A long series of questions fuels the debate over sustainable development and the green economy. To name a few: Will the human capacity for innovation be able to offset environmental degradation? Can growth remain an economic priority? Or, conversely, is abandoning growth a viable development path? Amid theories and hypotheticals, the arguments must eventually shift from the abstract arena of general principles and focus on specific problems.
Eastern Europe provides an interesting test case.
After the breakdown of the Soviet Union, most Eastern European countries reoriented their economies toward the European Union (EU). Many of these countries actually joined the EU, overcoming a division rooted in the split of the Roman Empire, 1,500 years prior to the iron curtain. It remains little short of a miracle that the re-unification of Germany and the enlargement of the EU bridged such an ancient divide.
However, this eastward expansion of the EU created a regional mismatch between economic and political institutions. Economic membership requirements—in particular, the Stability and Growth Pact, which placed limits on national debts and deficits—set unrealistic and unachievable expectations on new Eastern members. This mismatch, manifested in today’s Eurozone crisis, now threatens to separate the continent into a strongly competitive Northern economic region and a Southern region that severely lacks competitiveness. Regardless, both regions seem headed for a long period of slow growth and increasing social and environmental problems, while neither region seems capable of real cooperation on key regional or federal decisions like smart grids or research and development priorities.
For Eastern Europe, this presents a serious dilemma. Eastern European countries can, on the one hand, try to integrate with the highly competitive group of Northern countries, which include Germany and Scandinavia; but this would require very rapid development of government institutions along with cultural acceptance of these institutions, a process that could easily end in failure. On the other hand, Eastern European countries could fall back from the impressive growth that preceded the financial crisis and follow the economic spiral of Southern Europe.
Fortunately, greening the economy presents Eastern Europe with a potential path out of this bind. The region need not choose between Northern and Southern Europe if it can establish itself as uniquely competitive.
The transition away from communism, in 1991, led to large-scale structural changes throughout Eastern Europe and a wave of deindustrialization. This shift diminished some environmentally damaging practices, but not all. Continued environmental degradation, pervasive energy inefficiency, obsolete and wasteful production technologies, increasing water scarcity and water losses, as well as costs associated with these concerns are the legacy inherited by Eastern Europe. Such a legacy presents monumental opportunity for mainstreaming environmental goals into national and sectoral policies.1
Despite relatively low prices for energy, water, and other environmental services compared to Western Europe, a growing proportion of Eastern European household budgets is dedicated to utilities. At the same time, utility companies are financially unstable and require subsidy,2 and most Eastern European countries are highly dependent on energy imports. Hungary, for instance, imports over 60 percent of its raw materials, 80 percent of its natural gas, and 100 percent of its crude oil from Russia.
These challenges, alongside several other economic and social factors—shadow economic activity, relatively low labor productivity, brain drain, and economies skewed to low-value activities—make Eastern Europe particularly vulnerable to fluctuations in the global economy.3,4 Scrutiny of the current development model in Eastern Europe reveals the huge potential of investment aimed at transforming national infrastructure through sustainable development. This would benefit both economic competitiveness and long-term economic resilience.
We suggest that the sustainable transformation include the following:
- Use supportive policies and complementary incentive schemes to encourage emerging environmental efforts. For example, the city of Czestochowa, Poland, with financing from the European Investment Bank, opened a combined coal-biomass plant that reduced CO2 emissions by 24 percent in 2003. The city also developed an energy efficiency plan for buildings and paired this with small hydro, solar, and wind plants.5
- Strengthen the corporate-university linkages and stimulate the involvement of businesses in the development, prototyping, and piloting of innovative sustainability technologies.
- Upgrade and renew power grids locally and regionally to facilitate use of renewables. Averaging intermittency and resources over a wide geographic range can improve the stability of the power grid and lower the price of renewable electricity.
- Focus efforts on increasing the efficiency of fossil fuel consumption while phasing in novel renewable solutions like decentralized small-scale biomass power plants, biofuels from sustainable agriculture, or high-altitude wind energy. In Vatra Dornei, for example, a tourist town of 16,500 residents in Romania, a newly constructed small-scale thermal power plant runs on sawdust from the local sawmills. This recent construction centralized and updated the heating network for about 25 percent of the town’s population, reduced the import of liquid fuel previously used to heat water, and reduced the quantity of wood waste dumped in nearby woods; the anaerobic decomposition from this dumping emits significant quantities of methane.
- Identify opportunities for structural changes to employment. For example, Poland could look to offshore wind energy as a new source of demand for skilled labor, currently being displaced in sectors like shipbuilding. Or Hungary could use building retrofits to both increase employment and reduce energy costs.
