European Commission economist Alessio Terzi speaks to Alex Katsomitros about his vision for green capitalism, and explains why degrowth would be a bad idea
Is continuous economic growth compatible with keeping our planet habitable? It’s an old question that has preoccupied economic science ever since the beginning of the industrial revolution, and has now come back to haunt a new generation of economists courtesy of climate change. One of them is Alessio Terzi, an Italian economist who works for the European Commission. In his book Growth for Good: Reshaping Capitalism to Save Humanity from Climate Catastrophe, Terzi charts a path for the transition to a green economy that is both geopolitically realistic and fair, while lambasting radicals who advocate for a reversal of economic development. And Terzi is not afraid of using his own country as an example of the perils of anaemic growth.
I recently caught up with him to speak about the inevitability of carbon border taxes, the necessary overlap between policies tackling inequality and climate change, and why economists and scientists need to talk to each other more.
Alex Katsomitros: A big part of your book is a critique of “degrowth”, a rather fringe economic theory. Why do you think that degrowth would lead to authoritarianism?
Alessio Terzi: It is a fringe, but increasingly popular theory. Greta Thunberg’s new book includes articles from degrowth theorists who see capitalism as the root cause of climate change. Usually economists dismiss degrowth on the grounds that it will cause a recession, which people would never vote for. This is rather shallow, because the degrowth movement argues that it’s only involuntarily shrinking of the economy that generates bad effects like unemployment. My theory is that degrowth rests on the idea of voluntary scarcity, an old concept that starts with Plato’s theory of finding happiness in human relationships, rather than material consumption. Many religions, including Christianity, use similar rhetoric. So degrowth scholars believe they will succeed where Jesus Christ didn’t. If you cannot persuade people that this is good for them, you need a government to dictate what they are allowed to do in granular detail, because every activity generates CO2 emissions. That’s where authoritarianism comes in.
AK: A counter-argument would be that we cannot go on like that, because our resources are finite. We only have one planet. How would you respond?
AT: I agree. I am not defending the status quo – my book’s subtitle is Reshaping Capitalism. We cannot keep pumping up emissions. We have to solve the problem within planetary boundaries, but that does not necessitate degrowth, because every activity has an impact on nature. It’s about managing this relationship and finding a balance. If a resource becomes scarce, we substitute it. When England ran out of trees, people switched to coal, which led to the Industrial Revolution. We will follow a similar path to address modern scarcity and switch away from fossil fuels.
AK: Many pro-degrowth economists believe that it can solve two problems: climate change and inequality. What’s your take? Can we tackle climate change without exacerbating inequality?
AT: If we leave it to market forces alone, the green transition will exacerbate inequality. Currently, we are trying to jumpstart a new green industrial revolution: reinventing the whole of production, consumption, transport, agriculture. Past industrial revolutions rendered whole sectors, professions and skills irrelevant. So it is fundamental to use policy to contain inequality. If not, people will oppose it, even if this goes against their interests, because climate change affects the poorest the most. We saw that with the Yellow Vest movement, and also Brexit – regions that voted for Leave were receiving EU cohesion funds. So policy must be used to offer these regions a clear role in the green economy.
AK: You argue that economic growth is the answer to both climate change and inequality. What about digital growth, which is relatively carbon-free. Is that a solution?
AT: We do see rapid dematerialisation. An example is Netflix – we used to have VHS cassettes. It will help, but it is not the main solution. We cannot switch to the Metaverse and detach ourselves from material reality. These sectors also require energy, so we still need to invest in renewables. It’s complementary, but not a substitute for green policies.
AK: In the book you discuss Italy as an example of a country where the lack of growth has had grave consequences. It’s also one of the few countries where some form of universal basic income has been tested. Was this experiment successful?
AT: It’s hard to say, given the short timeframe. The general perception is that it mostly went to people in need and decreased extreme poverty. But it wasn’t a game-changer for the economy, so I am agnostic about it. Having a “citizens’ income” programme is not at odds with our economic system, but just an alternative social welfare policy. I don’t have anything against it, unless it is used to argue that we don’t need economic growth, just redistribution. That’s not a revolution in welfare policy, especially in a country like Italy. Redistribution is not a substitute for growth. With no growth you have fewer resources, so redistribution becomes harder, because you have to persuade some people that it’s worth taking from them. Redistribution is always a zero-sum game. In an expanding economy, you can redistribute the extra income. Slow growth was the norm before the Industrial Revolution and there was not much redistribution, or if there was it was from the poor to the rich. So in a slow-growth economy, power relations become more entrenched.
AK: You claim that global cooperation is a pipedream and suggest that we should focus on national policies. Why is that? Is there something wrong with the Paris Agreement?
