How Green Technology Can Spark Economic Growth

In rented offices on a quiet side street in Paris, not far from the Eiffel Tower, analysts for the International Energy Agency spend long days and nights crunching numbers about oil production and greenhouse gas emissions. They're basically the staid, sober global accountants who watch over the power supply for the 30 rich countries that are members of the Organization for Economic Cooperation and Development, and their many reports are dry and technical. But there is one term that has taken on ominous overtones in recent studies. The phrase "business as usual" has started to read like the end of the world.

With a sense of urgency bordering on desperation, the IEA has been calling for radical changes in the way the world drives its cars, its factories and, indeed, the global economy. In November the agency will issue a collection of comprehensive reports that declare in no uncertain terms, "a global revolution is needed in ways that energy is supplied and used."

But the financial crisis plunging the world into recession right now has caused a wave of doubts, second-guessing and backsliding among many political and business leaders. Italy and several Eastern European states have threatened to sink previously agreed upon European Union initiatives. With bank collapses, home foreclosures and unemployment on the rise, and the public coffers drained by bailout packages, even America's vaunted venture capitalists are getting cautious. A few months ago, many were ready to invest in huge green-technology projects. Now they say they're scaling back if, indeed, they can get the money together at all. China's leaders, after what seemed a crisis of environmental conscience during the Beijing Olympics, may be inclined to dispense with their qualms as they see their economic growth drop from double digits to single ones.

But there are also powerful voices being raised amid the din of despair, saying that now is precisely the time to seize the initiative and launch that "global revolution" the

IEA is calling for. And not just because it will stave off disasters two or three decades away, but because it can provide the impetus to pull the global economy out of the slump it's in now and put it on a more solid foundation than it's had in at least a generation. British Prime Minister Gordon Brown, French President Nicolas Sarkozy and American presidential candidate Barack Obama have taken up the cause of what United Nations Secretary General Ban Ki-moon last week called a "green New Deal" that would rebuild and reshape the economy of planet Earth in ways reminiscent of the programs that President Franklin Roosevelt used to revitalize the economy of the United States during the Great Depression.

It took a great war, and all the military industries that fed the carnage, to bring America out of the Depression. But to a surprising degree, the world economy has been riding the strength of its hottest sectors ever since. By the 1990s, it was the rise of the Internet and the network economy, which collapsed in the dotcom bubble and gave way to housing and the financing that paid for it. In each of these recent cases it was the market that discovered and promoted a new engine for growth—creating millions of jobs and trillions in profits worldwide. Between 1996 and 2000, the tech sector created 1.6 million new jobs, according to Moody's—roughly 14 percent of new U.S. job growth. In this decade, the financial sector accounted for a lion's share of U.S. corporate profit, while housing accounted for a staggering 40 percent of new U.S. job growth. Now, those two stalled drivers are leading producers of unemployment: Goldman Sachs, the royal house of finance, announced a 10 percent staff cut last week.

The world, simply put, needs a new economic driver, a new hot growth industry. And with financial markets down one-third or more for the year, even once stalwart capitalists are now willing to entertain the idea that perhaps the government must play a greater role in sparking growth and job creation. Proponents of the 21st century's New Deal argue that massive public investments and fiscal incentives can lay the groundwork for the private sector to develop whole new industries and create millions of jobs in the near term, and, oh, by the way, save the planet in the medium term. "You are not just putting money into hot paper or into a financial-services sector that destroys itself," says Oliver Schäfer, policy director of the European Renewable Energy Council. "You are investing in clean technology, which is real business."

Indeed, in 2008 the promise of jobs is a stronger incentive to go green than the threat of ice caps melting and coastal cities drowning in 2018 or 2048. In the euro zone, for instance, unemployment is expected to rise from 11.3 million to 14.5 million by the end of next year, pushing the rate up from 7.5 to 9 percent. In the U.S. the rate is 6.1 percent, but is expected to push toward 8 percent by the end of 2009, the highest in 25 years. Bill Gates, a man who knows a thing or two about job creation, predicts unemployment could reach as high as 9 percent. Already in the first nine months of this year some 760,000 people lost their jobs, and the total ranks of the unemployed has swollen from 7.3 million to 9.5 million.

