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1. What is the problem?

We need a comprehensive ecological and social transformation in order to avoid the collapse of civilization via widespread hunger and suffering.  Thus, we need a systemic approach to making monetary investments in many sectors of the society and economy:  food production, water supply, healthcare, education, housing, energy supply, energy demand technologies, land-use, natural environment reconstruction and preservation, mass transit, production of consumer goods, etc..  Yet, most reports and discussions of transitions to sustainability do not address the huge problem of how to finance such transitions in a serious way commensurate with the substantial magnitude of the problem.  In fact, the magnitude of necessary gross investments (not net costs) in all of these areas listed above might be of the order of magnitude of at least 5-10% of world GDP per year.  At the lower end of this range that would imply about $3.5 trillion per year in gross investment requirements, or almost 3 trillion euros.  Rough figures just for the United States indicate that more than $1 trillion per year may have to be invested there just to convert the energy system from a fossil-fueled based system, to a renewable energy based system, including investments in more energy efficient energy end-uses.  Note that so far, almost all (if not all) of the integrated assessment modeling done in addressing the issue of the economics of mitigating climate change for the IPCC assessments, or for other reports, do not include a treatment of the incremental investment requirements for any of the topics listed above except for the energy supply system.  Even the investment requirements for converting the economy to more energy efficient end-use technologies are completely omitted from the climate change assessments!

Most reports (from the UN or otherwise) talk vaguely about public/private partnerships to accomplish this, but this is little or no discussion of how these investment decisions can be made in a way that maximizes democratic input of all relevant stakeholders, minimizes corruption, and is done in a way that is likely to reach all necessary social and ecological goals over the long run.  There is also no discussion at all of what level of interest rates, or rates of return, the world could afford to pay on such investments so that income inequality does not get worse, and, indeed, gets better.  Rates of return on these investments are important because, to slightly oversimplify, if the rate of return is higher than the average rate of labor productivity, then income tends to shift from labor to capital.   Yet, in OECD countries, labor productivity has only been increasing at about 1.5% per year.  Yet, not even the Germany government, not to speak of the US, can borrow money that cheaply for long-run investments.  That is the massive problem we face!  So tax policies will also be needed to re-distribute income from such investments back to essential social purposes, even if most of the huge investments I believe are needed are made by public entities.

 

2. Some Economic Considerations

There are some basic economic factors that must be taken into account when addressing a transition to a sustainable world.  One consideration is that much gross investment would be required just to sustain the world economy in a business-as-usual scenario.  Thus, a transition to a Great Transition may not require more gross investment that a business-as-usual scenario, though I think it probably will, at least for the first few decades.  The reason why is that more new investment will be required to address the vital issue of enhancing the well-being of the world’s poor, at the same time that massive investments will need to be made to convert the current energy and production systems to more renewable technologies, which are typically more capital intensive than existing technologies used for the same purposes.  This may lead to greater economic “growth” (often known as “green growth” in the next few decades than we might have seen in a business-as-usual scenario.  This extra amount of growth will, of course, tend to make climate change and other ecological problems worse, but I believe this is inevitable because the world will not be able to cut back its consumption of many consumer goods even in rich countries fast enough to avoid this incremental growth, and we probably want poor countries to grow their economies faster anyway.  Of course, any additional growth should be directed, as much as possible, in sustainable directions.  Part of the economic development strategy should be to increase human and ecological well-being with the least possible energy use and pollution.

Another reason why I believe that most new investment to finance the Great Transition will have to come from the public sector, besides the lower rate of return requirements, is that private capital markets will not direct sufficient amounts of investment into the needed sectors to finance this transition.  After all, many needed investments may even prove to be money losing propositions, but that will be a cost that society will have to bear to achieve aspects of sustainability.  Either way, private capital markets under capitalism tend to allocate money towards the highest rates of return, at least in theory.  (Note the paper attached on my skepticism as to whether or not stock markets are useful to society anymore, if they ever were.) So when reports on financing sustainable development glibly state that most investment capital will have to come from the private sector, as they usually do, this is not realistic, in my view.  Making large investments in sustainable technologies and infra-structure year after year, will imply that dollars or euros will begin to be repatriated to the rich countries that were the source of those investments all too soon for the recipient countries to benefit over the long run.  Thus, financing sustainable development using private capital from wealthy countries would be no more sustainable than imperialism ever proved to be.  Thus, either huge amounts of finance capital will just have to be given to poor countries by institutions like the World Bank and regional development banks for “free”, or most sustainable development investments will have to be made a very low, subsidized interest rates by governments.

