The More Important Crisis
Have you been following the current economic doom and gloom? If you haven’t then I don’t blame you!
The topic of the sovereign debt crisis which has engrossed Europe has been a rather gloomy one. With it came a new language which nonchalantly arose into fruition, for the very reason that it has bandied about amongst television and newspapers for almost too long. Terms such as “haircuts”, “bond yields”, stock market “rallies”, and even nicknames such as “Merkozy” became common vernacular. Speculation on who would default, involuntarily, also would ensue: Who will it be? Greece, Portugal or Spain? And how would we rectify this?
But, of the many areas affected – to date, and for within the foreseeable future – one area stands out in particular – the environment. Because, within the heat of it all: the figures, the graphs, and the stock market rallies; it is easy to forget the connections and implications our economic decisions make; particularly, when we are so concerned about avoiding a double dip recession, and when sovereigns around us are at the near point of collapse.
It was thus enlightening to note that Ban Ki-Moon, UN Secretary General, did not forget the opportunities that could arise of investing in environmental and sustainable measures. He opined that economics was tied to the environment as a, “global ecological suicide pact” [1]. And rightly so! It isn’t all about the money! For, it was the impact of poor decision making, poor regulation, and the opportunity of lucrative gains which caused this downturn anyway.
Therefore, in order to revitalise the economy – in addition to correcting past areas of financial vulnerability – some have described the economic downturn as an investment opportunity to finally tackle global warming and climate change. This article will describe the positives and pitfalls of the economic downturn on the environment. And it will address how we can better use and understand the environment to achieve short term economic and long-term sustainability.
Taking Advantage of the Downturn
Prior to the current financial crisis, proponents argued that the economic downturn could actually be used as an advantage for governments to achieve environmental targets. This is because, as the preconditions of the environment are tied to resource and consumption; it goes saying that a lack of demand in industry and manufacturing would result in lower emissions.
As well as a lack of demand in output, there will also be a lack of demand in services. Consumers will be thriftier; driving less, flying less, and willing to pay more attention to energy conservation within the home – overall, consumers will aim to consume less.
A scarcity of finance from lenders and a fall in consumer demand both domestic and abroad would also mean that organisations would look to reduce costs, and therefore, could achieve this by becoming more efficient; thus, complimenting the aim of reducing emissions around the globe. Waste for instance, becomes an important issue – see below, retailer’s initiatives, bullets 1 and 2.
- Tesco and Marks & Spencer’s, are trialling new packaging that will keep fruits and vegetables fresh for longer – in order to reduce food waste [2].
- Sainsbury’s are encouraging consumers to freeze food differently – up to the use by date – instead of, on the date of purchase – to reduce pre-mature food disposal [3].
While, a global contraction in economic activity is not exactly a long-term strategy, the challenge is to seize on this downturn to de-emphasize manufacturing in order to favour cleaner economic activity – re-energising the economy in a more sustainable light. So that once a rise in production and activity does ensue, it is less at the environments expense.
The Downside
On the other hand, an economic downturn may not present an entirely positive situation either.
Due to pressure on both private and public organisations and existing governments to spend less money, green initiatives and investments may not be so forthcoming. It is a conundrum, especially as environmental-economics continues to stress that nurturing sustainable methods is better in the long term for the economy. But instead, because of the immediate lack of finance available to firms, investments in clean technology and other initiatives may have to take the backbench; especially in cases where the only way to improve efficiency is the complete replacement of old systems – this is especially applicable to small firms with low funds: they may have no choice in the matter, regardless. A report from the Carbon Trust and Siemens supports this: It indicates that firms would struggle to find access to finance energy efficient investments within the 2012 year; despite the resulting cost savings that would help cover repayments [4].
In an attempt at cost savings, firms may look to take shortcuts, or may outright choose the unsustainable option. For example, by preferring cheaper less eco-friendly produce; taking advantage of cheap labour markets (imports and exports increase emissions); cutting green promotions which do not draw in finance (e.g. bullet 1); or simply, by disregarding the environmental choice altogether – even reneging on previous promises (bullet 2).
- Tesco, weighing up whether to phase out carbon footprint labels: due to the high cost and time consuming nature of the process – this saw not much uptake from other retailers [5].
- Government perhaps reneging on climate goals altogether? In the pursuit of shale gas [6].
If consumer demand and confidence is already low, and governments do not have confidence either – lack of investment and incentive will mean that research and development within the environmental industries will also start to suffer.
The Pivotal Point
The financial crisis and climate change share fundamental characteristics. Both are a consequence of speculative and narrow interests superseding the common interest, both evolved dramatically over the current decade and both have global implications. Both are also about risk and how it is priced and managed—and both have high consequences when risk management goes wrong.
As European Commission President Jose Manuel Barroso stated, within 2008 – at the time when the economic downturn was in its beginnings – the troubles affecting the world economy should not be allowed to distract from more serious risks posed by climate change: “One thing we have learned from the financial crisis is that, if we ignore risk building up in the system, it is much harder to manage that risk. We must recognize it early and tackle it.”
In order to use the environment as an investment advantage: we must take into account environmental externalities within investment assets e.g. the price of carbon, or the price of choosing the alternatives (e.g. the above aforementioned, The Downside, examples) – so that the true value of the assets may be accounted for – and this way, governments and investors could then understand how the long term value of the assets changes over time; perhaps leading to better resource-allocation decisions by governments and businesses alike.
As former US President Al Gore, reminds us: investors who fail to realise the cost of environmental externalities could be making the same mistake as financiers who failed to realise the true value of sub-prime mortgages [7]. This is important, because, while the worst impacts of the financial crises are likely to pass within just a few years, the impacts of climate change could be felt for centuries. It is this long-term influence that needs to be understood better – although, some may feel that, perhaps, it’s already too late.
“Essentially nothing has changed in 20 years. We are not remotely on a course to be sustainable [8].”
[1] http://www.guardian.co.uk/environment/2011/jan/28/ban-ki-moon-economic-model-environment
[2] http://www.guardian.co.uk/environment/2012/feb/07/tesco-new-packaging-food-waste
[3] http://www.guardian.co.uk/environment/2012/feb/10/sainsbury-food-freezing-advice-waste
[4] http://www.businessgreen.com/bg/news/2135568/report-warns-firms-refused-green-loans
[5] http://www.businessgreen.com/bg/news/2142302/tesco-drop-carbon-footprint-labels