Such are the hopes for green industries that Japanese Prime Minister Taro Aso talks of "a great opportunity for new growth" and vows that "we will achieve the low-carbon society that is compatible with growth ahead of the rest of the world." Tokyo's ministry for trade, economy and industry says it wants to build a new industrial infrastructure by banking on more efficient use of energy and innovative technologies.

The U.S. Congress endorsed a green response to the global crisis when it demanded provisions for developing renewable energy supplies as a condition for approving the massive financial rescue package in October. And the political platforms of both the major presidential candidates note the promise of green initiatives. Republican John McCain may have made a stump-speech mantra of the phrase "drill, baby, drill" [for oil], but his official position is that "the U.S. must become a leader in a new international green economy."

Democrat Barack Obama is considerably more ambitious. Among other programs, he says he'll "strategically invest $150 billion over 10 years" in a "clean energy economy" that will "help the private sector create 5 million new green jobs, good jobs that cannot be outsourced." In a good year the U.S. economy adds 2 million jobs, so Obama is talking about goals so ambitious that they amount to a green New Deal, even if he doesn't use the phrase himself.

Obama is also talking about accelerating the commercialization of plug-in hybrid cars, promoting renewable energy projects, encouraging energy efficiency, investing in low-emission coal plants and advancing the next generation of biofuels. Obama wants to create a program to train American war veterans for work in green industries and modernize factories to make green products. Heather Zichal, Obama's policy director for energy, environment and agriculture, says the candidate believes that given the economic climate these are investments the United States must make, and that government has to play a role. His "point is that you can't just hope that the free market is going to fix these problems," she says.

But at this critical juncture of global crisis and epochal political transition in the United States, while the White House waits for a new occupant, a few European countries have taken the strongest lead pushing forward with substantive initiatives. According to a recent United Nations report, Germany's $240 billion renewable-energy industry already employs 250,000 people, and by 2020 is expected to provide more jobs than the country's auto industry, which is currently the country's biggest manufacturing business. Britain plans to spend $100 billion on 7,000 wind turbines by 2020, and the government claims that will create 160,000 jobs. "I know that some people may be saying that the difficult financial circumstances that the world now faces mean that climate change should move to the back burner of international concern," British Prime Minister Gordon Brown recently said. "I believe the opposite is the case."

But just how plausible are such plans? Even if they create jobs, will those jobs really contribute to a system that slows or stops global warming? Fatih Birol, the chief economist at the International Energy Agency, has overseen the studies calling for a global revolution in the way energy is supplied and used. But he remains pessimistic. The wholesale transformation of the energy economy as a response—as the response—to the global recession "is only in our minds," he says. The fatal dynamic is perfectly straightforward. In a recession, consumption of just about all commodities goes down, but so do energy prices—and that discourages the development of alternatives. Nuclear-power plants, vast solar collection farms, forests of wind turbines, ethanol production, R&D for electric or hydrogen-powered cars and the infrastructure to support them—all require enormous quantities of capital awaiting a fairly distant payoff. When capital and credit are tight, and oil prices suddenly drop (they are less than half what they were in July), private investors are less likely to put billions into a distant clean-energy future. Alternative programs for renewable sources of energy that might make business sense when oil is at $140 a barrel make less sense when it's at $70, and none at all if it drops below $40. Even if it's clear that over the long term oil prices will continue to rise, the volatility of the market undermines long-term planning.

To push ahead, governments have to provide incentives and regulations, and a whole lot of money up front. If global warming is to be confined to about 2 degrees Celsius by 2050—instead of rising by an apocalyptic 6 or 7 degrees—carbon-dioxide emissions will have to be 50 percent lower in 2050 than they are today. And according to the International Energy Agency, that will require investment of about $45 trillion by 2050. Such expenditures could well be offset by energy cost savings, but that would happen later, and the enormous layouts have to happen now. This is not a problem that unregulated free markets and private capital are going to solve short of a Malthusian meltdown.

If there is good news, in Birol's view, it's that after the epic interventions in the financial markets over the past few weeks, the notion that the state might intervene massively to redirect the energy market no longer seems extreme, even to the normally laissez-faire British and Americans. Once you open the floodgates of government funding for the banks, why not for green industry, too? And while the U.S. government has a weak record picking investment targets—its 1970s foray into synfuels is remembered as a classic boondoggle—other states have proved that government can pick winners.

