A green solution to make Europe sick

Published in Business Spectator (Melbourne), 1 August 2013

There may not be much growth in Europe at present, but at least European leaders continue to produce an impressive number of growth initiatives.

Last week, the presidents of the European Commission and the European Council, José Manuel Barroso and Herman van Rompuy, issued a joint letter ahead of the next G20 summit in St Petersburg in early September. Both politicians called for more “green growth policies in structural reform agendas, generating climate finance, improving the transparency of commodity markets and promoting investment in energy infrastructure”.

The Barroso/van Rompuy statement stems from the EU’s long-held creed that growing environmental regulations can play an important role in creating jobs and growth. Unfortunately, as a new report from Sweden’s Timbro Institute shows, there is little reason to believe such promises.

Dr Christian Sandström’s book Are Green Jobs Promising the Moon? – On Europe’s New Growth Policy is uncomfortable reading for environmental activists and green growth campaigners. Written without a hint of polemics but in a dry and sober academic style, it shows why ‘green growth’ does not even work in theory let alone in practice.

Once upon a time, both common sense and economic theory suggested that any new business regulation was costly and that therefore new regulations would slash jobs, lower productivity and ultimately reduce growth. How could it be otherwise? If companies were no longer free to do what they want but also had to perform by some regulatory standards, this naturally impinges on their ability to maximise profits.

Of course there may be good reasons to regulate some business behaviour. But no one in his right mind would have claimed that such regulations made companies any more profitable – they were never meant to do so. In any case, if the newly enforced behaviour made more economic sense, then companies would have behaved in this way without regulation.

This attitude changed when Harvard management guru Michael Porter published a couple of articles in the early 1990s in which he claimed that, indeed, environmental regulations might make companies more innovative. Consequently, he argued, whole economies would become more productive and competitive.

Even with an undergraduate understanding of economics, Porter’s thesis should have been easily refuted. But the claims were far too politically alluring to be measured by normal economic standards. They finally allowed politicians to claim that environmental policies did not only have no negative economic effects. On the contrary, imposing environmental regulations could actually promote growth and jobs.

It was the regulatory equivalent of a free lunch: a cleaner environment at no cost and with an extra economic gain. Sounds too good to be true? It certainly is.

In his book, Dr Sandström investigates the academic literature to try and verify Porter’s claims. And indeed, there is some (weak) evidence that increased environmental regulation may trigger efforts by companies to spend more on research and development. In a way, this is unsurprising: if companies are legally required to find alternatives to current production technologies, of course they will need to spend time and money to devise them.

However, when it comes to the more interesting question of whether these extra R&D activities actually lead to increased productivity, competitiveness and profits, there is no hard evidence. As Sandström summarises the research: “the proposals put forth for more regulations in order to create green growth are done without sufficient support from academia.” This is probably just his polite Swedish way of saying that vague hopes for green growth are nothing but a convenient political illusion.

The reality of green growth policies is, however, far worse than this academic conclusion suggests. Not only do green growth policies fail to produce any real growth, the ways such schemes are implemented in practice also show all the signs of government failure resulting from rent seeking, information problems and outright corruption.

Sandström goes through the examples of five European countries (Spain, Italy, Germany, Denmark and the UK) and the US to show how green growth initiatives were implemented and what effects they produced. The results are staggering.

In Italy, for example, there have been cases in which organised crime has been drawn into new green energy projects. Given high subsidies for the wind power industry, that was perhaps to be expected. If wind power now even beats the returns from the more established business activities of the mafia, then it is only natural for godfathers to go green. Or, in Sandström’s words: “these examples should be viewed as illustrations of the risk of creating opportunistic behaviour because of high risk-free profits from subsidies.” If one were to put it positively, environmental subsidies may reduce the need to do anything illegal. Just building windmills will do. We’ll give them a subsidy they can’t refuse.

Spain’s green growth policies are perhaps an even better case study in the absurdity of environmental subsidies. Under the pretence of saving the environment while creating jobs, Spain has devoted considerable resources to promoting renewable energies, over a long period. But then a study by Professor Gabriel Calzada Alvarez of King Juan Carlos University in Madrid calculated the real costs of creating green employment.

According to his estimate, each green job cost an average of €570,000. In wind power, the figure was closer to €1 million. Calzada’s study attracted much attention, and it certainly received much criticism. However, even the Spanish government subsequently accepted many of his criticisms. Not least because rapidly rising electricity prices were becoming an unpopular burden on Spanish consumers and businesses.

In conclusion, Sandström expresses his astonishment that in contrast to nearly every field of public policy, no extensive cost-benefit analyses are prepared for those policies claiming to promote green growth. “Instead, it seems the debate often is based upon reports or policy documents that were developed in order to support a pre-defined political opinion,” he says.

If politicians actually tried to find hard evidence for their green growth claims, they might look in vain. Instead, we may need to revert back to the old days of common sense when nobody expected environmental regulation to cause anything else but economic costs in return for environmental benefits.