Growth and Capitalism in the Era of Climate Change

Date July 27, 2022
Speaker Alessio TERZI (Economist, DG ECFIN European Commission; Lecturer, Sciences Po Lille)
Commentator KAWAGUCHI Yukihiro (Director for Industrial Green Transformation, Manufacturing Industries Bureau, METI)
Moderator WATANABE Tetsuya (Vice President, RIETI)

This seminar revolves around the book written by Alessio TERZI titled Growth for Good. In this book, TERZI addresses climate change from the perspective of economic growth and capitalism. For example, should economic growth be abandoned in order to successfully mitigate climate change? Does ceasing the use of fossil fuels and transitioning to green energy hinder economic growth? Our society is organized in a capitalistic manner. Abandoning capitalism in the fight against climate change would cause tremendous difficulties. Therefore, TERZI outlines the use of capitalism against climate catastrophe involving the government, business, and citizens.


One positive element from COVID-19 lockdowns was that environmental indicators improved. As a result of COVID lockdown measures, air quality started to improve, CO2 emissions started to drop, and water quality improved. Therefore, I began to think about the relationship between the economy and nature. After COVID and lockdown are completely finished, curtailing the economy could be a tool in reducing CO2 emissions, as we witnessed from lockdowns.

When considering the relationship and connections between the economy and nature, it is also necessary to consider capitalism. For example, what is the connection between economic growth and capitalism? Could it be that capitalism requires growth? What is the relationship between growth and nature? Could it be that in order to have growth, the only way is to destroy the planet or to continue burning fossil fuels? What is the relationship between capitalism and nature? Can we have green capitalism as many would argue? Are capitalism and nature impossible-to-reconcile forces?

The reality of economic growth

I try to argue that for a growing share of the population, particularly in rich, advanced economies, there is a growing share of people who are not convinced that economic growth is a useful target. Millennials and Generation Z are growing disenchanted with economic growth for a variety of reasons. The first is that we have not seen much economic growth per se. Millennials have seen the least economic growth of any generation in U.S. history, which is similar to Millennials’ experience in Europe.

The second point is that when we have seen economic growth, it has gone hand-in-hand with increasing inequalities. For some countries, there is a growing share of national income that accrues to the top 1%. Therefore, not much economic growth is seen. In addition, when we have seen economic growth, a disproportionate share of it has been captured by those who are already wealthy. Also, there is a growing environmental awareness among young generations.

Over the last 200 years, economic growth and CO2 emissions have proceeded hand-in-hand, which gives us a sense of why those who are not economists are not convinced that economic growth is a positive target. Capitalism and economic growth are symbiotic, and there are some features of capitalism that constantly foster economic growth due to the fact that capitalism is a system organized around profit maximization and competition. Moreover, there are certain features of capitalism that generate constant economic growth or desire for economic growth, given current consumer preferences.

The implication I try to reach is not that this is a good or a bad thing, but I try to caution against abandoning economic growth as part of a list of things we would need to do to mitigate climate change (as is sometimes heard within environmental discussions). Individuals are allowed to say that economic growth must be abandoned for climate change mitigation; however, since capitalism and growth are intertwined, if they argue that one must be abandoned, then they are arguing that the other must also be abandoned. If this is the case, a blueprint of how society would be organized in an alternative way must be developed.

Economic growth vs. degrowth

When I was writing this book, I realized that there is a non-mainstream or heterodox literature that realizes the fact that capitalism and growth are intertwined, which falls under the umbrella of “degrowth” literature or eco-socialism. Some of its advocates call for a steady state economy. They say that we have to abandon economic growth, and that because they are so intertwined, we have to abandon capitalism as well, because we have to focus on nature. As a result, we might have scarcity, but that type of literature would say that this should be voluntary scarcity. We should embrace a concept of minimalism but at the level of society as a whole. We would have less, but we would be happy with less, and we would share the fewer resources among ourselves better, benefiting both ourselves and nature

There is a heterodox view that it is capitalism itself that imposes a series of unnatural desires (that would otherwise not exist), leading to excess and destructive production and consumption. However, my book reaches a different conclusion. First, I take a historical approach to show that rapid growth is a recent phenomenon that started around the Industrial Revolution in Europe, and then spread into other parts of the world. We have experience with periods when there was limited or no economic growth. When that was the case, we did not particularly share the limited resources that we had, but rather, in a steady state environment, conflict within groups of society and countries is exacerbated. In other words, I go against the utopian view that we will come together and peacefully share a more limited stock of resources. Scarcity would in other words not be voluntary.

A more dystopian scenario is likely in which we fight over what is left, which is obviously something that we would want to avoid. I try to say that the ‘desire for more’ is what has led us as humans to use our shared intelligence, shared knowhow, technology, and tools to shape the environment in our favor and get more of what we want. The desire for self-determination as a species, which is what has propelled us to the top of the food chain, is deeply intertwined with this desire for more, which is unlikely to disappear.

