Economic Principles for “Spaceship Earth”

Over 50 years ago, Kenneth Boulding’s landmark essay, “The Economics of the Coming Spaceship Earth,” was published in a volume of works prepared for an RFF forum on environmental quality in a growing economy. Since its publication, this essay has had a profound influence on much of our thinking about the global economy and sustainability. Its vision of the “spaceship earth” was essential to shaping the sustainability concept of the 1960s and 1970s in seminal classics of that time.

In perhaps the most famous passage of the essay, Boulding describes the open economy of the past—with its seemingly unlimited resources—and contrasts it with the closed economy of the future. He wrote, "I am tempted to call the open economy the 'cowboy economy,' the cowboy being symbolic of the illimitable plains and also associated with reckless, exploitative, romantic, and violent behavior, which is characteristic of open societies. The closed economy of the future might similarly be called the 'spaceman' economy, in which the earth has become a single spaceship, without unlimited reservoirs of anything, either for extraction or for pollution, and in which, therefore, man must find his place in a cyclical ecological system which is capable of continuous reproduction of material form even though it cannot escape having inputs of energy."

Boulding’s essay was influential for two reasons. First, as he emphasized in his opening sentence, transitioning to a more sustainable economy requires humankind to rethink its relationship with nature: “We are now in the middle of a long process of transition in the nature of the image which man has of himself and his environment.” Second, as an economist, Boulding recognized that the main impetus for change must occur in the basic production and consumption relationships of modern economies: “The closed earth of the future requires economic principles which are somewhat different from those of the open earth of the past.”

The private sector is beginning to take a lead in fostering global environmental responsibility and stewardship. Ahead of the opening of the Paris climate change conference in December 2015, Bill Gates of Microsoft, Mark Zuckerberg of Facebook, and other high-tech entrepreneurs announced the formation of the Breakthrough Energy Coalition, which will fund a worldwide public-private partnership among governments, research institutions, and investors to finance clean energy innovation and low-carbon development around the globe. The coalition will target research and development (R&D) in green electricity generation and storage, transportation, industrial use, agriculture, and energy systems efficiency.

In some areas, corporations are taking action on climate and energy issues absent government mandates.  Moreover, “they are ahead of their governments in planning for climate change risks, costs, and opportunities,” according to a 2014 report on the global corporate use of carbon pricing. According to that report, 150 companies worldwide impose a price on carbon in their internal operations and investment decisions and 212 companies are directly engaging with policymakers in support of carbon pricing legislation.

Ten global corporations have committed to greenhouse gas reduction targets consistent with limiting global warming to less than 2°C—the threshold that scientists widely agree would help avoid the most disastrous effects of climate change (Table 1). Sony Corporation, for example, achieved its target of a 30 percent reduction in greenhouse gas emissions from 2000 to 2015. Aggregate reductions by these corporations will amount to 799 million metric tons of carbon dioxide equivalent (MtCO2e)—or 2 percent of the world total. Other corporations are expected to make similar commitments, which would further boost the chances of limiting global warming to 2°C­.

Momentum exists in other sectors as well. Increasingly, investors and insurers are requiring better quantitative assessments of environmental risks for investment portfolios—risks arising from climate change, natural resource scarcity, and pollution—and are incorporating these assessments in their long-term investment decisions. For example, in a survey of 36 global financial institutions by the Finance Initiative of the UN Environment Programme, 75 percent stated that they monitor environmental risks to transactions, and 42 percent accounted explicitly for such risks in their credit assessments. The UN survey also reports that 60 leading insurers, insurance market bodies, and international organizations (representing 20 percent of the global insurance market), along with investment owners and asset managers with combined assets of $59 trillion, have agreed voluntarily to integrate climate change and environmental degradation considerations into their investment analysis and decisionmaking processes.

These examples represent a promising start of a new sustainable trajectory for the global economy, but more widespread adoption of such initiatives by the private sector is needed. In all economies, private enterprise is the primary source of technological innovation, which is necessary for economy-wide change and for offsetting any constraints imposed by “spaceship earth.” Here, government has an important role to play, especially in fostering economy-wide green innovation and R&D, disseminating proven green technologies to lower-income countries, and facilitating green financing and investments. The focus on innovation by the Breakthrough Energy Coalition, for example, highlights the potential for interaction between the private sector and government.

