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Existence well what does it matter? I exist on the best terms I can. The past is now part of my future, The present is well out of hand.
Joy Division, “Heart and Soul” (1980).
As the fallout from the subprime crisis continues, the credit losses and write downs to date of London’s big banks have been neatly compiled by Here is the City (and shown above in US$bn). On a per employee basis the three biggest losers are the Mizuho Financial Group ($2,750,000 per employee), UBS ($1,681,818), & Citi ($1,363,333) respectively. Whether firms can survive given such a poor performance is a moot point.
The recently published Living Planet Index – a census of the animal kingdom, albeit based upon only 4,000 species – purports to show a dramatic and unprecedented loss in biodiversity in the period from 1970-2005 (The Independent): land species have declined by 25 per cent, marine life by 28 per cent, and freshwater species by 29 per cent.
Extinction has a dynamic like financial capitalism – it is part of an evolutionary struggle, in which life today has come at the cost of the death of almost everything that came before – and both species (literally) and bankers (figuratively) live and die seeking a balance or compromise between growth and stability.
Public concern about the fate of the planet suffers from overkill. Many who once cared about the environment now share a Voltairean sentiment that the easiest way out of the crisis might be to strangle the last panda with the guts of the last blue whale. However, today’s cataclysm is no different from many others… Few plants and animals live for long. The descendants of a very few, transformed by natural selection, make up the world today.
Steve Jones, “Almost Like a Whale. The Origin of Species Updated” (1999).
But whilst the world is basically full — new species will have to push out their predecessors — human action since the advent of industrial revolution has had a profound impact. [And sometimes we create unexpected niches for a wildlife renaissance - the Iron Curtain becomes a biological corridor or green belt across Europe]. We are essentially shoving many species into a situation whereby there are too few individuals to avoid utter extinction.
Governments are now intervening in financial markets – to protect the public from the banks’ excesses (and to save the banks themselves from the excesses of global financial markets). Regulation has proven insufficient (it tends to focus like generals on the last battles) and the rewards from financial globalisation of the past 5-10 years seem too slim given the costs: the challenge is to improve regulation, but its effectiveness will be will only be shown by the next financial cycle. The convalescence of the banks has begun, but the recovery from a slowdown in consumption and economic growth will take a while.
Biodiversity loss has also been asymmetric – and the policy response has been vapid. Can anything effective be done? Prince Charles has called for a fund of US$15bn a year to pay for a “global insurance policy” to halt deforestation. Such a global commitment would be a fillip: but getting the incentives right (plus concomitant transparency and accountability in carbon markets) for avoided deforestation is more of a challenge than finding the cash.
William Morris has been described by E.P. Thompson as one of the greatest of Englishmen, and as a revolutionary without a revolution [Persons & Polemics, E.P.Thompson, Merlin Press, 1994]. At the end of the nineteenth century this perspicacious man, who saw that economic relationships reflect and fashion moral relationships, rallied tirelessly against the ethic of Cain – the acquisitive society and deepening wealth inequality – in contrast to a society based on the ethic of community and a society of equals, and believing that that there could be no compromise between the two ethics set out to work for the revolution.
The appalling waste of life & suffering in the past 100 years would undoubtedly cause Morris pause for thought and probably less zeal for revolution. But his moral critique – following a long tradition of English dissenters – finds an albeit faint echo in Joseph Schumpeter’s concept of “creative destruction” which describes the uneven evolution of capitalism and corporatism, and their relationship to democracy, and which arguably has renewed relevance after twenty years of globalisation.
The question of how liberal democracies, entrepreneurs and dominant classes will respond to climate warming is now focused on the opening debate over carbon taxes, and is taking place against a background of stumbling growth and the unbridled greed of the financial markets added and abetted – in the UK – by the present and preceding New Labour administrations.
But the same Labour governments have also set two precedents: commissioning the Stern Report, and introducing the climate change bill. The first established that adopting measures to reduction carbon and other greenhouse gas emissions would cost less than failing to prevent climate change, and that such measures are affordable; the second includes a politically far-reaching timetable for mandatory cuts in targeted greenhouse gas emissions, based upon binding domestic carbon reduction targets, effectively establishing a pathway to make the UK a low-carbon based economy.
The Stern Report has been controversial, initially for the choice of discount rate, and more recently because of the assumptions and numbers used to estimate the consumption reduction equivalence (including putting a monetary value on human life), which have been used to estimate the social cost of carbon in the cost-benefit analysis for the proposed third runway at Heathrow. George Monbiot has taken umbrage that the “shadow price of carbon”, which is currently valued, human lives and all, at £25 a tonne. Human life is not a commodity, but it does have an economic value in many markets. The Economist response errs in overstating the capacity of future growth and material progress to reduce poverty in a world known to be bound by climate change constraints and the immediate necessity to reduce consumption.
