True or False: To reduce Greenhouse emissions, Do We Need to Sacrifice Economic Growth?

8. Recent Data says FALSE, but the devil is in the details (9 min read)

Photo by Ian Taylor on Unsplash

I’m sure you have heard this idea: Either we can reduce our CO2 emissions by deliberate economic “de-growth”, or we can continue chasing GDP growth (with as much emissions as it takes) and march towards climate catastrophe.

This thinking has found a lot of support from a section of the public more concerned with climate change than anything else, and a whole lotta scorn from everyone else. After all, few people want to be poorer than their forefathers, especially by choice. But economic data from the last couple of years is showing something interesting: 

Some countries have grown their economies while simultaneously reducing CO2 emissions. 

This is wonderful news, and has tempted many to believe that victory is in sight. But I wondered... What tangible impact does it have? Will this trajectory continue? The story told by this data is subject to a lot of ifs, buts and nuances that seem hazier as I dig deeper. 

So I want to share with you how we got here, and why this news, although promising, needs a healthy reality check. Dear reader, welcome to this week’s edition of Climatonomics - And I want to hear from you! (Questions at the end)

The great decoupling: More growth, fewer CO2 emissions

A technical term economists have for relating a country’s economy GDP (per capita) with its CO2 emissions is called Decoupling. I have included charts that show GDP growth with time, compared to change in emissions over the same period. 

Note that emissions are based on not just production based emissions (PBE) i.e. emissions from emissions inside the country, but also from consumption-based emissions (CBE) i.e. emissions produced outside the country to manufacture products it imports. PBE and CBE are more accurate metrics of emissions comparison, as developed countries import manufactured goods, and this metric captures those emissions. If you are interested in how this data is calculated, it’s a fascinating topic which is more complex than it looks. Here’s a quick explainer post, if you want the details. 

Whodunnit? Why Counting Carbon Emissions is Far More Complicated Than it Looks

There are 3 broad categories of decoupling based on GDP per capita:

Absolute Decoupling: The country’s GDP increases, while its CO2 emissions decrease, or just remain the same. Essentially, there are no extra emissions to achieve GDP growth. Examples: USA, Canada, Germany and most of the EU.

Relative Decoupling: The country’s GDP increases, but its CO2 emissions increase at a much slower pace. The growth comes at the cost of more CO2, but it’s not a proportional increase. Examples are India and China, with the latter achieving a higher decoupling due to a stronger service sector.

No Decoupling: These countries have grown their GDP by significantly increasing their CO2 emissions, often at a much higher rate than their GDP growth. Examples: Pakistan and Brazil.

Reasons For Absolute Decoupling

While each country is unique, there are some common patterns in every economy that achieved absolute decoupling. 

1. Rise of the service sector

One of the defining features of an advanced economy is a developed service sector. The service sector is an umbrella term for all industries of highly specialized products based on specific knowledge and skill sets. Software, engineering design, financial services and tourism are part of the service sector.

A service sector based economy is attractive from a carbon emissions perspective, compared to a manufacturing or agricultural sector. For instance, a desktop computer consumes around 0.1-0.2 kilowatt Hour (kWh) of power. A software engineer can invest time and energy on this computer to create a software or a website. They can then monetize it to multiple customers, without repeating the effort for each customer.

Compare this to manufacturing. A CNC machine consumes an average of 1.0 kWh and can only produce a fixed number of widgets at a time. More customers buying these widgets will increase profits, but proportionally increase energy consumption (effort). Manufacturing is energy intensive when scaled to a large customer base. In contrast, the intellectual property in enterprise and consumer software, banking and financial sector can scale to thousands or millions of customers with a much less increase in energy costs. 

The service sector often makes more profit per kilogram of CO2 emission ($/KgCO2) than manufacturing. The profit goes up when the intellectual property (IP) is unique and demands a premium. Even in cases of manufacturing, the engineering design that creates IP drives most of the profit, despite the manufacturing being done in another country. Apple and Nvidia are great examples: they are both headquartered in the US where they develop the bulk of their IP and keep profits, but outsource manufacturing of the actual product to Asia.

In short, the service sector has low-carbon and low energy overhead but high value. A strong service sector in most developed nations has allowed them to decouple while still maintaining a robust economy. This does not mean ALL manufacturing is low value, as we’ll see next.

2. Cleaner Power Sources 

This shows how much Kg of CO2 each country emits per USD in GDP (Lower values are better). The top 5 nations are either fossil fuel exporters (Iran, S.A., Russia) or massive coal consumers for power generation (India and China), which fuels their export economies. (From Hubacek et al., 2021)

The service sector does not entirely explain the decoupling. After all, how are countries like Germany decoupled, but still competitive and strong in manufacturing? Besides the IP, the answer comes down to the energy source, where most of the emissions in any country are concentrated.

Burning coal emits twice more CO2 than natural gas. Germany transitioned from coal to natural gas (from Russia. A move that has not aged well) shortly after its reunification in 1989, and embarked on a major renewable energy expansion in the 2000s. Compared to Asia, Germany only manufactures products high in the value chain, such as luxury cars, aircraft components and specialized machinery. These products, originating from domestic IP and high-skilled labor, command a premium in the international market because of a lack of comparable competition.

