15.11.2021.

The fastest headless chicken

Ilustratīvs attēls - mērķis
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Less frequent readers of the leading global economic journals or analytical articles who are more concerned about Covid-19 issues may have failed to notice the cardinal shift in the global business environment attitude towards the climate change and sustainability issues over the last couple of years. This is a major change of focus caused by the insights gained during the pandemic: a massive shock to the economy, the first crisis in the modern history which has not been based on a bubble of economic imbalances or a political blunder but a medical cause that cannot be dealt with by using traditional economic instruments.

As pointed out by analysts and businesses, developments around Covid-19 also provided an explicit demonstration of the fact that the evolution of ecological catastrophes, so often mentioned by scientists, cannot be controlled by economic tools. Nobody is willing to find oneself in a situation where a violent avalanche of losses sweeps away the wealth accumulated over the last centuries and destroys the basis of the economy.

There are quite a lot of examples demonstrating the rapidly growing interest from businesses all over the world. Just to mention the most striking one: the initiative Climate Action 100+ focuses on joint action “to accelerate the transition to net-zero emissions by 2050 or sooner.” 617 global investors representing over half of all global assets, i.e. 55 trillion US dollars, across 33 countries have joined the initiative. These global giants directly affect the blood circulation of the economy, namely, the corporate securities market which in turn defines the value of businesses and affects the decision-making at the shareholders meetings.

If we have a look at the documents of the European Central Bank or other financial institutions, the climate change, pollution or biodiversity loss are defined as risks posing a threat to the economic growth and corporate profitability. No, this is not an altruistic wish to build a better world, it is a bitter awareness of the fact that the current model of the economy will be unable to continue functioning like this forever. It might be a coincidence, but we also see many active advocates of sustainability in the management of many supranational institutions nowadays. China’s quite active stance regarding the above issues is yet another essential piece of the puzzle.

One might ask a question: why everything was let slide so far and couldn’t the fight with this challenge be started earlier? Have there been too few warnings by scientists and NGOs? Probably, but as I already mentioned, Covid-19 brought us a nasty “revelation”; moreover, coincidentally, part of the products and technologies necessary for the economic transformation have matured and are freely available in the market. Also, the loud wake-up call of the increasingly more often observed local climate catastrophes cannot be denied.

Well, whatever it was, it is really serious this time.

We are facing structural changes in the whole economy, with notable effects on consumer behaviour. This will affect each and everyone and will last for decades, but the initial leap is likely to be the most painful, at least psychologically.

Should anyone doubt the global nature of the changes, the results of the UN Glasgow climate summit also testify to that.

In the shadow of the myth about Latvia as the greenest country in the world

Some words about words: someone who does not know the relevant terminology could be confused by the abundance of concepts and terms. The concept of sustainable development is based on a simple, but excitingly harmonious idea about balancing the needs of a human being, environment and economy.

Although at first sight it seems reasonable and attractive, unfortunately it does not represent the way things are currently organised in Latvia. Latvijas Banka's preliminary analysis suggests that during the 30 years of the restored independence we have failed to achieve balance; on the contrary, the level of many parameters of the quality of life is unsatisfactory. It is particularly true of the social inequality rooted in inequality of opportunities and preventing part of the society to enjoy the fruit of development and limiting our further development opportunities. Quite often we view natural resources merely as commodities; the status of the second greenest country in the world is just a well-preserved myth: currently we rank approximately No 35 in the global greenest country charts. We can be proud of strong economic growth over the last few decades; nevertheless, the issue of the side effects and sustainability is becoming increasingly urgent.

Looking at it from a more philosophical point of view, one can see two principles ensuring a sustainable approach, i.e. mutual respect and sustainable balance. Public needs stem from the individual needs of all members of the society, and the task of satisfying them in a balanced way is a much more important and complex challenge than the economic development. A person’s senses and feelings are as important as numerical values.

Goals and timelines

The European Green Deal, quite often referred to by media, is the good old sustainable development policy, just named in a different way and supplemented with emphasis on issues within the competence of the European Commission. The content of the initiative covers both climate and biodiversity, as well as social issues.

The policy for preventing climate change can be measured and harmonised with various world cultures more easily. It is based on a scientific finding that, over the last decades, the climate change was mainly caused by human activity, with the emissions of the greenhouse gases (GHG: CO2, methane, nitrous oxides and several other gases) being the most significant contributor. I do hope that the report recently published by the Intergovernmental Panel on Climate Change (IPCC), based on approximately 7000 research papers, will be a convincing source of information also for those in doubt.

