The Value Of Environmental Capital

Ernst Ulrich von Weizsäcker

Co-Chair of the United Nations Environment Programme's International Resource Panel and is Co-President of the Club of Rome

The human race is at a tipping point. A moment of great change lies before us. We have been so successful in developing our knowledge, technology and skills that we have created untold wealth and material prosperity – prosperity that could barely be dreamt of 100 years ago. The innovators of the 19th Century couldn’t imagine the scale of innovation we enjoy today, but nor could they imagine the extent to which this change is impacting our environment.

Revolutions in electrical and digital technology mean the human race now covers much of the planet and harnesses resources from its furthest corners. However, this is not without cost. The size of our global community now rivals the planet’s ability to cope.

Improved exploration and exploitation of resources means commodity prices have fallen over the past 200 years.

Some would argue this decline in prices has slowed since the year 2000. Why? Until roughly 2000, only about one billion people on Earth, chiefly in the economically advanced OECD countries, were enjoying modern type prosperity based on high resource consumption. But since the 1990s, the People’s Republic of China and other populous BRIC countries have entered world markets as major buyers of petrol, minerals and other natural resources. Consumption in these rapidly developing countries is rising at a time when resource exploitation may have reached its natural geological and technological limits.

This increased scarcity doesn’t mean there will be an immediate escalation in prices. I tend to believe that the rise of commodity prices on world markets will be considerably lower than in previous decades. Look at the boom of cheap shale oil and gas in North America, and the discovery of new metal ores in Africa. However, even if scarcity grows slowly, I believe that all countries are well advised to accelerate their efforts in developing technologies that are dramatically more resource-efficient than today’s.

“The countries that introduce efficiency technologies first will benefit… and will be ones to shape the future global economy”

Why is this? Improved resource productivity is already available. Some pioneering countries in East Asia and Europe are already engaging in it and are thereby reducing global demand. Whilst the USA may be culturally reluctant and lacking in the necessary infrastructure to become truly resource-efficient, if China and Europe move ahead with the new technological revolution, then the USA will have no choice but to join the trend. China, in her 11th and 12th Five Year Plans, has already stressed the importance of energy efficiency in planning for economic sustainability.

I’d also argue that many overestimate the energy demands that a country really needs. The reason? Political leaders make short-term decisions to please their people or the electorate by making natural resources as cheap as possible, thus frustrating all efforts towards higher resource productivity. It never occurs to politics or industry that it could be wise to artificially create a financial signal of future scarcity. The notable exceptions are China and Germany.

China first let energy prices, which were formerly heavily subsidised, gradually approach world market levels and later even moved them upwards beyond the world market. Germany, in 1999, introduced an ecological tax reform, which shifted an increasing part of the fiscal burden from labour to energy, thus making energy efficiency more profitable and the laying off of workers less so.

There is another way of putting a price on energy use, or more specifically, on the emission of CO2 or other greenhouse gases: it is the limiting and trading of emission permits. This has been the method chosen by the EU countries for fulfilling their obligations under the Framework Convention on Climate Change (FCCC) and its Kyoto Protocol. But Europe’s emissions trading system (ETS) has lost its traction, notably after the prices for the permits fell to near zero.

Direct pricing on a predictable trajectory can be very attractive for investors and creators of new technologies. They can more or less calculate by which time an efficiency technology will become profitable. If we were to make energy prices (and raw material prices) rise by as much as the documented efficiency gains of the previous year, then, on average, the cost of buying energy and materials should remain constant.

History demonstrates how human labour productivity rises in parallel with gross labour cost. Over a period of 150 years, both labour productivity and gross labour cost rose roughly twentyfold in the successful industrialised countries.

This mutually enforcing development of cost and productivity turned out to be the engine of technological progress and of spreading wealth.

This is an exciting time – I foresee a long- term but revolutionary improvements in resource productivity. Improved productivity would also affect infrastructure planning, housing, mobility, nutrition habits and the durability of goods – these are all issues that environmental policymakers have long struggled to find solutions to.

Worldwide scarcities, or the cost of refinement, will inevitably be felt in developed and well as developing economies. The countries that introduce efficiency technologies first will benefit, enjoying ‘first mover advantages’ on world markets, and will be ones to shape the future global economy.