Innovation, globalisation and the environment

Brendan Gillespie and Xavier Leflaive
Environment Directorate

Globalisation is exerting pressure on the environment, but it may also provide solutions. Could green be turned to gold? Climate change, melting polar ice, rising sea-levels, unpredictable weather patterns, drought, rampant urbanisation, demographic explosions: the list goes on. Many people blame globalisation for these ills, and it is true to say that increased economic pressures inevitably leave a bigger footprint on our planet.

Consider the expert opinion. The Millennium Ecosystem Assessment, an authoritative scientific report prepared for the UN secretary-general, concluded that over the last 50 years, humans have changed the world’s ecosystems more rapidly and extensively than at any comparable period in history. While gains in well-being are beyond question, the main message is that we are spending the planet’s natural capital in unsustainable ways.

However, recoiling from globalisation will not solve environmental problems. Rather, thanks in part to the innovation, trade and investment that it spurs, as well as new markets, globalisation can promote more efficient use of natural resources and reduce pollution to levels below what they would otherwise have been.

In any case, recoiling is not viable because individual countries cannot set rules independently of what is happening elsewhere. The re-emergence of highly populated economic powers, particularly in Asia and Latin America, and the hope that Africa will soon grow too, means that environmental pressures will rise, not fall. In developing countries that rely on natural resources, the pressures will be particularly intense. Environmental pressures generated in the emerging economies are often commensurate with those of OECD countries as a fraction of GDP, but are much lower in per capita terms. Convergence with OECD patterns of production and consumption is not a realistic option, but it would also be unrealistic to expect developing countries to change first; richer countries must take a lead.

We have common but differentiated responsibilities: OECD countries generated most of the global environmental problems we now face, and have the means to address them. On the other hand, these efforts will not be effective if we do not engage the major emerging economies like China and India. The International Energy Agency estimates that China will overtake the US as the major source of greenhouse gases by the end of the decade. Yet China currently does not have any obligations to reduce its emissions of greenhouse gases. This must change.

In February 2007, the UN’s International Panel on Climate Change, which brings together leading experts from around the world, stated “with confidence” that rising global temperatures since the mid-20th century “are very likely due to greenhouse gases” from human activity. They suggest that there is a relatively small window of opportunity in which to take decisive measures. The much-quoted Stern Report in 2006 argued that the benefits of taking such action would justify the costs. Innovation is essential if that opportunity is to be grasped.

A major obstacle to international action is the potential impact on competitiveness. But while environmental requirements may impose costs, their potential to stimulate innovation is often ignored. Innovation is not just about new devices, it is also about ideas and fast thinking, including among governments. With our policies and institutions (and individuals in general) we must deliver on what we have already promised. But beyond that, to encourage real transformations in markets and behaviour, government policy has much to do.

The encouraging news for governments is that the customers–their voters–want change! They no longer see the environment as a threat to economic performance, but increasingly as an opportunity. And that means markets. Economic globalisation, and the increased demand for natural resources it generates, is stimulating a new revolution, where eco-efficiency is the leitmotiv. Biofuels are coming on-stream–though their eco-benefits are still a matter of debate–wind farms are mushrooming, less-polluting “hybrid” cars are being marketed, eco-friendly houses are being built and new measures are being introduced to manage waste. As with other revolutions, those who harness the business opportunities first will gain competitive advantages over others. Notice that it is the major OECD players, from Japan to Germany via the state of California, that are already taking a lead on the business side.

In Germany, it has been estimated that the market for environmentally-related technology accounted for 4% of turnover for all sectors of trade and industry in 2005, and that this would grow to 16% in 2030.

The federal environment ministry is playing its part: it “wants to implement an innovation-based environmental policy that will help achieve a double-dividend for the environment and trade and industry. By backing and disseminating eco-innovations and eco-high tech, we are assuming responsibility for our threatened ecosystem and making a contribution towards Europe achieving its ambitious goal: to become the most resource-efficient economic region in the world.” In other countries, like the US and Japan, governments are also actively developing policies to promote “eco-innovation”.

