nues and the opportunity to access climate funds. Insti- and bureaucrats and made without involving affected
sustainable development tutionally, the planning and finance authorities in many stakeholders. Initially, governments led the way to sus-
authorities, have been established (see innovation 3). countries have, as a result, included the environment in tainable development, but
For instance, the National Council on Green Growth national development planning, budgeting and expen- the notion of the ‘sustain-
Key definition:
(NCGG) has become the fundamental mechanism in diture reviews (PEI, 2015). However, the practice of iso- Community-based
able development triad’ of
Cambodia, contributing to the implementation of Global lating an economic process from its wider impacts – or Natural Resource government, civil society,
Green Economy Principles (GGKP, 2013). Whereas only an economic institution from the wider institutional frame- Management and business actors
A scheme based on the transfer of
a few countries had a central environment authority at work – is still widespread (Confino, 2015). ownership or user rights of natural jointly leading change has
the time of the first UN conference on environment and resources or wildlife resources from since taken root. Exam-
development in Stockholm in 1972, practically all coun- With this growing involvement of ministries of planning the government to local communi-
ples include Community
ties. Through economic incentives
tries now have ministries of environment. Their mandates and finance, national plans are increasingly based on for these communities, CBNRM pro- Based Natural Resource
have become increasingly clear and often overloaded. more holistic frameworks (see innovation 5 in Box 6.2). motes the sustainable management
Management (CBNRM)
of local resources. Adapted from:
Although their power does not often match their wide National sustainable development strategies from the http://wwf.panda.org and National Sustainable

Development Councils than purely assessing their environmental impact. For In some cases, a greater recognition of traditional holis-
Key definition:
National Sustainable (NSDC), which represent example, the Social Capital Protocol, a new initiative by tic institutions can go a long way (see innovation 9 in Box
Development Councils major groups, but still the World Business Council for Sustainable Develop- 2). In the quest for efficiency and effectiveness, western
Bodies that serve as promoters of
sustainable development at the na- often lack representation ment (WBCSD), aims to mainstream the measurement of societies developed through separating complex socie-
tional level. NSDCs typically reunite of smaller groups such as social impacts. tal goals into individual sectors, disciplines and institu-
leaders from civil society and other
groups with the government to gen-
workers and trade unions, tions. This was successful until increasingly global limits
erate discussion and collaboration parliamentarians, indig- Recent experience of tackling complex ‘wicked’ global and scarcities demanded more integrated approaches.
for sustainable development poli-
enous people, farmers, problems, along with government’s greater openness to In contrast, many traditional societies have retained
cies and practices. Adapted from:
women’s organizations, evidence-based policy is also encouraging scientific a sense of the whole, as in their stewardship of the
https://www.ncsds.org
and youth groups. innovation (see innova- land. Interdisciplinary science has recognised this and
Key definition: tion 8 in Box 6.2). At the
Evidence-based policy embraced anthropologists and others who understand
Furthermore, sustainable development production codes Set of methods that strive to inform international level, the the holistic realities of many traditional institutions. It is
and standards are increasingly influencing business policy making through rational anal- Intergovernmental Panel no surprise that the first major global science initiative to
ysis and scientific evidence. Evi-
practice, investment, and policy in many sectors (see dence-based policy making fosters on Climate Change (IPCC) follow the IPCC and the MA – the International Assess-
innovation 7 in Box 2). The food, forestry, energy, and lat- a more analytical and systematic and the 2005 Millennium ment of Agricultural Science and Technology for Devel-
approach to policy design rather
terly mining sectors, for example, have developed sus- than directly influencing policy
Ecosystem Assessment opment (IAASTD, 2009) – emphasised the importance
tainability schemes to address social and environmental goals. Adapted from: https://www. (MA) enabled economists of embracing local technical knowledge and traditional
odi.org
concerns. Motivation to develop and implement those and natural scientists to institutions.
schemes may be attributed to different factors, including work together on major
management of reputational risk, enhancing resource issues and the results are starting to influence devel- Looking forward is equally important: future-fac-
security, or in anticipation of wider legal changes. opment decisions, in spite of their apparent complexity ing mechanisms are evolving, to come to grips with
Examples of such schemes are the Forest Stewardship to policy-makers and the lack of academic incentives. multi-variate and non-linear futures (see innovation 10 in
Council (Cashore et al., 2004) and the Marine Steward- Interdisciplinary science for analysing linked envi- Box 2). Whereas climate and geology used to be con-
ship Council (Blackmore et al., 2015). Although these ronmental, economic and social issues has become sidered ‘fixed’, today there is recognition that even these
codes and schemes do not yet dominate the markets for increasingly recognised and deployed. Government “fixed” factors are changing, less to say factors such as
some commodities, and have so far failed to transform research and policy are discovering interdisciplinary societal preferences. Using approaches that anticipate
sectors as a whole (IISD et al., 2014), they still have the approaches and, as an example, seven UK research futures is increasingly the norm and promises to nurture
potential to influence public policy on production, and councils have jointly launched a £1.5 Billion Global Chal- institutional resilience. Scenario development, invented
consumption, and improve practices in niche markets. lenges Research Fund. The 8-year Ecosystem Services by Shell for the oil industry, has been deployed by the
Despite a lack of transparency in the reporting of sus- for Poverty Alleviation Programme (ESPA) has attempted IPCC and the MA and is now de rigueur for exploring
tainability practices, it is promising that some businesses to bridge the science-policy gap in many low-income systemic change. Modelling has become more sophis-
have begun to incorporate analysis of their dependence countries, offering practical frameworks that demon- ticated, with technology now enabling real-time manip-
on natural capital and associated risks into their deci- strate the links of environmental, social and economic ulation of factors to explore the best way to achieve
sion-making (NCC, 2018) – a higher level of interest systems (Schreckenberg et al., 2018). synergies between economic, social and environmental

objectives, as in the case of the Millennium Institute’s can be seen as the beginnings of a sustainable develop- 3.2 Institutional barriers to inclusive green
T21iSDG simulation model. ment ‘meta-institution’. economy
So, where there was once a primacy of single organi- This has not only been achieved through the overt In spite of the progress described above, there is not
zations in centralised roles, the system is changing into promotion of sustainable development as a concept. yet a robust, resilient and mainstream institutional land-
multiple networks of players working together towards Instead, it’s also the outcome from people’s shift in per- scape that supports green economy. At the interna-
sustainable develop- spectives on the relationship between development and tional level, there is the set of intergovernmental sus-
Key definition: ment (see innovation 11 environment. A meta-analysis of the evolution of the tainable development and environmental conventions
Network in Box 6.2). Networks are mainstream environment agenda alongside the main-
Here a network refers to voluntary referred to above. Yet there are major institutional fail-
(formal) multi-organizational ar- characterised by many stream development agenda reveals their increasing ures in mainstream trade, financial, and global public
rangements for collaboration on nodes and links (actors convergence. In essence, both environment and devel- goods regimes. For example, international norms and
collective goals.
and relationships), but opment agendas no longer avoid one another, but are governance structures for rapid and effective green
they also maintain the beginning to feed back into each other, when human technology transfer will be crucial building blocks for
autonomy of the actors (the network partners). Although or environmental limits sustainable development, but are fragile at best (UN
these networks are diverse, there are certain standards Key respectively are breached. Environment, 2015). While current efforts to pursue
note
or common practices that they share, notably: a clear As an Oxfam Malawi officer re- There is an increasing green economies are rightly focused on at the national
internal purpose stemming from the collective aims of vealed to the author, where once sense of convergent level, ultimately the global green economy needs to be
Oxfam delivered seeds and imple-
partners, an organizational structure that is proportionate ments to farmers, they now have to
agendas, at least in pro- addressed.
to this purpose but in which decisions can be taken and invest in soil and water conserva- gressive quarters, towards
tion.
implemented effectively, and a stable income that does environment with people, There are institutional barriers at the national level, too.
not depend on one single funding source. A truly resil- alongside development The sustainable development ‘legacy’ built up over
ient and adaptable network is not taken over by a ‘hub’ with nature. In many ways, green economy is the logical recent decades within most countries is a disparate
but uses the combined strength and knowledge of all next step – where integrated economic institutions also set of agreed vision statements, niche plans, isolated
its nodes, possibly facilitated by such a hub. The Green now provide for both of these agendas. Figure 2 indi- projects and some capacities. There has not been
Economy Coalition example is an effective demonstra- cates the variety of ‘institutional connectors’ that have broad-scale institutional reform. One notable phenom-
tion of such a hub and is discussed later in this chapter enabled this gradual congruence to date: we suggest enon is that peoples’ jobs within institutions have very
(Box 6.4). that many of them offer potential for achieving green rarely changed. Additionally, some sustainable devel-
economies. opment plans run parallel to mainstream economic and
Some of the above innovations have become part of development plans and may be upstaged by them. As
mainstream policy, planning, budgeting and investment seen in the previous chapter, mainstream institutions in
in certain countries and sectors. However, they are rarely many places still remain structured around the brown
the rule, demonstrating that most countries and sectors economy and resist change. Enthusiasm to support the
are still dominated by the ‘brown economy’. Neverthe- growth of particular green projects should not blind us
less, in cases where these innovations have prevailed, it to this reality. We therefore need an institutional reform

3.3 Recent case studies of catalytic A principal influence in this early stage of institutional
Box 6.3: Summary of the barriers to institutions driving reform change towards a green economy were international
initiatives, for instance, the Green Economy Initia-
institutional reform for green economies ‘Green economy’ was barely spoken of before the tive launched by UN Environment in 2008 that aimed
Poverty, environment and climate problems are the result of deep 2008-9 financial crisis, and since then, it has put the to support the transition; (see also Chapter 1). In this
structural failures (GGGI, IIED & GEC, 2016). Not surprisingly, most
barriers to green economy are institutional in nature and are often the
challenge of reforming fundamental economic rules onto section we will discuss salient issues concerning some
main reason for a lack of progress or poor decisions made in pursuit of the political agenda. The 2009 Commonwealth Heads of the major international institutions that promote an
green economy. Institutional barriers specifically associated with green IGE. Changes, however, would not have taken off without
economy initiatives to date include:
of Government meeting, for example, had as its theme
‘The Road to Recovery’ and the heads of states’ private a diversity of national and local institutions driving in
• Overly technocratic scope and lack of inclusion – too many initiatives meeting was on green economy prospects (IIED, 2009). similar directions. For this reason, we will also explore a
have focused on projects and technologies, as opposed to ‘tougher’ Proliferating projects and enterprises, for example, that selection of such cases. These cases are principally cat-
structural/institutional reform. Due to the technical nature of the initiatives,
often only environmental and economic objectives have been factored promote low-carbon technology, sustainable agricul- alysts that have begun changing the overall institutional
in. Considering social capital is necessary to reap support and to ensure
that institutions are capable of delivering the envisaged projects. Without
ture or eco-tourism. In addition, increased availability landscape (i.e. the meta-institution). Each case has
structural reform, social objectives can easily be overlooked and thus in financial incentives to carry out such activities, have overcome some, but by no means all, of the barriers to
lead to low societal support and a ‘green economy owned by the few’.
begun to impact the products and services offer pro- institutional change, which are identified in Box 6.3. They
• Lack of overarching national green economy policy and/or strategy –an vided by the market, and have emerged from their specific contexts (e.g. PAGE
overarching strategy is needed to improve the coordination and imple-
mentation of all related activities, from field to policy. Without a compre- public services offered by from several UN agencies), have become embedded to
hensive green economy strategy, national institutions lack a mandate to Key definition:
lead the transformation across all sectors. Sustainable agriculture the government, and raise varying degrees (e.g. Amazonas Sustainable Foundation
Sustainable agriculture describes civil society expectations in the sustainable development landscape of Amazo-
• Driven by external organizations – rather than by national, local and the incorporation of economic,
sector stakeholders who have a record of effective structural change in environmental, and social consider- on the availability of such nas and Development Alternatives (DA) Group in India,
their fields (including major mainstream players who are open to green ations within agricultural practices goods and services. This which will be introduced in section 3.3.3).They play dif-
economy). in order to avoid compromising
future generations’ ability to meet proliferation has been ferent roles in catalysing the transition to green econo-
their needs. Adapted from: http:// enabled by diverse inno- mies (top-down, bottom-up, bridging, and validation).
asi.ucdavis.edu
vations in international, Most are innovative cases – new institutional innovations
national and local institu- rather than stories of the evolution of existing institutions.
Key definition: tions. New kinds of insti- Given they are relatively new; the literature on most of
approach that is informed as much by the barriers that it Ecotourism
tutions and institutional these cases is scarce.
Eco-tourism is defined as a form of
will face, as by the potentials of its realization. We sum- tourism that encompasses the prin- mechanisms have begun
marize the main barriers to institutional reform towards ciples of sustainability. It does not to improve mainstream
only strive to minimize detrimental
green economies in Box 6.3. effects of traveling on the environ- actors’ awareness, incen- 3.3.1 International green economy institutions
ment, but it also aims at fostering tives and commitment
interpretation and education as well Chapter 1 introduced several international institutions for
as the social well-being of local to act, as well as their
an IGE, including United Nations Partnership for Action
communities. Adapted from: http:// behaviour.
www.ecotourism.org on Green Economy (PAGE), Global Green Growth Insti-

Figure 2: The institutional integration of environment and devel-
opment over time – towards a truly inclusive green economy?
tute (GGGI), Green Growth Knowledge Platform (GGKP)

and the Green Economy Coalition (GEC). This sub-sec-
tion discusses these institutions, vis-a-vis the innova-
tions, as well as the barriers identified earlier. Together
with the national and local level case studies in the fol-
lowing sub-sections, these discussions are intended
to provide a few pointers to the direction of institutional
reforms required to deliver an IGE.
Partnership for Action on Green Economy (PAGE)
PAGE, by drawing several UN agencies together
in response to country demand, has contributed to
multi-disciplinary approaches coupled with in-coun-
try deliberation of diagnostics and optional pathways
Drivers of integration to green economy. UN Environment’s early work on the
Increasing feedbacks between environment and development: both positive and negative effects become apparent mutually reinforcing relationship between environmental
Limits of institutional silos become apparent: people find they cannot achieve desired outcomes through one agenda alone
investment and economic prosperity (UN Environment,
2008) plus ILO’s work on green jobs (ILO, 2013), form
Societal demand for integration: people campaign on issues with linked causes, e.g. health, pollution, jobs; concern for ‘just transition’ to minimise ‘losers’ (see Chapter 5)
an evidence- and skills-based core of this partnership,
Top-down drivers of integration: states need public goods, efficiency and effectiveness; businesses need to secure scarce resources; some political leaders champion sus- enriched by UNDP’s integrated in-country policy and
tainable development
programme work, UNITAR’s capacity development
Institutional ‘bridges’ that enable integration expertise, and UNIDO’s promotion of innovation and
green industry. This “One-UN” collaboration is condu-
Plural policy processes: that pull agendas together e.g. GE strategies, ‘reciprocal mainstreaming’ connecting env and dev plans; policy coherence e.g. PC sustainable
development cive to ministerial commitment and the mainstreaming
of green economy strategy into national development
Networks and coordination: that link env and dev communities: sustainable development Councils and Accords; cross-ministry planning groups; sustainable development
units; communities of practice planning. Its primary focus is to engage national govern-
Integrated planning tools: sustainability assessment (SESA), environmental expenditure reviews, capital accounting, sustainable development foresighting, modelling tools
e.g T21 iSDG
Integrated metrics: multi-dimensional poverty, ecosystem services/wellbeing, resilience, footprints
Localisation processes: decentralisation, participation, landscape/nexus approaches that highlight cross-issue local realities.

ments in a productive dialogue. Nevertheless, tackling These international institutional arrangements for green
institutional barriers remains challenging. economy initiatives reflect the more than usual level Box 6.4: Green Economy Coalition -
of collaboration. The availability of information, social
Global Green Growth Institute (GGGI) media and numerous methods for people to connect paving the way for new GE institutional
GGGI is innovative in at least three aspects. First, it has with each other have in part enabled this. The main norms
an integrated delivery model for technical and advi- elements of a global institution for catalysing green The GEC grew from the shared concerns of several international groups,
sory services in green investment, policy, and knowl- economy may already be in place: a cross-UN pro- initially including IUCN, IIED, WWF, UN Environment, WBCSD, among
others, each concluding that the environment and the economy need to
edge-sharing. Second, it employs national teams, gramme in the form of PAGE; a ‘go-to’ information source be more closely aligned for a sustainable future. Together, they proposed
often with national officers who are on secondment to that also identifies research priorities in the shape of the a ‘Global Coalition for a Sustainable Economy’ as ‘the sustainability chal-
lenges are too big for one sector, organization, or strategy to address
improve the chances of a demand-led approach rooted GGKP collaboration; an independent GGGI to comple- alone’ (IUCN, 2009).
in a country’s institutions and aspirations. Third, it helps ment them and improve the finances flowing to IGE; and
GEC’s power lies in its ability to bring together the stakeholders needed
countries to be able to attract their own finance rather a dialogue and consensus-building platform open to civil for change, to give them the space to exchange experiences and
than providing limited finance itself. While GGGI is quite society in the Green Economy Coalition, which is dis- develop solutions together. Its position as a platform not only generates
cussed below. “informational power”, but also “political power” to drive policy decisions
a traditional development assistance organization, for green economies. Its approach is based on dialogue with diagnos-
its increasing tendency towards engaging in partner- Perhaps the main advance made by these and other
tic to help stakeholders scope what a green economy means for them,
modelled after existing dialogue-based models such as the Forests Dia-
ships, rather than relying entirely on in-house capabil- international green economy initiatives has been the logue and the Poverty Environment Partnership. However, this concept
ities, means it has been open to others’ influences- for recent emphasis on ‘inclusive’ and ‘pro-poor’. This was
also has downsides: diverse approaches are compatible with convening,
but are challenging for achieving clarity of position. The centrality of a
example working with the GEC and IIED to explore evi- a reaction to earlier efforts that focused on least-cost positive, engaged secretariat, while helpful for mobilising and building
dence of inclusion in green growth approaches (Bass et carbon abatement, but excluded many players and their trust among members, also means that members can rely on the secre-
tariat too much without making their own tough changes.
al 2016). needs. Consequently, several international initiatives are
The Coalition has been careful to avoid single issues, but rather showed
Green Growth Knowledge Platform (GGKP) now actively trying to ensure that they serve a majority in how the different parts of the agenda link up, such as fairness, inclu-
low-income countries. sion, ecological limits and natural capital. The GEC works through an
GGKP collates publications on a website organised issue, generates consensus among its diverse members, and moves on.
around sector, theme, country, project and best-practice Green Economy Coalition (GEC) To keep people focused on the prize of transition, building a compel-
ling narrative has been central to the GEC’s work with devices such as
bases. GGKP research committees review the evidence GEC is a new kind of institution that is designed to
‘glimpses of a green economy’, ‘stories of change’, and a ‘barometer’ of
progress.
available and identify knowledge gaps, proposing future catalyse the transition to green economies: holistic and
research. Fifty-eight ‘knowledge partners’ have so far inclusive, future-focused and adaptive, values- and
GEC now includes both international members and national NGOs large
and small, forming national hubs that reach out to hear the ‘voices of
joined GGKP (GGKP, 2019). Its institutional model is evidence-based. Established in 2009, initially as a the poor’. It has upheld high aspirations for inclusive GE, conferring the
consistent with the requirements of IGE: it is an acces- time-bound partnership for three years between a few
credibility to critique some of the intergovernmental work (e.g. too many
initiatives were focused on carbon, large companies, big infrastructure
sible, organised platform and network for international founding members (like the GGKP), its membership has and high technology, risking green economy being owned by elites)
green economy research that encourages collaboration grown to include international organizations, business (GEC, 2014). As its work plan and funding expands, the GEC intends not
to build a large central secretariat but to mobilise best-placed members
among actors in generating and using knowledge for the and civil society, as well as large and small organizations to act, increasingly those based in different continents.
green economy transition. across 20 countries. Its role is to facilitate multi-stake-

holder dialogue at national, thematic and global levels, (GEC, 2017). In the African context, UNECA (2016) sug- and oversight role, e.g. Mozambique.’ UNECA is equivo-
sharing experience and knowledge, and building a gests relative strengths and weaknesses of the various cal about which institutional approach is best, but help-
shared narrative that makes a strong case for change. institutional arrangements for these strategies and plans. fully postulates five factors that contribute to the success
There is much to learn from the evolution of the GEC and It concludes: ‘What is emerging is that countries are of planning for IGE (Box 6.5).
its network: Box 4 is the first attempt to draw out institu- either building on existing institutional frameworks and
tional lessons and principles from the GEC. reformulating sectoral and national development strate- Of these, coordination of national organizations is partic-
gies, e.g. Ethiopia, Rwanda and South Africa; or antici- ularly important from a practical perspective. No single
As the GEC case study suggests (see Box 6.4), the ‘safe pating a gradual but eventual introduction of new institu- institution can tackle the interlinked challenges of inclu-
space’ that it has created has encouraged collaboration tions and mechanisms to take over the implementation, sive and green economies, yet each institution wields
between the international green economy initiatives – the power of its mandate, planning system and budget.
with the GEC helping participants under the initiatives to Therefore, the ability of many institutions to work sys-
come together, to get to know one another, mutually rec- tematically together in ‘vertical’ (across levels of gov-
ognise strengths and weaknesses, learn and adjust. This ernment) and ‘horizontal’ (across sectors) coherence is
collaboration has already broken-down apparent barriers Box 6.5: Lessons from African important. As noted before, the best arrangements will fit
between narrow definitions of green economy and green the national context well – with function mattering more
approaches to IGE planning
growth and developed shared principles, priorities and than a particular institutional form (World Bank, 2017).
pathways towards an IGE (GEC 2019 forthcoming). While African governments have employed a variety of approaches to Many inter-ministerial mechanisms, however, are con-
IGE planning, the most successful ones are characterized by:
nected to one-off projects and do not last long, posing
• Strong, high-level leadership, which links long-term national goals with
problems of institutional memory and legacy. Others are
3.3.2 National green economy institutions environmental risks and opportunities and builds winning coalitions; limited by a lack of interdisciplinary understanding and
examples include Ethiopia and Morocco;
methodologies (UNDP, 2017; UN-PAGE, 2016).
The existence of a national green economy strategy or • Clear economic, environmental, and social objectives reflected in out-
plan is still taken as a primary indicator of progress in come-based mandates supported by strong institutional governance, Effective coordination mechanisms are characterized by:
such as in Rwanda and South Africa;
green economy rather than any institutional or behaviour a clear vision and scope, a related planning and moni-
change. So, for example, the existence of a national • Robust and adequately resourced planning and coordination processes,
designed to generate compelling evidence, overcome barriers, and
toring framework, high-level and centrally-located lead-
green economy strategy or plan was obliged to be con- manage conflicting interests; such an approach characterized the devel- ership that has the independence to raise challenges
opment of Kenya’s Low Carbon Climate Resilience Plan;
sidered in a recent assessment of progress across 21 and help push through substantial reforms, a secretariat
Mediterranean countries. However, the conclusion of • Active and strategic processes of stakeholder engagement with clear to organise dialogue and work plans, a planning division
roles and well managed expectations, exemplified in the inclusive green
this assessment indicates that even countries with good growth process of Mauritius; to help with comprehensive strategy, and an implemen-
strategies ‘still lack concrete implementation mecha- • Well-governed institutions able to manage a predictable long-term cycle
tation division to ensure coordinated delivery. In this sub-
nisms, stakeholders’ commitment and systematic fol- of planning, implementation and review, which aligns with other activi- section, we examine two cases of this below. One is a
ties and protects against political change and interference by interest
low-up and evaluation’ (eco-union et al., 2016). groups. Ethiopia is doing well in this respect. green economy ‘accord’ between diverse stakeholders,
enabling recognition of multiple strands of work, exper-
Globally, over sixty-five countries had some type of Source: UNECA (2016)
imentation and adaptive strategy (South Africa). The
green economy strategy or plan by the end of 2016

second is a multi-agency programme aiming to embrace Response, National Sustainable Development Strategy ments, have somewhat undermined the Accord. Addi-
all stakeholders in making a system-wide energy transi- 2011-14, Clean Technology Fund and Green Fund, and tionally, there is not yet an integrated information and
tion (Germany). South African business leadership. monitoring system or a set of standard metrics to link the
various pieces and to assess added value.
Case study: South Africa – the Green Economy There have also been several institutional challenges
Accord as a multi-stakeholder platform for adaptive that need to be addressed. The Accord’s eclectic Thus, it remains to be seen whether the voluntary, collab-
strategy approach means there is not yet a common view on what orative Green Accord institutional model will be able to
a green economy would look like. It has been criticised drive coherence and systemic change across all institu-
Approaching green economy as a multi-stakeholder for focusing on an ‘add-on’ green sector or ‘green’ niche tions, investment, and behaviour.
process, not just a plan. South Africa signed its Green (with 300,000 jobs), as opposed to an economy-wide
Economy Accord in November 2011 (Economic Devel- transformation (all 5 million jobs envisaged under the Case study: Germany – the Energy Transition (Ener-
opment Department of South Africa, 2011). Recognising New Growth Path). Because of this confinement, com- giewende) uniting policy and public incentives
that there is much to learn and a lack of precedent for mitments are heavily focused on energy-related issues.
green economies, the government agreed that a fixed One of the most significant challenges in Germany is
Water, waste, biodiversity and ecosystems, however, are decarbonising the economy (UNFCCC, 2016). As in
plan or ‘predictive strategy’ would not be appropriate. of significance to a majority of population and could bear
Instead, an accord was adopted to encourage action all countries, the prevailing energy system has a per-
high potential from an IGE perspective. vasive influence: throughout history, the transition from
research, convene regular stakeholder meetings to
review progress, and to apply ‘adaptive strategy’. The Additionally, there are challenges of inclusion in a the woodfuel era, to the coal and steam era, then to the
Accord formed part of a set of multi-stakeholder ini- country where resource rights and their allocation have prevalent oil-based era, and currently to direct electricity
tiatives in support of the country’s ‘New Growth Path’, been pre-defined in a non-participatory way. Inclusion is have marked major changes in the way economies and
which aims to create 5 million new jobs by 2020 and to difficult in practice where populations are often scattered societies are organised.
cement a ‘national partnership’ between the Government and informal economic actors are not well organised. Germany’s Energiewende programme recognises that a
and social partners (organised labour, businesses and This often means that the transaction costs of moving shift in the country’s energy supply requires significant
community constituents). The Accord brought together onto green economy paths institutional change, one that supports economic growth,
12 government departments, three major labour feder- Key definition: hold back progress.
Transaction costs inclusion and environmental protection at the same time.
ations, and diverse business and community organiza- Costs incurred by market exchang- Energiewende exists to shape Germany’s transition to
tions, to design and implement major programmes of Despite bringing a number
es such as costs for the formation
of different government
of contracts or those related to re-
a low-carbon, environmentally sound, and affordable
public and private green investment. search on market prices. Adapted energy system. Launched with legal support in late
from: https://stats.oecd.org
departments together, the
An OECD peer review mission to South Africa in 2012 lack of capacity, expertise 2010, Energiewende is driving renewable energy, energy
noted that the Accord had gained the public interest, but and political influence of efficiency, energy demand management, decommis-
recommended it be brought together with several other the lead agency, the Economic Development Depart- sioning nearly all coal-fired generation, and phasing out
institutional innovations to improve momentum towards ment of South Africa, the absence of an implementation of nuclear reactors by 2022 (Buchan, 2016). It includes
a green economy (OECD, 2013). These other innova- plan, and the failure of other departments (responsible ambitious targets by 2050: greenhouse gas (GHG)
tions include, among many, the National Climate Change for implementation) to take ownership of the commit- reductions of 80–95 per cent compared to 1990, when

emissions were 1,248 million tonnes total emissions of as natural gas, and given rise to cheap, polluting lignite, Governments differ in how far they are decentralised to
CO2 equivalent; 60 per cent renewable energy in the hampering the reduction of emissions (Pegels, 2017). local levels. But local authorities almost everywhere are
energy portfolio; and 50 per cent reduction in consump- Favourable energy prices for energy-intensive enter- no longer merely service providers. They are also highly
tion (Agora Energiewende, 2013). prises were financed by shifting the burden onto house- complex systems that can play a central role in an inter-
holds and small and medium enterprises, making two dependent world. In Western European, North American
Energiewende presents an extensive institutional reform thirds of the population agree that the burden for the countries, and Japan, between 40 and 60 per cent of all
agenda – shifting energy policy from demand-driven to Energiewende is not shared equally (IASS, 2017). To governmental spending
supply-driven, from centralized to distributed generation embrace all stakeholders, institutional change, therefore, takes place at the subna-
(e.g. combined heat and power in small units), and from Key note:
has to be combined with continuous public feedback. tional level, while in the
overproduction and overconsumption to energy-saving In addition, in North America and economically less devel-
and increased efficiency. Together with a commitment to As we have stressed, effective institutions often grow Europe, 57 per cent of all public
oped parts of the world,
sector employment is at the subna-
greater transparency in energy policy formation, this can organically from their context, and become fit for that tional level, while in Africa the figure the figure ranges from 3
amount to a greater democratization of energy. context. In this respect, the exact Energiewende model is 6 per cent; in Latin America, 21
to 30 per cent. (ECOSOC,
per cent; and in Asia, 37 per cent.
is unlikely to translate to many other countries, especially 2017a).
The reform was designed to combine national-level those with weaker social institutions.
political ambition with societal demand – marrying a top- Although local authorities have significant influence,
down, legislated mandate for change and programme except perhaps on elites, they are not uniformly sup-
coordination with ensuring widespread local ownership. 3.3.3 Local green economy institutions portive of inclusive and green approaches. Satterthwaite
There is significant participation of the German public, and Sauter (2008) lay out the local government institu-
building on long-standing German traditions of collec- For green economies to achieve scale – to become
tions needed for sustainable development (in education,
tive civic action in, for example, guilds and coopera- the norm rather than isolated ‘green’ projects and busi-
health, environmental services, natural resource regu-
tives. So the public benefits from Energiewende as not nesses – the focus must be on inclusion (Benson 2016).
lation, business development and legal enforcement)
only energy consumers, but also as investors (private However, it is not easy to involve large numbers of
and give examples of both supportive and unsupportive
households, land owners, and members of energy coop- excluded people without engaging with the institutions
types. Those that are supportive are characterised by:
eratives) and sometimes as employees of decentralised that represent, serve and regulate them. This points to
energy generating companies. To this end, central the importance of municipalities and other local authori- • High levels of transparency and accountability to local
authorities engage with local governments (Länder). ties, producer associations, community natural resource groups;
management associations, chambers of commerce, and
While the overall shift to renewable energies has been others in shaping and delivering green economies. The • Well-established work programmes with low-income
a success: about 36 per cent of electricity came from institutions that are directly formed by local people – as groups;
renewables in 2017 (BMWI, 2018) and 88 per cent of rights-holders, producers, consumers and citizens – will
the general public support the energy transition (IASS, • Giving such groups central roles in defining priorities
be particularly important, and will include institutions at and undertaking initiatives;
2017), the results are not as clear for other targets. The village level. These are all potentially parts of the local
abundance of cheap energy has, for example, crowded institutional landscape of a green economy. • Mobilising resources to build the local economy–
out relatively clean, but expensive energy forms, such skills, natural resources and finance; and

• Openness to influencing central government policy is best placed to perform. It delegates the other tasks sis on business development and training for indige-
based on the above. to other stakeholders and intermediaries such as local nous groups using the Amazon’s natural resources and
and regional governments and business and community drawing on best local practices).
In poor countries, there is a further challenge: up to 80 processes, and intervenes — and only in a secondary
per cent of the workforce may work and live in the infor- capacity — only when an issue cannot be resolved or Since 2008, FAS’s institutional mandate to implement
mal economy (IIED, 2016a). There are over 500 million best resolved by such intermediaries.” the Bolsa Floresta state policy has helped to confer the
smallholder farms around the world supporting over 2 power to bring together all state departments that are
billion people, many operating in the informal economy – (ECOSOC, 2017a) relevant to local economies, livelihoods and environmen-
clearly one of the world’s most significant bases for local tal conservation, and to catalyse action partnerships.
green economies. There are many types of community or In conclusion, considering the significant role local and There are now over 100 partnerships, many focused on
communal natural resource management regimes pro- subnational stakeholders are playing in constructing nine regional Centres for Conservation and Sustainabil-
ducing a mix of public and private benefits – institutions green economies, the institutional landscape is not yet ity, which involve FAS’s with the state health authorities,
could drive local green economies. Yet the potential of conducive and is difficult to navigate. Two examples are local government, and local NGOs. Today, these Centres
informal actors is not yet realised. They cannot easily be offered to illustrate the kinds of organization that can support professional qualifications, entrepreneurship,
reached by formal organizations such as local govern- catalyse change at subnational levels. Approaches like knowledge exchange, waste recycling and sustainable
ment. Instead, their inclusion relies on a much broader these will be increasingly important if inclusive, and local agriculture. Its growing institutional mandate has helped
range of women’ groups, religious organizations, social green economic activity is to achieve scale. FAS to reach nearly 600 communities in the Amazon,
enterprises and others, that also need to be considered Fundação Amazonas Sustentável (FAS, the Sustainable including some of the most isolated, remote, and poor
as part of the institutional landscape for green econo- Amazonas Foundation) was created in 2007 by the State (which often take many days to reach by boat from the
mies. of Amazonas in Brazil and Bradesco Bank as “a meso- capital, Manaus).
In the context of global economic, political and cultural level institution between government, communities and After 10 years, FAS’s institutional mechanisms have
processes, it is essential to consider the impacts these businesses that catalyses the local green economy”. Its taken off because they are simple to understand by all,
processes have at the local level. Indeed, there is some developmental and environmental activities are substan- attract the interest and excitement of stakeholders, build
consensus that the nation-state as the predominant tially supported by both Brazilian and global corpora- trust, and realise synergies. For example, Bolsa Floresta
system of public governance, as it stands today, has tions. The FAS’s mission is to improve the riverine com- gives farmers a regular income for practicing farming
become increasingly incompatible with contemporary munities’ quality of life in the State of Amazonas, helping without fire; just one criterion. This has greatly reduced
realities. Those realities are increasingly characterized them to grow their economies by mobilising capital consequent deforestation, boosted the local economy,
by the emergence of multi-stakeholder and multilevel assets within social and environmental limits (FAS, saved on government environmental protection costs
institutions (ECOSOC, 2017a). 2016). Its slogan – ‘making forests worth more standing and enabled many other co-benefits for farmers from the
than cut’ – is illustrative of its approach of ensuring local registration process. All of this helps to establish FAS as
“Establishing institutions that are effective, accountable people can make a good living in the forest environment. a ‘meso’ level institution that connects others and – criti-
and open to all, means moving more and more towards Its principal work includes: Bolsa Floresta (conditional cally – engenders trust, a core characteristic of catalytic
a “helmsman” State, with a central Government that payments to farmers for forest conservation), Education organizations (FAS, 2016).
performs the tasks that only it can perform and that it and Health, and Innovative Solutions (with an empha-

Development Alternatives (DA), India is one of the Social Enterprises (SEs) that are
being built at a rapid rate in India around previously unnoticed opportunities in con- Box 6.6: Social enterprise - a promising driver of green economy
servation, renewable energy and clean transport (Box 6). Currently, private companies
provide a significant proportion of India’s public services; their primary motivation is at local levels
profit – not justice, collective security, clean air, or other social goods that people need The experience of Development Alternatives and other social enterprises (SEs) suggest that effective SEs are charac-
terized by:
in order to face emerging challenges and opportunities. SEs can fill the gap by provid-
ing the motivation, ingenuity and customer focus (characteristics shared with success- • Locally relevant innovation of products, services and business models: SEs respond to basic needs of the local poor by
improving the understanding of, and access to, local resources and technologies. They can also generate goods and
ful private companies), while aligning their services much more closely to the needs of services in ways that reduce the environmental or social problems that private businesses usually create. This is very
local producers, consumers and citizens. At the same time, they avoid the simplistic difficult for large businesses, research institutions or Government agencies to achieve alone.
‘one size fits all’ public services that are provided either directly by governments or • Creating jobs at low cost: Green jobs produce the goods and services required to fulfil everyone’s basic needs in ways
through contracts with private businesses (Palwa, 2012). that regenerate – rather than destroy – the environment. At the same time, they generate the wages that help people to
access these goods and services, and confer the financial security that empower people within their communities. SEs
can create jobs at much lower financial and energy cost – perhaps $100 and 0.1KW/hr compared to $100,000 and 10
DA – claimed as the world’s first social enterprise dedicated to sustainable develop- KW/hr in corporate job creation.
ment - has been behind much of this. It serves the innovation, incubation and imple- • Mobilisation and investment in local capital assets: SEs put local human and
mentation of enterprise development and has shown that small technology investments material resources at the centre of their operations, often combined with inno-
vative knowledge or technology to establish efficient and competitive busi-
through SEs can contribute to big gains in terms of job creation, mobilising local capi- ness models. The results create markets for other local businesses. This may Key definition:
Trickle-down
tals, and improving the quality of services delivered. For example, DA has facilitated the compare favourably with external models, such as development assistance,
This effect is derived from the trick-
which brings external financial and technical resources and hopes for the
establishment of more than a thousand businesses and over a million green jobs since maximum ‘trickle-down effect’. le-down theory in economics, which
its inception, spearheading low-carbon pathways and inclusive growth in rural housing, argues that tax benefits and other
• Incubation of business models to a viable scale: ‘Network enabler’ organiza- economic benefits for corporations
renewable energy, water management, sustainable agriculture, waste management and tions provide integrated services to make the local ventures profitable and, will eventually lead to economic
crucially, to scale them up.
recycling. DA’s lessons on effective SEs are summarised in Box 6.6 (right). gains for the entire society. In other
words, economic growth will be
• Investment in ‘undesirable’ sectors: SEs are increasingly able to draw invest-
ment into sectors that had been considered undesirable by business. They boosted and the benefits will “trick-
are able to demonstrate – at least to social investors – how financial returns le down” to other groups in society.
can be obtained both from the delivery of goods and services (selling to often Adapted from: https://www.investo-
pedia.com
4. Analysis – Institutional reform for inclusive green
poor consumers) and from purchasing goods and services made locally
(buying from the poor).
economy Principal source: Palwa, 2012.
In section 3, we described how we have begun to see a ‘wiring together’ of existing

and new institutions to better support IGE. We noted how some catalytic institutional
innovations at international, national and local levels have helped, along with deploying In this section, we offer an empirical overview of the typical processes of institutional
existing institutional coordination mechanisms at the national level. However, we also reform that can overcome the barriers (4.1) and the characteristics of effective inte-
emphasised how many of the main barriers to a green economy remain institutional in grated institutions that emerge from – or are strengthened by – such processes (4.2).
nature. Hence the importance of system-wide institutional reform.

4.1 The process of institutional reform and tools to adapt – helping stakeholders to navi- suited to one stage more than others. One problem is
towards a green economy gate the pathway. that particular narratives are used, business cases are
made, or instruments used, which do not suit the stage
There is no blueprint for how particular institutions move (iv) Capacity: mobilisation and development of capabili- that the country has reached (e.g. countries at the ‘do
towards a green economy; there is a large diversity of ties – to undertake all tasks involved. no harm’ stage are unlikely to be interested in full natural
contexts. The process is a political and societal one, at Each element on its own is not sufficient for ‘rewiring’ capital accounts or green fiscal reforms). Interven-
least as much as a technocratic one. It can be expected or ‘retooling’ the institutional landscape for inclusive tions must match the stage a country’s institutions have
to take considerable time, over which the institutional green economies. Too often, only a narrow form of the reached, though this can be complicated when a coun-
dynamics will include: growing pressures to change last element – capacity development through short-term try’s business institutions may be more or less progres-
norms, exhaustion of some institutions that become unfit training – is relied on, even where major institutional sive than its government.
in new circumstances, ‘unfreezing’ of other institutions to changes are required. While some elements can be
become more responsive to pressures to change, rede- While a system-wide transformation (i.e. something
formulated in advance, the institutional transformation like stage 4) may seem a far away reality, much can be
ployment of some institutions and spinning-off of new pathway itself is not predictive and cannot be planned
ones, and eventually meta-institutional regime changes achieved through smaller steps, which should be deter-
in a definite manner. Nevertheless, it is of fundamental mined with consideration of sequencing and priorities
including umbrella coordinating institutions (see e.g. importance, the stage a country or sector reaches is, in
Scoones, 2016). at the national level. Such a process could come, for
large part, a strong determinant as to what type of inter- example, in the form of an institutional reform roadmap,
vention will work, as we will explain below. starting with assessing the stage(s) already reached.
Many are searching for a more deliberative and accel-
erated approach to institutional reform, given the institu- While progression is commonly observed towards inte-
tional barriers to inclusive and green economies (UNDP, grated approaches, this does not mean that full integra-
4.1.1 Pathways of institutional transformation – tion of all institutions into a monolithic green economy
2017). It can be considered, that progress should be four basic stages:
evident in four areas: institution is the most effective or efficient approach to
Building on the historical observations summarised in stage 4.
(i) Pathway: an institutional transformation pathway – Figure 2, we can iden-
progressing from institutional silos towards inte- Instead, the ability to engage and mobilise all institu-
tify four typical stages of tions with relevant mandates can be useful (e.g. Involv-
Key
gration. note progress towards integrating various policy-relevant institutions in finance, trade,
(ii) Processes: multi-stakeholder processes involving
This broadly corresponds to the ing inclusion, green and labour, and environmental policy-relevant institutions).
three orders of change noted in
alliances and leadership – creating political and Chapter 10 on financial system economic objectives in a A national institutional framework that embraces many
practical reform ‘space’ to
reform (Hall 1993): our Stage 1 is a typical country or a sector. institutions, taking advantage of multiple network effects
1st order change, where assump-
Key definition: embark on this pathway. tions and paradigms remain fixed. These stages are illus- but ensuring coherent vision and coordination, can be
Institutional silos Stages 2 and 3 are 2nd order or trated in Table 1 below, more effective than comprehensive replacement institu-
Approach which tackles problems incremental changes, through new
in an isolated manner instead of
(iii) Communications: instruments rather than overarching
which implies that certain tions (Nilsson, 2017).
looking at the whole system (see including agreed metrics policy. Stage 4 is a 3rd order major policy ambitions and/or
chapter 1). paradigm change.
instruments will be better

Table 1: Institutional reform towards integrated objectives (sustainable development, GE): a 4-stage empirical framework. Developed from Raworth, Wykes & Bass (2014)
Stages in institutional Level on integration at this stage Current status Catalysts that help this stage
reform
1. Silos - ‘do nothing’ Separate – institutions work separately; Very few countries are still at this stage. Prevailing institutional incentives – incumbent regimes, profes-
and social, environmental, and economic But prevailing incentives can be hard to shift. sional disciplines and elite bargains maintain (and often robustly
objectives are not integrated in practice. defend) silos.
2. Safeguards - ‘do no Checks and balances – between social, Most countries have achieved this stage, with many provisions in Citizen engagement has often pushed for safeguards.
harm’ environmental, and economic objectives legislation. Tools include: Environmental impact assessment; Social Impact
seek a minimal ‘do no harm’ outcome, with But provisions are often misunderstood and ignored in practice. Assessment; ‘alternative livelihood’ schemes; cash transfers or
minor institutional cooperation. compensation.
Safeguards do not enable the major leaps forward that are
required.
3. Synergies - ‘do good Win-wins – between social, environmental, Many countries are at this stage International engagement has often catalysed win-win strate-
win-wins and co-bene- and economic objectives are sought, but Policy discussion is constructive and focused on integrated gies.
fits are limited in extent – to where current insti- schemes. Tools include: Strategic environmental assessment; Payments
tutional and finance rules allow. for Ecosystem Services and conditional cash transfers; joint env/
But win-wins are elusive – just as important is to consider ‘losers’
as well, with ‘just transition’ (see Chapter 5) or at least compen- social protection schemes e.g. jobs through land restoration;
sation mechanisms. certification of production; and Public expenditure reviews on
environment, climate, sustainable development.
4. System-wide reform Full integration – of sustainability, effi- Few countries are at this stage yet. Multi-stakeholder policy/oversight bodies
- ‘do more by changing ciency, equity and long-term orientation. However, the need for an inclusive green economy is understood Primary empowerment e.g. rights reforms and redistributing
the rules’ A truly inclusive, green economy draws by many – institutionally this means: assets
on relevant concepts of circular economy,
• Much better trade-off decisions – with mechanisms to Inclusive formalisation of informality
bio-economy, etc. Addresses structural
analyse and resolve Fiscal reforms pro-green economy, anti-brown economy
barriers to scaling/speeding up the transi-
tion towards green economies. • Changing economic structures so they are inclusive and Wealth/natural capital accounting and other means for better
green decision-making.
What, then, helps countries or sectors to progress 4.1.2 Stakeholder interactions and leadership: in Table 1. Multi-stakeholder processes (MSPs) provide
between the stages? The following section will elaborate this space. The value of MSPs lies in their potential to
on a number of important factors. Financial, juridical, organizational and mental space achieve consensus and pool the necessary resources
is needed for the kind of adaptive strategy required to for the institutional reform that no one stakeholder alone
drive the transition from siloed organizations to full inte- could achieve (or even envisage). MSPs confer legiti-
gration (GGGI et al., 2016), i.e. from stage 1 to stage 4 macy by virtue of whom they involve and the kinds of

information they uncover. Many national and municipal support of green economy, ‘Partnerships have a posi- scale and speed of uptake that we need – hence the
sustainable development councils and green economy tive impact […] through trust-based relationships with need to secure societal demand as a countervailing
cross-ministerial groups attest to this. Indeed, it is no the right people, using the right language, to tackle the force to shape green economies. The likely demands of
longer considered acceptable to proceed with any major right issue, at the right time [...] These intangible ingre- future generations also need to be taken into account
policy change without them. IIED and GEC (2013) offer dients are often the most important and we need to get in political and economic context that tends to often act
guidance on effective national dialogues for stakehold- better at understanding this chemistry and how to make on short-term incentives. One example of how such lon-
ers to address green economy at various levels – vision, it work quicker and at scale’ (3GF, 2016). It concludes ger-term thinking can be incentivized is the Wales’ Well-
purpose, principles, policies, and precise targets for that platform organizations are helpful in scaling up being of Future Generations Act, which requires named
getting there. and increasing the number of such partnerships. 3GF public bodies to ensure this by vesting power in a Future
itself is one such platform for the business world; the Generations Commissioner that provides future gener-
However, there are limits to MSPs, which must be Green Economy Coalition (Box 4) for civil society; and ations a stake in today’s decisions (Welsh Government,
managed. At some point in the encounter between MSPs the Green Growth Knowledge Platform (GGKP) for the 2015).
aiming for green economies and mainstream institutions research and knowledge community. All of these help to
that may perpetuate brown economies, something tends encourage a ‘thick soup’ of partnerships and networks
to give way. There have been too many instances of the aimed at green economy that is accessible to many: this 4.1.3 Tools for institutional reform
MSP being ignored, annihilated, co-opted, dropped, or model is in direct contrast to prevailing models of cen-
at best being absorbed, e.g. NCSD (Dalal-Clayton & Good communication is an especially important quality
tralised institutions.
Bass, 2009). Additionally, there are too few instances that enables institutions to be effective in their own work
where the MSP’s legitimacy is complemented through The institutional landscape evolves in large part because and in their cooperation with others. One barrier to insti-
gaining an independent power base, or changing the leaders push existing institutions into new territory, or tutional reform in the green economy context remains the
way that prevailing power is exercised. While prevailing spot an important gap that leads to the establishment of lack of a common narrative for the IGE. Green economy,
powers very often find a good reason to entertain holistic new institutions. This leadership may come from politi- green growth, green prosperity, low-carbon develop-
MSPs initially (they can gain intelligence and sometimes cal, economic, civil society, technological, or business ment, and sustainable development need some sort
influence from them) they can unfortunately ‘turn off’ the spheres, and often across these spheres, such as the of common messaging if confused stakeholders are
MSP if it becomes threatening. Hence there is a need to South African Green Economy Accord and the global to become more confident to commit. The GEC organ-
institutionalise MSPs’ mandate as a continuing process Green Economy Coalition, thereby widening the ‘owner- ised an informal institutional collaboration group, which
of dialogue and review, for example through national ship’ of the new institutional ideas. One example is the has prepared a common narrative that will best engage
sustainable development or green economy councils, African Leadership Group on Biodiversity Mainstream- the public and subsequently politicians (GEC 2019,
steering groups, accords or parliamentary committees. ing, which includes people from conservation, devel- forthcoming). In addition, establishing new metrics of
opment and finance authorities within and across eight progress is a tough institutional nut to crack (see also
Green economy partnerships and networks also provide African countries (Musasa, 2017). Chapter 10 of this book). Statistical authorities in particu-
the required space. According to the report published lar are the ‘guardians’ of definitions – of what is included,
by 3GF (Global Green Growth Forum) in 2016, which However, there are also limits to relying on leadership. and what is not, when it comes to key measures such as
brings together business-focused partnerships in ‘Top-down’ decisions alone do not always result in the economic success or wellbeing. While there are multiple

alternative measures out there, none has yet become Assessment (SEA), sustainability reporting protocols for • Resource and financial mobilisation and management
mainstream, and are unlikely to become so until the the private sector, environmental economic analyses,
green economy narrative enters day-to-day business. and Natural Capital Accounting (NCA). There have been • Oversight and redress
positive feedbacks between some of these instruments. • Transparency and accountability
Another tool for institutional reform towards an IGE is For example, the findings of a one-off environmental
information and communication technology (ICT) (see expenditure review can create demand for an NCA A second question that needs to be asked is ‘whose
also Chapter 4 of this book on innovation). While the system, so that a continuing track can be kept of stocks capacity?’ We propose that capacity is needed for
role of ICT has not yet been fully exploited, it holds the and flows of natural capital. the functions lined out above at three levels (see also
promise to support multi-factor decisions, enable citizen OECD, 2012; UN-PAGE, 2016): Firstly, individual capac-
engagement in generating and using data, drive new ity - knowledge and skills that help people to build rela-
spatial/resource modelling that green economies need, 4.1.4 Capacity development tionships, trust and legitimacy (‘soft capacities’) and
and do so increasingly in ‘real time’. The qualities inher- interdisciplinary technical and managerial skills (‘hard
A country may have changed its policy, but often this capacities’). Secondly, organizational capacity - organi-
ent in ICTs that support effective institutional arrange-
is not matched by investment in the social and human zational structures, systems and teams that bring indi-
ments for green economies have been spelled out by
capital needed to carry it out. Green economy will vidual capacities effectively together, preserving conti-
ECOSOC in the following way: “ICTs enable collabora-
require new organizational capabilities to plan, imple- nuity through staff turnover. And thirdly, institutional or
tive, integrated and coordinated action across public
ment and review reforms – and thus also new skills and enabling environment capacity - cross-sectoral policy,
sector agencies and between the public sector and
behaviours among the many professionals who work in legal, regulatory, economic, scientific, information and
other actors. ICTs make governments transparent and
government as well as those across the business and social support systems to encourage and require indi-
accountable; harness and distil vast amounts of data to
financial sectors. viduals and organizations to contribute to sustainable
assist with policy planning; and (promote) data and ana-
lytical tools for measuring progress” (ECOSOC, 2017b), Capacity development is a huge subject, outside the development.
and further, Electronic governance helps to ensure scope of this chapter. It begs the question ‘capacity
institutional transparency and improve service delivery for what?’ In brief, this means capacities to operate the
and is becoming a ‘must-have’ even in poor countries entire ‘institutional cycle’, i.e.: 4.2 Characteristics of enabling institutions
(ECOSOC, 2017a). Thus, it can be subsumed that ICTs
are increasingly a central part of democratic and public • Data and knowledge access This chapter has demonstrated that there is much to
administration reform with high relevance to the transi- learn about the kinds of institutions that are needed for
• Analysis, learning and review an inclusive green economy. Based on the initial syn-
tion to an IGE.
thesis of literature and case studies to date, and taking
• Participation among stakeholders
Apart from communication and informational tools for into account SDG16, which addressed institutional chal-
driving institutional reforms, many analytical instru- • Policy dialogue and formulation lenges (Box 6.7), we can propose a dozen tentative
ments play an important role, as shown in the right-hand characteristics of institutions that are ‘fit’ for green econ-
column of Table 1. They include public environment and • Law and standard-setting omies while acknowledging the large diversity of institu-
climate expenditure reviews, Strategic Environmental • Planning and coherence tional contexts and needs (Box 6.8).

oped successfully, and that no ‘standard’ form
Box 6.7: Social enterprise - a promising of institutional set-up exists. Box 6.8: Tentative characteristics of institutions ‘fit’
driver of green economy at local levels Instead of using the above criteria in a pre- for green economies
SDG 16 includes several targets that suggest the qualities that institu-
scriptive manner, Green economy strategies at 1. Voice and inclusion – participatory, trust-building and empowering – especially of poor
tions should have if they are to be effective in the transition to sustainable various levels may use the above characteris- and marginalised groups; demonstrating clear social purpose and participation in gover-
development (our emphases in italics): tics as diagnostic criteria for institutional reform. nance.
16.3 Promote the rule of law at the national and international levels and 2. Rooted – in local contexts, capabilities and needs. Embracing domestic cultural, politi-
ensure equal access to justice for all;
5. Conclusions cal, economic and social processes that support GE, and thus ‘owned’ by stakeholders.
16.5 Substantially reduce corruption and bribery in all their forms; 3. Future-oriented – clear vision, long horizons. Responsive and adaptive, not only focus-
Although many countries have to date devel- ing on short-term stability but also long-term wellbeing of future generations.
16.6 Develop effective, accountable and transparent institutions at all
levels; oped green economy transition plans, the lack 4. Holistic and systemic – integrated, interdisciplinary, and internalizing externalities.
of efficient, capable institutions is one of the Respecting both ecological and social limits in planning, incentives and implementation.
16.7 Ensure responsive, inclusive, participatory and representative deci-
sion-making at all levels; persistent obstacles to IGE progress. Only 5. Networked – linking actors horizontally and vertically, and across knowledge systems.
transparent, competent, resilient and enabling Supporting coherence, collaboration and coordination, and not overly centralized.
16.8 Broaden and strengthen the participation of low-income countries in
the institutions of global governance; institutions can ensure that sustainable devel- 6. Wealth-building – helping stakeholders to understand, manage, grow and track the
opment is taken into consideration in the deci- capitals needed for inclusive green economy, and make sustainable trade-offs.
16.10 Ensure public access to information and protect fundamental free-
doms, in accordance with national legislation and international agree- sion-making process, and that all societal 7. Resilient – effective means for feedback, learning, adaptation, prioritization and
ments ; groups are represented and participate. grant resourcing.
16.b Promote and enforce non-discriminatory laws and policies for sus- representation and participation to all societal 8. Legitimate and clear mandate – rooted in the constitution and legal regime, accepted
tainable development . groups. Developing such institutions will not as right and proper, reflecting societal demand and consensus, and autonomous from short-
term political pressure and vested interests.
follow a single model in all countries. Institu-
tions are complex and diverse and shaped 9. Upholding the rule of law – protecting rights and fundamental freedoms, reducing
bribery and corruption, and promoting informed consent and the body of sustainable devel-
by their historical, geographical, political and opment law.
Whereas not every characteristic will be a prerequi- cultural contexts. If new institutions gain com-
site for every institution, organization, rule or norm (and mitment from stakeholders, to coordinate effec- 10. Evidence-based and -sharing – founded on sound science and local knowledge;
ensuring access and welcoming and responding to diverse information and learning loops.
instead might pull the former in too many dimensions) – tively among them and to increase cooperation
their absence across the national institutional landscape for an IGE, they will need to be tailored to local 11. Accountable and transparent – institutions are able to account for performance, trans-
parent and open about the quality of that performance, and subject to independent oversight.
can make the reform process very fragile. However, needs and circumstances. They will build on
overall, the outline characteristics remain quite general, what works in context. 12. Competent and adequately resourced – finance and expertise are secure but respon-
sive to need, with mechanisms to mitigate risks and avoid performance dropping off.
and a wide variety of institutions in government, busi-
ness or civil society could achieve and demonstrate This chapter has explored promising institu-
those. Nevertheless, it is useful to emphasize that many tional various reforms and innovative measures
different types of institutions may be selected or devel- in diverse contexts including new regulations
for sustainable development, the establishment

of national environmental authorities and cross-sectoral procurement, production methods, training and market- In summary, this chapter aimed to convey that it is time
authorities and international green economy institutions, ing. to identify and invest in institutions that are ‘fit’ for driving
including PAGE, GGKP, GGGI, and GEC. But there is and delivering inclusive green economies. They will be
more to be explored and achieved beyond the scope of From successful examples of institutional reform the especially critical for shaping local and national econ-
this chapter, especially to foster capacity for implement- chapter has derived characteristics to build institutions omies in which people and nature thrive together. And
ing and delivering IGE objectives- the long term ‘messy for inclusive green economy. We have also learned why they will embrace the objectives and demonstrate the
business’ of changing the way core economic sectors careful planning is necessary, which lays out concrete characteristics that may eventually inform a global meta
such as construction or agriculture reform their planning, processes to implement for institutional change. The institution- a common global IGE.
chapter has furthermore demonstrated the need for all
stakeholders to be involved in such processes.

