Unsustainable Developments

//Unsustainable Developments

It seems like we right now are running hard from facing the truths and some associated pain, and that in at least two instances that are striking for their similarities: the global financial crisis and climate change. Let me begin with the financial crisis. The main problem of the financial crisis is that levels of debt have become too large and cannot be repaid by the original debtors. Lenders and many politicians are now desperately searching for others to take on these debts, and throughout the crisis unfortunately governments have been all too willing to take over the liabilities of banks and other financial institutions. They should not have done that!

How do I know that debt levels are too large? An analysis by McKinsey shows that debt levels have reached a new high in 2010 at 212 trillion dollars (T$ – Teradollars). The global, total GDP, for a reference, was T$63. The global GDP measures all the income of all humans in a year, 2010.  If you are a homeowner looking for a mortgage, lending 3.5 times your annual income is about as high as it gets. Then you need to put up your home as a guarantee. What is the global value of ‘homes’? The World Bank puts the total value of all produced assets – buildings, roads, railroads, factories and machines – at T$124. (The latest available estimate is for 2005 and has probably risen since then due to the massive investment in China, but the debt in 2005 was already higher, at over T$150.) Debt hence exceeds the total value of all the physical capital in the world. Therefore, if you hence try to unwind all the debt in bankruptcy proceedings, you end up with physical capital being redistributed to the lenders, but not sufficient cover the nominal value of the debt. As some of the capital is owned by people who have no or little debt, there is even less real value out there that backs up the existing loans.(For more on this issue, check out Keen.)

Financial markets are now desperate for government action. Market analysts describe stock valuations being driven by government action, not economic fundamentals. Markets call for more credit, for more liquidity to enable more lending and to rescue financial institutions that have made loans that cannot be repaid. They want governments to take on more of the liability of private actors. For those governments who would now longer be solvent if they accepted the bank debt accumulated in their countries, markets want Germany and – through the World Bank, China – to take on the liability of governments . This is a process of burdening the future tax payer with liabilities she has no responsibility for. What does she get in return? Market actors who have learned that they can offload risk to others. We are turning our children into debt slaves. Future tax income is mostly from taxes on labor and consumption, and if these liabilities are accepted taxes will have to be raised. Accepting these debts means burdening future generations in order to rescue capital owners from the collective consequences of their poor decisions.

The only way out of this crisis is to write off bad debt. We should have started with this in 2007, as Stiglitz argues. We should certainly do it now. Creating more debt by national banks producing excessive liquidity and governments nationalizing debt only makes the problem worse and the ultimate pain larger. It is irresponsible.

Now let’s turn to climate change: We have understood the problem for a long time and the evidence is becoming increasingly stark. Currently, we are experiencing a rapidly increasing rate of emissions of greenhouse gases (for an analysis by the Global Carbon Project co-authored by Glen Peters, see here) at a time when we should be rapidly decreasing the emissions. The IEA’s Global Energy Outlook confirms that emissions need to peak by 2015-2017 the latest for us to have any chance at all to reduce emissions to levels which allow temperatures to stabilize at 2 degrees of warming. What is instead happening is that we continue a mode of development which so systematically leads us to a projected temperature rise with +6 degree by the end of the century. The implications of such a policy will be dramatic. Why do we postpone action? Because the evidence is not 100% air tight, according to the standard of proof required by some? The evidence will be so only once it is too late. It is irresponsible to further postpone actions.

Here, the room for even drastic action to succeed limiting climate change to a level that might still be acceptable is running out if we do not act more quickly. What we will need to do is to revise our mode of economic development. Not doing so will result in an economy that is not fit for the future, and in a rapidly changing climate that is threatening much of our natural capital. Again, our children will be the ones who will suffer as a result of our inaction.

Climate change and the global financial crisis are similar: our actions are such that we currently make bad problems worse. We postpone dealing with the problem so that our children will be left to sort out the mess. They will be in a much worse position to do so.

Some of the solutions to the two problems are the same. We need to find a new mode of economic development that does not rely on debt to finance overconsumption or to build assets we cannot afford to operate. We need to invest our savings in things that have a return on investment: infrastructure that furthers human well-being by promoting human-powered transport and that requires little energy to operate, a renewable energy supply system, skills, and natural assets. The parallels do not stop here. Why do we hesitate pursuing this course of action?

By | 2017-11-08T21:16:08+00:00 December 12th, 2011|Reflexions|0 Comments

About the Author:

Edgar Hertwich
I am a professor at the Yale School of Forestry and Environmental Studies and currently serve as president of the International Society for Industrial Ecology. I grew up in Braunau, Austria, studied physics at Princeton and Energy & Resources at the University of California, Berkeley. From 2003-2015, I directed the Industrial Ecology Programme of the Norwegian University of Science and Technology. My research interests cover life cycle assessment, sustainable consumption and production, trade and environment, risk analysis, and climate mitigation. I am interested in understanding how activities in our society require resources and produce environmental pressures. I would like to better understand the dynamics in our development that affect these driving forces and their resulting environmental pressures, and alternative courses of action that can reduce these pressures. What is the connection between human activities on the one hand and emissions and resource use on the other hand? What are the implications of our current development path? What do we need to change, both in terms of individual actions and policy frameworks, to achieve a more sustainable development.

Publications: See full list here (in Google Scholar)

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