Chris Huhne’s broken window

Energy Secretary Chris Huhne spoke of a dark day, and made clear he was ‘deeply disappointed’. EU plans to raise the target for carbon emission cuts in Europe have failed. The Polish government blocked them, deterred by the high cost a tougher target would impose on the Polish economy.

The existing EU target plans to reduce carbon emissions to at least 20% below their 1990 levels until 2020. But most European governments no longer consider this ambitious enough and attempted to raise the target to 25%, with the British government pleading for 30%. Mr Huhne’s response to the events was interesting: ‘The UK together with its European colleagues will continue to make the economic case for tighter EU carbon targets so that we can make the most of the future green economy.’

Thus, instead of making the case that the economic cost of emission cuts is justified by the environmental gain, Huhne now reinterprets them as creating a win-win situation: there is, supposedly, an environmental and an economic case for green policies. Prime Minister Cameron supported this view: ‘The UK can prove that there need not be a tension between green and growth.’

However, if a higher carbon emission target simultaneously helps the environment and the economy, then why settle at a mere 30%? Would not 40%, 50% or 95% provide an even bigger boost? Indeed, associations like the Green New Deal Group believe that we do not even need austerity measures, because the way to balance the fiscal budget is to spend more public money – on green projects. This, they believe, would lead to growth in the green economy, resulting in soaring tax revenues.

The logic of Cameron, Huhne and the Green New Deal Group is, of course, just another illustration of the broken window fallacy. All the resources that are funnelled into the ‘green economy’ have to be sucked out of the ‘non-green’ (i.e. wealth-producing) economy first. The only way to make an economy grow is to combine resources in a smarter way than before. If the ‘green economy’ did this, it would not require any government policy to promote it, because private investors would rush in anyway. The tale of the economy boosted by green investment is akin to the tale of the Baron von Münchhausen pulling himself out of the swamp by his own braid.

So of course there is a tension between green and growth, and those who advocate green policies should be open about it. Interestingly, it is only the ‘soft Greens’ or ‘Green Keynesians’ who deny the existence of a trade-off, while the ‘Deep Greens’ readily acknowledge it. The report of the Steady State Economy conference, for example, even rejects the idea that increasing energy efficiency could avert the alleged ecological disaster(s) ahead:

‘As cars become more efficient over time, using less fuel per mile travelled, the cost of driving falls. People may use the money saved to drive further, or more often, undermining fuel savings. Alternatively, they might spend this money on a different activity altogether, such as a holiday in Spain, increasing fuel use overall.’

There is, however, one thing which Green Keynesians and Deep Greens have in common: both camps believe the policies they advocate are advantageous on so many levels that they wouldn’t actually require global warming any more. If green investment was such a great way to stimulate the economy, we should have it regardless of how global temperatures evolve. Likewise for the Steady Staters, who don’t think we should have holidays in Spain anyway.

Dr Kristian Niemietz is the IEA's Editorial Director, and Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).