Feasta is an international network of people who have set themselves the task of identifying the characteristics that a society would have to possess to be truly sustainable. By this, we mean that the society is capable of continuing as it currently functions for several hundred years without being forced to change because it is exhausting social and environmental resources on which it depends. Once we have identified these characteristics, we can see what needs to be changed in our current societies and economic systems.

One of the features of a truly sustainable society we have identified is that its economy would not need to grow continuously to avoid collapse. The current economic system, on the other hand, would collapse if it did not grow. Feasta has therefore devoted a lot of thought to attempting to explain why this is the case, and whether it is possible for the system to be changed so that it becomes unimportant whether growth takes place or not. This submission summarises Feasta's findings on why economic growth is necessary to avoid economic collapse and what needs to be done to change that.

1. Why economic growth is required

National income growth is currently the world's most widely considered economic indicator. It is the percentage by which the amount of trading in the monetarised part of a national economy has risen, usually in the course of a year. Put another way, it is the percentage increase in the total of all the money incomes generated in the economy. Its significance is much wider than that, however. Because it measures the additional income, the growth rate is an excellent guide to the extra profits that arose in an economy and hence the attractiveness of that economy to investors.

Graph 1: The rate of increase in the world's output has moved very closely in step with its emissions from fossil fuel use.

Graph 2: There has also been a very close relationship between the rate of growth of world output and the rate of growth of its consumption of oil.

The relationship between economic growth and energy use is very, very close, as is shown by these two graphs. Graph 1 shows the link between world economic growth and carbon dioxide emissions, Graph 2 that between world growth and world oil use. The inescapable conclusion to be drawn from these graphs is that it is going to be impossible for economies to grow if emissions are reduced at the sort of rate required if the carbon dioxide concentration in the atmosphere is to stabilise at 400 parts per million, the level thought to correspond with the temperature target set by the EU, a 2 degree Celsius rise. The level is 379 ppm today and, at the current rate of emissions, 400 ppm will be reached in 10-15 years. Accordingly, if the 400ppm level is not to be breached, drastic cuts in the rates of fossil fuel use are required immediately. These cuts will have to be so rapid - perhaps over 3% a year - that technological advances and the greatly increased use of energy from non-carbon sources are most unlikely to be enough to ward off economic contraction, let alone enable growth to continue at anything better than a snail's pace.

Enabling the world economy to cope with not just zero growth but actual contraction requires changes in the way that national currencies like the pound and multinational currencies like the euro are put into circulation. There are two reasons for this. One is the fact that our present money is created as a debt and debts have to be repaid with interest and the second is that, if a significant number of people in an economy are employed making growth happen, they and others will become unemployed if it stops.

A. The debt-based nature of money

Most of the money supply in OECD countries - all but about 3%, the value of the coins and notes - is issued as debt. In these countries, the total of all the bank accounts in credit is balanced exactly by all the accounts on which money is owed. This makes the economies basically unstable because if insufficient new loans are taken out in any year to cover the principal and the net interest being paid into the banks on the previous years' loans, the money supply will contract. A smaller money supply makes it impossible to carry on the same level of business as in the previous year. People lose their jobs and surplus capacity appears, further inhibiting borrowing and investment. A downward spiral could develop with one set of job losses leading to others.

So, if the economies of these countries are not to become depressed, the amount borrowed in any year has to be at least equal to the amount being paid to reduce old loans plus the banks' retained earnings. And, assuming that the banks are not distributing all their profits, this means that the amount borrowed has to grow year by year. But since a steadily increasing amount of borrowing cannot be supported by a stationary or declining economy, this means that the economy has to grow too to prevent the level of indebtedness rising continually in relation to national income. This is a small effect compared with the second reason why growth is required.

B. The relationship between employment and growth

If there is no growth in any year, the investments made the previous year have produced no return. Because firms will almost certainly have taken on debts on which interest has to be paid to finance their investments, this hits company profits. The lower profits and the unused capacity created by last year's investment discourages further investment at least in those sectors in which the increased capacity has not been taken up.

Any reduction in investment has serious results quite apart from reducing borrowing and hence the money supply. In normal years in industrialised economies, somewhere between 18% (US and Sweden) and 28% (Poland and Portugal) of GNP is invested in projects that, it is hoped, will enable the economy to grow the following year. A similar proportion of the labour force is employed on these projects. Consequently, if the expected growth fails to materialise and all further investments are cancelled, a fifth or more of a country's workers will find themselves without paid work. These newly-unemployed people will be forced to cut their spending sharply, which in turn will cost other workers their jobs. The economy will enter a downward spiral, with each round of job losses leading to more.

In the present system, the only way to ensure that an adequate level of borrowing takes place to maintain the money supply and that an adequate amount of investment takes place to maintain high employment is therefore to ensure that growth occurs year after year. Studies have shown that a minimum of around 3% growth is required in Britain to prevent unemployment increasing.

The prospect of the rate of investment falling and creating widespread unemployment terrifies governments so much that they have to work very closely with their business sectors to ensure that their economies continue to grow almost regardless of any social or environmental damage the growth process may be causing. In other words, the need for growth to maintain short-term economic sustainability gets in the way of attending to more fundamental types of sustainability such as halting climate change.

Indeed, it presents a massive barrier since roughly half of all the fossil energy used in OECD countries is required for the growth process. Consequently, if we could find a way to enable the OECD economies to survive without growth, very deep and rapid cuts in world fossil energy use would be possible and hence in the level of emissions.

