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Charting the Effects of the Financial Crisis
Adam Stein, 22 Sep 08

It takes more than wind to make turbines spin.
lehman-brothers.jpg

In the wake of the financial meltdown, some have wondered about about the broader implications of the disappearance of Lehman Brothers’ carbon trading desk. And the answer to that question, at least, is easy: there are no broader implications to the disappearance of Lehman Brothers’ carbon trading desk.

This is true for a variety of reasons, not least among them that Lehman Brothers was a small player in the carbon markets. The center of gravity in the carbon-trading world is in Europe. Beyond that, the carbon market itself is just one corner of the energy finance universe. So Lehman is a corner of a corner, and anyway the disappearance of a single trading desk is nothing really to fret over.

A trickier question is what affect the broader issues in the financial markets have for the development of clean energy. And, well, it’s hard to say, as all sorts of countervailing forces are at work.

It helps to step back briefly and consider what is actually going on in the economy. The Freakonomics blog recently offered up one of the most lucid discussions of the ongoing financial crisis. I recommend the whole thing, but in a nutshell:

Financial institutions borrow money all the time to fund their investments. When the real estate bubble burst, a lot of those investments lost value rapidly, leaving banks such as Bear Stearns and Lehman Brothers unable to borrow new money and unable to repay their existing debt. This situation can lead to a domino effect — “contagious failures” — in which borrowers are unable to repay lenders, who are then themselves sucked into the financial crisis.

The issue isn’t that all these financial institutions are suddenly worthless. By all accounts, most of AIG’s business is quite healthy, and the government will turn a healthy profit on the bailout. Rather, the institutions fail because they don’t have enough cash to cover their near-term debts, in much the same way that you can starve to death in your $3 million house if you don’t have money to buy bread. So the federal government steps in, effectively guaranteeing that these companies will be able to repay their loans. But even if the intervention works to stave off the contagion, very few institutions want to loan out more money in this environment.

This is a big problem for anyone who needs a loan to finance an investment or business activity. Guess who needs loans? Clean energy developers. Windmills ain’t cheap.

Looking broadly, I see at least five broad economic trends affecting the clean energy market over the next few years.

  1. The credit crunch. Banks are having a hard time of it right now. This is an unequivocally bad thing for the clean energy sector. Clean energy projects typically entail massive up-front capital outlays, followed by relatively low ongoing costs. Banks provide the money for those up-front expenditures in the form of loans.

    Except that right now, banks have retreated into their pillow forts. One analyst projects that, by 2020, the clean energy sector in Europe will require about 85 billion euros per year in financing to meet EU goals. Given the current pace of lending, debt finance will fall about 21 billion euros short. I’d put very low confidence in these specific numbers, but they are illustrative of the problem faced by energy developers who need cash to turn blueprints into megawatts. A secondary likely effect of the credit crunch is consolidation in the clean energy industry, as financially healthy energy developers (especially in Europe) snap up sound-but-cash-strapped counterparts.

  2. Fossil fuel prices. To simplify: dirty energy competes with clean energy. High fossil fuel prices make clean energy projects look more attractive.

    There are people paid much more money than to me predict the direction of fossil fuel prices, and I won’t pretend to have any special insight here. Based on my own analysis, which involves drawing a supply and demand curve on piece of graph paper with a crayon, I predict that fossil fuel prices will continue to gradually rise for years to come, while also exhibiting high volatility. The underlying upward trend in fossil fuel prices will be positive for clean energy development, but the volatility will blunt some of the benefit by injecting a high degree of uncertainty into the market.

  3. Supply chain constraints. Whatever the state of the present economy, clean energy has been booming for several years now. One inevitable consequence of the growth is that manufacturers are having a hard time keeping up with demand for basic infrastructure, such as wind turbines. This situation should eventually right itself, but it will remain a brake on growth in the near term.

  4. Global carbon policy. In fits and starts, governments worldwide are putting a price on carbon. And though the shortcomings of these early attempts have been well noted, in aggregate policymakers are stumbling in the right direction. These efforts are helpful, even if they aren’t anywhere near enough.