 

3. How can these large investment requirements be prioritized?

The need to prioritize such large amounts of investments in projects throughout the world is, indeed, a daunting challenge.  Clearly, planning will have to proceed on a regional or national basis, depending on the nature of the investment projects.  Ideally, a common funding mechanism and formula could be developing for allocating internationally contributed funds to all recipient countries, in a consistent manner so that regional rivalries and jealousies are minimized.  Similarly, it would be good if similar technological and social approaches to similar problems were taken, if it becomes clear what the best approaches are.  Clearly, mistakes will be made, but the world will not be able to afford too many “mistakes”.

In addition, we need to ask whether or not putting 5-10% of world GDP into investments to achieve sustainable development is realistic.  I think the answer is clearly yes, since even BAU scenarios for Europe assume that 18% of GDP is annual gross investment, and a green growth scenario increases that to 22%. Of course, some of the 18% would be modified to target sustainable development goals rather than normal business goals, with 4% additional to enhance the achievement of those goals.  (See Tabara, et.al., Transformative Targets…., 2012) (Note that this macro-economic analysis supports the hypothesis that investing for sustainable development would lead to higher than otherwise GDP growth rates.)  In fact, probably a high proportion of the 18% would be re-directed to more sustainable technologies than would otherwise have been invested in.  Examples include; much better insulated residential dwellings and office buildings, more efficient mass transit vehicles like buses, solar electric generators instead of natural gas-fired generators, higher efficiency appliances, organic farm equipment instead of normal farm equipment, etc.

To some extent, then, a wide range of regulatory and legal mechanisms can be relied on to force private investment into the achievement of various technology development and production goals.  One set of such mechanisms would be new technology efficiency targets that would have to be met periodically, and the efficiency goals are tightened up.  “Efficiency” in this sense would not be limited to just the consumption of electricity, but also the consumption of other natural resources, water, and food crops.  One kind of “efficiency” that is often forgotten is the recycling of key feedstocks and consumer products, as well as making most products with longer usable lifetimes, so fewer natural resources have to be used in the overall economy to replace existing usable items.  This can greatly reduce the turnover rate for the consumption of consumer items, once people get used to the item that purchasing the very latest designs for a product is not important.  This can hopefully be done for most products, even clothing.  But now that consumer electronics absorb so much of household budgets and attention, regulations may be required to slow down the rate of planned obsolescence of hardware.

Prioritizing other investments will necessarily depend on the existence of more complex and coherent “five-year plans”.  Five years is probably a reasonable time frame for planning many investments, getting feedback from their success and operation, and adjusting future plans to take the learning process into account.  This would be part of what modelers usually call “learning by doing”.  In addition, five-year plans would have to be adjusted as new technologies are developed, with variations from previously forecast levels of cost and operating parameters.  In general, physically-based targets for energy, minerals, and water consumption reductions are likely to be the most practical, since they will be relatively easy to measure.  Such targets could probably be applied individually to each major corporation, or relevant government agency, in each country.

