Fred's Footprint: What does the credit crunch mean for the environment?

It's a question that anyone concerned about the environment is asking. There will be some fairly obvious effects on energy use and commodity prices, but I think this moment of crisis is a big opportunity for persuading the world that the next big crash could be the Earth's ecosystems going into meltdown.

First the prosaic. Global recession is going to have two effects - pulling in opposite directions. The economic downturn will reduce fuel burning and so cause a slackening off in the recent inexorable rise in emissions of carbon dioxide. It happened in the 1930s; it will happen now.

That's the good news. The bad news is that, as the cost of fuel plunges (oil is back under $80 a barrel already ), the incentives to use less and to switch to renewables will evaporate. Cheap coal will trump clean coal - let alone solar panels and wind turbines.

But what could really change as a result of the crunch is the world's view of what capitalism can and, more particularly, cannot do for us. Like protecting the planet.

I am no economist, but reading some of the op-ed pieces from those who are, I am struck by how often they explain the financial crisis in terms of a phenomenon they were loathed to mention before: "externalities".

For instance top Cambridge economist John Eatwell, writing in The Guardian . defined the externalities that crashed the global finance system as "systemic risks" that don't show up when individuals make their choices about how to invest.

In other words everybody acts rationally according to what they see as their own interests - but the net result is that the system becomes less and less stable and eventually crashes, at which point everybody loses.

That seems like a fair summary of what has been going on. You can blame greed if you like, but the whole system is built on greed, so that doesn't take us too far. The point of the system is to make individual greed work for the common good, and that has always been the claim made for capitalism.

So we have a pivotal moment here. Economists admitting that global capitalism exhibits "systemic risks" because

it can't handle "externalities".

They like to explain that in terms of complex trading systems. But that, surely, is just the start. The game now should be to explore what other "externalities" are out there that markets don't factor in, but which could crash the system. Perhaps not just for a few years, but forever.

And here is where environmentalists get to raise their voice.

We greens have been saying for decades that the way the global economy is operated ignores the cost to the overall system (ie the planetary life-support system and the survival of humanity) of growing pollution and declining stocks of key natural resources. "Natural capital", as some call it .

And most economists have been patting us on the head and telling us that greenies don't understand how the hidden hand of capitalism will figure all this out and head off any danger.

Well, their bluff now stands exposed in the starkest possible terms. Their notion of a self-sustaining, self-regulating economic system is rotten to the core. Building a new system will require regulation based on attention to the externalities that the market does not correct for.

But that means looking beyond the failings that brought down the system in recent months. It means looking ahead to the next crisis, the next cartload of externalities that will threaten the wellbeing of all 6.7 billion of us.

That means, in my judgment, tackling "systemic risks" like climate change, peak oil, crashing ecosystems and water shortages. In none of these arenas does short-term economic self-interest work to the common long-term good. In each of them global action by governments will be needed to head off disasters that will damage us all.

The big secret is out. Unfettered markets bring disaster. We need government too. Governments may be preoccupied right now with rescuing banks and reviving financial liquidity. But environmentalists need to use the new language of externalities and systemic risk to shout loud and long that politicians must act soon to protect natural capital. Or it may not just be the finance system that hits the rocks next time, it may be our species' entire life-support system.

Fred Pearce, senior environment correspondent, Columbus, Ohio


Category: Credit

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