The Structural Causes of Climate Change
What follows is a discussion of structural problems in the relationship between national economies and Foreign Direct Investment (FDI). The emphasis is on the role of transnational capital itself, independent of national political economics.
It is argued that in order to prevent further environmental degradation, pollution and climate change, the power relationship between states and multinational investment needs to be rebalanced to improve environmental, social, and financial stability.
The inconvenient truth faced by governments worldwide is that the neoliberal globalization of capital over the last two decades has intentionally weakened their ability to protect the environment by subordinating national economic controls to “the market” i.e. to the financial interests behind multinational corporations. This is the real reason that Copenhagen never had a chance.
One solution suggested is an adjustment to the current global financial system (a carbon tax) along with various command and control interventions to re-orient investment for the benefit of the environment.The Problem
IPCC scientists inform us that climate change is caused by a change in the chemical composition of our planet’s atmosphere, that is by the introduction of atmospheric pollutants which we call “greenhouse gases.” Greenhouse gases can be byproducts of land and forestry mismanagement. They also result from industrial activity, such as the mining and smelting of metals, cement production, and so on. Of major importance is the use of fossil fuels in manufacturing, in agricultural fertilizers and insecticides, in generating electricity, in military activities, and in the transportation of people and goods.
The above are all economic activities. The word “economy” is derived from the Greek ‘oikos’ house and ‘nemein’ manage; so economics is household management. Our household is planet Earth but unfortunately our economists and financiers focus on companies, industrial sectors or on national economies, ignoring atmospheric chemistry. Politicians cannot ask them to put our house in order. Neoclassical economics does not incorporate climate change so its economists do not know how to solve the problem.
While ‘real’ economic activity produces greenhouse gases, this activity is directed by the financial system (providing investment and credit in return for ownership and interest.) Global finance, like the climate, is suffering a systemic crisis.
Finance and the environment are linked by economic activity (commerce); both negative and positive effects spill over from one to the other.
Following is an attempt to delineate structural problems in the global financial system. If these problems are tackled head on, it is argued that finance can be converted into a positive influence on the environment.
Examining Structural Causes Climate change is caused by pollution of the atmosphere by greenhouse gases; the gases in turn are side effects of profit-seeking economic activities such as investment in the production and trade of goods and services. The structural problem is that the investment is immune to climate change. There is cause but no effect.
Sovereign nations elect governments that purport to meet their needs, but the global financial system, like global warming, exists outside of nations, in the multinational sphere. The globalization of capitalist expansion is a result of flows of (mainly private) capital protected by a framework of treaties and legal tribunals for conflict resolution. If a conflict is not resolved by legal tribunals, nations can press for the use of diplomatic, economic or military reprisal to protect their private multinational interests. Options include economic sanctions, changes in the availability of international loans or ‘aid’, covert and overt military incursion, financial destabilization, etc.
To solve the problems of climate change, systemic changes must occur in the financial/economic systems of the planet at both the national and international level. More robust international coordination will be essential as piecemeal controls will simply cause the pollution to move from one nation to another. This is analogous to financial controls that are rendered ineffective due to offshore havens.
International finance knows only one logic; the protection of, and the maximization of return on, capital investment. Sometimes referred to as the logic of the free market, financial markets are far from being free of political power.
Private capital aligns its interests with governments by means of lobbies, loans, bailouts, revolving door placement of key personnel, corruption and other institutions. Financial interests become, in effect, national interests. Many lobbyists at Copenhagen advocated for preventing, limiting, delaying or offsetting the cost of structural changes in the economy. This lobbying too was instrumental in preventing a real solution at Copenhagen.
National Economy, Global Finance
Although most governments still measure economic activity in Gross Domestic Product (GDP), the active agents in national consumption, imports and exports are often multinational corporations. Multinational corporations have become pervasive through financial globalization. Any environmental solution must
translate to their bottom line.
Corporations are bought and sold by international investors: private capital, investment banks, sovereign wealth funds, pension funds, individuals etc.
Buy/sell decisions are driven by return on investment. If global carbon taxation means that environmentally unfriendly manufacturing of goods or services becomes more expensive, investors will encourage corporate leaders to seek cleaner (cheaper) production. Corporations that do not adapt to the new cost reality will be eliminated from portfolios. For real change to happen the structural behavior of investors will need to change. Certain investments can be encouraged, others limited and yet others eliminated. Whole industrial sectors will need to be shut down or taxed very heavily (so that goods which cause environmental damage cost more.)
Further lobbying against such change is expected. Any change in the global economic playing field can be mitigated by temporary subsidies for industrial conversion but not by offsets which simply move the pollution elsewhere.