  5. The economy. Although it is very difficult to make predictions about the direction of the economy, it appears likely the current downturn will continue for some time. Which is bad for the climate, mainly because of the way that a weak economy interacts with the other items on the list.

    For example, slow growth saps the political will for dramatic action on climate change. Some legislative efforts, such as California’s AB32, are probably too far along to be at major risk for derailment. RGGI in the northeast is also pretty far along, but not so far along that New York Governor David Paterson wouldn’t consider bolting from the agreement. And, of course, federal legislation continues to lurch zombie-like around the halls of congress. The next president will have to expend a lot of political capital to pass a national carbon cap even under the best of circumstances. These are not the best of circumstances.

So the scorecard on macro trends in the clean energy sector reads: credit crunch, very bad; high fossil fuel prices, very good; supply chain constraints, bad but self-righting; global carbon policy, nascent but directionally correct; overall economic malaise, generally dampening.

Anything to add to this list?

Adam Stein is a co-founder of TerraPass. He writes on issues related to carbon, climate change, policy, and conservation.

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Comments

What are we thinking and doing? What is to become of our children?

Our children’s future is being mortgaged and put at risk by leaders in my not-so-great generation of elders. Is there no end to arrogance and adamant avarice of the greedy kings of wealth concentration, their bought-and-paid-for politicians, their many minions in the mass media?

Somehow we and our children have got to find more effective ways of communicating about threats to human wellbeing that are being perpetrated before our eyes by self-proclaimed “Masters of the Universe” among us.

Good and able people are not saying loudly, clearly and often enough what they know to be true.........not speaking truth to power.

Many too many politicians are posing for the public and pandering to those with great wealth; too many investment brokers are devising economic bubbles and pyramid schemes, skimming millions for themselves.......”breaking” the financial system and threatening the real economy; and the mass media has been turning a blind eye to the entire mess.

Such woefully inadequate leadership needs to be named, shamed and replaced.

Perhaps more people will stand up, remain standing, and speak out loudly, clearly and often about what they see and know to be happening.

Our children could soon be confronted with an economic and/or ecological wreckage of an unimaginable kind; but, because so many people are not reasonably, sensibly and responsibly communicating with one another now, the chances for taking the measure of certain ominously looming economic and ecological challenges and finding adequate solutions to them appear to be diminishing day by day.

Perhaps there are at least three questions worthy of consideration by young people and their elders today.

Is it possible that the wondrous planetary home we inhabit was given unto the stewardship of humankind simply for the purpose of allowing the greediest people on the planet to fulfill their unending wishes and insatiable desires, come what may for a good enough future for their own children, coming generations, billions of less fortunate people in the family of humanity, global biodiversity, Earth’s body and environment? Are the greedy kings of wealth concentration and power politics, who consume, possess and hoard a lion’s share of the world’s wealth, the only people who matter? Are the selfish among us, the ones who are about to be “bailed out” this week despite their unbridled avarice and obscene behavior, supposed to be source of our primary concern?

At least to me, it is crystal clear how so few have stolen so much from so many.

Not ever in the course of human history have so few people been so greedy by having taken surreptitiously and then hoarded so much wealth that rightfully belonged to so many less fortunate people.

Clearly and evidently, the colossal global economy is an ever-expanding, artificially designed, manmade construction. For whom does the world’s human economy exist? To fulfill the wishes and insatiable desires of those with ill-gotten gains? Only to provide security for the greediest among us?

And, of all things, for many too many leaders of my not-so-great generation of elders to extoll the virtues of their unbridled avariciousness and applaud each other by passing out ‘awards’ to each other for the triumph of their greed, all of this is plainly outrageous.

In light of what has occurred in the both the financial system and the real economy in recent years, can someone please explain what the terms “fairness” and “equity” mean? Can anyone find examples of these phenomena in the distribution of wealth by the organizers and managers of the world’s human economy today?

Who knows, perhaps change toward common sense, fair play and sustainable behavior is in the offing.

