Climate Change and the GFC - cause for hope?

Written by Network member: Lloyd Fleming

The Global Financial Crisis (GFC) has really stolen the limelight from those of us seeking greater action on climate change. Just as the momentum seemed to be swinging our way after years of government inaction, business stalling and public indifference, along came a new and largely unanticipated crisis, diverting everyone's attention away from the Global Climate Crisis (GCC).

In fact, the causes and consequences of the GFC and GCC are strikingly similar. The two crises are fairly obviously linked – massive economic growth has only been achieved at the expense of the environment. Perhaps less obviously though, solutions to one crisis may well contribute to solving the other.

The global economy and the world's climate are often characterised as systems, albeit extremely complex ones. The GFC and GCC strongly challenge our expectations of how these systems should operate. Of course, shocks to the system are nothing new in global finance. Over-exuberance leads eventually to a re-assessment of value:  demand falls, companies scale back, unemployment rises, the economy contracts and overall wealth decreases. After the period of contraction, growth returns. So in many ways the GFC is a normal part of the economic cycle. But the GFC also has some unusual and highly disruptive characteristics.

First, the scale of the crisis is unprecedented and has highlighted just how interconnected the global economy now is. George Soros¹ recently suggested that while the US may have been the cause of the GFC, its effect has been felt more keenly in more peripheral economies (think of Iceland, which went bankrupt). This is analogous to the GCC, where the CO2 output of industrialised countries over 250 years is now impacting the rest of the world through climate change. Countries peripheral to the main emitters (like Bangladesh) are certain to suffer greater effects of climate change, due in no small part to a lack of resources and economic resilience.

The GFC also challenges our notions of economic growth as a viable and sustainable long term model. Economic growth in the West, particularly since 1990, has been built on significant national borrowing and overconsumption. Economists at the recent World Economic Forum in Davos observed that the post-war economic order was largely run by and for debtor countries (i.e. the G7, principally the US, Britain, France and Italy). These countries borrowed heavily, mainly from China and the oil states, to fuel growth. Now the lenders or "surplus" countries are being asked to bail out the debtor nations. As Paul Keating² put it, "you have a massive dam of savings [in China], you have a huge pipeline via a loose monetary policy in the United States, feeding funds to the core of the international financial system in New York ... and a massive sprinkler, ... the investment banks, throwing the money around to every nook and cranny of the economy, in the end the investment banks were servicing the least worthy credit customers in America, the people who couldn't even afford a normal mortgage."

But while the growth and consumption model is not working for the West, neither is it working for those that supplied the credit for growth. They cannot just sit on their money and hope for the best, since any major sovereign default such as the US or UK would eliminate their wealth. In addition, they have lost the markets that fuelled their economic growth.

This situation points to a shift of power in international relations. Just as Europe was at the mercy of the US following the Second World War, the G7 is now at the mercy of cashed up nations like China, India, Russia and the oil producing states. In order to find a way out of the GFC, the G7 will need to engage constructively with "surplus" nations and these countries won't be dictated to by the architects of their own misfortune.

A similar need to re-write the rule books is also required to address the GCC. Carbon "debtor" nations – those that for 250 years have pumped out CO2 through their industrial processes – must acknowledge that their economic models no longer serve the climate (or indeed the financial) system. Countries with the potential to be in carbon surplus will need to step up and take a lead. By way of example, Australia could reduce its per capita carbon output by faster take-up of renewable energy; Indonesia could reduce and eliminate deforestation and thereby build carbon credit by sequestering CO2.

¹ George Soros, "The Game Changer" from The New Paradigm for Financial Markets – The credit crisis of 2008 and what it means (Public­Affairs Books, New York), reprinted in the Financial Times, 28 January 2009 (http://www.ft.com/cms/s/0/49b1654a-ed60-11dd-bd60-0000779fd2ac.html)

² Lateline, "Paul Keating joins Lateline", ABC Television, 2 Feb 2009, http://www.abc.net.au/lateline/content/2008/s2480345.htm