Janez Potocnik-Eu. Commissioner for Environment: The only way forward is a sustainable economy

Debate on Green Economy (at the Graduate Institute Geneva)

Geneva, 17 April 2013

Good day, everybody …

Just two weeks ago I shared some of my thoughts about the green economy in an event organised by Sciences Po and Ecolo Ethik in Paris. Inevitably my main messages will be repeated, but I hope they will be still fresh for such a young and fresh audience.

You are future policy makers, leaders and active members of our society. I believe that you have a very important role to play in shaping this world, your own future.

On 7th June last year a scientific article in the journal Nature stated the following: "Today conditions are very different because global-scale forces including, but not limited to, climate change, have emerged as a direct result of human activities. Human population growth and per-capita consumption rate underlie all of the other present drivers for global change".

I want to talk to you about those global challenges that we all share and the strategic choices they impose on us. Then I want to look more particularly at the challenges that we face from the perspective of one global region – Europe. I hope to show you that, even if in Europe we are faced with specific problems such as the severe financial and economic crisis, our solutions to those problems are closely tied into how we deal with the global challenges.

First let's look at those global challenges which we all share.

Our planet's population is expected to rise to more than 9 billion by the middle of this century. We will share our planet with an additional 3 billion middle class consumers by 2030. These figures are repeated by many and may no longer sound dramatic to you. So, let me slightly rephrase them. The world's population is increasing by 140.000 people per day, all aspiring… legitimately… to the same living standards that we enjoy. In just 30 years - one generation - 2 billion people more will share the planet, which is more than the total amount of the population on the planet at the beginning of the 20th Century. On top of that, in just over 15 years from now, there will be an additional 3 billion middle class consumers, which corresponds to twice the total population at the beginning of the previous century.

Of course, this is great for those 3 billion whose living standards will rise, and for the businesses that will thrive in providing for those demands, but this will put immense strain on many resources. We will need three times more resources -140 billion tons annually- by 2050. The demand for food, feed and fiber is projected to increase by 70%.

Already today 60 % of the world’s major ecosystems on which these resources depend are degraded or are used unsustainably. (fish, water … biodiversity, climate change). Without important efficiency gains, by 2030 we will need 40% more water than we can access. We would need around three times more resources by 2050.

A few days ago the departing Environmental Editor of The Independent - after 15 years of work – wrote (I'm summarizing): "Earth is under threat, as it has never been before, from the ever more oppressive scale of the human enterprise. We have the knowledge and capability to destroy our own home and ourselves. We have a terrible potential for destruction, for causing suffering to others and, indeed, now, for destroying our own home."

To put it simply: the world has changed. We are more interconnected and interdependent than ever. Many challenges, like for example climate change, disappearing biodiversity, scarce resources (like water, land or oceans), potential pandemics, poverty, global security … can only be addressed if we join our forces. Looking to the future, the "business as usual" scenario simply will not work. Transition from our current resource intensive growth model to a resource efficient growth model, to a circular economy, is absolutely necessary. It is actually inevitable for all our economies. For the first time, we humans, are affecting the balance of our planet.

Of course this growth model is more advanced in the industrialized part of the world, but the danger that the emerging economies – those where most of those 3 billion new middle class consumers live - would follow the same development path is more than real. It may sound hypocritical for rich countries to say "grow as we say, not as we did", and of course those 3 billion have just as much right to a decent quality of life. But the resource intensive growth model of the previous century can simply not be extended to today's global population. Industrialized nations must change their production and consumption patterns of the last century, and developing countries must not seek to imitate those patterns, but rather take a different route to higher living standards. The stakes are high and our responsibility for managing our own future has increased enormously.

The importance of the necessary transition to a resource efficient growth model is more or less already understood worldwide. These were basically the questions we jointly addressed a few months ago at the Rio de Janeiro conference on sustainable development. The 2012 Earth Summit did not lead to the ambitious outcome many - including myself - had hoped for. But it did reach a very important milestone: a renewed commitment in favour of a global transition towards a green economy. This in itself is an achievement, and even more so in these economic times, where the tendency is too often to put the environment at the bottom of political agendas.

