Robyn Williams: Let’s try a thought experiment. Go to Wikipedia and click up the list of the world’s largest companies. Then count the number of oil and gas companies compared to the rest. It’s astounding. Steven Turner, one of the brilliant producers of Radio National Breakfast, showed me this and it indicates just how much money we give to what some might consider to be old-fashioned technologies. Henry Ford once said, way back, talking about progress, that, if you asked the public about improvements it wanted in transport, they’d say ‘a faster horse’. Well, Michael Molitor, a Cambridge trained economist based in Paris, says our next technology after the horse and carriage, the car of the last century, will be a surprising choice. While you contemplate the investment challenges of Tuesday’s budget, consider this. Michael Molitor is Visiting Professor at the University of New South Wales.

Michael Molitor: Most key decision-makers in government and business have come to believe that responding to climate change will be expensive. To be more precise, they are adamant that capital allocated to lowering carbon emissions will mean that global GDP will be lower in 2030 and 2050 than if we had not made these investments. This simple little idea is the key reason why, after more than 24 years of UN sponsored global climate negotiations, carbon emissions are rising faster than ever and well above what was modelled on computers just 10 years ago.

What if they are wrong? What if, on the contrary, investments in lowering carbon emissions make you richer? Even more controversial, what if reducing carbon emissions represented the only pathway by which global economic growth targets could be met? If this were true, and my research suggests it is, then instead of a race to the bottom where everyone fears reduced economic growth from high carbon costs, we move to a race to the top where reducing carbon emissions becomes the most attractive growth opportunity in history.

Let’s be clear that this question of future growth does not include any consideration of the costs that we are already seeing from increases in the damages from extreme weather events. The latest IPCC report issued just last month claimed that the costs of these damages are already impacting global economic growth. For purposes of this discussion, we can assume that these costs do not exist because my argument concerning the economic growth potential of investing in de-carbonization is valid without including them.

I started my journey to refute the conventional wisdom on the high costs of addressing climate change by studying the dynamics of global economic growth. My review of the literature and economic data told me that growth is measured, surprisingly, by only one economic performance metric: gross domestic product or, more commonly, GDP. This made things easier for me as the arguments concerning the costs of reducing carbon emissions were expressed as a decline in future GDP levels.

Using GDP as my reference economic performance metric I discovered some interesting numbers. Global GDP in 1970 was approximately US$18 trillion and it grew to US$54 trillion over the next 40 years to 2010. Not bad I thought, a tripling of global economic output in just 40 years—representing the greatest increase in history. Then the penny dropped and I made another somewhat obvious observation—global economic growth represented by GDP must be exponential for the entire system to function properly. If global GDP tripled between 1970 and 2010 then the increase over the following 40 years to 2050 had to result in much more than a tripling of economic growth.

I tried to calculate how big global GDP needed to be in 2050 in order to meet the growing aspirations of a rapidly expanding human population expected to reach, by UN estimates, 9.5 billion. I estimated that number to be US$480 trillion but my confidence in this figure was not high enough to justify trying to use it in a piece of published research. The OECD came to my rescue when they announced in 2013 that their estimate of the global GDP required in 2050 was US$305 trillion. I was pleased that my number was not far off and that the more defendable OECD figure had confirmed my view that GDP growth between 2010 and 2050 was going to be exponentially higher than the previous 40 years.

Now the fun begins. Imagine the UN gives you the responsibility for creating a global economic growth plan to take GDP from US$54 trillion in 2010 to US$305 trillion in 2050. I decided to start this exercise by looking at the factors that would constrain growth over the forty year period in question. In this connection, if the global economic system were a large company you might first ask about the company’s debt when thinking about factors that might make future growth difficult.

You might be surprised to learn that global debt, both public and private, is approximately US$250 trillion today. This includes everything from student loans, auto loans, and home mortgages to the corporate debt of large companies and the sovereign debt of nations. This represents 4 years of global economic growth at today’s level and requires around 3 percent annual economic growth to pay off in a timely and efficient manner. Countries including France, now experiencing growth of around 1 percent, are actually falling deeper into debt. As a point of reference, global debt in 1970 was equal to less than one year of economic growth at that time.

The next problem you would find while looking for factors constraining growth is the explosion in health care costs around the world. Most of the additional spending is going towards treating rapidly growing chronic diseases and deteriorating mental health. This trend is expected to continue for some time as it exhibits numerous momentum aspects that make slowing it down very difficult. This large and growing problem constrains growth both my keeping people away from work while they are sick and directing large amounts of capital towards negative to low growth activities.

A related constraint is the explosion of people now entering retirement age and the exponential increase in growth required to generate enough financial contributions to meet their related pension costs. Japan and the U.S., for example, are both going to find it very hard to meet these liabilities. In the U.S., underfunded pensions currently exceed US$800 billion and are rising quickly. A significant amount of growth will need to be directed towards solving this problem leaving less capital to invest in activities capable of accelerating growth to the new levels required.

There are many other factors constraining growth including the growing disparity in wealth and incomes—this is where Thomas Piketty is changing the narrative through his outstanding recent book Capital in the 21st Century. We are also heavily underinvested in stationary energy where the International Energy Agency has calculated the amount now totals US$50 trillion through the year 2030.

