Reports emerging from the European Commission last Thursday suggest that two key environmental proposals may be dropped from its programme. The object is to reduce the number of regulations with which businesses must comply.
If true, the associated losses could be considerable. The Clean Air package could deliver “monetised air quality benefits” of up to €151 billion per year by 2025, according to the E.U.s impact assessment. The Circular Economy package, which is focused on recycling, offers net savings to businesses of a staggering €604 billion through “resource efficiency”. To put that in context, the controversial Transatlantic Trade and Investment Partnership (TTIP) promises a boost to E.U. GDP of €120 billion by 2027 in the best case scenario.
Why would the Commission want to drop widely-supported proposals for clean air and recycling worth a potential €755 billion between them, while pursuing a controversial trade deal worth €120 billion at best? The answer lies in the provenance of those numbers, all of which are measuring different things.
For a start, those “monetised air quality benefits” are not real money. Their value derives from something much more important than that, which is the quality and length of people’s lives. The impact statement for the clean air package anticipates a reduction of 50% in premature deaths from particulate emissions by 2025 in the recommended scenario, and of 33% from low level ozone. This equates to 60,000 fewer premature deaths than would occur under existing policies.
Emission abatement measures are estimated to cost about €5 billion a year by 2025, against which can be offset various savings such as fewer working days lost and reduced healthcare needs, which together are worth about €3 billion. The cost to polluters of installing abatement equipment is also offset by the benefit accruing to the manufacturers of that equipment.
In terms of real money, therefore, the net result of air quality improvement is broadly neutral. GDP does not measure the quality and length of people’s lives, so the size of the economy does not change as a result of the clean air package. In terms of economic growth, that €151 billion of “monetised air quality benefits” simply disappears into the ever-cleaner air.
Something similar happens with recycling. That €604 billion saving is some way into the future and is preceded by costly investment. The impact assessment for this package identifies a net €29 billion annual social benefit, but makes no specific claims in relation to economic growth. As with cleaner air, reductions in landfill, marine litter, atmospheric CO2, etc. do not translate directly into economic growth, since social benefits are not measurable in GDP terms.
The fact that human health and the state of the environment have no value for GDP provides a hefty clue to the European Commission’s list of priorities, of which growth is number one. Since GDP is the internationally recognised measure for economic progress, policies that do not focus upon it - or do not do so in the short term - are being marginalised. Although climate change is at number three, environmental protection as such does not feature in the top ten. TTIP, on the other hand, is at number six.
If the Commission decides to scrap the clean air and recycling proposals, it will highlight once again the uselessness of GDP as a measure of human progress. I’ve discussed elsewhere how it encourages governments to value the different forms of economic activity in the reverse order to that which people would naturally adopt. By focusing exclusively on money transactions, it ignores many things that have a direct focus on human wellbeing, including the huge amount of useful and productive activity that people undertake in their lives for no pay at all.
The limitations of GDP as a measure of wealth production are increasingly well known. Less widely recognised, however, is how a policy focus on GDP is likely to promote inequality by favouring the already-wealthy. Because it measures the economy as a whole, GDP is not concerned with how wealth is distributed, so its usefulness depends upon the assumption that a growing economy is good for everybody. This is the logic of trickle-down” - the idea that the wealth of the rich finds its way down to the benefit of all.
People with spare capital are well placed to increase the money wealth that GDP measures, whereas the less well off may create wealth much more efficiently outside the money economy by doing things for themselves, as this example graphically illustrates. The way to maximise GDP, therefore, is to favour capital investors and encourage everybody else to prioritise paid work over self-motivated, unpaid activity.
The trickle-down theory, however, is increasingly discredited. A report published last week by the OECD concluded that GDP would be higher if societies were more equal, and that relying upon trickle-down is likely to undermine growth in the longer term. If policies that target GDP are favourable to the rich, however, this analysis poses a significant problem. More equal societies have higher GDP, but policies focused on GDP growth tend towards inequality and may, therefore, prove self-defeating.
Ultimately this is a question of long term and short term outcomes. Business-friendly, light regulation and low taxes designed to help company profits may give GDP a short term boost but will end up leading to lower growth. Governments looking for sustainable growth of the sort of wealth that really matters need to plan people-friendly, socially inclusive measures that will increase individual wellbeing over the long term.
Planning does not become “long term” just because it has a distant date attached to it. Projections for TTIP are based on 2027, by which time, it is claimed, “every year an average European household would gain €545, as our economy would be boosted by 0.5% of GDP, or €120 billion annually.” The word average, however, conceals any amount of inequality, and the main cheerleaders for TTIP are the corporate interests for whom new avenues to short term profit will be opened up.
In practice, households that are invested in corporate profits will do much better than average out of TTIP, and the rest will do far worse. The reason is simple: TTIP seeks to increase the movement of goods in the interests of lower prices, but since moving goods around has a significant cost (both financial and environmental) it follows that those lower prices will be paid for by the lower wages that an even more competitive economy demands.
A clean environment, on the other hand, provides direct social benefits for everybody. The additional costs incurred by business will be repaid in spades by improvements in quality of life and human wellbeing. In this scenario, corporate profits may grow less quickly, but the totality of human wealth has greater potential for sustained increase in the longer term.
If the E.U. is keen to assert leadership on these issues, it could do worse than reflect upon what “wealth” really means for its 500 million citizens. Higher corporate profits extracted from an increasingly “flexible” labour market is probably not the answer to this question. Among possible alternatives: clean air to breathe; an affordable place to live; a fair share in the wealth that society produces and the time to enjoy it. All things that GDP can’t measure and which form no part of what "economic growth" currently means.