Growth is green

The New Statesman blog has an interesting article by Dimitri Zenghelis (who waste policy people may remember spoke at the CIWM/ESA conference back in June).

Mr Zenghelis correctly identifies that the economy is currently being held back by a lack of investment. However, he fails to recognise that investment is in turn being constrained by wrong-headed capital regulations placed on the banking sector (as I argue here). This regulatory distortion is a (the?) principal cause of the widespread retrenchment across the economy.

Investors are understandably worried about lending to a "policy-driven sector". Any investment which depends for its long term success on government whim rather than underlying economic fundamentals is bound to operate on shaky ground.

The long term future for the green economy though is bright. Resource efficiency is a widespread and ongoing phenomenon which is not going to go away. At the same time, consumers' preferences for environmental goods and services tend to increase over time as their incomes rise. This means that in the long run, improvements to the environment will lead to welfare gains and an underpinning economic case for them can be made.

In the short run, however, this will be subject to fluctuation and uncertainty. Such uncertainty is compounded when governments intervene by pushing favoured and currently expensive technologies. By trying to run before we can walk, government policy can lead to the early deployment of expensive solutions which crowds out resources from parts of the economy which are currently more productive.

On this basis, one could argue that Government intervention which distorts the market in the near-term may perversely delay the long-run transition to a green economy by slowing growth and delaying consumers' adoption of greener preferences. This is ultimately counterproductive but sadly all too common.