Steven Earl Salmony
AWAREness Campaign on The Human Population,
established 2001
http://sustainabilitysoutheast.org/index.php


Posted by: Steven Earl Salmony on 26 Sep 08

The current financial crisis is not about the lack of laws, but of the failure to enforce the laws on the books. It doesn't matter how many laws we have or how well written if they are never enforced against the powerful. When prosecutors are corrupt, criminals run free and engage in ever larger crimes.

The willful failure by DOJ lawyers to incarcerate their private practice bretherin in prior scandals such as Leslie Fay / Bear Stearns became a seed which bore us the fruit of Enron and WorldCom. Similar failures by DOJ lawyers to incarcerate or indict corporate executive criminals taught more greedy players that hiring a law firm employing former DOJ lawyers ensured a regulatory climate devoid of criminal consequences. Upon this corrupt playing field was born the current financial crisis.

Our own U.S. Attorney General John D. Ashcroft warned of the existence of more public corruption in the U.S. than he could detect and prosecute, and he specifically identified Law Enforcement and the Judiciary as part of the problem. We are in need of a Federal Special Prosecutor to examine corruption in the DOJ regarding willful failures to enforce the law against law firms representing powerful hedge funds.


Posted by: David O'Donnell on 27 Sep 08

Limits to greed................

A remarkable amount of mental energy has been exerted by many ‘experts’ (and wealth distributed to them by their benefactors) over much of my lifetime in a concerted effort to widely share and consensually validate the specious idea that there is no such thing, of all things, as the most obvious of things……..limits to growth in a finite world. Most recently, Schellnhuber in Germany, Rapley in England, Rees in Canada, Hansen in the USA, McMichael and Butler in Australia…….the list goes on and on……..good scientists all, have been noting over and over again that the human species is approaching ecological limits evidently, obviously imposed by the biophysical reality of the planetary home we are blessed to inhabit. To put it another way, rampant overproduction, rapacious overconsumption and unregulated overpopulation activities by the human species now overspreading the surface of Earth will lead to an ecological “tipping point” of some, perhaps unimaginable sort.

The question seems to have been, Which biophysical limit will be exceeded first? Precisely what will it mean for the human species to overreach and by so doing “give rise to” or “produce” some sort of ecological tipping point? What will happen then? What kind of global wreckage might ensue? What will that moment in space-time look like? Many scientists seem to have been thinking that the unbridled overgrowth activities of the human species would literally and eventually overwhelm the Earth and its environs because the family of humanity has chosen to recklessly ignore the reality of human species limits and Earth’s biophysical limitations. For example, recall the ruthless derision of the great work of the Club of Rome regarding ecological limitations to the growth of absolute global human population numbers.

Even so, despite all the attention, the warnings and the good scientific evidence, an ecological tipping point may not be the source of the greatest, most imminent challenge to human wellbeing in these early years of Century XXI. The most pressing, most forbidding threat to human wellbeing may not be ecological in its nature.

For a long time, I have been haunted by the words of Percy Bysshe Shelley (1792-1822) that are emblazoned in a sonnet about Ozymandias.

” I met a traveller from an antique land
Who said: Two vast and trunkless legs of stone
Stand in the desert. Near them on the sand,
Half sunk, a shatter’d visage lies, whose frown
And wrinkled lip and sneer of cold command
Tell that its sculptor well those passions read
Which yet survive, stamp’d on these lifeless things,
The hand that mock’d them and the heart that fed.
And on the pedestal these words appear:
“My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!”
Nothing beside remains: round the decay
Of that colossal wreck, boundless and bare,
The lone and level sands stretch far away. ” —Schelley

What was the “colossal wreck” this “king of kings” observed and how had it happened? What caused the destruction of the world?

The calamity Ozymandias witnessed may not have been more or less than the incredible consequences of human greed having exceeded limits to its growth. That is to say, the adamant and relentless greediness of kings and self-proclaimed Masters of the Universe precipitated the gigantic, distinctly human-driven catastrophe to which The King of kings makes reference.

Steven Earl Salmony
AWAREness Campaign on The Human Population,
established 2001
http://sustainabilitysoutheast.org/index.php


Posted by: Steven Earl Salmony on 29 Sep 08



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