Carbon Taxation
One elegant means to orient trade to the benefit of the environment is a tax based on the amount of energy that goes into the product or service (a carbon tax). Taxation levels can be measured in Joules or Calories of energy and adjusting the taxation levels based on the type of energy used to make the product, thus taxing dirty energy (e.g. electricity generated from coal) above renewable energy. Production of essential goods using renewable energy could also be subsidized, such as locally grown organic food. Publicity driven over-consumption and other non-essential climate damaging production can be taxed much higher using the model of sin taxes, except in this case revenues would not be used for the cost to society of the health of drinkers or smokers, but of our home planet. Taxes could be imposed by the consuming nation’s customs and taxation service, thus providing funds for national and global clean energy conversion. Revenues can also be used to pay climate debt and to help with adaptation costs. A similar tax is being debated in Europe mainly as a result of the efforts by French president Nicolas Sarkozy. Transport levies for the energy used in transporting goods could be included in the taxation on bunker fuel for marine and air use, and diesel taxation on terrestrial transport.
The Oil Syndrome
Our current global trade activity has become distorted by the temporary availability of a relatively cheap fossil fuel energy source: oil. Moving people and goods back and forth across the planet has become commonplace. Services are outsourced, resources imported in a constant search for cheaper goods and labour. Some journeys are unnecessary and what is more, they were not possible (economic term ‘efficient’) before cheap fossil fuels. The practice has also facilitated global trade imbalances as multinational finance encourages cheaper, dirtier production far from the markets for end-users. IPCC scientists inform us that this needs to end. Al Gore refers to this as an inconvenient truth. It is much more than inconvenient. It necessitates radical, economic systemic change.
The fossil fuel lobby has been extraordinarily successful in maintaining its quasimonopoly on providing energy. Wars have been waged, patents bought and shelved, public transport systems dismantled, and profits have risen. Elimination or massive contraction of the sector will be difficult as it is closely aligned with transport and other global distribution sectors and with government, especially in nations where oil revenues are high. While it may be necessary over the next few centuries to use some oil in non-damaging chemical manufacture (such as the creation of certain plastics for industrial use), the practice of burning fossil fuels must be eliminated rapidly.
Economists need to rethink the fundamentals of their trade and adapt their practices to prevent further rapid deterioration of the planet’s environment. One suggestion from South America would be to incorporate principles of sustainable community practices such as buen vivir, which incorporates rules for living well in balance with nature. Practiced for centuries in Andean communities, buen vivir is still practiced now. This suggestion has one advantage; at least we know it works.
Structural Problems with National Government Ministries
Climate change is not just a result of international trade or finance. National governments can encourage climate-friendly policies within each nation. They can have a significant impact by coordinating their environment ministries with their finance/economics ministries. By making this possible some structural changes in government operations will be required.
In the current best case scenario, environmental ministries and their agencies do focus on local pollution problems and on management of “natural resources.” In the developing world many governments lack a public framework for environmental protection. Many developing nations do not have a ministry for the environment; instead they have sub-ministries (secretariats) tasked with energy, mining, agriculture or other “resources” focused on export. Export-driven economies are driven by the payment of external debt. This too will need to be alleviated or eliminated by offsetting against climate debt. By doing so southern governments will have more of a choice as to what they wish to export, and they will be able to adjust to the new economic reality without building up debt.
In practice environmental authorities rarely exercise control over economic ministries by advising them which economic activities they should or should not pursue. Unfortunately, in many countries the opposite is true. Resource allocation in developing nations, especially to powerful corporate interests can also be a major source of corruption.
Better environmental controls imply key national policies, including optimal taxation and subsidies for agriculture and fossil fuel exploitation, promoting sensible choices of energy sources such as geothermal, wind, or solar power.
This can be enabled by charging consumers more for electricity generated from oil, coal or gas while converting the grid or paying them more for electricity generated from renewable sources that they sell back to the grid (net metering).
Energy and Food
In most nations neither food nor energy policy is under national control. Encouraging the generation of local clean energy and local food production without using fossil-fuel based fertilizer can change this, meanwhile eliminating two significant problems (imports) in the national accounts.
Food, energy, fertilizers, etc. can still be imported during a transition period. However, costs should rise gradually and significantly. Market signals should be clear in promoting national food sovereignty. Agricultural practices causing excessive climate damage should be substituted. For example, industrial farm animal production can be curbed and gradually eliminated and replaced with crop and animal rotation. By encouraging education in the integration of arable and livestock farming, the ministries of agriculture will encourage the national production of healthier food, eliminating the use of fossil insecticides and fuels in fertilizer. They can thus build back carbon into the soil while producing healthy food in a sustainable manner, thus becoming agents of positive climate change.
To be effective, regulation of private multinational finance (currently immune from most national controls[1]) will be necessary by means of changes in corporate taxation and subsidies, tightening controls on cross-border financial transfers and changes in accounting laws. In some cases command and control policies will also be required. No one can cry foul of such “protectionist” measures when it is not national industries but the planet’s atmosphere that is being protected. Coordination in international fora will be required, such as at the UNFCCC or the FAO.
Crises
The latest financial crisis had its origins in speculative activities in the private financial services sector centered in New York and London. The crisis spread quickly through the globalised financial system, and has severely affected ‘real’ economic activity as corporate bonds and private consumption credit vaporized, thus creating unemployment. In the meantime the planet is experiencing an environmental crisis, and in many countries a related energy and/or food crisis.
