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European Commission

Janez Potočnik

European Commissioner for Environment

The global challenges we face and the choices we must make

Panel discussion: Europe and the Reshaped Global Order - Bled Strategic Forum (Slovenia)

Bled, 2 September 2012

Ladies and Gentlemen,

It goes without saying that it is really an honour to participate in such an important event as the Bled Strategic Forum. But it is not only an honour; it is also a pleasure, in particular since we are here in my own country, Slovenia, and even in my own region. So, I would first like to thank the organisers for their invitation and their welcome.

On 7th June this year, a scientific article in the journal Nature stated as follows: "Today's conditions are very different because global-scale forces including, but not limited to, climate change, have emerged as a direct result of human activities. Human population growth and per-capita consumption rate underlie all of the other present drivers for global change".

Today I want to talk to you about those global challenges that we all share and the strategic choices they impose on us. Then I want to look more particularly at the challenges that we face from the perspective of one global region – Europe. I hope to show you that, even if in Europe we are faced with specific problems such as the severe financial and economic crisis, our solutions to those problems are closely tied into how we deal with the global challenges.

First let's look at those global challenges which we all share.

Our planet's population is expected to rise to more than 9 billion by the middle of this century. We will share our planet with 3 billion extra middle class consumers by 2030. This is great for those 3 billion whose living standards will rise, and for the businesses that will thrive in providing for those demands. But new demands will put immense strain on many resources. We will need three times more resources – 140 billion tons annually - by 2050. The demand for food, feed and fibre is projected to increase by 70%. Yet already today 60% of our ecosystems underpinning these resources are degraded. Without important efficiency gains, by 2030, we will need 40% more water than we can access.

To put it simply: the world has changed. We are more interconnected and interdependent than ever. Many challenges, like for example climate change, disappearing biodiversity, scarce resources (like water, land or oceans), potential pandemics, poverty and global security can only be addressed if we join our forces. We also share the challenge of the global economic slowdown and how to stimulate economic growth and satisfy demands. Transition from our current resource intensive growth model to a resource efficient growth model is - in the context of those global megatrends - actually inevitable for all our economies.

Of course this growth model is more advanced in the industrialised part of the world, but the danger that the emerging economies – those where most of those 3 billion new middle class consumers live - would follow the same development path is more than real. It may sound hypocritical for rich countries to say "grow as we say, not as we did", and of course those 3 billion have just as much right to a decent quality of life. But the resource intensive growth model of the previous century can simply not be extended to today's global population. Industrialised nations must change their production and consumption patterns of the last century, and developing countries must not seek to imitate those patterns, but rather take a different route to higher living standards. The stakes are high and our responsibility to manage our own future has increased enormously.

The importance of the necessary transition to a resource efficient growth model is more or less already understood worldwide. These were basically the questions we have jointly addressed couple of months ago at the Rio de Janeiro conference on sustainable development. Rio is seen by many, if not most, as a failure. But the truth is that the success or failure of the Rio+20 Conference was not decided in June 2012. It will be decided in the years to come. We must take advantage of all the work, positive energy and investment that went into Rio, and indeed find means to harness some of the frustration of those who wanted more out of it, including me and us Europeans. But Rio did achieve some notable advances:

  • It achieved broad buy-in of the concept of green economy;

  • It achieved adoption of the 10 Year Framework of Programmes on sustainable production and consumption;

  • It achieved establishment of intergovernmental committee of experts to prepare options for a sustainable development financing strategy;

  • It achieved commitment to the beyond GDP concept and corporate sustainability reporting;

  • It achieved commitment of many partners on natural capital accounting; and

  • It achieved operational agreement to work on Sustainable Development Goals.

The Rio Summit showed that in this context the EU and emerging powers will be partners in the 21st Century. We face the same resource pressures and environmental challenges - even if at different stages. But, we will also be competitors, as increasing competition for resources leads to economic, but also political pressures, and even to conflicts. The fact that we will be in such greater competition means that we have to find ways to better manage our resource use. I would dare to guess that in the future strategic partnerships will be more than in the past built around resources, with large, resource rich countries with relatively low population density on one side, and highly populated, resource-poor countries on the other side.

Our future, taking into account human population growth and growing per-capita consumption rate, will be very much shaped by how well we manage existing limited resources. Water, land, energy, oceans, raw materials, biodiversity, ecosystems and the complexity of their interactions will be decisive for our future. In the past we were never so seriously forced, at least globally, to deal with these questions. As we have advanced in our ability to provide for consumer needs, eradicate and treat diseases, live longer, handle natural disasters and wage wars, we have done all of this on a planet that has stayed the same size. Whilst we can achieve a lot by directing our technological and innovative capacities to getting more out of our limited resources, it will not be enough. We also need to rethink our existing development model.

And now about Europe.

