How to Promote Growth and Protect the Planet

January 18, 2022

By Christina Nelson

Many people believe that economic growth and environmental preservation are like oil and water — they don’t mix naturally. But the devastating effects of climate change are pushing countries to figure out ways to lift people out of poverty while also protecting the environment and reducing carbon emissions.

Seema Jayachandran, Professor of Economics at Northwestern University, researches these trade-offs — and outlines tangible steps that governments and the private sector can take to boost economic growth and shift production to companies that have a lower carbon footprint. In this interview with IFC Insights, she discusses how regulation, technology, and smart policymaking can make a difference.

Q: What are some of the assumptions people typically make when they think about economic growth and the environment?

A: I think what most people worry about is that there's a really tough trade-off between economic growth and the environment so that when a country is getting richer, it's going to come at the cost of environmental damage. I actually think that's often true, but not always, and a lot of the scope for policy is to try to lessen that trade-off or to find win-win opportunities.

Q: Can you give some examples of some of the policies or some of the win-win opportunities you've seen that have been able to balance these trade-offs?

A: One example is conserving energy or producing in an energy efficient way. If there are some energy-saving technologies that firms have not been able to adopt, for example, because they're not aware of them or because they don't have access to capital, then by providing capital or providing information, they will be able to produce what they're producing with less energy. That actually can lower their costs and be good for the environment.

There are other examples. I do some of my work in rural areas around deforestation. There are ways that you can get people to participate in more sustainable agricultural practices that enable them to be more productive as farmers and in a way that they need less land and can protect the forest, so we keep carbon in the ground and protect biodiversity. In Uganda, people are cutting down forests because they're subsistence farmers and they want to grow a little bit more cassava, or they want to sell some trees to pay for their school fees. In that kind of setting, one policy that can be very effective is to compensate people — give them cash grants — so they can use that to start a business or pay for school fees and make that money conditional on protecting the forests.

Q: Are there lessons that we can learn that can be applied across different countries or different contexts?

A: I think one lesson is that it's hard to generalize, and so we have to always monitor whether something that's helping firms be more productive is going to be good or bad for the environment. To me, one path to protecting the environment is better regulatory capacity. There’s been some research recently that explained the impressive reductions in air pollution produced by U.S. manufacturing in the 1990s and 2000s. A lot of people thought pollution reduction came from the composition of what we were manufacturing or technological progress. But it turns out almost all of the pollution reduction came from the Clean Air Act.

If you think about low- and middle-income countries, compared to developed countries, that regulatory capacity isn't in place. How much money are governments able to put into enforcing environmental regulations? And is that done in a corruption-free way? So if I think about the surest bets for reducing environmental damage in low- and middle-income countries, it's going to be to increase regulatory capacity.

One example is in Brazil, where around 2005 the government invested in a new technology that used real-time satellite imagery to identify where deforestation was taking place. That was important because with its limited resources to enforce anti-logging regulations, it could direct those resources to the right place. And what they found was a really dramatic reduction over the next decade in deforestation in the Amazon.

Q: The Brazil example is interesting because it leverages new technologies to achieve environmental protection goals. Is this an area where you see more opportunities for the private sector to invest in technologies that we haven't imagined yet?

A: If you want to regulate something and you want to incentivize people to do something, you need to be able to monitor it. And so I think, the technologies to monitor especially around land use or pollution, where we can use satellite imagery or other remote technologies, that's a really promising way to improve the regulatory capacity. It also widens the whole scope of policies to protect the environment.

I think another really ripe area is around carbon markets in low- and middle-income countries. A lot of corporations in the U.S. and Europe want to be carbon neutral and to buy carbon credits. One worry in buying those carbon credits right now in low- and middle-income countries is: Is that really providing benefits for the environment? Can you prove that you actually made a difference? On the one hand, some of the best bargains for protecting the environment are probably in low- and middle-income countries, but that technology or that kind of monitoring isn't as active there. If you’re trying to work in very rural places, it’s going to be costly to do that monitoring without technology that allows us to do it at scale and remotely.

Q: Are there certain incentives that should be in place for the private sector when it comes to environmental regulation?

A: Ultimately, pollution and environmental damage is an externality. Markets aren't going to solve that entirely and people acting in their self-interest aren’t going to be solving it entirely.

I think energy efficiency is a really good case where what's good for the environment could be good for the bottom line of a firm. If you have to have stricter emissions standards, firms have to figure out how to manufacture in a less environmentally intensive way to meet the regulations. When less of their costs are being allocated to energy, that will make them more profitable. One of the arguments for carbon taxes is it starts to align the profitability of firms with what's good for the environment.

One of the barriers to effective regulation is corruption. Right now, some firms bribe their way out of regulations while others play by the rules. And so stripping corruption out of governance would both make regulation more effective, but also make it more equitable, and not punish firms that are playing by the rules.

Q: If you were advising a policymaker, how would you guide them about the trade-offs in balancing economic growth while also protecting the environment, including reducing carbon emissions?

A: I think the world really needs to be prioritizing reductions in carbon emissions, but at the same time, half the world is living on less than $10 a day. I think a simple piece of advice is to shift the burden of who's paying for mitigation of climate change toward wealthier countries that can afford it. We want emissions to be lower, but it shouldn't be an equal burden across countries. It should be based on both ability to pay, but also acknowledging that rich countries have contributed more to climate change. I think it's exciting to think about win-wins, but we need to be realistic that we're not going to be able to get massive growth in low- and middle-income countries nor are we going to be able to solve climate change just with win-wins.

There are going to be some trade-offs. A low- or middle-income country shouldn't be thinking about how do we get carbon neutral growth, or how do we get growth without increasing our carbon footprint. But how do we minimize that trade-off? How do we shift more production to firms that pollute less, are energy efficient, have a lower carbon footprint? We should be thinking about what is the path to growth that can still balance this goal of moderating our carbon emissions or other environmental damage.

Q: There have been CEOs — people like former Unilever CEO Paul Polman — who've said that it's the responsibility of corporations to do good and do well. Do you think this has merit? What role do you think CEOs should play in driving these changes?

A: I think it's great that more corporations are thinking about their responsibility to the environment and broader social goals. In the short run, if some firms are doing it and others aren't, will that be rewarded in the marketplace? I wouldn't want to rely on just the benevolence of some CEOs when others aren't coming along to solve these major challenges. But I think it's great. One of our lessons of the pandemic is people are rethinking where they want to work, and they want to work in a company that they feel proud of.

Q: What do you think international finance organizations should be doing to help balance the goals of economic growth and environmental protection in developing countries?

A: I think we have some technologies that are amazing that should be adopted everywhere. In many cases, what's missing is the financing to adopt new technologies. For example, landfills in wealthy countries use state-of-the-art technology that limits methane emissions. We would want that around the world, not just in wealthy countries. I think there's also a need for more innovation, and innovation is going to take financing. For example, we know that as people in poorer countries get richer, they're going to be adopting more air conditioning. That's inevitable — and air conditioning makes you more productive, so in in terms of growth, that's a good thing. But it should make us nervous in terms of the carbon footprint.  So some innovation around new air conditioning, for example, is something that is needed and where financing would be very valuable.

Published in January 2022