The upshot of all these constraints on growth is that reaching US$305 trillion is going to be very difficult—even without any damages flowing from climate change. To have any hope of meeting this ambitious target we will need to create numerous new economic growth platforms. History tells us that a great approach to lifting growth comes from investing in infrastructure as this has the double effect of creating jobs and the new platform from which future growth can take off. Of all the large infrastructure projects one could imagine, nothing comes close to the scale of opportunity represented by a rapid de-carbonization of the global energy system.

Even though the International Energy Agency estimates that the level of investment required to de-carbonize the global energy system is approximately US$1 trillion per year for the next 40 years, I believe the actual number is close to twice that amount at US$2 trillion per year. The difference in the two numbers comes from my realization that there are many large, long-lived, high carbon emitting assets that must be shut down immediately.

Existing coal-fired power plants, for example, represent, on their own, 50 percent of the total allowable carbon emissions over the next 36 years if we are to avoid the biggest climate change damages and keep surface temperature increases to less than 2 degrees centigrade—this is the global target now agreed to by the international community. The additional amount is required to pay the debt and equity holders of these assets to shut them down. To ensure that these payments would lead to growth, I would require the recipients of these payments to invest the entirety of this capital in new or low carbon energy assets.

The remainder of the US$2 trillion would be divided into four investment categories: First, direct a limited amount of the new investment capital into dramatic improvements in the efficiency of the existing fossil based energy system. This may seem counterintuitive but is a very good use of capital as many of the resulting reductions in carbon emissions will be achieved at negative cost (they generate more returns than the initial investment). Furthermore, we will need to keep the lights on while we shift to the new low or zero carbon energy assets.

Second, send more capital to technologies that already exist at scale including wind and solar energy projects. Depending on where they are located, this might also include investments into nuclear power stations. Third, much more investment into proven technologies that do not yet exist at full commercial scale will be fundamental. This includes, for example, energy storage, smart grids and battery electric vehicles in large urban areas.

Finally, because there is a significant probability that the other 4 options may leave us short of our carbon reduction and economic growth targets, we will need to invest in game changers. These are technologies that are not yet proven but which have the potential to lift dramatically the efficiency with which capital, energy and resources are utilized. This is where we might predict the next Google to be created and includes, for example, artificial photosynthesis, integral fast breeder reactors, thorium reactors, new materials including graphene, and quantum computers. Important progress is being made in all of these areas—they only need to attract significantly higher levels of investment to accelerate their commercialization.

Now you may be asking from where will the money come from to finance all of this and the answer is straightforward—from the same large institutional investors who financed all of the existing low efficiency high carbon emitting activities. Pension funds and insurance companies are chasing higher and higher financial returns to meet their growing liabilities and this is moving them quickly into an area which had traditionally attracted less than 1 percent of their capital—infrastructure. In this connection, the fastest growing new asset class are green bonds and climate bonds. Investment into low and zero carbon energy assets is advancing largely on the basis of key underlying trends in capital markets.

Of course, the most efficient means of transferring investment into highly efficient low or zero carbon assets is to launch a carbon tax. The Australian Government did this in 2011 and some of the roughly AUD$7 billion in annual revenue went to the Clean Energy Finance Corporation—also created by the Australian Government. After two years in operation, Australia’s carbon tax had an inflationary impact of just +0.02 percent, forced large carbon emitters to become more energy efficient which saved them money, and directed significantly new capital to large renewable energy projects. Despite this clearly successful outcome, the new Government elected in 2013 has decided to scrap the carbon tax and all of the other legislation designed to move the Australian economy towards a more efficient and growth oriented future.

One cannot complete this discussion without some mention of the real shortcomings associated with the use of GDP as the key indicator of economic progress. GDP measures everything and nothing that matters. It counts as positive the costs of automobile accidents, divorce, treating type II diabetes and any other negative welfare event that requires expenditure to correct. It does not recognize enormous disparities in wealth and income and it absolutely loves inefficient economic activities—the more money that needs to be spent to deliver the same outcome the better. Despite these obvious deficiencies both governments and the market place enormous value on this perverse metric.

In the last two years, the U.S. State of Vermont has decided to stop using GDP as an economic measure and replaced it with a new standard known as the Genuine Progress Indicator or simply GPI. The Governor then ordered the State’s economic data to be revised back to 1950 using GPI instead of GDP. The result is absolutely shocking—the State of Vermont announced it stopped growing in 1978. The State of Maryland has passed similar legislation and 7 other States are considering doing the same. Using the same approach and applying the GPI to 17 of the G20 countries, a group of ecological economists reached the same conclusion last year—all of these large economies stopped growing decades ago.

It is not surprising, therefore, that despite historically low interest rates and large asset purchases by central banks over the last several years, we have not seen a return to the growth levels that preceded the 2008-2009 global financial crisis. Thomas Piketty believes we will not see a return to higher levels of growth for decades under the current economic system. It should now be abundantly clear that we cannot continue down the traditional path of inefficient investments that, by this definition, emit large amount of wastes.

Our mistake has been to focus on the problems flowing from these wastes including, most importantly, global climate change. We will rapidly de-carbonize the global energy system not because we are sufficiently concerned about the uncontrolled risks flowing from a climate system greatly modified by human activity but because, in the absence of this global infrastructure investment opportunity, we will never achieve sufficient growth to meet the needs of a global population on its way to 9.5 billion.

Robyn Williams: Michael Molitor spoke about GDP and GPI at the University of New South Wales. He’s with the International Energy Program of SciencesPo in Paris and he was science advisor for the film The Day After Tomorrow. Next week: Dr Penny Olsen from the ANU on the art of William Cooper.