Heathrow is now a lightening rod for climate change campaigners and regardless of government estimates that a new runway has a net economic benefit, it is unlikely to be built: innovative protesters plus MPs in London and Home County constituencies will ensure that profits take second place to environmental and political costs. Large infrastructure and technology projects have track record of cost underestimation and cost overruns. Hypothetical gains from growth in air traffic are not shared equally and nor are the costs: the extent to which scenarios have been developed that take into account the effect of a fuel levy on airlines, carbon taxes on airline tickets, and the cost of disturbance to Londoners remains unclear. The debate is really about re-appraising the UK’s aviation forecasts and policy in light of the need to cut emissions by 30% by 2020.
In the UK emissions are about 10 tonnes of CO2 equivalent per capita. With a population of about 60 million the current annual level of domestic emissions is 600 million tonnes. An initial low carbon tax of, say, £10 per tonne (US$15 per tonne) would generate £6,000m per year in tax revenues. Total UK tax revenues were £520,000m (about £8,500 per head) in 2006-07, of which income tax and national insurance payments represented 45%. The carbon tax can be introduced as a revenue-neutral measure, for example matched by reductions in incomes taxes – although strong arguments can be made for some carbon tax receipts to be ring-fenced to finance public support for carbon technologies, grants and subsidies to encourage the switch to lower carbon technologies for power, heat and transport, as well as part of UK contributions to international safety nets and adaptation funds for those poorer countries most likely to be directly affected first by climate change – for example to counter declining crop yields in Africa.
Faced with the social costs of their spending, consumers can be expected to reduce their demand for carbon emission goods and services, and companies will invest in more efficient technologies (Shell have called for a carbon price close to $100 – about £50 – per tonne of CO2 to justify investment in carbon-capture-and-storage schemes). Carbon pricing and supporting regulations need to be introduced quickly: the Stern report emphasised that price of delay will be higher mitigation costs.
Short of rationing only carbon pricing will induce the shifts needed for the UK to meet its commitment to reduce emissions by 60% before 2050 to about 4 tonnes per capita. Carbon pricing policies will raise many distributional issues, and open the debate on the nature of our society. William Morris would be working now to prepare the ground for a more cooperative social contract, and raging against the moral immiseration of the ruling classes, who “rather than lose anything which really is its essence, it will pull the roof of the world down upon its head.”
Dr. Alan Grainger, from the University of Leeds, has questioned whether the popular assertions about deforestation are valid. He acknowledges that deforestation is occurring, but examining FAO time-series data he has found a number of errors and inconsistencies, but no long-term net decline in tropical forest area. His findings are mirrored by recent satellite data. He calls for an international effort to monitor tropical forest trends through the establishment of an independent body. Strengthening national forest agencies is essential, but the difficulties are less about the statistics than interpreting the data and trends. Querying deforestation is not new: James Fairhead and Melissa Leach have been the forefront of those comparing international perspectives, orthodoxies, forestry & conservation programmes with local narratives. In “Reframing Deforestation: Global analysis and local realities: studies in West Africa” (Routledge, 1998), they write:
the extent of forest loss during the twentieth century has been vastly exaggerated. Much so-called deforestation either took place much earlier, or has not taken place at all since the areas in question have not carried in historical times…much of the forest that has been lost during the twentieth century, and indeed much of that remains, covered land which had been populated and farmed…on the northern margins, it has on the contrary sometimes been people, their settlement and land use which has been responsible for the development of forest vegetation where it was previously lacking.
Similarly, there has been increasing understanding of the importance of forest regrowth in Central and Latin America since the mid-1990s, and that in many regions secondary forests are an integral part of land use systems.
These are important insights that will determine the success of efforts to reduce deforestation. First, whose voice counts in deciding areas to be supported and the form that support will take, and second how these processes will be monitored and supervised?
Some of the practical difficulties can be seen in Liberia. The first map shows the extent of present forest cover. The new forest law gives an unprecedented institutional role to communities and civil society in the management of the country’s forests. Communities must be consulted about all forest land use decisions. 30% of forest lands are to be set aside in protected areas with financing from a share (10%) of stumpage and forest product fees. Communities also share revenues from commercial forestry, with 30% of land rental fees distributed to directly affected communities and another 30% shared between all 15 counties. Forest management contracts are subject to an annual financial audit and rolling 5-yearly performance checks. But rebuilding both the state forestry department and ensuring that civil society groups are equipped to support communities is a long-term process, not least in a country emerging from civil conflict.