But how should such five-year plans be created?  Here I think my “Regulating the Economy” paper that we discussed about three years ago is relevant.  It described a multi-stakeholder process for approving corporate or agency investments that was relevant under forms of capitalism similar to what we have now.  Yet, it allowed for legally authorized mechanisms for establishing and following regulatory processes and results that would allow for considerable stability even for private capital markets.  For example, once the industrial regulatory boards (IRBs) described in this paper approve any particular investment, then investors would be almost surely assured of a “regulated return” on this investment.  What level that return might be is still a key issue.  As discussed above, any real rate of return much above the rate of growth of labor productivity would probably be too costly for most socially desirable investments.  Therefore, the financing of the Great Transition via private capital markets might be quite limited in scope even if the regulatory approval of IRBs is obtained. A similar approach to prioritizing sustainable investments that applies more to government or quasi-public agencies is a “participatory budgeting” process, as we discussed three year ago.  In that situation, a city council process similar to that carried out by IRBs could be structured such that public investments required multi-stakeholder review and approval as occurred at IRBs.

 

4. Mechanisms for Raising Capital for Great Transition Investments Over the Long Run

One possible mechanism for financing the Great Transition has been proposed by David Schweickart, namely a government tax on the net depreciable assets owned by corporations, businesses, and government agencies.  The tax rate could either be differentiated by industry to encourage or discourage investments in certain industries, or it could be constant across all businesses.  These tax revenues would be handed over to regional or local development banks and used to fund both private and public sector projects.  Presumably, the financing of private sector investments would be done through low interest loans.

Of course, there are many other possible tax mechanisms for raising investment funds, depending on the level of funds required.  Obviously, if public tax mechanisms are the primary source of investments, then it becomes even more justifiable to have the public, through stakeholder processes, to actively participate in the decisions as to what investments are actually made.  The stakeholder processes could even be run by the regional or local development banks, just as at the global level, similar processes might be undertaken by a reformed World Bank.  It would also be more justifiable for public institutions to hold equity shares in each business in which public funds are invested.  Capital markets could probably only be trusted to allocate some of the needed investment funds in a reasonable manner in circumstances where there were a relative lack of negative systemic implications of such investments. Anyway, in an accompanying paper, I explain why I don’t stock markets and having external equity shareholders in corporations is socially desirable any more, if it ever was.

To the extent that the world still relies on private capital markets to fund sustainable development projects in developing countries, it seems clear that strict controls on international capital flows would have to be established.  Namely, we could not allow private corporations to invest in a long-term project in a developing country (or any country?), and then try to pull their money out of the country mid-way through the project.  It is not even clear to me that developing countries should allow investors to ever pull their money out of the country, even profits.  The reason for this concern relates to obvious problems that have around since the days of colonialism.  If the profits from investments are regularly repatriated to the rich country making the investment, then the developing countries never get to reinvest the money, and cause the economy to grow further.

So, in general, it seems to me that if massive capital flows are required to finance the Great Transition in developing countries, this money and any profits or returns that derive from it must be required to stay in the developing countries indefinitely, other their national and per capita income will never rise, and may, in fact, fall relative to rich countries over the long run.  After all, isn’t this what has happened over the last century, or longer, in many developing countries?  While a somewhat different topic, all of these issues must also be considered systematically in the context of what kinds of ownership structures should be encouraged/allowed in the future for “sustainable” businesses.  For example, should national and international policies be established to move steadily in the direction of worker or community-owned businesses from the current dominance of external stockholder-owned businesses?

Similarly, to the extent that we still want and/or have international aid institutions such as the World Bank and IMF in the future, most of their investment and financing projects would probably have to be undertaken at highly subsidized interest rates, or as simple grants, on which no returns were expected.  Again, this will probably be necessary so that money (interest payments on loans) is not constantly being pulled back out of developing countries.  Obviously, strict criteria and priorities for sustainable development investments would have to be developed within these agencies consistent with the five year plans being developed at the region and global level.  How these international aid agencies should interact with regional governments and businesses is a major issue given the problems that have been common in the past.  Often, of course, these international aid agencies have simply supported the business agendas of major international corporations and donor governments, and have not invested in ways consistent with the development priorities of developing countries.  This must change – but what kinds of changes are both practical and theoretically desirable?  And for any approach to providing external aid or capital, how can government and corporate corruption (in both rich and poor countries) be dealt with effectively to make sure that the money is well spent.  These are all huge issues!

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