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CHAPTER 7: INCLUSION, POVERTY REDUCTION &
GENDER EQUITY FOR A GREEN ECONOMY
CHAPTER 7: INCLUSION, POVERTY
REDUCTION & GENDER EQUITY
FOR A GREEN ECONOMY
LEARNING OBJECTIVES Paul Steele
This chapter aims to enable its readers to: International Institute for Environment and Development
• Outline the main challenges facing humanity and analyse their drivers; Paul Steele is Chief Economist at the International Institute for Environment
and Development (IIED) where he focuses on financing for the SDGs and
• Articulate how the inclusive green economy model seeks to address these chal- Incentives for an inclusive, green economy. He spent eight years with the
lenges; and United Nations Development Programme (UNDP) in Bangkok working with
Ministries of Finance in Asia Pacific on climate and development finance.
• Understand the major characteristics that underpin national strategies on For four years he worked with the Department for International Development
inclusive green economy, the related analytical tools, key actors and initiatives (DFID), UK as the only environmental economist and focused on poverty and
as well as the critical role of public policy in turning the inclusive seen economy environment issues in Africa and Asia. He holds an MSc in Environmental
Economics from London University and a BA in Politics, Philosophy and
model into practice. Economics from Oxford University.
CHAPTER 1: INCLUSION, POVERTY REDUCTION AND GENDER EQUITY FOR A GREEN ECONOMY 7.2
CHAPTER CONTENTS gender equality in the context of a green economy tran- For these purposes, inclusion is defined as the pro-
sition (a case which has recently been strengthened by cesses of overcoming social exclusion through poverty
Foreword the Sustainable Development Goals), and examines the reduction, or of addressing discrimination against a dis-
instrumental case for why this transition will improve the advantaged social group, such as women.
1. Poverty, inclusion, and gender equity: sta-tus health, livelihoods, and vulnerability of poor women and
men. Section 3 then presents economic theory, model- At the global level, absolute poverty (using the inter-
and trends national poverty line of US$1.90 per day) has fallen
ling statistics and empirical studies to demonstrate the
2. Why a green economy transition should links between green economy transition and poverty considerably over the past 15 years – both in terms of
numbers, and as a percentage of the world’s popula-
contribute to inclusion, poverty reduction, and reduction, income, and gender equality. Section 4 con-
tion. Almost 1.1 billion people were lifted out of poverty
siders the trade-offs between inclusion and a green
gender equality: Intrinsic versus Instru- economy transition, as well as how these might be between 1990 and 2013. However, still 766 million
mental approach addressed (such as through price increases for fossil of people were living on less than US $1.90 a day in
fuels). 2013, as estimated by World Bank (2017). However,
3. Theory and data of how green economy the remaining poor population is often difficult to reach.
transition matters for inclusion, poverty re- By doing so, the chapter aims to enable the reader to Many of them live in remote rural areas with little access
better reflect upon the fact that a green economy tran- to share the common wealth achieved by their city or
duction and gender equality
sition does not automatically enhance social justice in country. They are frequently living on poor quality land
4. Managing trade-offs : Why inclusion, poverty developing countries. Indeed, social justice cannot be and far from formal markets, generally find themselves to
reduction and gender equality are enhanced unless the transition is complemented by inte- be politically invisible, in some cases. Only a deliberately
grated policies that ensure that the externalised costs of inclusive approach will succeed in reaching them.
not inevitable outcomes of a green economy greening the economy do not fall on those that are living
5. How to increase inclusion, poverty reduc- in poverty. Finally, Section 5 presents illustrative exam- In addition, the advancements to fight poverty have
ples of how inclusion, poverty reduction, and gender been predominately driven by pro-poor growth in both
tion, and gender equity as outcomes of green China, and more recently, in India. Due to the huge size
equality can be improved under a green economy transi-
economy transition tion, focusing on four main approaches: empowerment, of their populations, improvements in these two coun-
tries mask underperformance elsewhere, and particu-
6. Conclusion integrated institutions, inclusive finances, and metrics.
larly in some African countries. In addition, there are still
hundreds of millions of people that continue to live just
Foreword above the official poverty lines with few safety nets, low
This chapter will begin by discussing the status and 1. Poverty, inclusion, and gender job security and limited physical and social infrastruc-
ture. These people therefore remain highly vulnerable
trends of the key aspects of inclusion, focusing on
poverty, equality, and gender equality in developing
equality: status and trends to the effects of conflicts, economic shocks (as in the
2008 global financial crisis), or climate impacts (such as
countries. Section 2 introduces the intrinsic case for This section will examine and review the global status
establishing the links between inclusion, poverty, and and trends on poverty, inclusion, and gender equality.
tries (with some emerging economies experiencing as estimates of female infanticide, gender-based vio-
rapid levels of growth), wealth within most coun- lence, and cases of child marriage, show that women
tries is becoming increasingly concentrated in the and girls still remain seriously vulnerable in many coun-
hands of just a few individuals. Indeed, a recent tries.
study conducted by Oxfam found that just eight
individuals now possess more wealth than the 3.5 Another area of exclusion that has been receiving
billion people living in the “bottom half” of the global increasing recognition is disability. Estimates of its prev-
population (Oxfam, 2017). Rising inequality is often alence are challenging due to the lack of uniform under-
accompanied by polarised levels of education, standing on, or definition of, what disability is, as well as
health, and mobility, each of which further exacer- a lack of national data allowing for international compar-
Figure 1: Paradox of global GDP growth alongside persistent poverty. ison. The most comprehensive estimate of global prev-
(Left-hand figure of World real GDP based on Tani, 2016 and right-hand bate the imbalances of power – fuelling exclusion
figure from Chen and Ravallion, 2012). at the cost of future economic growth. Indeed, the alence is from 2011, when the WHO/World Bank’s World
2013 UNDP Human Development report found that Disability Report synthesized data collected from 59
countries with high inequality suffer from slower countries through the World Health Surveys from 2002 to
floods and droughts), each of which can cause them to 2004, and which was based on a ‘functioning’ approach.
growth rates than countries in which incomes are distrib-
fall back below the poverty line. From this, the 2011 report estimated the global preva-
uted more equally (UNDP, 2013). There is now growing
political momentum in many countries to address lence of disability to be at 16 per cent, with a lower prev-
The geography of poverty is also changing. Already,
inequality, even if it is phrased in more politically accept- alence of 12 per cent in higher income countries and a
more than half of the world’s poor now live in Sub-Saha-
able terms, such as ‘inclusion’. higher prevalence of 18 per cent in lower-income coun-
ran Africa, and this number is set to increase further by
tries (WHO/World Bank, 2011).
2030 (World Bank, 2016). Out of the eighteen countries
Gender inequality also remains a stark global issue. In
in which the number of people living in absolute poverty
this regard, data shows that women complete at least
is rising, fourteen are located in Africa (Kharas et al.,
twice as much unpaid domestic and care work as men.
2018). These countries also represent some of those
most at risk to challenging social and political conflicts,
Even where women provide more agricultural labour, 2. Green economy transition’s
and climate extremes. And, while poverty remains pri-
most agricultural land is still owned by men: in India,
Nepal, and Thailand, for example, less than 10 per cent
contribution to inclusion,
marily rural, urban poverty has now also increased to 20
per cent of the total poor. This is due in part to increas-
of women farmers own the land that they farm, while in poverty reduction & gender
ing rural-urban migration, with it being estimated that up
Kenya this figure is only 1 per cent, despite women pro-
viding 70 per cent of the agricultural labour (IFAD, 2008).
equality: Intrinsic &
to 80 per cent of the total population in some cities now
living in slums (World Bank, 2016).
However, some improvements have been made and instrumental approach
provide hope for the future: 20 per cent of parliamen-
tarians worldwide are women, and many countries now There are both intrinsic (i.e. moral) and instrumen-
The challenge of tackling relative poverty now also
have almost 100 per cent enrolment of girls in primary tal arguments for the transition to a green economy to
takes place in a global context or rising and widespread
address poverty and inclusion issues.
inequality. While wealth is expanding between coun- education (IPU, 2014). However, other indicators, such
• First, the intrinsic argument views inclusion, poverty On the other hand, the instrumental view of the interlink-
reduction, and gender equality as fundamental under- Box 7.1: Selected SDGs will drive some ages between poverty, inclusion, gender, and a green
pinning of a green economy transition. This position is economy transition focuses on ‘cause and effect’. In this
supported by the UN’s Declaration of Human Rights aspects of an inclusive green economy way, the transition to a green economy can contribute to
and many other UN Conventions related to develop- SDG 1: End poverty in all its forms everywhere. the ‘effects’ of poverty reduction, inclusion, and gender
ment and poverty reduction, which explicitly call for SDG 2: End hunger, achieve food security and improved nutrition and equality by first reviewing which environmental issues
these to be prioritised within national policies. promote sustainable agriculture. this transition will ‘cause.’ Then those that are most likely
SDG 5: Achieve gender equality and empower all women and girls. to threaten the health and livelihoods of poor women and
• Second, the instrumental view submits that if complemen can then be addressed on this basis (DFID et al.,
mented by targeted, integrated policies, the transition SDG 6: Ensure availability and sustainable management of water and
2002).
sanitation for all.
to a green economy will contribute to poverty reduc-
tion and enhance inclusion. SDG 7: Ensure access to affordable, reliable, sustainable and modern
energy for all.
Our focus here is primarily on the instrumental view, as SDG 8: Promote sustained, inclusive and sustainable economic growth.
2.1 Environmental health of poor people
the intrinsic view is determined by definitional consid- and transition to a green economy
SDG 10: Reduce inequality within and among countries.
erations. For instance, if by definition a green economy
is required to contribute to poverty reduction then the SDG 11: Make cities and human settlements inclusive, safe, resilient and While the provision of water and sanitation has improved,
transition will necessarily be inclusive. In this regard, it is sustainable. many poor people still lack regular and safe access. In
important to note that the intrinsic view recognising the SDG 16: Promote peaceful and inclusive societies for sustainable devel- 2012, 89 per cent of the world’s population had access
interlinkages between green economy, poverty, inclusion opment. to an improved drinking water source (up from 76 per
and gender equality has recently been endorsed under cent in 1990), which still left almost 750 million people
the 17 Sustainable Development Goals (SDGs), which exposed to, and relying on, unsafe water sources
were formally agreed and launched by all countries at (UNDP, 2014). And while sanitation coverage increased
The 17 goals and 169 indicators may be complex, but from 49 per cent to 64 per cent over this same period,
the United Nations General Assembly in September sustainable development (SD) is inevitably a multi-di-
2015. over a third of the world’s population, almost 2.5 billion
mensional endeavour, and especially when applied people, continue to live without sanitation, with one
Up to this point, progress on issues of poverty, the to all countries and all people. Importantly, equity and billion of these still forced to resort to open defecation
environment, and economic growth had largely been inclusion are central components to half of the Goals (UNDP, 2014). Moreover, these water and sanitation
pursued independently. Indeed, certain SDGs (see Box shown in the box, and the SDGs commit countries to end metrics are often inadequate, with “improved” water
7.1 below), whilst not being without their critiques, do extreme absolute poverty by 2030: a global commitment sources and sanitation types not reflecting real needs
provide a platform for joint action on poverty reduction, that would have seemed naïve even a decade ago. In observed on the ground — a reflection of the failure to
inclusivity, and environmental sustainability, based on the this regard, the SDGs aim to drive inclusive green growth include people when defining the targets.
high degree of consensus between countries and stake- at the national level, since the 2030 Agenda applies uni-
holders that the SDGs represent. versally and equally to all countries across the globe. In addition, deaths from the effects of air pollution con-
tinue to rise, with indoor air pollution, which affects the
very poorest members of society. In 2012, around 7 dependent on agriculture; 1.6 billion rely on forests; and more traditional resource
Key concept:
million people died as a result of air pollution exposure a further 250 million on fisheries (Lee, 2012). Natural Governing the commons management approaches
– one in eight of total global deaths,: 4.3 million from capital is therefore critical for low-income countries — Good examples from Ostrom’s (such as small-scale irri-
‘Governing the Commons’ (https://
indoor air pollution, mostly resulting from cooking with forming 25 per cent of national wealth, compared to just wtf.tw/ref/ostrom_1990.pdf) are: gation and traditional
biomass, and 3.7 million from other effects of outdoor air two per cent in those countries which are members of Torbel in Switzerland (p. 61), Hira- fishery management
no, Nagaike and Yamanoka villages
pollution (with 1 million deaths being attributed to over- the Organisation for Economic Co-operation and Devel- in Japan (p. 65), Spanish Huerta regimes in South Asia),
lapping causes) (WHO, 2014). Of the 4.3 million deaths opment (OECD) (World Bank, 2006). irrigation institutions (p.69) and as well as those that are
irrigation communities in Philippines
attributed to indoor pollution, most of the victims are (p.82). Further resources:
more contemporary (such
women and young girls, who spend most of their time This explains why farming, forestry, and fisheries make https://www.youtube.com/ as community manage-
with the ‘killer in the kitchen.’ (WHO, 2004). up 57 per cent of what has been called ‘the GDP of the watch?v=Qr5Q3VvpI7w
ment forestry in Nepal
poor’ in India, even if they contribute just 7 per cent to Switzerland: https://houseofswitzer-
and elsewhere) (Ghate et
land.org/swissstories/environment/
Since 2012, the proportion of the world’s population India’s formal national GDP. It is also why forest com- swiss-village-changed-ecology- al., 2008). In this respect,
living in slums, and specifically urban residents in devel- munities choose to invest an estimated US$2.5 billion of twice Japan: https://www.youtube.
the adoption of collective
com/watch?v=GFVwm3earxU
oping regions, has fallen from 40 per cent to 33 per cent. their own labour and inputs each year into sustainable Spain: https://dlc.dlib.indiana.edu/ management approaches
However, the rapid rate of urban population growth has forestry — a figure that is higher than the combined dlc/bitstream/handle/10535/10135/
under a green economy
ORTEGA.pdf?sequence=1&isAl-
meant that the actual number of people living in slums yearly contributions of all international organisations put lowed=y Philippines: https://www. transition can contribute
has risen considerably, from 650 million in 1990, to 760 into forestry aid (ITTO & RRI, 2007). youtube.com/watch?v=yNQcOvn-
to poverty reduction by
QY4g
million in 2000, and reaching 863 million in 2012 (UNDP, increasing the social and
2014). These slums are known for having poor environ- In this regard, many poor groups have developed
the skills to successfully manage natural capital, and institutional capital of poor
mental conditions which have a corresponding negative women and men.
impact on human health, such as poor water and sani- numerous examples of community managed natural
tation, indoor air pollution, exposure to vector-borne dis- resources in drylands, croplands, forests, and fisheries
eases (such as dengue fever) from a lack of drainage, have been well-documented by anthropologists. Ini-
and vulnerability to climate change-related flooding. tially, economists focused on the so-called “tragedy of 2.3 Poor people vulnerability and
the commons,” which undermined the effectiveness of transition to a green economy
community management approaches. More recently,
however, this narrative has changed, and the “tragedy Climate change is now almost universally recognized
2.2 Livelihoods of poor people and of open access” now acknowledges the inefficiencies of as posing a huge short-term threat to poor economies,
transition to a green economy open access approaches, with the collective manage- and particularly to the very poorest members of the pop-
ment of natural capital serving to address these. Elinor ulation. This discourse has shifted from concern over
The poorest members of society disproportionately rely impacts on future generations to the realisation that
on available natural assets such as forests, fisheries, Ostrom, the Nobel Prize-winning economist, focused
her work on documenting what made these collective climate change is already having significant impacts –
and farmland for their livelihoods, nutrition, health, and increasing the intensity and frequency of natural disas-
employment, and this is especially the case in rural management schemes successful (Ostrom, 1990), and
her theories have now been applied to both older and ters, the economic damages from which exceeded
areas. Some 2.6 billion people are either partially or fully US$380 billion in 2011 alone. While the financial impacts
of these are greater in emerging economies, the toll on 3. Theory and data of how green 3.1 Theoretical literature on a green
society and human life hits small, low-income countries economy transition in low-income
the hardest (World Bank, 2012a). economy transition matters for
countries
Within this context, evidence increasingly suggests inclusion, poverty reduction and
There is now emerging theoretical literature on the
that women and other excluded groups are particu- gender equality effects of a green economy transition within low income
larly exposed to the effects of climate change. The
Inter-Governmental Panel on Climate Change (IPCC, This section presents economic theory and data from and less developed countries. This literature has been
2014) concluded that: “Differences in vulnerability and modelling and empirical studies which consider the links produced both by international organisations such as
exposure arise from non-climatic factors and from mul- between a green economy transition and poverty reduc- the World Bank and the United Nations, and by more
tidimensional inequalities often produced by uneven tion, income, and gender equality: academic economists (Scott et al, 2013; Barbier, 2013;
development processes (very high confidence). These Dercon, 2011; Hallegate et al., 2012). The only applied
Section 3.1 presents the proponents and critics of the work to have been conducted tends to be advocacy
differences shape differential risks from climate change. theoretical linkages between growth and development,
[…] People who are socially, economically, culturally, analysis, made by green growth exponents such as the
in the context of a green economy transition in low New Climate Economy (eg. NCE and GoU, 2016).
politically, institutionally, or otherwise marginalized are income and least developed countries. The proponents
especially vulnerable to climate change and also to of these linkages focus on the instrumental justifications It is submitted that the literature that has been critical
some adaptation and mitigation responses (medium that were briefly introduced in Section 2. Critics of these, of a green economy transition is constrained by seeing
evidence, high agreement). This heightened vulnerability on the other hand, tend to focus on shorter-term green the goals of economic policy (i.e. to deliver growth and
is rarely due to a single cause. Rather, it is the product economy issues, while ignoring the effects of distribu- employment) in the aggregate and over relatively short
of intersecting social processes that result in inequalities tion and equality over time. Section 3.2 presents some of term periods, while generally ignoring the long-term
in socioeconomic status and income, as well as in expo- the data that is available for these linkages, with a focus effects of distributional issues or other social goals. As
sure. Such social processes include, for example, dis- on modelling and some empirical data taken from Ethi- such, some of the critiques in this section are limited and
crimination on the basis of gender, class, ethnicity, age, opia and Uganda. In this regard, the limited observable partial when considering poverty reduction and inequal-
and (dis)ability.” empirical data is highlighted. Section 3.3 then presents ity as explicit long-term goals and objectives.
the linkages between a green economy transition and
Some publications, by international organisations such
income inequality, with a focus on equality of incomes,
as the OECD and World Bank, have argued that a green
natural resource access, and climate vulnerability
economy transition in developing countries is ‘neces-
and emissions. Finally, Section 3.4 considers a green
sary to achieve sustainable development’ (World Bank,
economy transition in the context of gender equality,
2012). This core argument, as Resnick et al. submits, is
and examines both the traditional literature focusing on
based on the evident failings of following the ‘conven-
the unequal burdens of environmental degradation, as
tional development theory’ path (Resnick, 2012). Indeed,
well as a more radical feminist interpretation of a green
upon reviewing publications by the World Bank, ADB,
economy transition being needed to free women from
ESCAP, UN Environment, and OECD, and based on
patriarchal economic systems.
hypothetical and empirical analysis, Scott et al. (2013) A second critique raises the opposite concern – that their comparative advantages and past investments,
argue that green economy can bring ‘poverty reduc- green growth is too closely linked to the earlier eco- economically costly and face popular resistance’.
tion, economic growth, reduced vulnerability to climate nomic models of neoclassical growth (see Chapter 2).
change and natural disasters, greater energy security, For instance, Becher (2012) argues that ‘the assumption This literature also considers the potential impacts a
and more secure livelihoods for those directly dependent underlying economic policies – that growth automatically green economy transition can have on jobs in develop-
on the use of natural resources’. brings prosperity, or for that matter, greater justice – has ing countries. A green economy requires low-carbon
proven to be false’. These arguments similarly oppose climate resilient investments and investments in natural
However, at least two main economic critiques to the the financialization of natural capital, which is framed capital to create green jobs (Bowen & Kuralbayeva,
literature relating to development and poverty reduc- within the traditional neo-liberal economy mode of think- 2015). Green livelihoods therefore depend on the cre-
tion have been put forward. As a sceptic of the green ing (Scott et al., 2013:5; McAfee, 2012). ation of entrepreneurial opportunities and decent jobs,
economy model, the economist Dercon (2012) argues and to this end a green economy can influence the
that ’conventional growth may provide a more rapid The emerging theoretical literature also focuses on two labour market by creating new employment opportu-
route out of poverty.’ Dercon further argues that given necessary components for a green economy transition: nities where previous jobs had been lost (see Chapter
their level of poverty and high dependency on natural state capacity and sufficient finance. A green economy 5 for a full discussion of the impact of Green Economy
resources and natural capital, the ‘poor are likely to often requires, at the initial stage, state structural trans- on labour). In this regard, the proponents of green
suffer most due to their low resources for mitigation and formation and huge capital investment. However, chal- economy argue that the overall net expansion of jobs
for investment in adaptation’ (2011). In addition, con- lenges regarding the ‘absorptive capacity’ for innova- would have a positive effect (OECD, 2013). This is par-
cerns have been raised regarding the trade-offs that tive green technology among developing countries is ticularly important when taking into account the high
must be taken for advancing green economy transitions evident, and the transition may be ‘too costly for LICs youth unemployment rates in most low-income countries.
within national development strategies. As Resnick et and potentially a constraint on their economic develop- However, countering this position, some writers contend
al. (2012:1) argue these pose ‘more trade-offs than is ment’ (Scott et al., 2013:10-12). The question of afford- that the technological advancement and mechanisa-
readily acknowledged’. Here, it is submitted that the ability then, with many developing countries already tion of several economic sectors, as part of a green
focus of green growth strategies essentially remains to facing overstretched public finances, is important. economy transition, can lead to unemployment among
reduce carbon emissions, and that doing so requires the poor who live in both urban and rural areas. These
that countries deviate from both the prescriptions of con- In this regard, there have also been huge disparities economists argue that a green economy is anticipated
ventional development theory, as well as their current between the levels of climate finance awarded to devel- to be highly based on certain technology and industri-
development trajectories. Therefore, while the long-term oping continents, with Asian and Latin American coun- alisation processes, and that these may benefit more
environmental benefits in this context could be size- tries receiving a significantly greater amount than their educated, skilled workers; and this can negatively affect
able, the initial short-term societal and economic costs African counterparts do. It is therefore submitted that, in the millions of poor people whose livelihoods depend on
are likely to be particularly felt by the poorest members Africa, the proposed economic transformation under a labour-intensive employment, especially in agriculture
of society. These trade-offs are explored further in green economy can potentially be an obstacle for growth (Barbier, 2015).
Section 4. and poverty reduction. Indeed, in the cases of Malawi,
Mozambique and South Africa, Resnick et al. (2012) Finally, the literature also speaks about the need to
conclude that green economy ‘may be inconsistent with ensure that natural resource revenues are carefully
managed in order to benefit the poor and to sustain ‘lack of a model’ is indeed creating uncertainty for devel- mation Plan. Our goal is quickly to improve the living
future finance flows — maintaining these as a resource oping countries in pursuing a green economy transition. conditions of our people by reaching a middle-income
‘blessing’ rather than a resource ‘curse’ (Auty, 2001). status by 2025 based on carbon-neutral growth.”
Revenue flows from natural resources — such as min- However, some countries are nevertheless making
erals, land, forests, and fisheries — are more critical to attempts to seize opportunities that might be presented (FDRE, 2011: 5)
low-income than to high-income countries, a depen- by pursuing a green economy transition, and reviewing
some of these national initiatives can provide a basis To this end, it is stated that the CRGE, which deploys
dency that has increased with commodity price booms a ‘sectoral approach’ and identifies more than 60 pri-
(Isham et al., 2005). It is therefore vital that these reve- for developing corresponding activities. Some of the
countries that have taken these steps include Columbia, oritised national initiatives for advancing the green
nues are used in ways that benefit the poor, both through economy transition, can enable Ethiopia to become a
revenue-sharing schemes, and to secure future revenue China, India, Ethiopia, and Uganda. For now, our focus
here is on Uganda and Ethiopia, and the green economy middle-income country ‘while limiting 2030 GHG emis-
streams through the management of the natural resource sions to around today’s 150 Mt CO2e – around 250 Mt
base (Ploeg, 2011; OECD, 2008). transition in an African context. Sub-Saharan Africa had
the biggest group of people in extreme poverty com- CO2e less than estimated under a conventional develop-
pared to other regions in the world in 2015 and the World ment path’ (FDRE, 2011).
Bank (2017) projected the trend to continue until 2030.
3.2 Applied economic literature on a In line with the theoretical literature examined in Section
3.1, these country modelling calculations conducted at
green economy in low-income Advancing the green economy agenda is seen, for gov-
the national level highlight the need for major financing,
countries: Country data ernments of the global south, to be part of their foreign
policy and diplomatic efforts to create a positive state often with huge external investment, to unlock the full
There is limited data from modelling or actual empirical image or brand at the global level (Death, 2011). Ethio- potential of a green economy transition. For instance,
work conducted on the interlinkages between poverty pia, while representing African interests at COP15, took in Uganda it is estimated that an annual investment of
reduction, development, and the transition to a green on a leading role in elaborating the common position of US$1.8 billion is needed until 2020 to meet its green
economy in low-income countries. As Scott et al. (2013) the African countries and, in doing so, served to create a economy objectives (NCE & GoU, 2016). In the case of
pointed out, macro-level ‘research on the costs and ben- new state brand at the global stage. Indeed, while Ethio- Ethiopia, initial estimates for achieving a green economy
efits’ of a green economy transition has not yet been pia is a low-income country, it decided to be a leader in detailed a total expenditure requirement of around
carried out within many developing countries. This lack the global and national greening agenda by launching US$150 billion over the next 20 years, ‘with around US$
of a green economy ‘champion’ for a model transition its Climate Resilient Green Economy (CRGE) Strategy in 80 billion of required funding estimated to be capital
within a developing country context, and the subsequent 2011. The following quote, made by the late Prime Min- investment and the remaining US$70 billion assessed
unproven results (Jacobs, 2013) is creating uncertainty ister Meles Zenawi, reflects the new ambitious direction as being necessary to cover operating and program
and deterring many developing countries from pursuing that the country decided to pursue. expenses’ (FDRE, 2011). The CRGE, recognising this
this approach. Developing countries are struggling to huge financing gap, calls for the mobilization of addi-
find a showcase “green economy country” with a similar “We have therefore embarked upon the development tional resources from both international climate finance
initial level of economic development but reaching a of a CRGE strategy addressing both climate change and the private sector, requiring additional state capac-
high degree of economic growth with the transition. The adaptation and mitigation objectives […] which will be ity and the development of a CRGE Facility to oversee
fully integrated into our five-year Growth and Transfor- this project preparation. To this end, the CRGE Strat-
egy reformed the Environment Protection Authority to ‘boost to economic activity, worth around 10 per cent
give it the status of an executive body with a ministerial Box 7.2: Organic agriculture in Uganda of GDP by 2040 compared to business as usual (BAU)
mandate – making it the Ministry of Environment, For- deliver employment of up to 4 million [green] jobs; and
estry, and Climate Change. Inclusive green economy within the agriculture sector would entail an reduce future greenhouse gas (GHG) emissions by
increase in sustainable farming practices, including organic production,
and an increase in food productivity. Agriculture is a dominant sector in 28 per cent relative to a conventional growth pathway’
However, despite the initial investment required, Ethi- most African economies, accounting for 32 per cent of Africa’s GDP and (Ibid). For instance, Uganda plans to create up to 4
opia’s transition to a green economy is expected to supporting about 65 per cent of the labour force (AGRA, 2013). As such,
million green jobs by 2040 (NCE & GoU, 2016). While
targeted green investment in the sector could yield long-term positive
provide significant positive pay-offs. Indeed, ‘for more results and generate the highest social impacts with regards to the some of these green job opportunities are projected on
than 80 per cent of the abatement potential, abatement economy and food security.
the basis of future initiatives, there is evidence of some
costs are less than US$15 per Mt CO2e. Many of the ini- In Eastern Africa, the amount of land under organic production has progress already being made in Uganda, such as in the
tiatives offer positive returns on investments, thus directly been expanding. Between 2000 and 2012, land under organic produc-
sector of organic agriculture (see Box 7.2).
tion grew more than 20-fold (UNECA, 2016). Uganda currently has the
promoting economic growth and creating additional biggest proportion of land under organic cultivation (Willer and Lernoud,
jobs with high value-added’ (NCE & GoU, 2016). The 2014), and accounts for 16 per cent of Africa’s total. Ethiopia and the To conclude, modelling data is starting to emerge on
United Republic of Tanzania also have significant areas of organic agri-
ambitious strategy to transform Ethiopia to a middle-in- cultural land, with 13 per cent and 12 per cent respectively.
how a green economy can contribute to development
come status, and in a short timeframe, has prioritised in low-income countries, but this is still primarily based
In Uganda, organic products represent an important source of export
the forestry, agriculture, energy, and transport sectors for earnings for the state, and provide revenue for smallholder farmers.
on hypothetical modelling promoted by exponents of
investment. For instance, the huge hydropower poten- Certified organic exports increased from US$3.7 million in 2003-2004 to a green economy transition. Meanwhile, critics of this
tial of the country, demonstrated through megaprojects US$6.2 million in 2004-2005, before jumping to US$22.8 million in 2007- transition focus primarily on the possible imposition of
2008.
like the Renaissance Dam (with about 6,000 megawatt short-term societal and economic costs on the poorest
capacity), is expected to positively contribute towards Through organic farming, Uganda not only gains economically but also members of society. However, it is argued that these
contributes to mitigating the effects of climate change, as greenhouse
the country’s generation of clean energy. emissions per hectare are estimated to be on average 64 per cent lower critics fail to properly consider long-term sustainability of
than emissions produced on conventional farms. In sum, Uganda has traditional growth models, and whether these will lead to
Similarly, Uganda’s national green strategy aims to make taken an apparent liability – limited access to chemical inputs – and
lasting poverty reduction. This dichotomy arises from a
turned this into a comparative advantage by growing its organic agri-
it an upper-middle income country by 2040, and ‘a green culture base, thereby generating revenue and income for smallholder lack of observable empirical data and actual experience
growth leader in the region’ (NCE & GoU, 2016: v-vi). To farmers.
over time. While this section has identified some excep-
this end, its recently developed Green Growth paper, Source: UN Environment, 2010 and UNECA, 2016 tions to this, such as the growth of organic agriculture in
entitled Achieving Uganda’s Development Ambition – Uganda, contributing to poverty reduction in the short-
The Economic Impact of Green Growth: An Agenda for term, generally it will be some time before independent
Action and published in November 2016, aims to accel- and observable macro-economic empirical data will
erate the country’s economic development in a way that Vision 2040 strategy. This strategy estimates that a 3 per allow the impacts and effectiveness of a green economy
ensures ‘growth is socially inclusive and that the protec- cent increase to the annual public budget, financed by transition in low-income countries to be assessed.
tion of the environment is upheld’ (NCE & GoU, 2016). the development and climate communities, will bring
This document is intended to complement and enhance an economic benefit of ‘US$3 for every dollar invested,
Uganda’s Second National Development Plan and its even excluding wider benefits’. With full implementation
of its green strategy, Uganda expects to experience a
3.3 Economic literature on green economy nomic growth and income inequality can be neutral, pos- are very inequitably distributed and controlled by certain
transition and inequality itive or negative (Chen & Guo, 2002), or take the shape elites, the overall economic growth rate is reduced (Auty,
of an inverted U (Kuznets, 1955,). In this regard, the 2001).
Inequality is important because of its fundamental asso- ‘Kuznets Curve’ submits that inequality is low (negative)
ciations with income or wealth, ethnicity, gender, and the at initial levels of growth, increases (positive) as income Increasing evidence also suggests that climate change
power to access or control natural resources. Inequality levels increase, before falling again once an average has a direct ‘cause and effect’ relationship with inequal-
can also determine vulnerability to the effects of climate level of income is reached. Aghion et al. (1999), based ity – that the effects of climate change can be a cause
change, the capacity to respond to green growth ben- on cross-country empirical studies, found a negative for income inequality, while income inequality itself
efits (such as green jobs), and the impacts of green correlation between the average rate of growth and mea- increases vulnerability to climate change, creating a
policies (UNRISD, 2012). More recently, the economist sures of inequality. The compilation of household-level reinforcing circle. Indeed, a recent study in Nature by
Thomas Piketty has argued that inequality is deeply data from developing countries also suggested little or Burke et al. (2015) found that unchecked climate change
rooted politically and thus cannot be determined or no correlation between growth (and indicators of growth is likely to reduce global average incomes per capita by
dealt with by economic mechanisms alone; rather, that promoting policies) and its effects on inequality across roughly 23 per cent by the year 2100, but that this figure
knowledge and skills diffusion are the two converging countries (Ravallion, 2001), and this reaffirmed the will vary considerably depending on where a country
forces essential to economic growth and the reduction of conclusions of Dollar and Kraay (2000) that economic is located. According to Burke et al. (2015), climate
inequality (Piketty, 2014). growth has a low direct impact on inequality (UN Envi- change will reduce average incomes in the poorest
ronment, 2011). countries by 75 per cent in the year 2100, while the
The identifiable links between economic growth and the richest countries may actually experience slight income
social pillars of sustainable development have generally With regards to other aspects of a green economy tran- gains. Climate change is therefore predicted to signifi-
shown to be positive and complimentary (Hallegate et sition, such as access to natural resources and vul- cantly increase global patterns of inequality.
al., 2012; Dollar & Kraay, 2002), and even more so in the nerability to the effects of climate change, the links to
presence of policies that reduce inequality. In economic inequality is much clearer. Firstly, it has been shown In this regard, inequality of income can also exacerbate
theory, wealth inequality is directly related to the capac- that more equal access to natural resources promotes climate change as high-income individuals are much
ity to invest in physical or human capital, which in turn economic growth, and that inequality of access has the more likely to emit greenhouse gases. To this end, a
affects the long-term growth rate (Aghion et al., 1999). opposite effect. High levels of inequality in the distribu- recent article by Piketty and others found that “Global
However, this conclusion has been challenged by recent tion of income and tenure to land appear to slow eco- CO2e emissions remain highly concentrated today: top
‘degrowth’ literature (Jackson, 2017), which argues that nomic growth and restrict the opportunities for pro-poor 10 per cent emitters contribute to about 45 per cent of
beyond a certain level of income, growth may in fact growth (Aghion et al., 1999, Ravallion, 2001). Studies of global emissions, while bottom 50 per cent emitters con-
have negative impacts – in particular, by increasing post-war land reform in Korea and Taiwan, on the other tribute to 13 per cent of global emissions. Top 10 per
inequality, as will be seen below. hand, showed that a reduction in inequality helped to cent emitters live on all continents, with one third of them
foster rapid and broad economic growth. In addition, the from emerging countries” (Chancel & Piketty, 2015).
The question as to whether income growth causes natural resource ‘curse’ (as considered in Section 3.1)
inequality continues to be contested both theoretically submits that where certain natural resources (particularly
and empirically. Theoretical relationships between eco- hydrocarbons, but also hard rock mineral and forests)
indoors. Green economy initiatives that promote the use tion, raise financing, and acquire relevant technology.
Box 7.3: Green economy investments in of cleaner energies can therefore have positive cor- Therefore, it is submitted that gender needs to be central
responding effects on gender equality (see Box 7.3 - in developing ‘environmentally friendly technology’
energy for gender benefits example from Bangladesh). (ENERGIA et al., 2011:3). In many developing countries,
A pioneer in renewable energy production and distribution, Grameen women are often unable to seize the new benefits asso-
Shakti has been operating in Bangladesh for the last 20 years. The not- Another linkage between gender equality and green ciated with green economy, including ‘improved agricul-
for-profit organization provides renewable energy services, such as solar economy relates to job creation. Globally, while the gen-
energy or biogas, to households for electricity generation and cooking. ture management […] due to patriarchal attitudes and
eration of green jobs is expected to create a wide array social conditioning’ (ENERGIA et al., 2011:3). This cri-
This benefits women in two respects: 1) Women are able to reduce of opportunities for women, this can go both ways. As
the time-consuming, tiring, and often unpleasant and even dangerous tique also contends that ‘a gender-equality perspective
work of gathering biomass fuel; and 2) Grameen Shakthi has trained a ENERGIA et al. (2011:2) point out, greening initiatives is still missing from the mainstream understanding of the
growing pool of female energy technicians, allowing women to benefit that aim to generate ‘green jobs’ in the informal sector concept, which is based on a traditional interpretation
from the production side of renewable energy. There is now a network
of ‘Grameen technology centres’ (GTCs), with most of these being can in ‘some cases even be a threat to women’s liveli- of the economy, focusing on growth while ignoring the
managed by women engineers. These GTCs train other women as hoods’. There is also the question as to whether infor- value of care work’ (2012:20). On this basis, it is submit-
technicians through a two-week course, in which they learn to assemble
equipment and how to install and maintain solar home systems. Some mal jobs, such as domestic work and the engagement ted that a green economy transition that fails to value the
women are then given further training on how to repair these. As of 2008, of women in agriculture and food production, can be care and domestic contributions of women does not fully
20 GTCs had trained over 1,000 technicians; with at least 300 of these
technicians working either for the GTCs or on their own. considered ‘decent jobs’ under a green economy transi- depart from conventional economic approaches.
tion. For example, some jobs involve the use of harmful
Source: Ashden, https://www.ashden.org/winners/grameen-shakti
chemicals – ‘women in the flower industry are exposed
to pesticides, and women hairdressers use chemicals
linked to breast cancer,’ meaning that women often ‘have
different health risks from working with chemicals than
4. Managing trade-offs: Why
3.4 Economic literature on green economy inclusion, poverty reduction and
men’ (ENERGIA et al., 2011:5). Green jobs therefore
and gender equality need to be introduced in ways that do not undermine
employment opportunities for women.
gender equality are
The emerging literature on the relationship between a
green economy transition and gender equality high-
not inevitable outcomes of a
Finally, the literature on gender equality and a green
lights the strong linkages between the two. Traditionally, economy transition has given rise to a more radical cri- green economy
this literature has focused on how a green economy will tique: that in order to become more effective within a
provide benefits to poor women in terms of health, live- The previous sections have served to demonstrate that
green economy context, women first need to be freed by placing green growth at the heart of their develop-
lihoods, and vulnerability. For example, in most devel- from current patriarchal systems. This includes eco-
oping countries women bear the principal responsibility ment objectives, governments can generally achieve
nomic, legal, and political constraints which limit their sustainable economic growth and social stability (OECD,
for collecting and then using household forms of energy ability to own and control land and, restrict their rights
– often generated from biomass – and thus spend much 2013) and bring long-term sustainable benefits to the
to access natural resources, and often prevent them poor (Raworth et al., 2014). However, emerging theoreti-
of their time not only travelling to collect the biomass, from obtaining necessary training, to access informa-
but also facing harmful smoke exposure when cooking cal literature by Dercon, Hallegate and Barbier highlight
a number of potential trade-offs to these benefits, as settlements or rural houses in Bangladesh and other of environmental externalities (e.g. through a ‘Carbon
initially considered in the previous section. If not compli- climatically vulnerable locations. This is an area where tax’) may lead to higher energy prices for consumers.
mented by integrated policies, these trade-offs can have further attention is required. They may also have income and distributive effects – a
negative impacts on the poor: ‘Carbon tax,’ for example, is likely to reduce the number
• Moving from labour intensive, more poverty-reducing of jobs in the polluting, fossil fuel industries (Hallegate
• Increases to fossil fuel prices, if not complemented technology to more capital intensive and less poverty et al., 2012). However, green economy policies can
by other policies, can strongly affect those poor con- reducing technology, such as the development of succeed if the external costs of these policies are con-
sumers who have no alternative but to continue to pur- high-tech, clean technology for energy, agriculture, tained, ensuring that they do not disproportionately
chasing fossil fuels. and transport, may potentially reduce job and employ- affect the poorer members of society (Huberty et al.,
ment opportunities for the poor. 2011). For example, removing fossil fuel subsidies and
• The closure of coal mines, often found in the poorer
parts of a country, can have significant impacts on • Green economy initiatives, which carry high health providing direct cash transfers to low-income house-
coal miners who have limited employment alternatives. costs, such as rare earth metal mining (e.g. cobalt) holds (as in the case of Indonesia), or promoting higher
for renewable technologies and batteries, often dis- government spending on other public development
• An increase in biofuel production, intended to reduce proportionately affect the very poorest members of objectives such as health and education (as in the case
greenhouse gas emissions, can displace land for food society. For instance, artisanal miners in many African of Ghana), has shown that such policies can signifi-
crops, negatively impacting poor rural food producers. countries are exposed to serious pollutants on a daily cantly improve the living conditions and wellbeing of the
Indeed, “land grabbing” for biofuel production by cor- basis, as well as the conflict and negative social poorest (OECD, 2013).
porates and state-led mega-investments has, in many impacts experienced in mining regions.
cases, driven Indigenous and rural communities off of To this end, Dercon (2011) conducted a study in 2011
their own land, leading to an increase in conflicts in An IGE does not operate in a vacuum (UNECA, 2016). in which he deployed a number of stylized examples
many communities. The green economy does not automatically increase of green growth initiatives, assessed their effects and
social justice, and must be complemented by inte- impact on the poor. His analysis focused on three main
• The use of scarce natural resources for green, grated policymaking processes and a holistic outcome categories of green growth policies (environmental
non-poverty reducing investments. For instance, framework which combines environmental, social and pricing and regulation, low-carbon investments, and
climate proofing (e.g. protecting against floods and economic objectives, so that the costs of greening the adaptation investment), and he tested these in four
storms) public infrastructure such as roads, ports and economy do not fall on women and men living in poverty spatial and sectoral dimensions. These dimensions are
industrial estates is more likely to benefit the wealthier (Raworth et al., 2014). Thus, as the trade-offs above now crucial in understanding the dynamic relationship
members of society. To this point, the focus of climate serve to illustrate, green economy policies do have the between economic growth and the inclusiveness of
proofing physical infrastructure has generally been for potential to cause inequalities (Barbier, 2015) and their growth in low-income and least developed countries.
the economic benefits to the economy as a whole, with ultimate effect is dependent on them being compli-
only a limited consideration of the distributional and First, he found that environmental pricing and regula-
mented by other integrated policies. tion intended to internalise environmental costs (such
poverty reduction benefits (UNDP, 2011). However,
there are now programmes to climate proof capital that Indeed, green economy policies can have both negative as fuel or water pricing at full cost) might impact poor
are important for poor people, such as low-income and positive impacts – for instance, the internalization people (as consumers and producers) through rising
prices, while the wealthy could circumnavigate envi- costs of coal are included (such as its negative impacts
ronmental regulations by simply displacing pollution Box 7.4: Successful energy subsidy on health and outdoor air pollution), renewables can
to low-income areas. The design and enforcement of be seen to be the more cost-effective option. At the
regulations as part of green growth policies is therefore reforms in Kenya same time, however, increases to fossil fuel prices (e.g.
central to determining whether these will benefit the In Kenya, energy subsidy reforms were made under a new energy policy through the removal of fossil fuel subsidies) could also
in 2004. The policy increased power tariffs in 2005 to reflect long-term
poor. Second, Dercon found that low-carbon and other marginal costs, introduced an automatic pass-through mechanism to
potentially have negative impacts on the poor. As such,
environmentally friendly investment strategies could adjust tariffs for changes in fuel costs, and reconstituted the Electricity it is important for governments to be aware of these tran-
Regulatory Commission as an independent energy regulator.
promote and mobilize investment at a local level (such sition costs and to ensure that they favour the excluded
as by supporting growth-focused on local linkages, such The new policy led to significant improvements in the electricity sector as and poor, as shown by the example of energy subsidy
power generation steadily increased, distribution losses declined, and
as agriculture close to cities). However, such strategies the number of customers served by grid-supplied power expanded sub-
reforms in Kenya (see Box 7.4). This can be achieved by
could also discourage investment in more rural, marginal stantially. In the post-tariff increase period, the average annual increase shifting the savings made by removing fossil fuel subsi-
areas from common shared development as the cost of in national power supply was over 5 per cent. Line losses declined from dies into social programs and initiatives that benefit the
18 per cent in 2005 to 16 per cent in 2011, and the collection rates
long-distance transport could be a factor holding back increased from 85 per cent of total power bills in 2005 to 99 per cent in poor. Such initiatives have been successfully introduced
the investment, which may lead to geographical imbal- 2011. Indeed, electricity access in Kenya increased by almost 140 per in Indonesia, Ghana, Mexico, and Germany, where the
cent between 2005 and 2011.
ance. Finally, his study found that adaptation measures costs under a green economy transition have been
generate the strongest trade-offs for the poor. Instead Political support for the process was achieved through prior consultation cushioned by social protection reforms and programs.
with trade unions, which helped to mitigate potential job losses. On the
of encouraging economic transformation and migration, basis of these reforms, the increase in revenues would also be used to
rural adaptation measures may actually encourage the expand energy access, with the newly reconstituted Electricity Regula- A second, important trade-off is the use of greener,
rural poor to invest in low-return livelihoods. In addition,
tory Commission to promote integrity and more transparent processes. cleaner technology, which can potentially produce
investments in public infrastructure may be centred on Source: IMF (2013) more (energy) outputs while using fewer polluting and/
the most economically valuable assets at the expense or natural capital inputs. However, it will also have
of poor communities based in marginal and unsuitable impacts on other types of assets and may, for example,
areas, making them increasingly vulnerable to climate require more or less labour or capital inputs. Again,
shocks. One common example of a trade-off would be any this may negatively impact poor women and men, and
short-term increases in energy prices before renew- the impacts of these technologies therefore need to
As earlier sections have demonstrated, the medium and able energy prices can compete with the lower market be carefully assessed before being introduced to a
long-term benefits of a green economy transition are rates for fossil fuels. In many cases, this will bring country. Indeed, while internet connectivity and high-
clear and, if implemented correctly, can provide tangible immediate benefits to the poor. First, renewables are tech approaches will always be important aspects of
benefits to the excluded and poor. However, the transi- now price-competitive (half the new energy-generating a green economy transition, it does not require only
tion may also carry many costs, and these are essen- capacity installed in 2014 across the world was renew- imported or high-cost high technology. Instead, an inclu-
tially the costs of moving from unsustainable production able). Second, poor people in remote locations often sive approach to a green economy transition will aim
and consumption processes to ones that are sustain- live too far from the grid to utilize traditional power sup- to identify and support local technical knowledge, as
able. It is therefore vital that these transition costs are not plies, and thus decentralized renewables may represent well as innovations compatible with informal economies.
borne by the excluded and poor. a more convenient option. Finally, when the external Energy-efficient cookers made from local materials,
bicycle-based transportation, and local mobile phone 5. How to increase inclusion, their lack of a political voice on the global stage is seen
apps are good examples of affordable technologies that as being a cause of these wider problems. As such, it
can directly benefit poor groups. In this regard, social poverty reduction, and gender is submitted that a systematic change, with new gover-
enterprises can be good brokers for finding, testing, and equity as outcomes of nance institutions, is required at the global level (Action
extending appropriate technologies that produce the 2). As rights-holders, poor women and men must be
inclusive and green outcomes that are sought by these green economy transition able to hold duty-bearers accountable for their actions
groups. For example, the solar water heater program This final section reviews the existing literature on recom- (MRFCJ, 2015). These duty-bearers are those acting
in Bangladesh, as detailed in Box 7.3, is supported by mendations for advancing a green economy transition at the governmental or state levels, who have a legal
social enterprises and aims to maximize benefits for the that increases inclusion, poverty reduction, and gender obligation to protect, respect, and fulfill the rights of the
excluded and poor: low-income women act as produc- equality. These will be considered under the following rights-holder (UN, 2016). To this end, it is contended that
ers and distributors and, as a result, thousands of female four main areas (which need to be pursued together): an empowerment and human rights-based strategy, con-
jobs have been created. sistent with the UN Declaration of Human Rights, should
(i) Empowerment be pursued as part of the broader SDG implementation
A third and final trade-off may occur when prevailing process at the global level.
governance and fiscal rules for access to and control (ii) Integrated institutions
over natural resources work against the social and In many developing countries, marginalized producers
institutional capital of the poor. It is often mistakenly (iii) Inclusive finance; and who operate through micro/small enterprises within the
assumed that simply increasing the value of natural (iv) Metrics informal economy still form the backbone of that coun-
assets and capital, such as through increasing land try’s economic activity. Smallholder agriculture remains
prices for biofuel production or receiving, will benefit the principal form of employment in many countries,
the excluded and poor. Instead, these higher prices 5.1 Empowerment with women often being the main source of agricultural
may lead to higher demand and ‘land grabs’ and ‘green labor. Meanwhile, the non-agricultural informal economy
grabs’ that subsequently exclude the poor from access- Increase empowerment and rights: recognising, continues to grow and now accounts for 82 per cent of
ing natural capital. Greater resource and tenure rights empowering and engaging poor women and men — the total non-agricultural employment in South Asia, 66
must therefore accompany these increases in natural so that they can be effective agents and rights-hold- per cent in sub-Saharan Africa, and 51 per cent in Latin
resource prices for the poor (Cotula and Mathieu, 2008). ers in their own future America (ILO, 2014). Indeed, the informal economy is
Improvements to land governance are especially import- now encouraging innovative developments in a range of
ant for women who, while often being the primary farm Poor people are actors for, and the holders of, univer- sectors, including energy, water, sanitation and transport
workers, have limited land and tenure rights (Kisambu, sal human rights. They also possess the most credible provision.
2016). voices in terms of drawing the world’s attention to the
poverty, environmental and climate agendas – these are Poor women and men, then, can be a central compo-
all issues that disproportionately affect their livelihoods. nent in advancing the transition to a green economy – as
However, prevailing dialogue and decision-making struc- empowered citizens able to upgrade slums, as custodi-
tures are often closed to this group of population and ans of natural resources, as labour intensive producers,
and as distributors of low carbon technologies and prod- 5.2 Institutions ment and new landscape/spatial modelling providing
ucts. Informal labour markets should therefore be sup- clearer ideas on the consequences of multi-factorial
ported (e.g. to achieve higher wages), and governments Developing integrated, inclusive and transformative decisions – and all increasingly in real time.
should resist attempts to criminalize or close them. institutions — including for collective action on mul- If the work completed to date has focused on integrated
Instead, in those cases where informal labour markets tiple systemic risks and opportunities assessments, plans, and projects, this should now be
do have negative environmental and health impacts on Poverty, environmental and climate issues affect stake- expanded to encompass the development of integrated
the poor (such as in some small-scale mining, and waste holders across a variety of different sectors, and solu- governance frameworks and institutional capacities.
recycling and disposal), the provision of technological tions to these problems accordingly require collection This is certainly an ambitious aim, given that poverty,
and training support can help to shift informality along action from a wide range of organizations. On this basis, environmental and climate problems are themselves the
the spectrum from ‘dirty’ and ‘illegal’, to ‘professional’ the international community needs to build more and result of deep structural failures. So while systematic,
and ‘efficient’. stronger bridges between these individual organisations, institutional reform may at first appear daunting, a lot can
and to promote synergies and collaborative practices, be achieved in smaller steps. Moreover, to begin this
Doing so requires a formal, institutional process and, process, sequencing and priorities should first be deter-
when organized by governments or state/private cor- which benefit the poor. These bridges need to be built
deliberately and systemically — developing integrated mined at the national level, and perhaps in the form of
porations, these can be (inadvertently) exclusionary or a poverty, environment, and climate institutional change
environmentally ineffective. Such processes, if prompted institutions with common rules, knowledge bases, and
norms that achieve a better balance between sustain- roadmap.
by small producers or traders based on their own cap-
itals, knowledge and organization can be more sus- ability, growth, and equity.
tainable; however, these are likely to miss out on other
technological, skills-based and market opportunities.
Two decades of mainstreaming the environmental and 5.3 Finance
climate agendas at the international level have gener-
Instead, through a better understanding of these infor- ated enough theoretical experience to consider how Inclusive finance and business: reforming private
mal actors, as well as the power and agency that they this institutional restructuring may be achieved. On this and public investment — to better engage with the
hold, it is submitted that innovative hybrid approaches basis, three key opportunities may be identified. First, people and environments marginalised by current
can promote rewarding livelihoods and create decent the 2030 Agenda requires governments to generate policy
jobs within these informal environments. In the long-term, national plans for implementing the SDGs within their
education and training programs should complement Together, the 2015 Paris Agreement and 2030 Agenda
respective countries. Second, there is now an increas- for Sustainable Development, promote the need for
these, in order to build a workforce suited and prepared ingly imminent need for the international community
for an inclusive, green future. huge new investments in energy, transport, and urban
to make decisions on issues that will help shape the infrastructure across the world. If done correctly, these
futures, one way or another, for poor people and the investments have the potential to make real progress on
environment (e.g. whether to exploit new fossil discover- poverty, environmental and climate issues.
ies, or where to focus climate change adaptation plans). However, for these investments to achieve the requisite
And third, these decisions are to be facilitated by the scale, the current financial rules need to be changed.
availability of new information and communication tech- These must recognize the interests of all stakeholders
nology and ‘big data,’ with magnified citizen engage-
of innovation, and should prioritize investment quality as
Box 7.5: Social protection schemes well as quantity. Box 7.6: Support for SMMEs in Nepal
starting to address climate and environ- Microfinance, local funds, and social protection schemes In Nepal, the Alternative Energy Promotion Centre has developed a
mental objectives can provide targeted financial instruments that reach targeted subsidy model to enable the most vulnerable households to
adopt renewable energy technologies. Forty per cent of Nepal’s National
those who need it most and so get money to where it Rural Renewable Energy Programme’s US$170 million budget is being
Brazil: The national Bolsa Verde program provides cash payments to
low-income families who adopt practices that conserve trees, fish, and matters (IIED, 2017). Where new finance is brought into disbursed as grants to these households and, depending on the cir-
cumstances, these grants can cover between 30 and 50 per cent of
other natural resources. The scheme targets people in extreme poverty, the economy as a measure to drive green growth, it the cost of buying and installing renewable energy technology (with the
and particularly forest-dependent communities in the Amazon region.
The program distributes more than US$40 million dollars each year to
often fails to consider the benefits that this may provide remainder coming from concessional loans). These grants are delivered
in accordance with Nepal’s Subsidy Policy for Renewable Energy (2013),
more than 69,000 families, and the quarterly payment of 300 Reais that to poor women and men. Indeed in many cases, the which promotes the targeting of poor, vulnerable, and socially marginal-
these receive is nearly double the average quarterly income. poor and excluded are not able to access formal credit ized households.
Ethiopia: The Productive Safety Net Project provides 7 million people, markets, general financial instruments, or even basic Source: Rai et al. (2015) and Steinbach et al. (2015)
who are chronically food insecure, with a predictable transfer of cash or banking loan facilities due to their lack of collateral and
food, in return for labour on schemes that benefit vulnerable communi-
ties. These work schemes include tree planting, water harvesting, and low income earnings, for instance, only a quarter of
the construction of health centres. The project enables vulnerable people adults of sub-Saharan Africa have access to a formal
to resist shocks, accumulate assets and, most importantly of all, to feed
themselves. The project aims to encourage households to engage in bank account (Demirgüç-Kunt el al., 2017). Microfi- Financial mechanisms should also look to prioritize the
production and investment promotes market development by increasing nance, local funds, and social protection schemes can informal economy and Small, Medium and Micro-sized
household purchasing power.
therefore expand this access to financial capital for the Enterprise (SMMEs). In terms of inclusive consumption,
India: Each year, the Mahatma Gandhi National Rural Employment excluded and poor (Steele et al., 2015a). the exploration of major, “bottom of the pyramid” markets
Guarantee Scheme provides tens of millions of people with 100 days of
paid manual work. The scheme creates a legal right to employment, and can better align these mechanisms with the needs of
Social protection can also be designed in a way that
anyone who applies and is not given work within 15 days is entitled to an poor consumers who, as was detailed in Section 5.1,
unemployment allowance. Since 2006, when the scheme began, US$25 is adaptive. In this way, social protection and climate
often operate within informal markets. In order to mobi-
billion has been distributed. Participants work on projects that benefit resilience objectives are linked and targeted towards
their local communities, such as creating infrastructure for water harvest- lize green production, jobs, livelihoods and SMMEs
ing, drought relief, and flood control. those households that are most vulnerable to income
within informal economies should be recognized as
and climate shocks. Other social protection schemes
Source: Steele et al. (2015b) being potential drivers of, IGE growth and especially
are now also starting to address ecological rehabilita-
in those countries where ‘job creation’ represents a
tion through afforestation and water management initia-
primary political concern. Start-up grants provided to
tives (Porras et al., 2016). Examples of these schemes
SMMEs can be a useful tool in this regard (as shown
and not just shareholders, and should consider long- in Brazil, Ethiopia, and India are provided in Box 7.5,
in Box 6), and these work well for projects that may not
term outcomes as well as share prices. There is a need while in South Africa’s “Working for…” programs, public
generate revenue, but are otherwise ideal for promoting
to engage those who, while not having contributed to works schemes for cleaning up the nation’s river basins
green growth. However, these grants should be aligned
these issues, can nevertheless play a powerful role in and water bodies are targeted at single-parent female
with other investments to ensure that first; they do not
addressing them. Finance mechanisms will therefore headed households — including those affected by HIV.
increase government expenditure over investments and,
need to be more accessible, integrated, and supportive second, do not provide false market signals. The long-
term effects of these grants and subsidies should also environment, and climate (such as the judicious use general public to use the system to inform national
be monitored, and subsidies should be phased out once of economic information, but also incorporating ethical decision-making and transparency.
markets have been developed. arguments, people-centred stories of change, ‘wellbe-
ing’ measures, and ways to ‘brand’ poverty, environ- • Today’s ‘data revolution’ provides many opportunities
ment, and climate). that are yet to be harnessed. Information and commu-
nication technology and ‘big data’ can help us build
5.4 Metrics • A conceptual framework that best expresses the links a picture on how poverty and the environment relate
New messages and metrics: improving and aligning between poverty, environment, and climate, and which in specific cases, as well as the effects and impacts
poverty, environment, and climate messages, nar- is scientifically credible, robust to diverse biophysi- that previous interventions have had. This will help the
ratives, and metrics – to inspire widespread under- cal, social, and economic realities, policy-influencing, international community to progress from the drawing
standing of poverty, environment, and climate issues, and can be used throughout the whole policy cycle of crude trade-offs between poverty, environment, and
and to galvanise and measure progress (from assessment to debate, modelling, planning, and climate, to achieving better distributional results and
accounting). This framework could be based on two correlations which can optimize synergies and inte-
A positive narrative promoting the poverty-environ- reviews: gration. In addition, new technology, such as mobile
ment-climate nexus is now needed. A narrative that is phones, can enable poor people to become powerful
based on enduring prosperity, and perhaps on joint • A review of existing frameworks, including the steps data producers and receivers. They can bridge the
human and ecosystem wellbeing, could have increasing countries have taken to implement the SDGs (and disconnect between global and very local, service
political traction as extreme poverty declines but climate especially the nine poverty, environment, and climate providers and service demanders, and thus enhance
change and ecosystem degradation impacts really related SDGs noted in Table 2); learning and accountability.
begin to ‘bite’. New players, such as BRICS (New Devel-
• A review of how the Millennium Ecosystem Assess-
opment) Banks, locally controlled development funds,
ment’s ecosystem service-wellbeing framework has
and domestic markets, now need to work alongside the
been adopted and adapted by different disciplines,
UN and other development agencies that have until now
from economists, to statisticians, to natural scientists. 6. Conclusion
led the poverty, environment, and climate agendas to
establish a clear and coherent set of poverty, environ- • Rolling out the System of Environmental Economic This chapter provided an understanding on the link-
ment, and climate planning and performance standards. Accounts. Under the auspices of the UN Statisti- ages between inclusion, poverty and gender equality,
cal Division, the System of Environmental Economic and the transition to a green economy. It demonstrated
These standards will require cross-disciplinary collabo- that poverty reduction is not an automatic outcome of
Accounts has now been agreed at the international
ration, and must engage multiple stakeholders from all green economy interventions and that trade-offs do
level, with the Wealth Accounting and Valuation of
(and not just developing) countries in order to produce exist. However, the recommendations put forward in this
Ecosystems (WAVES) initiative, led by the World Bank,
a message that is universally acknowledged and chapter can provide a guidance for learners and deci-
providing support to countries for implementation. Yet
accepted. This message should include: sion makers on research, evidence and best practise,
more is still needed to generate the necessary phys-
• Communication strategies that can successfully influ- ical and economic data for the system, and to create and thus help maximising identified links and syner-
ence positive decision making regarding poverty, the necessary demand among policymakers and the gies between inclusion, poverty reduction, and gender
equality. A careful consideration of inclusion, poverty
and gender equality, and their fully integration into pol-
icy-making may thus help ensure that the transition to
a green economy promotes social justice among the
poorest members of society.
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erty
CHAPTER 8: FISCAL POLICY FOR AN
INCLUSIVE GREEN ECONOMY
Thomas Sterner
CHAPTER 8: FISCAL POLICY FOR The Environment for Development Initiative and University of Gothenburg
AN INCLUSIVE GREEN ECONOMY Thomas Sterner, a Professor of Environmental Economics focuses on the
design of policy instruments to deal with resource and environmental problems.
Sterner has published more than a dozen books and a hundred articles in
refereed journals, mainly on environmental policy instruments with applications
to energy, climate, industry, transport economics and resource management
in developing countries. With Gunnar Köhlin, he has founded the Environment
for Development Initiative. Sterner is the recipient of the Myrdal Prize and
LEARNING OBJECTIVES
past president for the European Association of Environmental and Resource
Economists. During 2015-16 he was guest professor at the Collège de France.

