Moving Toward a Steady-State Economy
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When he resigned his post as a senior economist with the World Bank in January 1994, Herman Daly delivered a farewell speech to his colleagues in the style of the Dutch uncle. Prescribing “a few remedies for the Bank’s middle-aged infirmities,” he spoke of the bank’s “unrealistic vision of development as the generalization of northern overconsumption to the rapidly multiplying masses of the south.” He warned that the depletion of natural capital could no longer be left out of the economic equation. It was time, he said, to assign a monetary value to the negative environmental impacts of throughput and to factor them in as opportunity costs of production.
Daly railed against free trade and the unfettered globalization of capital and made this parting prognostication: “It is an unthinkable thought right now, but take it as a prediction—ten years from now the buzz words will be ‘the community rooting of capital for the development of national and local economies.’”
Over the course of the last 15 years, popular journalists like Tom Friedman and movies like An Inconvenient Truth have mainstreamed many of Daly’s once controversial ideas. “Going local” is indeed the buzzword of the moment and the media has cast an unforgiving spotlight on the central role that the unregulated global capital markets have played in the worldwide economic meltdown.
The European Union’s Emissions Trading Scheme—which puts a cap on manmade greenhouse emissions and requires public and private entities that produce more than their allocated allowances to purchase offsetting carbon credits—has been operating, however imperfectly, since 2005. On June 26, the House of Representatives passed the American Clean Energy and Security Act, creating the framework for a US cap and trade carbon market. More and more institutional investors and lenders around the world are demanding that corporations implement transparent, triple bottom-line accounting practices to measure the social and environmental costs of doing business, not just the financial costs.
But since he retired from the World Bank almost 15 years ago, Daly has remained decidedly outside the mainstream himself, mounting a steady barrage of criticism against what has been the central, unchallenged goal of Western economies since World War II—the relentless, single-minded pursuit of economic growth as measured by GDP (gross domestic product). The zeitgeist may be catching up with Daly, though. More and more economists, environmentalists, and real-world financiers and portfolio managers, many of whom call themselves “steady staters,” are seeking to knock GDP growth off its pedestal as the preeminent driver of economic policy.
THE CASE FOR A STEADY-STATE ECONOMY
The term “steady state” derives from the 19th-century classical economist John Stewart Mill’s assertion that, after a certain period of growth, economic policy makers should strive for a “stationary state” in which capital stock is held relatively constant and population levels are stable. If left unchecked, Mill argued, economic growth would inevitably lead to a decline in human welfare and to irreversible environmental damage. The Club of Rome’s The Limits to Growth (Universe Books 1972) and Daly’s seminal volume Steady-State Economics (W. H. Freeman 1977) reintroduced Mill’s critical perspectives to a mid-20th century that was wedded to the notion that growth was the panacea for all the world’s ills.
Growth advocates, steady staters maintain, are operating under a number of wrongheaded assumptions, the first of which holds that the earth’s ecosphere functions only to serve the human economy. The economy, steady staters argue, is an open system inside the earth’s closed system. It cannot expand indefinitely without using up the earth’s finite resources.
Steady staters assert that growth as currently defined in GDP terms has failed to signal when human productive activities become “uneconomic.” In societies operating at high levels of consumption, incremental benefits are outweighed by incremental costs—for example, the health impacts of pollution. These costs, however, either go unrecognized or are registered as additions to rather than subtractions from GDP.
Steady staters also point to studies that suggest that continued growth in high-consumption economies, rather than enhancing human welfare, contributes to social malaise, as consumers acquire “positional” goods far beyond their basic needs, chasing fruitlessly after elevated social status. Polls indicate that self-reported “well-being” actually peaked in the United States in the 1950s and began to decline as per capita consumption rose sharply through the postwar years.
Steady staters discredit the belief of many globalists that the developed world has a responsibility to consume in order to support the export markets of developing economies. Steady staters point out that, as the developed world continues to consume at uneconomic marginal rates today, it contributes to the environmental degradation and resource depletion that precludes poorer nations from achieving higher material living standards tomorrow.