The second map – - based on satellite imagery — shows an interpretation of land use change with the darker areas indicating forest loss. But land use change needs to be verified at the local level to indicate for example whether the change is occurring as a part of bush fallow cultivation, or land clearance. The flux in land tenure adds to these difficulties. See the Liberia Forest Initiative for reports. As reported by Rights & Resources many initial carbon trading schemes have shown little community ownership and benefit.There is no template to fit the differing forest characteristics and political institutions of tropical countries, but common standards (most probably drawn from forest certification and EITI experience) are needed, in order the monitoring and evaluation required for financial intermediaries.
Since much of the financing for carbon trading will come from private investors, the experience of the recent financial market instability may prove salutary if the corrections and new regulatory institutions are put in place. The extent of the debacle is widely recognised.
Globalization, thy name is Wall Street bailout…less than two decades after the collapse of the Soviet Union and the West’s gleeful jig dancing on the grave of communism, state capitalism is suddenly threatening the autonomy of the global “free” market. Wall Street’s elite banks, long time freedom fighters for deregulation and scorners of all government intervention in the marketplace, are now begging, cup in hand, for aid from a gallery of regimes that includes some of the most authoritarian and undemocratic governments on the planet…Perhaps it would be more accurate to say freer markets lost the day. The root of Wall Street’s woes leads back directly to their own strategic missteps, greed, speculation-run-amok, and lack of appropriate supervision.The brightest minds in finance had exactly what they wanted, a play ground where the monitors were looking the other way, and they blew it.
Similar points are made in The Independent. The FT reminds us that the US banking system has enjoyed four bailouts in the past three decades, namely the crises over developing country debt, saving and loans, commercial property in early 90s, and today’s sub-prime and securitised credit mess. This amounts to “a history of privatising gains and socialising losses.” (See for example: the US$66 billion staff pay costs of the big US investment banks).
There are inherent difficulties in the regulation and supervision of an industry which is driven by spectacular profits. But a more robust system will need to be in place if there is to be confidence in carbon trading as a financial transaction as well as a means to prevent forest loss. How far should regulation go: “The question the authorities need to ask themselves is simple: if a specific [financial] institution fell into substantial difficulty would they have to intervene?” only answers the first part of the question. How to monitor forest governance is the second part. If tropical forests have global public good properties then putting in place institutions – at local, national & international levels – for monitoring and verifying forest condition and international public and private financial transfers, including supporting civil society, in poor countries is a prerequisite.
How to construct an international financial governance system for carbon trading has become a more pressing question in light of the exposure of global banks to investments in sub-prime mortgages – with the OECD estimating losses of $300billion – described as “a measure of the depth of mismanagement, non-regulation and structural dysfunctionality of today’s financial system.”
The growth of derivatives and other investment vehicles and their impact is told by John Lancaster in the London Review of Books.
But it is from this mess that phoenix-like new and credible instruments and regulations will be needed not least for the delivery of payments on an unprecedented scale to a variety of forest stakeholders – forest managers, poor rural communities, government agencies — to manage and conserve forest resources. While initiatives such as the World Bank’s Forest Carbon Partnership Facility, and other similar multilateral and bilateral assistance to countries to implement carbon trading systems, as well as conservation efforts — such as the recent news to support Sierra Leone’s Gola forest, and Guyana’s invitation to the UK to its manage tropical forests (which conjures up images of ‘reversed’ groundnut schemes) are all welcome, the bulk of the necessary investment can only come from international private equity markets.
The central point — whether sub-prime lending or payments for avoided deforestation — arises from the principal-agent problem: the separation of consumers — mortgage holders or forest stakeholders — from financiers. The myriad of ever more complicated investment vehicles designed to spread risk began to create the illusion that risk had been abolished, and in doing so magnified the risk and infected financial markets to such an extent that everyone now bears a part of the risk. The credit crunch at Northern Rock was not as a result of mortgage holders being unable to make their regular payments; the problem was the bank’s inability to secure liquidity in the wholesale money markets which had in essence become the bank’s main customer.
Dani Rodrik in “One Economics, Many Recipes” argues for policies rooted in local realities and strategies that respond to their specific constraints. Forest governance can be designed at a local level — its success will reduce risk and increase carbon values. The success of forest certification over the past 10 years provides a starting point, together with improved national fiscal systems. Poorly performing states will receive, and be answerable for, lower carbon receipts
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Martin Wolf — author of Why Globalisation Works — has written in his FT column what amounts to a cri de coeur article on the prospects of future economic growth and democracy.
