Spain is our best proof that economic crises are great for the climate; yet the ongoing troubles of the economy have much less desirable consequences for the well-being of the Spanish people
Economic recession means decreasing total production of goods and services.
Put simply, people buy less, businesses sell less, and producers produce less. A recessed economy uses less energy, takes fewer natural resources from the Earth, and does not require as much labor.
As a positive result, climate-changing greenhouse gas emissions fall. Economic downturns generally reduce the total environmental impacts associated with human activity.
On the other hand, workers are laid off, businesses fail, living standards go down, little money is available for borrowing, and government struggles to provide essential services with less tax revenue.
Currently, many climate scientists and ecological economists advocate degrowth — deliberate economic recession, by definition — in order to reduce emissions and slow atmospheric warming. These supporters of shrinking the economy essentially believe that advanced economies have grown larger than the size at which net benefits are maximized.
Let’s call this perfect size of the economy the macroeconomic bliss point. Beyond this optimal total economic output, the costs of further economic growth outweigh the benefits.
For example, using natural resources to produce energy and goods provides benefits to society, but after our material needs are met the incremental benefits of taking more resources from the Earth decrease. Meanwhile, the costs of using more and more natural resources increase as over-extraction and ecological degradation constrain future generations’ opportunities for flourishing.
Perhaps we can have negative economic growth and the consequent decrease in climate pollution without the human hardship that traditionally accompanies recession, but few economic models exist to test this possibility. Quite frankly, degrowth does not work within today’s global economic framework.
Recessions make life harder for people but they are good for nature in general. Let’s look at Spain’s interminable economic slump as an example of this conundrum.
In 2013, Spain became the first country for which wind power was the largest source of electricity generation over an entire year, according to reports from the country’s system operator Red Eléctrica de España (REE) and the Spanish Wind Energy Association (AEE). Wind accounted for 20.9 percent of power production, just edging nuclear plants for the top spot.
Total electric power use in Spain has declined three years in a row because of the country’s long-lasting recession. Less economic activity means less demand for the electricity that powers the economy.
The wind blows regardless of economic conditions, so wind power naturally accounts for a greater share of electricity generation as overall generation drops. The same can be said for solar power and other renewable technologies that rely on environmental systems rather than costly fuels to produce energy.
In general, decreased demand for electricity means that less fossil fuels burn. Thus economic downturns reduce climate pollution.
Evidence from Spain supports this hypothesis. The country’s gross domestic product — the generally accepted most important indicator of macroeconomic performance — fell 1.3 percent in 2013, according to preliminary estimates (economists and politicians typically aim for at least 2 percent GDP growth to maintain a ‘healthy’ economy). Meanwhile, the industry report from the REE calculates that greenhouse gas emissions from Spain’s electricity sector in 2013 fell 23 percent from the previous year.
In my blog post Band-Aid for a Broken Market, I detail how the global financial crisis and subsequent Great Recession derailed the EU Emission Trading Scheme by causing emission reductions for which the multinational cap-and-trade system had not planned. Clearly, economic downturns bring about decreases in climate pollution.
Yet many clean energy advocates overlook the reality that much of the decrease in carbon emissions can be attributed to economic decline. Environmental groups celebrate Spain’s record-setting wind power industry and associated emission reductions as clear-cut evidence that investment in renewable energy can in fact slow climate change.
A news article from CleanTechnica typifies the environmental community’s general misunderstanding of a shrinking economy’s influence on emissions and the proportion of power production from renewable sources: “Kudos to Spain for leading the world in renewable energy despite tough economic times.” I added the emphasis.
Granted, Spain’s renewable energy subsidies would have made wind a big factor with or without the economic recession. As Kees van der Leun, managing director of sustainable energy consultancy Ecofys, pointed out to me on Twitter, wind power output in 2013 would have been 19.6 percent of Spain’s 2008 total electricity consumption.
Over the five-year period since then, electricity use has decreased 7 percent. Had the economy grown instead of shrunk during that period, electricity consumption would likely have risen. With increasing total electricity use, it’s hard to predict what fraction of total demand would be met with wind power, since a strong economy and government incentives would drive both investment in wind projects and demand for electricity.
Now Spain plans to dramatically cut renewable energy subsidies, a move that will make returning to economic growth without causing an upsurge in carbon emissions much more difficult. Below, the fiscal reasons for such reductions in government spending are explained in more detail. Needless to say, the wind and solar industries are up in arms over the regulatory changes.1
We can’t call Spain’s economic mess a positive development just because it reduces climate-warming emissions.. They call the current situation a crisis for good reasons.
Author Jaime Pozuelo-Monfort summarizes the predicament in the Huffington Post blog: “Spain is in deep recession not only economic-wise, but from every other point of view.” He details Spain’s corrupt political parties, incompetent leaders, separatist regions, wasteful territorial structure, massive public debt, unsustainable private debt, and failing education system.