Imagine that we keep global GDP constant between now and 2050, and we are in a steady state economy at a planetary level. Also, the pace of the rollout of the green transition is to continue at the rate it has been happening up until now. By 2050, emissions would be down by roughly 40% which is very far from net zero. This implies that a steady state economy on its own cannot be a solution, but rather it requires one of two things. It requires either a very big acceleration in technology and the rollout of clean technologies, or it requires a shrinking of income levels. Instead of settling with what we have, we would need to shrink incomes. The heterodox and degrowth literature focuses on rich countries because that literature states that rich countries need to shrink in order to open up space for the growth of poor countries. The level of shrinkage is significant, such as a 60% reduction in income levels, which cannot be achieved on a voluntary basis, meaning that this cannot be a democratic process. I argue that pursuing the technological acceleration channel is the only realistic and credible way to achieve the climate goals.

It also occurred to me that there is nothing that states the only way to achieve economic growth is by burning fossil fuels, extracting raw materials, or destroying nature. This might be the current system, but it does not have to be that way. The implication is that a different type of capitalism, a reshaped capitalism, or a new capitalism would be needed.

Using capitalism to our advantage

The overarching message of the book is that in order to avoid a climate catastrophe, we must go through a deep acceleration in the development and deployment of green technologies. In addition, capitalism has perhaps many negative sides to it. However, it is an efficient machinery in terms of its ability to develop and deploy technology knowhow and innovation throughout society. This does not mean that capitalism will solve climate change on its own. Rather, we will need to take certain measures in order to reorient capitalism and enroll it in our fight against climate change.

I try to argue in the book that we are dealing with a big issue, and it is close to a whole-of-nation approach because it will require everyone—businesses, consumers, and citizens—to be on board. If consumers or citizens are not interested in the importance of the green transition, they will not allow governments to take the measures that are needed to avoid a climate catastrophe.

I also argue that the degree of the transformation that we are envisioning is something that is close to an industrial revolution or to a new industrial revolution. We know from past industrial revolutions that when these technological transformations happen, they completely modify the structure of the economy. In doing so, some areas are at risk of being left behind. Societies that leave large chunks of people behind are those that are least likely to engage in these technological transformations. Therefore, I try to argue that the green transformation and social dimensions are very closely intertwined--one rests on the other--and the degree to which we are going to achieve the green transition relies on the degree to which we can keep everybody on board and make sure that certain parts of society are not left behind.

My book is also very practical, and this practicality can be seen not only in the fact that there is a detailed list of the necessary things to achieve a green transition, but also because, for example, there is a case study chapter that takes Italy as an example of a steady state economy. It shows the negative dynamics that are unleashed when an economy enters a steady state.

Green macroeconomics

Also in the book, there is a section on green macro which involves the idea that if we were to implement all of the necessary policies and green deals, what would happen to economic growth? According to one narrative, many people present the green transition with a focus on costs and that it is an expensive endeavor which must be undertaken for moral reasons. However, it is not an investment opportunity because we are achieving the same things that we already had in the past, just without emitting CO2. It creates stranded assets because companies have invested resources in fossil fuel infrastructure, which must be abandoned. When we insert the green transition in macro models, we find a muted impact on GDP.

However, I would argue against this reading. The first problem with this reading is defining the baseline. Most models compare the green policy against the business-as-usual scenario or a baseline that is a protracted trend of what we have already seen. Going forward, there are scenarios in which we proceed with the green transition, or we do not. If catastrophic climate change is the baseline, any green policy achieved is a deviation from a very negative scenario. Therefore, it has positive gains, and it is an investment opportunity, which reflects that there is poor integration between economic and climate models.

In addition, this transition is going to be closer to an industrial revolution that is going to transform everything in the system. It is going to transform production, consumption, agriculture, housing, transport, and more. When that happens, it's going to recast comparative advantages between countries and firms.

Energy and technology transition of the past

In the past, energy transitions had the same characteristics as the current one. They were initially more expensive, and they displayed some qualitative positive features. Because of these features, richer households and richer governments would adopt these technologies. As they were doing that, these new technologies would reduce cost curves and become cheaper. At some point, they were so much cheaper that everybody else in society got on board, which I would argue is exactly what we're going to see with the green transition.

If you look carefully at the history of past industrial revolutions, early on, they did not display many productivity improvements because firms did not know how to use the new technology. After workshops were set up or reorganized, we observed productivity improvements.

The green transition has a scope for secondary innovation, and innovation will continue after the transition. Now that we are entering new technological spheres, we are likely to see a potential acceleration in productivity growth. The International Energy Agency stated that renewable energies could rapidly become the cheapest energy source in history, which would boost productivity levels across the economy. The implications of this are, first, it makes self-interested commercial sense for countries and companies to embrace the green transition and to try to be at the forefront of the green transition purely because of self-interested benefits.

The second point focuses on governments. Particularly, countries are going to use their policy tools to make sure their companies emerge successfully, which we have seen in the past. There is a myth that the first Industrial Revolution was accomplished by the business sector alone. However, governments were taking active steps to push their industries at home and abroad. This implies that we will see more of this push for an active industrial policy. Additionally, there is going to be a more active use of trade clauses in trade treaties, carbon border tax, and carbon border adjustment mechanisms.