- Use low-energy intensity residential heating to fight economic and social inequalities and to target those populations most heavily affected by changes in energy costs—specifically Latvia, Slovenia, and Hungary, which have the lowest energy intensity of residential heating among the EU-27. This would primarily affect the elderly, single-person households, households living in dwellings supplied by district heating, and poor rural groups.
- Use formal and informal educational institutions to raise awareness of sustainability challenges and solutions. Lack of awareness of economic consequences from depleted natural capital and environmental degradation is often a barrier to the transformation of production and consumption. These kinds of programs are already established and underway in some countries. The Black Sea NGO Network, for example, is training and building a network of youth leaders in Bulgaria, Georgia, Romania, Russia, Ukraine, Turkey, and Moldova. Together, these youth provide a civil sector voice in defense and promotion of environmental legislation concerning the Black Sea.
- Upgrade and develop an advanced railroad network connecting to Western Europe.
- Improve and enlarge the existing structures of water management, including drinking water, sewage water, and freshwater use in agriculture and forestry.
- Expand the heating systems based on co-generation of electric and thermal energy.
- Tighten enforcement of natural resource rights and curb illegal resource exploitation using local communities and stakeholder empowerment.
Of course, integrated implementation—that is, each of the above policies entering force at once—is critical to efficient transformation of the Eastern European economy, and this raises the unavoidable question shadowing most environmental reform: how will these measures be funded?
Before the financial crisis, investments in Eastern Europe depended very heavily on large capital flows from (mainly Western European) member countries of the Organization for Economic Co-operation and Development. This investment generally targeted the financial, construction, and retail sectors. Since 2008 these flows have slowed to a trickle, and the need to increase domestic investment and wean countries from external capital flows provides strong political incentives for greening the economy. For example, restructuring financial incentives so that risk-adjusted returns favor green investments over brown investments would implicitly encourage the kind of change we are describing.6 Because investment stems mainly from property incomes, these incentives could include a tiered or differential system of taxation: property income invested in sustainable entrepreneurial activities could be fully exempted from taxation, for instance, while incomes directed toward other, non-sustainable ends would be taxed more heavily.
Incentives would also have to be set to explicitly redirect investment toward sustainable development. There is no panacea for such a complex problem; no silver bullet can singlehandedly push new investments this direction. Rather, carbon pricing must be combined with suitable regulations, like building codes; or cutting-edge renewable energy projects must be spurred with public-private partnerships and facilitation of private sector participation. This transformation process will require continuous monitoring and improvement through ongoing assessment of what does and does not work.
Ultimately, the transformative measures described above are best driven through trial and experimentation. They must, of course, be informed by targeted research and development, but they will remain ineffectual without on-the-ground learning opportunities from actual investment. Had Europe only fostered research and development in aerodynamics and airplane technology, this sector would not have become a mainstay of the European economy. By building the Airbus family of planes, however, Europe became (and has remained) one of the leaders in airplane technology. In the years to come, similar developments are possible in the domain of sustainable development and technology, but only if fomented by the spirit of experimentation. Given its dynamism before the financial crisis, Eastern Europe can and should push forward with this strategy.
Admittedly, significant challenges remain, even if investment incentives are aligned to encourage sustainable development. To start, the fragmented and relatively weak environmental ministries of Eastern Europe must be strengthened through establishment of a single and coherent governance framework.
Concerted efforts to green the economy must also be paralleled with solid job creation. This is a difficult undertaking. While green jobs are straightforward in theory—invest in sustainability technologies, create jobs—this interaction is more complicated in practice. Increased economic competitiveness goes hand-in-hand with increased productivity; and, unless precautionary policies are set in place, increased productivity can ultimately drive down employment rates. As employment and productivity in much of Eastern Europe are already very low, the region faces the delicate challenge of raising productivity while also increasing employment. In the context of the EU Lisbon strategy, which aims to make the EU the “most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion,”7 walking this balance could prove difficult.8 Even during the years before the financial crisis—years of relative economic improvement in the region—there was little visible effect on job creation.9
A related and equally daunting challenge is decoupling economic output from material use through new production processes and redesigned goods and services. Ideally, decoupling permits the economy to continue growing without breaching ecological limits or depleting natural resources. While progress has been demonstrated on relative decoupling by doing more with less—that is, a decline in ecological intensity per unit of output—absolute decoupling, in which resource impacts decline in absolute terms as economies grow, has remained elusive. This achievement will be no easy feat.
A strategy that embraces pursuit and growth of a green economy could, nonetheless, offer Eastern Europe a third choice—beyond the North-South dichotomy—out of the ballooning European financial crisis. While some low hanging fruits for relative decoupling do exist, Eastern Europe should push toward absolute decoupling of economy and resources, and this way rise from the rubble of communism as a new model of sustainable development.