According to the Princeton Environmental Institute, for example, the richest 7% of the world’s population—about a half billion people—is currently responsible for 50% of global CO2 (carbon dioxide) emissions, while the poorest 50% of the population emits only 7% of worldwide emissions. This figure does not include the emissions produced by developing countries to support their export markets.
The Oslo-based Center for International Climate and Environmental Research reports that a third of China’s total CO2 pollution and half of the 45% increase in the country’s CO2 emissions between 2002 and 2005 are associated with the manufacture of goods for export. The steady-state critics of free trade and globetrotting capital attest that developed economies are not only contributing the lion’s share of the world’s pollution inside their own geographic borders, but are also outsourcing environmental degradation.
Steady staters point to another fatal flaw in the notion that the western world can lift the developing world out of poverty through imported consumption. As more and more of the world’s poor benefit monetarily from export-led growth, they begin to pattern their own consumption habits on those of their overconsuming export partners.
The growth in private ownership of cars in China is illustrative. According to the National Bureau of Statistics of China, the total number of cars for civilian use was up 24.5% to 24.38 million in 2008. And Chinese consumers are determined to play a fast game of catch-up with their counterparts in the developed world. According to a McKinsey Global Institute study, there will be almost five times as many privately owned cars—120 million—on China’s roads by 2020.
What about those optimists who maintain that we can keep the engines of growth firing on all cylinders by virtually decoupling the industrial process from natural resource depletion through technological advances in waste management, energy efficiency, and recycling? If China can produce no-emission electric cars to meet the aspirational requirements of the swelling ranks of its middle class, and can retrofit its coal-fired generators with 100% CO2-recapture technology, will all be well with the world?
Although they welcome technologies that increase energy efficiency and reduce waste, steady staters don’t buy the argument that we can invent our way onto a perpetual sustainable growth track. “You can’t escape the coproduction of waste in the production process, and you can never achieve 100% efficiency. This would violate the second law of thermodynamics,” says Brian Czech, author of Shoveling Fuel for a Runaway Train (University of California Press 2000) and president and founder of the Center for the Advancement of a Steady State Economy, an organization dedicated to spreading the steady-state gospel.
Joshua Farley, of the University of Vermont’s Gund Institute for Ecological Economics, is the coauthor, with Herman Daly, of Ecological Economics (Island Press 2004). Farley echoes Czech’s view: “It’s a basic law of physics that we can’t do work without energy, and 86% of energy used globally is fossil fuels. It’s another law of physics that we can’t make nothing from something, so the energy used ultimately returns to the environment as waste. If we could use 100% renewable energy, we would still need to mine the minerals required to build the solar collectors and would be unable to avoid damaging the environment in the process.” Even if we dramatically reduce the environmental damage per unit of GDP, says Farley, a moderate 3% GDP growth rate will inevitably push us up against ecological limits within a generation or sooner.
TEN STEPS TO A STEADY STATE
But steady staters aren’t just naysayers; they propound a clear set of alternative policies to the GDP growth model. The Canadian ecological economist Peter Victor maintains that “you can construct a macro picture for a national economy where the economy is not growing much or at all in GDP terms but where social and economic objectives are being met.”
Exactly what would such an economy look like and how can it be realized? In a speech before the UK Sustainability Commission in 2008, Herman Daly outlined ten policy ideas for the transition to a steady-state society. They include a cap–auction–trade system for basic natural resources; a shift away from taxing income and toward taxing resource depletion and environmental pollutants; limits on income inequality; more flexible workdays; and the adoption of a system of tariffs that would allow countries that implement sustainable policies to remain competitive in the global marketplace with countries that don’t.
Daly also calls for a transition to a 100% reserve requirement for bank lending, returning the control of the money supply to government; a stable worldwide population; and separation of GDP into two separate “costs” and “benefits” accounts. To discourage transborder financial capital flows that exploit the labor and resource capital of developing countries, he would also downgrade the IMF (International Monetary Fund) and World Bank into clearinghouses that collect fees from countries that run both surpluses and deficits in their current and capital accounts. Lastly, he would remove the price barriers to “nonscarce” intellectual capital—including royalty payments to patent holders. These barriers, he notes, often prevent developing countries from accessing the clean technologies critical to sustainable growth.
