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2015 Farsight Conservation

The Lend is Nigh!

October 2, 2016

A tale of two crunches - credit and carbon

The parallels are striking, the differences petrifying

 

 

It is rare that a film does a good job of portraying a book but the 2015 release of John Lewis's The Big Short did just that, providing an insight into the pushers and players behind the 2007 financial crisis.

 

Behind all the jargon and financial paraphernalia, the cause of the crisis was simple. Individuals over consumed, primarily via mortgages, in the present and were unable to meet the obligations this created in the future. That is what credit enables; one to have money today and pay for it in the future, in effect shifting consumption from the future to today. The bad news however, is that when the future comes, someone has to pay. Factors running up to the financial crisis created an environment in which individuals were able to vastly over consume in the present, at levels which they would never be able to pay back in the future.

 

As any good scout will know, the fire triangle states a fire needs fuel, heat and an oxidizing agent – the financial crisis needed greed, slack regulation and inertia. The greed came from a well publicised motley crew of corporations and, often a neglected point, also the individuals who over consumed. Slack regulation and inertia were driven by incremental government policy and regulator action (or a lack of). The Big Short illustrates the government and regulator inertia brilliantly, as data filtered through showing the tip of a looming iceberg, the head honchos believing in their own brilliance, ignored it.

 

The parallels between the credit crunch and the growing carbon crunch are striking. Look no further than the behaviour of Volkswagen and the wider car industry for the presence of greed. Combined with the track record of the petrochemical industry since the 1960s – and the resultant deniers still trying to flog a very long, very dead horse – the greed is piled miles high. Each individual going on their next flight, buying that bigger car or protesting the eyesore wind turbine is also stoking the fire.

Again, for slack regulation Volkswagen is a case in point. The UK, French and German governments have lobbied to maintain loopholes in emissions testing whilst maintaining a steady flow of hot air about the emissions scandal, the net result of which has been, nothing. And like the extremely well paid corporate executives who drove the financial crisis, former Volkswagen CEO Martin Winterkorn will face zero punishment or prosecution.

 

Inertia has maintained the route on which carbon emissions are travelling with very little being done to change the direction, despite not just the tip of the iceberg being visible in data, but the titanic ploughing into it. This will be clear to anyone who takes a fleeting glance at the now monthly headlines about the month just gone being significantly hotter than the same month last year – 2016 is on an unbeaten hot streak. Much like 2015 was. And 2014.

Financial credit can be beneficial if maintained at sustainable levels, it provides a mechanism for cash piles to be put to good use. Carbon emissions are the same; the ascent of fossil fuels has had some huge positive impacts on the world. But much like credit in the run up to 2007, carbon emissions are running at a massively unsustainable level, the planet can only absorb a certain amount of carbon via the carbon cycle.

 

Those who argue that carbon capture or geo-engineering are the answer should be viewed with the same scorn as anyone who was selling quantitative easing and negative rates as a solution before the credit crunch would have been. Only broken systems need to be fixed.

 

Two stark differences between the crunches are evident. Firstly, carbon dioxide can stay in the atmosphere for hundreds of years, meaning the future burden created is far larger and longer lasting. Our children and their children will pick up the tab for our over consumption today.

Secondly, the direct consequences of the credit crunch were dealt to mankind. With the growing carbon crunch no such species harbouring is present, our fellow earth inhabitants will feel the crunch at the same, or more likely to an even greater extent, than humans. This will multiply the implications for us all.

 

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