This article first appeared in Forum, The Edge Malaysia Weekly on October 3, 2022 - October 9, 2022

In the field of economic history, one common proxy measure for economic output growth is population growth, especially in cities. The reason is that for a large chunk of human history — post Black Death era notwithstanding — output per capita remained pretty stagnant for the bulk of the population. With stagnant output per capita, by observing how the denominator grew — with population records typically much better preserved than macroeconomic records — we can roughly tell how the numerator grew as well.

All this changed by about 1870, long after the commencement of the Industrial Revolution. The Industrial Revolution may have revolutionised production practices in industry, beginning in Britain, but it did not necessarily improve standards of living. Indeed, in macroeconomic output numbers, the Industrial Revolution was more like the Industrial Evolution. John Stuart Mill, a famous British political economy thinker and philosopher, wrote in the early 1870s that “…it is questionable if all the mechanical inventions yet made have lightened the day’s toil of any human being”.

In a recent book called Slouching Towards Utopia: An Economic History of the Twentieth Century, J Bradford Delong, a professor of economics at the University of California Berkeley, argues that post-1870, economic growth fully took off, with output per capita finally increasing in a sustainable manner. He attributes this rise to three factors — full globalisation, the industrial research laboratory, and the modern bureaucratic corporation. The first opened up markets of consumers globally like never before due to advances in transport and telecommunications. The second gathered communities of engineering practice to supercharge economic growth. The third organised communities of competence to deploy these fruits of invention.

But as Delong rightly points out, such economic growth was not evenly distributed over space and over time. Sustained per capita growth occurred primarily in the West at first, with many countries around the world only seeing such growth after World War II. And, as one can imagine, the contexts in which such sustained growth happened differed wildly across countries. Those contexts also differed wildly over time — for instance, trading internationally under World Trade Organization rules versus General Agreement on Tariffs and Trade rules versus no rules. And when it comes to the future of economic growth, these differing contexts are of immense importance.

We all know that humanity’s desire to avoid being the first species on our planet to make itself extinct requires a future development model that is far more forgiving on our natural resources and on Earth. Yet, as we also know from history, different countries achieved sustained economic growth in different ways across space and time. Many of the developed countries in the West grew on the basis of the exploitation of natural non-renewable resources such as coal, and on the colonisation of other countries and their people. Indeed, Kenneth Pomeranz, a prominent economic historian, argues that the Industrial Revolution happened first in Britain due to its proximity to coal sources and its access to the resources of North America.

In today’s world, coal and colonisation — at least direct colonisation, as many argue that indirect colonisation is still very much a thing, which is a discussion for another day — aren’t in vogue any longer. Coal, of course, is still a key source of energy for many countries, Malaysia included, but the pressure to move away from coal grows day by day. It is true that we absolutely need to move towards a greener model of economic development, and how we generate the energy required for that development is a key part of it. But notions of fairness and justice matter in development too. How “fair” is it that countries that grew rich on the basis of “un-green” development now get to set the standards for developing countries, banning those very models that made rich countries rich in the first place?

An example of this is carbon offsets or carbon credits. Carbon credits are basically a form of certificate that provides the holder the permission to emit one tonne of carbon dioxide or a greenhouse gas equivalent. Thus, a given company — carbon credits are typically purchased by corporates — buys these credits as a means of offsetting their emissions, thereby moving towards some form of carbon neutrality.

There are, naturally, critiques of carbon offsets that liken them to a modern-day Indulgence, where corporates can sin as long as they pay for it. However, there are three key differences. First, carbon offsets have to be linked to some form of carbon removal in the first place, either by nature-based solutions like reforesting deforested areas or restoring forests, or by technology-based solutions like carbon capture and storage. So, at the very least, the “means” of generating credits are good “ends” in and of themselves. Second, companies will have to reduce emissions gradually over time anyway; there aren’t enough offsets to reduce emissions to what they need to be. Third, carbon offsets are just another form of internalising externalities; at the very least, companies are now paying for what they should have been for decades. But most of all, we seek progress, not perfection, and a market that rewards things like nature-based solutions shouldn’t be dismissed summarily.

Anyway, a key component of a carbon credit is the concept of “additionality”. GHG reductions count as additional if they would not have occurred in the absence of a market for offset credits. It is essentially a counterfactual argument. As an example, a current existing rainforest that is designated as a forest reserve would not get you a carbon credit; it’s already there. However, if a deforested area is reforested to generate credits to be sold on a carbon market, then it is additional. The purpose of “additionality” is two-fold. The first is more principle-based; it is trying to ensure that there is a “positive” move towards overall carbon reduction. The second is commercial; additionality limits supply and, hence, manages the carbon markets from being flooded with credits.

Look, I love good counterfactual arguments, but here’s the justice problem. For countries which have developed by exploiting their natural resources such as rainforests, mangroves, plains and so on, additionality is easier to come by. To be clear, while these aren’t always developed countries even though most are, developing countries can also destroy rainforests — Brazil is a clear example. On the other hand, for countries — typically developing countries — which have maintained their forests, even if it wasn’t necessarily by choice, they can’t then turn these natural resources into high-quality credits. Avoided deforestation can be a carbon credit, but it is deemed of “less quality” than a credit borne from reforestation. Again, why are we penalising countries that may have done a good, sometimes inadvertent, job at prioritising the conservation and preservation of their natural biodiversity?

Justice is not just something that is seen at just one point in time. It matters over time as well. Perhaps what we need are different standards with regards to additionality for developing countries, particularly those that prioritised conservation in the past. If forest reserves don’t count as “additional” in developed countries such as the US, maybe they should in developing countries whose natural resources have been exploited over time, not just by themselves, but by their colonisers as well. The idea of a level playing field between developed and developing countries is not historically just. Things were unfairly titled towards these rich countries in history. We need to re-tilt it back towards the rest of us.

Nicholas Khaw is an economist and head of research at Khazanah Nasional Bhd

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