2. Preventing an economic collapse

How then can governments change their economies so that they can not only manage without growth but also cope with the economic contraction that reducing fossil fuel use is almost certain to bring about? We have seen that no growth means that private sector investment slows or stops. Governments could neutralise such a decline by increasing their own spending by the same amount. They could even target this extra spending on projects that reduced greenhouse emissions. In the current system, however, the extra spending would generally involve running a budget deficit that would be financed by borrowing. This would top up the money supply but if it did not enable growth to resume fairly quickly by enough creating shortages of capacity which forced companies to start investing again, the resulting debt could build up to such an unmanageable level that the banks would refuse to lend the government any more except on unfavourable terms.

This is exactly what happened in Japan during the 1990s - government spending on building unnecessary roads, airports and bridges kept unemployment low for almost a decade but failed to re-ignite the growth process. Eventually, when the debt burden reached 130% of national income, the government realised that it would have to stop borrowing. It allowed unemployment to rise but the debt was already too high in the eyes of the three US credit rating agencies and in December 2001, they lowered their rating on government bonds. This led Heizo Takenaka, the economics minister, to warn the country on television that a further downgrading of the debt would be catastrophic as it would lead to higher interest rates thus making a recovery even more difficult to bring about.

So the only non-time-limited solution would be for the government to fill the gap left by the decline in private investment by spending into circulation money it had created itself rather than borrowed. This would enable it to continue to pick up any economic slack by investing in projects that reduced fossil energy demand until either the private sector had begun to invest again or it had developed a no-fossil-fuel economy that was completely sustainable.

If the point was reached at which there were no further projects into which new money could be poured to produce a worthwhile return in terms of either sustainability or quality of life, the government's investments should stop and it should divert the money to the least-well-off segment of the population so that they could spend it instead. When this happened, everything being produced by the economy apart from that required to maintain the capital stock would be going to meet people's needs rather than to generate growth or enhance sustainability. There would be no net investment or net savings in such an economy.

If fossil fuel emissions are severely restricted to combat climate change, the extreme case in which private sector investment never resumes on a substantial scale will never come about because the increasingly high energy prices will in themselves create a wide range of opportunities for businesses to invest and make profits. Research in America indicates that for every $10 a barrel rise, the US growth rate falls by 0.4% for about four months. After that, the economy recovers rapidly so that after 18 months the higher energy prices actually boost the growth rate by 0.1%, an effect which lasts for another year and a half. This is because while in the short run, consumer spending falls because of the increased cost of vehicle fuel and heating oil, in the longer run, firms invest in the new opportunities open to them, such as supplying equipment for renewable energy projects and insulating people's homes. Higher energy prices therefore tend to shift spending away from consumption to the production of goods for export (in order to pay the higher cost of energy imports) and to pay for capital investment in energy-saving and energy-producing technologies. They may not depress the overall level of economic activity in the log run and they could even, perversely, increase energy demand, because the investment goods purchased are likely to have a higher embodied energy content than the goods and services which the consumer is no longer buying.

There would therefore be continued private investment even in circumstances in which the overall economy was shrinking because of the new profit opportunities created by the higher energy prices. The level of this investment might not be adequate, however, to keep an economic system in which money was created on the basis of debt running satisfactorily and the only safe, controllable course would be for governments to issue non-debt based monies themselves whenever demand was slack. They would gradually replace the debt-based money issued by the banking system with a stock of money which they had spent into circulation themselves and which remained there until they taxed it out again. The result would be an economy that was exceptionally controllable and stable - trying to control inflation by reducing the money supply through interest rate rises is a very crude approach, since higher interest rates are themselves inflationary as they increase business costs.

3. Should economic growth be sacrificed to preserve the climate?

Two points should be made. One is that there is certainly no need for growth to continue in the OECD bloc. Its people are the most lavishly resourced in the history of the world and there is no evidence that further economic growth would make them any happier. The second is that the depletion of the world's oil and gas reserves means that the option of continuing to generate economic growth by moving to higher and higher levels of energy intensity is about to be closed off, although opinions differ over exactly when this will happen. Some think that the peak in global oil production is about to be reached, while others think that, given enough investment, it will not be reached for 25-30 years.

Whichever is the case, economic growth should be halted now because the changes that the OECD countries are making to achieve it make them less able to adapt to a low-fossil-fuel-use world. This is because, at present, they are generating their growth primarily by technologies that substitute fossil energy for that from the sun and human and animal sources. This confers a massive competitive advantage upon them and other industrialised countries since one litre of petrol can do as much work (in the sense of lifting a load a certain distance) as a man can do in a hundred hours.

They are applying fossil energy in two ways to achieve this growth. One is as capital, the energy embodied in buildings, infrastructure and equipment. The other is as income, the amount of energy needed to operate and maintain the capital stock. Consequently, as they grow economically, they become increasingly dependent on energy use. Even if they can avoid collapse if no growth happens, they need a lot of energy to maintain their current methods of production and distribution and hence their income levels. This will be an enormous burden in future since all types of energy are likely to become considerably more expensive in relation to labour whether or not an effective climate treaty comes into force because of the rapid depletion of supplies of oil and gas.

Indeed, such countries might well find that the investments they made in increasingly energy-intensive technologies during their rush-for-growth years were a mistake and that they will be out-competed by countries which have not "advanced" so far and have retained more labour-intensive methods of production and distribution. If this is a serious possibility, the conclusion as to be drawn that overall economic growth within the OECD and in the energy-intensive sectors of poorer countries needs to stop immediately in those countries' own interests. Such growth takes them further and further up a cul de sac down which they will have to return, only to find when they do that the energy they require to re-equip themselves to operate at a lower level of energy use is very much more expensive.

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