A similar story has played out in the United States, where manufacturing is focused on high value, high profit-margin products such as space tech, aircraft, cars, industrial machinery and farm equipment, many of which require high-skilled labor. Yet, the US CBE has reduced significantly because of the fracking and shale revolution that has virtually replaced coal with cheap and plentiful natural gas. Wind and solar power have also seen massive growth.

It is important to acknowledge that developed nations have immense financial and technological resources (relative to their smaller populations) to invest in renewable energy projects on a large scale. 50% of German power comes from renewable sources, while France is the most efficient of the lot: It gets 72% of its power from nuclear energy, and another 18% from other renewables (which is also why rabid anti-nuclear activism drives me nuts).

All this sounds wonderful, but there are reasons to be cautious. 

Barriers Keeping Us From Declaring Success

Let’s be straight: Making economic success not dependent on increased emissions is an unprecedented achievement. But we have to ask: Is this enough? Is everyone on course to decoupling? Or worse… will decoupled countries regress? Let’s look at what the data doesn’t show us, but we can read between the lines.

Challenge 1: Decoupling Can Be Slow, Expensive… And Not Permanent

Developing countries whose economy depends on manufacturing for export are typically energy scarce, with less financial capacity. India and China are prime examples, as they do not have massive natural gas reserves or renewable energy capacity to match the size of their populations. But coal is abundant. And Cheap. 

In the choice between no power and polluting coal power, countries always pick the latter. China still has the world’s highest concentration of coal plants, followed by India, with more under construction. The more coal power India and China use, the harder it makes decoupling for the developed nations that import from them.

Countries that have successfully decoupled have two characteristics: high GDP and high per capita emissions. Switching to renewables needs an entirely different technology stack, supply chain and labor, requiring years of sustained R&D and education investment. Even then, decoupling is not permanent: In fact, 32 countries were absolutely decoupled from 2010 to 2015, but 22 of them had lost that status by 2018¹. 

Much like physical fitness, economic decoupling is a lifestyle, not a destination. Countries can change their energy usage, consumption, power sources, and emissions policies based on politics. 

Still, this challenge pales compared to what I consider the biggest headache…

Challenge 2:… No One Is Serious About Reducing Consumption

Developing nations have dramatically increased both consumption and production of emissions on par with developed nations. No indication of slowdown. (From Hubacek et al., 2021).

With burgeoning trade from developing to developed nations, the populations in the developing countries are being rapidly lifted out of poverty. This has increased their purchasing power, and trade between developing nations has more than doubled since 2004.  

Today, the net emissions from CO2 based on trade between developing nations are almost as high as those from developing to developed nations. Before we rush to place the blame on developing nations, note that the absolute CO2 emission even for the decoupled developed world has seen only a modest decrease. This is far worse than it looks when you compare demographics.

The US population has nearly stopped growing, while the EU has been staring at demographic collapse for a while now. In comparison, the developing world is seeing tremendous population growth, and nearly 8 out of 10 people in 2100 A. D will live in Asia or Africa.

This means two things:

1. People in the developed world have only modestly reduced consumption, despite having smaller populations. They have achieved decoupling with less polluting energy sources, rather than a massive reduction in consumption (not surprising).

2. More people in the developing world seek to consume as much as the developed world, and emissions continue to grow, unless they switch to renewable energy or choose lower consumption (yeah, that’s not gonna happen).

Final Thoughts - And what do YOU think?

Between developed nations decoupling and reducing emissions, and developing nations increasing theirs, recent study shows that the numbers are just about even, i.e., the emissions from increased trade were offset by decoupling. Despite all the decoupling, the CO2 concentration in the atmosphere has continuously increased.  

Even if we keep up pace with the same level of decoupling, it will not be enough to reduce emissions to limit global temperature rise to under 2 degree Celsius. And If developed nations with superior quality of life are not willing to make major reductions, I cannot blame the developing world for this mess. But they still need to be a part of the solution.

Looking at the data² now, I say the future looks bleak. 

But I will also say this: 15 years ago, there were few predictions that renewable energy would be as cheap and widespread as it is today. One explanation is that our technology forecasts are often linear, while disruptive technology growth is usually nonlinear or exponential. We have seen this several times: computer chips, smartphones, aviation connectivity and even agricultural yields. Similarly, maybe several untested, clean energy sources may well be competitive in the next fifteen years?

Considering humankind’s track record with tech, I should be more optimistic than I am.

Also, considering humankind’s (abysmal) track record in reducing consumption, I should reconsider any temptation of hope. 

I want to hear from you:

Is my optimism, however cautious, justified? Or deluded?

Will consumption (like it has so far) overcome any emissions reductions we make, or do you foresee a change in global habits?

All said and done… Are you optimistic? Why or why not?

Please drop your comments below. Since you have already subscribed to the email, it will take exactly 3.7335 seconds to sign in to Substack and comment here, and I respond to all of them.

Until later.

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1. Hubacek, Klaus, et al. "Evidence of decoupling consumption-based CO2 emissions from economic growth." Advances in Applied Energy 4 (2021): 100074.

2. As always, thanks to the wonderful, amazing Our World in Data Team