By Terry Barker and David King
Large-scale investment to fix global finances is an opportunity to move quickly to a low-carbon economy
The financial crisis that started in May 2007 is a global catastrophe. As central banks, one after another, reduce interest rates towards zero, they risk the world economy falling into a global liquidity trap in which monetary and fiscal policies become ineffective and regulation becomes the main instrument for recovery. The effect of such a trap is to risk global depression and mass unemployment for years to come.
In the background lurks another crisis — the risk of dangerous climate change. Although these changes are slow-moving, increasing concentrations of greenhouse gases will risk more climate catastrophes that will damage human wellbeing and conceivably lead to mass unemployment in the very long run.
These two crises are not independent. Both arise from human greed largely unrestrained by ethics, or concern for others in distant lands, or future generations. And the state of the world's finances can either hinder our efforts to tackle climate change or, if the world responds correctly, provide an unrivalled opportunity to help.
The most prominent policies at the moment are market-based instruments such as emissions trading schemes, which put a price on carbon dioxide emissions. But the financial crisis is rendering such policies ineffective. Carbon allowance prices in the EU emissions trading scheme have hit new lows recently as plunging economies reduce the demand for electricity.
If the short-term reduction in demand for emission permits continues into a collapse of allowance prices to near zero, then not only does the market lose its ability to cap emissions but we would also lose the valuable experience built up by companies in the carbon market. One way to restore profitable allowance prices in the scheme is to tighten the emission reduction targets for 2020. Even an announcement that such tightening is being considered may be enough to support the prices.
So how can investment best achieve climate change stabilisation at different carbon prices? The Intergovernmental Panel on Climate Change (IPCC)'s fourth assessment report, published in 2007, examined this and concluded that most actions proven to reduce greenhouse gas emissions involve regulation, tradable permits or carbon taxes. Not so many involve direct government investment, such as making buildings more efficient, reducing deforestation, investing in public transport, and subsidising and supporting research in renewable energy.
But things have changed since the last IPCC report. The global financial markets are not as they were at the end of 2006, when the assessment was finalised. We face the prospect of a large and global unemployment problem, and carbon markets that do not deliver the expected incentive to induce technological change. In this new context, measures such as taxing carbon, tradable CO2 allowances and strong regulation of industry begin to seem less immediately attractive than simple direct investment by governments.
As the financial crisis continues, there is widespread recognition of a need for substantial investment by governments — fiscal stimuli — to restore confidence, spending and employment to more normal levels. This is where resolving the financial crisis can help climate policy. The investment should be in decarbonising national economies and international transportation at an accelerated pace.
Such action presents an immediate solution to both crises if combined with the bankrupting of the insolvent banks, with appropriate protection of depositors and small shareholders. Other global measures are also needed as a coordinated response to the crises for the investments to work. However, the scale of the financial crisis means that much more investment will eventually be required. Money spent on decarbonising is likely to seem small in retrospect.
We are in a global depression, not quite on the scale of the Great Depression Of 1929-1932, but approaching it in the UK, many other European countries and in Japan. Our January 2009 outlook suggests that on present policies Britain's GDP will fall by 3.8% in 2009, and then by a further 6.2% in 2010.
Such a sharp contraction in economic activity is bound to have an impact on greenhouse gas emissions. In a fossil fuel-based global economy, growth is closely correlated with these emissions, so recession means lower emissions, for a time at least.
This of course does not mean that the financial crisis helps to address the climate change problem because the effect is hopefully short term. But the crisis may provide the stimulus we need to move to a low-carbon economy. In dismal economic times, investments in things such as infrastructure and new technologies become available at lower cost and greater benefit than at other times.
So let us take stock. We have a critical and deepening global financial crisis that demands large-scale job-creating investment. And we have an impending global climatic crisis that could be partially solved by large-scale job-creating government investments. If it cannot be quickly resolved, the financial crisis itself could seriously undermine the market-led climate change policies we have, so there is an increasing need to go for more direct investment approaches to tackle climate change.
The answer is obvious. The resolution of the global financial crisis must be seen as an opportunity to kick-start a rapid shift to a low-carbon economy, which is absolutely necessary in the coming decades if we are to avoid dangerous global climate change.
Sir David King was the government's chief scientific adviser and is now director of the Smith School for Enterprise and Environment. Terry Barker is director of the Cambridge Centre for Climate Change Mitigation Research.
This article originally appeared in The Guardian.
Photo credit: flickr/amagill, Creative Commons License.