The Rio Summit showed that in this context the EU and emerging powers will be, in the 21st Century, partners. We face the same resource pressures and environmental challenges - even if at different stages in our development. But, we will also be competitors, as increasing competition for resources leads to economic, but also political pressures, and even to conflicts. The fact that we will be in such greater competition means that we have to find ways to better manage our resource use. I would dare to guess that in the future strategic partnerships will be built around resources more than in the past, with large, resource rich countries with relatively low population density on one side, and highly populated, resource-poor countries on the other.

We have advanced enormously in our ability to provide for consumer needs, eradicate and treat diseases, live longer, handle natural disasters and wage wars. But we have done all of this without taking into account the limits of our planet. Our future, taking into account human population growth and growing per-capita consumption rate will be very much shaped by how well we manage existing limited resources. Water, land, energy, oceans, raw materials, biodiversity, ecosystems and the complexity of their interactions will be decisive for our future. In the past we were never so seriously forced, at least globally, to deal with these questions. Whilst we can achieve a lot by directing our technological and innovative capacities to getting more out of our limited resources, it will not be enough. We also need to rethink our existing development model.

For the past two centuries we have relied on an economic growth model based on cheap and abundant resources. This great acceleration has been a fantastic achievement of the generations of humans that have so successfully mastered so many obstacles to bring such unimagined health and prosperity. But we cannot go on growing in the resource-intensive way we did in the past; certainly not on a global scale. Today the richest 20% of the world consume about 60 times more than the poorest 20%. Just imagine the stress on the world's resources if the rest of the world would live the same way as we do.

Ladies and gentlemen,

These pressures on natural resources will be the most significant limiting factor on our ability to grow and provide higher living standards, also within the European Union.

Europe is of course part of that interconnected and interdependent world. An important part. All the challenges I have just mentioned are also our challenges. On the top of that we are in the turmoil of the most serious financial, economic and even political crisis. We are struggling to find the way out, to stabilise and reform our economies and to find effective ways to inject new growth and create new jobs. The build-up of debts, deficits, and imbalances in our economies did not happen overnight, it happened over many years. And the readjustment we are now going through won't be concluded overnight either. There is no silver bullet - if there were, it would have already been fired. So financial and economic consolidation must be achieved whilst dealing with the structural problems and strengthening the competitiveness of European economy. We need consistent policies, but also patience.

Why is it so important that we now look back and fix the damage we have done on the way? Why is all this so important today also in Europe, including for our exit from the crisis?

Firstly: we use a lot of resources. The European economy is built on decades of resource intensive growth. We use 16 tons per person per year, we throw away 6 tons of that, and half of that waste is buried in the ground as landfill: 3 tons per person every year;

Secondly: resources and energy (World Energy Outlook: International Energy Agency) are getting more expensive. After a century of declining resource prices in real terms, pressures on resource supplies have led to a steady increase of prices since 2000. On average, real prices for resources increased by more than 300 % between 1998 and 2011. At the same time, resource price volatility also increased. In Europe, 87 % of EU companies expect resource prices to continue rising in next 5 years. We are going to have to get used to higher energy prices and higher resource prices in Europe because they are here to stay for quite a while.

Thirdly: already today resources are the dominating factor in the cost structure. For example in German industry 43% of the total costs can be attributed to the use of resources and only 18% to the cost of labour. We are still very much focussed on labour productivity, and macroeconomists are used to talking about labour and capital productivity because they are the traditional drivers of growth and also, let us be honest, they are relatively easy to measure. But if you dig a little deeper most of them will admit that labour and capital are no longer the main drivers of growth. In the jargon of growth accounting, more than half of growth comes from what is called 'total factor productivity'. Total factor productivity captures the impact of innovation and technological change on growth. And at our stage of economic development here in Europe, these are the main determinants of growth.

And fourthly: we import most of our material resources. More than half of the materials that we use are imported. We import six times more than we export. We have the world's highest net imports of resources per person. And our dependency on import is increasing. We get 48 % of our copper ore from abroad, 64 % of zinc and bauxite and 78 % of nickel. We import all of our cobalt, platinum, titanium and vanadium, as well as rare earth metals.

What can be done? What must be done?

