Pensions Conference 2012: Review of Workshop B5 - Resource and environmental limits to economic growth

The end of the world as we know it?

There has been exponential growth in the economy since the industrial revolution.  Most actuarial approaches for funding pension schemes include an implicit assumption that this exponential growth will continue.  This fascinating talk from Oliver Bettis considered whether this assumption is realistic or whether we will hit biophysical limits to growth within the next few decades.     

From GDP and population growth to patents granted in the US and species extinctions there are many examples which show that we are living in an exponential world.  If recent trends continue then the world economy would grow 14 fold, in real terms, by the end of the century.  This prompts the question - is economic growth always good?

Resource limits:  The energy content of a barrel of oil is similar to the output from 30 people doing manual work for a month. Oil discoveries peaked around the 1970s.  For the last couple of decades oil has been pumped out of the ground faster than new reserves were discovered.    International Energy Agency forecasts show that if current oil consumption stays flat over the next 25 years then around two thirds of our oil will need to come from fields yet to be developed or found.  The IMF considered what would happen if oil production declined by 2% p.a. and estimated that oil prices would increase 800% over the next 20 years.  Consequently this could lead to an “oil crunch”, and there are parallels here to the credit crunch.   

Environmental limits:  Atmospheric CO2 has been linked closely to average temperatures over several hundred thousand years.  Present levels of atmospheric CO2 are about one third above the previous maximum from this period.  The impacts of increased CO2 emissions could be severe.  A 4oC average increase in global temperature means that 90% of summers would be expected to be warmer than the hottest summer in the late 20th century.   

Economic growth has been correlated with growth in the use of resources and growth in the use of fossil fuels.  One way to look at the human impact on the world is to look at world population, affluence (consumption per head) and technology (the environmental impact of consumption per head).  If affluence and population continue to grow then we are reliant on technology to stabilize our environmental impact.  However over the last decade the carbon intensity of GDP has been increasing, so technology is not providing the solution at present.       

Turning to how this could impact on actuarial advice, it is worth considering whether long term modelling and funding approaches allow for environmental and resource limits on growth being reached.  Investors that consider this may wish to increase their focus on “green” investment. 

Actuaries are well placed to use our core skills to work more widely in this area.  For more information join the Resource & Environment Member Interest Group: http://www.actuaries.org.uk/members/pages/resource-and-environment-member-interest-group