AT: Ideally, we want a globally coordinated green transition. But we don’t have a global government, and climate change makes it even less possible. People say that global problems require global solutions, but these are difficult to implement. Tensions between countries will increase, including between rich and poor countries. At the COP27 conference, developing countries argued that floods ravaged Pakistan although it generates little carbon emissions, and that developed economies created the problem and should pay for it. Rich countries will pay a bit, but that will not solve the problem, due to constrained budgets. Take the UK: during a crisis, the first thing governments cut is foreign aid. So the more global cooperation the better, but don’t count on it to be the main avenue to address climate change.
AK: What about climate reparations?
AT: The floods in Pakistan will cost several billions, and we will see more of these events. I don’t see this scale of resources being transferred to poor countries, even if theoretically it’s possible. Rich countries had pledged to help poor ones with $100bn by 2020; this has not happened. And on a global scale this is a small amount. Just compare this to decarbonisation costs in France, estimated around at €50bn annually in a relatively decarbonised country. I don’t see global climate reparations happening.
AK: How do the war in Ukraine and the energy crisis affect the green agenda?
AT: I wrote the book before the war. But as I argue there, the green transition is not the end of geopolitics. It will happen during the new Cold War between China and the U.S. and other tensions, essentially a polarised world. The war in Ukraine vindicates that. People argue it will slow down the green transition. The war will possibly accelerate it, as it makes fossil fuels more expensive. It has done what carbon pricing was supposed to do, but much faster, which creates macroeconomic problems like inflation. But it does exactly what economic textbooks recommend.
AK: Give us your take on carbon border taxes?
AT: For national green policies to work, some type of carbon border tax is inevitable. Governments don’t want their industries to lose competitiveness. The EU is responsible for 8-10% of CO2 emissions. If it decarbonises but nobody else does, nothing will change. So we need these measures to push other countries to accelerate the green transition. This tax is the mirror image of carbon pricing at home, like the EU does with the ETS. The alternative proposed by the IMF, a global carbon pricing scheme with revenues redistributed across nations, ignores geopolitical tensions.
AK: Many people think this tax might be used in a protectionist manner, for example by the EU.
AT: Some countries want to prioritise development over green policies, and argue that taxes harm development. But the green transition will not happen because of policies, but because citizens want it. Consumer preferences change, especially in developed countries where consumers think green. So this dichotomy between development and the environment is false. Carbon border taxes make clear that pollution-based development is not realistic. You risk getting stuck with old industries, which brings neither development nor green transition. Taxes favour industries that provide growth opportunities in the green economy.
AK: Regarding population growth: environmentally speaking, a decrease would be preferable, whereas economists usually associate population increase with economic growth. Is there a balance?
AT: Initially, in the ‘60s and ‘70s, the degrowth movement focused on population reduction. The new wave of scholars focuses less on this, because they target rich countries with no population growth. Global population is already stabilising, the UN estimates it will stop growing by mid-century. Changing demographic patterns is hard and takes time, which we don’t have. We need to reach net-zero by 2050, and we can’t do that through demographic policies.
AK: What about people who don’t have children on environmental grounds?
AT: To me, that is an extremely odd way of looking at the world. It’s a negation of the principle of progress, like voting for your own extinction.
AK: In the book you discuss the clash between scientists, notably climate scientists, and economists, an issue that came to the fore during the pandemic. Why does that happen? Is the reason a fundamental difference in the way the two sciences see the world, or perhaps that some scientists project their ideologies on science, as you mention in the book?
AT: It is an issue close to my heart, because I come from a family of natural scientists. Climate scientists are frustrated with economists, because economics has incorporated climate change into its models very slowly. The Nordhaus model, for which the economist William Nordhaus won the Nobel prize, produced strange results, notably that global warming of 4°C would be optimal. So I understand their frustration. We need science and technology, but also growth, they are two sides of the same coin. Science laid the foundations for the industrial revolution and has been the engine of progress ever since. It will be part of the solution again. Scientists and inventors are the central agents of the green transition. So my message is more reconciliatory, rather than an anti-science approach, which wouldn’t make sense anyway.
ABOUT ALESSIO TERZI
Alessio Terzi, a lecturer at HEC Paris and Sciences PoLille, is an Economist at the European Commission and the author of ‘Growth for Good: Reshaping Capitalism to Save Humanity fromClimate Catastrophe’. Prior to this, he was aFellow at Bruegel and a Fulbright Scholar at the Harvard Kennedy School. He obtained a PhD from the Hertie School with a thesis on economic growth. His research and commentaries have appeared in leading media outlets including BBC World News, ‘FinancialTimes’, and the ‘Wall Street Journal’.