Climate change – financial crisis doesn’t bode well

I avoid commenting on the current turmoil in the financial markets, since I work for a financial institution.  But, beyond the immediate distractions of this year, it’s been fascinating to see how the world has reacted to the causes and managing the outcomes, and use it as a proxy for climate change.

The key parts of relevance to me are the widespread short-term views and unsustainable positions, woolly and wishful thinking, the unpredictability, and the lack of global steering and political leadership for global problems. Expanding briefly on these in the context of the financial crisis, for short term views and unsustainable positions, we have sustained balance of payments deficits and historically terribly high housing prices.  These have to unwind sometime, and the longer they are left the more painful the unwind will be.  And yet, 2 years ago people said that they were they were new baseline norms, despite the enormous history of hubris in making such predictions (I could link to worth sources for this, but this from I think 2005 is far more fun).  The best example for me of woolly and wishful thinking is the assumption that economies in the world were not linked on the basis that they hadn’t been before … even though the massive rise in the use of complex financial instruments and global financial markets pretty much guaranteed that they now would be.  Indeed it became a self-fulfilling outcome since the lack of linkage between markets was used by institutions to offset risks in one specific market … and in the process made them less individually susceptible to small shocks and but massively raised the risk of a large shock.  Part nationalisition of UK banks as an outcome of allowing Lehmans to go bust show how hard prediction is.  And, if you haven;t read ‘The black swan’ by now then you should.  On the lack of global leadership for global issues I am thinking more about the lead-up to the current financial issues than the response to it, which has been surprisingly integrated, at least at times (e.g. co-ordinated interest rate cuts).  But, even here we have had the British and Icelandic governments at loggerheads, and using anti-terror laws to freeze money.

There are a couple of interesting differences between the current global downturn and climate change.  Firstly, climate change is orders of magnitude more impactful than the current downturn, even though that feels painful right now.  To pick just one example, no major cities are underwater as a result of the global downturn.  Some paper gains in housing over the last few years have been lost, but nowhere has been abandoned. Threats from global warming include Mumbai, Karachi, New York, Los Angeles, Tokyo, Bangkok, Jakarta, Buenos Aires, Rio de Janeiro, Shanghai and Cairo (see here).  Second, the likely outcomes and steps to remedy them are far far clearer than those for the financial crisis, and have been for many years now.  They may not be palatable, but they are clear (e.g. see the OECD report here).

So, how do the issues that I picked out earlier on the financial crisis play out for climate change?  All are so evident that they don’t need spelling out one by one. But, the surprise and twists and turns in response to the financial crisis and global downturn, as well as the apparent pain from what is by comparison to global warming a small issue, makes me pretty nervous about our ability to handle climate change effectively.

As an example, when it comes to the tough global calls, my observation is that we are pathetically poorly prepared.  The recent meeting in Poznan was fairly typical, and pathetic.  The US can just about be forgiven for not making commitments with a new president on the way (just about forgiven).  But the EU was a fairly dreadful example of inter-country negotiation, with last years promise to cut emissions by 20% from 1990 levels in the next ten years now looking like about 4% after all sorts of ‘special interest’ and single country pleading (e.g. see here).  Indeed, there seems to be a game of brinksmanship going on, with everyone being dragged down to the lowest common denominator.

The parallel to draw from the financial crises today is that the clarity of thinking and responses to a building situation are simply not enough.  For example, greenhouse gas emissions have carried on rising, even though they have fallen slightly per unit of GDP, as GDP has risen faster.  If the tools for reduction do not more than keep pace with GDP growth then the GDP growth cannot be allowed … and yet there is absolutely no apparent interest in dialling back GDP.  It’s worth remembering that the classical definition of a recession is two quarters of GDP fall.  So, interestingly, what is required is in many ways very similar to the current ‘crisis’ that politicians now seem to be trying so hard to avoid, and due to which they say they can’t afford steps on climate change!

Things on that front will get tougher, and we will have moments of truth when we need to make tough calls.  New Orleans is an instructive example.  After the Katrena hurricane, it would be a perfect time to re-evaluate whether a city below sea level and exposed to hurricanes was a good idea when weather and sea levels were going to get more troublesome.  That wouldn’t have required international co-operation, ‘just’ resolve to look at the relative economics properly within the USA.  But, the Speaker of the House of Representatives got into trouble and had to apologise for making such a sensible suggestion (see here).

In summary, there have been a number of areas where the response to the conditions that led to the financial issues of 2008 has been inadequate.  There is much wringing of hands about it now.  Climate change has a more predictable and far more serious outcome.  And a pathetically poor history of responses taken to it.  There is little about the world’s handling of the financial crisis that bodes well for climate change, unless we have the humility to learn from it.  Sadly, globally, we have a very very poor record there as well.

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2 Responses to Climate change – financial crisis doesn’t bode well

  1. Jim Pye says:

    A very thought provoking post and one that would de well as a comment in the national press. I am even prompted to buy The Black Swan which you have recommended to me before. What I find so depressing about the actions (or non-actions) of the world’s politicians is that they are so keen on promoting their own statesmanlike images that they actually do nothing of any lasting value. Even today, people are talking about ‘when’ the recession will end and not doing anything about stopping it happening again, like sorting out the financial regulators who failed so dismally over this present crisis.

  2. Mark Wakeling says:

    Excellent post. As Jim says, unfortunately politicians aren’t best placed to make the right decisions on long term issues as they are always thinking about short term political expediency. I doubt this will change be it the economy or climate that is affected. I don’t suppose the ‘general public’ are much better either, most people are pretty selfish really and don’t care about other people or events that won’t happen to them in the short term.

    The New Orleans example is just one of many where people choose to live in pretty illogical places, but how do you change it ? Anywhere drought ridden is not a good place to live, and most can’t afford to move anyway without external help.

    So not sure what to do really, sounds a bit doom-mongering, but we don’t seem to have the have people or systems to deal with it. Ultimately nature will takes it’s course.

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