Dematerializing Growth: Technology or Preferences?

1. Dematerializing Growth:Technology or Preferences? Sjak A. Smulders Tilburg University Paris, September 5, 2003 La croissance économique devient-elle immatérielle?

2. Dematerialization • Less use of materials (including energy) in the aggregate economy ……absolute delinking • Less use of materials (including energy) per unit of output ……relative delinking • Less use of scarce resources ……focussed delinking

3. Aproaches to Dematerialization • Utopias • Engineers • Philosophers • Business community • Innovative firms • Vested interests: employment and competitiveness • Economists • cost-benefit analysis • welfare costs, externalities • economy as a whole

4. Bridging gaps • Technical possibilities • Social desirability • Economic incentives • Economic policies

5. Endogenous growth theory • Explain growth from • tangible inputs (cf. old growth theory) • intangile inputs (knowledge, innovation) • Role of incentives • incentives to substitute and innovate • incentive to save and invest • Role of policy • aims at correcting market failure • permanent (long-lasting) growth effects

6. Endogenous growth and the environment no production without pollution (polluting inputs) pollution abatement (cleaning-up or reducing polluting inputs) -- implies substitution Endogenous growth and resource use energy as a factor of production natural resource sectors (e.g. fishery) Bovenberg/Smulders Aghion/Howitt Grimaud Bretschger/Smulders Groth/Schou Smulders/De Nooij Growth and resources

7. Key questions • Limits to growth? • In unregulated economy • In optimum • In between • How does environmental policy affect growth? • What is the cost of environmental policy? • How stringent is optimal environmental policy?

8. Outline La croissance économique devient-elle immatérielle? • The answer from endogenous growth theory • Some missing elements in endogenous growth theory

9. Answering the question

10. Our question: Does growth become immaterial? YES!!! • growth has to become immaterial...! • …it can become so… • …but it will become so only with appropriate policy.

11. 1. Growth has to be dematerialized 2. Growth can be dematerialized3. Growth will be dematerialized only with price incentives

12. Why we need todematerialize • Output grows, resource inputs non-growing, so resources per unit of output fall. • Endogenous growth theory experiments • Fix resource input and check whether growth is still feasible • Find optimal resource use and check whether optimal growth is positive • Find market instruments to implement two previous steps.

13. Or don’t we? • Theory: absolute delinking. • History: growth through expanding the set of useful materials/energy. • Stone – Iron – … – Plastics – Sand • Solar – Water – Coal – Oil – Nuclear – Solar • Perhaps no need for dematerilization yet, but substitution of new materials for old, scarce ones: focussed dematerialization. • Even then, new knowledge essential: substitute knowledge for resources (again relative delinking) • Buying time only?

14. 1. Growth has to be dematerialized 2. Growth can be dematerialized3.Growth will be dematerialized only with price incentives

15. When growth can be dematerialized • Substitution between man-made inputs and resource inputs. • Man-made inputs: • Implications output Polluting inputs, materials Man-made inputs

16. Substitution versus innovation • Diminishing returns: • Productivity of man-made inputs falls if resources per unit of capital fall (εK <1). • If poor substitution (σ<1), εK falls and εR rises. • Diminishing returns are offset by technological change • specialisation and division of labour • improvements in resource efficiency • satisfy same needs with new means or replace old needs by new needs • Technical change affects εK, εR and resi.

17. So we need... Long run growth is feasible if • …substitution is good… • technological changeis resource augmenting Modelling chalenges: • Technological change • old growth theories:exogenous technology • New growth theory: endogenous technology. • Substitution • Non-neoclassical economics: lack of substitution • Neoclassics: love to use the Cobb Douglas function, but recent work considers CES

18. physical capital Install capital goods Diminishing returns Markets Private good knowledge capital R&D or learning Less diminishing returns Knowledge spillovers Public good Endogenous technology

19. 1. Growth has to be dematerialized 2. Growth can be dematerialized3. Growth will be dematerialized only with price incentives

20. When will growth be dematerialized? We now switch from a planner perspective to a market perspective (incentives). Demand for materials must fall. This requires • higher prices (substitution) • if there is a market and the resource becomes scarce, this happens “automatically” • if there is unpriced scarcity, this channel fails • lower demand (technological change) • but then we have to explain why technological change is resource saving. Likely to come from higher prices.

21. Substitution and missing markets • If resource prices fail to reflect scarcity,

22. Innovation and incentives • Develop new ways of resource use: • producers save on resource cost. • Innovators capture (fraction) of resource cost savings: innovation rent • if innovation rent > innovation cost, innovation is profitable. • Higher resource prices – higher resource costs – higher innovation rent • Degree of appropriability also a determinant of technical change (α)

23. The bias of technical change • Higher resource prices shift the direction of technological change • Resource-saving technological progress may come at the cost of lower overall technical change. • Incentives to improve the productivity of man-made inputs: • Relative innovation rents and costs determines direction of technical change:

24. Crowding out “Dematerialization policy”: cut in resource use, or increase in resource prices. • What happens to overall R&D and technical change (total factor productivity)? Likely to fall in response to policy • Lower overall rate of return: less inputs implies lower scale at which innovations are implemented • Resource price policy may fail to reduce resource use because of rebound effect.

25. Crowding in? • Technical change may rise in response to policy if... • ...spillovers from resource saving are relatively large: the economy as a whole learns from the new technologies. • Cf. Porter hypothesis • Other models have found that environmental policy raises growth.

26. Lessons from endogenous technology • Poor substitution – large induced technology response • Technology is not a free lunch • Innovation cost • Crowding out of R&D • Externalities, market failure, policy failures

27. Missing elements

28. Narrow focus • Main focus is on technology side: • Substitution in production • Technological change • What about • Substitution in utility • Social innovation • Main policy prescription is correct prices... • What about other policies?

29. Policy • First Best • correct prices for scarce resources… • …tax in proportion to marginal damage • correct rewards for innovation… • …subsidy in proportion to spillovers • Second Best • We do not know spillovers, so no reason to subsidize green technologies more than brown technologies • Correcting environmental externalities is first priority • Political Economy?

30. Sociology Dematerialization: more value per resource input • What determines value? • Not resource input, but services from resources • Value of services is subjective, and depends on social context: norms and culture.

31. Status signaling • Consumers care for relative consumption • Social status • Mimic your hero • Show off your wealth and life style. Requires visible goods. Resource-intensive goods are more likely to be status goods. • Everybody tries to consume more resource-intensive goods than the other. • Externality: coordination failure. • Reason to have more stringent dematerialization policy

32. Lifestyles and social coordination • Will price policies be sufficient? • Snob effect: higher prices make a good more valuable as a status good. • Social coordination may be more effective (culture, education) • However, we have to be careful: • Is it really an externality? Private institutions to internalize adverse social competition effects. Social Coase Theorem. • Costs of coordination (including adjustment costs) • Deprive people of the possibility to reach social status

33. Conclusions

34. Future research • Endogenous growth theory now provides a well-developed framework on technology, resource use and growth… • …to study feasibility of growth in a first-best world… • …but we need more research on the role of political economy and social interaction