Sustain to gain: September 2010 Archives

If you expect a global agreement on curbing greenhouse gas emissions, the upcoming climate negotiations in Cancun will certainly disappoint you. A climate bill was stalled in US Senate, and without the US China will not move either. However, meanwhile negotiators focus on more tangible topics, such as REDD (reducing emissions from deforestation and forest degradation). UN parties are ready to settle on a agreement that includes a 4.5 billion dollar fund that is used to refund the protection of forests. Hence, global forests and the ecosystem service they provide get a market price. As deforestation and land-use change contribute currently to 20% of annual greenhouse emissions, a reduced rate of deforestation would finally benefit the climate.

One caveat with the market-based approach comes from the literature on managing the commons. Elinor Ostrom (Nobel Price 2009) and co-workers have accumulated massive evidence on how commons - such as forests - are successfully managed. They demonstrate that a decentralized just sharing of resources, monitoring and social sanctions are crucial ingredients of commons management. Inversely, a pure market-based approach, especially if it is top-down, can decrease acceptance of local stakeholders and increase the risk of gaming: Stakeholders could follow REDD literally but not in spirit, e.g. by substituting bioversity rich forest with tree monocultures.

Now, deforestation and GHG emissions are a global problem and, hence, need a global solution. REDD is urgently needed. Ostrom's results, however, suggest that REDD (beside qualifications that aim to avoid gaming) would profit from explicit inclusion of local shareholders, such as indigenious tribes and squatters. In many cases, ownership of forests is not well defined (offering opportunities for land grabbing). In these cases, community-based commons management, requiring the build up of institutional capacity, may be the best way forward.

From another perspective, however, there is not enough market involved in REDD. More precisely, a crucial market distortion is painfully ignored. There are drivers of deforestation and increasing land consumption, mostly economic forces. Locally, squatters live on burning down rain forest to gain land for agricultural production. Logging companies live from selling wood. In addition, however, global market forces demand further land: population growth, increased demand of meat, and increased demand of biofuels. Industrially produced biofuels and industrially produced meat have been shown to produce large carbon footprints, a significant part of which is related to land-use change. A suitable market signal, hence, would be for the US and the EU to reconsider their 2020 quota targets for (first generation) biofuels, and for OECD countries and China to introduce carbon taxes for biofuels and meat. This would decrease deforestation pressure in countries such as Brazil and Indonesia and would provide a strong stick complement to the REDD carrot. Income of taxes can then fund REDD and other forest protection schemes.

Is banking, as practiced today, sustainable? Does it become more sustainable with Basel III regulation? An article by Mark Joob in the Financial Times Deutschland from 16 September 2010, claims: no. 

Basel III requires banks - among other measures - to retain more core equity capital, limiting banks ability to hand out credits they cannot cover themselves. It has been critized from a variety of perspectives (e.g. that administrative complexity crowds out small banks and gives big banks an additional edge).

The FTD article is more fundemental in its criticism - credit growth itself is the problem. The argument follows Binswanger's book "Die Wachstumsspirale", literately, the spiral of growth. Companies borrow money to invest into production. To cover the opportunity costs of money, and to compensate for the risk of bankruptcy, creditors ask for interests. To pay back credits, companies, hence, need to earn profits. As the credits enter the exchange flow as additional money, more products can be bought from already existing production, guaranteeing the profits of companies. Crucially, the total amount of money grows along - otherwise, no net profits are possible.

The author of the FTD article and Binswanger now suggest that this growth dynamic is sort of a large scale Ponzi scheme, because the additional income is derived from the income of natural (finite) capital.

How does this claim relate to concepts of sustainability? Sustainability is a normative perspective that tries to care of the well-being of both current and future generations. There are two dominant frameworks: weak and strong sustainability. Weak sustainability assumes that one has to consider aggregrate well-fare only, and that in particular natural resources can be substituted with men-made capital. More precisely, if we know the (marginal) shadow prices of natural resources, services and sinks, and price them in, there is nothing to worry about. Strong sustainability assumes that substitutability between natural and men-capital is rather limited, and hence, that we have to  strictly protect sources and sinks.

Clearly, the growth spiral argument belongs to the camp of strong sustainability. Assume the opposite view: growth is based on real added value (and not substantially based on natural capital), then the growth spiral is not so much of a problem - at least from an ecological point of view.

Whatever one precisely thinks about weak and strong sustainability - it is interesting to see that these sustainability perspectives have their natural correlate in monetary policies.

Image via Wikipedia

Peak Oil has grown up from on obscure theory of some weirdos (or so it was understood) into a mainstream theory - most disagreement is about the exact point in time of peak oil but not on the fact itself.

The Strategic Institute of the German Bundeswehr has now published a document on the implications of peak oil for security (more precisely: the study was leaked). The study is very well written and recommended as an essential read not only for geostrategist but especially for those involved in global sustainability questions. In fact, at least in wording the authors care about such diverse issues as environmental impact of unconventional oils and the impact of global-marked-induced land-use change on indigenous populations. It is worthwhile to have a closer look on some of their results:

•  While resource conflicts have existed before, peak oil poses a systemic risk for global economies as oil is required for a multitude of energy-related processes and for chemical purposes (e.g. as fertilizer).
•  Scarcity of oil is coupled with a concentration of remaining resources, notable in the Middle East.
•  Aggressive oil resource policy used to be expensive in terms of exploration and political costs (e.g. China in Africa). However, with rising oil prices, the ratio will change and benefit China. With concentrated resources, geopolitical leverage of oil-rich regions increases; this will be reflected in UN institutions.
•  Scarce resources are most efficienctly distributed via market mechanisms. However, morald hazard of national actors (trying to get preferred access to resources via bilateral agreements, and perhaps secret arrangments) may induce a straight forward prisoner's dilemma.
•  It is speculated that unconventional resources in environmentally-conscious nations are used as a strategic reservoir only (I don't see this is agreement with current exploitation of oil tar sands in Alberta).
•  Oil-dependend agriculture (both in terms of production processes and associated transportation of intermediate goods and products) means increasing food prices, impacting poor city populations globally, and - jointly with increased demand on "bio"-fuels - increased pressure on land use.
•  In fact, a sustained global food prices could be the most harmful outcome of peak oil.
•  Increasing oil prices induces (beside increasing food prices) higher coal prices, and higher demand on further electrification. The latter requires other resources (such as copper, lithium, etc.), possibly inducing further "peaks".
•  Finally, there is a risk of reaching a "tipping point" via peak oil, i.e. higher food and transport prices induce the crash of industries (such as the car industry), flashing out a global recession with banking crisis and whatever you don't want to think about.

The report has more to say on LNG and other crucial issues. As a bottomline, however, the report repeatedly calls for proactive countermeasures, notably a reduction of oil consumption and more efforts into  renewable energy (infrastructures). A conclusion founded in a security-centered analysis, and surprisingly in broad scope in accordance with both climate change and sustainability concerns.