We live in a positive-sum world economy and have done so for about two centuries. This, I believe, is why democracy has become a political norm, empires have largely vanished, legal slavery and serfdom have disappeared and measures of well-being have risen almost everywhere. What then do I mean by a positive-sum economy? It is one in which everybody can become better off. It is one in which real incomes per head are able to rise indefinitely.
Leaving aside some distinctly odd arguments on the emergence and nature of democracy, (and plainly crass comments about environmentalists and socialists), Wolf’s belated awakening to the dependence of the positive-sum world economy (his long hand for capitalism?) on intensive energy use is well illustrated by four charts:
Now climate change and future energy demands become a security and not least distributional issue, upon which Wolf takes unsurprisingly an apolitical middle path between optimists and pessimists on growth and concludes that the “condition for success is successful investment in human ingenuity”.
Whatever that means…
There are real physical limits to growth and the world’s capacity to sustain life (see an earlier post) — and foremost amongst the policy choices to achieve a steady-state international economic system is the need for redistribution within and between countries. It would be interesting to redraw these graphs according to class, which might show the extent to which the rich distort the world’s ecology. The turbo capitalism generated by today’s globalisation is undermining the ability of trade to pull people out of poverty and has created financial markets that have taken the world hostage.
The issue of deforestation was assiduously left out during the negotiations for the Kyoto agreement, not least because the difficulties were clearly recognised. Now the Bali climate change conference seems set to include deforestation. A draft agreement states that it will address “enhanced action on mitigation of climate change including consideration of … policy approaches and positive incentives to reduce emissions from deforestation in developing counties.”
Avoided deforestation has become a buzz word du jour. It is estimated that deforestation accounts for 20% of current emissions, and that the carbon emission trading market is worth about US$30 billion at present. Including carbon credits for avoided deforestation as part of emissions reductions schemes seems a win-win solution. However the graph below illustrates the challenges ahead.
This shows the relationship between forest cover and governance in 2005 for 40 developing countries accounting for about 750 million hectares of primary forest taken from FAO data. The governance score is taken from the indicators compiled by the World Bank: the scores range from -2.5 to +2.5 with the higher values indicating a more positive governance outcome. There are six broad categories: voice and accountability, political stability, government effectiveness, rule of law, regulatory quality and control of corruption. The latter is used here, although frankly the results hardly change with any of the others. Brazil is the outlying spot on the far right. The Democratic Republic of Congo in Central Africa should be in the centre of the chart in terms of forest area, but there is no comparable primary forest data, and with a corruption score of -1.39 (which is also its best score) it would lie on the bottom.
Transferring large amounts of funding to the least well-run countries, mostly small economies, such as these encompassing the bulk of the tropical and sub-tropical forests – often with a substantial proportion of their land area under forest (as shown in the lower graph) has not proved successful to date in terms of development or poverty reduction. Paul Collier in his recent book “The Bottom Billion” has written: “A reasonable estimate is that over the past thirty years [aid] has added one percentage point to the annual growth rate of the bottom billion… Aid has been a holding operation preventing things from falling apart.”
In an earlier post I made an argument for a market-based approach, with the market pricing carbon according to risk for individual countries so providing an incentive for governments to introduce governance reforms themselves, supported by bilateral and multilateral aid programmes.
Yesterday’s speech by Gordon Brown was his first on environmental issues since becoming Prime Minister. The main points were his commitment to the carbon bill which he inherited, and to the UK meeting its share of the EU target to generate 20% of Europe’s power from renewable sources by 2020.
As expected the speech was full of platitudes to vision, and the penchant for declaring the UK to be at the forefront of the “fourth technological revolution”, London to be the self-evident centre for global carbon trading, and calling on Johnny Foreigner to jolly well catch up (which may be seen to be good for domestic politics, although goodness knows why, but must rankle with everyone else). Equally the speech was short on any immediate policy shifts or practical steps.
But this is not to deny the significance of the carbon bill. The first draft was published in March 2007, and was introduced to Parliament on November 14th 2007 following parliamentary and public consultations. When passed the law would aim to make the UK a low-carbon based economy. The draft bill includes a timetable for mandatory cuts in targeted greenhouse gas emissions, based upon binding domestic carbon reduction targets, 5-yearly carbon budgets, and annual progress reports to Parliament. The longer-term target is a 60% reduction – based on 1990 levels – in carbon emissions by 2050, and the more immediate target (described rightly by Polly Toynbee in The Guardian as “eye-wateringly tight”) for a reduction of between 26-32% by 2020.