It's the French who offer perhaps the most detailed blueprint for the moment. The particular advantage that Gauls have is that dirigisme (state planning) has never been a dirty word in Paris. The government often tries to guide the markets, and without apologies. Massive public investment in rebuilding and reorienting the economy is what gave the French what they still call les trente glorieuses, the 30 glorious years of phenomenal growth after World War II. That was when they made the expensive but prescient decision to build the nuclear-power plants that now supply 80 percent of their electricity, and with no direct emission of greenhouse gases. So, too, the French dirigiste decision to crisscross the country with capital-intensive but energy-efficient high-speed train lines.

Although France was seen as an environmental laggard in the '80s and '90s, when green causes seemed more about lifestyle than survival, over the past year the problems have been defined and addressed with stunning celerity. "We have gone from recognition to action," says Nicolas Hulot, the mediagenic environmentalist and host of the widely distributed "Ushuaia" TV documentaries, who has been a key figure pressuring the government.

In October 2007, Sarkozy kept his campaign promise to convene all branches of government, unions, the private sector and other interested parties in a conference similar to the one on the Rue de Grenelle in Paris that ended the quasi revolution of 1968. This Environmental Grenelle, as it's now called, came up with 268 recommendations, many of which have been passed by the Parliament. And those have provided Sarkozy with the detailed specifics needed more than ever in the current crisis.

The clear priorities in the new legislation are on practical programs that have an immediate effect on, yes, the job market. First on the list is the construction business: an estimated 25 percent of the country's greenhouse-gas emissions comes from energy consumption in buildings. "We're trying to have a 40 percent drop … by 2020," says Nathalie Kosciusko-Morizet, the state secretary for ecology. Hundreds of millions of euros have been earmarked to make homes, offices and especially public housing better insulated and more energy-efficient. Kosciusko-Morizet says that this project will generate some 200,000 of the 500,000 jobs the Grenelle initiatives are supposed to create in France over the next dozen years. The initiatives in Obama's campaign platform are similar, but in France they're already becoming law.

Transportation is another sector that's already been addressed creatively in France. A system that went into effect on Jan. 1 offers a financial bonus for the purchase of cars with low emissions, while there is a tax disincentive (called a malus) against buying a car with high emissions. Virtually overnight the French taste in automobiles has been transformed. The sale of pollution-prone used cars has dropped off while the number of new cars sold in France by Renault, for instance, was up 8.4 percent in September and 3.4 percent for the year. That means more manufacturing jobs can be sustained or created.

Success doesn't come cheap. The bonuses will cost the government up to €200 million this year. And when other huge costs of redirecting the energy economy are added to the monumental expense of bailing out the financial sector, there is no way France will come close to the Maastricht criterion of a 3 percent deficit for each country in the euro zone. But Paris says the new expenditures are betting on future energy savings as well as the "formidable follow-on effect" of raising employment and creating dynamic new sectors in the economy. "This time it won't be about sacrificing the future for the present," said Sarkozy, "but on the contrary, putting our country in the best possible situation to face the future."

Can the rest of the world be persuaded to take even more dramatic steps? What of countries like Poland, which produces 94 percent of its electricity from coal, or China, which pumps more carbon dioxide into the air in eight months than the European Union is likely to save in the next 12 years with all its programs to reduce emissions 20 percent by 2020? Complicated schemes to price carbon emissions and trade carbon credits, some of which are in place, may provide a useful mechanism. So might the costly and almost entirely untested schemes to capture and store the carbon dioxide produced by power plants and factories.

But the political and financial reality is that no government will be so moved by the dire predictions of the world's scientists and the doomsday scenarios on computer models that it will allocate trillions of dollars just to meet those postulated challenges. What governments might do, and some certainly will do, however, is spend huge sums soon to kick-start their economies and create millions of jobs. "The nation is asking for action, and action now," said Franklin Roosevelt when he took office in 1933 and launched the New Deal. Today the global economy—the planet itself—is asking for the same thing.

With William Underhill in London, Christian Caryl in Tokyo, Jacopo Barigazzi In Milan, Jessica Ramirez in Washington, D.C., and Melinda Liu in Beijing