Europe is of course part of that interconnected and interdependent world; an important part of it. All the challenges I have just mentioned are also our challenges. In addition, we find ourselves in the turmoil of the most serious financial, economic and even political crisis. We are struggling to find the way out, to stabilise and reform our economies and to find effective ways to inject new growth and create new jobs. Long term financial consolidation is of course necessary, but in the Commission we are also strongly supporting the renewed drive for sustainable growth, currently sweeping across Europe. The build-up of debts, deficits, and imbalances in our economies did not happen overnight, it happened over many years. And the readjustment we are now going through won't be concluded overnight either. There is no silver bullet for economic growth. If there were, it would have already been fired, as mentioned in one of his recent speeches by my colleague Olli Rehn. So financial and economic consolidation must be achieved whilst dealing with the structural problems and strengthening the competitiveness of European economy. We need consistent policies, but also patience.

For me, one of the most important answers - if not THE most important answer - is to put the knowledge based, resource efficient, low carbon economy in the centre of our political attention and actions. Making the same green economy we were so vocally supporting in Rio, a reality in Europe. I am convinced that the answer to the current economic crisis lies in our ability to transform the challenges we face today into opportunities for tomorrow. This in turn will define Europe's position in the multi-polar system as it develops. The strategy that we in the European Commission defined in 2010 – the Europe 2020 Economic Strategy – is trying to do exactly that. Using our natural resources in a more efficient way is not only about safeguarding the environment (although I think that that is a pretty important aim in itself); it is also about future EU competitiveness, long-term prosperity, economic growth and job creation. It is about giving an answer to the economic instability we have plunged into, and about shaping our future. The European Union's Multi-annual Financial Framework for 2014-2020, which is now under discussion, should send an important signal of Europe's readiness to invest in its future; into job-rich green growth and innovation based re-industrialisation of Europe. The Multi-annual Financial Framework should become an important part of our Marshall Plan for Europe.

Why is it so important that we in Europe understand the global story I have explained at the beginning? Three facts explain the predicament of Europe in this context.

First: we use a lot of resources. The European economy is built on decades of resource-intensive "brown" growth. We use 16 tons of materials per person per year. We throw away 6 tons per person, and half of that waste is then just buried in the ground as landfill.

Second; those resources are getting more expensive. After a century of declining resource prices in real terms, pressures on resource supplies have led to a steady increase of prices since 2000, and prices will inevitably continue to rise and remain volatile.

And third, we import most of our material resources. More than half of the materials that we use are imported; indeed we import six times more than we export. We have the world's highest net imports of resources per person. And our dependency on import is increasing. We get 48 % of our copper ore from abroad, 64 % of zinc and bauxite and 78 % of nickel. We import all of our cobalt, platinum, titanium and vanadium, as well as rare earth metals.

The message from these three facts should be clear, and indeed our companies acknowledge the need to adapt. Increased materials prices mean that manufacturing companies in Germany now spend twice as much on materials as they do on labour. This invisible hand means that they are already refocusing their innovation potential from improving labour productivity to improving resource productivity. But the global battle for resources is only just beginning. Resource scarcities and pressures will be in future a major constraint on growth. The invisible hand is not enough to manage a more fundamental economic transition. But that does not mean that we need an "iron fist".

It is for public authorities, including at EU level, to show leadership and give the right signals. In the EU, re-orienting our growth will be particularly difficult because we are locked into old growth models. This is why our policy approach must be based on carrots as well as sticks. We need to go beyond the traditional "three C's" - command, control and compliance - and the polluter pays principle, by developing the "three I's" - innovation, incentives and integration. We must recognise that it is enterprises that will innovate on the scale needed for our transition, but public authorities/governments need to provide direction, incentives and leadership in order for enterprises to make the right investments in change. As the situation is today, market forces are too slow and imperfect; the financial, business and economic world takes too much of a short-term view; and politicians tend to work too tightly only around electoral cycles.

Even if we can use new technologies to discover and exploit new sources and to dig deeper in existing ones, increasing resource supply will never be enough to meet the new demands, therefore:

  • we need to use less virgin material;

  • we need to Recycle and Reuse. For example by developing the markets for secondary raw materials, waste and by-products. We estimate that through greater 'industrial symbiosis' (where the waste of some firms is used by others) the EU could save up to € 1.4bn a year and generate up to € 1.6bn in sales;

  • we need to increase resource productivity. McKinsey estimates that increased resource productivity can address up to 30 % of 2030 total resource demand, with many improvements at low cost;

  • and we need to increase the added value we get from the same materials. Just think how one smart phone in your pocket does what your telephone, hi-fi, desk-top computer, record collection and library did 10 years ago with far less material.