The climate neutrality goal is much easier to grasp than the previous "limiting climate change to x degrees". The goal means that by 2050 the human economic activity has to reach a level where it has no negative impact on climate, i.e., GHG emissions are permissible only in cases where we can offset an analogous amount via using the land, i.e. in agriculture and forestry. There is no reason to blame politicians for making "inadequately high commitments for our green and poor" nation anymore. The rules of the game are the same, but each country has discretion to improve its economy in the most appropriate way. However, we should bear in mind that the climate neutrality goal is not the only one and the effort to achieve it must not be detrimental to other aspects of sustainable development. The most likely climate neutrality conflict domains are the quality of life, inequality, biodiversity and clean environment.

Latvia does not rank among the top countries with the highest ecological footprint; nevertheless, as we are citizens of a sufficiently well-off economy on a global scale, our individual consumption considerably exceeds the global resource "quota". To stop the negative developments wave, it is economically advantageous for us to join efforts with other European countries which have been hit by the climate change more severely, e.g. Germany, Italy, Spain, since these countries are our major economic partners contributing to our well-being. Africa, the continent hit hardest by the climate change, with its number of inhabitants estimated at about 2.5 billion, is a threatening source of climate migrants.

To reach climate neutrality, the most prominent changes can be expected in the energy, transport and agriculture sectors, and they will affect each and everyone in Latvia. For the wealthiest individuals, it will be no problem to build a passive house, buy an electric car or pay a three times higher electricity bill, but Latvijas Banka would also suggest to seriously address the social consequences of the prospective changes.

A well-considered sequence of decisions, use of the changes to enhance prosperity and targeted help to the low-income groups may ensure not only a formally green, but also a truly sustainable development of this country and thus determine the ranking of Latvia among other countries.

The range of options and the depth of changes can be without exaggeration compared to the introduction of the market-based economy at the beginning of the 1990s; the biggest difference is an opportunity to do everything in a timely manner and gradually, avoiding any "shock therapies".

Case studies

Let me give you some examples: Latvia ranks the last in the European Union (EU) in terms of solar and wind energy generation per capita, although technologies would allow for competitive electricity generation without subsidies. At the same time, the subject of wind farms caused a storm among businesses, environmental activists, local inhabitants and local governments already during the initial phase of the projects. A solution would be to start by setting the target of the desired total power of the wind farms, compatible with the load balancing capacity of the power supply system (since wind energy is not constant); geographically most appropriate regions should be identified by assessing both the economic aspects (connection to the distribution networks, onshore and offshore costs), and the impact on the landscape and regional development, and interests of the local government. Only the public authorities can cope with this challenge; currently, however, no ministry sees its role in implementing such a complex idea, while local governments feel confused in the crossfire of the stakeholders. Meanwhile, the investors, unable to implement their plans in Kurzeme, already talk about building power farms near Gaiziņš. In my opinion, that would do unjustifiable damage to the superb landscape of the Vidzeme Upland. Probably, with the support of EU funds, all the necessary wind power can be generated offshore, without ruining the traditional Latvian landscape, but it is just a hypothesis referring to the strategy "Latvija 2030". The scenarios of the world central banks' "Network for Greening the Financial System" forecast carbon prices to stand at 650-700 USD/t in 2050. This autumn, a small price leap in the EU from 25 EUR/t to 50 EUR/t caused an electricity price surge in Latvia. The green electricity accounts for only slightly over half of our energy consumption; if we are not able to improve this balance, prices are bound to rise further.

An interesting decision was taken by the government in June: an interministerial working group for coordinating climate policy was established. Its goal is "to ensure a uniform strategic vision and priorities of sectoral ministries with respect to increasing the national greenhouse gas reduction targets for 2030". What shall we do in cases where the climate policy is in conflict with other sustainability elements? Does the working group also aim at assessing the social effects and adjust their proposals? Does the working group comprise representatives of e.g. the Ministry of Welfare? No, unfortunately it doesn't, it's not in the working group's terms of references. So obviously we will address the issues on a case-by-case basis, wandering in circles? It looks like we have lots of free resources and unlimited time.

As to the thermal insulation of buildings, according to the Ministry of Economics calculations, the needed total investment amounts to 19 billion euro by 2050. There are a number of support instruments, but they are mostly implemented as a grant to the owners of the buildings to be supplemented by their own financing, thus narrowing the range of potential beneficiaries. Support is equally available to those who could independently renovate their property and those whose financial situation and the limited amount of the grant prevent them from taking this opportunity. As a result, compared to the government's target for 2050, a mere 2.3% of the multi-apartment residential buildings have been renovated with the EU support over the last 11 years. Unfortunately, we have also seen cases where the grants in the hands of unskilled commissioning authorities eventually end up with wind-stripped facades and long-gone building contractors. ESKO (energy service) companies are ready to invest their funds in the thermal insulation of private houses, relieving their owners from additional mortgage liabilities; the government, however, has failed to establish an appropriate ecosystem for broadly based development of these companies. It is easy to demonstrate progress with the first tens of millions of euro, but the issue of a credible completion of the process remains open.