• Outline a number of fiscal policies that can be considered when an inclusive Gunnar Köhlin
green economy is sought.
The Environment for Development Initiative and University of Gothenburg
• Assess trade-offs between environmental and fiscal impacts, as well as discuss
distributional consequences. Gunnar Köhlin is the Director of the Environment for Development Initiative – a
global network of environmental economics’ centers. He is also an Associate
• Review frameworks for public expenditures and public environmental expendi- Professor at the Environmental Economics Unit, Department of Economics,
ture reviews (PEERs), to help assess the efficiency and effectiveness of govern- University of Gothenburg. He has spent 30 years working with applications of
environmental economics in developing countries including the development of
ment resource allocations across environmental priorities. a dedicated PhD program in environmental and development economics. His
research interests focus on natural resource management and environmental
• Explore and understand the relevance of carefully designed fiscal policies that policy analysis in developing countries. The applications have been focusing on
stimulate green innovation and investment and take into consideration environ- forestry, energy and sustainable agriculture as well as environmental strategies
at the country level.
mental externalities and the distributional implications of taxes, subsidies and
government spending, for advancing the inclusive green economy.
Kristin Seyboth
Independent Consultant
Kristin Seyboth is an independent consultant with more than a decade of

applied expertise in climate change mitigation and renewable energy. Prior to
founding her private practice, she led, co-authored and managed reports for
the Intergovernmental Panel on Climate Change (IPCC) and the International
Energy Agency. The IPCC’s 5th Assessment Report on Climate Change
Mitigation, which Seyboth co-authored and co-coordinated, is considered
by many to be a landmark report – it provided the scientific basis for the
Paris Agreement. Seyboth received her Master of Science in Environmental
Management and Policy from Lund University, Sweden and her Bachelor of
Arts in Biology from Bucknell University, USA.
CHAPTER 8: FISCAL POLICY FOR A INCLUSIVE GREEN ECONOMY 8.2
CHAPTER CONTENTS Table 1: Classification of instruments in a policy matrix (Source: Sterner and Coria, 2012)
Using markets Creating markets Environmental regu- Engaging the public

1. Introduction and overview of green fiscal policies
lations
2. The political economy of green fiscal reform Subsidy reduction Property rights and Standards Public participation
3. Distributional consequences decentralization
4. Public expenditure reviews Environmental taxes Tradable permits Bans Information disclosure
and charges and rights
5. Concluding remarks User charges International offset Permits and quotas
systems
1. Introduction and overview of green fiscal policies Deposit refund Zoning

systems
Targeted subsidies
1.1 Fiscal policies in context
As described in Chapter 2.5, an inclusive green economy (IGE) is characterized by engaging the public (Sterner and Coria, 2012), see Table
methods and patterns of production and consumption that are low, or even zero, in Key explanation: 1. This chapter focuses primarily on the first category,
Taxes
carbon emissions, that are resource efficient and are waste minimizing. These activities Taxes must go through a relatively ‘using markets’. Fiscal policy, which makes use of gov-
should remain within the planetary and local boundaries critical for natural and environ- complex legal process that involves ernment revenue collection (e.g. taxes) and expenditure,
passing and modifying tax law
mental resources. The transition toward an IGE is characterized by increasing the share which can make them difficult to falls largely in this category. Market-based approaches
of green activities in each of the components of aggregate demand: household con- implement. can both be seen as a complement and a substitute
sumption, government expenditure, investment and net exports. The role of green fiscal for command-and-control regulation. Market-based
policy is therefore to shift consumption, investment and the government’s own expendi- Key explanation: approaches are not only interesting to policy makers as
ture in a way that stimulates innovation and green investments and dissuades activities Charges a means to increase incomes, they often increase both
Charges may be levied by the ad-
with negative environmental effects. ministration and may be earmarked
static and dynamic efficiency as compared to com-
for local or sectoral use and are typ- mand-and-control environmental regulation.
A number of taxonomies exist to categorize policy instru- ically more readily accepted.
Key term:
ments, each with its own pros and cons and usefulness in A comprehensive green fiscal policy is therefore an
Taxonomies different contexts. Based on field experience, one useful essential ingredient to ensuring that an appropriate incentive structure is in place to
System according to which things, typology applicable to natural resource management and achieve an inclusive green economy. Through the design of government revenues and
in particular animals and plants,
can be sorted into groups that pollution control (based on World Bank, 1997) breaks expenditures, signals can be given to consumers and producers that ensure efficiency
share similar qualities. Adapted policy instruments into four categories: 1) using markets; in resource use, discourage environmental pollution (static efficiency), and encourage
from https://dictionary.cambridge.
org/ 2) creating markets; 3) environmental regulations; and 4) innovation in new products, processes and technologies (dynamic efficiency). In other

words, taxing externalities can incentivize the investments and technological progress
upon which a green economy is dependent – it may also increase resource efficiency Box 8.1: Tax base erosion If the government officer in charge did not realize
and reduce environmental problems and welfare losses. this and instead counted on a long-run stream of tax
revenue – and if the government prematurely abolished
Each environmental tax will normally affect behaviour
other (e.g. labor or VAT) taxes – then a problematic
by consumers and input choice by firms. This is the
budget deficit could be created.
purpose of the tax. The size of the reaction will depend
1.2 Fiscal Policies Important to Green Economies on the relevant price and substitution elasticities. If
elasticities are high, there will be a big behavioural
In the case of carbon emissions, the response to
taxes can be significant, but takes time as adapta-
change. If elasticities are low, the response will be
In this section, we provide a brief overview of a few of the most prevalent green fiscal tion is rather slow. Eventually it would be ideal if taxes
smaller. Often the behavioural response increases
on fossil fuels were to reduce fossil fuel use so much
policies, including Pigouvian taxes, resource rents, subsidies and subsidy removal. over time so that the short-run elasticity is low while the
that revenues become negligible. However, this is
long-run response is higher. This means that over time
Pigouvian taxes include a number of different categories of taxes that attempt to correct the tax will tend to diminish the pollution or resource
still decades away, due to a multitude of factors. One
factor is that carbon taxes are generally not high
negative externalities, such as carbon taxes, fuel taxes and taxes on sulphur and nitro- use even more than the initial response. From an
enough to be reflective of the ‘real’ cost of the neg-
environmental viewpoint, a more rapid response may
gen. For each category of policy, an introduction to design features is provided, unique be desirable if the environmental problem at stake is
ative externalities produced by polluters, and that no
coordinated, global approach to a carbon tax or a
features are discussed, and a general summary of existing policies worldwide is pre- urgent.
cap-and-trade system exists, which captures the entire
sented. Each sub-section concludes with a brief review of experience with those poli- Another aspect of the decrease in pollution (or
global economy. Another factor is inertia and path
dependency, which ranges from earlier investments in
cies. resource use) is that tax revenues will tend to fall - at
the fossil-fuel based infrastructure with a long lifespan,
least compared to a simplistic calculation that fails to
risk aversion of private and corporate actors, such
take the demand response into account. For some
as banks, which often lead to hesitance to trust and
time tax revenues may be stable or may even increase,
1.2.1 Pigouvian Taxes depending on income elasticities and on whether the
thus finance new technologies, such as solar or wind
power. When that time comes, the missing environ-
tax level is raised over time. Eventually, however, tax
The most fundamental challenge for a green economy is that there are plenty of revenues will often fall quite considerably – particu-
mental revenue is not a serious problem. Taxes could
be applied to new (environmental) problems or could
instances when producers and consumers of goods and services do not fully consider larly if the optimal solution involves zero or near zero
revert to be based on labour, capital, property, VAT, etc.
emissions. This is sometimes referred to as tax base
how their production and consumption affect the environment and thus the welfare of erosion. If the item that is taxed has very high demand
to face the tax base erosion problem that is created.
In the long-run, continued automation and artificial
people. Such environmental externalities are not only a violation of the Polluter-Pays elasticities, its use will be reduced very quickly. The
intelligence could reduce the importance of labour as
high elasticity shows that as soon as there is a tax in
Principle, but lead to inefficiencies throughout the economy. An optimal policy for a gov- place, people will substitute away from the polluting
a production factor, which would create a much more
serious problem of tax base erosion rather than the end
ernment is therefore to identify such negative environmental externalities, estimate the good or input and thus the problem is readily solved.
of the fossil fuel era.
negative welfare implication each externality has and then impose a tax that is exactly
as large as that negative welfare effect so that the producers and consumers fully inter-
nalize the cost – a Pigouvian tax. For example, such taxes can be placed on green-
house gas emissions, pollution and environmental degradation. tax is not an end in itself, but a means, such considerations are not actually problem-
atic. The positive effects on the environment offset the reduced income from taxation. It
Pigouvian taxes raise revenue while at the same time
Key term:
might be tempting to see Pigouvian taxes primarily as a tax base, but it is better to see
reducing the negative environmental impact by taxing
Pigouvian taxes them primarily as environmental taxes that just happen to give a positive effect to the
the negative environmental externality. These taxes have
A pivougian tax sets out to internal- budget and allow other taxes to be somewhat lowered.
ize externalities, such as pollution, been criticized due to their inherent tax base erosion
and prevent market failure. Adapted
from https://www.investopedia.com effects (See Box 8.1). However, since an environmental

The difference between taxes and charges (terms that The design of an environ- Empirical evidence suggests that levying an environ-
Key term:
are sometimes – here and in other texts - used inter- Deadweight loss mental tax must carefully mental tax while reducing taxes on labour, corporate or
changeably) should be noted, largely for the differences consider competitiveness
A loss that occurs because the gov- income taxes – called revenue recycling – can increase
ernment raises taxes to increase its
in their ease of implementation. Taxes must go through income, but thereby loses moneyand social consequences. economic efficiency and can also produce posi-
a relatively complex legal process that involves passing In practice, many environ-
instead. Due to increased taxes, a tive employment effects (UN Environment, 2017). For
company might have to cease op-
and modifying tax laws that can make them difficult mental tax reforms have
erations, for example, and will stop
example, in Germany green taxes were recycled to cut
to implement (See Section 9.2 for more on political had positive effects on
paying taxes completely. Adapted pension contributions and thereby lowered labour costs.
from https://dictionary.cambridge.
economy of fiscal reform). Tax revenues go to the central org
competitiveness, though In British Columbia, green taxes were accompanied by
treasury - money that goes to the treasury is often per- negative effects on indi- cuts in corporate and personal income taxes. Lump-sum
ceived as being ‘lost’ (Sterner & Coria, 2012). Charges, vidual industries are pos- payments were also made to low-income households.
on the other hand, may be levied by the administration sible (UN Environment, 2017). Reduced tax rates for Revenue recycling in such ways may help to enhance
and may be earmarked for local or sectoral use and are industry (particularly those that are energy intensive or the political acceptability of green tax reforms (See
typically more readily accepted. subject to intense international competition) are a widely Section 2), although the demand elasticity of the taxed
applied protective measure and a major element of item must be carefully considered such that a tax base
Careful valuation of the negative externality is needed many reforms. Such exemptions and reductions may be erosion problem is not created (See Box 8.1).
in order to set an optimal Pigouvian tax. In theory, the unattractive in that they reduce the incentive to adapt
optimal levels of a Pigouvian tax are equal to marginal behaviour toward protecting the environment and may Earmarking (designating funds for a specific purpose)
damages at the optimal pollution level (i.e. at the inter- also increase administrative costs (UN Environment, is used widely (e.g. in the United States and many other
section of the marginal damage and the cost curves), 2017). industrialized and developing countries), for major
but these are difficult to estimate for a number of undertakings such as road construction, though it is
reasons. These reasons include a lack of understanding An additional design consideration lies in the inherent considered by economists to constrain optimal govern-
of the multiservice and public good characteristics of difference between point (e.g. a specific industry) and mental allocation of taxes and expenditures. Accord-
ecosystems, the potentially large slope of the damage non-point (e.g. from mobile sources and agriculture) ing to that theory, all revenues should go to the trea-
curve, and (e.g. in rapidly growing economies) there pollution. The effectiveness of environmental taxes can sury and compete equally for public funds (Sterner &
is a fundamental challenge of estimating the cost of be assessed more easily for point sources where emis- Coria, 2012). Due to earmarking, many argue that funds
damages at a hypothetical optimum to which a society sions can be measured directly. While taxes may be the should also be designated for environmental fees, even
hopes to move toward (Sterner & Coria, 2012). While most efficient policy to address some non-point pollution if sub-optimal from a broader economy perspective. If
optimal taxation preferably should affect behaviour as (e.g. cars due to the handling of fossil fuels), changes in so, economists argue that earmarking of environmen-
little as possible (a reason why e.g. property taxes are emissions cannot be measured directly and must there- tal tax returns for environmental public projects should
preferred to labour taxes is to minimize such a dead- fore be estimated. This makes the effectiveness of the ideally be limited to cases in which such spending would
weight loss to welfare), this is not true for taxation of policy less certain than for point-source pollution (See for generate efficiency gains comparable to those from
negative environmental events (e.g. pollution or resource example, NOx emission discussion below). cutting distortionary taxes (Bird & Jun, 2005 in Heine,
depletion). Norregaard & Parry, 2012). Earmarking could also
increase the feasibility of implementing a tax or charge
CHAPTER 8: FISCAL POLICY FOR AN INCLUSIVE GREEN ECONOMY 8.3

Figure 1 provides an overview of environmental taxes in place for the past twenty years
Box 8.2: Green bonds Market Securitization program, issues bonds to provide (1994-2014), across a number of countries. In the OECD, the use of environmental
low-cost capital to finance solar photovoltaic systems taxes is still relatively limited in many countries. The share of generated revenue (equal
and other clean energy improvements for Hawaii con-
Increasingly, government agencies are issuing to 1.56 per cent of GDP in 2014) has been declining. A closer look at many developing
sumers. (Hawaii State Energy Office, 2018).
so-called ‘green bonds’ – bonds that are identical
to traditional bonds, but with an additional step that countries reveals that they also have decreased their environmental taxes in 2014 com-
The municipal bond market is particularly attractive
tracks, monitors, and reports on the use of proceeds
as it is the local authority’s typical responsibility for pared to 1994.
for dedicated green projects. These projects can be
overseeing water, waste, and transport services (See
related to climate (e.g. renewable energy or energy
efficiency) or sustainable waste management, land-
UNDP, 2018). The municipal bond market funds large- Carbon Taxes
scale, long-term capital-intensive projects in states and
use, biodiversity, clean transportation, clean water, etc.
cities, along with their operational expenses. It pre-
dominantly attracts individual investors, either directly
Carbon taxes put a price on CO2 or other GHG emissions, ensuring that different fossil
Green bonds appeared on the securities market at a
time when there was a great need for large infrastruc-
as retail investors or through mutual funds, mostly fuels are taxed in a ‘neutral way’ according to actual emissions. For an overarching
because municipal bonds tend to be issued as tax-ex-
tural investments for a sustainable future, e.g. in renew-
empt instruments. The first municipal and city bonds
environmental bad, such as climate change, carbon taxes have a number of attractive
able energy and climate change adaptation. At the
same time, large investors – not least pension funds
were issued in 2013 by the U.S. State of Massachu- features. Carbon taxes are economy-wide, and thereby provide an incentive to reduce
setts and the Swedish city of Gothenburg. Since that emissions across sectors. Emitters are heterogeneous in terms of technology, size, and
- were looking for secure investment opportunities. The
time, local green government bonds have continued to
green bond market can therefore be expected to grow organization – a carbon tax addresses this heterogeneity by allowing emitters to direct
grow (Climate Bonds Initiative, 2018). Johannesburg
rapidly in the years to come. A striking example is the
French government, which raised US$830 million for
was one of the first cities to issue a Green City Bond efforts toward their distinct marginal abatement costs (these abatement costs typically
(worth approximately US$143 million). Funding through
projects that included renewable energy in schools
the bond will be provided to biogas and solar projects, differ greatly between sectors). In other words, emitters
and energy efficient social housing (UNDP, 2018). Sim-
ilarly, the U.S. State of Hawaii, through a Green Energy
dual-fuel buses and others that are dedicated to reduc- Key definition: may choose to invest in those abatement efforts that are
ing the city’s greenhouse gas emissions (UNDP, 2018). Marginal abatement cost least costly first. This ultimately minimizes the cost of pol-
The cost of abating one additional
unit of carbon emissions. lution control, thus enhancing economic efficiency. It also
contributes to dynamic efficiency, stimulating research
by increasing its acceptance among the general public. Recently, an innovative finan- and development, innovation, and adoption of new tech-
cial instrument – green bonds – has been increasingly used by government entities to nologies that emit less carbon. It also provides a financial incentive to invest in technol-
‘earmark’ bond proceeds to green projects that generate climate or other environmental ogies that reduce emissions.
benefits (See Box 8.2). There are a number of design considerations that are important to consider when
To what extent have environmental taxes been used? Answering this question is implementing a carbon tax. These include: the tax rate, whether certain sectors should
complex since one of the goals (at least in the long run) of the environmental taxes is be exempt, how revenues are to be used, how to assess distributional impacts (e.g.
to reduce the negative externality being taxed. If they are successful, revenues will impacts especially on low-income households – see Section 3.1) and how to ensure
decrease over time. As such, comparisons of revenue as a measure of how environ- that the tax reaches its emission reduction goals (NREL, 2009).
mental policy is implemented in a particular country or year will be inherently inaccu- Around 4 per cent of global GHG emissions are currently covered by carbon taxes
rate. An example of this is Sweden, which has record high tax rates but little pollution. (World Bank, 2016). Figure 2 (below) shows the levels of carbon taxes in those coun-
As a result, the overall share of pollution taxes is moderate, as seen in Figure 1 (over- tries that had adopted a policy by 2016. Though some countries (e.g. Sweden, Norway,
leaf) and Box 8.1. and more recently France) have significant carbon taxes, there are exceptions for

Figure 1: Environmentally related taxes per country for the 20-
year period 1994-2014 in 5-year increments. This figure requires
careful interpretation. A country might have a high tax revenue
because they have high emissions but recently introduced high
tax rates – they might also have moderate tax revenues because,
like Sweden, they have had high tax rates for a long time, so the
activities taxed have been reduced. Source: OECD Statistics,
2018

It is challenging to draw firm conclusions about the effects of carbon taxes on emission
levels by assessing individual countries. This is the case as many additional factors
come into play which would need to be considered by research, such as economic
growth levels or parallel programs that address analogous environmental issues. None-
theless, some studies (Sumner et. al.,2011), find real reductions in carbon emissions in
those countries that have carbon taxes. This appears to be supported by other studies
that have found effects albeit not always significant or large, such as two studies on
Norway by Bruvoll and Larsen (2004; 2006) and a study by Cambridge Econometrics
(2005) on Modelling the Initial Effects of the Climate Change Levy for the UK. Also,
Berkhout et al. (2004) conclude that the energy tax in Holland had a small yet signif-
icant impact on household energy consumption. Likewise, Martin et. al. (2011) find
strong impacts on energy intensity of the UK’s Climate Change Levy (CCL), introduced
in 2001, on manufacturing plants. A paper by Lin (2011) that estimates the mitigation
effects of the carbon taxes of five European countries (Denmark, Finland, Sweden,
Netherlands and Norway), also provides evidence that CO2 taxes proved effective in
reducing CO2 emissions. However, several of these papers also suggest that desired
mitigation effects are reduced due to tax exemption policies for energy intensive indus-
tries (see also Hammar et al. (2013)).
Many debate the pros and cons of carbon taxes versus cap and trade policies. On the
positive side, carbon taxes continuously encourage emission reductions (at least as
long as the tax is high enough to provide an adequate incentive to reduce emissions),
whereas cap and trade policies encourage reductions only to the point of the cap
(although the cap can be lowered). Taxes are straightforward to implement, they create
Figure 2: Levels of carbon taxes across countries (Source, World Bank, 2017, Carbon Pricing Trends)
revenue and they are viewed to be transparent because the price is known (in cap and
trade policies, prices may be volatile). Another important advantage of carbon taxes (as
compared with a cap and trade programme) is that the tax works well in combination
certain sectors (e.g. production of electricity), meaning that there are no countries that with other instruments of climate and energy policy, such as green certificates, subsi-
have truly overarching carbon taxes in place. Sweden does, however, come fairly close dies to renewables and regulations that have been introduced after (or in some cases
as the tax is applied not only to transport fuels but also heating and some industrial use. before) the tax. With cap and trade policies, on the other hand, because of the abso-
It should also be noted that while some countries do not formally have carbon taxes, lute ‘cap’ of emissions, an additional policy may yield no further reduction in emissions.
they do have gasoline or diesel taxes that serve roughly the same purpose (see next This is because the additional policy yields reductions in emissions by some facilities,
Section). causing the demand for and price of allowances to fall. An additional policy in the pres-
ence of a carbon tax, on the other hand, can lead to an overall reduction in emissions

(Goulder and Schein, 2013). See Chapter
9, Box 9.4, for a discussion of policy align-
ments of cap and trade programmes and
feed-in tariffs. Carbon taxes can be viewed
as less politically acceptable, and do not
necessarily guarantee a certain level of
emission reductions, as do permit schemes
(NREL, 2009).
Fuel Taxes
Fuel taxes, generally and simply, are taxes
imposed on the sale of fuel such as gas-
oline, jet fuel and diesel. Fuel taxation
policy differs considerably across coun-
tries, which is a large part of the reason
for widely different domestic fuel prices.
Fuel taxes are generally not imposed for
environmental reasons, though they cur-
rently have the largest impact on revenues.
The practice of earmarking fuel taxes also
differs across countries and may influence
Figure 3: Overview of tax rates on gasoline and diesel motor fuels (USD/litre). Source: OECD, 2015, Taxing Energy Use
the support for or against such a tax. For
example, in the United States most fuel
taxes are earmarked for highway construc- non-transport machinery, such as agricultural equip- (such as Australia, Canada and New Zealand) have
tion. ment, heating, light industry and diesel generators. The somewhat intermediate tax levels. Prices in most Euro-
role of particulate matter and the dangers of diesel to pean countries are more than twice as high as US prices
Diesel and gasoline often face quite different taxes. At human health have recently become more important (see e.g. Sterner (2007)).
one time, diesel was preferred over gasoline because concerns, suggesting that diesel may receive more
it is generally more energy efficient and it was believed attention moving forward. The level of fuel taxes across countries seems to be
to create less toxic exhaust emissions. As a result, until affected by a number of socio-economic factors, which
catalytic converters reduced the emissions from gaso- Figure 3 gives an overview of total tax rates on motor in turn influence the costs and benefits of such a policy,
line engines, diesel was preferred. Diesel is also much fuels across countries. Fuel taxes are high in almost the as well as political attitudes toward the policy. For
cheaper than gasoline in many countries, and is used entirety of Europe and in Japan. Other countries (such example, the presence of an oil industry tends to lead to
heavily in both transport (buses, trucks and cars) and as the US) have low levels of taxation, and yet others lower gas taxes and high consumption levels. This has

As a result of the fuel policy in the EU and Japan, some econometric studies show that
fuel demand has been cut so dramatically that it has had a large and significant effect
on the carbon content of the atmosphere (Sterner, 2007). In general, fuel demand is
quite price-elastic – at least in the long run – and therefore fuel taxation can be an effec-
tive long-run instrument to lower demand and thereby emissions.
Sulphur and Nitrogen Taxes
In the 1970s acid rain was a major environmental problem – it is an interesting case
demonstrating the successful use of market-based instruments. Acid rain is caused by
emissions of sulphur dioxide (produced in the combustion of fossil fuels such as coal,
oil and natural gas) and nitrogen oxide (produced by nitrogen fertilization of soils, and
fossil fuel combustion largely in mobile sources), which react with water. The acid pro-
duced damages plants, organisms and infrastructure. There are several differences
between sulphur dioxide and nitrogen oxide that necessitate a differentiated policy
approach.
Most policies addressing sulphur dioxide are regulatory. They include performance
standards on the sulphur content of fuels or design standards that prescribe certain
technological requirements (Sterner and Coria, 2012). In addition, a number of coun-
tries have used differentiated taxes on energy or fuel to target sulphur reductions. The
level of these taxes range widely, from under US$50 /tonne in Italy, France, Switzerland
Figure 4: Prices and consumption of fuels in selected countries in 2014. Source: Gasoline Prices IEA
(2009) and IEA (2018), Consumption IEA (2017), with population data from UN (2017).
and Spain, to higher levels in the Scandinavian countries Sweden (US$3,000/tonne),
Norway (US$2,100/tonne) and Denmark (US$1,300/tonne), where local ecosystems
are very sensitive to acidification (Sterner and Köhlin, 2003). In countries with high
been shown in the United States, Mexico, Venezuela, and some countries in the Persian taxes, sulphur emission rates have generally fallen dramatically. For example, between
Gulf. Also, low population density generally results in a higher dependence on individ- 1980 and 1997 substantial reductions were seen in Austria and Sweden (86 per cent),
ual transportation, leading to lower taxes, whereas high population density countries Finland (83 per cent), Germany (80 per cent), Norway and Switzerland (both 78 per
tend to have higher taxes. Higher highway tolls are also associated with lower taxes cent) (Sterner and Coria, 2012). In the USA, a trading scheme was established for SO2
(Sterner and Coria, 2012). among electric utilities in 1990, and is considered a success for achieving environmen-
tal goals at comparatively low costs (Sterner and Coria, 2012).
Countries with low or negligible fuel taxes (resulting in cheap fuel, e.g. the United
States) tend to have much higher consumption rates than countries in which fuel taxes Countries with a tax on nitrogen have levied between US$30 and US$100 /tonne. Unlike
are higher (resulting in more expensive fuel, e.g. in Europe, see Figure 4). In most Euro- SO2, NOx does not result from a fuel impurity, and therefore cannot be easily predicted.
pean countries, per capita consumption of fuel is less than half of that in the US. As a result, expensive monitoring equipment is required (Sterner and Coria, 2012). It

follows that these taxes are most often levied on the and neglect others. Since these natural resource sectors of government revenues in 2013), since 2003 has been
basis of estimated pollution. Inherent technical diffi- are profitable, salaries tend to increase and naturally plagued by conflict and internal instability. Poor state
culties to monitoring and enforcement have made NOx rising salaries in one sector will have at least some ten- legitimacy and a highly fractured society have retarded
emission reduction less successful than that of SO2. dency to spread to other sectors. The ease of export- the emergence of solid accountability systems and have
ing and earning money in the profitable sector will tend contributed to a deterioration of the country’s external
1.2.2 Resource Rents (through various mechanisms) to encourage an over- competitiveness and non-oil trade balance, exposing the
valued exchange rate that makes it even harder for the county to oil shocks and increasing the number of poor
The sustainable management of natural resources such country’s industries to export in any other sector. households (World Bank, 2015b).
as oil, minerals, forests, hydropower, etc. is central for an
inclusive green economy. This is due to their importance Thus, exports from the more profitable resource sector Where institutions are strong, one approach to counter-
for livelihoods, labour opportunities, contribution to GDP make other sectors less competitive. Generally, the act the difficulties inherent with the ‘resource curse’ is to
and exports and, not least, due to the disastrous effect resource curse is also strongly associated with weak neutralize excess earnings by, for example, creating a
that mismanagement can have on the people that are public institutions which in turn slows growth and affects sovereign wealth fund. Such a fund can invest in other
directly affected. institutional capacity to handle shocks (Isham et. al., activities that can continue to provide wealth even after
2005). It is also quite common for lobbyists from the the boom. They may help to smooth volatile revenues
Empirical evidence has shown that countries endowed booming sector to have undue influence over govern- and provide a buffer to maintain public spending in times
with richer natural resources systematically grow more ments. Corruption and policy capture can arise in this of low commodity prices. There are relatively few coun-
slowly than resource-poor countries, creating a so-called setting more easily, creating a situation in which deci- tries that succeed with such policies, though Norway is
‘resource curse’ (Frankel, 2010). A number of possible sions over policies are directed away from the public sometimes cited as a developed country example, and
reasons for this curse have been proposed. One such interest towards specific interest due to lack of transpar- Timor-Leste as a developing country example. In the
reason is that often resource-rich countries develop ency, accountability and information (OECD, 2017). 1990’s in Norway – following previous legislation granting
their economic activity along a narrow geographic and ownership of all of the nation’s resources to the state - a
material base, focusing on the abundant resource. The For economies based on exhaustible resources, the Government Pension Fund, informally known as the Nor-
inflow of foreign currency that results from the resource Hartwick rule offers a prescription for maintaining sus- wegian Oil Fund, was created to manage the revenues
export can become so great that it leads to a distortion tainable and constant levels of consumption. This rule generated by its fossil resources. Today, this fund is
of the economy, making other sectors uncompetitive. prescribes reinvesting resource rents in reproducible worth more than US$1 trillion – one of the world’s largest
This phenomena is sometimes also called the ‘Dutch capital such as machines. It argues that the value of investors. Withdrawals from the fund were capped at
disease’ (named after the problems created in the investment should equal the value of rents on extracted 4 per cent annually to help ensure security should the
Netherlands after discovery of natural gas in the North resources at all points in time. (Hartwick, 1977; Asheim, petroleum resources expire. In sum, Norway has suc-
Sea). In a country afflicted by the resource curse, the 2013). ceeded in transforming its petroleum wealth into finan-
booming sector is more profitable than other sectors. As The strength of a country’s institutions is a critical con- cial assets. The 2005 Petroleum Fund in Timor-Leste has
a result, talented entrepreneurs and workers flock to this sideration in whether the resource curse can be coun- helped control phase-in of petroleum income into the
sector, depriving other, established sectors of suitable tered (Ploeg, 2011). For example Chad, a country highly country’s economy with a diversified investment strategy
resources. Politicians vie for the attention of this sector dependent on oil revenue (which constituted 70 per cent and transparency requirements. A share of revenue and

investment returns (approximately 3 per cent) is trans- on ideology. In some countries, rights (e.g. minerals or ute proportionately to government revenues. It is in the
ferred to the state budget and is dedicated to investment water) are associated with land ownership. In others, design of contracts for resource concessions and other
in economic affairs, public services, education, social rights (e.g. water rights) belong to communities or may tax policies that countries can ensure a fair share of the
protection and other programs (GIZ and UN Environ- be grandfathered to historic users. One might say that resource rent from their natural resources. Successful
ment, 2016). we are in a constant process of creating land rights. design and implementation of such a contract or policy
Some refer to this as a process of enclosure. In medieval will typically depend on the strength of the institutional
Public funds, such as Norway’s Government Pension Britain, for example, public or common lands were open environment in which it is implemented.
Fund, may also contribute to green investment and and private lands were ‘enclosed’ through some form
thereby a green economy. Such funds can gain expo- of fence (usually a hedge). Naturally, in historic times
sure to green assets by committing to green debt plat- 1.2.3 Subsidies and Subsidy Removal
there were no rights to the bottom of the deep seas, nor
forms, investing in renewable energy companies and to radio frequencies, geo-stationary ‘parking spots’ for Subsidies may range from tax expenditures to direct
projects or participating in green infrastructure funds. To satellites, nor rights to emit carbon dioxide. Rights are budget-financed payments in support of certain activ-
date, green investment strategies by sovereign wealth created as scarcities develop and these rights can either ities believed to be environmentally friendly. Rather
funds are still relatively nascent, though there has been be thought of as emanating from, and inherently belong- than charging a polluter for emissions, subsidies offer
some investment in green infrastructure assets (e.g. by ing to, the state, the owners of adjacent land property, or a reward for reducing emissions, thereby providing an
funds in China, Morocco, Saudi Arabia, and the United customary users. incentive to reduce polluting emissions (Coria, 2018).
Arab Emirates) (UN Environment, 2017). They are typically (partial) payments for verified abate-
The importance of the design of resource rents is ment costs (e.g. fixed capital costs for a filter, catalytic
Charges such as mining royalties, stumpage fees, user evident from the dependence that many, particularly
fees, and land taxes, on the extraction of various natural converter or other), and may come in the form of grants,
developing, countries have on oil and minerals. Many low-interest loans and favorable tax treatment. For
resources have become increasingly prevalent. They African countries are particularly dependent on reve-
may be charged because of negative external effects example, subsidies may be used to do the clean-up if
nues generated by mineral and petroleum extraction. the polluter cannot be identified or is bankrupt, (the most
(e.g. environmental externalities) or because the gov- At least 70 per cent of total government revenues come
ernment (as is the case in Norway and many other famous example being the ‘superfund’ sites under the
from the petroleum sector in Algeria, Angola, Demo- Comprehensive Environmental Response, Compensa-
countries) owns the resource and thus could and should cratic Republic of Congo, Equatorial Guinea, Libya, and
charge a scarcity rent (Sterner and Coria, 2012). Even tion, and Liability Act in the United States)
Nigeria (Jones, 2011). Minerals are also important for a
in the case of ill-defined property rights, the state can number of African countries as a proportion of GDP, for Subsidies may also be provided to actors that help
apply this right. Quite a few countries have a law stating government revenues and for export, and thus foreign avoid external environmental costs (e.g. by generating
that all forests or lands that are not explicitly the property exchange earnings (see Figure 5, overleaf). While miner- cleaner electricity). The idea behind such subsidies is
of other individuals or entities, automatically belongs to als may be important in terms of contribution to GDP and that society would have to bear a given cost if a given
the state. export earnings, this does not automatically translate quantity of energy was produced by a conventional
Resource rents theoretically can belong either to owners into government revenues. In Cameroon, and in partic- energy plant – the level of subsidy paid to renewable
of land, to citizens or to polluters, depending on the ular in South Africa, the governments have been unsuc- energy plants/producers would be based on this cal-
legal philosophy of the country/region, on tradition and cessful in ensuring that returns from minerals contrib- culation (Coria, 2018). By supporting adoption of better

icies. Once introduced, however, subsidies are difficult to phase-out, and may create
vested interests and clientelism. This also makes it challenging to phase out subsidies
that have negative environmental consequences and that drain the government budget,
as part of green fiscal reform. By making resource use cheaper, subsidies may con-
tribute to higher consumption and thus resource depletion. For example, subsidies for
fossil fuels encourage excess energy consumption, artificially promote capital-inten-
sive industries, reduce incentives for investment in renewable energy and accelerate
the depletion of natural resources (IMF, 2013). The IEA estimated the value of global
fossil fuel consumption subsidies in 2016 around US$260 billion, with vast differences
by country (see Figure 6). Estimates vary widely by organization, however, depending
on the methodology and whether externalities are included. For example, in 2015, IMF
estimated that energy subsidies would incur costs of US$5.3 trillion, or 6.5 per cent of
global GDP (IMF, 2016). Most of this arises from countries setting energy taxes below
levels that fully reflect the environmental damage associated with energy consumption,
such as by global warming and local air pollution (IMF, 2016).
There are potentially substantial benefits to fossil fuel subsidy reform, which include
increased government revenue, a reduction in global CO2 emissions, and in pre-ma-
ture air pollution deaths, though the exact quantification of such impacts is subject to
debate. An IMF report estimates, through a partial equilibrium analysis, that eliminating
Figure 5: Mining Revenue - Selected Sub Saharan African Countries (2009-2015) Source: Information
subsidies could raise government revenue globally by US$2.9 trillion (3.6% of global
drawn from Sopp and Leiman, 2017. (Incl data from IMF International Financial Statistics, Primary GDP) (IMF, 2016).
Commodity Prices, Government Financial Statistics, World Economic Outlook Database. Country
specific data sources vary. A number of countries have embarked on fossil fuel subsidy reforms; however, efforts
have been both successful and unsuccessful. Reforms have addressed fuel subsidies,
the electricity sector and in isolated cases, the coal sector (IMF, 2016). In some coun-
practises by way of different financial support schemes, such subsidies can incentivize tries (e.g. in Turkey, Brazil, Chile and South Africa), reforms have led to a permanent
the adoption of sustainable technological innovations. The additional demand creates and sustained reduction of subsidies, whereas in other countries subsidies have either
economies of scale, again, providing impetus for technological learning effects. For (temporarily) re-emerged (e.g. Indonesia, Peru and Iran) or price increases were rolled
this reason, subsidies to renewable energy production can have large and far-reaching back soon after the reform began (e.g. Mexico).
implications when it comes to setting the future structure of the energy and transporta-
tion systems. A number of key elements have been identified for fossil fuel subsidy reform, based
on experience in countries in which such reforms have been implemented. These ele-
Subsidies are often popular with polluters (as it does not fulfil the polluter pays princi- ments include: 1) a comprehensive plan for energy sector reform including analysis of
ple), which may make them more feasible to implement politically than other fiscal pol- impact and consultation with stakeholders; 2) an extensive communications strategy;

3) appropriately phased price increases, which may vided for the construction of fishing vessels. In addi-
vary across energy products; 4) targeted measures tion, support for the modernization of fishing vessels to
to protect the poor; and 5) institutional reforms that improve safety, working conditions, hygiene and product
depoliticize energy pricing, such as the introduction quality was limited and provided only on the condition
of automatic pricing mechanisms (IMF, 2013). that such aid did not increase catch capacity (Markus,
2010).
Targeting measures to protect the poor may be par-
ticularly relevant in developing countries, where
households may spend as much as 10 per cent of
their income on energy (World Bank, 2010). Reform- 2. The political economy of green
ing subsidies for energy in such countries could
make modern energy unaffordable if not accompa- fiscal reform
nied by, for example, cash transfers to the relatively
As discussed in the previous section, there are many
poor. Such pro-poor policies can be financed by
strong arguments for environmental taxes, which
funding streams previously spend on the energy
include increased revenues, the polluter pays prin-
subsidy. (See Iran case study (Section 2.2.1) below).
ciple and the opportunity to offset other distortionary
Another example of subsidies with negative envi- taxes. Such attractive features would suggest that green
ronmental consequences are those in the fishing fiscal reforms have the ability to easily gain wide public
industry. The difficulty with a majority of fisheries support and to be successfully implemented. However,
subsidies is their capacity enhancing effect: sub- environmental policy instruments are not selected based
sidies result in more and bigger boats, and longer on academic merit or how good they would be at allocat-
nets. While this may increase fish yields in the short ing resources – enlightened civil servants cannot imple-
term, this practise exacerbates the depletion of fish ment optimal green taxes without political backing.
stocks in the long run (in turn leading to a reduction
Environmental policy instruments are inherently part of a
of economic benefits over a longer period of time).
political struggle between different interest groups and
Subsidies also lower retail prices, which increases
other political factions and will naturally be a product of
consumer demand for resources that are already
such circumstances, as well as of the institutional and
under pressure (Markus (2010); See also Sanchirico
cultural features of a country’s public sector. If not taken
and Wilen (2007); Khalilian et al. (2010); and Costello
properly into consideration, these factors may obstruct
et al. (2016)). Some positive efforts have been made
implementation and/or make the final outcome of a
to counter such policies. For example, in 2002 and
certain policy deviate from expectations. One country’s
Figure 6: Energy Subsidies by Country (2016). Source: IEA, 2018b. 2007 the EU amended its European Common Fish-
fruitful introduction of a certain environmental policy
eries Policy to phase out support previously pro-
does not guarantee success in other contexts. This

means that the design and implementation of a green are further concerns (IMF, 2013). See Section 2.2 for between fuels). The energy tax and CO2 tax should be
fiscal policy needs to consider and be tailored not only short summaries of subsidy removal in practice. seen in combination, as two tax components rather than
to environmental and economics characteristics, but as two separate taxes. The energy tax targets other
also to the political context. In the following section, we will have a closer look at external effects than CO2 emissions (such as noise, con-
some cases where green reform has either succeeded gestion and road wear from traffic) and also acts as a
The administrative feasibility of an environmental tax, vis- or failed, in an attempt to demonstrate political and way of generally stimulating energy efficiency.
à-vis its closest substitute, is an important consideration. institutional aspects that influence implementation and
In many developing countries the tax base is small and overall results in both positive and negative directions. The significant aspect of the green tax reform was that it
it is difficult to implement efficient property taxes, labour If acknowledged and carefully incorporated in policy was introduced as part of a broad tax-reform with bipar-
taxes and value-added taxes. The feasibility of a tax, design, political and institutional characteristics may tisan support. The introduction of CO2 taxation was just
and the lower transaction costs of enforcing some envi- effectively support green fiscal policies’ potential to a small part of the funding of this reform that primarily
ronmental taxes make them particularly interesting for achieve traction in the political system. involved dramatically lower taxes on capital and labour.
many developing countries with large informal sectors. The political opportunity to introduce this rather unique
As an example, a recent World Bank report (2015) notes tax consisted of the confluence of two separate politi-
that carbon sources are concentrated making carbon 2.1 Experience in implementing carbon cal processes. The predominant political pressure was
emissions straightforward to monitor and carbon or taxes a demand for a drastic reduction in marginal income
energy taxes difficult to evade. For such cases, as in tax rates that had reached very high levels. At the same
Sweden and the UK, tax evasion has been shown as time, there was an increasing interest in environmental
substantially lower than for value added tax and income 2.1.1 Carbon tax in Sweden issues. The CO2 tax was thus introduced at a moment
tax respectively. For the many developing countries The long-term aim of the Swedish Government is a when there was a need to fill a gap created by reduced
struggling with tax evasion, that is a substantial advan- sustainable energy supply that makes efficient use of taxes on other factors of production. According to
tage (World Bank, 2015). resources and gives rise to zero net emissions of green- pre-reform estimates, the reform entailed a reallocation
house gases in the atmosphere by 2050 (Government of revenue of approximately 6 per cent of GDP. Interest-
In terms of subsidy removal, the adjustment of subsi- ingly enough, at the design stage it was expected that
dized energy prices has, in many cases, led to wide- Bill 2008/09:162). Sweden is a positive example of politi-
cal opportunity and implementation of a CO2 and energy the amount of carbon emissions would decline, meaning
spread public protests from those who benefit from the that the associated tax revenue would also be reduced
subsidy, followed by either a complete or partial reversal tax. To ensure general acceptance, the country imple-
mented exemptions and gradual changes to its policies. (Swedish Green Tax Commission, 1997). In summary,
(IMF, 2013). A lack in public support for subsidy reform transparency in shifting taxes on labour to taxes on
is often the result of distrust that the government can In 1991, Sweden introduced a CO2 tax on all major pollution was an important factor to achieve popular
reallocate savings to benefit the broader population and fossil fuels at rates equivalent to US$35/tonne CO2 – a support for the reform. It happened to also be a high
that vulnerable groups will be protected. The inflationary very high level of taxation on fuels compared to other political priority and made a lot of economic sense given
effects of higher domestic energy prices and the possi- countries. At the same time the energy tax rates were the high marginal tax rates on labour at the time.
bility for adverse effects on international competitiveness reduced by 50 per cent, which still meant a net increase
for all fuels (although the increase varied in magnitude

In general, the introduction of the carbon tax did the EU ETS cap and trade program by reducing
not increase the tax burden on the public sector, the CO2 tax on fuels used in those industries, e.g.
while tax increases for companies and house- heavy energy-using installations such as power sta-
holds in the energy and environmental areas were tions and industrial plants. In 2011 the CO2 tax for
combined with general tax relief in other areas. industrial installations within the EU ETS was abol-
This avoided increases in the overall level of taxa- ished. As for heating fuels that are used by industry
tion, addressed undesirable distributional conse- not covered by the EU ETS, the lower level of the
quences and stimulated job growth. CO2 tax was raised to 30 per cent of the general
level in 2011 and further increased to 60 per cent in
Over the years, the CO2 tax rates gradually 2015.
increased, with the purpose of achieving cost
effective emission reductions. The tax changes While we cannot establish causality, we can point
were implemented stepwise so that households to the fact that Sweden has seen significant reduc-
and companies had time to adapt. For example, tions in carbon intensity, particularly in the sectors
in 2009, the Swedish Parliament adopted a where the full tax is applied. The CO2 tax has had
number of tax changes in the climate and energy a major impact on fuels used for heating purposes,
area that entered progressively into force (Gov- where biofuels and other non-fossil energy sources
ernment Bill 2009/10:41). The fact that the reform (such as energy from waste and surplus heat from
was gradual and predictable made it more Figure 7: Development of the Swedish CO2 tax for different areas of use. Note that industrial processes) have significantly increased
Nominal CO2 tax levels, for 2010-2015 the 2010 level is used. From 2008, level for
acceptable to those affected, as well as the industry outside EU Emissions Trading Scheme (EU ETS) is shown. Fuel used for
their shares.
special concessions made to industrial emissions, stationary motors and for heating purposes in the manufacturing process in indus-
as can be seen in Figure 6. try. Diesel as motor fuel in tractors and other agricultural and forestry machinery is The Swedish experience also shows that emission
not included. (Source Hammar et al 2013) reductions can be combined with economic growth.
In 2017, the general CO2 tax corresponded to Between 1990 and 2010, CO2 equivalent emissions
around US$137/tonne CO2 (1.13 SEK per kg were reduced by 8 per cent while at the same time
CO2). This is an order of magnitude higher than been subject to a considerably lower tax level than
households (See Figure 7). economic activity increased by 51 per cent. This may
the price of permits within the EU Emissions Trading be considered an ‘absolute’ decoupling (see Chapter
Scheme which laid at around US$6/tonne CO2 for most Another important issue when it comes to green tax 2) if examined from a territorial or production-based
of 2017, and US$15/tonne CO2 in early 2018. In Sweden, reform is how it relates to international commitments. approach. Moreover, the total tax share of GDP actually
the risk of carbon leakage was addressed through the Since Sweden is part of the European Union, it had to fell, so carbon taxation did not lead to ‘a bigger state’.
use of somewhat lower tax levels (that are still high in an balance its own policies with EU policies and in some The green fiscal reform and the high carbon taxes in
international context) for certain sectors. For example, cases also transition from Swedish policies to EU pol- Sweden managed to reduce an already low level of
ever since the introduction of the CO2 tax, industry has icies. In 2008, Sweden took a first step towards abol- emissions of CO2 per GDP to even lower levels. (See
ishing the CO2 tax within the industries that are part of Figure 8, which compares Sweden to a number of other

countries). This exemplifies both the cent of the country’s greenhouse gas
potential of green fiscal reform to fun- emissions. It went into force in 2012,
damentally affect the sustainability and was first scheduled to operate with
of an economy by decoupling emis- a fixed price model that continued until
sions from growth, but also the extent mid-2015. Then, beyond 2015, emis-
to which policy makers need to go to sion trading was to begin (Jotzo, 2012).
achieve these objectives. Following the 2013 federal election,
legislation was introduced to repeal
2.1.2 Australia’s carbon policy the carbon price. It went into effect
reversal mid-2014, effectively ending Australia’s
carbon policy. Though emissions had in
Australia is another example of the fact declined during the short life of the
importance of political feasibility for policy, public support for this move was
green tax reform, and in many ways is provided by an increase in electricity
the opposite from Sweden. The Aus- costs for households and industry and
tralian economy is tied closely to fossil a campaign that placed the economy
fuels – coal and natural gas account Figure 8: Carbon dioxide emissions per unit GDP in selected countries and regions. Source: Carbon Dioxide against the policy (Baird, 2014).
Information Analysis Center, Environmental Sciences Division, Oak Ridge National Laboratory, Tennessee,
for the bulk of the country’s export United States.
income, fuelled largely by Chinese Since its repeal in 2014, climate
demand. It is the world’s second change policy has remained an issue
largest coal exporter. The country also change issues. While in office, Rudd’s flagship climate on the Australian political scene. Aus-
relies heavily on coal for domestic electricity generation. change policy, the Carbon Pollution Reduction Scheme, tralia did sign the United Nations Framework Convention
The strong connection to fossil fuel interests has made twice failed to gain the support of the Australian Senate, on Climate Change Paris Agreement in 2016 and in 2017
action on climate change the subject of a highly partisan and helped confirm climate change as one of the most the government completed a climate policy review that
debate between Australia’s major political parties (Bailey controversial issues in Australian politics (Bailey, et. al., concluded in 2018 it would begin developing a long-
et. al., 2012). 2012). Since 2007, climate change policy has contrib- term emissions reduction strategy. Nonetheless, Aus-
uted to the downfall of a number of prime ministers and tralia clearly demonstrates how a political environment
The political environment surrounding climate change opposition leaders (Jotzo, 2012). can prevent the success of a carbon tax, no matter how
mitigation policy has shifted starkly in the past decade, well-designed.
and continues to be volatile. Though the first blue prints A growing awareness that Australia faces severe risks
for emissions trading were developed in the 1990’s, from climate change impacts helped propel broad bipar-
the government refused to ratify the Kyoto Protocol in tisan support for carbon pricing in 2007-2009. Then, in
2002. Following this decision, the incoming Prime Min- 2011, amidst policy uncertainty, Australia implemented
ister Kevin Rudd expressed strong support for climate a carbon pricing mechanism covering around 60 per