THE STEADY STATE IN THE REAL WORLD
Daly’s ten points add up to a tall and arguably impossible order for national and global policy makers. Yet, surprisingly, a number of countries appear to be moving toward a steady state without making it an explicit policy goal.
Daniel O’Neill, the European director of the Center for the Advancement of the Steady State Economy and a postgraduate research student at the University of Leeds, reports that Denmark, Sweden, Switzerland, Germany, and Japan achieved at least two steady-state objectives in the 10-year period ending in 2005—relatively stable levels of population and per capita consumption, as measured by energy use and ecological footprint. He reports that these countries also rate well when it comes to social indicators such as life expectancy and reported life satisfaction, while maintaining low levels of inflation and (with the exception of Germany) relatively low unemployment rates.
The Global Footprint Network, an international environmental research organization, tracks ecological footprints by measuring the area of land and water necessary to provide the resources used and absorb the wastes produced by a given population. A country’s total footprint may be compared to its biocapacity—the productive land and water area within its borders—to evaluate sustainability.
“For the half dozen or so countries that are approaching the goal of a steady-state economy, only Sweden has a footprint (4 hectares/person) significantly less than its biocapacity (10 hectares/person),” says O’Neill. “By comparison, Denmark has a footprint (8 hectares/person) that is comparable to its biocapacity (6 hectares/person), while Japan has a footprint (4.6 hectares/person) that is over seven times its biocapacity (0.6 hectares/person). It’s important to emphasize that these footprint comparisons are with respect to the resources available within each country’s borders. Thus we see that while Japan has a per capita footprint that is not much higher than Sweden’s, it is heavily dependent on resource imports due to its high population relative to land area.”
However, if the earth’s productivity were divided equally among all people, each person would be entitled to only about 2.2 hectares of productive land. “If we use this as our measuring stick (instead of national biocapacity) then the citizens of all of the ‘pseudo steady-state’ countries that I have listed are consuming too much,” O’Neill alleges. These economies will not have reached a true steady state until they use natural resources at a rate that does not exceed the earth’s capacity to regenerate them, and until they produce pollutants no more quickly than the earth’s “sinks” can assimilate them.
Policies that reflect the steady-state principal of internalizing formerly externalized costs of production include Germany’s Green Dot scheme, which imposes a sliding-scale fee on manufacturers and retailers based on the amount of product packaging they use. German president Horst Köhler, a former IMF managing director, has publicly stated his support for an economic revolution, away from quantitative growth, toward qualitative growth. Sweden has an explicit policy goal to be free of fossil fuels by 2020.
Although the UK is not on the list of would-be steady-state economies, it has been at the forefront of the discussion surrounding the mounting of a challenge to the conventional growth model. In March 2009, the UK government’s Sustainable Development Commission published “Prosperity without Growth?” Both Herman Daly and Peter Victor were consultants on this report, which blames the single-minded pursuit of growth for the global financial and environmental crises, and which calls on the leaders of the developed G-20 countries to adopt a 12-step transition to sustainable economies that is almost identical to the steady-state blueprint.
Grassroots movements are also driving steady-state behaviors on a local level. For example, Sweden is now home to a number of ecomunicipalities. Led by economist Torbjörn Lahti and by Karl-Henrik Robèrt, founder of the Natural Step Movement, these formerly depressed industrial towns have made an official and deliberate commitment to “dematerialize” their economies and to foster social equity.
Övertorneå, Sweden’s first ecomunicipality, which experienced a 20% unemployment rate during the recession of the early 1980s, and which has lost 25% of its population to out-migration, now boasts a thriving ecotourism economy based on organic farming, sheepherding, fish farming, and the performing arts. With most of its energy generated by biofuels, Övertorneå has already reached its 2010 goal of being a community free of fossil fuels. Hällefors, a former steel town that also suffered from high unemployment 20 years ago, has nurtured businesses in the renewable energy, organic farming, and culinary arts sectors. Similar ecocommunities exist in Norway, Finland, and Denmark.
