The twenty-first century will not be like the twentieth. Most obviously, the economy of the future will be low-carbon, more efficient, less reliant on fossil fuels and highly digitised.
It will need to forgo dangerous depletion of natural resources, in particular the renewable kind, such as forests, fisheries and ecosystems that are prone to irreversible collapse. The governments Dasgupta Review on Biodiversity spoke of “levels of ambition, coordination and political will at least as great as those of the Marshall Plan”
The world has been transformed by the Covid-19 crisis and society is facing up to profound challenges. The pandemic has exacerbated growing inequalities in income, wealth and access to public services like health, education, housing and transport. Investing in a resilient recovery, requires urgent investment in a broad range of complementary productive assets – human and social capital, natural capital and infrastructure – necessary to secure sustained future prosperity.
The Wealth Economy approach recognises the mutually reinforcing nature of society’s assets. Investment in one component of wealth influences the returns to all other investments. Because assets complement each other, the returns to any single element will be higher if they are treated as a complementary portfolio.
For example, when we invest in nature, we are enhancing productivity of a range of core assets including physical and human capital, thereby pushing forward the productivity potential of the economy.
Investment in urban trees and woodlands promotes outdoor recreation, with positive effects on physical and mental health, reducing burdens on health systems while increasing the returns to housing investment. It also helps to lower carbon emissions, absorb harmful particulate pollution, increase water retention, provide cooling and shading services as well as promote healthy and happy workers, who are more productive and take fewer days off work.
Yet, unlike human, physical and knowledge capital, natural capital—which provides the building blocks of all other forms of capital—is generally in decline.
Indeed, Covid-19 has reminded the world of the urgent need to strengthen the quality and resilience of natural assets. A measurement system that traces changes in a range of comprehensive wealth measures over time is urgently needed.
Funding the clean transition and the changing landscape of opportunity
The bulk of the transition will be financed by the private sector, and it will require public outlay to provide the enabling physical, human and knowledge infrastructure.
This spending should afford great opportunities for investment in new clean, resource-efficient sectors in energy, transport, agriculture, manufacturing and construction.
But it also presents a growing risk of disruption and devaluation in existing carbon- and resource-intensive sectors and activities.
Meeting climate targets will mean getting more out of the resources we have. This requires innovation to raise resource productivity and improve demand responsiveness, so as to match the availability of changing supply (thereby circumventing the need for additional capacity).
The alternative of reduced final consumption and investment – or ‘de-growth’ – is neither politically appealing, nor economically and technologically necessary, provided there is a clear and credible attempt to steer innovation.
Existing assets, which were at the heart of driving economic growth since the Industrial Revolution, are in danger of becoming liabilities. It is now widely known that if we are to meet climate targets consistent with an evens chance of limiting temperatures to 2° above pre-industrial times, a third of global oil reserves, half of gas reserves and 80% of current coal reserves will have to remain in the ground or, if they are burned, the emissions will have to be captured and stored.
More relevant to 21st century Wales, downstream infrastructure, such as ports, pipelines, refineries and power generation, also risks being stranded or rendered obsolete before the end of their working lifetime. So too do fossil fuel-dependent heavy industrial processes.
Additionally, this risk of obsolescence is also not limited to physical assets. There is a great danger that human and intangible assets of slow-moving companies and regions will also become devalued if they do not stay ahead of global competition to transition the economy
Where previously, climate policies were viewed as handicaps pushing up energy costs and promoting relocation of jobs and facilities abroad, now a growing chorus of companies are asking government for clearer and more ambitious climate regulation to spur competitive advantage. As the world shifts to low carbon resource-efficient markets, any countries or firms that fall behind on policies and investments will increasingly find that high productivity activity may move elsewhere.
The transition will involve technological discontinuities, disruption, and systemic transformation. It involves not only the emergence and diffusion of radical innovations, but also the decline or reorientation of existing industries and technologies all along the supply chain from resource supplier through manufacturer and service provider through to consumer.
Policies encouraging a low carbon transition cannot be applied top down. They will require public support. While policymakers must prepare society for the economy of the 21st century, they have also to recognise that many peoples livelihoods are wedded to the economy of the 20th century.
Ensuring a just transition will be crucial for maintaining social cohesion and economic justice and enabling the climate transition to unfold. This requires enabling institutions that reskill, retool and compensate affected workers to secure the skills and jobs necessary to enable those affected by change to participate in the 21st century economy.
The important task for policy makers at the national, regional and local level is to manage the inevitable and inescapable transition to a low carbon resource-efficient economy. The longer the delay in managing that transition, the bigger the dislocation, the higher the adjustment costs and the greater the loss of competitiveness. And this is without accounting for the environmental risks.
As the world recovers from a pandemic, the time to build the future is now.