I know that many of you in this room are wondering what your future will look like. I also know that it is not ideal to grow up with so many uncertainties. But the one thing that is very clear to me, is that we can and should transform the challenges we face today into opportunities for tomorrow. I know it sound a bit like a cliché, but I can't find a better expression to use.

The real innovation challenge for companies is to shift innovation potential from labour to resource productivity. This is also the core question connected to necessary structural changes. It is not only a question of our future environmental agenda, as some might see it, it is actually a central question of our future competitiveness, and it should be the essence of our new industrial policy. To be clear, I'm absolutely not supporting deindustrialization of Europe, but I do believe dematerialization of our industry is necessary, as a precondition to keep industry in Europe.

For this we need change. We need to rethink the way we function, the way we produce and consume. The process of economic recovery cannot only be about stimulating growth, it has to be about building the basis for a different quality of growth in order to ensure a prosperous, inclusive and sustainable future.

This is why the EU has made the efficient use of natural resources one of the pillars of its economic growth strategy. What does resource efficiency mean? It means using less stuff, but getting more value and wellbeing from it. It means reducing the environmental impact of our resource use. We have to turn that human creativity and innovation that so successfully exploited those resources to provide us with health and prosperity, to rolling out those benefits to billions more people, in ways that exploit resources less.

McKinsey estimated that such increases in resource productivity could deal with about 30 % of the extra demand for global resources we can expect by 2030. So it will help, but it is not enough. That is why I believe that the concept of resource efficiency must go further than resource productivity; beyond getting more value per unit of resources. Because those same resources can have a second, or a third life. They can be re-used and recycled. We need to move from a linear economic model, where we extract, produce, use and throw away, to a circular economy model.

Let me give you an example. Do you know that the phones you have in your pockets have within them many precious substances that have to be sourced through primary extraction? However these substances can be recovered. One of them is gold. If you want to make one gold wedding ring you would need approximately 10 tons of golden ore but only 10 kilos of mobile phones. And for treating the ore one often needs to use toxic substances like cyanide.

The European eco-industry alone has created 1.2 million new jobs since 2000, employing today around 3.4 million people. And this is only one small part of the story. It is the greening of the wider economy that will produce the most new jobs. It is already doing so. Evidence points to an increasing number of green jobs as we move towards a resource-efficient economy. The most recent estimate is of around 20 million jobs or 5 per cent of the workforce.

In addition, with the global market for clean technologies forecast to double by 2020, we can build on our current strengths. The EU is amongst the world's leaders in sectors such as energy efficiency and water and waste management. Today we provide one-third of the global market for clean technologies and, if we can keep that share in a rapidly-growing sector, it will inevitably mean new jobs, new markets and new benefits from launching innovative technologies or business models.

Switzerland is also moving in the same direction. The green economy is not a new concept here. You have already introduced important measures such as the CO2 tax or the tax on Volatile Organic Compounds. The national Green Economy Program agreed by the Swiss Federal Council in 2010 identifies six areas of action that move in a similar direction: A Cleantech Masterplan, an increase in resource efficiency in the information and communication technology sector, better information on the environmental impacts of products, the integration of environmental information into the measurement of welfare, an ecological tax reform and the assessment of the impacts of new legislation on resource use and efficiency.

It is for public authorities, including at EU level, to show leadership and give the right signals. In the EU, re-orienting our growth will be particularly difficult because we are locked into old growth models. This is why our policy approach must be based on carrots as well as sticks. We need to go beyond the traditional "three C's" - command, control and compliance - and the polluter pays principle, by developing the "three I's" - innovation, incentives and integration. We must recognise that it is enterprises that will innovate on the scale needed for our transition, but public authorities/governments need to provide direction, incentives and leadership in order for enterprises to make the right investments in change. As the situation is today, market forces are too slow and imperfect; the financial, business and economic world takes a too short-term view; and politicians tend to work too tightly only around electoral cycles.

We live in market economies and the role of the market will also in the future remain central. It is the best means we have, but a free market alone is not enough to bring this transition about. The market cannot ensure efficiency in the allocation and use of resources if prices do not reflect the true costs of resources, if rewards to capital are disproportionate to other inputs, if managers on annual contracts are induced to make short term investment decisions, if directors' business decisions are overly influenced by bonuses based on short term share price.

