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Twin Crises: Economy and Climate Are the Opportunity of Our Times

| Friday March 6th, 2009 | 0 Comments

lunapic-123633474665085%283%29.jpg The twin economic-climate change crises are just that–intertwined–and they present societies worldwide with the greatest opportunity, as well as challenge, since the Great Depression, according to UK economist Nicholas Stern in a McKinsey Quarterly video interview.
Just as there are those strongly advocating the idea that the US can and should address the economic crisis and climate change in an integrated fashion, there are those strongly arguing that the government should tackle the economic crisis first and then address climate change.
Separating and dealing with the two crises individually is misleading and misses, or avoids, the point entirely, Stern asserted in the McKinsey interview. “To take the opportunities of the kind I described, there are a number of things that we have to overcome. One is the idea that the economic crisis takes precedence over the climate crisis. That’s just confusion. That just misses the point about how we can put our policies on these two things together in a very constructive way.
“So we can be much more energy efficient. We can insulate our homes and get unemployed construction workers back into work. Those are the kinds of ways in which we can put things together. So to say that first one and then the other is just analytical confusion. We have to look at what’s involved in doing both and see and recognize how one can support the other.”


2009: A Crucial Year
In the most comprehensive study of the effects of climate change and global warming on the world economy to date, Stern concluded that one percent of global gross domestic product needs to be invested to avoid the worst effects of climate change.
Failing to do so could risk global GDP falling up to 20 percent below the level it might otherwise be, he wrote in his “Stern Review on the Economics of Climate Change,” which was commissioned by then UK Chancellor of the Exchequer Gordon Brown
Global economic and climate change crises are already upon us, and world leaders and societies need to take on the challenge of addressing them both this year, Stern urged in the interview with McKinsey’s Matt Hirschland.
“Two thousand and nine is a crucially important year. We are in the middle, I hope it’s the middle, of one of the worst economic crises the world has seen – certainly the worst since the 1930s. We have to have a big fiscal stimulus package to pull us out of this. Monetary policy is moving in the right direction, but there’s a limit to what monetary policy can do. This needs a stimulus package probably around 4 percent of world GDP – around $2 trillion, taking all countries together.
“The second thing we must have in 2009 is a strong international agreement to deal with an even bigger crisis, which is the climate crisis. That, too, means that we’re under great pressure on time. The longer we delay, the more the greenhouse gases build up, the more difficult the starting point for action becomes.

“So this is a real hurry. Perhaps even faster moves are required on the economic crisis than the climate crisis. In other words, we might have two or three months to work out our response to the economic crisis, and six or nine months to work out our response to climate crisis. But these are both in the here and now – in 2009.”

Connecting the Economic Crisis and Climate Change
Making his point that the economic and climate crises are indeed linked, and that responses to them should be linked as well, Stern looked back at the causes of the latest liquidity-fed asset bubble.
“I think that they do come together. They come together for a number of reasons. They come together because we should be understanding how we got ourselves into this difficulty in the economic crisis. It was by ignoring risk. It was by not understanding what was going on. It was by postponing action.
Drawing on a now oft-repeated adage, the longer risks are ignored and actions to address them postponed, the bigger the problems grow and the more costly it becomes to address them, Stern said.

“That’s even more true for climate change. And we’ve got to learn that lesson. We should also learn another lesson from the past, of economic fluctuation and economic growth, and that is that when we reflate the economy, we should do it in a way that lays foundation for future growth, that brings on the supply side.”

Key to reflating economies, government leaders need to set the basis for real, sustainable growth and economic activity as opposed to the type of liquidity-fed and leveraged debt-fueled reflation of value of assets on paper, he urged.
“How did we reflate the economy after the bust of the dot-com? We lowered interest rates, had a big asset price bubble, and demand increased on the back of inflated house prices. That’s not sustainable.
Stern concludes the interview on an optimistic note. “We need to have a reflationary package, which lays the foundation for future growth. And if we look into the future, it’s actually quite
exciting.

“Because what we see is the biggest technological opportunity that we’ve had for a very long time: as big as the railways, as big as electricity, as big as the motorcar, and, most recently, information technology. It’s the opportunity to go for low-carbon growth.”


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