Climate economic basics

The inflation crisis works against climate investments. Inflation is particularly a problem because debt levels are too high, and climate investments require increased debt. This raises e.g. the questions of:

• When will the debt risk become too big?
• When is it prudent to raise credit for some purposes (e.g. climate) and not for others?
• Is this manageable at all in real life? Isn't everything climate related in the end?

Climate and the environment relies on economy

The above are questions with no clear answers in particular in traditional economic theory. But because credit growth has dropped as a result of the inflation fight, it has boosted the debate on whether new ways of thinking economics are necessary. This thinking must ensure that climate action remains a priority no matter how the financial markets evolve. This debate can jump if the ECB decides to separate climate financing from general monetary policy.

Fundamentally climate economy adresses an often overlooked aspect. Climate debate and -policy is predominantly about the supply side of the equation, i.e. how to produce energy in a climate friendly way. But the energy usage per capita is only adressed to a limited extent. Traditional economy is generally built on the assumption that resources and raw materials er unlimited. There is however a clear correlation between economic activity and climate stress per capita.

The problem is thus without imminent effect on the financial markets. But in the long run it can open to a new interpretation of e.g. the purpose of central banks. And here it will have an imminent and direct effect on financial markets, as any sign of increased liquidity does.

The needs have been a long time coming

Adam Smith in the 1700's, John Stuart Mill in the 1800's and John Keynes in the 1900's all predicted that humanity would move out of the phase of economic growth and tangible strive. This would happen, they foresaw, once basic needs were met and a reasonable lifestyle for everyone was ensured.

• In 1930 Keynes e.g. wrote “Time is not yet rife - for at least another 100 years, we must pretend to ourselves and others that beautiful is ugly, and ugly is beautiful, for the ugly is useful, and the beautiful is not. Greed and manipulation must be our gods for some time still. For only they can lead us through the tunnel of economic necessity in to the daylight”.
• Keynes had no way of predicting the timing or the extent of the current climate crisis. Neither could he in 1930 predict the population growth or the technological revolution that has produced todays living standard and use of resources, that has all led to our current ecological overload. But Keynes implicitly said, that the effect hereof should be measured and calculated as a natural element of economic thinking.

Therefore, many people have long argued that the thoughts of Keynes should come true. This means that the economic growth paradigm should be fundamentally changed, re-defined. When OECD e.g. assesses that 3% annual growth is enough to avoid a debt collapse, this equals a doubling in 24 years. With increased economic growth so does humans' ecological footprint inevitable also increase.

The Club of Rome' report "Limits to Growth" from 1972 analysed the relations between population, technology, industrial capital, farming and environmental quality. As countries prosper, the consume more resources. But the resources are limited and often finite. An economy whose financial stability is relying on constant stimulation of demand, not only destroys the plants' limited resource base, it also undermines its own financial and political stability.

There is an absolute limit ...

If global warming e.g. should be limited to 1.5 degrees or a little above this, then according to the IPCC there is only space for another 500-700 billion tonnes of CO2 in the atmosphere. This limit (”the CO2 budget”) is thus the limit, for what the world can be allowed to emit until 2050. However, according to the current plans for fossile energy usage, the CO2 budget will have been exhausted at the start of the 2030's.

It is therefore a fundamental problem with the way we think and calculate economy today, that we do not include depreciations of the "externalities", i.e. climate and environment. The depreciation of externalities equals depreciations on assets in an annual account, but with the decisive difference, that his asset is not renewable once it is written off. It can neither be substituted. How do you measure and price so limited a resource? How are economic calculations even possible?

To measure is necessary for making comparisons. Comparing is our way of determining whether something is desirable or not. The world and our values are relative: Everything we measure, affect what we do, and what we do, affects what we measure.

... that is not addressed in traditional economics

Economic activity is currently expressed in GDP.

• Paradoxically, the GDP definition was invented (per request) by the one of the foremost wealth inequality economists, Simon Kuznets. Kuznets himself saw the flaws on GDP calculations and warned, that GDP only adresses flows of money through the system, not the reserves or the absolute levels.
  • GDP does e.g. not distinguish whether increases in consumption possibilities are created or if there is a cleanup after pollution, i.e. counterproductive activities.
• GDP only measure the type of manufacturing that is within the limits of either the market economy or the public systems. It only measures what can be translated in to money.
  • If a neighbour e.g. helps you fix a fence or if a parent cares for his/her own child, none of these services are registered as a contribution to GDP. But if others are paid to do this, it is included, even if the total wealth is the same.
• GDP thus only expresses the economic activity that can be measured and thus taxed.
  • GDP is thus a good measure for creditbase on a sovereign level. It expresses the potential for recovering debt.
  • But GDP is insufficient as a measure for the wealth or well being of the population.
    • According to John F. Kennedy ”The GDP does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile”.
  • In wealth terms GDP also sees the wealthy citizens' dollar for the same value, as that of the poor citizens' dollar.
    • It therefore does not adjust for the marginal utility, that an extra dollar has for a poor vs. a wealthy citizen.
    • Purchasing Power Parity can partially compensate for the imbalance, but cannot outweigh it in a simple manner.
  • Among suggestions for socially more fair ways to measure wealth, Herman Daly’s og John Cobbs’ GPI (Genuine Progress Indicator) from 1989 should be included.
    • GPI includes aspects such as costs of crime, costs from ozone depletion and costs from erosion of resources.
      • According to GPI wealth has not grown since the early 1970s.
    • GPI is a relatively complex math based on a number of normative and arbitrary prerequisites (how do you e.g. measure well being)? In real life the definition is thus not well suited for comparisons, and its practical worth is thus limited.

But we have committed to change our mindset

There are thus no simple alternatives to GDP. It is however necessary to supplement or change the existing ways to measure economy in a more ESG oriented direction, for ...

• The Toronto-conference from 1998 encouraged ...
• ... and The UN climate convention from 1992 decided that differentiated responsibility should apply. This means, that the countries with necessary knowledge and economy should bare the biggest responsibility for climate change.
• The Kyoto protocol from 1997 (COP3) cemented the principle ("Annex I-countries"), and 
• finally the Paris accord from COP21 in 2015 refers in several places to the principle of justice. This is defined as that some peoples have enjoyed extra advantages from the usage of cheap fossile energy. These advantages have affected the climate changes for other peoples particularly hard.