One need not look further than the shattered Spanish labor market for confirmation of the country’s calamity: unemployment hovers just under 30 percent, while the youth unemployment rate climbed to a ridiculous 57.7 percent last November. More under-25s are looking for a job than have one.
What’s more, the official unemployment percentage would be even higher, except for two details about its computation that lead to systemic underestimates of the negative jobs impact of a prolonged recession. First, unemployment rates do not include people who have become so frustrated or hopeless that they have stopped actively looking for work. And secondly, the calculations count part-time workers seeking a full-time job as employed — even those who don’t make enough to support themselves or their families.
Many jobless adults survive on their retired parents’ pensions for survival, spreading the hurt of difficult times across generations. More troublingly, rampant unemployment diminishes the workforce supporting the pension system.
To make tough times worse, Spain recently withdrew 5 billion Euros from the Social Security Reserve Fund in December, according to Europa Press. This money was almost certainly extracted from the pension reserve account in order to assist the country in attaining its deficit goal.
Spain claims to have met its fiscal goals in 2013, but European Union officials recently visited to meet with representatives from the Valencia and Madrid regions about the reliability of budget data. Blogger Mish Sendlock sums up the general sentiment of analysts: “If Spain meets it budget deficit target this year, it will likely do so by some sort of accounting gimmickry or purposeful under-reporting of regional debt.”
Many economists consider limiting government deficits during economic recession counterproductive anyway. For example, reducing pension payments limits the purchasing power of retirees — and consequently reduces spending by many of their children too, in Spain — which compels suppliers in the economy to produce less, anticipating weak demand.
Of course, falling production reduces employment further as manufacturers and distributors lay off unneeded workers. Thus even more people end up dependent on government benefit programs, which in turn puts additional strain on the fiscal budget, restarting the process that led to Spain’s withdrawal of cash from the Social Security Reserve Fund in the place.
This vicious cycle of diminishing demand and shrinking supply perpetuates recessions. Fiscal austerity — trying to minimize government deficit — seems to hurt rather than help recovery.
Pozuelo-Monfort, a Spanish academic and social entrepreneur, warns of imminent violent revolution. He then calls for another type of revolution, one he does not elaborate beyond an analogy to open-heart surgery.
What about a revolution in macroeconomic thinking?
Economists have long been reluctant to discuss degrowth as a serious option, since a shrinking economy causes social problems that tend to disproportionately affect those who have the least to lose. Yet Spain is proving that this involuntary ‘strategy’ works to decrease greenhouse gas emissions, albeit with dreadful side effects.
Now if only we can find a way to ‘degrow’ the GDP without putting a significant portion of the population out of work.2
Macroeconomics, the study of entire national and international economies, falls short as an approach for studying the possibilities of prosperity without economic growth for two reasons:
- macroeconomic models customarily ignore the ecological foundation upon which all human enterprise is built; and
- the measures of macroeconomic success do not gauge real well-being for actual people.
In fact, the main goal of macroeconomics is to grow the economy. Standard theory says that as technology gains allow each worker to get more done, total output — as measured by GDP — must increase to keep everyone employed.
Yet the flaws in current macroeconomic models are widely acknowledged and well-documented. Even Harvard University professor Greg Mankiw — a former economic adviser to President Bush II — admitted in last Sunday’s New York Times that economics is a primitive discipline with limited predictive powers, equating today’s economist with a medical doctor two centuries ago.
Capitalism’s favorite macroeconomic metric, gross domestic product, simply quantifies the busyness of the economy. The most common way to calculate GDP measures total economic production by adding four aggregate numbers: consumer spending, business investment, government spending, and net exports.3
Basically, economists use money spent as a proxy for prosperity. The idea is that people will pay according to how much they value the things they purchase, so total expenditures can approximate material well-being.4
Many researchers have attempted to create ‘adjusted’ economic indicators that take into consideration aspects of well-being ignored by GDP — the national accounts version of baseball statistics like on-base plus slugging, which takes into consideration more aspects of hitting than the simple batting average.
In the January 15 edition of Nature, ecological economist Robert Costanza and a host of colleagues published this piece of recommended reading to detail GDP’s many flaws and provide an overview of the variety of efforts to come up with a better indicator of national success.
We need an economist to create a macroeconomic metric in the vein of sabermetrics, statistics that look beyond traditional measures of baseball skill in search of objective knowledge about the game. Drawing inspiration from the ideas of Indian economist Amartya Sen and British ecological economist Tim Jackson, someone must quantify the capabilities for human flourishing within ecological limits.