Meanwhile, the UK-based Transition Culture movement has gone viral. Founded by permaculturalist Rob Hopkins in Totnes, England, the movement promotes local resilience, “powering down,” and “reskilling” as a response to climate change and peak oil. From Chile to Japan, over 150 communities around the world have become Transition Towns. Here in the United States, 24 communities belong to the movement. (Sandpoint, Idaho, was featured in Jon Mooallem’s April 16, 2009, New York Times Magazine article "The End Is Near! (Yay!).")
Other signals of a steady-state mentality include growing public protest over executive compensation and the Obama administration’s proposed regulations for realigning executive pay with long-term performance across the financial services sector. And then there’s the “locavore” movement, which has taken off with a vengeance in the US—as evidenced by the Obama White House’s kitchen garden. The Story of Stuff, a low-budget 20-minute animated video that vividly connects the dots between human consumption and the despoiling of the planet, is being used as an educational tool in classrooms across the country.
Perhaps one of the most intriguing pieces of legislation inspired by steady-state principles is a bill that is expected to be introduced into the Vermont Senate in 2010. The bill would establish a Common Asset Trust managed by a board of trustees, with a binding mandate to assign present and future generations explicit property rights to certain resources—water, wetlands, air, and air waves. “If this legislation passes, if you want to use one of these assets you will have to compensate the commons,” says Joshua Farley of the Gund Institute, which helped craft the legislation.
Disbursements from the Common Asset Trust fund would be used for public welfare initiatives including health care, social security enhancements, public libraries, and education. And at least 25% of disbursements would be paid out on a pro rata basis to each Vermont citizen. “We see this as a pilot project that could be adopted elsewhere in the world,” Farley explains.
INVESTING IN THE STEADY-STATE ECONOMY
Steady staters’ proposed policy directives would clearly expand the public sector. But investment and financing opportunities in the private sector would surge as well. As the title of Peter Victor’s book, Managing without Growth: Slower by Design, Not Disaster (Edward Elgar 2008), intimates, steady-state economies are designed to operate dynamically within the limits of the earth’s biophysical regenerative constraints. They are not failed-growth or static economies.
“I sometimes make an analogy with a forest in equilibrium,” says Victor. “The total biomass is constant but you do have continual change. Trees are growing and others are dying. It is just that the total stock of trees doesn’t keep rising, so the biosphere as a whole remains in balance.”
According to Victor, as economies transition from growth to steady state, with a price placed on the real environmental and social costs of throughput, the composition and nature of what is produced and consumed will also evolve. Durability and cradle-to-cradle manufacturing will replace the industrial design concepts of disposability and built-in obsolescence. Large-scale, single-commodity agribusinesses characterized by heavy dependence on antibiotics, fertilizers, pesticides, and transport fuel will be replaced by smaller, local, organic farms. There will be less investment in technologies that extract oil from the tar sands of Canada and more in technologies that maximize the throughput of energy from renewable sources, and that recapture waste products and heat for reuse.
Those who fail to factor “natural capital” risks and costs into their valuation models are likely to join the endangered species of the capital markets in a steady-state world. On the flip side, those in the investment and financial community who buy into the inevitability of the steady state say it is opening up a whole new approach to value.
“From an investment analysis perspective, I think it is going to be a very exciting time,” says Sucheta Rajagopal, a steady-state proponent who specializes in socially responsible investment with Hampton Securities in Toronto. “There is a lot of room for innovation and ingenuity in how we apply this new concept. We will move from economic growth measures by quantity of what we produce into economic development measures that focus on the quality of what we produce. For instance, we now look at GE, which has made investments in water purification, and we value how many units of water purification systems GE produces. In the future we will want to add into GE’s value the clean water it is creating. People ask, ‘How can you value these intangibles?’ But we measure intangibles all the time—like brand, or research and development. Ten years ago people said, ‘How can we measure carbon?’ But we now have a carbon market.”