Support to the green mobility is a similar case: the first ten million euro generously allocated to support the buyers of electric cars as compared to probably required tens of billions of euro investment if we believe that all privately owned cars will be electric cars, which is actually hardly possible considering the financial, urban planning and technological aspects.

Short distance policy

Formally, we have heaps of plans and strategies for whatever may come, public administration has achieved such perfection in this genre. However, content-wise more often than not they describe a linear course of development from the current reality to the bright future ahead. The financial calculations are based on the traditional "we will need money; currently there is none, but eventually it will definitely be available". Large figures suggest a seemingly serious approach; nevertheless, it seems that the authors have ignored the reality. We have a definite target in terms of both time and contents; it would be preferable to offer credible solutions understandable for the general public, keeping in mind that the opinion of non-governmental partners should also be listened to.

Recently, I heard a politician's comment that other countries do not know either what to do. True, but we are one of the poorest EU Member States and our capability to invest resources at the last moment and rapidly buy technologies is definitely weaker. This means that we should prepare more carefully and plan really wisely in the long term, since the final target is the same for all EU countries. Should, with technologies evolving, new opportunities emerge, we can always change the plans, but we should not wait for the unknown to come doing nothing. Data analysis credibly suggests that Latvia's green ranking among other EU countries is the result achieved despite rather than thanks to the sectoral policies implemented over the last few decades. Such non-targeted policy, rich in short distance measures, unfortunately reminds one of a decapitated chicken running around without direction. Even if we can compare our performance with that of countries implementing a similar approach, "the fastest headless chicken" is not a nomination to be happy about. 

May I suggest a hypothesis that one of the reasons for the idle planning is being afraid of voicing the expected magnitude of the change and the impact on the daily lives of the electorate. Maybe it is time for the civil society also to wake up, defining a positive demand for a balanced and credible policy?

No doubt, the economic restructuring of such a scale is both expensive and time consuming, but it is our decision to choose between the two models that have already been tried in practice before: a) a timely, well-considered transformation = costs+opportunities; b) delayed, chaotic and unbalanced policy = costs+losses. This sounds trivial if we don't take into account the scale of the process. The risk of delayed action is loss of competitiveness and poverty. My guess is that at a later stage of the process the successfully transformed superpowers might begin to limit the availability of products not produced in compliance with the principles of sustainability in their market. Similar ideas are already being tested now, e.g. the draft EC proposal for carbon border tax.

In view of the traditional cooperation culture of the coalition parties in Latvia, it is highly unlikely that without a centralised approach and a team of powerful professional experts under the auspices of the Prime Minister we will be able not only to comply with the minimum standard of green transformation, but also to successfully use the new opportunities and balance the burden on the population groups in a socially fair way. When analysing sustainability issues in different sectors, the need to synchronise the approaches of different ministries becomes very explicit, as the traditional areas of responsibility of ministries are definitely narrower than the scale of the preferable solutions. Could the inter-institutional/interdepartmental barriers be overcome without the involvement of the Prime Minister?

I intentionally did not emphasize the undoubtedly huge importance of the individual choices and the change in our personal behaviour, as a comprehensive and sufficiently wide-scale change in behaviour requires a supporting environment, inter alia the national policy.

Already now, the climate policy has become another target for proponents of conspiracy theories. I would like to encourage media representatives and politicians to increasingly engage in awareness campaigns in order to prevent another case of splitting the society. In my opinion, the idea of sustainable development is a wonderful instrument to create a common future vision.

P.S. This article should not be seen as criticism of a particular government, but rather of the political legacy built over at least 20 years.

The issues of sustainable economy were also discussed at the annual conference of Latvijas Banka. It took place on 20 September, and one of the panel discussions "Moving towards sustainable development" was dedicated to the following topics:

  • Interest and mandate of central banks to deal with sustainability issues
  • The European Green Deal of the European Commission, its priorities, scope, overall objective and instruments
  • Distance to reaching sustainability objectives, awareness of the existing state of affairs Internal possibilities and resources
  • Significance of the financial sector in the process of moving towards the green transformation
APA: Kušners, E. (2021, 27. nov.). The fastest headless chicken. Taken from https://www.macroeconomics.lv/node/5401
MLA: Kušners, Edvards. "The fastest headless chicken" www.macroeconomics.lv. Tīmeklis. 27.11.2021. <https://www.macroeconomics.lv/node/5401>.
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