Economic growth and climate change

Each generation inherits a world that was created out of beliefs contemporary and relevant to a certain time. These beliefs affect prevailing values, values, which become embedded within the framework of decision-making. Often times, these values are based on beliefs that may no longer be understood, known or even correct. Nonetheless, they are transferred from one generation to the next and modified by another generation’s cumulative addition. From this perspective, a lack of understanding of the beliefs that comprise the framework of society can eventually be problematic. And this is evident in the present period.

Let’s take a step back to the 1930’s when Simon Kuznets developed a method for assessing the production capacity of an economy. The method, which earned him the Nobel Prize in Economics, provided the foundation for the calculation of the gross domestic product. By definition gross domestic product or GDP is the sum of all goods and services produced within a country’s national borders during a specific time period; everything from desks to diapers can be included.

Since the 1940s, GDP has become a simple assessment tool of economic capacity between countries and over time within the same country. However as Kuznets warned, though the indicator is useful for determining production capacity, it is limited as a metric to evaluate the state of an economy’s inhabitants. GDP as a single aggregated value cannot assess quality of life and it cannot provide insight on the distribution of wealth.

In spite of the statements of Kuznets and other economists of the time and over time, GDP has arguably become the single metric of not only domestic economic progress but also global economic progress. As the indicator of progress it is the targeted metric of economic policy. GDP is tracked and targeted by government and central bank policy makers with the intent to increase its value over consecutive periods.

There are four components to GDP, consumption spending, investment spending –investment on production capacity, government spending and net exports—spending by foreigners for US goods relative to US spending on foreign goods. In the United States the single largest component of GDP, comprising in excess of 65% of GDP, is consumption. As a result, our economy is targeted to consumption, from increasing employment, to low interest rates, to the built-in obsolescence of the goods we purchase.

Given that GDP was established and gained global traction over 70 years ago, our value for consumption has been inherited and modified over a few generations. We have been taught that we have insatiable appetites to consume and have perpetuated the consumption cycle, to maintain the era of consumerism. But this may be the problem.

Over time, through globalization, commercialization and the increasing busyness of life, consumers have become increasingly distanced from the production process of the good they are consuming. Consumers are no longer knowledgeable about the impact that their consumption demand has on the degradation, exploitation and depletion of planetary resources. Instead what consumers are aware of is price.

Fundamentally, consumers have focused on market price and have delegated the inclusion of value parameters including environmental and social costs to producers, but producers are incentivized to minimize cost and maximize return, a seemingly divergent incentive.

In most cases, market prices do not reflect the cost of a good. Lets look at a t-shirt manufactured in a developing country for sale in a developed market. The price of the t-shirt reflects only a portion of its true cost because it neglects social and environmental costs. The price neglects the costs of the exploited wage paid to the textile worker: the social cost resulting from his missing health care and the health and quality of life impact of the non-living wage. Though it does likely include transportation expense, it does not include the carbon footprint or the waste cost related to the landfilling or alternative disposal of the garment. In net, the cost of the consumption is only partially borne by the purchaser; other societies and the environment subsidize the price.


Consider the market price for the air we breath, there is no price, it is free and we need air to live. But, in spite of it being essential for life, it is a costless component of the production process; waste has been released into the air we breathe for years. If there had been a cost for disposal, or even better, a social value that prevented the release of air borne waste, the pollution that has collected in our atmosphere for the past three hundred years would have been significantly less. As simple as it may sound, consumers could have promoted the welfare of the atmosphere through their collective demand that air quality be preserved. How money is spent sends a very strong signal to producers of what will sell.

Both consumer awareness and economy-wide alignment are requisite to promote sustainable economic outcomes. This is, for example, evident in viewing the relationship between economic growth and carbon emissions over the past few hundred years. The energy consumption rates required to promote production and thereby foster consumption have enabled the speed of climate change activity being witnessed today. Atmospheric carbon dioxide is correlated to GDP growth; but so are degradation and exploitation of the environment.



COP21 will offer the needed international platform to evaluate the basis of climate change activity, which arguably is related to how we measure and drive economic growth. The inclusion of sustainable economic development within the Paris Package provides an opportunity for the inclusion of quality of life and ecosystem balance in the defining of economic growth. These elements essentially recognize that how we measure quality of life is fundamental to the economic outcomes we create. From this perspective COP21 could be the catalyst to move beyond GDP to determine a constructed international standard for economic progress. Ultimately, the goals of the UNFCCC to “stabilize greenhouse gas concentrations at a level that would prevent dangerous anthropogenic (human induced) interference with the climate system” may be better aligned with a measure such as gross national happiness, the better life index or a similar parameter. Further, the long term impact of COP21 may be dependent on explicitly promoting such a value shift.