With an economic model that more accurately reflects the well-being of people and the environment, we can look beyond the traditional models and investigate whether developed societies can prosper without economic growth, as Jackson’s 2009 book Prosperity Without Growth explores.6 This line of inquiry is important because countries have struggled mightily to reduce greenhouse gas emissions with economic growth.7
To quote Jaime Pozuelo-Monfort once more, “Profound changes are necessary if Spaniards wish to have any future at all.”
To me, this makes Spain a terrific candidate to experiment with new ways to quantify economic success. In this case, an original method is needed to measure progress toward recovery, specifically.
Let us see if the country can be mended in terms of human health, security, comfort, and happiness without resuming the habitual growth in climate pollution and environmental destruction that routinely comes with an expanding economy.
- One type of government spending contributing to Spain’s deficit is the subsidy program for renewable energy. As part of repairing the government budget, Spain plans to eliminate subsidies for new renewable energy plants and cut benefits paid to existing facilities, a reduction that could exceed $2 billion, according to The Wall Street Journal. Surprisingly, Spain may actually be able to reduce the public deficit without causing a surge in emissions upon recovery by using some of the money saved on subsidies to retire emission allowances in the EU Emission Trading Scheme. But environmental groups that credit the country’s carbon reductions to generous government support for wind and solar power would likely oppose this plan (they are predictably staunchly against the current subsidy cuts) because it intuitively seems pro-fossil fuels. Read this post for a full explanation of the proposal to use savings from cutting energy subsidies to cost-effectively reduce emissions through the EU carbon market. ↩
- One straightforward solution to the rampant unemployment associated with an economy that’s not growing is each member of the labor force working fewer hours. As technology progresses, total production across an economy must increase just to keep employment constant, since each person-hour of labor can do more work. But growing the economy is not the only option. Alternatively, we could turn these gains in labor productivity into extra leisure time for everyone. More than two centuries ago, philosopher John Stuart Mill, whom we now call an economist, reasoned that once we establish decent standards of living, we should focus on morality, equality, and increasing leisure rather than straining to accumulate more and more wealth. Yet in our capitalist economic system, time and again we have chosen greater wealth instead of more free time when additional capital, new innovations and improved processes increase the amount of output that human work can produce. ↩
- Three methods exist for computing gross domestic product, all of which should hypothetically yield the same result: (1) by aggregating the sum of the value of all the goods and services produced in a country in one year; (2) by aggregating the sum of all incomes in a country in one year; and (3) by aggregating all expenditures in a country in one year — consumption plus investment plus government spending plus exports minus imports. ↩
- To be clear, GDP in itself is not the issue, insofar as it does a great job of measuring market transactions. GDP presents problems only when it is used to make conclusions not supported by that narrow scope, like when academics, reporters, and popular writers use GDP per capita as an indication of living standards, an application not supported by the statistic. NPR’s Planet Money podcast recently ran a short radio piece called, “The Invention of the Economy” that chronicles the eight-decade history of GDP and how it’s been used and misused. The story makes the fascinating point that before the Great Depression of the 1930s there was no such thing as “the economy.” The economy is an idea that we created in order to help fix the economy! ↩
- To be more clear, GDP is far from a perfect statistic even to gauge economic activity, as it excludes secondhand goods, voluntary labor, and household work like chores and food preparation. Moreover, GDP ignores variables that affect future possibilities for consumption — and well-being — such as changes to the asset base and non-market ecological costs (pollution). ↩
- Among those who support ending economic expansion, some see degrowth as an emergency strategy to ward off the threat of climate disaster, whereas others call for a slow transition to a steady-state economy — a societal paradigm shift that, in theory, will decrease inequality and allow us to live more in harmony with natural systems. Representing members of the first group, climate scientists Kevin Anderson and Alice Bows-Larkin of the UK’s Tyndall Center propose rapid economic degrowth in developed economies to enable 10 percent-per-annum emissions reductions, an approach that allows us to stay within the arbitrarily agreed-upon 2-degrees Celsius maximum warming limit while still allowing developing countries to increase emissions for another decade as economic growth brings hundreds of millions out of poverty. Economist Peter Victor of York University typifies the second camp of degrowth advocates with LowGrow, a simulation model of the Canadian economy he uses to compare long-run future scenarios of ‘business-as-usual,’ ‘selective growth,’ and ‘degrowth,’ the last of which slowly reduces GDP to a level that corresponds to a global economy that fits within Earth’s ecological limits. The results of the study are published in a paper called “Growth, degrowth and climate change: A scenario analysis.” ↩
- Even as many countries decrease the emission intensity of economic output — measured as carbon pollution per dollar of GDP — macroeconomic growth has prevented absolute reductions in greenhouse gas emissions. In other words, as the climate impact of economic activity is lessened by efficiency gains, these improvements are more than offset by increasing total production. ↩