Fostering Economy-Wide Green Innovation and R&D

A key impetus for the rapid adoption of green innovation is technology “spillovers,” which occur when the inventions, designs, and technologies resulting from the R&D activities by one firm or industry spread relatively cheaply and quickly to other firms and industries. Technology spillovers are critical but present a particular challenge: they undermine the incentives for a private firm or industry to invest in new R&D activities, as it bears the full costs but receives little or no returns from the subsequent spread of innovation throughout the economy. The result is under-investment in green innovation, unless it is bolstered by public policies to provide R&D subsidies, make investments in scientific research, and protect intellectual property, as well as other initiatives that foster more upfront R&D investment.

Realizing the benefits of technology spillovers therefore also depends on an important and complementary role for government in supporting private sector initiatives in green innovation. Such public support could be funded through the removal of environmentally harmful subsidies. Estimates suggest that, globally, this approach to funding could amount to $1.9 trillion from ending fossil fuel subsidies, $485 billion annually from eliminating agricultural subsidies, and $27 billion from ending subsidies for marine trawling.

Although more advanced countries are likely to be at the forefront of global green innovation and R&D, industries in lower-income countries can also benefit from adopting and disseminating proven green technologies. The UN Environment Programme’s Partnership for Action on Green Economy (PAGE) is conducting assessments of the role of industry in facilitating the transition to a green economy in developing countries, including recommendations for how governments can better support the transition to green industrial production through technology adoption. Assessments for Burkina Faso, Ghana, Peru, and Senegal demonstrate that government policies can assist dissemination through private-public partnerships and illustrate the benefits to industry of reducing resource use and environmental impact, improving the effectiveness of industrial zoning and environmental regulations, applying more widespread and systemic reviews of the resource efficiency of imported technology, providing financial assistance for the adoption of renewable energy technologies, encouraging greater uptake of environmental management standards, and identifying and supporting green industry supply chains with export potential.

Facilitating Green Financing and Investments

Green financing involves the financial system’s support of investment decisionmaking that takes into account improved environmental performance and underpriced environmental risks, including those from climate change, natural disasters, and natural resource scarcity. Government also has a role to play to encourage more widespread adoption of green financing and investment principles. Here, priority should be given to ensuring that the rules governing financial systems support investment decisionmaking that accounts for environmental sources of risk and opportunity. As prudential authorities and regulators of financial systems, central banks can advance this objective by establishing requirements for environmental risk management and reporting, incorporating impacts of natural disasters and climate change considerations into financial stress tests across institutions, adjusting capital provisioning to account for underpriced environmental risks, initiating prudential reviews of the impact of sustainability factors on financial stability, and stimulating markets for specific assets (such as green bonds) through asset purchases.

Because banks and investors rely extensively on company disclosures to evaluate environmental risk, a need exists for common international approaches with standardized data and risk measures to evaluate environmental impacts and inform decisionmaking. This requires governments to coordinate and develop common practical frameworks, methodologies, and tools to provide a systematic approach to monitor and integrate environmental factors into credit and investment risk assessments.

Already, there are efforts to develop international guidelines and common policy and legal frameworks. In February 2016, finance ministers and central banks governors of the G20 major economies met in Shanghai and committed to developing such frameworks to green the $90 trillion of investments required over the next 15 years to achieve global sustainable development and climate objectives. The G20 has also launched the Green Finance Study Group, co-chaired by China and the United Kingdom, to explore ways of mobilizing private capital for green investments.

As Boulding predicted over 50 years ago, our perception of the world must change, from a limitless frontier to a “spaceship earth.” The new set of economic principles that underlie this concept must involve a greater role for the private sector, including corporate environmental responsibility and stewardship, improved environmental assessments that factor in the true cost of resource and environmental use, and investments in green assets, technologies, and innovation. In recent years, the opportunities for businesses to capitalize on these initiatives have proliferated.

If we hope to achieve more sustainable economic development, these new economic principles must create sufficient incentives for future expansion in production and consumption, as well as investment decisions, to be decoupled from increased resource use, wasteful production, and pollution. Policies to advance green R&D and innovation, disseminate existing technologies more quickly throughout the developing world, and provide the governance framework for green financing are fundamental to facilitate the transition to a more sustainable trajectory.

Now we must urgently tackle the next challenge, of fostering these new principles to accompany the vision. Innovation, technological adoption, and financial investment—led by private enterprise with support from public policy and the right incentives—can launch the spaceship earth on a more sustainable and prosperous path.