Leslie Christian is a former Salomon Brothers derivatives salesperson who became a steady-state convert after reading Daly’s book Beyond Growth (Beacon Press 1996). She is now the chief investment officer of Portfolio 21 Investments, which manages a $237 million mutual fund based in Portland, Oregon, guided by sustainability principles. “I am a logical person and once I turned the corner of getting it that the limits to growth are a matter of fundamental physical laws, it was impossible for me to see it any other way,” she says.
While Portfolio 21 confines its investment universe to publicly traded companies with strong environmental and social track records, Christian acknowledges that there are no companies in the portfolio that meet all of the fund’s sustainability criteria. Meanwhile Portfolio 21 Investments’ managers have created Upstream 21, a miniature, sustainable “Berkshire Hathaway” that purchases small, privately held companies in the region. Upstream 21’s goal is to maintain and strengthen the sustainable practices of the former owners and keep the companies local. It has purchased three companies in the forest products industry and is now planning to diversify into other light manufacturing sectors.
Rob Wilder, cocreator of the exchange-traded WilderHill Clean Energy Index, points to waste heat recapture as an interesting concept—in theory. Wilder notes that investors today may be hard pressed to find shares in companies that are pure plays in recapturing waste heat, and that no large public companies currently focus specifically on that area. But the future may be a different story, and the WilderHill Index does already hold two companies—Amerigon and Ormat—that develop advanced waste heat recapture technologies with funds from their currently profitable business arms.
Amerigon is developing thermoelectric modules to capture waste heat from cars and convert it to electricity. Ormat is finding ways to recover energy from the exhaust and midstream gases that are a byproduct of cement production, for conversion into new sources of generation. “There is going to be so much growth in businesses like these that can capture the waste streams and turn them into goods,” says Wilder. “The profits are going to flow to them.”
New analytic tools—databases, models, and measures—are rapidly being developed and refined by environmental risk consulting firms to support steady-state investors. UK-based Trucost, for example, provides data and analysis on corporate emissions and natural resource depletion to enable evaluation, on a company-by-company basis, of the once hidden environmental costs and risks of doing operations.
Trucost’s models are capable of measuring 702 different environmental variables—from greenhouse gases to mercury—in both a company’s direct operations and its supply chain. Data is culled from corporations’ own reporting and from other external sources. “At the moment our clients are paying us primarily for our greenhouse gas analysis,” says Simon Thomas, Trucost’s CEO. “However, we have been asked more and more for analysis on water use—it is becoming the next carbon in terms of perceived corporate risk.”
Trucost’s TRUEVA (True Economic Value Added) is a key measure calculated by subtracting from a company’s net operating profits after taxes not just the cost of financial capital but the cost of natural capital as well. This measure helps investors assess the ability of a company to absorb the costs of pending or expected environmental regulations as well as the possible penalties that could be assessed as a consequence of successful environmental lawsuits. TRUEVA helps portfolio managers minimize environmental risk, since even companies in the same sector often exhibit a wide variation in environmental exposures.
For example, a TRUEVA analysis of the largest US electric power companies’ exposures to carbon risk in 2004 (based on an assumed price of carbon mitigation of $14 per ton) indicated that while American Electric Power, a utility heavily reliant on coal-fired generation, posted an EVA of $134.9 million, its TRUEVA was a negative $4.8 billion. Meanwhile PG&E, which sources its electricity from far less carbon-intensive sources, posted a TRUEVA ($497.3 million) only slightly lower than its EVA of $507.8 million.
Thomas credits the United Nations Intergovernmental Panel on Climate Change’s 2007 Stern Commission Report with raising awareness in the corporate and investment community that mitigating the impacts of climate change will be far less costly to the business economy than a do-nothing approach. Despite the economic downturn, Thomas reports, Trucost had its most profitable month in March 2009.
