The Unassuming Economist

From an IMF working paper by Signe Krogstrup and William Oman:

“Climate change is one of the greatest challenges of this century. Mitigation requires a large-scale transition to a low-carbon economy. This paper provides an overview of the rapidly growing literature on the role of macroeconomic and financial policy tools in enabling this transition. The literature provides a menu of policy tools for mitigation. A key conclusion is that fiscal tools are first in line and central, but can and may need to be complemented by financial and monetary policy instruments. Some tools and policies raise unanswered questions about policy tool assignment and mandates, which we describe. The literature is scarce, however, on the most effective policy mix and the role of mitigation tools and goals in the overall policy framework.”

From a VoxEU post by Arlan Brucal, Beata Javorcik, and Inessa Love:

“The link between foreign ownership and environmental performance remains a controversial issue. Data from the Indonesian manufacturing census show that plants undergoing foreign acquisitions reduce their energy intensity by about 30% two years after acquisition by multinationals. This column argues that foreign direct investment can serve as a channel for the international transfer of environmentally friendly technologies and practices, thus directly contributing not only to economic growth but also to environmental progress.

According to the 2018 report of the UN Intergovernmental Panel on Climate Change (IPCC), exceeding the global threshold of 1.5°C above the pre-industrial temperature level will mean increased risk of extreme drought, wildfires, floods, and food shortages for hundreds of millions of people. Keeping emissions below the crucial threshold would require widespread changes in energy, industry, buildings, transportation, and cities. Can multinationals be part of the solution? Can flows of foreign direct investment (FDI) help put a brake on emissions? Or would they exacerbate the already worsening global climate condition?

Environmentalists argue that highly polluting multinationals relocate to countries with weaker environmental standards to circumvent costly regulations in their home country (Hanna 2010, Millimet and Roy 2015, Cai et al. 2016). In this way, they increase pollution levels not only in host countries but also globally.

In contrast, supporters of globalisation point out that FDI has a positive effect on the natural environment because multinationals tend to use more efficient and cleaner technologies than their domestic counterparts. With the spectacular growth in FDI flows and the increasing importance of developing nations as host countries, the potential effect of FDI on the natural environment remains controversial (Kellenberg 2009, Cole et al. 2017).

In a forthcoming paper (Brucal et al. 2019), we contribute to this discussion by examining the impact of foreign acquisitions on energy consumption and CO₂ emissions of acquired plants. The study is based on plant-level data from the Indonesian Manufacturing Census, covering the period 1983-2001. The data contains detailed information on plant-level use of various energy inputs (both in value and physical units) and thus can be used to calculate the expected CO₂ emissions using standard conversion factors specific to each type of energy. We then compare the changes in these variables in the acquired plants and a carefully selected group of domestic plants that had not changed ownership.¹

Why would we expect acquired plants to improve energy efficiency?

There are several reasons why foreign acquisitions may improve energy efficiency. First, foreign acquisitions tend to increase production volume by boosting productivity and facilitating access to foreign markets through the foreign parent’s distribution network (Arnold and Javorcik 2009). This makes investments in improving energy efficiency more worthwhile as the sales base becomes large enough to cover the fixed cost of investment.”

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From the India Forum:

“Renewable energy capacity has expanded globally but this does not as yet mark a shift away from fossil fuels. On current trends, energy use from CO2-emitting fuels will continue to rise in the future. Talk of decarbonsiation of the world economy is premature.

In 2015, global carbon dioxide (CO2) emissions plateaued even as the world economy grew by about 3%. Emissions rose, but only slightly, the following year. There was much relief, even triumph, in the mainstream press and some scholarly literature, that the world economy had begun decarbonising. Reports suggested we were experiencing “a partial decoupling between the growth in CO2 emissions and that in the economy”.

Since 1970, CO2 emissions from fossil fuels―coal, oil, and gas―had grown by about 0.4% for every one percentage point rise in world GDP. But now writers surmised, they would stay flat or even decline while economic growth continued.

A second proposition, connected to the first, suggests we have been witnessing an energy transition worldwide: a shift away from fossil fuels and towards a huge expansion of renewable energy, led primarily by solar and wind power. Referring to one such fossil fuel, the energy analyst and executive chairman of Brookings India, Vikram S Mehta, wrote a couple of years ago, “Historians will look back on 2016 as the year of inflexion for the oil industry … the year the oil era began to slowly but inexorably hand over the energy baton to clean energy”(“Over the Barrel”, Indian Express, 6 February 2017). The climate change activist and writer Bill McKibben recently wrote approvingly “ … in the next few years, we will reach the peak use of fossil fuels, not because we are running out of them but because renewables will have become so cheap. … [Kingsmill] Bond writes that in the 2020s―probably the early 2020s―the demand for fossil fuels will stop growing.” ( “A Future Without Fossil Fuels”, New York Review of Books, 4 April 2019)

This essay probes whether, and to what extent, these two propositions hold water. It builds on arguments made by others that talk of an energy transition is misleading (Sweeney and Treat 2017) or very partial (Pirani 2018). Using the latest available data I show that whereas we are undoubtedly witnessing an expansion of renewable energy worldwide, it does not amount to a transition. Not as yet. For the concept energy “transition” also implies that we are transiting away from what was dominant earlier and relegating it to a small proportion of the energy landscape. That is certainly not happening with oil and gas. Whether we are even transiting from coal is moot.