These are times of flux, and governments have to be careful not to crowd out the private sector and other players in these new markets, but to provide incentives and room for them to expand. As with Germany, governments have to do more to encourage new standards which in themselves will create new and exciting markets—in environmentally-friendly building for instance, or in energy generation. Governments must set frameworks and longer-term targets which stimulate open-ended eco-innovation, and avoid technology-specific standards. They must establish performance benchmarks, and implement policies that encourage the dissemination of cleaner technologies beyond local markets. They must accelerate the market launch of new technologies and clear away hurdles from financing environmentally-related innovation. In short, they must integrate the environment into national innovation systems. Good examples to follow come from Japan, with the Top Runner scheme, or from the EU’s Environmental Technology Action Plan.

Governments should check their own activities too, particularly through their public procurement policies. Citing cost as an excuse for inaction, without examining potential benefits, sends out the wrong message to business, as well as to poorer countries wishing to take environmental action themselves.

But while governments must play ball, it is the private sector that will score the home runs. That includes multinational enterprises. Some environmental activists will not agree, but MNEs are global players, and have the potential to spread good environmental practices, particularly to developing countries. In addition to adhering to high environmental standards in their own operations, they usually demand that their suppliers adhere to strict environmental requirements.

International organisations like the OECD must play their part by promoting policy dialogue and disseminating best practices via instruments such as the Guidelines for Multinational Enterprises. Even the fight against corruption, which the OECD leads, can root out environmentallydangerous practices. Inviting China, India and companies from other emerging countries to adopt these OECD disciplines is essential to create a level playing field for business.

Meanwhile, companies are not waiting around: some of the major multinational enterprises are busy developing strategies to “turn green into gold”, to quote researcher Dan Esty. Major companies such as General Electric, or giant retailer Wal-Mart, whose environmental performance manifesto for “21st Century Leadership” has raised eyebrows, are being forced to change. And it is not just for crude marketing purposes; as one policy advisor from Lehman Brothers wrote in the Financial Times, businesses must adapt to climate change or “wither and possibly die”. New partnerships such as the Global Reporting Initiative are stimulating new mechanisms for auditing businesses to prove that they “walk the talk”. Major financial institutions like Goldman Sachs are using environmental performance as a criterion in their strategic thinking and operations.

As in any historic transformation, there are winners and losers. Governments realise they have to address the political economy of environmental reform. Environmental requirements may benefit society, but impinge on households and sectors. Governments may need to find ways to address these distributional impacts, for example, by providing income support to poor households faced with increased water or electricity tariffs, or recycling revenues to firms hard-hit by environmental taxes for investment in less polluting technologies. Making policy succeed is not straightforward and the OECD is working to help governments understand how firms respond to different policy impulses.

Meanwhile, OECD is working with governments to integrate environment into their development co-operation programmes. This is a new challenge; aid agencies increasingly provide general budget support, and this shift has been linked to a relative decline in donor spending on environment, as well as fewer environmental advisers in the field. Yet developing countries must also adapt to climate change, provide access to safe water and basic sanitation, and strengthen their management of natural resources in support of pro-growth development policies. Moreover, it is the poorest populations that suffer most from environmental degradation. Innovation in energy, farming and sanitation, for instance, can help deliver technologies adapted to the circumstances in developing countries, but the fundamental challenge is to better integrate environment into national development policies–a task for which most developing countries lack the basic capacity.

Indeed, however important innovation is, basic actions count too. Several surveys in OECD countries suggest that while people rate environmental issues highly, only a very small percentage of them have changed their habits when it comes to recycling or switching off lights. This raises a simple question. If even on the ordinary things we cannot change the way we live, can we expect anyone else to?

References

  • OECD (2006), The Political Economy of Environmentally-Related Taxes, Paris.
  • LLewellyn, John (2007), “Companies must adapt or die in a changing climate” in Financial Times, London, 30 January.
  • For more on the IPCC, see www.ipcc.ch/
  • Visit www.oecd.org/environment
OECD Observer No. 261 May 2007



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