We need to give clear signals to the private sector so that it can make the up-front investments needed to become more resource efficient. So that companies are ready for input price increases, not just responding to supply shocks. This is particularly important for SMEs. If we just try to shield our incumbent industries from the future we are not doing them a favour, indeed we risk "killing them with kindness". We need to think about the industries of the future and that means "creative destruction" as well as "innovative creation". Our job is to make transition effective, smooth and just.

Ladies and gentlemen,

The 21st century is a century of fragility. We must turn it into a century of sustainability.

That change will be difficult, but I would like to conclude on a positive note. I take my optimism from the level of understanding and support I see developing in the progressive part of the business sector. The World Business Council for Sustainable Development - a forum of 200 member companies from all sectors and from all continents with a combined revenue of more than $7 trillion - in their Rio declaration, calls for regulation, norms, standards and codes of conduct so that front-runners who have developed and pioneered the solutions are rewarded with lower barriers and entry risks. Similarly, we hear increasingly the voice of long term investors, like pension funds, whose concerns about sustainable growth and whose commitment to contribute to Green Economy transition were loud and clear in Rio.

We need industry and investors on board. Rather than fighting the power of capital, or trying to legislate away its environmental downsides, we need to harness market forces to turn economies onto a track that is sustainable economically, financially, socially and environmentally. We need green economics. But industry and investors also need to take environmental concerns on board. Rather than trying to convince everybody how damaging environmental regulation is for their competitiveness, they should rather use that money and energy for innovating necessary solutions.

As my good friend Achim Steiner, Executive Director of the UNEP, after the Rio+20 Summit said: "We have failed to turn things round in the past 20 years, but underneath that failure there is an extraordinary array of activity and innovation"…. "Twenty years ago, we agreed what to do, now we have the tools to do it. If we do not go into the heart of economic policy, we will meet here at Rio+40 even more culpable. Markets are social constructs. They are not a force like gravity. They can be governed."

Yes, we must address market failures, but we must also address governance failures.

It is imperative that we address the prevailing short term logic which is built into all our systems, be it political or economic. Do you happen to know a politician that has been re-elected because she or he was defending longer term interests over the short term ones? Or a manager who was rewarded because the profits of his or her company were lower that year, but more sustainable in the longer term? It is of fundamental importance that we built more long term logic into our data collection, reporting systems, rewarding mechanisms, decision making processes. I'm convinced that one cannot manage the world of the 21st Century without taking into account the longer term picture and consequences. This would be simply self-destructive.

In shaping our future sustainable development path the strong role of civil society will also be important. We have to take citizens with us on the journey. And I believe strongly that it is the pressure of enlightened citizens, particularly through the power created by social media, that will play a decisive role in pushing companies and politicians in the direction of more sustainable choices.

Finally, for me Europe's role in this "reshaped global order" is clear, as is the path out of the economic crisis. Natural resources and the challenges they bring know no frontiers, and in this context neither should alliances and partnerships between existing and emerging powers. Europe has an important role to play and we cannot afford to fail.

Resource efficiency is more than a 'green' agenda. It is a transformational agenda. Yes, we have to change and structurally adjust our production patterns and consumption behaviour. But we are only at the start. The transformation of our economy will require further action in a wide range of policy domains: from energy, transport, construction and greening agriculture to combating climate change, preserving biodiversity and ecosystem services, eliminating environmentally harmful subsidies, shifting taxes from labour to pollution and resource use, and encouraging industry to take a longer-term view and to invest in technologies that will reduce the impacts on resources.

Planning the transition to a sustainable economy is the only sustainable way forward. And it is not about tomorrow - it is actually about today. It is the only way to avoid going from a financial to an “environmental credit crunch”. This is not just a 'green growth' agenda, it is a growth agenda that happens to be green. If Europe wants to retain an industrial base, it must start to innovate, invest and specialise in the activities where it will have a comparative advantage in the global context of competition for resources.

To put it simple: It is actually not about "green growth", it is just about growth. Full stop.

Today the responsibility of policy makers in all countries is to prepare for that transition. But tomorrow, as future leaders, your responsibility will be to take that transition forward. To make it sure that you get the future you want.

Thank you for your attention.

Janez Potocnik

European Commissioner for Environment