What’s more, given the accelerating impacts of global warming in recent years, are we transiting away from fossil fuels at anywhere near the pace that the science demands? This question has acquired even greater salience with the eruption of the “Extinction Rebellion” and other movements in Europe and elsewhere, including India, by school students and others demanding sharp cuts in emissions and the declaration of a climate crisis, both in India and on a planetary scale.”

From the European Environmental Bureau:

“Is it possible to enjoy both economic growth and environmental sustainability? This question is a matter of fierce political debate between green growth and post-growth advocates. Over the past decade, green growth clearly dominated policy making with policy agendas at the United Nations, European Union, and in numerous countries building on the assumption that decoupling environmental pressures from gross domestic product (GDP) could allow future economic growth without end.

Considering what is at stake, a careful assessment to determine whether the scientific foundations behind this “decoupling hypothesis” are robust or not is needed. This report reviews the empirical and theoretical literature to assess the validity of this hypothesis. The conclusion is both overwhelmingly clear and sobering: not only is there no empirical evidence supporting the existence of a decoupling of economic growth from environmental pressures on anywhere near the scale needed to deal with environmental breakdown, but also, and perhaps more importantly, such decoupling appears unlikely to happen in the future.

It is urgent to chart the consequences of these findings in terms of policy-making and prudently move away from the continuous pursuit of economic growth in high-consumption countries. More precisely, existing policy strategies aiming to increase efficiency have to be complemented by the pursuit of sufficiency, that is the direct downscaling of economic production in many sectors and parallel reduction of consumption that together will enable the good life within the planet’s ecological limits. In the view of the authors of this report and based on the best available scientific evidence, only such strategies respect the EU’s ‘precautionary principle,’ the principle that when the stakes are high and the outcomes uncertain, one should err on the side of caution.

The fact that decoupling on its own, i.e. without addressing the issue of economic growth, has not been and will not be sufficient to reduce environmental pressures to the required extent is not a reason to oppose decoupling (in the literal sense of separating the environmental pressures curve from the GDP curve) or the measures that achieve decoupling – on the contrary, without many such measures the situation would be far worse. It is a reason to have major concerns about the predominant focus of policymakers on green growth, this focus being based on the flawed assumption that sufficient decoupling can be achieved through increased efficiency without limiting economic production and consumption.”

From a VoxEU post by Giovanni Peri, and Akira Sasahara:

“Though the economic consequences of climate change will be felt across the globe, not all populations will be affected equally. This column examines the impact of rising temperatures on migrant communities. Using historical data from three decades (1970-2000), it finds that higher temperatures increased the number of rural-to-urban migrations in middle-income countries while decreasing rural-to-urban migrations in poor countries. The prospect of climate change leaving large rural populations trapped in poverty adds urgency to the case for addressing the asymmetric effects of global warming. 

The annual average temperature is projected to increase by up to 4° Celsius in the coming century (World Bank, 2018). Rising temperatures have been shown to influence various aspects of our economies, including GDP growth (Dell et al. 2012), local conflicts (Bosetti et al. 2018), mortality (Burgess et al. 2014), and agricultural and non-agricultural productions (Burke et al. 2015, Garcia-Verdu et al. 2019). Given the economic effects of weather shocks, we can expect the rise in temperatures to significantly affect migration patterns. The goal of this column is to provide new insight on expected migration responses to climate change by exploiting historical variations in temperatures and migrations.

Net migration rates at the grid cell level

We employ grid cell level data at the 0.5 x 0.5 degree resolution, where one grid cell covers the area of 56 km x 56 km at the equator for three decades: 1970-1980, 1980-1990, and 1990-2000. Decennial net migrations (the number of in-migrants minus the number of out-migrants) come from de Sherbinin et al. (2015) and population data are obtained from Yamagata and Murakami (2015). We define net migration rates by dividing net migration during the decade by the population at the beginning of the decade. Figure 1 shows a map of Europe describing net migrations during the 1990s. Red-coloured cells indicate positive net migration rates (meaning that in-migrations were greater than out-migrations) while blue cells indicate negative net migration rates.”

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