2.2 Experience in fossil fuel subsidy was told that they would be eligible to receive significant elements were included to help ease acceptance of the
reform sums of money, support for the reform was widespread. reforms: 1) the government committed to social safety
nets with budget allocations – increasing the number
Though the reform began smoothly in 2010, the second of households covered by the social protection system
2.2.1 Steps toward reform in Iran phase of the reform was postponed in 2012 following from 1 million to 7 million to ensure that the most vulner-
deterioration in economic conditions, increasing inflation able were protected from the price increases; 2) people
In Iran, the Targeted Subsidy Reform Law specified and exchange rate depreciation. Large shares of the
post-reform price targets with increases of up to 20 times were allowed to apply to social assistance by mail, so
revenues expected from price increases failed to materi- asking to help was less public (World Bank, 2017).
for gasoline, diesel, natural gas, electricity, some foods, alize, and as a result, revenues fell short of those prom-
and air and rail transport with the aim of closing the gap ised to households. Though consumption of subsidized As a result of the reduction of subsidies, gas consump-
between domestic and international prices. This policy products declined in the early stage of the policy, once it tion has been reduced by half in a period of just a
made Iran the first major energy-producing and export- was postponed the growth in consumption of subsidized couple of years (Nabiyeva, 2016).
ing country to drastically cut subsidies to fossil fuels. products rebounded.
For a full discussion see Astrov V. (2017) Nabiyeva, K.
To prevent opposition to the reform, the policy replaced For a full discussion, see IMF, 2011 (Iran – the Chron- (2016) and World Bank (2017).
subsidies with transfers to the population. Fifty per cent icles of Subsidy Reform, International Monetary Fund,
of the net proceeds from the price increase were allo- WP/11/167) and IMF, 2014 (Islamic Republic of Iran,
cated to households as cash and non-cash transfers. 2.2.3 Slow reform progress in Vietnam
International Monetary Fund, Country Report No. 14/94).
Thirty per cent of proceeds were allocated to enter- The IEA estimates that fossil fuel subsidies in Vietnam
prises, which were to receive subsidized loans for the fluctuated between US$1.2 and US$4.49 billion annually
adoption of new, energy-saving technologies and credit 2.2.2 Early signs of successful reform in the
between 2007 and 2012 (IEA, 2018b). Most subsidies
lines to mitigate the impact of energy price increases on Ukraine
are indirect and are not recorded as actual fiscal trans-
their production. Natural gas (most of which was imported from Russia) fers, making them very difficult to quantify. The support
As international prices were far out of line with domes- was heavily subsidized in Ukraine since its energy inde- comes in the form of control of prices for electricity and
tic prices, few could argue that maintaining such a pendence in 1991, with households paying 10 times petroleum products, and provisions for energy produc-
system was sustainable. Authorities made it clear from below the market gas price (Nabiyeva, 2016). ers and distributors, most of which are state owned
the outset that the purpose of the reform was to reduce enterprises (SOEs). SOEs receive, for example, dis-
Motivated in part by conditions required by the Inter- counted or even free resources and infrastructure, pref-
waste and make consumption more efficient. In passing national Monetary Fund in 2014 for continued loan pro-
the reform, authorities reached out to more than 70 erential loans from state-owned banks, loan guarantees
grams to the country, residential gas tariffs were raised or bail-out of loss-making units and a variety of corpo-
million citizens and engaged in a public-relations cam- by 470 per cent and district heating tariffs by nearly
paign that lasted for months. The purpose of the cam- rate tax breaks and concessions. Similarly, state-owned
200 per cent (Astrov, 2017; World Bank, 2017). In April Petrolimex, responsible for more than 50 per cent of Viet-
paign was to educate the public on the growing costs 2016, another gas tariff was introduced. In sum, amid
of low energy prices and the benefits expected from the nam’s retail petroleum supply dominates domestic fuel
fiscal crisis, prices were substantially increased for con- markets.
reform. Because close to 80 per cent of Iran’s population sumers, stirring social protests. Nonetheless, several

A brief survey of people’s perspective on reform of the society. The cost distribution may have many dimensions this assumption. Others (e.g. Speck, 1999) have shown
energy sector revealed a number of key concerns. – between owners of capital and labourers, between the distributive impacts of a carbon tax to be relatively
These include a lack of transparency regarding the rich and poor people, between urban and rural, but also weak, with only relatively moderate impacts on low-in-
monopoly structure of SOEs and the perception of likely across generations and more categories that may be dif- come households. Relative impacts would again depend
adverse impacts on household and enterprises, particu- ficult to predict (Sterner and Coria, 2002). Ultimately, the on the type of fuel being taxed, but also on the distri-
larly during time of economic downturn. Households and consideration from the most influential group will matter, bution of benefits from improved environmental quality.
small- and medium enterprises recent energy price has but it is also interesting to look for the distributional impli- In sum, the existing literature about possible adverse
increased, in the face of what they perceive to be waste- cations from an inclusive sustainable development per- distributional implications of carbon taxes has largely
ful and inefficient energy SOEs. spective. Overall, the distributional effects of an environ- yielded diverse conclusions. A recent overview study by
mental fiscal policy can vary significantly. Dorband et al. (2018), concludes that the distributional
Nonetheless, the government has committed to fossil consequences of carbon pricing can be expected to be
fuel fiscal policy reform and a transition to green growth The impact of a reform in terms of ‘regressivity’ (i.e. the most adverse in countries with relatively high per-cap-
(see the Party Resolution on Climate Change, Natural extent to which a policy imposes a proportionally higher ita emissions, whereas in countries with low emissions,
Resource Management & Environment and the national burden on the poor) or ‘progressivity’ (which is what an carbon pricing can be expected to entail less severe
Green Growth Strategy). Some preliminary steps have inclusive green reform typically should aim for) of taxes distributional implications, but as we will see below,
been taken in the direction toward green growth. For has been shown in the literature to depend on a number other factors than emissions are also important.
example, the government has instituted a small envi- of factors including the incidence of the policy vis-à-vis
ronmental tax and has started to raise electricity tariffs socio-economic conditions, as well as the nature of the In developed countries, carbon pricing tends to be
and prices for fossil fuels (e.g. prices for coal and gas goods and services affected (Aasness et al., 2002). This regressive, which can be explained by the more car-
for power production). The government has also agreed will be elaborated on in the following sections. bon-intensive consumption patterns of poorer house-
on a roadmap to restructure SOEs, scheduled to be holds (Dorband et al., 2018; Grainger et al., 2010). Direct
complete by 2020, though progress has been slow for a energy consumption and private transport in these
number of reasons. These include vested interests, the 3.1 Carbon and energy taxes countries can be considered as necessities and exhibit
complexity of SOEs’ role within markets, and difficulty in decreasing expenditure shares with rising income.
tackling the scale of commercial and institutional issues The effects of a general carbon tax will depend on the
existing within energy markets. For a full discussion and mode of implementation with respect to different fuels In poorer countries, the level of greenhouse gas emis-
accompanying recommendations see UNDP, 2014. and sectors, and will typically be more complex than for sions as well as the breakdown of carbon emissions by
a single fuel (Somanathan et al., 2014). sector looks quite different than those in high-income
countries. For example, in Ethiopia, the level of overall
Because lower-income households spend a larger share greenhouse emissions is comparatively low and most
of their income on energy than higher-income house-
3. Distributional consequences holds, a carbon tax could easily have a regressive
emissions originate in the agricultural sector (e.g. live-
stock), land-use and forestry (land clearance and fire-
The political feasibility of a green fiscal reform depends impact, but that depends on the composition of fuels. wood). As a result, the implementation of a carbon or
fundamentally on how it affects different groups in Some studies (e.g. Smith, 1992, for the case of the UK, energy tax will affect these countries differently than
and Poterba, 1991, for the case of the US) confirmed

options include setting a tax-free use for the essential use of energy (e.g.
metered domestic energy), or redistribution of carbon-tax revenues. The
1996 Dutch regulatory energy tax, for example, set a tax-free allowance of
800 m3/year for gas and of 800 kWh for electricity to reduce its distributional
effect on lower-income groups (Zhang and Baranzini, 2004).
In Europe, concerns about regressive effects of energy taxes have been
addressed by various redistribution and compensation mechanisms. For
example, exemptions have been made for some energy uses thought to be
characteristic of low-income households (e.g. night storage heaters were
exempted from German energy taxes), and higher tax rates have been
imposed on energy uses characteristic of rich householders. Despite such
efforts, the regressive effects often remain to some extent (Ekins et al., 2011).
Similarly, Increasing Block Tariffs (IBT), with higher prices for large consum-
ers, is the most common approach to ensure redistributive objectives when
it comes to energy tariffs in low-income countries. Unfortunately, since poor
families often share connections (and thus become “large consumers”) this
approach is seldom very effective (Whittington, 2000; Meles, 2017).
Figure 9: Distributional consequence of a carbon tax on the lowest income group relative to the national average in
low-income countries. Values smaller than one indicate progressive distributional impacts, whereas those greater
than one indicate regressive impacts. Source: Dorband et al., 2018. 3.2 Fuel taxes
As described in Sterner (2011), fuel taxes are often criticized for being
high-income countries. In an overview study of 87 low and middle-income coun- regressive, though a closer look at the empirical results shows that there
tries, Dorband et. al. (2018) found that for countries with per-capita incomes of below are large variations in distributional impacts and effects ranging from regressive to
US$10,000 per year carbon pricing has, on average, progressive distributional effects progressive. The specific regressive effects of fuel taxes are also impacted by country
(see Figure 9). In many low-income countries, energy and transportation access are still and region-specific factors such as distribution of income, energy supply structure and
luxuries and expenditure on energy shares increase with rising income. This is partially energy efficiency characteristics of domestic fuel use, as well as on the specifics of
due to the use of traditional biomass (which is collected rather than purchased) used as the methods used (e.g. whether lifetime or temporary income, or substitution or other
a primary fuel by the very poor. adaptations are allowed for in the analysis) (Ekins, 2011; Sterner and Carlsson, 2012).
Nonetheless, the assertion that fuel taxes are regressive is often used as an argument
The impact of a carbon tax on the distribution of income has been shown to be a fun- against them and can make fuel taxes politically difficult to implement even if untrue.
damental factor in securing public support for such a policy and thereby also politi-
cal acceptability (Baranzini, 1997; Zhang and Baranzini, 2004). There are, of course, In rich countries, fuel taxes may be neutral or weakly regressive, though the picture is
design options that could help to mitigate any regressive distributional impact. Such somewhat mixed. While in Europe (see below), taxes tend to be neutral, in some richer

countries, like the U.S., fuel taxes may be regressive mail rebate checks to households on an annual basis. In Ethiopia, private vehicles are used almost exclusively
(Sterner et. al., 2012). This is partly due to the absence (Bento et. al., 2009) by the richest 10 per cent of the population – around
of public transport, which makes people dependent on 85 per cent of Ethiopians live in rural areas with limited
cars, and the sprawling character of cities, as well as 3.2.1 Fuel taxes in Europe use of modern modes of transport. In the poorer shares
distances between places that people live and work. of the population, people prefer not to pay for public
These factors make many, in particular, poorer house- As discussed in Section 9.1.2, the average tax on gas- transport and tend to walk by foot or use non-motorized
holds dependent on cars and thus fuel, which may oline in Europe is very high compared to the U.S and means of transport.
present a sizeable proportion of their income. In addi- many other non-European countries. Nonetheless, the
tion, poorer households tend to have older, cheaper, and income distribution effects of fuel taxes in Europe have As a result of this split in transportation use, about 97 per
more gas-guzzling cars. been shown, in general, to be approximately neutral cent of the expenditure on private transport fuel in the
(Sterner, 2012). With the exception of income, other country is spent by the richest 10 per cent of the popu-
In low-income countries, fuel taxes are generally pro- variables such as population density, vehicle density lation (Mekonnen, Deribe and Gebremedhin, 2011). On
gressive. In fact, in some of the countries with the lowest and degree of urbanization do not tend to affect these average this population group spends around 0.8 per
incomes, such as India, Indonesia, China and many results. In lower-income European countries, such as cent of their household budget on fuel – the rest spends
African countries, the progressivity of fuel taxes may Serbia, the fuel tax is actually progressive (Sterner and nearly 0. Transport fuel taxes have thereby been shown
be quite strong. See, for example, the case of Ethiopia Carlsson, 2012). to be clearly progressive in Ethiopia. If fuel taxes were
below. In China, very poor households cannot afford In general, the highest burden is placed on middle-in- to increase, the rich are likely to be impacted dispropor-
public transportation and the very richest households come groups because the proportion of car ownership tionately – such a policy could be viewed as pro-poor
rarely use public transport. As a result, the fuel tax on is lower in low-income groups, and households without and would fit well in an inclusive green growth strategy.
public transport instituted in 2009 falls primarily on the cars are not much affected by transport fuel taxes
middle-class, and is therefore progressive (Sterner et. (Ekins, 2011).
al., 2012).
4.
Public environmental
In general, revenues generated by fuel taxes can be 3.2.2 The case of Ethiopia
used in a number of ways. In an ‘income-based’ recy- expenditure reviews
cling model, they could be allocated to households Ethiopia has had a package of fossil fuel taxes in place
for nearly a decade. These include an excise tax, a As presented in Section 9.1.2, government expenditures
according to their aggregate income, in order to reach
value added tax, road funds, municipal taxes and a can have important implications for the greening of an
the intended distributive objectives (Sterner et. al., 2012;
price stabilization fund applied to consumers of gasoline economy. Historically, public expenditures were focused
Bento et. al., 2009). If revenues are simply refunded on
and diesel oil. The package of these taxes is an equiva- on economic efficiency and macroeconomic stability,
a per capita basis, the overall fuel tax reform may be
lent of around Birr 4.41 per liter (or US$0.16) on gasoline but often failed to incorporate environmental and social
made more progressive (Sterner et. al., 2012). In an
and around Birr 2.39 per litre (or US$0.09) on automotive factors (Sheng, 1997). Public Environmental Expendi-
additional model, revenues could be allocated as a lump
diesel fuel (Mekonnen, Deribe and Gebremedhin, 2011). tures (PEEs) is one framework that helps guide govern-
sum according to each household’s share of aggregate
ment spending designated for achieving environmental
vehicle miles travelled. The government could simply
objectives.

4.1 An overview of public environmental tify data gaps, indicate current priorities and provide cial times, PEEs should focus on O/M - if O/M expendi-
expenditures and public an estimate of the costs of moving toward established tures are not made a priority, much larger expenditures
targets (Sheng, 1997). It also provides a framework for would have to be made at a later date on rehabilitation
environmental expenditure reviews cost-sharing between government, industry, households or replacement.
The PEE framework begins with the identification and and non-profit organizations. The United Nations uses
a Classification of Environmental Protection Activities Once government resource allocations have been made
ranking of environmental priorities, which may be done within and among sectors, Public Environmental Expen-
in a number of ways. One approach is to use a common (CEPA), to which countries may relate their expenditures
(UN, 1993). These include the following: diture Reviews (PEERs) help to assess the efficiency and
and broad international list, and focus data collection effectiveness of those allocations in the context of envi-
and indicator selection on a country’s specific circum- (i) Protection of ambient air and climate ronmental management frameworks and priorities (IIED,
stances. The World Bank (1995) developed such a 2009). PEERs are typically prepared by economists and
list that could be used as a basis and expanded or (ii) Protection of ambient water (excluding ground public finance professionals, with technical assistance
amended accordingly: water) from environmental professionals. Although international
(i) Sources (Water, Fisheries, Forests, Land, Sub-oil (iii) Prevention, collection, transport, treatment and dis- partners could give technical assistance (e.g. the World
assets) posal of wastes Bank), the usefulness and potential impact of the PEERs
increase with the levels of government involvement
(ii) Sinks (Solid Waste, Toxics, Greenhouse Gases, (iv) Recycling of wastes and other residuals (IIED, 2009; Swanson and Lundethors, 2003). PPERs
Stratospheric Ozone) highlight the mismatch between environmental policy
(v) Protection of soil and ground water
and what may be low levels of government spending in
(iii) Life Support (Biodiversity, Oceans & Coastal Zones)
(vi) Noise abatement those areas. Identifying positive and negative trends can
(iv) Human Health Impact (Water Quality & Access, Air be an important tool in holding governments account-
Quality) (vii) Protection of nature and landscape able for the direction of public investments. PEERs
(viii) Other environmental protection measures require detailed budget and expenditure data, which in
Setting environmental goals must be incorporated in many cases may be lacking, making the task challeng-
a process that considers other social and economic (ix) Research and development ing and time-consuming.
imperatives and trade-offs through a general equilibrium
analysis to produce a balanced picture of overall public Once decisions have been made on what types of envi-
expenditures (Sheng, 1997). ronmental protection activities are to be financially sup-
ported by society, spending questions can shift to what
4.2 PEERs in practice
In a next step, environmental expenditures should be specifically the government should spend on, how much Historically, PEERs have helped to redistribute spending
classified in a system that can be related to environ- to spend, and from where the funding comes (Sheng, toward institutions responsible for environmental priori-
mental indicators, which can also be done in a number 1997). PEEs are typically divided into two categories: ties (IIED, 2009). There are a number of positive exam-
of ways and can be based on various definitions. This capital expenditure and current expenditure (operation ples across Africa and Asia.
process helps to disaggregate environmental expen- and maintenance or O/M). Particularly in difficult finan-
diture data in the existing national accounts to iden-

In 2004, Tanzania decided to implement a PEER to help over time and also increased budget allocation to envi- ciency in carbon mitigation with far-reaching implica-
establish the level of environmental expenditure required ronment and climate related institutions (Government of tions for both production processes and consumption
to meet the country’s environmental priorities and Nepal, 2013). patterns. The ambitious carbon taxes in Sweden were
poverty reduction objectives. Using data from 2000-2002 an important factor behind an ‘absolute’ decoupling of
on government expenditure by central and local gov- economic growth and carbon emissions. Fuel taxes are
ernments, the resulting PEER highlighted key problems another example. In countries that have implemented
in spending that included: 1) below-potential revenue 5 Concluding remarks more stringent fuel policy (e.g. several in the EU and
collection; 2) low shares of revenue making it to districts Japan), fuel demand has been cut dramatically. Further-
(i.e. poor decentralization); 3) low environmental expen- Fiscal policy is an important tool in any economy and is more, the revenues from such taxation can be used to
diture; and 4) procedural constraints. As a result of the therefore also essential to create a truly green economy. lower other distortive taxation, to achieve distributional
PEER carried out in Tanzania, the environmental budget Through taxes and subsidies, signals can be given objectives and to fund other prioritized government
grew considerably and those sectors and local govern- to consumers and producers to shift investments and spending.
ment authorities that deal with relevant issues have clar- ensure efficiency in resource use, discourage envi-
ified responsibilities. (For more information see Paschal ronmental pollution and encourage innovation in new Resource rents
et al., 2007.) products, processes and technologies. Similarly, careful
targeting of government expenditures can effect both Economic theory suggests several reasons why resource
Similarly, following a 2012 PEER in Mozambique that production and consumption patterns as well as the rents should be taxed. One of these is simply the pre-
demonstrated insufficient funds to address economic portfolio of government services, including environmen- sumption of common or state ownership. If this is the
loss due to environmental degradation and the inefficient tal management. case (which varies from country to country and resource
use of natural resources, the government opened new to resource), then there is a clear case for government to
budget classification codes related to climate change This chapter has provided an overview of the most maximize revenues by selling extraction rights (or setting
and appointed two environmental focal points within the prevalent fiscal policies important to green economies: the equivalent mining duties, stumpage fees, etc.). Since
Ministry of Finance to enhance the use of environmen- Pigouvian taxes, resource rents, subsidies, and subsidy the income or rent is essentially windfall – or attached to
tal codes in budget lines. In Malawi, a PEER showed removal: immobile and naturally given resources such as land -
that only 1 per cent of the country’s environment and there is no risk for deadweight loss in taxing. (The oppo-
Pigouvian taxes site applies to taxing labour, profits or innovation.) Large
climate funds were allocated to districts in which people
are most impacted by environmental degradation and The optimal fiscal policy for a green economy is most resource rents, however, are often characterized by quite
climate change. Highlighting this information spurred the often implementation of Pigouvian taxes that correct severe lobbying and sometimes, institutional capture.
Government to explore how more funds can be allocated market failures and enforce the Polluter Pays Principle. Those countries subject to a resource curse – where
to the overlooked districts and to identify the major barri- Most often these failures lie in pollution and resource discovery of significant natural resources leads to cor-
ers (UN Environment and UNDP, 2017). misuse. An example is carbon taxation commensurate ruption, inefficiency, Dutch disease and sometime war
In Nepal, following a PEER instituted in 2010, the gov- with the social cost of carbon emissions. This is also - do not typically institute the ideal institutions or policies.
ernment created a new climate change related budget considered to be the most efficient policy instrument Instead their governments are often beholden to the
code to track climate related expenditures and results because it encourages both static and dynamic effi-

resource owners, and may therefore be opposed to insti- The increased attention to sustainable production and forward to a rapid increase in renewable energy pro-
tuting optimal rent capture. consumption, climate change and inclusive green duction, transportation solutions with a minimum envi-
growth created by the Sustainable Development Goals, ronmental impact, circular systems for production and
Subsidies and Subsidy removal the Paris Agreement and other international treaties gen- consumption of food, clothes and durable products and
Subsidies, which either offers a reward for reduc- erates momentum to look at the role of fiscal policy in government spending that is consistent with an inclusive
ing emissions, or for avoiding external environmen- achieving these ambitions. This chapter makes the case and green economy.
tal costs (e.g. for renewable energy investments) are that carefully designed fiscal policies that take into con-
often popular and more feasible to implement politically sideration environmental externalities and the distribu-
than e.g. Pigouvian taxes. However, subsidies can also tional implications of taxes, subsidies and government
become major burdens for government budgets and spending are critical to achieve these goals. Key Readings & Additional
slow down necessary reforms (e.g. fossil fuel subsidies). The fundamental premise is that if sustainability is to be Resources
Removal or reform of such fossil fuel subsidies with achieved, we need to use our resources as efficiently as
negative environmental consequences has begun in a Sterner, T., and J. Coria (2012). Policy Instruments for
possible. For that to happen, all actors must be aware Environmental and Natural Resource Management. RFF
number of countries with both successful and unsuc- of the real social cost of resource use. Clear incentives Press, Resources for the Future, New York, London.
cessful outcomes. are needed not only to reduce environmental degrada- Howlett, M., (2011). Designing Public Policies: principles and
Green fiscal reform cannot be seen in isolation from the tion and resource use, but also to unleash both market instruments. Routledge, New York, Oxon.
political realities of a country. In a democracy, there must powers and collective action to fundamentally transi- Ekins, P., and S. Speck (2011). Environmental Tax Reform (ETR):
be sufficient public and political support to carry out tion our economy towards sustainable production and A policy for green growth. Oxford University Press, Oxford.
major reforms. This also explains why the distributional consumption. This will need dramatic innovations and
Sterner, T. (ed.), (2011) Fuel Taxes and the Poor: The
implications of green fiscal reforms are so important. investments. Green fiscal policies have a very import- Distributional Effects of Gasoline Taxation and Their
After all, a partially implemented green fiscal reform is ant role to play in this transition since they can stimu- Implications for Climate Policy. Routledge.
often preferred to an optimal reform that is stuck on the late both static and dynamic efficiency. As the number Ploeg, F. van der (2011). “Natural Resources: Curse or
drawing board. of active green fiscal policies is multiplied, we can look Blessing?” Journal of Economic Literature 49/2.

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CHAPTER 9: GREEN INDUSTRIAL POLICY:
DIRECTING PRIVATE INVESTMENT
CHAPTER 9: GREEN INDUSTRIAL
POLICY: DIRECTING PRIVATE Anna Pegels
INVESTMENT
German Development Institute
Anna Pegels is Senior Researcher at the German Development Institute /

Deutsches Institut für Entwicklungspolitik (DIE). She received her doctorate
in economics in 2007 and has since then focused on the interconnections
between latecomer development and the green transformation.
At DIE, Anna has led several research projects and extensively authored and
edited publications on the question of adequate policy instruments for green
LEARNING OBJECTIVES latecomer development. Her current research concentrates on the transition to
clean energy and a circular economy in developing and emerging countries.
• Outline the main challenges facing humanity and analyse their drivers;
• Articulate how the inclusive green economy model seeks to address these
challenges; and Wilfried Lütkenhorst
• Understand the major characteristics that underpin national strategies on German Development Institute
inclusive green economy, the related analytical tools, key actors and initiatives
After finishing his Ph.D. in economics at Ruhr-University Bochum, Wilfried
as well as the critical role of public policy in turning the inclusive seen economy
joined UNIDO. During three decades, he served as Director for Private Sector
model into practice. Development, Director for Strategic Planning, Chief of Cabinet and Managing
Director of various Divisions – including responsibilities for strategic research,
policy advisory services, resource mobilization, evaluation and advocacy.
From 2013-2017, he was Principal Professor at the School of Economics and
Resource Management, Beijing Normal University.
Since 2013, he has been Associate Fellow at the German Development

Institute in Bonn. His current research focuses on green transformation,
competitiveness and the impact of digitalization.
CHAPTER 9: GREEN INDUSTRIAL POLICY: DIRECTING PRIVATE INVESTMENT 9.2

CHAPTER CONTENTS implementation issues of green industrial policy with an
Key term:
of economic sectors
emphasis on different instruments and their interaction. Development economics changes over time is
1. Green industrial policy: Conceptual issues The importance of defining policy packages that allow Development economics: Study a crucial determinant
field for economic improvement
synergies, whilst also being in line with good practice in low-income countries. Adapted of productivity growth,
2. Implementing green industrial policy principles of policy design and implementation, will also from: https://www.worldatlas.com/ technological upgrading,
3. Conclusions and open issues be discussed. Section 3 will draw key conclusions and and hence long-term
deal with a number of open issues that should receive Key term:
economic dynamism.
attention in the years to come. Industrialisation Seminal studies have
1. Green industrial policy: The transformation from agrarian
into an industrial society through so-
addressed this question
in either historical or
conceptual issues 1.1 The discourse on industrial policy
cial and economic change towards
manufacturing. Adapted from: analytical approaches
https://en.wikipedia.org/
This chapter addresses the concept, nature, and and most notably among
Green industrial policy is a derivative of industrial policy. them are the works
manifestations of green industrial policy and how it
Understanding the latter’s rationale, evolution, and Key term: of Clark (1940) and
contributes to an inclusive green economy (IGE). Contoversy over
application is thus imperative for coming to terms with Lewis (1955), with their
Green industrial policy was implicitly the intellectual services sector
green industrial policy. This section will review how the The nature and extent of the ser- emphasis on what Polanyi
foundation of UN Environment’s Green Economy Initiative
concept of industrial policy has developed over time, vices sector has remained a con-
(1944) labeled the “great
launched in 2008, and called for directing investments troversial subject in view of the fact
where common ground has been established, and in transformation” from
in environmentally significant economic sectors. The that part of the growth in services
what areas controversies have remained. is likely to be a statistical artefact
agrarian to industrial
term is relatively new and has found its way not only (caused by outsourcing) while
into globally negotiated commitments (Sheng, 2009) but Industrial policy is all about structural change and its many services continue to be di- societies.
rectly dependent on a manufactur-
also, in recent years, into mainstream economic literature directionality. Arguably, for those parts of economics As Ranis (2005) points
ing foundation (see e.g. the argu-
(Pegels, 2014; Rodrik, 2014, 2016; Schmitz et al., 2013; that deal with growth ment of Chang 2010, 88-101).
out, in those early
Lütkenhorst et al., 2014; Schwarzer, 2013; Hallegatte and development, the
Key term: years of development
et al., 2013). To fully appreciate the green industrial Agrarian society concepts of structural economics, industrialization was generally considered
policy concept, it is necessary to understand its origin in A society based on producing
change and diversification
crops and maintaining farmland. as a synonym for development. More recently, the
industrial policy itself. Adapted from: https://en.wikipedia. have always been at the transition to highly diversified manufacturing sectors
org/
center of attention (for as a source of rapidly growing intra-industry trade
Section 1 will thus elaborate on the evolution and
the main methodological (initially demonstrated by Chenery, 1960) has become a
state of the debate on industrial policy in general, and
Key term: implications of measuring dominant theme, followed by evidence of a general (yet
subsequently explain the fundamental characteristics Industrial society and predicting patterns still controversially discussed) trend towards service-
and distinct features of green industrial policy as a A society which is using technology
for mass production and can sup- of structural change, see dominated post-industrial economies. Thus, in general,
special manifestation of industrial policy. This will port a large population through the Altenburg et al., 2016). structural change is considered “as a central feature of
establish a methodological basis for the following more division of labour. Adapted from:
How the composition the process of development and an essential element
concrete and illustrative sections. Section 2 will address https://en.wikipedia.org

in accounting for the rate hands-off approach. (1) Industrial policy is more than correcting
Key term: Key concept:
Post industrial and pattern of growth. It Hands-off The evolution, and the market failures
Phase during which an indus- can retard growth if its twists and turns of this
Approach characterized by non-in-
trialized economy moves from
pace is too slow or its
tervening.
discussion have been Although various types
manufacturing to services and Key term:
direction inefficient, but it
information. Adapted from: https:// described elsewhere Market failure of market failure have
en.wikipedia.org
can contribute to growth if (Altenburg and Lütkenhorst, 2015; Rodrik, 2007; Stiglitz Situations in which market out- always been pertinent
comes are not providing maximized
it improves the allocation et al., 2013; Naudé, 2010) and will not be revisited here. efficiency. Market failures can
to justifying industrial
of resources” (Syrquin, 2007, p.4). provide a reason for government policy, they are neither
A certain degree of convergence, however, is striking intervention. Adapted from:
necessary nor sufficient.
https://stats.oecd.org
Given the centrality of structural change and and should be noted. Gradually, fierce ideological Making markets perform
diversification for economic development, industrial arguments have given way to a more balanced more effectively, removing
policy has been geared towards a direction that - for and nuanced assessment. The discussion’s more Key term: or reducing externalities,
Imperfect competition
a variety of reasons, including enhancing productivity, constructive element has moved from the question of Market situation where there are overcoming imperfect
creating employment or stimulating innovation - may whether to engage in industrial policy, to how to apply many sellers selling goods, which competition, addressing
are not completely similar, as they
be considered desirable from a long-term societal it, and what policy instruments to select to promote would be in a perfect competitive asymmetric information
perspective without, however, stifling market forces of structural change towards increased productivity and market scenario. Adapted from: or dealing with systemic
https://economictimes.indiatimes.
efficient resource allocation. As such, today there is a enhanced competitiveness. In this context, the recent com/ coordination failures
stronger emphasis than before on using industrial policy debate between Ha-Joon Chang and Justin Lin is – these are all valid and
as a tool to reach broader societal goals and thus to revealing, as it boils down to technical questions of just legitimate reasons for
acknowledge its normative orientation. how far a deviation from an economy’s comparative Key concept:
Asymmetric information
policy interventions 1.
advantage should be targeted, i.e. whether to gradually One agent in a trade possesses However, this is only part
In both literature and build on latent advantages or to venture into entirely new information while other agents
of the story. Above all,
practice, there has been industrial activities (Lin & Chang, 2009). Compared to
involved in the same trade do not.
Key concept: Adapted from: https://siteresources. reducing industrial policy’s
a protracted debate on earlier dogmatic arguments around industrial policy’s
Normative orientation worldbank.org role to correcting failures
Both aspects (innovative instru- the rationale for industrial potentials and perils, today’s discourse focuses on of market mechanisms
ments and broader goals) were ex- policy – defined here empirical evidence and the appropriateness of different
plicitly called for by Stiglitz already Key concept: creates an ideological
two decades ago as part of the as deliberate measures methodologies. Coordination failures framing that automatically
then prevailing discussion on defin- taken by governments to A more desirable equilibrium could
ing a ‘post-Washington’ consensus be reached but firms fail because puts the stigma of failure
drive structural change Thus, the time is ripe to build on this momentum, leave
(Stiglitz 1998). they do not coordinate their deci- on public policy-making.
in the desired direction. behind stereotypes and preconceptions, and take a sion making. Adapted from: https://
This debate has seen constructive perspective towards industrial policy. In en.wikipedia.org
Key concept:
Interventionist pendulum swings what follows, we stress five dimensions, which are also
Policy approach of intervening towards either a more of particular relevance to green industrial policy. 1 This applies under the assumption that the removal of market failure is not
in economic affairs. Adapted
from:chttp://www.dictionary.com
interventionist or a more fraught with severe policy failure related to both the willingness and the capability of
governments to act in pursuit of the public good (Altenburg & Lütkenhorst 2015, 45-
53).

Policies are fundamentally paradox that a field that primarily studies values wants to Indeed, examples of failed government interventions are
Key reference:
Policy making meant to contribute to be value-free” (2011, p.7). abound and range from import-substitution strategies,
achieving goals, to move
Similarly, Cimoli et al. 2009 argue which were applied
that the market failure argument is
‘something’ (for instance As such, industrial policy must be more than just a tool Key term: in many low-income
not irrelevant but constitutes a “mis-
leading point of departure” (p.20)a sector, an economy or to increase productivity, enhance competitiveness, Import substitution
countries in the 1970s,
strategy
for industrial policy.
a society) from the status and promote structural change. It is necessary that it Government strategy that empha- to some more recent
quo to a desired state. becomes part of a normative societal undertaking to sizes local production for local
politically supported
consumption, rather than producing
They are about reaching outcomes and not just about achieve and balance a variety of goals – from creating for export markets. Adapted from: green technology projects
optimizing a process. These two dimensions (process employment to ensuring equity and limiting climate http://www.businessdictionary.com
in high-income countries
and outcome norms) are not equivalent but hierarchical: change. Essentially, industrial policy needs to be (see the educational
outcomes yielded by market transactions (even if embedded and discussed within an overall vision of the analysis of the US Solyndra case by Rodrik, 2014).
resulting from perfectly ‘public good’ of societal change.
Key reference: functioning markets) This argument – apart from the methodological problems
Outcomes yielded by
market transactions must be subjected to an of counterfactuals, i.e. being unable to directly attribute
The distinction between outcomes assessment based on
(2) Industrial policy can avoid “picking winners” impact to specific policy measures – used to be an
being normative and markets being
a process or an instrument is in
broader societal goals, Frequently, industrial policy is portrayed along the important one. There is strong evidence for unsuccessful
itself questionable. As Sandel has such as equality, inclusion following lines: government policymakers define priority state interventions and severe policy failure. However,
pointed out, “markets are not mere
mechanisms. They embody certain
or sustainability (Altenburg sectors for further development and accordingly, ‘pick’ today’s proponents of an active industrial policy are no
norms. They presuppose – and pro- & Lütkenhorst 2015, p.10). companies (or groups of companies) worth being longer calling for a heavy-handed state to decide on
mote – certain ways of valuing the
supported through special incentives. This can take details of investments to be undertaken and seeking
Based on the above, it
goods being exchanged” (Sandel
to replace market forces. Instead, they argue for a
2012, 64). the form of assuming direct ownership, for instance
follows that anchoring the guided ‘discovery process’ (Rodrik & Hausmann,
governments running state-owned enterprises, or
case for industrial policy 2003), whereby markets are allowed to operate within a
offering various types
exclusively in market imperfections is insufficient. Doing broader “directionality” (Mazzucato, 2014) that provides
Key term: of indirect support such
so would reflect many economists’ broader attempts State owned enterprise signposts to a politically desired development path.
as priority access to
to remain in an allegedly value-free space that deals A legal entity created by the gov-
ernment to carry out commercial credit, preferential loan
with technical models and equations, and steer clear Hence what is being ‘picked’ are not individual
activities on its behalf. Adapted conditions or special tax
of normative considerations. In short, it would be an from: https://www.investopedia.com enterprises, but, for instance, types of technology (e.g.
privileges. The underlying
attempt “to separate efficiency from ethics” (Crespo, those which are resource-efficient and produce low
assumption that
1998, p.201). Recently, Sedlacek has drawn attention carbon emissions) that are needed to accompany and
governments possess superior knowledge compared
to the systematic elimination of values, normative reinforce long-term transition processes. “The history
to markets is challenged and seen to lead to a waste of
judgement and social context from mainstream of technological change teaches us that choosing
public resources and to misguided development that
economics, with his apt conclusion being that “it is a particular sectors in this process is absolutely critical…
later causes heavy readjustment costs.
the green revolution will not take off until it is firmly

picked and backed by the or university education) Paris climate negotiations, these corporations requested
Key concept: Key term:
Green revolution state,” (Mazzucato 2014, Export intensity and R&D support (that, “governments across the world to provide us with clear,
p.27). Importantly, this
The increase in crop yields based Index of export activity to calculate outside very basic stable, long-term, ambitious policy frameworks… We
on cultivation of new varieties of the revenue generated from export-
does not imply excluding
wheat, rice, maize and millet, and ing domestically produced goods. research, always implies believe that a price on carbon should be a key element
market-based decisions
intensive use of fertilizers, pesti- Adapted from: http://www.jgbm.org choices on specifically of these frameworks” (UNFCCC, 2015). This is a clear
cides, irrigation and machinery.
Adapted from:
but defining development what type of research to call for creating not just any business-friendly framework
https://stats.oecd.org trajectories (sometimes Key term:
support). Thus, it would but one that sets a consistent long-term direction for
also described as broader Feed-in tariffs seem more appropriate technology choices and thus reduces investment risks
Payments to the producers of
‘technology corridors’) renewable energy for the electrici-
to conceive a continuum for business players. Whether this is called functional or
to enable competitive processes, consensus building ty they generate and feed into the of policy selectivity rather selective is a moot point.
among stakeholders, and the distribution of knowledge grid. Adapted from:http://www. than a neat separation
fitariffs.co.uk
to feed into the targeted development path (Altenburg & Lütkenhorst,
2015, p.46). (4) Industrial policy can be designed to minimise
costly failures
(3) Industrial policy can guide private investment Second, in line with the earlier argument about
directionality, an enlightened industrial policy builds Any industrial policy may fail to achieve its goals and,
It has long been customary to adopt typologies that a desired long-term development trajectory into the in the process, costs are incurred. At the same time,
classify industrial policy measures as being either framework condition it establishes i.e. chooses a long- however, this argument should not lead to discrediting
functional (also termed: horizontal, cross-cutting or term ‘policy path’ that remains consistent over time. A industrial policies altogether. It must not be forgotten
aimed at creating a conducive business environment) government can create markets for green investments that there are also heavy costs to policy abstinence.
or selective (also termed: vertical or sectoral) - with the (for example, through feed-in tariffs for renewable Preserving the status quo of an economy’s structure
former being generally accepted and the latter subject energy), which trigger economies of scale, technological instead of actively transforming and diversifying it can
to controversy (see for instance the taxonomy proposed learning effects, and a decrease in unit costs. This, in prolong the life span of incumbent sunset industries
by Weiss, 2011, p.18). However, there are valid reasons turn, builds pressure on future governments to continue and cause even higher
to call this distinction into question. on the same path. In technical terms, this is referred to costs once adjustment
Key term:
as enhancing the “endogeneity” (Karp & Stevenson, Sunset industries
becomes inevitable. In
First, even allegedly functional policies impact differently
2012) of future policies (see also Section 1.2). An industry which has already this sense, governments
on distinct economic sectors. This applies all the way passed its peak and is now in de- are “doomed to choose”
from exchange rate Conventional wisdom suggests that business is cline. Adapted from: https://en.wiki-
pedia.org (Rodrik & Hausmann,
policies (with their effects interested in a state that leaves markets to work and
Key term: 2006) in the face of
Exchange rate policies depending on the export- does not intervene. Against this backdrop, it is intriguing uncertainty.
Policy a country uses to manage
its currency with regards to other
intensity of industrial to make note of the recent demand for active policies
foreign currencies and the foreign sectors) to education voiced by major European oil corporations. In a letter There can be different ways to design and implement
exchange market. Adapted from: policy (that can lean more addressed to the UNFCCC during the run up to the industrial policy, establish goals, and select instruments.
www.bankofbotswana.bw
towards vocational training

The potential costs of failure can be minimised through To sum up the above reflections: Industrial policy human and intellectual capital (e.g. through R&D to
full process transparency, participatory stakeholder provides a set of instruments aimed at steering promote new sustainable technologies and related
involvement, continuous monitoring, and rigorous economic and technological choices towards achieving skill upgrading programmes) and social capital (e.g.
progress evaluation towards systematic policy learning societal goals. To this end, a well-designed industrial through strengthening transformative alliances among
(Lütkenhorst et al., 2014). Section 2 will provide policy establishes a directional framework that offers various stakeholders) (see Chapter 2 in this volume for a
examples of such approaches. reliable signposts for long-term investment decisions conceptual distinction between different forms of capital
by private actors, and does so within a process that in green economy growth models).
stimulates competition and offers safeguards for
(5) Industrial policy can build on competitive corrective action. With a long-term transformative goal at the core, green
mechanisms industrial policy must be able to respond to key global
mega-trends that shape today’s development agenda.
The stylized contradiction between industrial policy and Within the broader framework of the SDG’s adopted
competition is a simplification that can be challenged.
1.2 Green industrial policy: key by the international community in 2015, this relates
There is sound evidence of how industrial policy components specifically to:
approaches can be designed to build upon competitive Based on the above stock-taking of the industrial
mechanisms. In various countries, feed-in tariffs are • climate change, which is widely considered as a
policy discourse, we can now enter the green industrial blatant case of market failure (Stern, 2007);
applied based on competitive bidding procedures; policy space with a fresh perspective. In doing so,
environmental product and process standards are we slightly amend our general definition of industrial • rapidly widening income gaps leading to higher levels
determined from proposals and best practices from policy and define green industrial policy as “any of inequality in high and
private industry; R&D government measure aimed to accelerate the structural low-income countries
Key term:
Key term: subsidies are granted transformation towards a low-carbon, resource- Social inclusiveness alike (OECD, 2011; Ortiz
Competitive bidding only after assessing efficient economy in ways that also enable productivity
Process of improving societal
& Cummins, 2011) and
procedures participation, especially for peo-
Competitive bidding procedure:
competitive submissions enhancements in the economy” (Altenburg & Rodrik, ple belonging to disadvantaged thus forcing the green
Selection process used in procure- from industrial clusters 2017, p.11). As such, green industrial policy can also and marginalized groups, through transformation to also aim
ment to determine the best bid promoting opportunities, access to
among competing suppliers and
or entire regions. In a be understood as a driver or accelerator for a country’s resources, and equal rights. Adapt- at social inclusiveness
contractors. Adapted from: http:// nutshell, smart industrial transition to an inclusive green economy. ed from: http://www.un.org and poverty reduction;
www.tendersinfo.com policy can be quite
sophisticated and in This calls for deliberate government action aimed at • the disruptive impact
Key term:
Key term: harmony with private incentivizing and directing private capital into the green The internet of things on employment in a range
Industry clusters sector dynamism and markets of the future. As will become evident from the System of interrelated devices of new technologies,
Groups of related firms in a certain and machines with the ability to
geographic area that share com- competition. This differs various dimensions and trigger points of interventions transfer data in a network without
above all linked to
mon markets and technologies and fundamentally from earlier elaborated below, green industrial policy seeks to raise human-to-human or human-to-com- robotics, the internet of
are often connected by buyer-seller puter interaction. Adapted from:
relationships. Adapted from: www. rigid, top-down policy the productivity of natural capital (e.g. through promoting https://internetofthingsagenda.
oregonbusinessplan.org approaches. renewable energy sources or a circular economy), techtarget.com

things and additive manufacturing (Brynjolfsson & necessarily change the entire policy landscape. Some (4) The disruption of old pathways with the risk of
McAfee, 2014); challenges remain essentially the same - green industrial stranded assets.
policy needs to address well known issues such as
• the need to safeguard and expand agricultural land policy alignment, political capture, evasive behaviour (5) The need to address production and consumption.
with a view to providing sustainable levels of food for of economic agents or deficient policy implementation
still rapidly growing populations in many low-income (6) The crucial importance of co-benefits.
capacities. However, some important additional
countries; characteristics need to be considered. In what follows, (7) The innovative nature of key policy instruments.
• the strong trend towards further urbanisation, which we emphasize seven defining strategic challenges of
calls for the long-term planning of sustainable green industrial policy (a more detailed elaboration
agglomeration infrastructures and transport systems is provided in Lütkenhorst et al., 2014, on which this (1) The reality of pervasive market failures
(WBGU, 2016); section partially draws):
As mentioned above, market failures are among the
(1) The reality of pervasive market failures. classical reasons evoked to justify industrial policy
• changing consumer preferences of globally growing
interventions. This line of reasoning applies all the more
middle classes leading to new lifestyles, such as (2) The need to define long-term development to the realm of finite resources, environmental goods
those visible in various strands of an emerging scenarios. and climate change (Stern, 2007; Nordhaus, 2013).
sharing economy (Rifkin, 2014), but also towards
Table 1 below provides a stylized typology of various
more resource-intensive consumption patterns; and Key term: (3) The creation of new
types of market failures and highlights the importance of
Stranded assets pathways in uncharted
• the rise of the service economy accompanied by Assets which have lost in value due coordination failures, public goods and externalities for
territory.
premature de-industrialisation in many emerging and to unanticipated write-downs or green industrial policy (more examples will be provided
devaluations. Adapted from: https://
low-income countries (Rodrik, 2015). www.oecd.org in Section 2).
The fundamental challenges stemming from these (and

further) global mega-trends have triggered a sense
Table 1: Typology of market failures. (Source: Lütkenhorst et al., 2014, p.11.)
of a heightened policy responsibility to anticipate the
implications, take advance action and where necessary, Asymmetric
mitigate the negative repercussions on economic Imperfect competition Coordination failures Public goods Externalities
information
and social development. This is not trivial; it implies
Market power resulting Superior information Obtainable benefits are Goods that are non- Deviation between
that the very raison d’être of green industrial policy is from non-atomistic of some market actors not being reaped due excludable and non-rival private and social costs
connected to fundamental, long-term societal goals that structures and collusive (mostly on the supply to lack of coordinated in consumption and benefits
markets alone fail to achieve – a point that will resurface behaviour side) action Most severe in case Pervasive in
repeatedly throughout this chapter. Crucial for creating of climate change environmental
new and disrupting mitigation suffering pollution, waste
Applying industrial policy to the task of bringing about old techno-economic from ‘free-riding’ management and
a green transformation towards sustainability does not pathways natural resource use

However, just ‘getting (2) The need to define long-term development Key term:
commitments regarding
Key term:
Environmental good prices right’ by scenarios Green investment future policy, create
Non-market goods, such as clean incorporating externalities Investing capital in green assets, a rationale for green
air, clean water, landscape, public
into market prices as the The green industrial policy challenge of dealing with such as green funds, companies,
investment policy”.
parks, rivers, mountains, forests, infrastructure and projects. Adapt-
and beaches. Adapted from: conventional response long-term societal transformations is a defining element ed from: https://www.cisl.cam.ac.uk
https://en.wikipedia.org
to market failures is and cannot be overestimated in its implications. It For green industrial policy
insufficient for a number calls for setting ambitious and coherent policy goals to promote long-term
of reasons. First, while the signals corrected prices send coupled with implementation trajectories that ensure structural change towards sustainable development
to market actors may trigger technological innovation stable framework conditions and thus inspire confidence pathways, it also has to factor in global mega-trends
and changes in behavioural patterns, these responses among market players. Frequent policy shifts are (see Section 1.2 above) that are going to affect and
may be too slow and adjustment periods may have to counterproductive for putting an economy on the path interact with, the green transformation, which in itself
be accelerated. As pointed out by Schmitz (2015), the towards sustainability. However, policy-making in the reflects both the mega-trends of environmental impacts,
transition towards sustainability must take place under face of quantifiable immediate costs and less certain and subsequent restructuring and adaptation efforts.
extreme time pressure and as such, we are faced with long-term benefits, is often challenged by both the To future-proof the economy against these trends,
an industrial revolution with a deadline. Second, even pressures of short-term electoral systems and the green industrial policy must address a multitude of
market-based instruments (e.g. cap-and trade-systems) tendency of citizens to put an irrationally high value dimensions encompassing infrastructure (transport,
are subject to political negotiation processes and often on immediate costs/benefits. This often comes at the energy, recycling, water etc.), technological innovation,
get diluted and lose effectiveness. Third, ‘correct’ prices expense of their own and future generations’ long-term education (skills development), trade and many others.
may be met with low price elasticities or principal- interests, i.e. the tendency to excessively discount future This raises issues of conceptual boundaries with many
agent-problems (World gains (see Chapter 10 on discounting and the findings complementary policy fields that cannot be neatly
Bank, 2012a), which of behavioural economics, e.g. Phelps & Pollack, 1968; drawn.
Key term:
Price elasticity can reduce their impact. O’Donoghue & Rabin, 2000; Kahneman, 2003).
The price elasticity in demand is the
percentage change in the demand Fourth, new technologies This harks back to the theme of policy endogeneity, i.e.
divided by the percentage change require not only market
(3) The creation of new pathways in uncharted
in price. Adapted from: https://stats. the need to establish the commitment to staying the territory
oecd.org prices that enhance their selected course of structural change which is binding
competitiveness but also and provides investment certainty also in the case of Against today’s deeply entrenched economic products
the breaking up of deeply a change of government. A green transformation thus and processes with
entrenched development paths and the complementary should ideally be translated into a national project with large environmental
provision of new sustainable infrastructure ( see the Key term:
buy-in from all societal stakeholders (see the example Carbon lock-in footprints, such as the
example of electric mobility in Section 2). of the German energy transition and a proposed coal If energy systems are largely based widespread phenomena
on fossil fuels, it is difficult for pub-
exit strategy in Box 9.7). As pointed out by Karp and lic and private actors to shift the of “carbon lock-in”
Stevenson (2012, p.26), “the endogeneity of future policy system towards alternative energy (Unruh, 2000) with high
technologies. Adapted from: https://
and the inability of current policymakers to make binding en.wikipedia.org
levels of inertia, new

environmentally friendly development trajectories need issue before being considered as a multi-dimensional For low-income economies in general, and low-income
to be charted. This constitutes a formidable challenge challenge of systemic transformation calling for new, countries in particular, there are powerful reasons
given that the effects of lock-in stem from individual sustainable development paths. Only more recently has in favour of being an early adopter of low-carbon
firms, technologies, and infrastructures as well as it been looked at from a broader perspective, underlining development paths, yet there are also arguments that
the co-evolutionary forces of social behaviour and the need for technological innovation as well as could be used to decelerate such a strategy (see Box
institutionalised policy-making. fundamental “social, normative and cultural innovations” 9.1, overleaf). It would be naïve to assume that trade-
(Messner, 2015, p.261). offs can be ruled out altogether. However, an important
Technically, a country’s environmental footprint depends argument developed by Porter and van der Linde
on the level of economic activity (as conventionally Specifically, green industrial policy is faced with the task (1995), challenges the conventional view of the cost-
measured by GDP) on the one hand, and the of encouraging broad technological experimentation increasing effects of strict environmental standards, and
structural composition and efficiency of production and innovation (R&D incentives playing a critical role stresses their positive impact on innovation and early
and consumption (which defines the environmental here), yet at some point having to choose specific investments into future green technologies.
intensity of the economy) on the other (Lin et al., technologies for upscaling and market creation. This
2018). Environmental often involves a trade-off and calls for taking well-
Key term: sustainability can, calculated risks in moving (4) The risk of stranded assets from disrupting
Environmental intensity therefore, be achieved by: from strategic niche old pathways
Key term:
Environmental impact per unit of
economic output.
(a) limiting or reducing Strategic niche management ( Kemp et
economic output (see management al., 1998; Unruh & Carrillo- As argued so far, green industrial policy is essentially
Creation of protected spaces for the
Chapter 2 in this volume development of promising technol- Hermosilla, 2006) towards challenged by future-proofing a country’s economy,
for a more detailed discussion of the role of economic ogies, which are later phased out. big-push investments identifying and promoting innovative sustainable
Through experiments the desirabili-
growth in the green transformation); (b) reducing the ty of the new technology and means
and incentives targeting technologies, creating and upscaling pioneering markets
environmental intensity of production; and/or (c) lowering to enhance its application rate are selected technology and bringing about changes on both the supply and the
the environmental intensity of consumption, for example investigated Adapted from: https:// corridors 2. demand side that can ensure a long-term uptake of new
repub.eur.nl
by promoting the circular economy, or setting incentives green technologies and products.
for changing consumption patterns. In this context, one
Key term: thorny issue relates to the However, such a fundamental transformation of
However, aligning the economy with environmental Lead market policy choice between productive capacities is necessarily accompanied by
A market, which pioneers the suc-
boundaries is not purely a technical issue. It is one of the cessful adoption of an innovation creating a lead market adjustment processes caused by the gradual withdrawal
most challenging and complex policy goals imaginable, Adapted from: https://en.wikipedia. or alternatively, relying on – and ultimately complete exit – of the technologies of
org
including critical questions and a number of trade- latecomer advantages. the past, i.e. the heavily polluting and high-emission
offs between costs, benefits, distribution, fairness, and industries. Inevitable adjustment processes in such
technological and behavioural change, at both national sunset industries need to be addressed as the latter
and global levels. Climate protection was initially treated 2 On a methodological note, we would argue that in contrast to the sector focus often employ significant parts of the workforce and can
of traditional industrial policy (e.g. textiles, electronics, automotive), green industrial
almost exclusively in terms of an environmental policy policy should be targeting resource-efficient, low-emission technologies across the
mount destructive political opposition against a green
board.