The firm was recently approached by Standard & Poor’s with an invitation to develop a low-carbon version of the S&P 500; the resultant index went live in March. “The fact that S&P asked us to do this indicates that there is a huge change in the perception of risk happening out there in the investment community,” says Thomas. The S&P low-carbon index returns closely replicated those of the S&P 500, according to Thomas, while emitting 48% fewer greenhouse gases. “Imagine what happens to a low-carbon investment strategy once the price of carbon goes through the roof,” he suggests.
Thomas believes that in coming years more and more environmental impacts will be recognized as real costs of doing business, especially as countries struggling with budget deficits seek tax revenues from new sources. Like steady staters, he sees a trend away from taxing the “goods” of income and labor and toward taxing the “bads” of resource depletion and pollution. He notes that Europe is considerably in advance of the US in this regard.
“There aren’t many European policy makers who don’t recognize that external costs are real,” he says, “that there is, for example, a precise relationship between sulfur dioxide in the air and the costs of asthma treatment now born by UK health services. In Europe we are all aware that if polluters had to pay directly for that damage they would be more circumspect about creating it.”
THE NEW BANKING MODEL EMERGES
If steady staters’ predictions become reality, the financial services sector will return to its former core function as an intermediary between borrowers and savers. “Every dollar loaned should be matched by a dollar previously saved somewhere else,” says Daly.
This sounds surprisingly like the sustainable banking model of Netherlands-based Triodos Bank, which has strictly adhered to sustainable banking principles since 1980. “Triodos has always operated under a simple transparent model in which it takes savings from depositors and lends them to sustainable companies,” says CEO Peter Blom.
On the investment side, Triodos offers an array of sector funds—including renewable energy and microfinance. Triodos is highly selective in its lending and investment practices. It supports renewable energy, such as wind power, biomass, and solar energy projects, but shuns nuclear. It invests both on a venture capital basis and through loans to manufacturers that are investing in technologies to reuse and recycle raw materials and in organic farming and organics-based product manufacture.
Triodos was not exposed to any of the complex financial instruments that eroded the value of so many financial institutions in the current crisis. Blom is a stern critic of the banking practices that led to massive taxpayer bailouts. “We have created too much capital and have come to think that there is value in its mere circulation,” he says. He maintains that a new banking model must emerge from the ruins of the banking crisis. Sustainable lending and investing must be its only goal and executive compensation must be circumscribed.
Triodos has adhered to that model for the last 30 years. By remaining an unlisted company, it has avoided focusing on short-term profit maximization. The strategy has paid off. The company’s balance sheet grew by 25% to 2.4 billion euros in 2008, 10% over expectations, as more depositors were drawn to what they perceived as sound management practices. Net profits were 13% higher than in 2007, exceeding internal targets.
In March, Triodos joined 10 other sustainable banks around the world—with a total of $10 billion in assets—to create the Global Alliance for Banking on Values. Two other partners are BRAC Bank, the world’s largest microfinance institution, and ShoreBank, a community bank based in Chicago. Achim Steiner, executive director of the United Nations Environment Programme, spoke at the alliance’s first conference.
While formerly formidable institutions are accepting bailout monies to stay afloat, the Philadelphia-based e3bank, which plans to use strict triple bottom-line principles to construct its lending and investment portfolios, is raising $30 million in private equity this summer and expects to be operational in September 2009. Chairman Sandy Wiggins is highly optimistic about the future of sustainable banks like e3bank. “I don’t think we could have done this even two years ago,” he says. “The confluence of the growing awareness in the consumer population about climate change and other pressing environmental issues, the power of the green building movement, and the general pressures we are feeling globally around resource consumption is now making our kind of banking possible.”
What does Herman Daly think about these signs that his long-held skepticism about growth economics may finally be catching on? “I have mixed feelings,” he admits. “I do think that some people are beginning to reconsider the old model, but we continue to live in a growth economy and that is what current leaders understand. I suppose they feel the public is just not ready to talk about anything other than growth and they won’t be elected if they do. It may take another growth and crash before we get really serious about this.”
—Susan Arterian Chang is a financial writer based in White Plains, New York.
Illustration by Mark Andresen.