For emerging markets, there is a false belief of the necessity of a development model based on polluting technologies before the green transition can be undertaken. By utilizing such a model, countries are at risk of locking themselves into technologies that are rapidly going to be perceived as old, low quality, and expensive, because green technologies will rapidly become the cheaper option. This will not guarantee emerging markets the growth that they need. Therefore, it makes sense for emerging markets to pursue the green transition in earnest.


This is a book which we should share among the Japanese people, businesses and government because this is a timely topic for all the Japanese including the Japanese government and Japanese companies. Under the leadership of Prime Minister Kishida, the government is working to realize a “new capitalism” and considering that while capitalism has been a driving force of growth, it has also produced adverse effects, such as widening the gap between the rich and poor and climate change. However, the government is trying to realize a “new capitalism” based on the idea that only capitalism can be a system that surpasses capitalism.

The basic ideas that run through the “new capitalism” are threefold. First, it can be accomplished through both the market and the state, and both the public and private sectors. The second idea is to create new markets through solving social challenges such as climate change. The third idea is to realize the happiness of the people through solving social challenges. In the new capitalism approach, solving the climate change problem or green transformation are major challenges.

Japan has declared carbon neutrality by 2050 and set a 2030 target consistent with that carbon neutrality goal. As the entire world market achieves net zero emissions, addressing climate change will no longer be a constraint on the economy. It is a key to a major transformation of a socioeconomy by stimulating investment, increasing productivity, and creating a major shift in the industrial structure.

I believe that such social transformation will be a challenge. Japan is currently discussing how to achieve the goal in each of its sectors. Prime Minister Kishida has stated that the public and private sectors will realize at least ¥150 trillion in new related investment over the next ten years. In addition, he has announced that the government intends to provide support in the amount of ¥20 trillion. He also indicated that the government would consider issuing new government bonds which are GX economic transition bonds as a source of funds for this purpose. We believe that the key is how these financial resources can be channeled into investment that will lead to growth.

The transition will also require a shift in the industrial structure, which will require a shift in labor force. Unless we address the burdens associated with such structural shifts in industries and society, we will not be able to reach a social consensus on climate change.

Japan must also take the lead in international rulemaking in conjunction with domestic investment. It has been said that Japan sometimes wins on technology and loses on competition. The EU is recognized as very good at making such rules. For example, recently, green steel or carbon-neutral steel are required and widely discussed but the definition and measurement method both differ among countries. Depending on that specific definition and methodology, it could be considered both a disadvantage and an advantage no matter how good the technology is. In addition, the carbon border adjustment mechanism may also be described as a competition over the rules over the system.


I would like to ask Dr. TERZI about the point made by Mr. KAWAGUCHI on the burdens for society in the transition states. If you have any comments on that it would be appreciated.

Alessio TERZI:
I will take this as an opportunity to make a clarification which is the fact that all of what I have told you is not meant to wash away the challenges or the difficulties of this transition. I do not want to pretend that it is all easy, and you just have to read my book, and the solution to everything is in there.

I'm just giving you a broad framework of what I see as a long-term sense of direction of how this will play out. It is going to be a challenge for workers to be retrained and companies to reinvent production processes, but accomplishing this will in fact provide a better future for the world.

Do you think the next generation coming behind us are more supportive of the green and environmental policies?

Alessio TERZI:
Yes. I teach in a university, so I have interactions with younger generations. There is a true, deeper concern about the environment in younger generations. This is a transformation we are going to see in focus as this generation matures into adulthood.

In your book, you mention the global climate trilemma. It would be helpful if you could share your view on it.

Alessio TERZI:
We should expect most of the green transition to happen at the national level. I do not think that there is going to be an ultimate treaty or a world government that is going to organize climate mitigation or climate efforts, but rather we are going to have to deal with a second-best world, which is a sum of national efforts, especially if we want to preserve our liberal democracy.

In your view, what is the difference between green technology and past technology like digital and blockchain, etc.? Is there a big difference between the two?

Alessio TERZI:
The only difference I see between the two is that one is something nice to have and the other is something that is going to have to happen, and it has to happen against the timeline that is given to us by climate science. While both of them might represent a sort of complete transformation of society, the economy, and so on, or have implications for a wider society, the green transformation, and the reason why I'm so interested in it, is an industrial revolution against a timeline. It is a timeline that is not something that eventually will happen, but it is something that has to happen, and we are going to use policy to accelerate it even more.

Green transformation has a time frame, and it has to happen within a certain time frame and with the target of 2050. If we are seeing a transformation like the Industrial Revolution, why is pushback against that trend so strong in every corner around the world?

Alessio TERZI:
Past industrial revolutions also had pushback. In the first phase of the first Industrial Revolution, there was the so-called luddism movements. People were smashing machines because they perceived them as changing their world, their environment, and shattering their professions.

Also, this relates to a narrative problem, and we have sold this as something that we are doing because it is the ethical thing to do. We have made it a moral battle of who is greener, better, and more pristine with their moral compass. I disagree with this. This will play out because there will be some early pioneers who see value in it. Eventually, the green option and the cheap option are going to be the same. At that point, even those who do not care or believe in climate change will switch to greener ways of doing

*This summary was compiled by RIETI Editorial staff.