Box 9.1: Low-carbon strategies for low income countries: Balancing
Potential pros* Potential cons
development goals
• Early acquisition of technological and • Overall scenario of tough trade-offs and
Most research on decarbonization tends to focus on the larger industrial and emerging economies (see e.g. DDPP, 2015).
This makes sense from a short- to medium-term impact perspective seeking to assess the implications of a sustainability managerial capabilities and skills related to exceedingly high opportunity costs (e.g.
transformation that is enacted now and can have tangible results in 10-15 years. However, there is a downside to this sustainable technologies that will dominate originating from critical investment needs in
approach. The world’s more than 70 low-income countries currently account for just 10 per cent of global CO2 emissions in future health, education, etc.)
(Nordhaus 2013, p.253), yet it is now at the early latecomer stage of their industrialization process when key decisions
on their development trajectory are being made. With only incipient industrial capacities in place, low levels of motorized • Investment into future export potentials: • Widespread poverty and high wealth
private transport, poorly developed transport infrastructure and a high population share without access to modern energy, access to stringently regulated markets aspirations of population put premium on
the critical challenge for these countries going forward is not to decarbonize existing economic structures, but to develop in terms of environmental footprints growth objectives; widening access to
new productive capacities, while avoiding the build-up of high-carbon economies relying on unsustainable technologies.
Moreover, in view of recent massive discoveries of coal and oil reserves in sub-Saharan Africa (SSA), their commercial
and various sustainability labels that energy valued higher than decarbonisation
exploitation may conflict with a limited global carbon budget as derived from a global 2°C warming scenario. The question increasingly govern global value chains • High upfront investment costs coupled with
thus emerges of how the legitimate economic development aspirations of low-income countries can be reconciled with • Access to dedicated green donor funds backloaded and often uncertain benefits;
global climate change boundaries and targets.
(bilaterally and in terms of global climate limited green donor funding available
There is an urgent need to prevent low-income countries from locking themselves into high-carbon development finance facilities) • Awaiting impact of technological learning
trajectories that would create unsustainable production and infrastructural capacities for decades to come. This calls for
early emphasis on the significant co-benefits, which can support the economic case for low-carbon development (see • Avoiding early lock-in of technologies and cost curves to make new green
also Section 2.2 below). Among others, these range from job creation (UN Environment, 2011; ILO, 2012) to acquiring new that will decline and possibly be banned technologies economically more attractive
skills in innovative technologies as well as educational benefits derived from rural off-grid electrification (Byrne et al., 2014; while new ones are rapidly phased in and • Lack of green awareness among private
Guruswamy, 2011; Kanagawa & Nakata, 2008).
becoming cost-effective sector players focusing on quick profits
Recent research on sub-Saharan Africa shows that early transitions to low-carbon development are feasible and can • Significant co-benefits (e.g. health benefits
yield both economic and social benefits. A methodology developed by the Overseas Development Institute and the from clean air and water as well as
German Development Institute includes four criteria (related to avoiding GHG emissions, averting lock-in risks, increasing
productivity, and reducing poverty) and concludes that switching from coal to renewable energy sources, removing fossil resource efficiency) that are key for policy
fuel consumption subsidies, reducing demand for agricultural land, and promoting mass transportation systems are management
among the most promising avenues to promote (Hogarth et al., 2015). However, it remains important to acknowledge that
environmental and climate objectives are part of a broader policy agenda that also encompasses goals related to equality
* The juxtaposition of pros and cons are just a listing of relevant considerations on both sides. The arguments are not
and poverty reduction. Although the case for promoting low-carbon development is sound and strong, it needs to address
horizontally linked. Source: Altenburg & Lütkenhorst, 2015, p.89.
a number of counter-arguments that cannot be readily dismissed.
In view of the severely constrained financial and institutional capacities in low-income countries, there is a critical need for
international funding frameworks (e.g. dedicated climate funds) as well as multilateral and bilateral cooperation to focus on
support aimed at easing financial burdens, advising on appropriate long-term strategies and policies, and strengthening
policy implementation capabilities. As low-income countries are not to be found at the technological frontier, emphasis
must be placed on “utilizing the opportunities already present that coincide with development objectives” (Kemp & Never,
2017), such as capitalizing on available renewable energy sources.
Source: Pegels, Lütkenhorst

transformation. The twin challenge is thus to create example of effective collective action based on a clear rationality that often
Key term:
incentives for green technologies while withdrawing goal of phasing out harmful substances backed up by Path dependencies governs economic
support from, and ultimately actively discouraging, the financial commitments (Lütkenhorst et. al., 2014, p.31). Continued use of a product or decision-making 3.
practice based on historical prefer-
continued use of polluting technologies. ence, even if newer, more efficient
products or practices are available
Consequently, green
The unavoidable aspect of devaluation of incumbent (5) The need to address production and Adapted from: https://www.investo- industrial policy must
technologies and related assets has, in the context of consumption
pedia.com
tackle deep-seated social
climate change mitigation, become known as “stranded norms and standards of
carbon assets”, specifically in the energy sector in As described in Chapter 2, both the supply and demand Key term: consumption behaviour. To
the form of “unburnable carbon” (Meinshausen et sides of the economy need to become sustainable, that Bounded rationality this end (like technological
Limited rationality during decision
al., 2009; McGlade & Ekins, 2014) and of carbon- is, low (or even zero) in carbon emissions, resource making due to the tractability of the lead markets), it can be
intensive financial assets. While it may be tempting for efficient, and with minimized waste. This requires decision problem, cognitive lim- effective to identify and
itations, and the time available to
governments to delay the necessary adjustment in the addressing all components of supply and aggregate make the decision Adapted from: showcase intrinsically
polluting capital stock to avoid industry resistance, a demand: consumption, investment, government https://en.wikipedia.org motivated lead users who
more sudden devaluation at a later time can be all the spending, and trade. pioneer sustainable forms
more disruptive. Key term: of consumption (Marechal
As emphasized before, the policy-induced creation Social norms & Lazaric, 2010) and who
To avoid unilateral competitive disadvantages from early of new markets (be it in terms of using innovative Informal understandings that shape
can serve as avant-garde
the behaviour of members of a so-
greening, unsustainable development trajectories must renewable energy sources, relying on sharing ciety. Adapted from: https://en.wiki- role models. Generally,
be addressed at different governance levels (see also approaches in individual transport or sustainable design pedia.org
there is a strong case for
section 3.2 below). This ranges from local action, such principles for consumer goods) is key for putting a green industrial policy to
as on company or city level, to national policy-making, green economy on a growth trajectory that allows for link up to new findings of behavioural economics within
supra-national alliances (such as networks of cities or upscaling innovations and for cost decreases along the the attempt to influence consumption styles (see Box
regions based on voluntary climate commitments), and technological learning curve. 9.2, overleaf).
ultimately, global action, as embodied in multilateral
negotiations on measures to protect the climate, More pronounced than in the case of conventional
biodiversity, or phase out specific pollutants. In the latter industrial policy, this implies that there is a challenge
in not only changing modes of production, but also in (6) The crucial importance of co-benefits
context, the required
responses are faced promoting the broad acceptance of changes in patterns Seeking co-benefits (in terms of collateral benefits on
Key term:
with the challenges of and preferences of consumption, and ultimately, in secondary or additional policy goals) is often critically
Montreal Protocol
Global agreement, finalized in 1987, collective action (Olson, individual lifestyles. Entrenched habits and forms of important for the broader societal acceptance of green
to protect the stratospheric ozone
1965; Ostrom, 1990). The behaviour need to be overcome with a view to breaking
layer by phasing out the production
and consumption of ozone-deplet- success of the Montreal up existing path dependencies and the bounded 3 Interestingly, this may apply even for supposedly rational corporate deci-
ing substances. Adapted from:
https://www.state.gov
Protocol provides an sion-making as has been shown to be the case in the so-called energy-efficiency
paradox (Jaffe and Stavins, 1994): Investments into more energy-efficient production
processes are often neglected despite their financial benefits.

industrial policy measures. In situations where the stakeholder acceptance, effectiveness and efficiency
Box 9.2: Evidence from behavioural green transformation is perceived to take place at the was highly uncertain and it took a lot of risk-taking and
expense of other economic or social goals it becomes experimentation to make them work.
sciences imperative to identify tangible co-benefits that can help
Contrary to (neo)classical economics, behavioural sciences question mobilize support from opposing stakeholders. Often
the assumption that rationality is the sole basis of human decision-
such co-benefits are economic advantages, such
2. Implementing green industrial
making. Behavioural sciences see the well-informed maximisation of
utility, the determinant of decisions in rational choice theory (Olson, as triggering innovation, enhancing competitiveness
1965; Becker, 1976), as only one subset of drivers of human behaviour,
the others being social, ethical and psychological drivers. Simon (1957),
also questions the unlimited ability of humans to obtain and process
and creating new green jobs. In addition, they may
also involve broader political benefits, such as the
policy
information in the pursuit of their goals (“bounded rationality”). strengthening of decentralized, municipal-level energy As has been argued throughout the preceding section,
Policy can use these insights to steer individual decisions towards a provision (for an overview on the ‘climate bonus’ see green industrial policy needs to initiate structural change
desired outcome – in our framework the outcome would be sustainability. Smith, 2013). of unprecedented scope and scale. To this end, it
Behavioural insights can, for example, be used to inform the design of
behavioural nudges (World Bank, 2012a). Thaler and Sunstein define borrows some of its instruments from both industrial
a nudge as “any aspect of the choice architecture that alters people’s The long-term nature of a green transformation
and environmental policy, but the conventional scope
behaviour in a predictable way without forbidding any options or necessitates the mobilization of transformative alliances
significantly changing their economic incentives. To count as a mere of instruments in these areas is not sufficient to meet
that are capable of and willing to take risks and stay
nudge, the intervention must be easy and cheap to avoid” (Thaler and the challenges posed by the green transformation.
Sunstein, 2008, p.6). Nudges, though an important policy component the course (Schmitz, 2015). Here again, co-benefits are
for the green transformation, have yet to be explored in any depth. As Green industrial policy may require additional and
crucial for advocacy campaigns that may even unite
their aim is to change human behaviour rather than influence the rate or indeed unconventional instruments, such as mission-
direction of technological progress, they are particularly suitable in areas traditionally antagonistic forces (e.g. trade unions and
that are difficult to tackle with technology alone, such as reduced and oriented R&D or consumer-oriented nudging based on
employers’ associations) behind a common purpose
sustainable consumption and recycling. behavioural insights.
(e.g. the creation of future-proof jobs).
One example of how to change consumption decisions informed by
behavioural insights is to change the default options. Empirical studies
2.1 Instrument categories and packages

show that people are more inclined to accept a pre-set default option
than to opt out (see, for example, Pichert & Katsikopoulos, 2008; Center (7) The innovative nature of key policy
for Research on Environmental Decisions, 2009; Brown et al., 2012).
Flight booking websites, for instance, can make the offsetting emissions instruments Green industrial policy instruments can be grouped into
option the default, forcing customers to take action if they want to opt
out. At the implementation level, green industrial policy four broad categories:
frequently involves designing and applying innovative,
Source: Lütkenhorst et al., 2014, p.23-24 (adapted from Pegels &
Becker, 2014). hitherto untested policy instruments. This is true even Regulation: Regulatory instruments can, for example,
for some instruments that by now have become part of mandate the use of particular technologies or products,
the standard green industrial policy toolbox, such as or prescribe performance standards, such as minimum
feed-in-tariffs for renewable sources of energy or cap- levels of resource efficiency, maximum emission levels
and-trade systems for emissions trading. However, in production processes, or a ban of substances
when these were pioneered, their impact in terms of or products such as plastic bags (Goulder & Parry,
2008). Provided it is strictly enforced, regulation has a

particularly strong steering impulse. The set of regulatory made mandatory. This threat of turning voluntary into Furthermore, governments will employ not only
instruments has been well-tried in environmental policy, mandatory regulation, if credible, is aimed at increasing instruments from one category, but a wide-ranging and
and their interaction with industrial policy aims has the effectiveness of voluntary agreements (“shadow of coordinated mix of all instrument types (World Bank,
been analysed widely, not least since Porter and van hierarchy”, Héritier & Lehmkuhl, 2008). 2012a). First, the policy instruments need to cover the
der Linde (1995) developed the hypothesis that strict entire technology cycle. Both green technology R&D
regulation can lead to Nudges: Using insights from behavioural sciences, and deployment support
competitive advantages choice design instruments influence the circumstances are integral elements
Key term: Key term:
Competitive advantage arising from the pressure of choices to encourage desired behaviour (Thaler & Technology cycle of green industrial
A nation has a competitive advan-
to innovate (for empirical Sunstein, 2008), for example, the prominent display The technology cycle is made up of
policy. Given the need
tage in an industry if it has sus- research, development, demonstra-
tained and substantial exports in assessments see, for of organic or local produce in cafeterias to encourage tion, market formation and diffusion. for rapid technological
that industry based on domestic
example, Rubashkina et its consumption. Nudges are strong enough to alter Adapted from: https://sustain-
advancements, direct
skills and assets outperforming its abledevelopment.un.org
worldwide competitors Adapted al., 2015; Cohen & Tubb, collective behaviour in a predictable way, but weak government support of
from: http://www.economie.ens.fr
2016; Ramanathan et al., enough to be easily avoidable, thus preserving R&D, including through
2016; Wang & Shen, 2016; individual freedom of choice. The use of nudges as public institutions (e.g. basic, or upstream R&D), and
Zhao & Sun, 2016; van Leeuwen & Mohnen, 2017). green industrial policy instruments is still in its infancy. incentives for private sector innovation are key (see
In practice, the boundaries between instrument Section 2.2.3). In addition to technology supply side
Market incentives: Market-based instruments influence measures, demand side measures need to bring the
the elements of the market – price or quantity – to categories are not always clearly defined, and
instruments may have features of more than one newly invented technologies rapidly to scale. For
encourage a specific behaviour in market actors: for instance, one of the key challenges of promoting
example, through subsidies, quotas for renewable category. For example, governments may mandate
emission quotas, but introduce market-based tradable renewable energy sources is a skilful combination of
electricity, or through carbon taxes. These instruments R&D subsidies and market creation. R&D subsidies
usually change the relative prices and hence investment permits to enhance efficiency. Voluntary standards with
increasing degrees of compulsion over time may be part need to foster a variety of solutions suited to different
incentives and can thus be avoided by economic actors renewable energy resource endowments, while market
at a cost. The category of market-based instruments as of the gradual introduction of regulation. The specific
instrument choice and design will depend on a multitude creation instruments (e.g. feed-in tariffs) are aimed at
part of a green industrial policy package has seen the scaling up and bringing technology costs down.
most policy innovation. of factors, such as the capacities of government and
industry, interests and negotiating power, society’s Second, policy packages need to consider the
Information and voluntary agreements: Information attitude towards the role of the state and the market, systemic requirements of new technologies and foster
instruments, such as disclosure requirements, are and on existing institutions. International learning about related complementary technologies. For example,
used to exert ‘soft’ pressure on polluters and to allow instrument choice and design needs to be a cautious in the case of renewables, these refer to electricity
consumers to make informed decisions. Information process, always taking into account compatibility with system management and storage technologies. For
and voluntary agreements rely on economic actors’ the specific country background and with carefully the large-scale deployment of electric vehicles, battery
willingness to cooperate. Voluntary agreements are chosen peer countries (World Bank, 2012b). technologies and charging infrastructure are key. Both
less binding than regulation, but can, if ineffective, be sectors (energy and transport) can – and indeed should

find ways of balancing potential negative effects on
incumbent industries – not only creating new groups
Box 9.3: Promoting electric mobility: A role (the population’s high environmental awareness coupled with an almost
fully renewables-based energy supply) as does the fact that Norway does of winners, but also dealing with those who stand to
complex policy challenge not have a domestic automotive industry and as such there is little resistance
from vested interests. lose. This broader perspective on complementarities
The transition from internal combustion engines to electrically powered and trade -offs is key for green industrial policy
cars is considered as a critical building block of any meaningful green Other countries are gradually moving towards the Norwegian approach. For
transformation. However, progress to date has remained limited in most instance in Germany, the initial emphasis on promoting supply-side R&D acceptance in both the business world and society at
countries. So far, only Norway and the Netherlands have reached significant efforts towards innovative technologies (easily explained by the presence of large. Safeguarding social objectives such as poverty
market shares of electric vehicles, with levels of 23 and 10 per cent, a powerful automotive sector invested in fossil fuel-based engines) is now
complemented by demand side incentives ranging from general buyers eradication and reduced inequality, as described
respectively, in 2015. This compares to a market share of well below 1 per
cent in Germany and below 2 per cent in France (IEA, 2016, p.11). premiums to special depreciation allowances for commercial cars (Altenburg, in Chapter 2 and Chapter 7, is indispensable in this
2014).
endeavour, as is dealing with powerful decision-makers.
The Norwegian success in pushing electric mobility owes itself to a
comprehensive package of policy measures. This includes generous In China, the government is currently considering the introduction of
financial incentives, such as exemption from 25 per cent VAT on purchase; mandated automotive fleet quotas for zero-emission electric vehicles as a At the same time, green industrial policy suffers from the
response to massive urban air pollution. Similar to schemes pioneered in
exemption from non-recurring vehicle fees and annual road taxes, and free
California and meanwhile applied in several US states as well as in Canada’s
same implementation issues as conventional industrial
use of toll roads and ferries. In addition, there are further incentives targeting
convenience, such as preferential access to bus lanes, and importantly, the Quebec Province, this would call for gradually rising minimum sales shares of policy, but potentially on a larger scale. Since stronger
zero emissions vehicles, proposed to be set at 8 percent for 2018 and 12 per
early build-up of an extensive charging infrastructure, which according to
cent for 2020.
intervention in current socio-technological pathways
recent research is the dominant factor for purchase decisions by consumers
(Sierzchula et al., 2014). At the same time, cultural factors play an important
is necessary, the risk of government failure increases
Source: Authors
as well. The following subsections will discuss the
interaction between green industrial policy measures
and conventional industrial policy aims, typical
implementation issues, and key general principles of
– be linked, to power electric vehicles with renewable a potentially conflicting
Key term: good practice in green industrial policy making. A select
energy and use the vehicle batteries as storage for Crowding out policy field, which has led
number of successful real-world policy packages will
fluctuating renewable energy supply. These examples Expansionary fiscal policy by to a contentious debate
governments to boost the econom- also be presented.
illustrate that green industrial policy needs to go beyond ic activity can result in increased
(see Box 9.4).
sectoral considerations and adopt a more holistic and interest rates. These can stop com-
interconnected view – and coordinated instrument Regarding green industrial
panies from investing and prohibit
packages – than conventional industrial policy (see the policy implementation in

previously profitable projects which
should have been financed through
2.2 Interaction between green and
example of promoting electric mobility in Box 9.3). loans.Adapted from: https://eco-the real world where there conventional industrial policy aims
nomictimes.indiatimes.com are competing interests,
Third, careful balancing and sequencing within well- the creation of co-benefits Many governments, recognizing the sustainability
designed policy packages aims at generating synergies from greening will play challenge and the economic opportunities of greening,
between instruments within the package and between a crucial role. It will necessitate close integration with are exploring synergies between green industrial policy
national policy aims and avoiding trade-offs or crowding more conventional industrial policy goals, such as those and the more conventional aims of industrial policy,
out. In this context, the combination of renewable related to competitiveness, employment and innovation. such as competitiveness, employment, innovation, and
energy feed-in tariffs and emissions trading constitutes At the same time, green industrial policy needs to income distribution (Pegels, 2017). Even low-income

affect the poor whose livelihoods often depend on
agriculture. Protecting the environment can, therefore,
Box 9.4: Feed-in tariffs and emissions that the long-term nature of developing low carbon technologies requires
looking beyond the cheapest short-term mitigation options; Jenkins (2014) directly contribute to economic growth and social
trading: Complementary or incompatible and Rozenberg et al. (2013) emphasise the political economy aspects
of ETS, such as difficulties to inclusiveness.
Both the feed-in tariff (FiT) instrument and various emission trading schemes set sufficiently strict caps to
are applied increasingly worldwide to push private investment into low- Key term: spark investment in low carbon • Reducing environmental hazards, such as air
carbon technologies. In the EU, their simultaneous use poses problems of Political economy technologies.
Looking at both political and eco- pollution, can lead to a considerable reduction
policy alignment. Sinn (2012), sees the European Emissions Trading System
(EU ETS) as the only instrument needed to reduce carbon dioxide emissions nomic factors, political economy is Lecuyer and Quirion (2013) in health costs. Air pollution, as found in many
the study of how a country is gov- stress that additional support
in the European Union and criticizes the use of feed-in tariffs as having a
erned. Adapted from: https://www. instruments can create the megacities, has been shown to increase the risk of
distorting effect. In principle, this is true – in a world with perfect markets and
without political capture, a stringent emissions trading scheme would suffice britannica.com required investment certainty for stroke, heart disease, lung cancer, and both chronic
low carbon investments where
to induce the green transformation.
fluctuating certificate prices fail,
and acute respiratory diseases, including asthma,
Any FiT-induced lowering of CO2 emissions reduces demand for emission and Fischer and Preonas (2010) state that cost reductions through learning and a reduction in life expectancy by several years.
and spill over effects can be an argument for parallel instrument use. Gawel
certificates traded under an ETS, cuts their price, and thus discourages
et al. (2013) and Gross et al. (2012) thus argue for realistic pragmatism. They
As such, air pollution has a strong negative effect on
investments in further emission reductions (Böhringer & Rosendahl, 2010;
Böhringer & Rosendahl, 2011). The parallel operation of FiT and ETS will recommend that as stringent cap and trade systems as possible should be wellbeing and economic development. The OECD
thus crowd out the former’s emission reduction benefits – at least for those established and complemented by targeted support for specific technologies (2016) calculates that in 2015, annual healthcare
emissions traded under the ETS. where necessary. The lower price of certificates opens political space for
tighter emissions caps without threatening the competitiveness of companies. costs related to air pollution amounted to US$21
However, in a more realistic world of uncertainties, information asymmetries Targeted technology support may be second best in a completely transparent billion, with the number of work days lost to air
and interest groups, more targeted technology support may be necessary. and efficient textbook situation, but in its absence, it may be the best
Although an ETS may crowd out the emission reductions of FiT systems, available. pollution-related illness standing at 1.2 billion. Should
literature finds various arguments for complementing ETS with additional no further measures be taken, the OECD further
support for low carbon investments. Vogt-Schilb and Hallegatte (2014) argue Source: Authors, adapted from Pegels & Lütkenhorst, 2014
estimates a rise of health costs to US$176 billion
annually by 2060, and a jump of 3.7 billion a year in
lost work days. These calculations do not account for
indoor air pollution. The World Health Organization
countries, although having little historical responsibility interventions. For example, information campaigns
estimates that while ambient air pollution causes
for greenhouse gas emissions, can find it economically and labelling, developing a market for environmental
3 million premature deaths every year, indoor air
beneficial to start implementing green industrial policies service companies, and subsidised credit lines to
pollution, mostly from the indoor use of biomass and
for several reasons (see also Box 9.1): enable households to invest in buildings insulation.
coal, is responsible for 4.3 million premature deaths
• Many measures to increase resource efficiency • Many forms of environmental damage immediately annually (World Health Organization, 2014; World
either pay off immediately or after short amortisation undermine agricultural productivity, for example by Health Organization, 2016).
periods. Producing with fewer resource inputs is soil erosion or water pollution. As most low-income
• Switching to green pathways now may be much
the easiest win-win option, and a lot of efficiency countries are highly dependent on agriculture,
easier than switching in the future. If, for example,
potential in industry, buildings, agriculture etc. is any negative effects on agricultural productivity
a city like Addis Ababa follows the development
still underdeveloped. Although cost effective, these undermine the potential for future growth. In addition,
of other African megacities, it may get locked into
opportunities often require additional government these negative effects can disproportionately

unsustainable pathways technologies are thus often cheaper and faster to quality infrastructure (such as test laboratories and
Key term:
Sunk investments due to sunk investments deploy than conventional fossil options, especially in traceability systems) earlier than their competitors
An investment that has already in infrastructure countries with abundant renewable energy resources, they may capture larger market shares.
been incurred and cannot be recov-
development – such as
ered. Adapted from https://en.wiki- such as solar irradiation and wind.
pedia.org allowing urban sprawl • Lastly, high-income country donors increasingly
which leads to high • Fossil fuel importing countries can reduce their commit to phasing out investment in environmentally
mobility requirements, dependency on these imports and vulnerability to harmful infrastructure in low-income countries. In the
an energy inefficient building stock, and transport oil price shocks by investing in renewable energy climate change negotiations, high-income countries
infrastructure oriented towards individual motorised and energy efficiency. Exporters of fossil fuels need committed to scale up climate related financial
mobility. The relative lack of existing infrastructure in to prepare for a possible devaluation of their fuel transfers and enhancing the transfer of environmental
low-income countries can, in this respect, turn out resources through decreasing demand from an technologies to low-income countries. Such transfers
to be an advantage, since they can avoid the costly increasingly decarbonised world. They can use the will not be spread evenly among recipient countries,
misinvestment in unsustainable infrastructure and remaining time to diversify their export structure and but foremost to those which can show absorptive
‘leapfrog’ into sustainable and efficient alternatives. develop competitive advantages in up-and-coming capacity and political
green technologies. Key term: ownership for a green
• Long-lived infrastructure in particular needs to be Absorptive capacity agenda.
planned with a long time horizon, since it can even • Many green technologies and practices are relatively Capacity of a country to learn and
to apply knowledge.
become stranded when stringent sustainability labour intensive, such as distributed renewable However, existing
policies or changes in demand patterns lead to its energies and organic farming practices. Accordingly, trade-offs between
devaluation. Coal fired power plants built today, for green industrial policies can have positive net environmental protection and economic development
example, may have to be decommissioned within the employment effects when juxtaposing employment should not be denied, and they need to be managed
next 20 years, which makes full amortisation difficult. gains in the new green sectors to losses in incumbent carefully (Scholz, 2012). In their early stages, most clean
This further tips the cost industries (see Chapter 5 for more information on technologies are more expensive than conventional
Key term: scale towards renewable employment effects). alternatives. These upfront costs need to be bridged
Amortisation
energies, whose cost before benefits can be reaped. At a national level, poor
The payback of debt with a fixed • Trade is increasingly organised in global value sections of the population must be protected against
repayment schedule in regular structures have developed chains in which large transnational companies
instalments over time. Adapted
favourably over the past rising costs, since they can least afford any additional
from:https://www.investopedia.com impose standards and traceability systems. These burden, and they are the ones least to blame for the
years. include more and more sophisticated environmental problem. On the international scale, the knowledge-
• The cost advantage of renewable energies standards, for example, organic labels for agricultural intensity of new green technologies could provide
particularly applies to the electrification of remote produce, or a ban on carcinogenic hexavalent high-income countries with first mover advantage as
rural areas where grid expansion is costly and chromium in leather products. Low-income countries they have a well-educated workforce and capacity
renewable stand-alone or mini-grid solutions which fail to comply with such standards are bound to for innovation. Countries that do not satisfy those
could offer viable alternatives. Renewable energy lose their export markets. Conversely, if they succeed requirements may have less ability to partake in the
in taking the lead and building the necessary

Table 2: Green industrial policy instruments and interaction with conventional industrial policy aims (source: Weinmann et al., 2016: 83)
Using the market

Voluntary, informational, and
Co-benefit or co-cost Cap and trade Mandating nudging instruments
Taxes / charges Subsidies
Competitiveness Global coordination or Compatibility with Trading instruments may fit into Global coordination or Information can be used as a signal
compensation of taxpayer trade rules needs to be framework of international treaties. compensation needed if global to environmentally conscious export
needed if global competition is considered. competition is strong, but may also markets when their standards are
strong. open up new export markets, e.g. adhered to.
organic food.
Employment Effects depend on use of Effects depend on Effects depend on likelihood of Effects can be negative (e.g. if Unlikely to have negative effects.
revenues; can be positive e.g. success in building production relocation to other, compliance costs lead to layoffs)
when ancillary wage costs are new industries versus less regulated countries (“carbon or positive (e.g. if mandating leads
reduced (“double dividend”). negative price effects on leakage”). to efficiency and competitiveness
incumbent industries. gains of regulated firms).
Innovation Send a stable price signal Effects depend on Can have effects similar to taxes, but Can have positive effects (Porter Unlikely to have negative effects.
which, if high enough, can spur the subsidy design. depend on stability and scale of the & van der Linde, 1995), but not Information and nudging can lead to
innovation. Innovation subsidies can price signal. automatically. consumer demand shifts and thus
be mission oriented. spur innovation.
Distribution / poverty Regressive effects of taxes Distributive effects Tradable permits are popular Can have direct effects on Unlikely to have negative distributive
can be mitigated by revenue depend on who receives with polluters if allocated freely distribution when costs are passed effects.
use. Charges may be politically and who pays for the (“grandfathering”), but can lead to on to the consumer.
more palatable. subsidies. price increases (e.g. energy prices)
with subsequent negative distributive
effects.
Key term: Key term: Key term:

Regressive tax effects Grandfathering Distributive effects
Taxes taking a proportionally Allocation of permits based on past Distribution of income gains and/
greater amount from those on lower emission levels. In this scenario, or losses across individuals in the
incomes. Adapted from https:// bigger polluters are granted more economy. Adapted from https://
en.oxforddictionaries.com/ permits and thus “rewarded” for 2012books.lardbucket.org/
their high emission levels.

benefits of a green economy. Table 2 gives an overview When the impact on their cost structure is limited or This can happen when the switch to cleaner production
of green industrial policy instruments and their potential positive, firms tend to be processes leads to disruptions, or when new machinery
positive or negative interaction with industrial policy Key term: less affected or can even is not as productive as previous models. Despite that,
Cost structure
aims. The proportion of a business’ fixed
gain competitiveness from the pressure to adapt can also incentivize firms to
costs to variable costs. Adapted green industrial policies. become more innovative and efficient, and in the long
from https://www.accountingtools.
com/
This is the case when term, lead to a competitive edge vis-à-vis its competitors
2.2.1 Competitiveness their modes of production (Porter & van der Linde, 1995).
are more environmentally
Impacts of green industrial policy instruments on Shifts in the competitiveness from polluting to clean
friendly than those of their competitors, when alternatives
competitiveness can occur at the individual enterprise sectors are, in principle, a desired outcome of green
to harmful processes or inputs are easily available and
the sectoral, or the national levels. Competitiveness industrial policy. However, when firms stand to lose from
affordable (or when they become so through innovation),
of enterprises refers to their ability to sell their goods a government policy, they seem to be more likely to
when their competitors have to comply with similar
or services and stay in business (OECD, 2010). organise towards influencing policy in their favour than
regulation or when they can pass on cost increases to
Aggregated over enterprises in a sector, these abilities those firms that are potential winners. As Baldwin and
input suppliers or customers. Conversely, firms which
make up competitiveness of the sector. At the national Robert-Nicoud (2007) put it, “losers lobby harder” (p.5).
have benefitted from externalizing environmental costs
level, competitiveness is the aggregated ability of In consequence, actors who stand to lose from a change
or for which the adaptation to cleaner production modes
firms in a country to produce goods and services for in policy usually receive more governmental attention
is costly or impossible, can lose competitiveness. This is
international markets, and simultaneously maintain and (OECD, 2007).
also the case if they cannot pass the additional cost on
expand real incomes in the long run (OECD, 1992).
to preceding or subsequent stages of the value chain, A frequent concern (and argument in the discourse
Competitiveness depends on the individual capabilities
and, crucially, if their national or international competitors on stricter environmental regulation) is the relocation
of firms, as well as the micro- and macroeconomic
are better positioned. of firms to other countries once regulation makes
contexts, i.e. the conditions they find in their respective
sectors and the national economy. The effect of policy In addition, to the direct effects on firms’ cost structures, their activities less profitable. When firms choose to
instruments on competitiveness at different levels is firms can experience indirect effects when adopting relocate and establish similarly polluting activities in
not necessarily uniform – while a country’s international cleaner production modes. On the one hand, these other countries, there is a negative economic impact
trade balance improves, individual sectors may struggle. effects can be positive, for example when the new on the regulating country and no positive effect on the
While a sector gains competitiveness, individual modes are more efficient, allow for product differentiation environment in general. For carbon dioxide emissions,
firms within that sector may not be able to keep up with opportunities for higher revenues, provide access Rutherford (1992) termed this issue ‘carbon leakage’.
with technological change. Firms in the same sector to new markets, improve stakeholder relations, or open Firms that experience negative impacts on their
often have similar input needs, production modes and new business opportunities (Ambec & Lanoie, 2008; competitiveness, and that can relocate their productive
customers, which increase the likelihood of a uniform OECD, 2010). On the other hand, they can also be activities relatively easily, are particularly prone to
impact. However, due to differences in their adaptive negative, where switching to the new modes lowers the carbon leakage (Meunier & Ponssard, 2014). However,
capacities firms may gain or lose competitiveness quality of the goods produced or requires investment there is little empirical evidence that environmental
compared to their competitors in the same sector. in new machinery without equivalent productivity gains. policies actually cause firms to relocate internationally

An alternative to exemptions is the stepwise
introduction of green industrial policy instruments to
Box 9.5: From export-processing zones Key term:
industries and technological spill
over effects on the one hand, give firms sufficient time to adapt. When firms have
to low-carbon zones: New approaches Duty drawback and sacrificing goals related to
social and regional inclusion on no possibility to adapt to cleaner production modes
Refund of feeds collected at impor-
towards dedicated spaces tation. Adapted from https://www. the other. Today, this approach is and are subject to intense international competition,
cbp.gov advocated by some economists
There is a long history of using various types of dedicated spaces with a view specifically for African countries protection may be necessary as long as there is no
to attracting foreign direct investment into developing economies. From the with poor infrastructure and international coordination on pollution regulation.
early days of export-processing zones (particularly in East Asia from the general business environments that are not conducive to attracting foreign
1960s onwards) to the concept of investment (Lin, 2012, p.174). The EU, for example, regularly determines sectors at
Key term:
special economic zones during risk from emissions trading, such as coal mining or
China’s economic opening in the At the same time, a new breed of zones is emerging that are explicitly
Export processing zones
1980s, such zones were provided linked to environmental goals. These range from simple pollution control metal production, which receive higher shares of free
Defined by the ILO as “industrial zones aimed at environmental compliance to eco-industrial parks and, more emissions allowances (European Commission, 2014). In
as experimental areas for offering
zones with special incentives set up recently, low-carbon zones. For
special conditions and incentives some cases, it can be a challenge to determine whether
to attract foreign investors, in which instance, both China and India
to foreign investors which
imported materials undergo some
governments were not ready Key term: have already formulated policy such free allocation is economically necessary and
degree of processing before being
to apply nation-wide. Typically, Clean Development guidelines for such zones, which
justified or an outcome of political capture (see Section
exported again”. Available at: http://
this would involve low levels Mechanism are often aimed at attracting
www.ilo.org
of regulation, duty drawback reduction targets under the Kyoto energy-efficiency or renewable 2.3.2 on the management of policy rents).
schemes for imported goods, Protocol by undertaking emission energy investments within
cost-free or low-cost infrastructure, reductions in low-income countries. the framework of the Clean
and restrictions on trade union activities, among other factors. A controversial Adapted from https://cdm.unfccc.int Development Mechanism (Yeo &
debate has ensued on the trade-off involved between promoting competitive Akinci, 2011). 2.2.2 Employment
The effects of structural change towards sustainability
on competitiveness, as discussed above, are closely
(UK Green Fiscal Commission, 2009). The decision for schemes rely on grandfathering emission permits – related to effects on employment. When green industrial
production (re)location hinges on a multitude of factors, that is, allocating polluters permits for free. Exemptions policy measures increase production costs, firms may
including wage levels, availability of high quality inputs, can severely reduce the potential to drive structural have to decrease other cost factors, such as those for
infrastructure, rule of law, corporate taxes, and the change and protect the environment. Both exemptions personnel. However, structural change towards low
general macroeconomic investment climate of countries. and grandfathering come at the cost of revenue carbon activities is unlikely to bring large employment
In this broader context, the concept of green and/or low- raising, thereby reducing the room for manoeuvre by losses in OECD countries. In 2004, a mere 8 per cent of
carbon industrial zones has recently gained momentum governments to soften negative distributive effects or the total workforce worked for the sectors responsible
(see Box 9.5, overleaf). foster upcoming, clean sectors. However, they may be for 82 per cent of the OECD’s CO2 emissions (OECD,
temporarily necessary to avoid abrupt structural change 2011).
Nonetheless, many green industrial policy instruments and give industries time to adapt, but should be phased
make concessions to protect the competitiveness of In contrast, green industrial policies can also have
out as soon as possible. the potential of increasing employment. Germany, for
affected industries. Carbon tax schemes, for example,
entail exemptions for large polluters, and carbon trading instance, used the revenue of energy taxes to reduce
pension insurance contributions (Forum ökologisch-

soziale Marktwirtschaft, 2015). This leads to a relative substantive shares in fast-growing markets, for example (a) Sectors with an above-average share of people living
cost shift from the productive input factor labour to in renewable energy technologies. For example, Pegels in poverty (for example,
the factor energy – labour becomes cheaper, while (2017) shows that Germany achieved a first mover Key term: agriculture or the informal
Natural capital
energy becomes more expensive. The result is a double advantage in wind converters, and is now competing Specific natural resources, such as sector);
dividend of increased employment and increased with Denmark for world market leadership. forests, agricultural land, fisheries,
energy efficiency, leading to less environmental impact. (b) Production factors
and more generally, the stock of
ecosystems that supply economi-
The potential double dividend makes reductions in Gaining a first mover advantage in knowledge-intensive which people living in
cally useful services (for an in-depth
labour related costs one of the most commonly used new green technologies may not be realistic for most poverty require for their
discussion of the different kinds of
capital, see Chapter 2).
revenue recycling options in high-income countries. low-income countries. Second mover advantages, on the livelihoods (for example,
In most low-income countries employment often takes contrary, are within reach: after Germany created a lead financial, physical, social
place in the informal sector, and social security systems market for solar photovoltaics, Chinese firms started and natural capital, and human capital, that is, their
are underdeveloped or lacking. The positive effect of mass-manufacturing of solar panels and exported them health and education [Hallegatte et al., 2014, p.6]);
reduced labour related costs is therefore uncertain. to the German market, putting pressure on German and
Other options for revenue use may be more beneficial, manufacturers (Pegels & Lütkenhorst, 2014). Similarly,
low-income countries may be well placed to develop (c) Employment opportunities that people living in
such as targeted support of people living in poverty. poverty depend upon (for example, low-skilled or
Peer learning among developing and emerging resource-efficient low-tech solutions.
informal labour). This aspect needs to consider net
countries may therefore be more suitable than the employment effects, that is, it needs to factor in both
transfer of best practices from high-income countries. the green employment opportunities created, and the
2.2.4 Inequality and poverty
brown employment opportunities lost (Bowen, 2014).
The effect of green industrial policies on inequality
2.2.3 Innovation and R&D is a highly relevant question in high and low-income Second, the consumption dimension needs to be
countries alike, and reducing poverty is a particularly considered and can be assessed by asking whether the
The impact of environmental regulation on innovation planned policy affects:
has been discussed since the 1990s, when Porter (1990) pressing issue in low-income countries. As suggested
put forward the hypothesis that strict environmental by Pegels (2015), governments may use a checklist (d) Access to key goods or services by people living in
regulation improves competitiveness because it forces for a rough assessment of potential impacts of green poverty (such as shelter, food, energy, or water, but
firms to upgrade technology and innovate. Taxation of industrial policies on poverty, followed by a more also to political processes and education); and
pollutants by governments, therefore, has an advantage thorough assessment, should critical areas be identified.
The questions to be asked can be grouped in two (e) Affordability of key goods and services (such as
over setting technology standards. When firms are
areas. First, the ability of people living in poverty to be those stated above).
regulated to adhere to a standard, their incentive to
innovate abates once they have reached the standard. economically active should not be hampered. Policy
Should any negative effects be found, mitigating
With taxation, the price incentive continues to reward makers may therefore ask whether the planned policy
measures can be oriented along the affected dimension.
further innovation. First mover advantages in new affects:
This can, for example, include the creation of alternative
green technologies can mean that countries secure employment opportunities, re-training and capacity

Table 3: Green industrial policy instruments and capabilities required for implementation (source: Weinmann et al. 2016, p.83)
Using the market

Voluntary approaches / informational, and nudging
Implemenation issues Cap and trade mandating instruments
Taxes / charges Subsidies
Technical capabilities Taxes can be easier to establish, Information on appropriate Possible if number of polluters is Voluntary instruments usually require Information disclosure requirements
administer and monitor than, for subsidy level can be sufficient and pollutions sources can relatively little administrative capacity, can be powerful instruments to
example, cap and trade systems. obtained by competitive be monitored, but requires relatively but can be less effective than provide consumers with the basis for
Most governments already have processes, e.g. public high technical capacity. Trading mandating. They can, in a sequenced informed choices, and to increase
tax systems in place in which tendering of renewable schemes often need to be set up from approach, be made mandatory societal pressure on polluters. Nudging
they can use for environmental energy feed-in tariffs. scratch, including institutions to monitor after companies have time to adapt. instruments can also have strong
purposes. Regular tax discussion However, tendering emissions, register allowances, and Mandating is useful if compliance is influence on consumer decisions, at low
and revision in budget cycles requires relatively high keep track of allowance trade. Taxing or observable, the number of regulated cost and with little technical management
enhances transparency and technical capacity. mandating may be preferable if technical agents is small and enforcement requirements. However, they should be
eases policy-learning. capacity to manage the market is can be safeguarded. Requires less tested before implementation to optimise
lacking. technical capacity than many market- intervention design.
based instruments.
Political / rent management Political aspects of monitoring and enforcement need attention, Trading schemes may be used as an Individual negotiation entails risks. Low risk of rent-seeking since rents
capabilities corruption complicates market-based policies. Smaller entry barrier, polluters will lobby for Risk of non-compliance of powerful involved are typically low to non-existent.
numbers of actors can coordinate more easily and thus exert free allocation of permits. Risk of price entities.
pressure to achieve a favourable design of market-based manipulation when the number of market
instruments. participants is too small.
Taxes typically engender Subsidies may be subject
opposition. to lobbying, trigger rent-
seeking and wasteful
activities. Sunset clauses
should be introduced and
communicated from the
beginning.
Key term: Key term: Key term: Key term:

Budget cycles Policy learning Sunset clauses Rent seeking
The major events stages in making decisions about the How policy systems generate and use knowledge about Measure in a law or regulation that provides that the law The manipulation of economic conditions to increase prof-
budget, and implementing and assessing them. It usually policies, their rationales, design and impact. Adapted will lose effect after a specific date, unless it is extended. its. Adapted from https://en.oxforddictionaries.com
consists of four stages: formulation, approval, execution from https://www.innovationpolicyplatform.org Adapted from https://en.wikipedia.org
and audit. Adapted from https://www.oecd.org

building, or price subsidies such as through electricity Given the strong case for discussed in Section 1.2, policy needs to play a major
Key term:
lifeline tariffs. Policy coherence active green industrial role in inducing the aforementioned investment shifts.
The systematic promotion of mu-policies in an environment This task is two-fold. On the one hand, policy rents
tually reinforcing policies for syn-
of failing markets,
ergies towards achieving set ob- need to be created to make sustainable investments
2.3. Practical challenges in instrument there are demanding
jectives and to minimize negative
spillovers. Adapted from http://www.
artificially attractive. Overly generous incentives are an
implementation liaise-kit.eu
requirements in terms obvious risk, leading to wasteful allocation of scarce
of policy coherence resources and turning rent-seeking into the very
In Section 1.2 above, we elaborated on strategic between a broad range objective of investment, thus stifling the entrepreneurial
challenges to green industrial policy. Some of these of responsible agencies. They typically involve thorny drive for innovation. On the other hand, profit sources of
challenges translate into very practical implementation issues of aligning energy, environment, competitiveness, unsustainable business practices need to be reduced,
challenges of varying relevance, depending on the trade and social policies, and thus should be because they either have negative economic impacts,
selected green industrial policy instruments. Table 3 consistently coordinated by a high-level authority. For or can result in a gradual dilution and diversion of policy
gives an overview. well-designed strategies to succeed, the creation of measures away from their intended goals, thereby
competently staffed and well-resourced supporting reducing their effectiveness and impact.
As the synopsis in Table 3 shows, both technical and institutions is key to success.
political capabilities are required to ensure effective Creating and withdrawing rents to direct private
implementation of green industrial policy. Even at the Now enter the political economy dimension. investment towards sustainability is thus the most
seemingly straightforward technical level, the challenges fundamental challenge, or indeed the “heart of
are immense. Specifically, in low-income countries, The major structural shift of private investment required green industrial policy”, as Schmitz et al., (2013) put
instruments like cap and trade are often without for the green transformation can only be achieved with it. A powerful tool are policy rents, which have the
precedent and need to be designed from scratch. the help of change coalitions across government and the potential to become a strategic resource for driving
Ideally, this presupposes a sophisticated institutional private sector (Schmitz et al., 2013). The identification structural change (Altenburg & Engelmeier, 2013).
infrastructure capable of formulating policies, steering of co-benefits with the traditional industrial policy aims This presupposes, however, that political capture by
implementation, ensuring discussed above may give the transition to sustainability lobby groups can be kept in check. For green incentive
Key term: transparency and a considerable boost, since it will create a broader base systems, the risk of rent-seeking political capture is
Pilot schemes of supporters than just environmentalists, such as trade
Testing a scheme in a limited con- consistency, codifying particularly high (Altenburg & Pegels, 2012). By their
text before introducing it on a larger legal enforcement, and unions representing workers in new green industries. very nature, these incentives are (a) provided under
scale. Adapted from https://www.
putting in place business Similarly, the identification of the level and distribution of technological uncertainty, meaning they are aimed at
collinsdictionary.com
development services that co-costs, and of measures to mitigate negative effects is taking incipient technologies towards the threshold of
are efficient and regularly crucial, since it may avoid the formation of veto groups. commercial viability; (b) devised in an open-ended
monitored and evaluated. Even for a country like Both elements can be key to forging change coalitions. manner to last for long-term transition periods; and (c)
China, moving from pilot schemes towards a national Change coalitions with industry will depend on profit effective economy-wide, rather than just in a confined
emissions trading scheme is considered a daunting opportunities (and loss risks) resulting from green number of specific sectors. This makes it almost
challenge (Zhang, 2015, p.27). structural change. Given the manifold market failures

impossible to establish unambiguous causality chains (1) Agreeing on long-term policy paths creating green tax commissions, with relevant ministries,
and to hold policymakers accountable. industrial organizations, trade unions and environmental
If green industrial policy is to effectively support organizations. Studies by independent research
This particular nature of green incentives makes them an broader transformative goals, societal acceptance organizations can provide a sound empirical basis for
attractive target for lobbyists and puts the responsible is key. In charting a long-term policy path, or to put it the discussions in such
government agencies under high pressure to stay their differently, designing a national transformation project, Key term: commissions.
policy course. Resisting such pressure is especially the inclusiveness of stakeholder consultations is thus Embedded autonomy
An autonomous state needs to be
difficult in many low-income countries with poorly an indispensable element. It is only by achieving a high At the same time, through
connected to society by a concrete
developed government capabilities, weak monitoring degree of consensus on policy goals (and on future organising an inclusive
set of social ties (“embeddedness”)
systems and insufficient transparency. However, even in order to avoid corruption andand structured process
technology corridors to be prioritized 4) that resistance rent-seeking.Adapted from http://
mature industrial economies can be prone to political to policy implementation can be kept in check. This chtzeng.blogspot.com of stakeholder dialogue,
capture. This raises the question of which institutional presumes that stakeholder engagement has an actual government action
conditions and economic incentives can be created to influence on policy design and implementation, and is becomes embedded
facilitate implementation and at the same time ensure not just a mock process, with influence taken effectively (see Evans, 1995 on the concept of ‘embedded
efficiency and effectiveness. We will turn to this issue in by interest groups in back rooms. A key aspect to the autonomy’) in the broad spectrum of societal interests
the following section. acceptance of any policy reform is trust in the capability and can more easily “elicit information about objectives,
and willingness of governments to consider a broad distribute responsibilities for solutions, and evaluate
range of interests, and to use revenues and distribute outcomes as they appear” (Rodrik 2007, p.112).
2.4 Good practice principles of green costs in a way which is fair and benefits society (Pegels, In turn, this can provide an effective platform both
industrial policy 2016). for building transformative alliances on the basis of
identified co-benefits (see Sections 1.2 (7) and 2.2
From the preceding sections, it is clear that preventing It is thus the crucial role of the state to ensure that above), for anticipating attempts of political capture
political capture of green policy measures is essential for the views of all relevant stakeholders – public and by lobby groups (see Section 2.3.2 above), and for
their effectiveness. This in turn calls for the design and private, business and academia, domestic and
institutionalising policy learning (see below).
implementation of long-term, consistent policy scenarios foreign, local and regional – are brought to bear on
that are credible in their goals and intentions as well as defining a national green transformation agenda. A
a general readiness for policy monitoring and learning. better understanding of the issue at hand, its causes, (2) Ensuring long-term policy credibility, while
impacts, and possible measures, can be achieved if
These fundamental requirements are elaborated below continuously improving policy by systematic
and illustrated with examples. For more specific good relevant stakeholders are involved and instruments are
monitoring and learning
practice elements of industrial policy in general see designed in cooperation with those affected. For carbon
Altenburg and Lütkenhorst (2015, Sections 5.4 and taxes, for example, the OECD (2007) recommends Transformative policies must be designed with continuity
9.2), and for green industrial policy in particular Pegels and consistency in mind with a view of ensuring policy
(2014b). credibility. They must be geared towards creating a
4 “The history of technological change teaches us that choosing particular sec-
tors in this process is absolutely critical ... the green revolution will not take off until it path that locks in the desired policy goals and the
is firmly picked and backed by the state“ (Mazzucato, 2014, p.27).

Box 9.6: The German energy transition as a Key term:
• Source-specific application
in accordance with different
• Convening a roundtable with all relevant stakeholders tasked with reaching
a national coal consensus with broad societal support, which would be
long-term national ‘project’ Degressive tariffs
Tariffs which gradually decrease
technologies and deployment
conditions;
complemented with a legally binding roadmap for phasing out coal by 2040;
over time below a certain rate. • Imposing a ban on new coal power plants and designing a concrete
The German energy transition (‘Energiewende’) is a project that aims at • Purchase guarantees decommissioning plan for all existing coal power plants;
radically changing the country’s existing energy system in the direction of Adapted from https://www.thefreed-
for unlimited volumes of energy
renewables and climate sustainability. Similar policy-relevant endeavours ictionary.com produced; • Committing to accompanying policy measures to mitigate the economic and
are seen across different regions and in countries with different economic social costs of structural adjustment. Specifically, this would include a structural
endowments and capabilities (Pegels & Lütkenhorst, 2014; Buchan, 2012; • Grid priority in terms of adjustment fund for affected lignite regions; a close monitoring of energy supply
Matschoss, 2013; Quitzow et al., 2016). Notwithstanding debates on various connection (“feed-in”) and transmission; and security during the transition phase; and special attention to maintaining the
implementation challenges and shortcomings, to date the German energy competitiveness of energy-intensive companies;
transition has consistently enjoyed exceedingly high levels of popular support. • Burden sharing of additional costs by all electricity consumers.
Providing long-term security to both investors and financing institutions, • Ensuring supranational policy alignment through a mechanism to be built into
It can legitimately be considered as a national transformation project that is
the EU ETS that would ensure the automatic withdrawal of certificates released
in line with the country’s generally high public backing of climate change and and remaining open-ended in terms of technology choice, the feed-in tariffs
through the coal phase-out (see also Box 4).
environmental policy objectives (Uekötter, 2014). have triggered the roll out and up-scaling of a whole range of renewable
technologies. However, over the course of time the original feed-in tariff Obviously, this proposal is exceedingly ambitious both in its overall goal and its
The rapidly rising contribution of renewables in Germany’s energy mix is among approach has become the victim of its own success by causing an excessive implementation modalities. Yet Germany does have a track record of reaching
the cornerstones of the energy transition. From around five per cent 15 years expansion of heavily subsidized solar PV deployment – a development that broad-based consensual policy decisions, as was the case, for example, in a
ago, the share of renewables in total electricity consumption has surged to over in recent years has led to a series of policy reforms. The recent reforms have 2007 agreement on the future phase-out of hard-coal mining. Furthermore, the
30 per cent in 2016. resulted in significantly reduced tariff rates in response to unexpectedly steep policy-driven push of renewable energy sources into the market has now been
technological learning curves and decreasing unit costs for renewable energy; pursued for 25 years, bearing in mind that the predecessor law to the EEG
From the outset, the German energy transition has been policy-driven and the introduction of an expansion corridor linking future feed-in tariff reductions went into force back in 1991. Thus, the principal lesson seems to be that policy
constitutes a clear-cut case of deliberately changing the main parameters as to actual capacity expansion (‘flexible ceiling’); and the gradual introduction of coherence over long periods of
well as the long-term price signals for energy markets. Apart from a whole competitive mechanisms, such as competitive bidding procedures. The latter time is not necessarily elusive.
range of conventional promotional instruments (e.g. preferential financing and had been applied before in some emerging economies, such as China, India Key term:
targeted R&D support), the introduction of feed-in tariffs constituted the major and South Africa (for the latter case see Pegels, 2014a), which points to an EEG Source: Authors, partially adapted
and decisive policy innovation, which is characterized by: interesting example of reciprocal inter-country policy learning. German Renewable Energy Sourc- from Deep Decarbonization
es Act – law to promote renewable Pathways Project (DDPP, 2015)
• Guaranteed feed-in tariff levels for 20 years, with initially fixed amounts (for 5-12 Currently, the debate in Germany is moving towards the design of a credible electricity in Germany. Adapted
years) subject to a degressive scale later on; long-term strategy for “moving out of coal”, based on a legally binding from https://www.bmwi.de
roadmap agreed by all societal stakeholders. A proposal by AGORA
Energiewende (2016) includes 11 actionable principles, encompassing:
commensurate policy tools, be they tax or financial At the same time, long-term credibility and pathways and being open to policy learning and adjustments
incentives, standards or regulations. This can be locking in desired policy goals and tools, calls for based on results derived from regular monitoring and
exemplified with the German energy transition and the greater attention to patterns of consumer behaviour that evaluation (see Box 9.7). A compromise needs to be
specific instrument of feed-in tariffs – a case where respond to new technological options. found between, on the one hand, keeping incentives
strong support for renewable energies has created robust and reliable, while, on the other hand, allowing
and scaled up markets beyond a point of no return, While policy credibility and long-term reliability are key for adjustments that must remain possible in the spirit
i.e. rendering this particular industrial policy direction to providing investment certainty, there is a potential of continuous improvement and technological cost
endogenous to the economic system itself (see Box 9.6). conflict between locking in a specific policy path

degression.This is a fine balance to be struck and no boundaries that must be drawn by policy decisions
general recommendations can be given. and with outcomes that must be subjected to political
Box 9.7: The concept of policy learning
assessments.
As argued throughout this chapter, the green transformation process Two different dimensions of policy learning need to be
is of a long-term nature, involves high levels of uncertainties and risks, distinguished. Before deciding on the policy path to In this final section, we turn to a number of areas that are
and demands knowledge of both synergies and trade-offs between
goals and outcomes. As such, it calls for a policy process that is able to be chosen, there is a need for a radical challenging of still subject to on-going, somewhat controversial debates
respond to these challenges through systematic policy learning, which existing pathways and an open-minded look at possible and that in our view would call for additional research
must have two main dimensions: learning from others as well as learning
over time. Cycles of learning should be put in place, where reviews alternative scenarios. Subsequently, when implementing efforts.
and revisions of goals and achievements are regularly carried out. The the chosen policy, the emphasis needs to shift to
implications that such an approach has on policy actors is not trivial, as it
requires a shift from policy-making based on linear thinking to one based
regular checks of achievements against expectations.
on complex adaptive systems (Hallsworth, 2012). This presupposes the existence of independent and 3.1 Implications of a finite global carbon
Several studies have recently explored how to achieve an effective
transparent monitoring and evaluation institutions, budget
policy process when dealing with complex problems (Jones, 2011). which are autonomous from those parts of government
One of the most compelling approaches to integrate learning in policy-
making is the ‘learning spiral’ developed by the World Bank based on
in charge of setting targets and regulating economic Notwithstanding scientific debates on its precise
several theoretical and practical concepts (Blindenbacher, 2010). At activity. volume, there is consensus that the available global
its core is an iterative process based on feedback loops that allows the carbon budget is limited and that it will be used up fast
integration of new knowledge in the decision-making process and adds
flexibility to revise earlier goals and objectives to ensure adaptability to a under any realistic decarbonization scenario. For green
continuously changing reality. industrial policy this has several implications. First, the
Within a scenario of disruptive change, as is the case in the current 3. Conclusions and open issues transition towards sustainability and decarbonization
green transformation, it becomes imperative to challenge not just must be radical (with negative emission levels to
specific policy goals and measures but also the prevailing framework From the broader perspective of green transformation be achieved within a few decades) and has to take
conditions, for example, not just to reduce resource consumption and
waste but to aim for building up a truly circular economy. In the parlance goals, this chapter has taken a fresh look at the industrial place under extreme time pressure. Second, high
of organisational learning policy discourse in general, and the characteristics and low-income countries alike need to define valid,
theory, this would imply
Key term: a move from ‘single loop’
and modalities of green industrial policy in particular. effective, and socially agreeable approaches towards
Horizon scanning learning, i.e. revision of The genuine rationale and role of industrial policy as their stranded carbon assets - again very much a
Technique for identifying early signs actions, to ‘double loop’
of potentially promising develop- learning, i.e. revision of
a tool, not just to optimize economic processes, but distributional question and as such a make-or-break
ments by systematically examining frame conditions (Argyris rather to support societies in reaching shared goals issue for the societal acceptance of any meaningful
threats and opportunities, especial- & Schön, 1978), which are
ly for new technology. Adapted from
was emphasized. It was argued that the raison d’être of green industrial policy. This is what the OECD refers
based on methodologies
https://www.oecd.org such as technology foresight (green) industrial policy interventions cannot primarily to as the political challenge of reducing ‘carbon
or horizon scanning. be derived from the correction of market failures but entanglement’ (OECD, 2015). Third, the action remit of
Sources: Adapted from Lütkenhorst et al., 2014 and Altenburg et al., lies in the provision of guidance and direction for green industrial policy needs to transcend the national
2016 (where further methodological details are provided). economic agents, above all private sector investors, level and move towards global negotiations about the
along a socially desired development path. In this, distribution of the remaining carbon budget.
markets evidently have a major role to play - yet within

Research carried out in the context of the United on the part of individual nation states. In contrast, the policy goals, could be established through defining
Nations’ Deep Decarbonization Pathways Project benefits to be gained from adaptation action occur at new ways of measuring social welfare. Gross domestic
(DDPP, 2015) demonstrates the magnitude of the the local or regional level and can thus be appropriated product (GDP) alone, which is the most widely used
global challenge: The project’s ambitious modelling more directly. A good example would be the case of a proxy, is incompatible with a green growth paradigm.
scenarios assume an average emission level as low as country that is building dams along its coast against Clearly, there is a need to design, and agree upon, new
2.1 tons CO2 per capita by 2050 across the 16 countries rising sea levels. welfare indicators (see Chapter 10 in this volume for a
covered. This must be seen against a 2016 world more detailed discussion). At the same time, “in most
average of approximately 4.8 tons per capita and, in At the same time, there are worrying trends towards a countries there is an almost paradoxical disconnect
terms of illustrative country examples, 17 tons for the gradual marginalisation and exclusion of low-income between green transformative goals on the one hand
USA, 7.2 tons for China and 8.3 tons for South Africa countries. On the one hand, these countries are not and their continued measurement by conventional
(Global Carbon Project, 2017). This is a stark reminder normally members of the new decentralised networks, economic indicators on the other hand” (Lütkenhorst et
of the massive adjustments needed towards reducing which tend to concentrate on major emitters of carbon. al., 2014, p.44).
the carbon intensity of future growth in high-income On the other hand, growing amounts of climate finance
countries, while ensuring that the new productive and are predominantly spent on mitigation programmes However, various conceptual innovations of measuring
infrastructural capacities in low-income countries are of in emerging, middle-income countries rather than on welfare have been introduced in recent years and are
a low-carbon nature. adaptation requirements in poorer countries (Boyle, in the process of being refined (for a comprehensive
2013). discussion on the issue of metrics, see Chapter 10). In
addition to such innovative macro-level approaches,
This puts the commitment to global carbon justice into there is also a need to
3.2 Global collective action great doubt. Low-income countries are expected to Key term: revisit prevailing statistical
invest in low-carbon technology patterns at low levels ISIC
Thus, in fighting climate change and accelerating a International standard industrial classification systems
of per capita income, i.e. to get green before they get classification of all economic activ- at the micro-level with
green transformation, the case for collective action
rich (for the case of sub-Saharan African countries, see ities (ISIC): Standard classification
a view to allowing a
at the global level is compelling. Many examples in of economic activities by the United
Hogarth et al., 2015). In more technical terms, they are sharper identification of
this chapter point to the significance of supranational Nations Statistics Division to pro-
supposed to ‘tunnel’ the environmental Kuznets curve mote international comparability of
environmental goods and
and ultimately global policy alignment. Although data. Adapted from http://ec.euro-
(Munasinghe, 1999, and Chapter 2 in this volume). While services. This holds true
issues related to public goods and collective action pa.eu
this may be technologically feasible, it would clearly for both disaggregated
requirements are well known to the industrial policy
require an enhanced political and financial commitment sectoral statistics (such
discourse (e.g. in terms of harmful incentives in the
on the part of the international community. as the International Standard Industrial Classification
competition to attract foreign investment), they assume
significance in the green industrial policy discourse [ISIC] approach ) and various patent databases that
where boundaries are truly global. By its very nature, are important for measuring the innovation capacity of
this applies primarily to effective mitigation action, which 3.3 New metrics economies.
presupposes global coordination and negotiation, thus An important conceptual foundation, and one that
opening significant space for free-riding behaviour underpins a consensus on long-term green industrial

3.4 Disruptive structural change Key term:
in global value chains. their levels of productivity, innovation and welfare
Reshoring The combined effect of without relying on economic growth. The need to
In recent decades, the fundamental dynamics digitalization trends and
Bringing production back to the decouple economic growth from resource consumption
of competitive integration of world markets (i.e. domestic country. Reverse process
new environmental trade and emissions has become accepted in large parts
of offshoring production to cheaper
globalization) have barely changed. Currently however, standards may lead to a
countries. Adapted from https:// of society, international policy circles, and important
strong indications of more radical, path-disrupting www.inc.com
significant regionalization parts of the business community: “Action to decouple
changes going forward have surfaced. and shortening of value business and economic growth from resource intensity
In addition to the environmental imperatives discussed chains, and would deserve heightened attention in future and environmental impact has never been more critical
in this chapter, fundamental implications are likely research. to the long-term success of business” (WEF 2012, p.5).
to arise from the digital revolution in its various However, the more radical proposition that there are
Generally, in scenarios of fast and radical transformation “limits to growth” (Meadows et al., 1972), and that hence
manifestations. There is ongoing, contentious debates within certain framework conditions, anticipating the
regarding the impact and potential pervasiveness of economic growth itself can no longer be regarded as
future is rewarded, while extrapolating from the past a sustainable foundation for welfare (Jackson, 2009),
various technological innovations (such as robotics, is penalized. If the current emphasis on disruptive
additive manufacturing and the internet of things), has remained highly controversial. Obviously, this all
structural change is justified – and there is growing depends on how economic growth processes are
yet there is no doubt that they will affect the current evidence that we are facing long-term fundamental
patterns of international specialization: “If you take shaped and measured. Circular economy concepts
transformation forces at work – then the methods of (WEF, 2014b), cradle-to-cradle approaches (Braungart
most of the costs of labour out of the equation by how we identify future competitive advantages have to
installing robots and other types of automation, then & McDonnough, 2009) and other forms of new growth
be revisited (for some methodological implications, see models could go a long way in making our future
the competitive advantage of low wages largely Altenburg et al., 2016).
disappears” (Brynjolfsson & McAfee 2014, p.184). This sustainable (see appendix of Chapter 1 for an overview
resulting trend of production ‘reshoring‘ could be further The most fundamental question is whether modern high- of concepts). They deserve priority attention in multi-
exacerbated by the impact of environmental footprinting income economies can maintain and even enhance disciplinary research efforts going forward.