Governments react to economic crises using stimulus packages. Keynesian stimulus packages have been far from environmentally friendly, and they need to be more than environmentally friendly, they need to be environmentally positive.
Better coordination between government agencies responsible for stimulating the economy and those responsible for protecting the environment will be necessary in the short term, eliminating aberrations such as subsidized credit stimulating new automobile purchases.
Again, lobbying resistance from incumbent industrial interests such as the oil and auto sectors should be expected and overcome. A few industrial sectors will inevitably be eliminated such as those based on the internal combustion engine. Eliminating polluting technology in transport will bring many positive side effects such as reduced noise pollution and fewer road deaths.
Rethinking Finance and Economics
It is time to pause and think again about economics and to prioritize the well being of the planet over short-term financial interests. The recognition that crises are interlinked will enable policymakers to cooperate toward integrated solutions.
Politicians feel hemmed in by financial and economic constraints; they are still advised by neoclassical economists who know nothing about the environment.
Neoclassical economics is suffering a serious crisis of legitimacy as nations try to clean up after the excesses of market deregulation that led to the August 2007 financial collapse. This form of economics is also blind to the environmental crisis and discourages government command-and-control. In Latin America this failed economic system is called neoliberalism.
As we begin the second decade of the twenty first century we are faced with many challenges. If we just focus on the two big ones: the climate change crisis, and the collapse of finance-driven, unfettered economic growth, we see that the answer lies in restructuring our real economies. As a side effect we could also avoid famine and produce better food.
Last December the streets of Copenhagen rang with the call for “System change not climate change!” Although some economic system change has begun, it needs to accelerate rapidly. Academics have begun to write about climate resilient industrial policy and ecological economics, in Cochabamba we can demand that it gets accelerated, and also look to older wisdom to guide us.
Economic and financial innovation alone cannot be trusted to solve this postmodern crisis.
We need to combat a really inconvenient truth. Weak governments have been manipulated by financial interests to allow their economies to become a service industry to multinational corporate interests. The power relationship between states and corporations needs to be rebalanced for both social and environmental reasons. This needs to be undertaken in a transparent and truly democratic manner so that each nation can see that the other is cooperating.
Our economies are driven by the failed principle that nature serves humanity. In neoclassical economic terms nature is a ‘commodity’, an input or an ‘externality.’ If we burn coal in an electric power plant, the air into which the smoke rises is an ‘externality,’ it is outside of the economic model. The coal, however, is internalized as a commodity. It can be extracted anywhere on the planet, at any environmental cost, and shipped any distance to be burned to release pollution without cost. This old economic logic was always patently absurd. It is destroying the planet.
While pollution remains external to economic activity, it is irrelevant to cost/profit optimization. Various attempts have been made to internalize the non-commoditised environment into economics. Early attempts have lead to the privatization of the commons (the air we breathe, the water we drink, public land and the oceans.) Commoditising the environment is a predictable reaction for an economic system threatened by climate change. In effect it co-opts nature. But of course, it does not work. It results in ludicrous arguments such as the greater efficiency of privatized water or air, or the problematic trade in carbon offsets.
A real alternative would be an ecologically sound economic system bringing global financial power in line with environmental necessities.
Conclusion
The collapse in the COP-15 was inevitable. While national interests continue to guard their corporations’ ‘rights’ to pollute, the nation which acts first, loses. The last economy to move on climate change has one last chance to get ahead, using cheap fossil fuel energy. Raw competition backed up by political, financial and military might, won out over intelligent cooperation. The UN process was compromised.
Mankind has drifted far from the industrious application of human creativity and ingenuity. Few of us live in harmony with nature. Our national laws make us absolute owners, not stewards, of the land. In human laws, nature itself has for no legal rights in most nations. Our laws recognize human rights and confer them on corporations. Nowadays only corporations can afford to protect their rights in courts of law. We would do well to remember that even the mightiest businesses will perish if we don’t abide by nature’s laws.
An economy in harmony with nature will eliminate unemployment and malnutrition. We will need millions of farmers to work in harmony with nature without oil-based fertilizers. Workers may replace robots. Architects and engineers will need to reconstruct our cities post-oil. Lawyers too will be busy reversing key distorting legislation, the personification of the corporation, patents on living genes, the list goes on and on.
Global capitalism is driven by raw financial power, in Spanish “capitalismo salvaje, but finance is powerless against nature:
“Only when the last tree has died, and the last river has
been poisoned, and the last fish has been caught, will
we realise that we cannot eat money.”
By implementing changes to the economic system incorporating principles of justice we still can produce a better world while preventing climate disaster. Our goal should be climate justice.
“Another world is not only possible;
it is, in fact, essential.”
Tony Phillips
Argentine committee for the support for the CMPCC,
Buenos Aires, Argentina
Thursday April 8th 2010
[1] Examples include transfer pricing, offshore listings, and other mechanisms for international distribution of profits and tax avoidance.
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