We live in market economies and the role of the market will also in the future remain central. It is the best means we have, but a free market alone is not enough to bring about this transition. The market cannot ensure efficiency in the allocation and use of resources:

  • if prices do not reflect the true costs of resources;

  • if rewards to capital are disproportionate to other inputs;

  • if managers on annual contracts are induced to make short term investment decisions

  • if directors' business decisions are overly influenced by bonuses based on short term share price

What do we, at EU level, need to do then? How can we provide the right framework conditions for transition? We need to:

  • Give clear signals to the private sector so that it can make the up-front investments needed to become more resource efficient. So that companies are ready for input price increases, not just responding to supply shocks. This is particularly important for SMEs. If we just try to shield our incumbent industries from the future we are not doing them a favour, indeed we risk "killing them with kindness". We need to think about the industries of the future and that means "creative destruction" as well as "innovative creation". Our job is to make transition effective and smooth.

  • One of the ways in which we shield industries and provide the wrong incentives is through environmentally harmful subsidies. We need to phase out these quickly and use subsidies to move in the right direction, for example by shifting taxes from jobs to pollution.

  • We also need to build up Europe's lead in eco-industries such as environmental technologies and services. These are not only the industries of the future in the markets of the future; they are the enablers for the rest of the economy to perform more efficiently.

  • And speaking of that wider economy, we need to promote broader use of a corporate sustainability index, such as the environmental index launched by the World Economic Forum in 2005.

Economic transition is never easy, particularly when, as in Europe today, we are locked into our behaviour. But the benefits of a transition to a resource-efficient growth model are many. And not just for the European Union:

  • The latest work of McKinsey on the Resource Revolution sets out the gains that we could achieve at a global level by 2030 at 2.3 trillion dollars for increased resource productivity alone.

  • McKinsey also shows it is good for business – 70 % of productivity opportunities for some resources have potential returns of above 10 %. Producing the same products by using less energy, less water and fewer raw materials makes economic sense.

  • And our own work in the Commission shows that a one percentage point gain in resource productivity can save € 23 billion a year to European businesses, and could help them create 150,000 jobs.

In these hectic economic times it is really difficult to claim that the focus on growth and jobs is not appropriate. But if, while focusing on those questions, we ignore some global megatrends like climate change, resource scarcity and disappearing biodiversity, the mistakes we will make could be fatal. We have more debts than one, and in planetary terms we are living way beyond our sustainable means. There can be no alternative to sustainability, both financially and environmentally.

Ladies and Gentlemen,

The OECD Director General, Angel Gurría, stated to the G20 in May that "changing our model of growth and making it greener and more inclusive is the only credible strategy that we have. And it is a practical and concrete approach that can help countries move towards more sustainable development."

That change will be difficult, but I would like to conclude on a positive note. I take my optimism from the level of understanding and support I see developing in the progressive part of business sector. The World Business Council for Sustainable Development, a forum of 200 member companies from all sectors and from all continents with a combined revenue of more than $7 trillion, in their Rio declaration, calls for regulation, norms, standards and codes of conduct so that front-runners who have developed and pioneered the solutions are rewarded with lower barriers and entry risks. Similarly, we hear increasingly the voice of long term investors, like pension funds, whose concerns about sustainable growth and whose commitment to contribute to Green economy transition were loud and clear in Rio.

We need industry and investors on board. Rather than fighting the power of capital, or trying to legislate away its environmental downsides, we need to harness market forces to turn economies onto a track that is sustainable economically, financially, socially and environmentally. We need green economics.

As my good friend Achim Steiner, Executive Director of the United Nations Environment Programme, recently said (reacting in The Guardian newspaper to some of the Rio+20 critics): "We have failed to turn things round in the past 20 years, but underneath that failure there is an extraordinary array of activity and innovation"… Twenty years ago, we agreed what to do; now we have the tools to do it. If we do not go into the heart of economic policy, we will meet here at Rio+40 even more culpable. Markets are social constructs. They are not a force like gravity. They can be governed."

We need good governance to make markets work properly. This is something that the OECD highlighted in its Green Growth Strategy. But just as we must address market failures, we must also address governance failures.

It is imperative that we address the prevailing short term logic which is built in all our systems, be it political or economic.

Do you happen to know a politician that has been re-elected because she or he was defending longer-term interests over short-term ones? Or a manager who was rewarded because the profits of his or her company were lower that year, but more sustainable in the longer-term? It is of fundamental importance that we build more long-term logic into our data collection, reporting systems, rewarding mechanisms, and decision-making processes. I'm convinced that one cannot manage the world in the 21st Century without taking into account the longer-term picture and consequences. This would simply be self-destructive.

In shaping our future sustainable development path, the central role of civil society will also be important. We have to take citizens with us on the journey. And I strongly believe that it is the pressure by enlightened citizens – particularly through the power created by social media – that will play a decisive role in pushing companies and politicians in the direction of more sustainable choices.

Finally, for me Europe's role in this "reshaped global order" is clear, as is the path out of the economic crisis. Natural resources and the challenges they bring know no frontiers, and in this context neither should alliances and partnerships between existing and emerging powers. Europe has an important role to play, and we cannot afford to fail.

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