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CHAPTER 10: THE GREEN ECONOMY PROGRESS
MEASUREMENT FRAMEWORK: A DIDACTIC INTRODUCTION
CHAPTER 10: THE GREEN ECONOMY José Pineda 1
PROGRESS MEASUREMENT FRAMEWORK:
United Nations Environment Programme
A DIDACTIC INTRODUCTION José is a Senior Consultant working with the Resources and Markets Branch,
Economy Division, UN Environment. Jose was a senior researcher for UNDP
Human Development Report. He has extensive research experience on green
economy, international trade and open macroeconomics. Prior to joining the
UN, he was Deputy Director of Research at CAF.
He has also served as Chief Economist of VENAMCHAM, and as consultant

LEARNING OBJECTIVES for the Venezuelan Ministry of Finance, the Venezuelan Central Bank. He
is currently Adjunct Professor in Sauder School of Business at University
This chapter aims to enable its readers to: of British Columbia. José holds a PhD in Economics from the University of
Maryland.
• Outline the main challenges facing humanity and analyse their drivers;
• Articulate how the inclusive green economy model seeks to address these chal-
lenges; and Eduardo Zambrano 1
• Understand the major characteristics that underpin national strategies on California Polytechnic State University
Eduardo Zambrano is Professor of Economics at Cal Poly in San Luis Obispo,
California, with research interests in General Equilibrium Theory, Game
model into practice. Theory, Decision Theory, Political Economy and Welfare Economics. He has
published in journals such as Econometrica, Games and Economic Behavior,
Journal of Mathematical Economics, Journal of Health Economics and
Economic Theory, among others.
He obtained his PhD in Economics in 1999 from Cornell University and has
worked since 2010 as a consultant to UNDP, UNEP, and the OECD in matters
regarding the measurement of human development, gender inequality, and
the impact of environmental sustainability on human development.
1. The authors are grateful for the substantive contributions provided by Antonio Villar, from Universidad Pablo de Olavide (Seville) and
the Valencian Institute for Economic Research (Ivie), as well as Carmen Herrero, from University of Alicante and Ivie for this chapter.
CHAPTER 10: GREEN ECONOMY MEASUREMENTS AND INDICATORS 10.2

CHAPTER CONTENTS Key note:
green an economy is, are Section 5 provides the conclusion.
Green economy meant to serve a purpose.
1. Introduction measures As Section 6 in Chapter
The list of green economy mea-
sures discussed in this chapter2 has stressed, the goal
2. Moving ‘beyond GDP’ should be to have a mea-
varies significantly in terms of their
methodologies and the indicators
2. Moving ‘beyond GDP’
3. An overview of measurement frameworks surement framework that
used. One example of such diversity
is truly useful for guiding
of indicators is that some measure-
Measuring human progress and its sustainability is a
4. Measuring progress in practice ment frameworks use indicators
countries in their formu- challenging task, fraught with a myriad of statistical and
for social inclusion while others real-world complexities, as we will outline below.
5. Concluding remarks lation and evaluation of
do not. This could be explained,
at least in part, by the evolution of
their social, economic and
the concept of green economy, as The most prevalent way, even to this day, in which
already discussed in Chapter 1,environmental policies. most individuals evaluate the extent to which a society
1. Introduction since inclusiveness was not initially
At the country level, indi-
given much attention in the concep- is making economic progress is the Gross Domestic
cators and measurement
tualization of green economy, but it Product (GDP). As Section 6 of Chapter 2 explains, it is
When we speak of green economy measurements and should support policymak-
has recently received more attention
indicators our main interest is in evaluating the extent to as the concept has evolved subse-
well known that the GDP paints an incomplete picture of
quently. ers along all main stages well-being, and it will be reviewed here so as to better
which an economy is inclusive and green. Put simply, an of the policy process, from
inclusive green economy (IGE) is one that successfully understand why we need to complement GDP with other
the setting of policy objec- measures. First, GDP tracks aggregate economic activ-
provides a response to three sets of challenges cur- tives; to planning, design, to policy implementation;
rently facing humanity: ity and it is insensitive to the distribution of the gains and
and, finally, monitoring and evaluation (UN Environment, losses of that economic activity across the individuals in
(1) persistent poverty 2014). (See UN Environment (2015) for an application of society. Second, it is not adjusted (or does not account)
the methodology to the cases of Ghana, Mauritius, and for the depletion of existing natural and physical assets,
(2) overstepped planetary boundaries Uruguay.) including geology, soil, air water, and many others. Third,
(3) inequitable sharing of growing prosperity The remainder of this chapter is structured as follows: In it does not track those factors that matter for well-being,
Section 2, we briefly discuss the limitations of the GDP to which lie outside of the sphere of market transactions.
The goals of this chapter are to: 1) identify some basic
measure progress and establish the basic desiderata for Another way to say this is the following: some of what
desiderata, or overarching principles, that we would
an IGE measurement framework. In Section 3, we review GDP tracks does not matter for well-being and some of
want any IGE measurement framework to satisfy; 2)
the main kinds of differences that exist among current what matters for well-being is not tracked by GDP. Think
survey the existing initiatives aimed at tracking whether
composite indices and dashboard of indicators and con- about the pollution of a river, from the production of a
an economy is green, inclusive, and sustainable; and 3)
sider the role of indicators in supporting green economy clothing factory – whereas the economic outputs of the
to provide an example of what a green economy mea-
policy-making. Section 4 presents an empirical applica- factory would be taken into account, the pollution it gen-
surement framework that satisfies the basic desiderata
tion of a Green Economy Progress measurement meth- erates (thereby creating environmental and health-re-
looks like in practice.
odology that satisfies the basic desiderata to a sample lated costs, contributing to the depletion of natural
Measurements and indicators on how inclusive and of 105 countries and compares it to other methods. capital), would not. Moreover, even those parts that

matter are evaluated ‘on average,’ and without regards the theory of fair allocation and cost-benefit analysis. (1)
to their distributional characteristics, or their sustain- Of course, the exercises carried out in these measures
ability. Thus, one quickly lands at the conclusion that, are heavily value laden, by necessity. As Section 2 of
rather than to ‘repair’ GDP one needs entirely different Chapter 2 explains, reasonable people will differ regard-
measures altogether if one wishes to evaluate societal ing how to carry out those measurements, depending on Let us look at the second part (e-μ(τ-t)) of this function
well-being. their philosophical postures about what matters most for in greater detail: this part discounts the well-being of
well-being. future generations vis-à-vis the current generation t at
The first global Human Development Report in 1990 the rate of a certain dis-
introduced the Human Development Index (HDI) as an In principle, it is relatively simple and uncontroversial Key note: count factor μ over contin-
alternative to GDP in which people are put at the center. to identify principles that a well-being measure should Discount on current uous time (expressed by
generation
The HDI has since become a widely used measure of satisfy. The desired measure, denoted as W(t), is the For the future generation: τ = t, so the exponential function e).
human progress, which is more related to the lives of well-being of the present generation (t). Here, well-being that (t-t)=0, and e^0=1, so there is Discounting over time with
people than GDP alone. depends on consumption, so think of W(t) as a function no discounting for the current gen- μ > 0 means that future
eration.
W(y(t)) that depends on the consumption flows y(t), for well-being is valued less
The search for alternatives to GDP in measuring prog- all individuals belonging to the present generation (t). A than present well-being.
ress have significantly expanded through the availability second measure, denoted as dV*, is necessary to track This formula certainly is not the only way to aggregate
of new data and methodologies, including subjective sustainability of well-being. intergenerational well-being, but entering this debate
measures of human well-being. The Better Life Initiative, is not crucial for what we are trying to do here. (See
developed by the Organization for Economic Coopera- Intergenerational well-being, denoted as V(y), is a sum Chapter 2 for a simple explanation of discounting.)
tion and Development (OECD), is among the efforts to of the well-being of all generations, starting from the
better capture what is important to people’s lives. They current generation t to infinity. The evolution of the consumption flows y(τ) for the
have been significantly influenced by the Stiglitz-Sen-Fi- members of each generation τ, starting with generation t,
toussi Commission (2010), which concluded in 2009 depends on what happens to key physical, natural and
that a broader range of indicators about well-being and other stocks K(τ). The consumption function can thus
social progress should be used alongside GDP. The Key note:
be written as y(K(t)). Given that there is an initial condi-
Report of the United Nations Secretary-General’s High- Mathmatical notation tion K(t) for those stocks, a projected joint trajectory for
level Panel on Global Sustainability also highlights that Current generation: t these consumption flows and stocks can be denoted as
Future generations: τ
the international community should measure develop- Consumption by individuals of the current generation: y(t)
y* (K(t)).
ment beyond GDP, and it recommends the creation of a Consumption by individuals of a future generation τ: y(τ)
new index or set of indices that incorporate sustainability Well-being of the current generation: W(t) To evaluate intergenerational well-being along such tra-
considerations.
Intergenerational well-being: V(y) jectory we include this in expression (1) and obtain: V(y*
Sustainability of well-being, assessed by the change in intergenerational
well-being: dV*
(K(t))), which for simplicity we can call V* (t). Let’s now
The task of developing and testing such measures Discount factor: μ compute the change, dV* (t), in such intergenerational
belongs to the field of Welfare Economics, the subfield of Different physical, natural and other capital stocks are referred to by K(t), K(τ) evaluation by calculating the total differential of V* (t), as
Projected joint trajectory for consumption flows: y* (K(t))
economic theory that encompasses social choice theory, follows:

(2) To see how this profile could be used in practice, let’s
look at their expected behavior in the case of an unex-
‹ ›
computation of the panel GDP,W(t),dV* . Even if we
were to include on the GDP measure all that we ought
pected negative shock to physical capital. Imagine that
to include, and if we were to agree on a methodology
a storm destroys buildings, factories and workshops.
for the calculation of the well-being index W, we face
The repair of broken machinery along with the execution
Where tracks how a change in a stock j affects multiple layers of uncertainty that make it very difficult
of other reconstruction efforts needed to restore the lost
to accurately calculate dV*. We cannot escape the fact
physical capital would be registered as an increase in
that informing about sustainability is informing about
GDP. If these efforts were to be purely based on GDP
intergenerational well-being and dKj (t) tracks the the future. In other words, as Section 7 of Chapter 2 has
would mean that the catastrophic event of a storm is
change in stock j for generation t. Expression (2) is already identified, we do not merely face a measurement
actually beneficial for the economy. However, looking at
adding up the changes in the set of relevant stocks, problem, we also face a forecasting problem.
the above set of indications, the W index will drop due to
where stocks that are more important for intergenera- the higher work intensity necessary to undertake recon- We learn, however, from the theoretical exercise that at
tional well-being count more by being given stronger struction, sending the correct message that the initial the very least we should:
weights. catastrophe was definitely not a blessing. In this case,
the dV* index tells us that sustainability is not (D1) Identify as many factors important for present
Present well-being W(t) can be said to be sustainable if well-being as possible, in order to estimate the progress
future generations experience a well-being which is as threatened: by increasing work intensity the current
generation is offsetting the damages inflicted by the countries are making in their levels of well-being;
large as the well-being enjoyed by the current genera-
tion. This means that W(τ) should be at least as large as catastrophe and does not pass the costs on to future (D2) Identify as many assets that matter for future
W(t) for the members of each generation τ following gen- generations. well-being as possible, their current stocks, and how
eration t. We show in Appendix 1 that if present well-be- If, on the other hand, the economy does not try to rein- they evolve over time;
ing W(t) is sustainable, then dV* (t) has to be positive. state its lost capital and aims instead to maintain its pre- (D3) Complete where possible with relevant information
In other words, we have established that if dV* (t) is neg- catastrophe standard of living, as measured by W, then about potential critical thresholds for the stocks of those
ative then present well-being W(t) is not sustainable, the message can be a decrease in economic activ-ity as assets;
because there will be a future generation with a level of measured by GDP, because less capital is avail-able for
well-being below that of the present generation, W(t). production. Whether the level of well-being W is (D4) Understand that it is near impossible to combine
sustainable depends on whether or not the economy all of these into a synthetic indicator of sustainability, or
Thus, the ideal set of indicators for a comprehensive was, before the shock, on a more than sustainable path. sustainable development, in a manner that will be fully
evaluation of a country’s current economic situation and If, for example, the economy was just sustainable satisfactory.
its sustainability is perhaps the profile: enough before and the shock is large, then this could tip
the scales towards unsustainability. In that case, the dV* These four ingredients, D1 to D4, which we call the basic
desiderata in what follows, become the starting point of
‹GDP,W(t),dV*› index would tell us that the level W is no longer sustain-
able. what we would want any Green Economy measurement
framework to have.
In practice, however, we face serious difficulties in the

To summarize, the logic behind the desiderata is the been developed in recent years. produced as part of a joint effort between the United
following: D1 is about identifying the profile of consump- Nations, the European Commission, the Food and Agri-
tions flows, y(t), that matter in the evaluation of present There are four types of measurement frameworks repre- culture Organization of the United Nations, the Organi-
well-being. D2 is about the identification of the changes sented in this literature: sation for Economic Co-operation and Development, the
in the relevant stocks, dKj (t), critical for the computation (1) adjusted economic measures International Monetary Fund and the World Bank Group.
of any indicator of sustainability dV*. Ideally, we would
have, for each stock that would enter into the computa- (2) dashboard of indicators The SEEA Central Framework is based on agreed con-
tion of dV*, a measure of how the stock affects intergen- cepts, definitions, classi-
(3) composite indices Key note: fications, and accounting
erational well-being. Since this is bound to be difficult, SEEA Central
a minimum requirement would be to know the thresh- Framework rules. As an accounting
(4) index-dashboard combos The SEEA Central Framework
olds below which the marginal intergenerational value system, it enables the
(2012) was adopted as an interna-
of those stocks, in other words, the intergenerational Below we summarize 18 of the numerous initiatives tional standard by the United Na- organization of information
value from using one more unit of these stocks, would aimed at measuring development ‘beyond GDP’ and that tions Statistical Commission at its into tables and accounts
forty-third session in March 20121.
be very high or very low. This is the rationale behind D3. formally incorporate sustainability considerations as an It is the first international statistical in an integrated and con-
D4 expresses that, as we have seen above, the techno- important part of their methodological approach. standard for environmental-econom- ceptually coherent manner
ic accounting. See United Nations
logical, ethical, and environmental uncertainties we face (2014).
to inform decision-making.
make a precise calculation of dV* very difficult. “Doubts The SEEA Central Frame-
about our ability to build an all-purpose scalar index of 3.1 Adjusted economic measures work allows for its imple-
sustainability are too strong (…) This suggests concen- mentation in parts or as a whole, adjusting to the differ-
trating efforts on a well-defined set of warning indicators ent needs, priorities and resources of its users.
covering separately the various dimensions of sustain- The System of Environmental-Economic The SEEA Central Framework allows for the measure-
ability” (Fleurbaey and Blanchet, 2013, p. 249). Accounting (SEEA) ment of physical flows and stocks while providing guid-
The SEEA 2012 Central Framework is a statistical frame- ance on the valuation of renewable and non-renewable
work, consisting of a comprehensive set of tables and natural resources and land within the System of National
Accounts (SNA) asset boundary. While not having an
3. An overview of measurement accounts, which guides the compilation of consistent
and comparable statistics and indicators for policymak- inclusivity emphasis per se, this framework is the base
frameworks ing, analysis and research. It is a conceptual framework of indicators, such as Inclusive Wealth Index (IWI), or
for understanding the interactions between the economy Adjusted Net Savings (ANS), which will be discussed
In this section, based on the understanding we just and the environment, and for describing stocks and the below. However, some of the critics of such measures
gained about what we would ideally want to have as trend of environmental assets. The main purpose of the have highlighted important limitations in their weighting
a measure of sustainable well-being, and what we are SEEA Central Framework is to place statistics concern- systems. This is because within the SEEA Central Frame-
likely to be able to achieve in practice, we now review ing the environment and its relationship to the economy work, a full valuation of assets and flows, that relate to
the most important initiatives that are aimed at monitor- at the core of official statistics. This framework has been natural resources and land beyond the valuation and
ing well-being and sustainability of well-being that have

that are included in the SNA, is still an outstanding chal- report is produced every two years and each edition is ideal, dV* (t), what the adjusted measures are trying to
lenge (see also Section 3.1.1 below). focused on a specific topic: the 2012 report was focused proxy. The serious difficulties of computing dV^* (t) with
on natural capital, while the 2014 report focused on any degree of accuracy was also discussed in that
Human Capital. The index tracks the amount of capital section. If the economy was perfectly competitive and
The Genuine Progress Indicator (GPI) in a nation by adding the ‘social worth’ of three forms had complete contingent claims markets, the weights
of capital: Manufactured, Human and Natural Capital.
The GPI is designed by the U.S.-based Centre of Sus- could be recovered from the behavior of the
Produced capital and human capital are directly calcu-
tainable Economy and the Institute for Policy studies This
lated by use of formulas derived from the theory behind
adjusted measure is applied in some U.S. states and it is market prices of the different stocks. Yet it is a fiction that
the measurement exercise, whereas natural capital is an
one of the several attempts made to substitute GDP and all the relevant information about future trends is ade-
aggregate of natural stocks.
provide a better measure of the economic welfare. The quately reflected in current observed prices. It is thus
GPI is related to an earlier measurement initiative that difficult to take the currently computed adjusted mea-
led to the creation of the Index of Sustainable Economic Adjusted Net Savings (ANS) sures as good estimates of what we would ideally like to
Welfare (ISEW). This index measures the economic measure to assess sus-
welfare of a country by using personal consumption and Pearce and Atkinson (1993) first introduced the concept tainability, namely, indica-
Key reference:
making deductions to account for the costs of crime, of ANS and the World Bank reports the data. ANS aims tor dV* (t), and for that
environmental degradation, and loss of leisure, as well to assess an economy’s sustainability based on the Fleurbaey and Blanchet, 2013, p. reason these measures
63. See also Chapter 2, Section 4 in
as additions to account for the flow of services from con- concepts of extended national accounts. This adjusted this textbook. are in a conflict of sorts
sumer durables, public infrastructure, and the benefits of measure comprehends 213 Countries and it is calcu- with desideratum D4.
volunteering and housework. Inclusivity enters the cal- lated by adding fixed capital, human capital and envi-
culation by also allowing for deductions to account for ronmental capital to the standard savings. There is no
income inequality. explicit accounting for inclusivity in this methodology. 3.2 Dashboard of indicators
Inclusive Wealth Index (IWI) Comments about the adjusted measures Green Growth Indicators
The IWI is designed by the United Nations University The purpose of any dashboard of sustainability indica- The OECD Green Growth Indicators are developed by
International Human Dimensions Programme on Global tors is to track the evolution of key stocks of built, the Organization for Economic Cooperation and Devel-
Environmental Change (UNU-IHDP) and UNEP, in col- human, intellectual, natural, cultural and institutional opment. This dashboard is composed of more than 50
laboration with the UN-Water Decade Programme on capital at the country and at the planetary level, that are indicators and is intended as a guideline for Countries
Capacity Development (UNW-DPC) and the Natural priorities to sustain life on the planet. We explained in that want to assess themselves in terms of green growth.
Capital Project. The IWI measures the wealth of nations Section 2 that in the ideal world such dashboard could The OECD collects data for the 34 OECD countries, as
by carrying out a comprehensive analysis of a coun- contain only a single number: the indicator dV* (t) since, well as Brazil, China, India, Indonesia, the Russian Fed-
try’s productive base. This measure covers 140 coun- as we saw in that Section, if dV* (t) is negative, then eration, and South Africa and the indicators are available
tries over the span of 20 years from 1990 to 2010. The present well-being is not sustainable. It is this theoretical

on the OECD website. Actually, OECD extends the set 5. Public health 3.3 Composite indices
to countries in Latin America and the Caribbean, Central 6. Climate change and energy
and East Asia, and the Caucasus. Green growth indica- 7. Sustainable transport
tors are also being integrated into OECD work, including
8. Natural resources Yale Environmental Performance Index (EPI)
country reviews and policy analysis.
9. Global partnership Yale (Center for Envi-
Key reference:
The indicators are grouped into four main categories: 1) 10. Good governance ronmental Law & Policy)
environmental and resource productivity; 2) natural asset The first three sub-sections of this and Columbia University
base, environmental quality of life; 3) economic oppor- The set of EU SDIs is divided in three levels of indicators, Section are based on Pineda, J.
(Center for International
and Galotto, L. (2015). The fourth
tunities; and $) policy responses. Indicators describ- complemented by contextual indicators, which provide sub-section is based on PAGE Earth Science Information
ing the socio-economic context and the characteristics useful information about the countries, but do not directly (2017a).
Network) designed the
of growth complete the picture. There is no explicit monitor progress. EPI and it is calculated for
accounting for inclusivity in this methodology. Together 178 countries. The first report published was the pilot in
with these indicators a small set of six representative 2006, and then EPI was calculated every two years until
indicators were chosen to facilitate the communication Comments about the dashboard of indicators the last edition of 2014. EPI is divided into two main envi-
with policy makers, media and citizens. While all these dashboards contain information on vari- ronmental protection objectives: environmental health
ables that affect current well- being, as well as variables and ecosystem vitality. These two areas are further
that affect the sustainability of such well-being, it is diffi- divided into nine core policies categories:
Sustainable Development Indicators (SDIs) cult sometimes to get a clear sense of whether or not a 1. Health impact
Eurostat produced the SDIs, where the dashboard of country is making progress overall, especially when the
2. Air quality
indicators covers 28 EU countries. It was first published dashboards contain a large number of variables. This
task of overall country evaluation could be easier if we 3. Water and sanitation
in 1997, and the most recent changes to the indica-
tor set were related to the adoption of the Europe 2020 knew how close the country was to meeting its goals 4. Climate and energy
Strategy. Eurostat publishes a report every two years or targets, and whether or not it was perilously close to 5. Biodiversity and habitat
with key trends in each sector for the EU as a whole. The reaching sustainability thresholds it wishes to avoid in 6. Fisheries
SDI dashboard is composed of more than 100 indices, key capital stocks. None of those initiatives, however, 7. Forests
where twelve of them have been selected as headline identify in a systematic manner critical thresholds or
8. Agriculture
indicators. The indicators are divided into 10 categories: targets for the stocks of the assets they monitor for each
country, as would be required by desideratum D3 (see 9. Wastewater management
1. Socioeconomic development section 2). Those are further divided into 20 indicators. EPI pro-
2. Sustainable consumption and production vides an overall as well as a category score to all the
3. Social inclusion 178 countries considered. The indicators were chosen
4. Demographic changes according to a generic guideline that considers rele-
vance, performance orientation and data quality. More-

over, the indicators should be available over time for a carbon competitiveness, only the 19 with the strongest their largest metropolitan areas. It was first published in
large number of countries. Normalization was done by statistical correlation were chosen. The normalization of 2010 and together with the Performance Indicator, Dual
converting the transformed and logged data into one the variables is made through a min-max transformation, Citizen publishes a Perception Index. The performance
indicator through the proximity-to-target method. This while aggregation of indices in the categories is made index of the 2014 GGEI is defined by 32 underlying indi-
methodology measures each entity’s performance on by arithmetic mean. There is no explicit accounting for cators and datasets, each contained within one of the
any given indicator based on its position within a range inclusivity in this methodology. four main dimensions of leadership & climate change,
established by the lowest performing entity (equiva- efficiency sectors, markets & investment and environ-
lent to 0 on a 0-100 scale) and the target (equivalent to ment & natural capital. Data are selected according to
100). The indices are aggregated through the arithmetic Global Sustainable Competitiveness Index (GSCI) a ‘top down’ method. First, the dimensions and sub-cat-
mean. There is no explicit accounting for inclusivity in egories to include in the GGEI were defined. Then those
The World Economic Forum (WEF ) developed The GSCI
this methodology. third-party datasets able to provide a value measure or
and it has been published since 2014 and the last report
generate a system for calculating a qualitative scoring
(2016) covers 180 countries. The GSCI is based on
for each category were identified. There is no explicit
Low Carbon Competitiveness Index (LCCI) 109 quantitative performance indicators grouped into
accounting for inclusivity in this methodology. The nor-
the 5 pillars of sustainable competitiveness. Data sets
malization approach uses GDP accounts for differences
The Climate Institute with the support of Vivid Econom- have been scored both for the current levels as well as
in the size of a country’s economy, while aggregation
ics projects the Low Carbon Competitiveness Index. the recent development of the indicator, not only reflect
is made by calculating a z-score and the associated
This composite index, first released in 2009 and last current standing, but also development potential. The
percentile of the standardized distribution. Then, these
published in 2013, is currently used in the G20 coun- GSCI aims to evaluate the ability of countries to create
percentile values are aggregated in a uniform manner,
tries. Its objective is to measure the current capacity of and sustain wealth that does not negatively affect the
generating a country score that is expressed on the
each country to be competitive and generate material underlying fundament of wealth creation, based on the
spectrum of 0-100.
prosperity to its residents in a low carbon world, based definition of Sustainable Development. The data, taken
upon each country’s current policy settings and indica- from international organizations and an internal survey,
tors. LCCI derives from the aggregation of 19 variables, was aggregated in countries through a sector-weighted Comments about the composite indices
divided into three categories: 1) Sectoral composition: country average procedure. The variables are normal-
how well, or otherwise, the composition of the economy ized and aggregated. There is no explicit accounting for While they can communicate complex ideas more
is currently structured towards less emissions intensive inclusivity in this methodology. quickly, composite indicators can be difficult to interpret.
activities; 2) Early preparation: the steps that coun- Ravallion (2012) presents several criticisms of composite
tries have already taken to move towards a low carbon indices, including the the fact that this approach inher-
economy; 3) Future prosperity: the impact on the level Global Green Economy index (GGEI) ently implies substitutability between different indicators,
of production of goods and services. The variables were as well as the sensitivity of their resulting ranks to factors
The GGEI is projected by Dual Citizen LLC. It measures
selected according to their relationship with the carbon set by their producers (such as indicator weights and
both the green economic performance of 80 countries
competitiveness (GDP per tonne of emissions). Among aggregation methods). A perhaps more problematic
and how experts assess that performance. This aggre-
the 36 variables likely to be linked to a country’s low aspect of the single composite index approach in this
gate index of 32 indicators studies 60 countries and

arena is that it attempts to combine the variables behind (i=1,…,I). We measure progress in each variable by the ress is positive when the level of variable 1 shrinks over
desiderata D1 and D2 into a single measure. A compos- extent to which a country is meeting its targets. If dyi* time. Notice that the slopes of these level curves differ
ite index that rewards the growth in variables important denotes the desired level of change in the variable and: across the two countries in the example. This illustrates
for present well-being but that penalizes the growth in the general principle that different countries may value
variables threatening the sustainability of that well-being certain kinds of progress more than others, depending
may end up classifying countries in an unintuitive way. on their initial conditions and the characteristics of other
For example, countries having low life expectancy and denotes the actual change in the variable we then countries.
low greenhouse gas emissions may have similar index measure progress in the variable by the computation of
values as those with high life expectancy and high emis- the ratio: As a way to put this general principle into practice we
sions, while their positions clearly need to be differenti- introduce the idea of thresholds: levels for the vari-
ated. This follows as long as we adopt the principle that ables that the countries should critically try to avoid. If
we consider it our moral duty not to impose on future it is desirable that a country’s level for a variable should
generations any form of sacrifice that we do not accept exceed a certain threshold, then we can assign a
for ourselves . This ratio has a straightforward interpretation: when Pro- greater importance to progress in that variable when the
gress(i) for variable i equals one this means the country current level is below the threshold (and lower impor-
met its target for that variable, when it is greater than tance when the variable already exceeds the threshold).
one this means the country exceeded its target, when Similarly, if it is desirable that a country’s level for a vari-
3.4 Index-dashboard combos able should be below a certain threshold, we assign
it is positive but less than one it means that the country
made progress but did not meet its target, whereas a greater importance to progress in that variable if the
when it is negative it means the country regressed, or current level is above the threshold.
The Green Economy Progress Measurement
got worse, in that variable.
Framework (GEP) Appendix B1 contains more details about the determi-
The GEP for a country is calculated as nation of the importance levels, which determine the
The Green Economy Progress measurement framework
slopes of the level curves in Figure 1 below, as well as
is composed of a GEP index, a companion dashboard
the proportionality constant, which determines the units
of sustainability indicators, and a country ranking that is
in which GEP is measured.
based on the index and the dashboard. It was designed
with the specific aim of meeting the basic desiderata for some (normatively determined) country-specific
The Dashboard
identified at the end of Section 2, and for this reason we importance levels, Importance(i) for each i=1,…,I and
explain this methodology in more detail. some country-specific proportionality constant κ. The GEP measurement framework keeps track of the
changes in relevant capital stocks (dKj) and presents
The Index Figure 1 below illustrates the level curves for the GEP of
those changes in a dashboard of progress for each
two countries for the case where there are only two vari-
country. Progress for each capital stock is calculated for
As in expression (4) above the GEP index is a weighted ables of interest. Variable 1 is one that we want more of,
each indicator Kj in the dashboard in the same way it is
sum of how much progress a country makes in each so progress is positive when the level of variable 1 grows
done for the variables in the index, that is:
of the variables, yi, that matter for present wellbeing over time. Variable 2 is one that we want less of, so prog-

The Ranking
Even though the GEP index is not combined with the dashboard indicators into a com-
posite measure of sustainable development, the information from both instruments can
nevertheless inform which countries are in a comparably more favorable position than
others.
To do this the GEP measurement framework defines the achievement profile for each
country as follows:
(i) The country’s achievement for each stock j in the dashboard is given by the
expression Progress(j)∙Importance(j).
(ii) The country’s GEP achievement is given by the expression GEP∙Importance, where
Importance is the average across all importance levels Importance(i) for each i=1,…,I.
The achievement profile for each country is then the (J+1)-vector given by the GEP
Figure 1: Level curves for the GEP for two countries achievement and the achievement for each of the stocks in the dashboard, as calcu-
lated above.
To determine how to use the information in the achievement profile of two countries in
for all relevant indicators in the dashboard j=1,…,J.
order to see which country is in a comparably more favorable position than another, the
GEP measurement framework appeals to three normative principles: the Pareto prin-
ciple, the principle of Priority to the Worst Achievement, and the principle of Indepen-
The thresholds for these stocks are calculated with respect to planetary boundaries. dence of Identical Achievements. We explain why it makes sense to employ these prin-
This approach of not combining all of the progress measures in the dashboard into ciples in this setting in Appendix B3.
a single measure intended to approximate dV* (t), is compatible with: (a) an outright
acceptance of the intrinsically limited substitutability between the different forms of These principles allow us to order countries in terms of their worst achievement but only
capital under consideration or, even if it wasn’t limited; (b) the extraordinary difficulty, considering the dimensions on which they differ. This order is known as the protective
both ethical and technical, in identifying the proper “trade-offs” between forms of criterion. This methodology allows us to rank all index-dashboard achievement profiles
capital. but not to combine the index and dashboard information into a synthetic index.
Despite the fact that the GEP measurement framework does not combine the variables To summarize, when comparing progress based on the GEP index and the dash-
in the dashboard into a single scalar measure, determining the importance levels asso- board, countries will be ranked according to their comparatively least-performing type
ciated with each variable in the dashboard is, of course, relevant. We explain how the of achievements. This approach sends the policy message that a country that is only
GEP measurement framework determines those importance levels in Appendix B2. making substantive achievements or on a few issues (indicators) of an IGE, at the cost
of others, will not necessarily be doing better than one that is making small achieve-

ments in all areas. Ranking countries based on the 4. Measuring progress in practice a green economy.
issues in which they are making comparatively the least
progress provides maximal incentives for countries to From the multitude of approaches that have been sur- Outputs: material and non-material well-being. Outputs
not dismiss any specific issue, and to develop a more veyed, there is no unanimous agreement on what ana- refer to broad notions of well-being that capture aspects
balanced and integrated policy approach aimed at lytical framework ought to be used to measure green that are not reported by conventional macroeconomic
making progress in a large number of the dimensions economy. However, an important step towards devel- measures. This type of indicator attempts to capture the
that characterize an IGE. oping such unifying framework has been done in a joint environment-related aspects of the quality of life and
effort by the OECD, UN Environment, the World Bank, their impact economic processes (for example, the effect
and GGGI as part of their collaboration on the Green of good air quality on health that affects labor productiv-
Comments about the Index-Dashboard Combo Growth Knowledge Platform (GGKP, 2013). One poten- ity).
tial useful framework that came out of this initiative is the Measuring green economy can support policymakers
This comment is about the GEP measurement framework use of the concept of production function, viewed in the
since it is the only index dashboard combo under con- along the main stages of the policymaking process:
context of government policies, economic opportunities objective setting; plan-
sideration. Because the GEP measurement framework and the underlying socio-economic background.
was structured, by design, to satisfy the basic desider-
Key reference: ning, design, and imple-
ata identified in Section 2, the framework has a disci- The framework proposes considering the environment See UN Environment (2015) for an mentation; and monitoring
plined methodology for the identification of the kinds of as natural capital, which together with other forms of application of the methodology to and evaluation (UN Envi-
the cases of Ghana, Mauritius and
variables that go in the index and the dashboard; it uses capital, are essential inputs to many production pro- Uruguay.
ronment, 2014), as shown
country level targets and thresholds as key inputs for cesses. This is illustrated in Figure 2, which presents the in Figure 3.
the determination of the importance that each variable transformation process from inputs into outputs passing Regarding the objective setting, it is necessary to
of interest has; and is able to use the information from through a production function, as in OECD, 2011. The conduct diagnostics based on approaches and indica-
both the index and the dashboard to give guidance to a main ingredients in this formalism are the following: tors that measure the present state, changes over time
country as to its multidimensional performance without and future trends. Outcomes, such as expected climate
the need to combine all the relevant information into a Inputs: the natural asset base. Natural capital provides
services as well as natural resources per se, which change or health consequences of air pollution, and
single scalar measure. On the other hand, it achieves all their drivers, such as emissions, are the only elements
this at the cost of added conceptual complexity, and this provide crucial inputs into production or direct consump-
tion. Indicators capturing the state of the natural asset taken into account in these diagnostics. These diag-
was perhaps unavoidable. Below we illustrate the payoff nostics identify challenges and opportunities that can
behind this conceptual effort by way of showing the base are crucial for identifying risks of overuse and/or
depletion that may threaten future green growth. lead to the formulation of respective policy priorities and
kinds of insights one can derive about both country and goals. For example, it may involve establishing a long-
planetary performance from its implementation. Production: intensity/productivity. These indicators focus term vision for green economy policy, developing base-
on environment-related “productivity,” or its inverse, lines against which to compare developments over time,
“intensity.” Progress can also be captured by measures and defining long-term targets aligned with domestic
of product-life environmental footprints or various proxy priorities (Mediavilla-Sahagun and Segafredo, 2014).
measures of innovation— which are important drivers of

Figure 3: Overview of the Integrated Policymaking Process and the role of indicators (UNEP, 2015).
Finally, when desirable policies have been identified and measurable actions are
implemented, indicators can be employed to monitor progress and assess the impact
of policy actions (such as electricity production from renewables or the improvement
in energy efficiency over time). The need to implement other policy interventions or
mitigating actions can be determined through these indicators, thus supporting the
achievement of the desired policy objectives.
Despite the significant efforts that have been done in order to have a common frame-
Figure 2: The production framework for green economy indicators and wealth accounting (GGKP, work (e.g. GGKP (2013)), the reality is that there are a variety of different approaches
2013). Note: Grey ovals represent indicator categories. that work with indicators on green economy, as we already saw on Section 3. In this
Section, we will present a practical application of the GEP measurement framework and
how it compares with alternative methods for measuring green economy progress. In
many cases, the indicators being used in the evaluations convey the same message,

but in other cases this will not be so. This is, in essence, a reflection of the methodologi-
cal differences behind these indicators.
4.1 Indicators in the GEP measurement framework

The GEP measurement framework is composed of a GEP index, a companion dash-
board of sustainability indicators, and a country ranking that is based both on the
index and on the dashboard (this country ranking is called the ‘GEP+’ (more on this
below). The GEP index is used to track the changes in GE indicators, relative to desired
changes, which directly or indirectly impact current human well-being. It captures par-
ticular characteristics of the concept of an IGE by including a set of multidimensional
indicators (e.g. indicators that capture the link between health and the environment).
The dashboard of sustainability indicators aims to monitor the sustainability of well-be-
ing (i.e. the well-being of future generations). It tracks some of the main forms of natural
capital (e.g. freshwater and land), as well as other key stocks of capital (e.g. human,
health), as reflected in the Inclusive Wealth Index (UNU-IHDP/UNEP, 2014) and which
affect long-term sustainability. Figure 4 gives an overview of the indicators included in
the GEP measurement framework.
In terms of the production function analogy, discussed in Section 3, indicators included
in the GEP index tend to be more related to production and outputs, while indicators of
natural capital appear primarily in the dashboard of sustainability indicators.
Figure 4: Indicators used in the GEP Measurement Framework (PAGE, 2017b).

4.2 Practical examples: Comparing the cases of China, Colombia Note: The 13 GEP Index Indicators are represented as trees while the elements of the dashboard of sustain-
and Ireland ability indicators are represented as the continents
To illustrate some of the main properties of the GEP measurement methodology, Tables
1a-c presents the weights, the slope of relative weights, and the value of progress for of the multidimensionality of an IGE in a way that is useful for setting priorities both at
the 13 indicators used in the GEP index for the case of China, Colombia and Ireland. the national and global level, and to understand the interplay between these two. For
The best way to understand how the weights are useful to set national priorities, is the example, the three countries in Table 1 are exceeding the global threshold for material
construction of the slope (ratio) of weights across indicators. footprint per capita. For this indicator, the initial situation was worse for Ireland, followed
by China and then Colombia. However, China experiences other significant challenges,
The weighting system of the GEP methodology allows us to understand the complexity for example in air pollution, so the slopes of weighting relative to material footprint

Tables 1a, 1b, and 1c (right): Progress, slopes and weights
by indicators for China, Colombia, and Ireland (Authors’ China
Protected areas
Life expectancy
Pension cover-
Environmental
basic services
Mean years of
own caculations, based on PAGE, 2017b)
Material foot-
Air pollution
Green trade
Energy use
Palma ratio
Renewable
The weights in the table are defined as πi=κ∙Importance(i)
Access to
schooling
inequality
patents
Gender
and the slope of indicator i with respect to mfp is Impor-
energy
print
tance(i)/⁄Importance(mfp). See Appendix B1 for details.
age
Weights � 0.0728 0.3303 0.2639 0.0704 0.0085 0.0355 0.0154 0.0360 0.0348 0.0400 0.0365 0.0116 0.0442
indicate that progress on material footprint will be
important but not as important as progress on air Slope with respect to mfp 1.0000 4.5350 3.6214 0.9660 0.1170 0.4881 0.2116 0.4942 0.4779 0.5487 0.5015 0.1597 0.6074
pollution (relative slope of 4.535). So, even though
Progress -3.8662 -0.1587 0.0387 0.5196 0.2306 0.4183 -0.5050 -0.1856 1.4626 0.6365 0.3624 0.6614 0.4121
the first weight indicates that it will be more import-
ant that China makes progress on material footprint
than Colombia, the analysis of the slopes incorpo-
Colombia
Protected areas
Life expectancy
rates information on the other indicators for each
Pension cover-
Environmental
basic services
Mean years of
Material foot-
Air pollution
Green trade
country, making it clear that progress on material
Energy use
Palma ratio
Renewable
Access to
schooling
inequality
footprint is of higher relative priority for Colombia
patents
Gender
energy
and progress on air pollution is of higher relative
print
age
priority to China (relative slope of 4.535 vs 0.4317
for China and Colombia, respectively). In the case Weights � 0.1222 0.0527 0.1334 0.0406 0.0520 0.0820 0.0218 0.1416 0.0878 0.0675 0.0709 0.0399 0.0874
of protected areas, another indicator for which all
Slope with respect to mfp 1.000 0.4317 1.0921 0.3325 0.4256 0.6710 0.1784 1.1592 0.7188 0.5524 0.5805 0.3269 0.7156
three countries are exceeding the global threshold,
the comparison of the relative slopes indicates that, Progress -1.6227 -0.1889 0.1015 0.4568 -0.1547 0.4070 -0.1194 0.2291 0.3021 0.1972 0.2914 0.1621 0.3635
in the case of China and Colombia, protected areas
are higher priorities than material footprint while for
the case of Ireland material footprint is the highest Ireland
Protected areas
Life expectancy
Pension cover-
Environmental
basic services
priority. In this way, the flexibility of the weighting
Mean years of
Material foot-
Air pollution
Green trade
Energy use
Palma ratio
Renewable
system allows for better articulation and action on
Access to
schooling
inequality
patents
national and global priorities based on when the
Gender
energy
print
global and national priorities coincide and when
age
they differ.
Weights � 0.3896 0.0414 0.1619 0.0269 0.0198 0.0397 0.1814 0.0470 0.0200 - 0.0250 - 0.0473
Another important advantage of the GEP weight-
ing system is that it helps to know if progress is Slope with respect to mfp 1.0000 0.1063 0.4156 0.0690 0.0509 0.1020 0.4657 0.1205 0.0513 - 0.0642 - 0.1214
happening where it is most needed. One way to Progress 0.2588 -1.3650 0.2872 0.5965 0.0965 0.5188 1.1076 0.4897 0.6252 - 0.4115 - 0.5137

understand this is by comparing the differences between Table 2: Rank and index value for a selected group of countries (Source: Authors’ own caiculations,
Key reference: based on PAGE, (2017b), GGEI (2016), and Hsu, A., et el. (2016)).
the simple average of progress across indicators (which
Notice that this comparison is meant assumes equal weights across indicators), with the value
to be illustrative and by no means
of the GEP index, which is the weighted average of prog- Rank GEP
exhaustive. However, we consider GEP index Rank EPI EPI Rank EPI
that comparing these indicators ress across indicators by using as weights. The values index
could illustrate not only the com-
plementarities across approaches
of the simple average of progress across indicators are
Ireland 5 0.4004 17 86.60 29
but also their methodological differ- 0.002044, 0.032693, and 0.325819 for China, Colom-
ences and how they may explain
differences in their results.
bia and Ireland respectively. Now, the values of GEP Colombia 81 -0.0222 49 75.93 16
index are -0.169356, -0.022191, and 0.400391 for China,
Colombia and Ireland respectively. Notice that in the China 93 -0.1694 77 65.10 52
Key reference: case of Ireland, the GEP index is greater than the simple
For the EPI weights were select- average, reflecting that progress was important where it
Table 3: Rank correlations for GEP index, Progress, EPI, and GGEI (Source: Authors’ own caicula-
ed according to the quality of the was of higher priority; it also reflects the fact that Ireland
underlying dataset, as well as the tions, based on PAGE, (2017b), GGEI (2016), and Hsu, A., et el. (2016))
relevance or fit of the indicator to only had regress on one indicator (air pollution). Ireland Note: Progress is the simple average of the progress made in all indicators of the GEP index (Prog-
assess the policy issue. The weight- made progress on the three indicators that were of the ress is a version of the GEP index with equal weighting).
ings given to Environmental health
and Ecosystem vitality were chosen
highest global and national priority. In addition, notice
to balance the contribution of these that the GEP index is negative for Colombia and China Rank GEP Rank
indicators to the overall EPI; these
as opposed to the positive simple average of progress Rank EPI Rank GGEI
explicit 60-40 weights provide an index progress
implicit 50-50 weighting because of values. This reflects the fact that these countries experi-
the differences in variability of the enced regress on more indicators (four indicators each), Rank GEP index
two policy objectives (less variabil-
1
ity across countries is observed for but, more importantly, that regress was made in areas of
Ecosystem Vitality). Moreover, lower high priority (material footprint for Colombia and mate- 100
weights are used to lessen the
impact of an indicator with a lower rial footprint and air pollution for China). These examples Rank progress 0.5405 1
quality of data or for proxy indica- illustrate the richness of change that can be captured by
tors. For the GGEI the weightings
the weighting system used in the construction of the GEP 100 100
for the four dimensions and sub-cat-
egories are applied equally, with index. Rank EPI
the exception of the Leadership & 0.0368 0.382 1
Climate Change dimension, where
Let’s now compare the relative performance of these
the weighting for the head of state 100 100 100
countries with two well-known measures, the EPI and the
and media coverage sub-categories
was lessened. See Appendix C for
GGEI, which were discussed earlier. Do they paint the Rank GGEI 0.1689 0.2574 0.4255 1
a more detailed description of the
same picture? Table 2 presents, for these three countries,
indicators used and their weights.
62 62 62 65
the values of each of these indices. We can see that the
relative order between these three countries is similar for
the GEP index and the EPI, while there is a change in relative order between Colom-

bia and Ireland, but China is still the worst performing Table 4: GEP+ (Rank among selected countries) (Source: Authors’ calculations based on PAGE (2017b)).
country among the three. So, it seems to be the case, Note: Observations in bold indicate the minimum value among all categories. The ranking presented in this table is based on the fol-
at least for these countries, that the different indices may lowing four categories: (a) the GEP Index; (b) greenhouse gas emissions; (c) nitrogen emissions; and (d) the share of land used as
permanent crops.
provide some similar information.
However, when we extend the analysis to all countries Country Progress GHG Progress nitro- Progress land
GEP index GEP+
in the sample, it seems to be the case that the EPI and (CO2-e/cap) gen emissions use
the GGEI have more in common among themselves than
Bulgaria -0.5471 -1.7996 0.1097 0.5328 5
with the GEP index, as shown in Table 3. This lack of
correlation of the ranking produced by these different Ireland 2.3998 7.8447 0.0012 0.6197 3
measures could be a reflection of the differences in their
methodologies and indicators covered. To illustrate this Germany 0.5734 0.2181 0.0039 0.1664 2
point, we have added as a measure the simple average Jamaica 1.1022 0.4906 0.1682 0.1256 1
of progress across indicators (a simplified version GEP
index without its weighting system). As the rank correla- Singapore 0.6208 0.4228 0.0211 -0.1218 4
tion table shows, both EPI and GGEI have positive and
statistically significant rank correlations with the simple
average of progress but not with the GEP index, which
could be partially explained by the differences in weight- country only using the GEP index, as we can see from has also a positive GEP index and therefore Germany
ing across indices. Table 4, Bulgaria has a higher GEP index value than will have a higher overall progress than Singapore.
Ireland. However, Ireland is a country with progress in all
indicators (the GEP index as well as all of the dashboard What these examples illustrate is that the assessments
indicators). of progress across countries could be misleading if only
4.3 Can composite indicators be a portion of the information is used. Some countries may
combined with a dashboard of So, if progress is assessed just based on the GEP index, have similar GEP indices but different performances on
indicators to better capture progress the fact that the progress achieved by Ireland seems the dashboard of indicators, or they may have a high
to be more sustainable than the progress by Bulgaria, GEP index but low progress on its dashboard, compared
in all aspects of green economy and
where there is regress on GHG and nitrogen emissions, to another country that may have progress on the dash-
sustainability? could be missed. Similarly, Germany has a higher GEP board of indicators but a negative GEP index. Given that
Table 4 shows the results of the combination of the GEP index value than Jamaica, and although both countries we aim for a comprehensive assessment of progress, we
index and the progress on the dashboard of sustain- experienced progress in all indicators, the progress want to be able to combine the information in all indica-
ability indicators to make a final assessment of green experienced by Germany on land use progressed the tors, not just the GEP index.
economy progress for a selected group of countries. lowest. However, if we compare Germany and Singa-
pore, we can see that Singapore exhibits more progress The GEP+ combines the information from the GEP index
Imagine that we base the progress on an IGE of a in all of the dashboard indicators. In addition, Germany and the dashboard of sustainability indicators into a

measure of progress that can give us an overall assessment that is conceptually sound between the GEP+ and both EPI and GGEI. The correlations in Tables 4 and 5 illustrate
(as it was explained in Section 3). It also produces very intuitive results, as illustrated in that, although many indicators may be aiming to capture progress on green economy,
the examples discussed below. their differences in terms of what indicators they include and how they’re calculated
could matter a great deal in terms of the assessment done. Knowing such differences is
In Table 3, we showed that part of the lack of rank correlation between the GEP index, key in the interpretation and comparison of results among different methodologies.
the EPI, and the GGEI was due to the weighting system. In addition, the fact that both
EPI and GGEI have indicators related to sustainability like CO2 emissions could also
explain such differences.
4.4 Are measures like the GEP+, EPI or GGEI adding information
In fact, Table 5 shows that there is a positive and statistically significant correlation of relative to what we can learn from per capita GDP growth?
the ranking from the GEP+ (which also takes into account the sustainability indicators
from the dashboard) and those produced by the EPI and the GGEI. (See Appendix B, Arguing the need to go beyond the GDP, which is particularly important for promoting a
for a more detailed description of the indicators used in the EPI and GGEI.) transition towards an IGE, started the conceptual discussion. In this section, the results
from the GEP+ are checked to see if they add relevant information relative to what can
Table 5 shows that there is a positive and statistically significant rank correlation be learned from analyzing per capita GDP growth.
Figure 5 (overleaf) presents the rank differences of GEP+ versus per capita GDP growth
rank. Notice that an observation in red (green) means that the rank of GEP+ is higher
Table 5: Rank correlations for GEP+, Progress, EPI and GGEI (Source: authors’ calculations based on
PAGE (2017b), GGEI (2016) and Hsu, A. et al. (2016))
(lower) that the rank of per capita GDP growth. As we can see from the figure, the
information presented in the GEP+ is very different from the ranking information from
Rank GEP per capita GDP growth. The rank correlation is -0.6051 and statistically significant at 1
Rank GEP+ Rank EPI Rank GGEI percent.
index
Rank GEP + 1 The countries highlighted in the figure represent the top and bottom 5 percent of
the sample in terms of improvements in position relative to other countries, or when
100 comparing rankings from the GEP+ with those from the per capita GDP growth. For
Rank GEP index example, if we only use per capita GDP growth, countries like China and Belarus will
0.2338 1
appear in the top positions of the ranking, but when we focus on progress towards an
100 100 IGE (measured by the GEP+), these countries appear at the bottom of the distribution.
Rank EPI 0.3122 0.0368 1 The opposite is true for countries like Italy, Japan and United Kingdom. These countries
are among the top 20 in the GEP+, but perform among the bottom 20 countries (out of
100 100 100 100) in terms of per capita GDP growth.
Rank GGEI 0.4003 0.1689 0.4255 1 Table 6 shows the rank correlation between GEP+, EPI, GGEI and GDP growth. There
62 62 62 65 is a statistically significant negative correlation between the ranking from GDP growth

and the ranking from the GEP+ and GGEI, while the cor-
Key note:
relation is not statistically significant for EPI. This result
Notice that in terms of the three illustrates that green economy indicators present a very
countries discussed on table 2, the
relative ranking in terms of GDP different assessment of progress than GDP growth,
growth will be the opposite, with which reinforce the need for pushing forward the work
China being at the top with Co-
lombia and Ireland many positions on green economy indicators as part of the broader
behind, which is not the case when beyond GDP agenda.
we focus on indicators measuring
green economy progress.
5. Concluding remarks
In this Chapter, some of the main methodological and practical aspects to consider
when working with green economy indicators were presented. The discussion in Sec-
tions 6 and 7 from Chapter 2 was built on and an extensive list of the main approaches
for the measurement of green economy was presented, and some of the challenges we
face to achieve a unified framework was discussed. Particular focus was on the green
economy measurement framework, recently developed by PAGE, since it is an example
of a comprehensive methodology for the monitoring of progress towards key social,
economic and environmental goals, integrating key theoretical aspects to its methodol-
ogy and application. The GEP measurement framework follows an extraordinarily prag-
Figure 5: Rank differential of GEP+ vs GDP growth. (Source: Authors’ calculations based on PAGE matic approach, guided by theory.
(2017b)
An effort to focus on measurement instruments that will be a practical guide to policy
at the country level was made. This allows for tracking their performance in key stocks
such as material footprint, rising emissions and increased freshwater withdrawal, while
at the same time ensuring that further development is not put at risk, economic oppor-
tunities are created, ecosystem services are preserved, and social inclusiveness is pro-
moted. Towards the end of the chapter, the results from the GEP framework was com-
pared with other well-known indices measuring green economy, the EPI and the GGEI,
to illustrate the implications of using different indicators, discussing their main results

and highlighting some of their important differences (in ventions. These are critical to obtaining a useful measure try Progress (GIP) index as a sectorial focused index,
terms of methodology and indicators used). In some of progress, which will be recognized as a valid instru- which would complement the ongoing PAGE develop-
cases, specific countries examples were used in order to ment by practitioners, as well as by the wider community ment of a GEP index. The latest application of the meth-
illustrate the main points and why these methodologies of researchers and academics working in the field. odology ranks the progress of 18 Chinese provinces
may be providing different, and many times complemen- based on seven indicators. Similar efforts are ongoing in
tary pictures, of countries’ progress on green economy. The flexibility of the GEP measurement framework has other countries as South Africa, taking advantage of the
This kind of analysis is critical for assessing the policy allowed its application for policymaking at the country methodology’s ability to do benchmarking at the national
implications of using any measurement framework to level. The methods used in the framework are flexible and international level to inform policymaking.
help select among competing frameworks, and to keep when it comes to selecting indicators, thereby making
advancing the frontiers on this line of research. inter-country comparison possible as long as the under- Finally, a variety of green economy indicators were
lying data is available, allowing for adjustments in the shown which can portray a very different assessment of
The GEP measurement framework, in its current state, choice of indicators to specific country needs and prior- progress than just focusing on GDP growth. Although the
satisfies the basic desiderata, synthetizes the ideas of ities. A particular application of this framework was done challenges on green economy measurement are many,
monitoring changes in key variables, taking into account: by the Partnership for Action on Green Economy (PAGE) results like this illustrate the importance of going beyond
(a) global thresholds that should not be surpassed; and for China’s Jiangsu Province in 2017. At the same time, GDP, in particular for the measurement framework to
(b) ambitious but achievable targets that may help the the United Nations Industrial Development Organization support the transformative policy agenda suggested by
countries move in the right direction through policy inter- (UNIDO) launched a project to construct a Green Indus- the green economy.