How is this to be achieved? There are two main elements – pace the Stern Report – technology and pricing: energy efficiency will be important (if backed for example by mandatory emission targets for vehicles, power stations, etc.), changing the energy mix (hence the emphasis on renewable sources and recycling, but the nuclear option remains one of the elephants in the room), and carbon pricing.
Carbon emissions trading, such as the EU Emissions Trading Scheme, is essentially a business carbon tax (without the public revenues). The big political decision will be to extend such schemes (tradable energy quotas) to individual carbon allowances (i.e.rationing) for the consumption of the main types of fossil fuel (electricity, gas, petrol, flying), and to substitute green consumer taxes for VAT and income taxes. Those with lower emissions could trade the unused part of their personal carbon credit – which could have a income redistribution effect (if this income is not taxed… ), a concept flagged by David Milliband, the then Environment Minister.
The bill’s targets are UK-based, but at present the bill also includes the provision that emission reductions “purchased overseas” may be counted towards UK targets (Schedule 2 Trading Schemes Part 1, 11 (1) (b): “units under any other trading scheme … relating to greenhouse gas emissions”) which leaves the door wide open for forestry.
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Al Gore’s Nobel prize is well-deserved. He has done as much as any person to popularise environmental concerns. But does he really challenge current political views, which have now taken on-board most of his arguments, i.e. they have become mainstream.
For example, offsetting carbon is – albeit slowly -becoming a middle (and business) class habit. But it remains an option. And it does not come close to taking account of our total life-span ecological ‘footprint’.
The scantiness of the debate is endemic in the political elite in the United States and Britain, where economic growth remains the paramount consideration: in such an environment even progressive policies such as carbon trading run the danger of becoming political face-saving accounting exercises.
Herman Daly challenged the primacy of growth in his seminal book “Beyond Growth: the economics of sustainable development” (1996). His basic premise is that the economy is a subset of the environment and natural resources not vice versa as traditional economics assumes, and so there are real limits to its expansion and capacity to sustain human life. The key is to find the optimal use of material resources and energy for a ’steady-state’ economy – whose aim is to create the “greatest good for an optimum number of people over the long run.” Daly stresses the need for development which equates to a qualitative improvement in our lives, whereby the economic benefits of increased consumption of good and services must be greater than their environmental costs.
Adapting to a steady state economy would of course take time given the extent of our current unsustainable economies. Perhaps gradually substituting income taxes with ecological taxes would be a step in the right direction, which could also form the basis of a fairer system where the poorest no longer pay a higher proportion of taxes than the rich.
Ruskin (quoted above) also said that: “When we build, let us think that we build for ever.”
The political ‘debate’ over climate change can be tiresome, Kyoto or not-Kyoto. But perhaps Bush is at least honest: many people and certainly most politicians are environmental hypocrites, begrudgingly accepting in principle the need for action but still resisting eco-chastity for themselves. The UN and EU give plenty of cover for government inaction. The main movers are likely to be self-interested big business. Which is all the more reason to work on rights and livelihood issues with forest communities, and help developing countries work out and negotiate their own programmes for forestry carbon credits.
- The Stern report called for the stabilisation of greenhouse gas concentrations at a level of between 450 and 550 parts per million by 2050 – implying that global emissions would have to be at least 25 per cent below current levels. The political challenge is how to reduce emissions to such an extent, not least as world economic growth is needed to tackle poverty. The economic challenge is to correct a market failure by creating and managing emissions markets, i.e. by pricing carbon and other greenhouse gases.
- Politically the present US-government stance – a preference for a loose global agreement within which countries set their own non-binding emissions targets (“pledge and review”), contrasts with the UN and EU stance which supports support mandatory reduction commitments on carbon emissions (“cap and trade”). The former voluntary approach would seem to favour newly industrialising countries, the latter richer industrialised countries. The apparent enthusiasm for multilateral solutions probably masks the reluctance of individual countries to risk short-term economic competitiveness by going it alone.
- What is needed in practice is an agreement between those countries responsible for 90% of global emissions (Australia, Britain, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, South Africa and the US), plus the involvement of the major transnational energy and manufacturing companies that actually produce the much of the emissions. The communications revolution and deepening globalisation are pushing business into ethical markets and products. Many businesses see that their own longer-term self-interest lies in the regulation of emissions and have become both leading advocates for government action on climate change and principle investors in new technologies and environmental markets. Businesses are in seeking greater standardisation in emissions markets and regulations. Read the rest of this entry »