Appendix A: The sustainability of Appendix B: The Green Economy if the outcome is for variable yi to shrink (like with air
present well-being Progress Measurement Framework

Claim: B.1 The determination of the importance levels of pollution, inequality and other ‘bads’).
the components of GEP and its units The implementation just described establishes the rel-
If present well-being W(t) is sustainable, then DV*(t) ≥ 0.
In Section 3.4 a general principle was introduced to evant tradeoffs between the different dimensions of
Proof: satisfy green economy measurement framework: that progress (as represented the slopes of the level curves
different countries can value certain kinds of progress illustrated in Figure 2). It allows for comparisons between
Let W(t) be sustainable. Then, different types of progress for each country and to make
more than others, depending on their initial conditions
W(τ) ≥ W(t), for all τ ≥ t. (A.1) and other country characteristics. The GEP measure- an overall determination of whether or not a country is
ment framework uses the idea of thresholds to make making progress. Thus far, however, the implementation
Therefore, along the trajectory Y*(K(t)) we obtain, inte- is silent about the units in which GEP is measured. This
this general principle operational. If it is desirable that a
grating both sides of (A.1), determination is important, for example, in order to know
country’s level for variable yi be above a certain thresh-
old ti greater importance is assigned to progress in that how to compare the GEP to its component parts (the
variable if the country’s current level is below the thresh- progress measures for each variable of interest), and
old. how to compare the GEP of different countries.
that is,
On the other hand, if it is desirable that a country’s level To make this determination, the GEP measurement
(A.2) for another variable yi to be below a certain threshold ti a framework adopts the ‘equivalence approach’ from
greater importance is assigned to progress in that vari- microeconomics. For a given progress profile [Pro-
able if the country’s current level is above the threshold. gress(1),Progress(2),..., Progress(I)] of the indicators that
Now applt Leibnitz rule to V*(t) = (V(y*(K(t))) to obtain matter for present well-being the GEP of this country is
The interpretation is that progress in a variable is more
dV*(t) = -W(y(t)) + μV*(t). (A.3) important the worse the country is, in relationship to the identified with the level L such that, if the country were to
relevant threshold for that variable. progress in each of its dimensions by a magnitude equal
to L, it would achieve the same level of green economy
It follows from (A.2) that μV*(t )≥ W(y*(t)), and from (A.3) Specifically, the importance of progress in variable yi is progress as when the country’s progress profile is actu-
we obtain that μV*(t) - W(y*(t)) = dV*(t) ≥ 0. ∎ defined as Importance(i) to be equal to if the ally [Progress(1),Progress(2),... ,Progress(I)]. It follows,
in particular, that if Progress(i)=1 for all i=1,…, I, then
GEP=1, which implies that:
outcome is for variable yi to grow (like with education,
protected areas and other ‘goods’), and to be equal to
As a consequence, the magnitude and sign of the GEP
can be interpreted in the same way as was each indi-

vidual measure of dimensional progress: when GEP is this example, country A is below
equal to one this means the country is equivalent to a its threshold –a bad thing– in vari-
position in which it met all its targets, when it is greater able 1 and above its threshold
than one this means the country is equivalent to a posi- –a good thing– in variable 2. It
tion where it exceeded its targets, so on and so forth. is, therefore, far more important
for country A to improve in vari-
Figure B1 again illustrates how this works. In the Figure, able 1 than in variable 2, and the
countries A and B exhibit the same magnitude of prog- GEP consequently puts greater
ress in both variables in point x: they exceeded their weight on variable 1 relative to
target in variable 2 by 75 percent while they fell short variable 2. This is what makes the
of their target in variable 1 also by 75 percent. A simple level curves for country A’s GEP
average would put country A and B in the same level of comparatively steep. The GEP
progress overall, but that is not what the GEP does. In for country A in situation x can
be found by identifying where the
level curve that passes through
x crosses the 45-degree line.
Box 10.1: The details from the example Because this level curve is steep,
illustrated in Figure B1. this intersection happens below
the ‘perfect progress’ point (1,1),
The parameters behind the example in Figure 2 are the following: Vari-
able 1 is a good, variable 2 is a bad. Progress(1)= 0.25, Progress(2) =
which means that the country gets
1.75. a GEP less than one. In the same
example, country B is above its Figure B1. The GEP Index-Dashboard space
These are the progress levels for these variables for both countries,
which means that both countries improved their levels of variable 1 and threshold –a good thing– in vari-
reduced their levels of variable 2. The thresholds for all variables equal 1 able 1 and below its threshold
for both countries. The rest of the variables are as follows: For country A
we have y1=y2 = 0.5, whereas for country B we have y1 = y2 = 2. It follows –a bad thing– in variable 2. It is country gets a GEP greater than one. Put simply, country
that the slope of the level curves of the countries’ GEP are: -4 for country therefore far more important for country B to improve in B’s GEP is greater than country A’s GEP because
A and -.25 for country B, and that Importance(1) = 2, Importance(2) country B made comparatively more progress in the
variable 2 than in variable 1, and the GEP consequently
= 0.5 for country A, whereas Importance(1).5, Importance(2) = 2 for
country B. puts greater weight on variable 2 relative to variable 1. dimension where it needed it the most.
This is what makes the level curves for country B’s GEP
The weights on progress for country A are then κA ∙ ImportanceA (1) =
0.8 and κκ A ∙ ImportanceA (2) = 0.2, while these same weights are κ κB ∙ comparatively flat. The GEP for country B in situation x
ImportanceB (1) = 0.2 and κB ∙ ImportanceB (2) = 0.8 for country B. can be found by identifying where the level curve that B.2 The determination of the importance levels of the
Finally, the GEP for country A is then 0.55 and the GEP for country B is
passes through x crosses the 45-degree line. Because components of the dashboard
1.45. this level curve is flat, this intersection happens above
the ‘perfect progress’ point (1,1), which means that the To determine the importance levels of the components

of the dashboard, the GEP measurement framework pro- Achievement. (just like for country B). Because achievement in the
ceeds just as with the determination of the importance capital stock level is the same for B and C the princi-
levels of the variables in the GEP index. In other words, To illustrate the principle, go back to the example illus- ple says that the countries ought to rank according to
Importance(j) is determined to be equal to trated in Figure 3 and add a dashboard to each country the GEP achievement information alone, and country B
consisting of a single capital stock, with a measured would rank over country C, since 1.81 > 0.69. Similarly,
level of achievement equal to 0.7 for country A and -0.3 the GEP achievements are the same for A and C and
for country B. the principle says that the countries ought to be ranked
in order for stock Kj to grow, and to
These index-dashboard achievement combos are illus- according to the achievements on the capital stock
trated in Figure A1 as points xA and xB. 1 The worst alone.
in order for stock Kj to shrink. achievement for country A is therefore 0.69, whereas Thus A would be ranked over C, since 0.7 > -0.3. Notice
for country B is -0.3. The principle says that country B that this is a refinement over what the principle of Pri-
cannot rank over country A, since 0.69 > -0.3. While in ority to the Worst Achievement would prescribe in this
this example Country B obtains a high GEP achieve- case, as that principle would allow countries B and C to
B.3 The Protective Criterion and its Properties ment, equal to 1.81, it achieves it at the cost of deplet- be ranked equally, since the worst consequence in both
To understand how one could use the information in ing its capital stock, as represented by the -0.3, and it cases is the same and equal to - 0.3.
the achievement profile of two countries to see which cannot obtain a high rank as a consequence. Even if
country is in a comparably more favorable position than country B’s GEP achievement level was much higher, the These principles, therefore, countries are ordered in
another, we consider first the case is one in which a conclusion would be the same. terms of their worst achievement, but only considering
country’s achievement levels are larger than the same the dimensions on which they differ. This order is known
Consider now a case where x and z are the achievement as the protective criterion 2. This methodology would
respective achievement indicators for some other profiles of two countries, such that they share the same
country. It is then perhaps suitable to assert that the first allow all index-dashboard achievement profiles to be
achievement in some dimension. Then it is reasonable to ranked but not to combine the index and dashboard
country is in a more favorable position than the second assert that whether x is in a more favorable position than
country. This is, after all, what the Pareto principle, when information into a synthetic index 3.
z is independent of how the countries do in the dimen-
applied to this setting, would prescribe. sion in which they fare equally well. This is the principle
While less obvious, there are two additional cases in of Independence of Identical Achievements.
which one could argue that a comparison between To illustrate the principle, go back to the example illus-
countries is suitable. trated in Figure B1 and consider country C, with a GEP
Consider the case where x and z are the achievement achievement of 0.69 (just like for country A) and a mea-
profiles of two countries. Then it can be argued that if x sured level of achievement for the capital stock of -0.3
is in a more favorable position than z, it must be that the 2 Barberà and Jackson (1988).
worst achievement in x is greater than the worst achieve- 1 Because the average importance of the progress indicators is 1.25 in that 3 This is so because the Protective Criterion (see Annex I.C in UNEP (2016)), like
ment in z. This is the principle of Priority to the Worst example (see Box 1 above), the GEP achievements for the countries are, respectively,
0.55 * 125 = 0.69 for country A and 1.45 * 1.25 = 1.81 for country B.
the leximin, does not admit a real-valued representation due to the lack of continuity
of the preference ordering. For proof see the example of Moulin (1998, page 34).

Appendix C: Details on indicators and weights on selected Table C1 (cont).
Ecosystem vitality (60%)
composite indices
Policy category Indicator Indicator description
Climate and energy Trends in CO2 emissions per Change in CO2 emissions from electricity
Table C1: Yale Environmental Performance Index (EPI). (25%) KwH (33%) and heat production
Environmental health (40%)
Source: Hsu, A. et al. (2016). 2016 Environmental Performance Index. New Haven, CT: Yale University. Change of trend in carbon Change in Trend of CO2 emissions per unit
Available: www.epi.yale.edu. intensity (33%) GDP from 1990 to 2000; 2000 to 2010
Trend in Carbon Intensity Change in CO2 emissions per unit GDP from
Policy category Indicator Indicator description (33%) 1990 to 2010
Health impact Child mortality (100%) Probability of dying between a child’s first Access to electricity (N/A) Per cent of population with access to elec-
(33%) and fifth birthdays (between age 1 and 5) tricity
Air quality (33%) Household air quality (33%) Percentage of the population using solid Biodiversity and Terrestrial Protected Areas Percentage of terrestrial biome area that is
fuels as primary cooking fuel habitat (25%) (National Biome Weights) protected, weighted by domestic biome area
(25%)
Air Pollution avg. Exp to Population weighted exposure to PM2.5
PM2.5 (33%) (three- year average) Terrestrial Protected Areas Percentage of terrestrial biome area that is
(Global Biome Weights) protected, weighted by global biome area
Air Pollution avg. Exp to Proportion of the population whose exposure (25%)
PM2.5 exceedance (33%) is above WHO thresholds (10, 15, 25, 35
micrograms/m3) Marine Protected Areas Marine protected areas as a per cent of EEZ
(25%)
Water and sanita- Access to drinking water Percentage of population with access to
tion (33%) (50%) improved drinking water source Critical Habitat Protection Per cent of critical habitat sites as designed
(25%) by the Alliance for Zero Extinction protected
Access to sanitation (50%) Percentage of population with access to
improved sanitation Fisheries (10%) Coastal shelf fishing pres- Catch in metric tons from trawling and dredg-
sure (50%) ing gears (mostly bottom trawls) divided by
EEZ area
Fish Stocks (50%) Percentage of fishing stocks overexploited
and collapsed from EEZ
Forest (10%) Change in forest cover Forest loss - Forest gain in > 50% tree cover,
(100%) as compared to 2000 levels

Table C.2 Global Green Economy index (GGEI). Source: Dual Citizen (2016). “The Global Green Econ-
Table C1 (cont). omy Index GGEI 2016 Measuring National Performance in the Green Economy”. 5th Edition - Septem-
Ecosystem vitality (60%) ber 2016.
Policy category Indicator Indicator description Sector Sub-category Source
Leadership & Climate Climate Change Performance (50%) International Energy Agency (IEA), Climate Change Per-
Agriculture (5%) Agricultural subsidies (50%) Subsidies are expressed in price of their Change (25%) formance Index (CCPI)
product in the domestic market (plus any
International Climate Forums (20%) Climate Action Network (ECO) reporting scored by Dual
direct output subsidy) less its price at the Citizen LLC on scale of 0-10
border, expressed as a percentage of the
Head of State (20%) Google Analysis scored by Dual Citizen LLC on scale of
border price (adjusting for transport costs 0-10
and quality differences)
Media Coverage (10%) Google Analysis scored by Dual Citizen LLC on scale of
Pesticide regulation (50%) Scoring of whether countries have signed 0-10
on to the Stockholm Convention and allow, Efficiency Sectors (25%) Buildings (25%) LEED certification as reported by the U.S. Green Building
restrict, or ban the “dirty dozen” POPs that Council (USGBC)
are common agricultural pesticides Transport (25%) International Energy Agency (IEA)
Water resources Wastewater management Wastewater treatment level weighted by con-
(25%) (100%) nection to wastewater treatment rate Tourism (25%) Scored by Dual Citizen LLC on scale of 0-10
Energy (25%) International Energy Agency (IEA)
Markets & Investment Renewable Energy Investment (25%) Renewable Energy Country Attractiveness Index (RECAI,
(25%) Ernst & Young)
Cleantech Innovation (30%) Global Innovation Index (INSEAD), Cleantech Group,

Heslin, Rothenberg, Farley & Mesiti p.c.
Cleantech Commercialization (20%) WWF Cleantech Group Global Cleantech Innovation

Index 2014
Green Investment Promotion & Facili- Scored by Dual Citizen LLC on scale of 0-10
tation (25%)
Environment & Natural Agriculture (17%) Environmental Performance Index 2014 (Yale University)
Capital (25%)
Air quality (17%)
Water (17%)
Biodiversity & habitat (17%)
Fisheries (17%)
Forests (17%)

Appendix D: An overview of measurement frameworks
Table D.1 An overview of measurement frameworks
Initiative Framework type Organisation Details Limitations

System of Environ- Adjusted eco- United Nations, the European • International standard for environmental account- • Missing full valuation of assets and flows related to natural
mental-Economic nomic measures Commission, the FAO, the ing (Ecorys, 2012); resources and land;
Accounting (SEEA) OECD, the International Mone- • Organizes information in an integrated and con- • Estimates of dV* (t) not satisfactory;
tary Fund and the World Bank ceptually coherent manner to inform decision-making; • Accounts for depletion of natural resources, but not for overcon-
Group
• Can be applied fully or partially, depending on the sumption or underinvestment (Ecorys, 2012);
needs, priorities and resources of its users; • No consideration of quality of resource accounts, e.g. water, soil
• Base of Inclusive Wealth Index and Adjusted Net (Ecorys, 2012).
Savings (see below).
Genuine Progress Adjusted eco- Centre of Sustainable • Includes welfare losses from environmental and Estimates of dV* (t) not satisfactory.
Indicator nomic measures Economy, Institute for Policy social factors in the calculation of a revised GDP
Studies (Hamilton 2002);
• Income equality as a measurement of inclusivity.
Inclusive Wealth Adjusted eco- United Nations University Inter- • Tracks a country’s amount of capital by analyzing Estimates of dV* (t) not satisfactory.
Index (IWI) nomic measures national Human Dimensions its productive base;
Programme on Global Envi- • Covers 140 countries over 20 years;
ronmental Change, UN Envi-
• Produced every two years focusing on a specific
ronment, UN-Water Decade
topic.
Programme on Capacity Devel-
opment, Natural Capital Project
Adjusted Net Adjusted eco- Pearce and Atkinson (1993), • Extension of GDP; • No explicit accounting for inclusivity;
Savings nomic measures World Bank data • Covers 213 countries; • Estimates of dV* (t) not satisfactory;
• Calculated by adding education expenditure to • Key estimates, such as the value of fossil water, net depletion of fish
net national savings and subtracting energy deple- stocks, degradation of soils, important pollutants are missing from the
tion, mineral depletion, net forest depletion, carbon calculation (World Bank, 2018);
dioxide and particulate emissions damage. (World • Education expenditure is seen as an investment in human capital,
Bank 2018). without accounting for its effectiveness (Hamilton, 2002);
• Sustainable growth rate of consumption set at 2.5% in the model is
subject to debate (see Chapter 1) (Ecorys, 2012)

Table D.1 (cont.)

Green Growth Indi- Dashboard of indi- OECD • Comprises more than 50 indicators in four groups: • No explicit accounting for inclusivity;
cators cators environmental and resource productivity, natural asset • Little coverage of indicators related to adaptation or resilience
base, environmental quality of life, economic opportu- (Ecorys, 2012);
nities and policy responses;
• No threshold or target stock.
• Collected for 34 countries;
• Subset of six representative indicators to simplify
communication.
Sustainable Devel- Dashboard of indi- Eurostat • Covers 28 EU countries; • Difficult to monitor progress;
opment Indicators cators • Includes more than 100 indices grouped into ten • No threshold or target stock.
(SDIs) categories: Socioeconomic development, Sustainable
consumption and production, Social inclusion, Demo-
graphic changes, Public health, Climate change and
energy, Sustainable transport, Natural resources,
Global partnership, and Good governance;
• 12 representative indicators to simplify communi-
cation.
Yale Environmental Composite index Yale (Center for Environmental • Covers 178 countries; • No explicit accounting for inclusivity;
Performance Index Law & Policy) and Columbia • Calculated every two years; • Difficult to interpret;
(EPI) University (Center for Interna-
• Two main categories: environmental health and • Targets for some indicators are debatable, such as for marine pro-
tional Earth Science Informa-
ecosystem vitality, with 9 subsections and 20 indica- tected areas (Ecorys, 2012).
tion Network)
tors.
Low Carbon Com- Composite index The Climate Institute, Vivid Eco- • G20 countries; • No explicit accounting for inclusivity;
petitiveness Index nomics • Determines capacity of each country to be com- • Difficult to interpret.
(LCCI) petitive and generate material prosperity to its resi-
dents in a low carbon world.
Global Sustainable Composite index World Economic Forum (WEF) • Covers 180 countries; • No explicit accounting for inclusivity;
Competitiveness • 109 quantitative performance indicators in five • Difficult to interpret.
Index (GSCI) groups of sustainable competitiveness.

Table D.1 (cont.)

Global Green Composite index Dual Citizen LLC • Covers 60 countries; • Difficult to interpret.
Economy Index • 32 underlying indicators and datasets in four main
(GGEI) dimensions of leadership & climate change, efficiency
sectors, markets & investment and environment &
natural capital.
Green Economy Index-dashboard EPartnership for Action on • Composed of a GEP index, a companion dash- • Complex.
Progress Measure- combination Green Economy (PAGE) board of sustainability indicators, and a country
ment Framework ranking.
(GEP)
Additional sources:
Ecorys (2012). Survey of green growth / environmental sustainability accounting and indicators. Technical paper.
Hamilton, K. (2002). Accounting for sustainability.
World Bank (2018). Data. Adjusted net savings, including particulate emission damage (% of GNI).

REFERENCES Pineda, J. and Galotto, L. (2015). Review of existing Green Economy Indicators. Mimeo.
Ravallion, M., (2012) “Troubling Tradeoffs in the Human Development Index, Journal of Development
Barberà, S. and Jackson, M. (1988). Maximin, Leximin, and the Protective Criterion: Economics, 99(2).
Characterizations and Comparisons. Journal of Economic Theory, 46:3444.
Stiglitz, J. E., Sen, A., and Fitoussi, J. P., (2010), “Report by the commission on the measurement
Dual Citizen (2016). “THE GLOBAL GREEN ECONOMY INDEX GGEI 2016 Measuring National of economic performance and social progress”, Paris: Commission on the Measurement of
Performance in the Green Economy”. 5th Edition - September 2016. Economic Performance and Social Progress.
Fleurbaey, M. and Blanchet D. (2013). Beyond GDP Measuring Welfare and Assessing Sustainability. Thiry, Géraldine and Philippe Roman (2014). The Inclusive Wealth Index. A Sustainability Indicator,
Oxford: Oxford University Press. Really?, FMSHWP-2014-71, juin 2014.
Green Growth Knowledge Platform (GGKP). (2013). Moving towards a Common Approach on Green United Nations (2014). System of Environmental Economic Accounting 2012— Central Framework.
Growth Indicators. Seoul, Paris, Nairobi and Washington DC: Global Green Growth Institute, New York.
Organisation for Economic Co-operation and Development, United Nations Environment
Programme and World Bank. United Nations Environment Programme (UNEP) (2014). Using Indicators for Green Economy
Policymaking. Geneva: UNEP.
Hsu, A. et al. (2016). 2016 Environmental Performance Index. New Haven, CT: Yale University.
Available: www.epi.yale.edu. United Nations Environment Programme (UNEP) (2015). Indicators for Green Economy Policymaking
– A Synthesis Report of Studies in Ghana, Mauritius and Uruguay. Geneva: UNEP.
Mediavilla-Sahagun, A. and L. Segafredo. (2014). Establishing Vision, Baselines, and Targets. In
Green Growth in Practice: Lessons from Country Experiences, Chapter: Establishing Vision, United Nations Environment Programme (UNEP) (2017). The Green Economy Progress
Baselines, and Targets, Publisher: Global Green Growth Institute, pp.59-78. measurement framework. Geneva: UNEP.
Moulin, H. (1998). Axioms of Cooperative Decision Making. Cambridge: Cambridge Univ. Press. University of the United Nations / International Human Dimensions Programme on Global
Environmental Change, United Nations Environment Programme (UNU-IHDP/UNEP) (2014).
OECD (2011). “Towards Green Growth: Monitoring Progress”. Inclusive Wealth Report. Measuring progress toward sustainability. Cambridge: Cambridge
PAGE (2017a). The Green Economy Progress Measurement Framework – Methodology. University Press.
PAGE (2017b). The Green Economy Progress Measurement Framework – Application. Villar, A. (2011). Who Meets the Standards: A Multidimensional Approach, Modern Economy, 2(4):
614-624.
Pearce, David and Giles D. Atkinson (1993). Capital theory and the measurement of sustainable
development: an indicator of “weak” sustainability. Ecological Economics, 1993, vol. 8, issue 2,
103-108.

CHAPTER 11: GREENING THE FINANCIAL
SYSTEM
CHAPTER 11: GREENING THE
FINANCIAL SYSTEM
Simon Zadek
LEARNING OBJECTIVES
This chapter aims to enable its readers to: Project Catalyst and Singapore Management University
• Outline the main challenges facing humanity and analyse their drivers; Simon Zadek is currently Principal of Project Catalyst, an initiative by UNDP,
Senior Advisor to UN Environment on sustainable finance, and Visiting
• Articulate how the inclusive green economy model seeks to address these Professor at Singapore Management University.
challenges; and He was until recently Senior Advisor on Finance in the Executive Office of the
UN Secretary-General, and Co-Director of the UN Environment’s Inquiry into
• Understand the major characteristics that underpin national strategies on Design Options for a Sustainable Financial System.
He is on the Advisory Board of the leading sustainability investment fund,
as well as the critical role of public policy in turning the inclusive seen economy Generation Investment Management.
model into practice.
CHAPTER 11: GREENING THE FINANCIAL SYSTEM 11.2

CHAPTER CONTENTS the definitional and methodological building blocks 1.1 Green Finance
needed to enable more systematic analysis. Underlying
this, however, and described in the third section of the Financing sustainable development will require the
1. Introduction large-scale mobilization and redirection of investable
chapter, is a ‘ground-up’ view of on-going policy and
2. Momentum in greening the Financial market innovations seeking to improve the alignment of funds. In the most comprehensive assessment to date,
the financial system with sustainable development (see the United Nations Conference on Trade and Devel-
System opment (UNCTAD) World Investment Report 2014 has
Exhibit 1), drawing on key reports and articles published
3. Measuring progress by and through UN Environment (Robins & Zadek, 2015, estimated that US$5-7 trillion a year are needed to
finance the Sustainable Development Goals (SDG). Of
4. Systemic and Incremental change 2016; Zadek, 2016). Building on these sections, the
chapter concludes with considerations for the future. the US$3.9 trillion per year that developing countries will
5. Concluding remarks need, only US$1.4 trillion is currently being supplied,
resulting in a gap of US$2.5 trillion, which needs to be
1. Introduction filled by private and public sources (UNCTAD, 2014).
Much of this investment is for the development of IGE,
Finance is the lifeblood of the economy and its key- notably access to energy, biodiversity, climate change,
stone is the global financial system. It deploys US$300 food security, water, and sanitation (ICESDF, 2014).
trillion of mostly private finance assets through a finan- “Imagine a financial system that serves Public finance will only provide a small fraction of total
cial system made up largely of banks, investors and the long-term needs of a healthy real financing needs for sustainable development?? (Green-
insurance companies and a vast network of interme-
diaries. The pathways of economies – from the world’s economy, an economy that provides hill et al., 2015). In China, for example, total green
finance is estimated to require about US$600 billion
major nations to the most local community markets - are decent, productive and rewarding liveli- annually, of which no more than 15 per cent can be
shaped by the financial system’s evolving design and hoods for all, and ensures that the natural expected to come from public sources, according to the
practice and is governed by a complex array of national People’s Bank of China and the Development Research
and international policy makers, regulators, standards environment remains intact and so able to
Centre of the State Council (PBoC & UN Environment,
bodies and norms. Beyond this formal system lies the support the needs of this and future gener- 2015; DRC & IISD, 2015). The bulk of the financing,
financing aspect of the informal economy, though these
are rarely included in discussion and analyses of the
ations. Imagine, furthermore, a financial in short, will need to come from financial and capital
markets.
financial system. system that is resilient and so able to serve
This chapter explores the relationship between the its core purpose in the face of growing Modern economies depend on an increasingly sophis-
ticated financial system to supply everything from
financial system and sustainable development, focus- environmental and other sources of payment services to investment, lending and insurance.
ing on how financial and capital markets enable or volatility.” Billions of transactions every day by hundreds of millions
impede the timely development of an inclusive green of people and institutions determine the creation and
economy (IGE). The chapter provides background and deployment of hundreds of trillions of dollars in financial
Source: Zadek, 2016

assets. Every one of these transactions has some com- Table 1: Green finance taxonomies (illustrative only)
bination of social, economic and environmental impacts,
whether positive, negative or both. Green finance, there- Concept Core Additional
fore, is not limited to a designated product or service, Categories broadly included across taxonomies Categories included in some taxonomies
but concerns the manner in which decisions across the Clean energy Wind, geothermal, solar, small-scale hydro, biomass. Other renewables, waste-to-energy, co-generation, nuclear
financial system take environmental considerations into large hydro, bioenergy feedstocks, clean coal, Improvements
account. in fossil fuels, Cleaner fuel production
Electricity Transmission systems for renewables, storage systems, Improving efficiency of transmission systems.
On a conceptual level, ‘green finance’ has been broadly transmission smart-grid, mini-gird.
defined by the G20 as “financing of investments that Efficiency Waste heat recovery, industrial energy efficiency, co-genera- Efficient products, energy efficiency in fossil fuel use.
provide environmental benefits in the broader context tion, energy efficient products.
of environmentally sustainable development” (G20
Green build- Building retrofits, new green buildings, energy audits, energy Advance materials.
Green Finance Study Group, 2016). Environmental ings services, equipment (e.g. lights, HVAC).
benefits might include, for example, reduction in air,
Transport Urban mass transit, non-diesel railways. Electric vehicles, hybrids, alternative fuel vehicles, Bicycle,
water and land pollution, reductions in GHG emis- pedestrian, waterways, logistics improvement, diesel railways,
sions, and improved energy efficiency while utilizing rail for transport of fossil fuels.
natural resources. Such crucial benefits are associated Non-energy Coal mine methane capture, fugitive emissions from gas and
with green economy developments in underpinning greenhouse oil, carbon capture and storage, reduction in greenhouse
new green industrial sectors, products and technolo- gases gas emissions from cement and chemicals production.
gies. Green finance, through the lens of financial deci- Pollution Air and water pollution control, soil remediation, mine reha- Waste: landfill and incineration without energy/gas capture.
sion-making, boosts environmentally friendly investments control and bilitation, waste to energy, waste gasification, composting,
and reduces environmentally harmful ones by internal- waste emissions scrubbers and filters, recycling.
izing environmental externalities and adjusting risk per- Agricultutre Energy and water saving, afforestation, plantation, reforesta- Conservation agriculture, sustainable fisheries, Identification of
ceptions. Table 1 provides an overview of categories of and land tion, managing forests for carbon, soil carbon management, protected ecosystems, ecotourism.
green finance by sector. no-till farming.
Water Water savings. Municipal, industrial and agricultural water supply, improved
Green finance is a subset of sustainable finance, which drainage, treatment of wastewater to meet compliance obliga-
embraces the full range of outcomes that need to be tions.
addressed in pursuit of sustainable development. For Disaster and Climate resilient infrastructure, Early warning systems, insur-
example, the UN-hosted ‘Financing for Development’ resilience ance against natural disasters.
process, builds on the Addis Ababa Action Plan, which Other Broadband, Data centres using renewable energy, low carbon
concerns financing for the SDGs, or the 2030 Agenda. energy powered mobile base stations, Virtual conferencing/
Green finance includes many aspects of financing that tech substitution.
addresses climate challenges. However, as climate

change also has an impact on social and economic out- failures including continued direct fossil fuel subsidies,
comes, there are additional finance needs, which are and market failures including the externalised socie- Box 11.1: Barriers to transformational
not necessarily related directly to reductions in emis- tal costs of negative health effects of carbon intensive
sions or energy use. Furthermore, green finance covers energy production. Equally, tapping into private capital financing
aspects of financing not related to the climate, such as to provide finance for investments that have positive Multiple barriers exist to mobilizing transformative levels of financing.
These include weaknesses in project pipelines, significant incremen-
land remediation and waste management. In practice, externalities as well as private benefits can legitimately tal costs to “greening” infrastructure, poor commercial opportunities in
green finance will always be loosely defined because of require the subsidizing of the incremental costs to financing the realization of some goals, scarcity or poor use of available
the connections to other parts of the sustainable devel- deliver the public benefits. Bringing forward the deploy- public resources, and inadequate enabling environment for private
investment.
opment agenda. For example, financing clean energy ment of renewables is a case in point, where extensive
can reduce the number of premature deaths, currently use has been made of public subsidies or imposed sur- The G20’s innovative work on green finance highlights barriers within the
financial system itself. A fundamental barrier is the continued failure in
US$6.5 million every year, from air pollution linked to the charges on electricity consumer prices. financial decision-making to account for environmental and related finan-
energy system (OECD, 2016). Similarly, financing that cial impacts. Information asymmetries explain this shortfall in part, as
reduces the impact of natural catastrophes on people Interventions in the financial system may also be war- financial decision-makers do not have the data to understand social and
environmental factors. Short-termism can deter financing from sustain-
could reduce the numbers displaced from their homes, ranted. Here, the focus is on four specific circumstances able investments that tend to be more capital intensive with associated
currently an average of 26.4 million people every year. (Robins & Zadek, 2015; Zadek, 2016; see also Exhibit 2): lower operating costs. Mispricing environmental risk can deter green
financing and encourage investment in pollution-intensive assets.
Thus, green finance in this context can also be seen as a (i) Valuing externalities: Action may be justified where Sources: G20 Green Finance Study Group, 2016; UN Environment &
financing for overall sustainable development more gen- financial markets systematically misprice the impact Smith School, 2014; Zadek & Robins, 2016
erally. of externalities on financial returns, and thereby
create negative spill-over impacts on third parties or
society in general.
1.2 Why intervene in the financial system? (iv) Ensuring policy coherence: Action may be justified to
(ii) Promoting innovation: Action may be justified to stim-
Conventional wisdom among economists suggests ulate “missing markets”, generating positive spill- ensure that the rules governing the financial system
that the ‘first best’ solution to real economy externali- overs, for example, through common standards for are consistent with wider government policies.
ties would be to intervene in the real economy. Pricing financial instruments that improve liquidity in embry- These four reasons are, in the main, first-best solutions
the negative effects of greenhouse gas emissions into onic areas. to providing public goods. The first three, in particular,
markets for products and services is without a doubt key
(iii) Managing systemic risks: Action may be justified which focus on ensuring markets effectively handle risk
to addressing climate change (see also Ch.8 on fiscal
where the stability of parts of the financial system pricing, innovation and financial stability, are central to
policy). In some instances, this is a matter of correcting
may be affected by environmental impacts, or the role of financial policy makers and regulators, as
policy failures. The IMF, for example, calls for an end to
by associated policy, technological and social well as standard-setters. From this perspective, these
energy subsidies that it estimates at US$5.3 trillion annu-
responses. reasons for intervening need not concern any direct
ally, or about 6.5 per cent of global GDP (Coady et al.,
policy or principled interest in advancing an inclusive
2015). Such subsidies, the IMF highlights, are made up
green economy.
of a combination of policy and market failures – policy

The fourth intervention concerning policy coherence enacted through financial system interventions may be vulnerable, including the 40 members of the V20 (V20,
does relate to the broader policy landscape. Conven- the only option. Enhanced environmental lender liability 2016).
tional wisdom rightly seeks to ensure the independence is an example, which effectively engages banks under
of regulators from shorter-term, political interests that threat of legal action to act as environmental stewards In conclusion, aligning the financial system with the
could do longer term damage to the financial system where conventional enforcement is ineffective (Sampaio financing needs of IGE requires a three-fold approach:
and in turn underlying prospects and performance. Reg- et al., 2016). 1) policy measures and market innovation across the
ulatory coherence with longer-term monetary and finan- real economy, 2) public financing where private capital
cial policy objectives is, however, important and often Alongside the core first and second-best reasons for should not be expected to pay for the delivery of public
critically so (Group of 30, 2015). The Bank of England’s intervening in the financial system to advance an IGE goods and services, and 3) interventions in the financial
prudential review of the impact of climate change on is the need to consider potential negative impacts and system itself to correct policy and market failures and
the UK’s insurance sector was, for example, in direct unintended impacts of action on the financial system ensure policy coherence.
response to the UK’s Climate Change Act (Bank of or real economy outcomes. Such negative outcomes
England, 2015). can arise for a number of reasons, each leading to the 2. Momentum in Greening the
implementation of a flawed measures, either because of
Together, the instrumental or ultimate aim of these four system complexities, conflicting objectives, or political Financial System
interventions is to improve the working of the financial interference. One case of conflicting objectives con- Interventions across the financial system to better align
system, which can be best understood along three axes cerns moves to integrate climate risks into sovereign it with diverse aspects of sustainable development have
(Robins & Zadek, 2016): credit ratings. Positively, increased rapidly in recent years. Broadly, these inter-
Key definition: such integration would
• Effectiveness: degree to which markets price sustain- V20 ventions can be placed in one or more of three catego-
Group of countries especially vul- ensure that bond default ries:
ability factors into asset values. nerable to climate change. Member risks were sensitive to
• Efficiency: costs of running a system that delivers
countries are Afghanistan, Bangla-
desh, Barbados, Bhutan, Burkina climate-related factors, • Business-as-Usual Developments: financial system
financial flows against requirements. Faso, Cambodia, Colombia, Co- and that countries were reform and developments intended to improve per-
moros, Costa Rica, Democratic formances that unintentionally impact the handling
Republic of the Congo, Dominican incentivised to mitigate
• Resilience: susceptibility of the system to disruptions Republic, Ethiopia, Fiji, The Gam- such risks through adap- of one or more aspects of sustainable development.
related to unsustainable development. bia, Ghana, Grenada, Guatemala,
tation measures. What Building out local capital markets, especially in devel-
Haïti, Honduras, Kenya, Kiribati,
Lebanon, Madagascar, Malawi, is problematic, however, oping countries, generally leads to increased domes-
There are, however, also times where ‘second best’ is Maldives, Marshall Islands, Mongo- tic, long-term financing, which can, in-turn, lead to
is that the countries that
justified. In some countries, notably many developing lia, Morocco, Nepal, Niger, Palau,
more environmental and broader sustainable devel-
Palestine, Papua New Guinea, will be most immediately
countries, environmental regulatory enforcement remains opment-related risks and opportunities. Conversely,
Philippines, Rwanda, Saint Lucia, impacted by such devel-
weak, resulting in pollution and broader environmental Samoa, Senegal, South Sudan, Sri
post-financial crisis measures to reduce the risk of
Lanka, Sudan, Tanzania, Timor-Les- opments would be the
degradation. Improving regulatory enforcement is almost bank failures, such as the Basel 3 regulations, tend
te, Tunisia, Tuvalu, Vanuatu, Viet world’s poorest and most
always the first best solution but might not be available Nam, and Yemen.
to make longer term lending less profitable and unin-
in the short to medium term for political or economic Information adapted from: https://
www.v-20.org/about/ tentionally reduces financing for low carbon, climate
reasons. In such circumstances, second-best solutions

resilient infrastructure At the time of writing this chapter, as part of the work of
Key definition:
Basel 3 regulations such as renewable energy the G20 Green Finance Study Group, UN Environment Box 11.2: Momentum in greening the
Set of measures to strengthen the (Alexander, 2014). prepared a progress report covering policy and part-
regulation, supervision and risk
nership action on green finance across the G20 mem- financial system
management of banks developed
• Market and Blended
after the 2007 financial crisis. bership, and internationally (UN Environment, 2017). As • California has introduced requirements for insurance companies to report
Action: market leadership
Adapted from: https://www.bis.org/
Table 2 (overleaf) illustrates, progress has been made on holdings in high-risk carbon assets (California Department of Insur-
bcbs/basel3.htm
from financial institutions across all members, albeit still in a patchy manner
ance, 2016).
has enhanced environ- • China has introduced a comprehensive set of guidelines to establish a
green financial system, including for banking, capital markets, insurance,
mental and societal considerations in financial market Considerable progress has been made in advancing local finance and international cooperation (PBoC, 2016).
decision-making, at times together with public actors green finance at the national level. As early as 2007, for
• France’s implementation of new reporting requirements for corporate, as
through enabling frameworks and public finance. example, the China Banking Regulatory Commission well as more specific reporting from institutional investors, and ongoing
An example of market action are green bonds (UN established the Green Credit Guidelines, which over work on the assessment of climate-related risks in the banking sector
are a key part of its low carbon transition strategy (Institute for Climate
Environment, 2015), new stock market indices, risk the subsequent period have evolved into an annual Economics, 2015).
modelling, advances in credit ratings (PRI, 2016) and assessment of each bank’s progress in greening its • India’s securities regulator has introduced green bond requirements to
remuneration and voluntary disclosure arrangements. balance sheet. Building on this development, the Peo- boost financing, particularly for renewable energy (UN Environment &
FICCI, 2016).
An example of blended action is development banks, ple’s Bank of China and UN Environment established a
which have taken a lead in blending public finance to Green Finance Task Force in mid-2014. This task force • Kenya is building on its global leadership in promoting financial inclusion
by developing a plan to mobilize green finance and position itself as a
leverage more private capital, and, in some instances, produced recommendations that informed the decisions regional hub (UN Environment & IFC, 2015).
tax credits are used domestically with the same aim in made by the State Council in August 2016, to advance • The Netherlands central bank has assessed the implications of climate
mind, notably in the US (Usher et al., 2016). the greening of China’s financial system. change for its financial system (Sustainable Finance Lab, 2015; De Ned-
erlandsche Bank, 2016).
• Targeted Rule-Making: specific non-market mea- As Box 11.2 suggests, Kenya’s advance of green • The Philippines has developed a public-private disaster insurance pool
sures have been taken by financial institutions, finance began with its digital efforts to increase finan- that will make disaster insurance compulsory for homeowners and SMEs
(Halle, Forstater & Zadek, 2015).
policy makers, regulators, standard setters and other cial inclusion (UN Environment & IFC, 2015). Indeed, by
• Switzerland has undertaken a comprehensive roadmap of the opportu-
non-market actors, or market makers such as stock 2014, Kenya had the world’s highest use of mobile pay- nities for the Swiss financial community in developing a green finance
exchanges, to embed aspects of sustainable devel- ments. Building on the dominant mobile payments plat- expertise and reputation (Swiss Federal Office of the Environment & UN
Environment, 2015).
opment in financial system decision making. UN form, M-PESA, a number of additional financial services
Environment has identified over 200 of these ‘green/ have been added. Notable has been M-KOPA, which • The UK has launched a green finance initiative focused on advancing
the City of London as a global green finance hub (McDaniels & Robins,
social’ targeted financial system reform and develop- uses the platform to enable poorer people to pay for 2016).
ment innovations, highlighting the leadership taken by renewable energy supplied by distributed solar technol-
developing countries in banking regulatory innovations ogy. Other examples include the Swedish start-up, Trine,
and the developed country leadership in the area of that has added crowd-sourcing in Sweden to this tech-
institutional investor (Robins & Zadek, 2016). nological eco-system to pay for the initial capital costs. SolarCoin from the US is experimenting with blockchain
and crypto-currencies to further enhance its offering.

Table 2: Green finance progress in G20 countries
Enhanced disclosure has been a favoured route into pro-
moting green and sustainable finance. Brazil and South Country 1. Provide stra- 2. Promote 3. Expand learn- 4. Support the 5. Promote 6. Encourage 7. Improve the
Africa house the first stock exchanges that introduced tegic policy voluntary prin- ing networks for development international and facilitate measurement
sustainability-related disclosure as part of their listing signals and ciples for green capacity build- of local green collaboration knowledge of green finance
framework finance ing bond markets to facilitate sharing on envi- activities and
requirements. Today, the UNCTD-hosted Sustainable cross-border ronmental and their impacts
Stock Exchange initiative has a membership of over 60 investment in financial risk
stock exchanges across the world advancing enhanced green bonds
disclosure. Most recently, the Financial Stability Board’s Argentina  

Task Force on Climate-Related Financial Disclosure Australia  
has made recommendations on how listed companies
Brazil   
and financial institutions themselves might advance a
more systematic approach to climate related disclosure Canada   
(TCFD, 2017). China       
Green bonds have been a favoured approach to pro- France     
moting capital-raising for green investments. Originally Germany    
advanced by development finance institutions such as
India   
the World Bank and a small number of banks, notably
Swedish SEB, green bonds are now a growing asset Indonesia    
class across the world. These bonds are supported by Italy  
an increasing number of standards, certification models Japan 
and institutions, and active promotion by governments
Mexico    
and regulators. Most recently, the Monetary Authority of
Singapore has introduced the world’s first subsidy for Russian Fed.  
issuers of green bonds that will cover additional costs Saudi Arabia 
such as certification.
South Africa   
The global financial system is dominated by a small South Korea  
number of regional and international centres, which in
Turkey  
turn have considerable influence over the development
of international norms and standards. Over recent years, UK      
a number of these centres have moved to develop US  
more integrated strategies for taking advantage of new EU  NA 
green finance opportunities as a means of mitigating
International      

green-related risks. For example, the City of London has Table 3: Comparative potential for the five principle approaches (Robins & Zadek, 2015)
launched a Green Finance Initiative led by the private
sector, and comparable initiatives have been set up in Approach Current practice Potential impact
France, Hong Kong, Singapore, and Switzerland. A coa- Enhancing market Widely adopted as relatively straightfor- Aims to increase financial returns Likely to have slow, modest
lition of financial centres engaged in advancing green practice ward and relevant to all countries’ finan- through better assessment of impact, unless undertaken with
finance was established as part of the G7 under Italy’s cial systems. risk:return opportunities. additional measures.
presidency in 2017. Harnessing balance Widely adopted, but limited by cost. Aims to increase financial returns Can be very effective where
sheets in return for provision of public deployed, but is likely to be
3. Measuring Progress goods. limited in impact because of
scarcity of public finance.
Explicit efforts to ‘green the financial system’ are rela- Directing finance A long history of use, now being adpated Varied effects on financial returns Can be successful, but with
tively recent. Partly as a consequence, most documen- through policy for sustainability goals. in requiring the delivery of public greater potential for unintended
tation of these efforts is made up largely of descriptions goods. consequences.
of their measures and activities, rather than providing Encourging cultural Not widely practiced, but potential for Can have varied effects on finan- Can be effective, especially
an analysis of effectiveness. Some of the descriptions transformation wide application and postive signs cial returns. when linked to policy direction
suggest impacts based on assumptions about what emerging post-crisis. and incentives and aligned to
types of measures are beneficial. For example, it is broader societal expectations.
generally assumed that providing more environmen- Upgrading gover- Least practiced. Is an essential enabler of the measures above.
tal impact information to the market can enhance the nance architecture
consideration of environmental aspects by lenders and
investors.
As a result, the commitment of over 40 stock exchanges, impacts on investors’decisions (Goldstuck & Naidoo, the period other developments, such as enhanced envi-
through their membership of the Sustainable Stock 2016). ronmental regulatory enforcement, might well have had a
Exchange initiative, to include sustainable development significant impact.
impacts in reporting requirements of listed companies China’s Green Credit Guidelines, to take another case,
is assumed to be a good thing. Other examples include have been highlighted as best practice in soft inter- Despite the lack of data, an overview of available
the work of, and directions proposed by the Task Force vention by a banking regulator in seeking to promote research, points to comparative performance across five
on Climate-Related Financial Risk Disclosure established green bank lending. Indeed, evidence indicates that approaches for improving the alignment of the financial
by the Financial Stability Board in 2016. Yet a study today over 15 per cent of total bank lending in China is system with sustainable development outcomes (see
undertaken in 2015 of the effects on investment deci- consistent with these Guidelines, a significant growth Table 3, above).
sions of strict sustainable development reporting require- since they were launched in 2007 (Green Finance Task
Force, 2015). Yet, there is no analytic evidence as to Furthermore, it is likely that there is a trade-off between
ments at the Johannesburg Stock Exchange, suggested speed and scale of impact with the risks of negative
that if taken alone such measures had marginal if any what extent the increase in green credit in China can be
attributed to the Guidelines specifically, given that over unintended consequences. For example, even if mea-

projects, however well designed they Furthermore, it concluded that market-based financing
were (Sampaio, 2016). provided the greatest proportion of investment in each
sector; ranging from 78 per cent in renewable power
In conclusion, there is clearly a great projects to 61 per cent in environment protection.
deal of work needed to move from
description of initiatives to analysis Looking forward, the study projects that China’s green
and assessment of their impact. investment demand (based on a larger set of catego-
Currently, the evidence available is ries including energy efficiency) of 2,867 billion RMB
largely qualitative, and fragmented (US$450 billion) in 2015, will grow to 2,908 billion RMB
across different approaches and (US$465 billion) by 2020. Although the annual growth
quality levels. rate is not large, the average size of the annual invest-
ment is high, exceeding 3 per cent of GDP.
Alongside the need to measure
impact is the need to measure prog- With respect to estimating flows, the Brazilian Bankers
ress in aligning the financial system Federation FEBREBAN commissioned the Getulio
with the needs of IGE (see Table 4, Vargas Foundation to undertake a mapping study of
overleaf). An obvious first step in this green finance flows in Brazil (FGV, 2014). They used a
direction is to determine the require- methodology that looked
Figure 1: Potential impact and practicality of implementation (Inquiry, 2015)the five princi-
ments and flows - the extent of green Key definition: at four levels across
ple approaches (Robins & Zadek, 2015)
finance needs, say of a country, and Non-reimbursable funds banking/credit, invest-
Funds that are granted as direct
the actual level of green finance financial aid from public budgets ment and insurance, and
sures to improve market practice such as enhanced flows and, where relevant, stocks for specific purposes in the public non-reimbursable funds
interest. Adapted from: http://www.
disclosure may not alone deliver the quantum changes (e.g. of green bonds). Currently available information, omega-consulting.ro (e.g. such as the Amazon
required, the risk of something going wrong as a result however, suggests that very few countries have under- Fund):
are small. Measures such as priority lending and taken any systematic measurement of green finance.
strengthened environmental liability, on the other hand, Several have, however, undertaken one-off studies of • General policies and voluntary commitments;
may over time drive greater change in moving towards a green finance flows. • Integration of environmental, social and governance
sustainable finance system, but need careful design and (ESG) considerations in processes and risk analysis
market preparation to avoid unintended consequences. Several Chinese institutions have undertaken one-off
green finance studies, including annual green lending (e.g. Equator Principles);
For example, such a consequence could have occurred
when Brazil’s Supreme Court found in favour of a consti- estimates by the China Banking Regulatory Commission, • Thematic investments (e.g. sustainable transport,
tutional interpretation that banks had unlimited environ- and the National Development and Reform Commission renewable energy); and
mental liability: there was a real risk that this would lead (Zheng, 2015). The study concludes that green invest-
ment rose between 2008 and 2012 from 2.2 per cent to • Thematic products (e.g. direct loans for energy effi-
to a collapse of lending for any environmentally sensitive
3.1 per cent of GDP, reaching US$260 billion in 2012. ciency).

Table 4: Key features of a performance framework for a sustainable financial system (Robins & Za- The analysis suggested that some US$2 trillion of bank balance sheets and investment
dek, 2015) assets under management are covered by general commitments and principles, and
around US$67 billion by thematic investment criteria. In Indonesia, the financial regu-
Feature Description Comment
lator, Otoritas Jasa Keuangan, has estimated total green lending undertaken by banks,
Requirements Capital required to Covering: (a) deployment of capital to fund covering renewables, sustainable agriculture, green industry and ecotourism (OJK,
finance sustainable devel- incremental assets or activities; (b) elimination 2014). This exercise found that the share of lending identified as green between 2011
opment. of “unsustainable” assets and activities pre-
and 2013 was very small, with only 1.2 per cent of total lending described as green in
viously funded by capital; and, (c) reserving
capital against conditions that could challenge
2011. The share of green lending increased slightly to 1.3 per cent in 2012 and 1.4 per
sustainability. cent in 2013, amounting to 10.2 trillion IDR (Indonesian Rupiah, about US$1 billion).
Flows Flows of finance against Providing a common approach for measuring Estimates of financial requirements, flows and stocks, however, do not provide a full
such requirements. actual flows, building on existing methodol- picture of the efficiency, effectiveness or resilience of the financial system, given the
ogies, accepting that flow analysis does not challenges of sustainable development. The connection between efficiency – the cost
clarify the effectiveness or efficiency of secur-
ing such flows.
of running the financial system relative to its output – remains largely unexplored, and
its links to sustainable finance are entirely unexplored. Interestingly, research has sug-
Effectiveness Degree to which markets Core to assessing existence of market failures, gested that the financial system’s efficiency has not improved despite going through a
price sustainability factors although need to distinguish failures associ-
period of massive volume growth and the extensive application of enabling, cost-reduc-
into asset values. ated with real or financial economy market
and/or policy weaknesses. ing technology, suggesting that actual cost savings have been captured by rent-taking
intermediaries (Philippon, 2015).
Efficiency Costs of running the Includes both transaction-specific and com-
financial system that prehensive financial system costs. Equally, there is little data or analysis that provides direct evidence of the effectiveness
delivers financial flows of the financial system in pricing and managing sustainable development, or more nar-
against requirements.
rowly environment-related risks. Many studies point to a divergence between financial
Resilience Susceptibility of the Covering the direct impact of environmental risk pricing compared to the extent of negative environmental externalities, indicating a
system to disruptions stress as well as impacts of transitional effects. gap between market and socially efficient outcomes.
related to unsustainable This is inherently future-oriented and requires
development. (a) analysis over extended time periods and The G20’s Green Finance Study Group highlighted this in its initial report (G20 Green
(b) distinguishing higher levels of resilience Finance Study Group, 2016), and the creation of the Financial Stability Board’s Task
through externalization and internationalization
Force on Climate-Related Financial Disclosures is premised on an assumption that
of sustainability factors.
climate risks are not priced effectively into private financing decisions (TFCD, 2016).
Whether this implies that private actors are mispricing risk given their pursuit of private
benefits is, however, another matter. The Chinese bank, ICBC, has published a report
on its environmental risk assessment, highlighting the importance of taking approach
based on longer-term scenarios, but nevertheless not finding significant risk mispricing
across its balance sheet (ICBC, 2016).

Similarly, when it comes to financial system resilience, 4. Systemic and Incremental strategy,” because of the need to finance profound
the Bank of England has led the way in undertaking a changes in China’s economy over the coming decades
prudential review of the impact of climate change on Change (UN Environment, 2016). Likewise, Mark Carney, Gov-
the stability of the UK-based insurance sector. Other ernor of the Bank of England, has argued that, “achiev-
central banks have followed suit, particularly in Europe, ing the SDGs will require mainstream finance. We need
with comparable assessments undertaken by the Dutch, 4.1 Finance as a tool for sustainable to build a new system – one that delivers sustainable
European, German, and Swedish central banks. These development investment flows, based on both resilient market-based,
higher-level assessments have, likewise, concluded and robust bank-based, finance” (Robins & Zadek,
that whilst the risk of instability exists, the likelihood is Understanding the finance system in the context of the 2016). It can thus be noted that a systematic transforma-
modest at present, with larger effects happening over needs of IGE is ultimately a matter of purpose. Finance tion of the economy towards an IGE requires, equally, a
time horizons that they consider to be beyond the formal does not exist for its own sake but rather to serve other systematically new approach to finance and investment,
mandates of central banks. As Mark Carney, Bank purposes. The core purpose of the financial system has a ‘paradigm shift’ within the financial system.
of England Governor, puts it, “once climate change always been to serve the real economy by providing a
becomes a defining issue for financial stability, it may range of essential services for companies, households, According to Thomas Kuhn (2012), a paradigm shift
already be too late” (Elliott, 2015). and public authorities. The transition towards sustainable occurs when evidence can be effectively described and
development is now reframing the historic relationship dealt with only by affirming the explanations and worl-
UN Environment has developed an initial version of a between the real economy and the financial system and dviews that are new or were previously controversial
performance framework, which rests on three analytical setting in motion a powerful new dynamic, focused on and unacceptable. Paradigm shifts bring with them new
pillars: the architecture of rules, behaviour in markets delivering inclusive prosperity, poverty elimination, and norms, orthodoxies, and worldviews. Drawing on Kuhn’s
and the flows of finance (Robins & Zadek, 2016). The respect for planetary boundaries. work, Peter Hall distinguishes three orders of change
architecture includes all rules, regulations, policies, (Hall, 1993; see Figure 2):
norms, and standards in the financial system that could Focusing on purpose leads to a re-evaluation of the
directly or indirectly improve sustainable development system itself. Progressing to a clean energy future is not, (1) First-order changes are “paradigm maintaining” and
outcomes. This helps to understand whether the ‘rules for example, simply a matter of more wind turbines and involve processes that adjust policy without challeng-
of the game’ are aligned with sustainable development solar panels, although further technological innovation ing their existing, underlying assumptions about the
needs. Under markets, the approach identifies key and large-scale deployment will certainly be needed. way things are.
aspects of the behaviours of market actors, and how A clean energy future will require new market actors,
(2) Second-order changes are more significant, where
well these market players, market makers, and financial new types of market relationships matching supply and
the instrument of a policy is adjusted but not the
services suit the sustainable development needs. And demand, different ownership configurations for key parts
overarching policy. Both first and second-order
under flows the allocation of capital to sustainable (and of the energy system, and a radical overhaul of energy
changes are characterized by incrementalism.
unsustainable activities) is measured in terms of annual governance at every level.
flows and overall stock of assets. (3) Third-order changes reflect deeper changes to the
Similarly, for finance, Zhou Xiaochuan, Governor of the
underlying terms of the discourse and indicate that a
People’s Bank of China, explains that, “in China, estab-
paradigm shift is occurring. Third-order change is the
lishing a green finance system has become a national

paradigm shift described by Kuhn, involving reap- 4.2 Change processes legal forms allowing for financial and non-financial cor-
praisal of what have previously been considered cer- porate objectives. Similarly, central bank innovators have
tainly true. (Mackintosh, 2016). Today’s momentum already shows some of Hall’s sec- started signalling the need for an alignment of their man-
ond-level characteristics. At least two different narratives dates with longer-term policy goals by highlighting the
Significant changes to the financial system will be question inherited conventions concerning change in complex dynamic between climate change and financial
necessary for the transition to sustainable develop- the financial system and provide an idea of an emerg- stability.
ment. Achieving ambitious goals, such as the SDGs ing new set of conventions. Innovations such as green
and associated targets, will not be possible without
system change, which could often mean the ‘creative
bonds reflect the extended application of existing market 5. Concluding remarks
architecture – and in many ways that is their strength,
destruction’ of existing markets and institutions, and the enabling rapid market expansion. Although progress Greening the financial system is a work-in-progress.
emergence of new configurations, rules and conven- is still relatively modest to date, it proves the potential While there is no doubt as to the direction of travel, what
tions. Here, finance is without doubt a case in point. It and the need to take the current level of innovation to remains unclear is how deeply rooted the changes need
is not a coincidence that some developing countries, a greater scale by addressing the role of sustainable to, and will be, and how long it will take to undertake
as opposed to richer countries, who play a leading role development in broader
in progressing alignment of their domestic financial market norms such as
systems with sustainable development. Such leader- credit ratings. While
ship can partly be explained by the higher visibility and responsible, sustainable
impact of unsustainable development. or low-carbon financing
was once undertaken
Beyond this, or perhaps in part because of this, develop-
only by impact investors
ing country central banks and financial regulators under-
and social banking pio-
stand their role as being to align finance with national
neers, we now see main-
development priorities, alongside the roles they share
stream investors, insurers
with their developed country counterparts of monetary
and banks increasingly
and financial stability and market integrity (UN Environ-
embracing new metrics
ment & AXA, 2015). As Dr. Atiur Rahman, the previous
and norms. Notable shifts
Governor of the Bangladesh Bank, pointed out, “devel-
in the interpretation of, and
oping countries appreciate more readily the profound
regulations governing,
connections between central and development banking”
pension funds’ fiduciary
(Rahman, 2014).
responsibilities are looking
increasingly like more
avant-garde innovations
in corporate governance,
such as the B Corporation
Figure 2: Three orders of changes needed for transformation

those changes. Early stage innovations demonstrate the
potential for easing environmental considerations into
decision-making across the financial system through
what might be termed measures to improve the effi-
ciency and effectiveness, and indeed resilience, of
financial and capital markets. Improved information flows
linked to capacity development are the symbols and
practice of taking advantage of low hanging opportuni-
ties, as is the development of the green bond market.
There is more of a challenge in addressing higher order
changes that go beyond these basics and seek to over-
come more endemic problems such as short-termism
and an over-focus on highly leveraged, intra-sector
trading, or an over-valuation of the benefits of liquid-
ity. Changing such features of today’s modern financial
system requires significant, and often unpopular actions.
Smart action along contingent pathways is needed
to enable modest nudges to precipitate wider spread
changes, and, as described above, there are examples
of such actions being taken, with positive but as yet
inconclusive results.

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of China and UN Environment

CHAPTER 12: INTERNATIONAL DIMENSIONS
OF GREEN ECONOMY
Guoyong Liang
United Nations Conference on Trade and Development
Dr. Guoyong Liang is an economist at United Nations Conference on
CHAPTER 12: INTERNATIONAL Trade and Development (UNCTAD) in Geneva. As a major author of World
Investment Report, a flagship UN publication, he has rich experience in
economic research, intergovernmental process and technical assistance.
DIMENSIONS OF GREEN ECONOMY Dr. Liang has published widely with a focus on international economic issues,
playing an active role in public policy making in trade, investment and related
areas. His recent book Chinese Economy 2040 is an influential work on the
new landscape of globalization and its implications for China’s development.
Zhengzheng Qu
LEARNING OBJECTIVES
Green Climate Fund
Ms. Zhengzheng Qu is the Project Preparation Specialist with the Green
• Outline the main challenges facing humanity and analyse their drivers; Climate Fund (GCF). She coordinates the daily operations of the Project
Preparation Facility, including application reviews and further design of the
facility.
• Articulate how the inclusive green economy model seeks to address these
challenges; and Prior to the GCF, Zhengzheng worked for the United Nations Environment
Programme as a Research Analyst focused on green economy related policy
• Understand the major characteristics that underpin national strategies on research and projects, as well as for the United Nations Conference on Trade
inclusive green economy, the related analytical tools, key actors and initiatives and Development (UNCTAD). Zhengzheng has a master’s degree on Banking
and Finance from Monash University in Australia.
model into practice.
Elena Antoni
United Nations Environment Programme
Elena is a research analyst at UN Environment, specializing in Inclusive Green

Economy and sustainable trade. Among others, Elena has led projects on
Green Industrial Policy and trade, UN Environment-WTO relations, fisheries
subsidies, trade and biodiversity, and foreign direct Investment agreements.
Elena is also the project coordinator and assistant editor of the Inclusive
Green Economy Book. Prior to working with the UN, Elena conducted
research on renewable energy infant industries, and gained experience in
strategy and planning in the manufacturing sector. Elena holds an MPhil in
Environmental Policy – Law and Economics of the Environment, from the
University of Cambridge.
CHAPTER 12: INTERNATIONAL DIMENSIONS OF GREEN ECONOMY 1.2
CHAPTER CONTENTS which places greater emphasis on the structural of debates over this most enduring issue grows more
impacts of transitioning to an Inclusive Green Economy complex even as it seems to become more finely
1. Introduction (IGE). Section 4 zooms in on the negotiations on the tuned.
liberalisation of the environmental goods and services
2. Trade & environment sector, which lies at the core of the trade and green (…)
3. Trade & inclusive green economy economy linkage. Sections 5 and 6 bring foreign direct The relationship between the two is of growing
investment and technology transfer into the discussions. significance, and in constant flux. Recent events such
4. Liberalising trade in environmental goods Section 7 summarises the major points of this chapter. as the creation of the World Trade Organisation and
& services renewed imperatives for the Non-Aligned Movement
add to the kaleidoscope of movements, motivations,
5. Foreign direct investments and inclusive
interests and objectives. Meanwhile, the distinct and
green economies 2. Trade and Environment perceptibly fixed interests of North and South remain,
6. Green technology transfer & knowledge The discussion of the relationship between trade and buttressing a framework that changes only piecemeal
green economy invariably covers the complex links if at all.
flows
between trade and the environment. Complexities (...) The two polar extremes of (voracious) unbridled
such as the environment-trade debate over the past free trade and rampant (protecto-)environmentalism
1. Introduction decade that has often been marked by mutual distrust are still very much in play: growth at all costs,
and a lack of mutual understanding: On the one hand, regardless of environmental decay or some irreparable
This chapter extends the green economy analysis from the environmentalist community has been critical consequence; and restrictive- punitive legislation
the national to international level with a primary focus towards free trade and wary about the effects of a ostensibly for environmental protection, but which is
on trade, but also covers foreign direct investment and more open trading system on the environment. On the certain to restrict trade and punish foreign traders
technology transfer. By way of globalisation of economic other hand, the trade community has been concerned — while affording disguised protectionism to
activities in the past decades, trade has become an that environmental protection would be utilised as a domestically-based transnational corporations. The
ever greater and more important part of economic disguised means of market protectionism. As Copeland two ends of this continuum have drifted further apart,
activity. This makes it also increasingly relevant from an and Taylor (2004) note in their review on Trade, growth and in doing so have created more grey areas in the
environmental and green economy perspective. and the environment, “The debate has often been widened spectrum between them.”
unproductive because the parties differ greatly in their
The chapter is organised as follows. Section 2 discusses Nagara (1994)
trust of market forces and typically value the environment
the relationship between trade and environment, which
differently”. Nagara (1994) elaborates this point by
has been extensively researched 1. Section 3 explores Nevertheless, the research interest on the interlinkages
stating that….
the relationship between trade and green economy, between environment and trade since the 1990’s has
“The debate over linkage between trade and the contributed to a better understanding of the channels by
1 See, for example, Copeland & Taylor (2004) for an overview of literature on the
environment continues unabated. The entire complex which trade liberalisation and economic growth affect
environmental consequences of economic growth and international trade. the environment. An example of this interlinkage can

be seen, for example, by the so-called Environmental Third, the technique effect refers to the change of environmental resources) and outputs produced
Kunet Curve proposed by the early economic literature, production methods due to a change in trade policy, (including pollution and waste). In turn, the structure
that have been relativised over time (see also Copeland such as trade liberalisation. As such, the technique of economic growth is a function of many factors, not
and Taylor 2004). In the analysis on the effects of the effect may lead to emissions falling as a result of trade least a country’s institutions and policies, including
North Atlantic Free Trade Agreement, Grossman and due to driving forces such as technology transfer and those related to the environment.”
Krueger (1991) identified three separate mechanisms technology diffusion. The technique effect is linked to the
by which trade (and foreign investment policy) Environment Kuznet Curve argument, which Grossman When it comes to fisheries, forests, wildlife and other
affects environmental factors: scale, composition and and Krueger (1991) explain as follows: “if trade ecosystem and biodiversity benefits research has
technique: liberalization generates an increase in income levels, indicated that trade is unlikely to be beneficial (see
then the body politic (voters) may demand a cleaner e.g. Bulte and Barbier 2005), and can sometimes have
“A reduction in trade barriers generally will affect the environment as an expression of their increased national irreversible effects on the sustainability of natural capital
environment by expanding the scale of economic wealth.” (Copeland, 2012). unless issues like the lack of secure
activity, by altering the composition of economic property rights and good governance are addressed,
activity, and by bringing about a change in the Over time, trade and environment have increasingly (Fischer, 2010) However, trade in environmental goods
techniques of production.” been understood in a synergetic, rather than solely and services may support environmental protection
opposing force. Some of it may relate back to the rise by providing producers with a greater incentive to
Grossman and Krueger (1991) of the green economy and its contribution to trade innovate. Innovations such as the possibility to sell to
First, by way of the scale effect, the expansion of flows (see below), as well as an recognition by the greater markets, as well as providing importing countries
economic activity through trade and investment trade community that environmental problems, such as with access to goods and services, such as pollution
(liberalisation) policy leads to an increase in the pollution climate change, can seriously harm trade flows. From control technology or renewable energy technology,
generated among others by expansion of transportation an environmental perspective, rather than solely framing thereby reducing environment impacts (see section
services that are linked to trade. Second, by way of the trade as a driver of environmental pressures, trade and 4). Supporters of trade as an instrument of the green
composition effect, trade impacts upon the environment trade policy have increasingly been viewed also as a economy maintain further that more efficient allocation of
by affecting the nature of economic activities in which possible tool to advance environmental sustainability. resources and higher levels of economic development,
a country specialises. Depending on whether trade This is also reflected in the 2030 Sustainable linked to trade, may free resources, which in turn be
(liberalisation) will lead a country to adopt more or Development Agenda that view trade as a means used for environmental protection and investment in
less polluting practises, this will decrease or increase of implementation for the Sustainable Development the green economy. Moreover, trade can support the
environmental impacts (in the respecting country). The Goals (see also SDG 17.1). In their joint publication, UN development of more environmentally-friendly pathways
composition effect must also consider the potential Environment and the World Trade Organisation (2018) by connecting producers of more sustainable products
export of environmental burden, where resource- acknowledge that: with new markets (e.g. certified organic products
intensive processes are shifted from the country of exported from a country with low cost supplies to a
“The impact of trade on the environment hinges region with high demand for organic products, such as
consumption to a country of production, with possibly ultimately on the “structure” of economic growth –
lower income or less stringent environmental regulation. the case for Europe or the US) (UN Environment, World
that is, the composition of inputs used (including Trade Organisation 2018). A robust trading system

also provides a stable and predictable condition for global shift to IGE will affect the trading system, and However, it must be emphasised that this may only be
innovation, which is crucial for tackling resource and what governance implications we might draw from that. viable if such policies are embedded in a sound overall
environmental challenges. Rather than focusing on the policy framework (including a supportive investment
‘if’, the more important question to ask is probably how environment, a robust IPR regime and sound domestic
trade and trade policies could and should be shaped 3.1 Trade as an instrument to support absorptive capacities). By way of opening new markets
towards enhancing the potential of trade to positively countries’ transition towards the for producers, trade can provide impetus for greater
contribute to human development and environmental investment in R&D and innovation in environmental
quality, while minimizing damages and risk. Generally, inclusive green economy technologies, thus strengthening the competitiveness of
scholars and practitioners agree, that environmental An important function of trade for economic greener industries vis-à-vis more polluting ones. This, in
policies, such as emission standards and institutional development is its ability to enhance economic efficiency turn, can help strengthen green industries in exporting
frameworks as well as the effective enforcement of by capitalising on countries’ respective competitive countries, as well as support the emergence of these
environmental rules and regulations, play a critical advantages and economies of scales, and allowing for industries in consuming countries, in addition to the new
role in making trade more environmentally friendly (UN the diffusion of goods, as well as related technologies job opportunities arising in the environmental services
Environment, World Trade Organisation 2018). The role and innovations. In many lower-income countries, sectors. In countries that still feature a weak domestic
that trade-related policies can play in enhancing the domestic capacity for producing certain environmental production capacity for environmental goods and
contribution of trade to sustainable development will goods (equipment and intermediate goods), services services, there may be trade-offs between facilitating
be outlined in some more detail in the remainder of this (technological and advisory services) and technologies green imports and developing domestic capacities
chapter. does not exist, and local production and supply might for producing environmental goods, services, and
currently not be efficient and economically viable (UN technologies (see also Section 4). In this case, a country
Environment WTO, 2018). Indeed, trade can enable might choose to align its trade and green industrial
countries to plug into value chains of production, policy strategies in a way as to advance its local
3. Trade and the inclusive green and thus specialise on particular aspects of the production capacity for environmental goods, with the
economy manufacturing process, enhancing competitiveness aim of unlocking a latent comparative advantage, while
integrating into global value chains of production (see
and efficiency. Policies to remove barriers for the import
In connection to trade, the concept of a green economy of these products, services and technologies (often also PAGE, 2017). However, a country may also decide
goes beyond the traditional emphasis on minimising through licensing), can make these products (or the to facilitate green imports, and focus on the development
the negative impacts of trade on the environment inputs for final products) available domestically at a of an environmental services economy. The debate
and maximising the positive impacts such as efficient low cost, as well as facilitating knowledge transfer on how much trade openness may be beneficial to the
allocation of resources and the growth of environmental and technology diffusion (Altenburg, T., & Assmann, environment but also to the economic competitiveness
goods and services. Instead, it focuses on how investing C. (Eds.), (2017)). This can therefore support of a particular country has also played an important role
in the environment and IGE as a whole can contribute to environmental protection in the country of consumption, in the evolution of international negotiations, such as the
trade and, by extension, broader SDGs, and how trade as well as R&D contributing to efficiency improvements Environmental Goods Agreement (EGA), as we will see
can support the transition to green economies. Inversely, of these technologies. in Section 4.
the discussion also includes consideration of how the

3.2 How investment in the inclusive green – they are either under-priced, not internalised and thus
economy affects trade Box 12.1: Electric cars: international not accounted for by those responsible for them, or
their essential functions entirely disregarded by market
As a result of the structural impacts that arise from the
trade and market growth forces.
green economy transition, the global landscape and Sales of electric cars hit a record of over 750 thousand worldwide
patterns of trade have been evolving and will continue

in 2016. China was by far the largest market, accounting for more As the OECD (2019) also observes:
than 40 per cent of electric cars sold globally. In 2016, Tesla’s vehicle
exports (from the US) to China tripled to exceed a value of US$1 billion,
to do so. This may be true in several distinct ways: accounting for 15 per cent of the company’s global sales. Experiencing “The impact of trade liberalisation on a country’s
First, with the green economy transition, the share of rapid sales growth in China while facing a tariff at 25 per cent, Tesla is
welfare depends on whether appropriate
now planning to invest billions of dollars (US) in a production facility in
fossil fuels in global trade is expected to decline, thus China. environmental policies are in place within the country
reducing the ‘carbon content’ of trade in the long run. in question (e.g. correctly pricing exhaustible
In the meantime, the Chinese Government introduces an ambitious
This impact is likely to be stronger for coal and oil, as policy aiming to encourage the local production of electric vehicles, environmental resources). Stringent environmental
as well banning sales of fossil fuel-based cars. Similarly, France and
international demand may remain high for natural gas, Germany have policies in place to support the take-up of electric policies are compatible with an open trade regime
which is generally considered ‘clean’. Second, the vehicles and many of the world’s leading car brands home to those
as they create markets for environmental goods that
countries, including Renaud- Nissan, BMW or Mercedes, have started to
share of environmental goods and services in trade is invest in R&D of electric vehicle technology. However, with the departure can subsequently be exported to countries that follow
expected to rise, reshaping the global landscape of from the fuel-based automotive sector, in which barriers of entry for new
suit on environmental standards – the so-called first-
players were extremely high, this change of technology may reshuffle
production, consumption and trade. Thirdly, with the the cards of who will stay relevant in the clean automotive sector of the mover advantage. This is especially true for complex
future.
rise of major green products and the decline of polluting technologies such as renewable energies.”
ones, international competitiveness is being redefined.
The changes taking place in the global automobile From this perspective, environmental regulation can
industry are illustrative of transformative processes be seen as mechanisms to reduce market failures
underlying assumption that the choice of rational actors
linked to the transition to green economies (See also Box and increase economic efficiency, which contributes
in a free market will always lead to the best possible
12.1). to economic development and supports global
outcome, and that changes thereof, including by way of
public goods like environmental quality. However, for
How do these new patterns of trade, which will depend regulation, can therefore only be ‘second best’ outcome.
environmental and trade regulation to work in sync it will
on the implementation of green economy policies, affect require strong cooperation between decision-makers in
However, it has since been widely acknowledged that
economic growth and development? Opinions on this the environment and trade domains: global economic
the neoclassic economic approach has traditionally
vary greatly, depending on the basic assumptions of governance and global environmental governance
inadequately considered environmental and social
different academic schools of thought. For example, both affect the volume and dynamism of international
factors. The basic assumption of neoclassic economic
from a neo-classic economic perspective, the regulation trade and investment in green goods and services.
theory, such as a perfectly functioning market, never
of trade flows (the same as any type of regulation Their co-evolution and interaction shape the dynamic
hold true as such in reality, due to the existence of
and interference with free market forces) may have a institutional context of an international green economic
market failures. Indeed, according to this school of
negative impact upon economic growth and thus lead transition.
thought, environmental problems itself can be seen as
to an overall welfare loss by hindering the efficient (or
a market failure, as environmental costs and benefits
‘optimal) allocation of resources. This stems from the
are not being valued and assigned in a correct manner

This also applies to the impact of environmental policies transparency and thus competitiveness of international one treaty of international law, might infringe a country’s
on international competitiveness, again affecting trade. obligations in another. To navigate potential conflicts
international trade (Copeland, 2012). Generally, the between trade and other areas of policymaking, GATT
discussion points to the importance of ensuring a level Whereas the establishment of the General Agreement Article XX on General Exceptions lays out a number of
playing field between countries, thus making the case on Tariffs and Trade (GATT) in 1948 preceded the rise instances in which WTO members may be exempted
for the importance of international cooperation in the of environmental governance at the international level, from GATT rules, including, for example, reasons linked
field of environmental governance and the alignment sustainable development had already established itself to environmental policy. Similar exceptions can also be
of trade policies with environmental objectives (UN as a central principle of international affairs at the time of found in a number of other WTO agreements (see box
Environment, World Trade Organisation 2018). the negotiation of the Marrakesh Agreement in 1994, to 12.2). Legally, this can exempt Member States from
establish the WTO. This is also reflected in the preamble their obligations under WTO law, in line with the criteria
to the Marrakesh Agreement (WTO 2019): of Art XX, thus providing Countries with the necessary
3.3 The world trading system and the “Recognizing that their relations in the field of trade policy space to legislate on national level. Put bluntly,
inclusive green economy and economic endeavour should be conducted this shall enable WTO Members to put in place policies
(....) while allowing for the optimal use of the world’s to protect the environment (among others), even though
The world trading system consists of organisations, resources in accordance with the objective of such a policy may violate a commitment under WTO law.
agreements and rules at multilateral, regional and sustainable development, seeking both to protect However, rather than providing countries with a blank
bilateral levels. At the heart of the multilateral trading and preserve the environment and to enhance the check for violating their commitments under WTO law,
system is the World Trade Organisation (WTO), which means for doing so in a manner consistent with their invoking Art. XX relies on a number of conditions, and
was established in 1995 as the successor of the GATT respective needs and concerns at different levels of has been used in a quite restrictive manner in the past.
to “develop an integrated, more viable and durable economic development.“ Despite this, its scope has changed over the years, as
multilateral trading system”, which encompasses “the we will touch on below.
General Agreement on Tariffs and Trade, the results of The text of the WTO therefore enshrines environmental
past trade liberalisation efforts, and all of the results of protection as one of the organisation’s core objectives. The text of the GATT and other WTO Agreements has
the Uruguay Round of Multilateral Trade Negotiations” However, the WTO mandate is generally restricted to not been modified since these agreements entered into
(WTO 2019, Marrakesh Agreement establishing the the advancement of advance trade-related issues, force. However, through jurisprudence, the interpretation
WTO). A wide range of multilateral agreements have similar to the environmental conventions, which cover of provisions of the agreements, including Art XX (Art
been negotiated and signed by the 164 WTO members, solely environmental issues. This makes it challenging 20), have evolved over time. Overall, decisions by the
which represent the bulk of the world’s trading nations. to address crosscutting topics at the interface of WTO Dispute Mechanisms have provided succinctly
Generally, States enter into trade agreements to advance environment and trade. more space to environmental-policy related matters
trade openness, and assure equal treatment and non- over time. Nevertheless, critics maintain that the current
Of course, policies in one area such as trade, can framework still does not provide sufficient policy space
discrimination between different trading partners, and
affect other policy areas, such as the environment. and clarity for States to put in place necessary measures
domestic and foreign companies. Trade regimes also
Hence, policies conducted by a country to advance to protect the environment and advance the green
serve an important role in promoting predictability,
national objectives and/or fulfil its obligations under economy. To explore how the negotiation of new rules

resolve disputes between countries effectively based overfishing, overcapacity, and IUU (illegal, unregulated,
Box 12.2: WTO agreements & on clearly-defined rules. Such a dispute arises when and underreported) fishing, as well negotiations on the
a WTO member State believes WTO another member liberalisation of Environmental Goods and Services.
environmental protection State is violating an agreement or a commitment of the
WTO. Among these disputes, there have been disputes The regulation of fisheries subsidies, as a trade-related
• General Agreement on Tariffs and Trade (GATT). Article XX of the
GATT on General Exceptions specifies two exceptions that are between two WTO Member States that concerned issue of environmental concern, has been on the WTO
relevant for the protection of the environment. WTO members may
environment-related measures, including a growing agenda for decades. A large portion of the subsidies
adopt policy measures that are inconsistent with GATT disciplines, but
necessary to protect human, animal or plant life or health, or relating
number of cases related to green products, such as provided by States to their fisheries, are problematic
to the conservation of exhaustible natural resources.
solar panels. These cases also point to the increasing from an environmental point of view, because they
• Agreement on Technical Barriers to Trade (TBT) (1995). The TBT
economic importance of the Environmental Goods lead to overcapacity (too many fishing boats fishing
Agreement deals with technical regulations and standards and
aims to ensure that they do not create unnecessary obstacles industry. As a result, potential violations of WTO law for the same fish), leading to overfishing. From a trade
to trade. At the same time, it recognises WTO members’ right to
through national policy measures such as support perspective, fisheries subsidies are considered trade-
implement measures to achieve legitimate policy objectives, such
as the protection of human health and safety, or protection of the
measures provided to the national industry, are more distorting, thus obstructing several WTO principles, such
environment. The TBT Agreement strongly encourages members
to base their measures on international standards as a means to likely to be scrutinized by other WTO Member (PAGE, as trade openness and non-discrimination. Abolishing
facilitate trade.
2017). environmentally harmful fisheries subsidies is thus
• Agreement on Sanitary and Phytosanitary Measures (1995). This considered a true ‘win-win-win’ topic – as it counters
agreement entered into force with the establishment of the WTO on What makes trade law relevant from an international trade distortions as well as overfishing and supports
1 January 1995. The agreement addresses the application of food
safety and animal and plant health regulations. law perspective, and different to most other areas economic development and social equity. As a result,
international law, is that its decisions are binding and and at the initiative of several WTO Member States
enforceable by way of dispute settlement procedures that founded the ‘Friends of Fish’ group, disciplining
and credible enforcement mechanisms. This gives environmentally harmful fishery subsidies has been on
at the trade and environment interface is unfolding trade law ‘teeth’, that most other areas of international the WTO agenda for decades, and is currently being
at the WTO, the following section will introduce the law cannot rely on. From an environmental perspective, negotiated with full intensity at the time of writing this
WTO dispute settlement procedures and two central using trade and trade law as a tool to advance chapter, with an agreement envisioned for the 12th WTO
environment related negotiations at the WTO. environmental objectives can therefore be seen as an Ministerial Conference, in 2020.
attractive option. This is possible whenever an issue
lies within the competency of the WTO, which means The negotiations on the Environmental Goods
The WTO dispute settlement procedures and the that it is trade-related and advances one or several Agreement (EGA) can be considered one of the
environment guiding principles of the WTO such as openness, non- central environmentally relevant trade negotiations
discrimination, or transparency. In order to make this at the WTO in the past decade. The goal of those
Since the establishment of the WTO, resolving trade negotiating the EGA, is to eliminate tariffs for a range of
more tangible, the next section will zoom in on two
disputes has become one of the core activities of the important environment related products, including those
negotiations of particular relevance from an environment
organisation, as over 500 disputes have been brought to generating clean and renewable energy, improving
and green economy perspective: the WTO negotiations
the WTO and over 350 rulings have been issued (WTO energy and resource efficiency, controlling air pollution,
to prohibit subsidies to fisheries that promote
2019). WTO’s dispute settlement mechanisms can help

managing waste, treating waste water, monitoring the quality of the
environment and combatting noise pollution (see also section 4).
Whereas the fisheries subsidies negotiations are still ongoing, EGA
negotiations have stagnated and, at the time of writing this publication,
were discontinued. The difficulties of reaching an agreement reflect
the complexity of finding a consensus at the multilateral level when it
comes to trade and environment related issues, a topic which will be
analysed in further detail in Section 4.
Environmental provisions in Preferential Trade Agreements

(PTAs)
Facing a stagnation of trade negotiations at the multilateral level,
countries have increasingly turned to negotiations at the regional
and bilateral level outside of the WTO. Regional Trade Agreements
and Free Trade Agreements (RTAs and FTAs), Preferential Trade
Agreements (PTAs), economic partnerships and other arrangements
aiming at trade liberalisation have grown substantially in the Figure 1: Environmental provisions in Preferential Trade Agreements (PTA’s) (DIE and Universiy of Leuven 2017)
past 10-20 years (see figure 1 below). More recently, RTAs have
increasingly taken up environmental and sustainable development
related considerations as part of the text of the agreement (Berger,
et al., 2017). This may be seen as a reaction to concerns raised in the past over the provisions, and the incidence of more substantive provisions rose from around 30% in
environment impacts of RTA’s but may also signal that trade policy is increasingly 2010 to 70% in 2012 (George, 2014).
understood as a tool to advance environmental objectives (UN Environment & WTO
2018).
3.4 Enhancing synergies and addressing potential conflicts
Environmental provisions in trade agreements can take many different forms, including:
a reference to the environment in the Preamble of the Agreement; the use of exceptions As we can observe from the cases above, the world trading system may support
based on GATT Article XX or GATS Article XIV; for the protection of human, animal and countries’ transition to green economies in various forms, including through their
plant life; a commitment to uphold environmental law and not weaken it to attract trade function to support transparency, by facilitating and regulating trade. However, critics
or investment; more substantive environmental provisions; and associated ex ante note that areas of conflict remain and that trade institutions, notably the WTO, are still
impact assessments. A review of environmental provisions in regional trade agreements too slow to incorporate environmental considerations, and to adapt their rules and
shows a steady increase in the number of agreements that include environmental frameworks accordingly.

As explained earlier in this chapter, the WTO framework be necessary going forward (see also UN Environment
allows members to impose trade restrictions to achieve Box 12.3: Restrictive trade practices & WTO 2018). The following section zooms in on the
legitimate policy objectives, which also include Environmental Goods and Services (EGS) negotiations
Some commentators have pointed to the trade restrictive effects resulting
environmental objectives. However, diverging opinions from the application of excessively high and punitive duties in the clean at the WTO, demonstrating some of the complexities
exist on whether these ‘exceptions’ granted to the energy sector in recent years (UNCTAD, 2014). This has also triggered encountered in this process.
momentum for retaliatory patterns of use of these measures in the clean
application of WTO law are indeed broad enough energy technology space.
to cover policy measures necessary to achieve This occurred, for example, in the case of the US countervailing duties
the transition to truly sustainable IGE. Many policy targeting China between 2007 and 2012. China challenged several such
measures relevant to the green economy transition are, duties and took the case to the WTO. In 2014, the WTO Appellate Body
found US duties inconsistent with WTO law. China then, in 2016, went 4.
Liberalising trade in
by definition, aimed at both transforming economic
structures, and thus in many instances affect trade
back to the CTO to request consultations concerning the failure of the US
to implement recommendations and rulings. The dispute is still ongoing. environmental goods and
and competitiveness in ways not covered by the (Source: PAGE, 2017) services
exception clause Art. XXX. Green industrial policies
(see also Chapter 4) are a case in point for this: this The liberalisation of trade in EGS has been one of the
policy approach shall serve to advance environmental main topics linking green economy and trade at the
between the two areas remain. This is resulting in legal global level. The EGS industry has been rapidly growing,
as well as a country’s economic objectives (and with
and political uncertainty on various topics, such as the driven by its rising economic importance, which has
that a country’s competitiveness in international trade).
legality of border tax adjustments under WTO law (see been supported by increasingly stringent environmental
An example can be the provision of subsidies to a
also Holzer 2014, or Pauwelyn 2013), or the possibility policies and enhanced environmental awareness.
country’s renewable energy. Such policies are usually
of differentiating products based on their process and Liberalising and facilitating trade in EGS is expected to
not permissible under the WTO framework and not
production methods (PPM) under WTO law (see also further boost the growth of this important industry.
covered by Art. XX. From a trade perspective, this is
Eisen 2019, Sifonio 2018, or Ziegler 2017).
important in order to avoid environmental policies being This means that tariff and non-tariff barriers to trading
used as covert protectionism. In practice, however, A stronger cooperation among the environment and EGS are reduced, which is expected to enhance their
green economy relevant policies are working on the trade community would help to clarify many issues overall trade volume, thereby making them more widely
interface of the economy and the environment, and a at the interface of environment and trade, enhance and cheaply available. Major negotiations have been
clear differentiation of policy objectives is problematic. synergies and avoid possible conflicts. A closer working taking place both at the multilateral level, in the context
In recent years, the clean energy sector has been an relationship between trade, environment policy makers, of Environmental Goods Agreement (EGA) of the WTO,
important case in point for this, often in the context of and global institutions would also help to establish a and at the regional level within trading blocks, such as
import restrictions imposed by States, also to react to vision on the role of trade for sustainable development, the Asia Pacific Economic Cooperation (APEC).
perceived unfair support provided by the importing and how it may best be employed as an instrument to
countries to their industry (See also Box 12.3). advance countries’ transition to IGE. The enhanced
cooperation between UN Environment and the WTO,
As the interaction between environment and trade has
proclaimed in 2018, can be considered an important
not been addressed in a systematic manner, gaps
step in this direction. However, many more steps will

4.1. Trends and drivers of global EGS trade
Global trade in EGS, most notably Environmentally
Sound Technologies (ESTs), has increased by over 60%,
from US$0.9 trillion in 2006, to US$1.4 trillion in 2016
(UN Environment 2018). The most traded environmental
goods include renewable energy technologies,
wastewater management and water treatment, solid and
hazardous waste management, and products related to
air pollution control.
Also, the involvement of developing countries’ in
the world trade of environmental goods has been
growing. Driven mostly by BRIC countries, the value
of environmental goods
Key term: exports from developing
BRIC countries countries’ has doubled
This term is used to describe the four
nations of Brazil, Russia, India, and
between 2006-2016.
China. The acronym was first used in Yet, the majority of less
2001 by Jim O’Neill. It was used to
group together the four nations that
developed economies,
were believed to be in the same stage especially least
of economic development. However, developed countries
it wasn’t until 2009 when the coun-
tries’ leaders created a summit. Then, (LDCs), do not yet fully
the following year it became a formal participate in the trade Figure 2: Exports of environmental gooda 2001-2007 (US$ billion) OECD list (source: UN Environment 2018.
institution. Adapted from: http://world-
populationreview.com of these products (UN
Environment 2018),
which can be linked to various factors including effective between a country’s regulatory stringency and its incentives has helped the country enter rapidly into high-
domestic markets or sound productive capacity (see international trade in EGS. For example, South Korea has end, low-carbon industries (Shim et al., 2009).
also Box 12.4). applied a selective and targeted policy approach that
focuses on reducing greenhouse gas emissions of its Many developing and emerging economies are at the
Studies suggest that environmental regulation is a major industrial sector by providing incentives to industry for early phase of market development, which requires
driver for the development of a domestic market for EGS, developing 1) green technologies and products, and 2) significant government investment in environmental
as well as domestic productive capacity. A study by public policy tools to increase awareness and demand infrastructure for goods and services, such as waste
the OECD (Sauvage, 2014) that addresses conceptual for these green products. The introduction of policy and wastewater. A strategic political framework, which
and empirical evidences point to a positive relationship accounts for environmental, economic, industrial

and trade policies can help put in place measures EGA will benefit all WTO members (WTO, 2014). Some
to advance a country from an early stage of market negotiators also mentioned that a two-phase approach Box 12.4: A holistic approach to help
readiness in EGSs to a more mature phase, while, at would be applied, which is to firstly negotiate on a wide
the same time, improving environmental outcomes, range of products for tariff reduction purposes, then to
developing countries further harness
competitiveness and economic development. Green tackle non-tariff barriers (WTO, 2014). trade opportunities in Environmentally
Industrial Policies can play an important role in this Sound Technologies.
respect (PAGE 2017, UN Environment 2018). For those countries that have already built a
significant EGS industry, facilitating the export of those • Many developing countries, especially LDCs, have not been able to
develop effective domestic markets or sound productive capacity
products and services can bring important economic for ESTs. To address this, a holistic approach is needed including
opportunities. An analysis conducted by the EU research and data capture, awareness raising, capacity building, and
4.2 Liberalisation and facilitation of the negotiation team demonstrates that the successful
policy coherence at national, regional and global levels.
EGS trade conclusion of the current full WTO EGA list can bring a • A better data system would need to ensure environmental credibility
of defined ESTs, address the issue of dual-use, improve classification
Key negotiations for liberalising and facilitating trade EUR 21 billion increase for global trade (Monkelbaan, of environmental services, capture the relationship between
environmental goods and services, and promote standardisation and
in EGS have been taking place at the multilateral 2017). Various studies show that a more liberal trade harmonisation of data collection.
level. In the WTO’s Doha Ministerial Declaration in in EGS may also benefit countries that currently do not
• At the country level, policy measures could be taken to promote and
2001, members agreed to the reduction, or if deemed have a sufficiently high level of production and services encourage trade and investment in EST sectors, build productive
appropriate, the elimination of tariff and non-tariff barriers capacities (Bucher et al. 2014), if embedded in a capacity, improve the skills of the labour force, ensure coherence
between environment and trade policies, and effectively assess
to EGS. However, due to the stall of the Doha round, holistic approach policy-making (see also box 12.4). impacts of EST trade based on comprehensive sustainability
assessments.
negotiations were not finalised. Taking up this issue later, However, some countries have expressed concerns that
14 WTO members released a joint statement in Davos liberalising the trade of these goods and thus facilitating Source: Entirely based on UN Environment (2018), Key findings
on 24 January 2014 and pledged to launch negotiations the import of EGS would make their own industry less
to liberalise global trade in environmental goods. The competitive or might hinder them from developing such
Environmental Goods Agreement (EGA) negotiations an industry in the future, which may partially explain their
hesitance to engage in negotiations. and soil, as well as problems related to waste, noise
were then formally launched on 8 July 2014 in Geneva and eco-system”. This includes cleaner technologies,
The EGA is a plurilateral agreement, which means that Besides concerns over competitiveness, the products, and services that reduce environmental risk
it is covering a group of WTO Members, rather than all negotiations on the EGA have been slowed down due and minimise pollution and resource use (OECD &
members of the WTO. WTO Member States negotiation to technical difficulties. One such difficulty has been on Eurostat, 1999). However, some countries have adopted
participants have grown to 18 by 2018, representing 46 what can and should be considered an ‘environmental’ a definition based on their own scope and criteria. For
WTO members and accounting for 86% of the global good (or service). According to the definition proposed example, Canada, Japan and the United States have
trade in environmental goods. Negotiations are in theory by Eurostat and OECD (1999), the environmental adopted a broad definition, thus encompassing a wider
open to all WTO members and outcomes will extend to goods and services industry consist of “activities which range of goods; while Italy, Germany and Norway’s
all WTO members on a ‘most favoured nation’ basis. This produce goods and services to measure, prevent, limit, definitions are rather narrow and focused on pollution
means that tariff reductions negotiated as part of the minimize or correct environmental damage to water, air

prevention activities and related commercial services
(Vikhlyaev, 2004). Box 12.5: APEC: a leader in liberalizing level, these ex-out categories must be translated to the level of tariff lines in
national tariff schedules, which is the way traded goods and the respective
Nevertheless, making this definition work in practise trade in environmental goods and services tariff that applies to them, is organized on national level. As these are not
harmonised internationally and look very different in each country, they do not
has proven more complex than it may appear at The APEC group of States has been a leader in the liberalisation of EGS form part of the negotiations. In the APEC example, APEC members chose
different approaches towards implementation on the national level: Some
first sight. One such complexity is that many ‘green’ trade. Through its Early Voluntary Sector Liberalisation (EVSL) initiative
countries, including Brunei Darussalam and Chile simply reduced tariffs for
launched in 1997, APEC aimed to obtain more favourable tariff treatment
products have dual or multiple uses. For example, a among APEC member economies (Sugathan, 2013). In Sydney 2007, APEC all tariff lines corresponding to the 54 HS product categories. Most countries
leaders made a commitment to clean and sustainable development and however identified the corresponding tariff lines for all ex-outs within the 54
‘green good’ traded on preferential terms may equally launched an action agenda including promoting the development of EGS HS product categories. As this will result in a broader list of goods to be
liberalised than specified in the ex-outs, Mexico chose to create new tariff-
be used for a ‘brown’ activity. Similarly, it is difficult to sector, and in 2009, endorsed the APEC EGS work programme. During its
lines that are identical with the ex-out categories. Korea and China again
meeting in 2011, APEC leaders agreed to voluntarily reduce the tariff to no
define what products may qualify as ‘greener’ than more than 5% on a list of environmental goods to be released in 2012 by the implemented tariff reductions for parts of already existing national tariff lines.
others, as environmental performance standards end of 2015 (APEC, 2011, 2012a
The endorsement of the APEC list marks the first multilateral tariff-cutting for
change frequently. Taking into account innovation and To specify the list of environmental goods that were found in 54 HS codes or environmental goods. Although the APEC list of environmental goods is only
product categories, the APEC further specified the environmental goods they for APEC members, they represent nearly 60% of world trade flow in those 54
technological advances, at what level should a more targeted within the HS codes, naming this specification a so-called ex-out. To sub-headings in 2011. According to APEC sources (APEC, 2012b and APEC,
2015), this could boost a US$500 billion global industry towards supporting
efficient product be deemed an ‘environmental’ product implement these international categories into tariff reduction on the national
job creation and economic growth in the region.
and granted with lower tariff levels? For this reason, Lim
(2017) and Cosbey (n.d.) suggested that a technical
and scientific advisory body is needed to provide
assessment and adjustment to what is considered successfully agreed on a voluntary reduction of tariffs on been brought into the discussion and negotiation yet.
an environmental good to ensure the environmental environmental goods can serve as an illustration on how In addition, environment services, such as renewable
credibility of a list of goods and services that are to practically address this issue (Box 12.5). energy equipment maintenance, is another area that not
categorised as EGS. yet explored.
However, as also a survey by Environmental Business
The second major technical difficulty lays in the way that International from 2013 demonstrated, tariffs are
major trade agreements classify goods: Major trade not one of the top concerns of companies active
agreements are based on the Harmonized Commodity
Description and Coding System (or the “HS” code) (UN
in environmental industries worldwide 2. However, 5. Foreign direct investments &
many studies indicate that non-tariff barriers such
Trade Statistics, 2017). These so-called subheadings, as countervailing duties and anti-dumping policies inclusive green economy
or HS codes, are used as a harmonised classification significantly influence trade in EGS. The APEC list, as
system for goods traded internationally, using a six- Shifting to a green economy relies on substantial
well as the EGA, however, focus on the reduction and
digit code. However, there are no HS codes on the investment in green sectors, such as energy efficiency,
elimination of tariffs only; non-trade barriers have not
international level that correspond to ‘environmental renewable energy generation, green transport and low-
goods’. The absence of a category for environmental carbon construction and production. In addition to
goods that is harmonised internationally makes 2 More information please refer to: ICTSD (2014), A conversation on green goods
domestic financing and investment, foreign investment
negotiations difficult. The APEC group of states that have trade with Ronald Steenblik and Grant Ferrier. Biores, Volume 8-Numer 1. Available can help to leverage additional financial resources from
at: https://www.ictsd.org/bridges-news/biores/news/a-conversation-on-green-goods-
trade-with-ronald-steenblik-and-grant-ferrier
abroad. This may involve commercial but also non-

creation; and various indirect effects via demonstration
Box 12.6: Multilateral funds and climate and spillover effects.
adaptation; technology transfer and capacity building; energy, transport,
finance industry, agriculture, forestry and waste management; and economic
diversification.
In this context, an appropriate degree of openness
Climate finance draws from public, private and alternative sources of to foreign investment, therefore, is important for
• Adaptation Fund (AF). The AF was established in 2001 to finance climate
financing at various levels. Article 9 of the Paris Agreement stipulates
change adaptation projects and programmes in developing country fostering the development of green service and
that developed country parties shall provide financial resources to assist
developing country parties with respect to both mitigation and adaptation, parties to the Kyoto Protocol that are particularly vulnerable to the adverse manufacturing industries (see also PAGE 2017,
while other parties are encouraged to provide or continue to provide effects of climate change. It is financed with a share of proceeds from
such support voluntarily. At the multilateral level, several funds have been the clean development mechanism project activities and other sources Chapter 2 on ‘border measures’). Depending on the
of funding. The fund is supervised and managed by the Adaptation Fund
established for environmental issues in general and climate change mitigation
Board.
sector, different contractual modalities and models of
and adaptation in particular:
cooperation between the private and public, domestic
• Green Climate Fund (GCF). The GCF was established at UN Climate
• Global Environment Facility (GEF). The GEF was established to help tackle Change Conference held in Cancun in 2010 as an operating entity of and foreign players may be useful. This may include
environmental problems on the eve of the 1992 Rio Summit. It serves as a the financial mechanism of the UNFCCC. Governed by the GCF Board, public-private partnerships (PPPs) in the forms of
financial mechanism for 5 major international environmental conventions: the fund seeks to promote a paradigm shift to low-emission and climate-
the UNFCCC, the UN Convention on Biological Diversity, the Stockholm resilient development. When the Paris Agreement was reached in 2015, build-own-operate (BOO), build-own-transfer (BOT)
Convention on Persistent Organic Pollutants, the UN Convention to the fund was given an important role in serving the agreement and
Combat Desertification and the Minamata Convention on Mercury. For supporting the goal of keeping climate change well below 2 degrees
or concession arrangements. In some cases, support
climate finance, the GEF has been entrusted to operate the Special Celsius. measures from the host State may also be linked to the
Climate Change Fund established in 2001 to finance projects relating to
requirement to invest in the local economy (see also
PAGE 2017). Making FDI work for the recipient country
will only be successful however, if a coherent legal and
commercial sources, such as official development aid. interest in and control over an enterprise in another regulatory framework, transparent public decisions
Investment from several multilateral funds also plays an country (UNEP Inquiry, 2017). and a commitment to green economy and sustainable
important catalytic role in areas such as climate finance development are in place. The appropriate use of
(Box 12.6). Beyond its function of providing foreign capital, FDI can International Investment Agreements (IIAs) can play an
also support technology instrumental role in this respect (See also Box 12.7).
The need for additional sources of finance arises as Key term: and knowledge
Spillover effects
emerging green products, sectors, and economic The beneficial effects of new techno- transfer and facilitate
activities are often considered ‘high risk’ investments logical knowledge on the productivity foreign market access
by traditional banks. In addition, financial sectors that
and innovative ability of other firms
and countries. Adapted from: https:// (UNCTAD, 1999). This 6. Green technology transfer and
specialise on high-risk investments, such as venture promotes green industrial
capital and private equity, are not fully developed in
www.igi-global.com
policy efforts of countries
knowledge flows
many countries. In such cases, foreign investment, in multiple ways: strengthening local production or Diffusion of green technology and knowledge transfer
including foreign direct investment (FDI) may fill this gap. delivery of green goods and services; access to is vital to a global transition to the green economy.
FDI is an investment by an individual or multinational foreign capital and technology, which are crucial for A challenge that many less industrialised countries
enterprise of one country that establishes a lasting the development of green industries (section 2.3); encounter is a lack of sufficient innovative capacities and
employment and human resource development; value ability to invest in R&D in advanced green technologies.

within which countries specialise on particular aspects of
Box 12.7: International investment production. For highly industrialised countries currently Box 12.8: Green technology transfers
leading on the production of green technologies, access
agreements to green tech, as well as the development of their green • Imports of goods and services. Advanced green technologies
are ‘embodied’ in machinery, equipment and components that are
International Investment Agreements (IIAs) are treaties between States manufacturing sector only functions in a context of transported from one country to the other. They may be subsequently
to promote and protect foreign investment under international law. By
concluding IIAs, capital-exporting countries (home States) aim to offer extensive trade relations. However, technology transfer ‘disembodied’ via demonstration or training. Together with imports
an additional layer of protection to their domestic companies investing of relevant services, such as technological and advisory services,
abroad, while capital importing countries (host States) aim to attract
is more than the import or export of goods. important knowledge can be transferred and utilized.
additional foreign investment to their economy. Over 2,500 IIAs are
• Technology trade and licencing. Technologies can be traded
currently in force. One may identify three basic ways through which a firm between countries through the exchange of intellectual property
However, promoting foreign investment through techniques such as can transfer its technology abroad: export products and rights (IPRs), the outsourcing of technical services, international R&D,
licensing and to some extent franchising. Among them, licensing
investment contracts, domestic investment laws and, above all, IIAs, services to a foreign market, license its technology to stands out as a major mode of international technology transfer.
has come under much criticism in recent years as a result of the surge
in disputes brought by foreign investors against host countries. This has a foreign firm, and investing abroad. These represent From the perspective of the licensee, the decision to obtain a licence
been the case as the way many IIAs are designed at present overlook depends largely on the size and growth potential of the domestic
the importance of environmental and social considerations. Moreover,
major processes of cross-border transfer of technology. market for the green products. For the licensor, market growth is
also a major determinant for achieving a royalty that is sufficient
in their present form and operation, IIAs may restrict the ability of States Various channels of green technology transfer function in to compensate the risks, such as technology leakage and reverse
to implement enabling policies. In response, more recently concluded
‘third-generation treaties’ increasingly make reference to environmental different manners, as illustrated in Box 12.8. engineering of proprietary technologies.
provisions in the text of the agreement.
• FDI and technological spillovers. FDI is a major means of
These channels of green technology transfer do not international transfer of technologies, including for such soft ones
However, going a step further, institutions such as PAGE argue that IIAs
should be designed in a way as to support countries’ transition to IGE by happen automatically. To describe the necessary as managerial expertise, marketing skills and knowledge of export
promoting sustainable investments vis-à-vis investments in the so-called markets. In addition, technologies can diffuse to a wide range of
‘brown’ economy. This would require IIAs to be drafted, designed,
conditions that are required for technology transfer to domestic firms from foreign affiliates, both vertically and horizontally.
Technological and knowledge spillovers take place through
interpreted and applied in a way as to facilitate investments contributing take effect, the term ‘absorptive capacity’ has been demonstration effects, labour turnover and linkages to domestic
towards the green economy, as well as regulating and potentially
excluding unsustainable investments from investor protection under the coined (see also Zahra and George 2002, Griffith 2003). firms, especially those in upstream activities (UNCTAD, 2001). In the
growing market of green consumer products, for instance, domestic
terms of the treaty. Absorptive capacity thus refers to the conditions that suppliers can enhance their technological capabilities by engaging in
Based on: PAGE 2018 need to be present in order for a country to realize the the supply chain of local affiliates of Multinational Companies.
potential of cross-border technology transfer for its • Movement of people. International movement of people, in particular
the inward movement of green technology professionals and experts
own technological learning and industrial development into the country, is another channel for international transfer of green
(Assman and DIE, 2017). In addition to adequate technologies. This is related to the domestic delivery of environmental
In that case, building up national production capacity for and/or green technological services. According to the definition of the
absorptive capacities, an enabling environment for WTO, a supplier of one Member in the territory can deliver services
green technologies is challenging, as it would take more cross-border flows of technology at the macro level internationally to any other Member through the presence of natural
persons. Domestic companies relate this to the employment of
time and money to generate the same technologies is essential. For example, for attracting low-carbon foreign professionals and experts, as well as returnees. For both, the
already available in some other places. Here, technology technologies some countries have established low- international movement of people is crucial.
transfer becomes central, in particular for many carbon special economic zones, others provide
developing economies, as a way to access advanced specific incentives (UNCTAD, 2010). The effectiveness
green technologies. In reality, today, the production of and efficiency of the transfer of green technologies
sophisticated environmental technologies is organised are also affected by the national system of innovation
in complex regional or global value chains of production,

in general and the sectoral innovation system for materials, others believe that such a proposal is neither to developing countries and stimulating the transfer of
specific green products in particular. For low-income necessary or appropriate, or support a more limited publicly funded technologies will prove essential.
developing countries where the innovation systems are patent disclosure requirement at the international level.
often weak, a friendly business environment, an open
trade and investment policy framework, and a sound
education system have been highlighted as fundamental How can innovation be boosted and new environmentally 7. Conclusion
prerequisites in fostering technology transfer and sustainable technologies be adopted? How can
knowledge diffusion. speedier diffusion of these technologies be enabled to By examining the two directional relationship between
developing countries where the need is greatest? From a international trade and green economy, the chapter
Another challenge pertains to intellectual property policy-making perspective, the following points may be showed that green economy represents significant
rights (IPR) protection, particularly when it comes to made: One central factor is the strengthening of policy trading opportunities and that trade can provide an
incentivising economic activities which involve the efforts at both the national and international levels. From engine for the green transition. The role of international
use of advanced green technologies from abroad. the viewpoint of recipient countries, the efficiency and trade in this regard is closely related to other
Protection of IPR is important to foster innovation, effectiveness of green technology is affected by various international economic activities, including foreign direct
in order to provide appropriate incentive for firms to institutional and policy factors, such as environment investment and cross-border technology transfer. The
innovate. Inversely, however, an IRP system, which is too regulation, international economic policies, science, chapter demonstrated that the environmental impacts
rigid, may stifle technology transfer and technological technology and innovation policies, and IPR regimes. of trade liberalisation are contingent on a multitude of
learning. WTO’s intellectual property rules regarding These institutions and policies affect firms’ incentives to factors. Looking at international efforts to liberalize trade
those from the environmental perspective have been acquire and absorb green technologies. For example, in the areas of green goods, services and technologies,
subject to continuous debates. This has led the 2001 strong environmental regulation and enforcement are the the chapter zoomed in on the Environmental Goods
Doha Ministerial Declaration to mandate the Committee main incentives for firms to acquire new technologies Agreement negotiations at the WTO, and made visible
for Trade and Environment (CTE) to look at IPR-related (Tébar Less and McMillan, 2005) and a major predictor some of the political but also technical complexities
issues. Since then, the committee’s discussions have for environmental technology export (Sauvage 2014). that arose in the negotiation process. Concluding, the
mainly centred around the relationship between the Given the positive externalities of green and low-carbon chapter made visible that trade has a strong potential
Agreement on Trade-Related Aspects of Intellectual technologies, there is a need to strengthen international to act as a driver for a country’s transition to a green
Property Rights (TRIPS) and the Convention of Biological cooperation on R&D in specific technological areas economy, and that green economies, inversely may
Diversity. However, conflicts and diverging opinions relevant for the green economy, and to expand the strongly affect trade flows. However, policy alignment
remain: some developing countries reiterate their space for these technologies in the public domain. In and a high willingness of actors to cooperate and find
proposal on amending the TRIPS Agreement to require addition, accelerating the diffusion of those technologies common ground, overcoming technical as well as
patent applications to disclose the source of biological political difficulties, will be essential to move forward.

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Editors: Derek Eaton (Technopolis group), Fulai Sheng (UN Environment)

Language editing: Chloe Hill

Design and Layout: Altus Impact

Prof. Dr. Mohamed Ahmed Bin Fahad Prof. Wu Jiang

CHAPTER 2 : THE MACROECONOMICS OF A GREEN ECONOMY

CHAPTER 3 : NATURAL CAPITAL

CHAPTER 4 : GREEN TECHNOLOGY

CHAPTER 5 : A JUST TRANSITION TO GREEN ECONOMIES: EMPLOYMENT & SOCIAL ISSUES

CHAPTER 6 : INSTITUTIONAL REFORM FOR INCLUSIVE GREEN ECONOMIES

CHAPTER 8 : FISCAL POLICY FOR AN INCLUSIVE GREEN ECONOMIES

CHAPTER 9 : GREEN INDUSTRIAL POLICY: DIRECTING PRIVATE INVESTMENT

CHAPTER 10 : THE GREEN ECONOMY PROGRESS MEASUREMENT FRAMEWORK: A DIDACTIC

CHAPTER 11 : GREENING THE FINANCIAL SYSTEM

CHAPTER 12 : INTERNATIONAL DIMENSIONS OF GREEN ECONOMY

1. Main challenges and drivers

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.1

1.3 The ‘take-make-dispose’ model

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.2

2. The ‘Inclusive Green Economy’ model

2.1 The need for a new model

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.3

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.4

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.5

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.6

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.7

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.8

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.9

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.10

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.11

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.12

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.13

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.14

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.15

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.16

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.17

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.18

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.19

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.20

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.21

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.22

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.23

CHAPTER 1: SUSTAINABLE DEVELOPMENT & THE INCLUSIVE GREEN ECONOMY 1.24

Derek Eaton is an economist and currently principal consultant with

At UN Environment, he was an author and a member of the core production

CHAPTER 2: THE MACROECONOMICS OF GREEN ECONOMY 2.1

economy might remain in a period with less-than-full

CHAPTER 2: THE MACROECONOMICS OF GREEN ECONOMY 2.2

CHAPTER 2: THE MACROECONOMICS OF GREEN ECONOMY 2.3

CHAPTER 2: THE MACROECONOMICS OF GREEN ECONOMY 2.4

CHAPTER 2: THE MACROECONOMICS OF GREEN ECONOMY 2.5

CHAPTER 2: THE MACROECONOMICS OF GREEN ECONOMY 2.6

CHAPTER 2: THE MACROECONOMICS OF GREEN ECONOMY 2.7

CHAPTER 2: THE MACROECONOMICS OF GREEN ECONOMY 2.8

CHAPTER 2: THE MACROECONOMICS OF GREEN ECONOMY 2.9

CHAPTER 2: THE MACROECONOMICS OF GREEN ECONOMY 2.10

suitable indicators of progress, such as happiness

CHAPTER 2: THE MACROECONOMICS OF GREEN ECONOMY 2.11

CHAPTER 2: THE MACROECONOMICS OF GREEN ECONOMY 2.12