Unlikely Alliance

canada            I read a quick article in Bloomberg Businessweek last week that detailed an unlikely alliance between tar sands producers and environmentalists to put a pollution tax on the dirty, heavy crude coming out of Alberta.  Yes, that is correct.  Tar sands producers are actually lobbying for a carbon tax or cap-and-trade system that would help to clean up their operations. In British Columbia, a province that enacted a carbon tax, families are paying an average annual premium of $376 and have reduced their per capita emissions 10%.  The producer’s biggest fears are to be viewed as “too polluting” by other nations, resulting in no market for their exports.  America’s opposition to the Keystone XL pipeline highlights this fear. Unless the tar sands can change their appearance, it seems that the world would be okay without the product.  An oil industry spokesman even said that “If your country looks at Canada and says your energy exports are too carbon intensive, then it becomes and economic competitiveness issue.”

tarsands            Standing in the way of this unlikely alliance and subsequent carbon pricing is the Prime Minister Stephen Harper.  Harper has traditionally emphasized business and job creation over environmental issues and is responsible for pulling Canada out of the Kyoto Protocol, the only nation to do so.  Failure to embrace cleaner regulations on the tar sands may soon become an environmental and economic problem for The Great White North.

tar sands movers            The winds of change are blowing, and nations are figuring out how to monetize carbon.  If Canada can enact sensible regulation that appeases both oil producers and environmentalists, then it can be a leader in the carbon markets.  If it fights the winds of change, then it risks being left behind by the rest of the world.  The simple answer is to put a price on carbon and use the proceeds to invest in clean technology developments.

How Much is Climate Change Costing Us?

“One degree Celsius rise in temperature is associated with 10% productivity loss in farming. For us, it means losing about four million metric tonnes of food grain, amounting to about US$ 2.5 billion. That is about 2% of our GDP. Adding up the damages to property and other losses, we are faced with a total loss of about 3-4% of GDP. Without these losses, we could have easily secured much higher growth.”

   -Sheikh Hasina, Prime Minister of Bangladesh

Most people think the biggest costs associated with climate change are in trying to avoid it by reducing carbon emissions.  However, a new study (Climate Vulnerability Monitor 2nd Ed) by DARA concludes that climate change is already costing us $1.2 trillion in foregone prosperity.  Yes, that is trillion with a T.  This is roughly 1.6% of global GDP.  By 2030 the effects of climate change could amount to 3.2% of global GDP with most of the pain being felt by developing nations.  Here are some more stats:

• Climate change and a carbon-intensive economy considered a leading global cause of death today, responsible for 5 million deaths each year – 400,000 due to hunger and communicable diseases aggravated by climate change and 4.5 million carbon economy deaths due mainly to air pollution

• Losses for lower-income countries are already extreme: 11% of GDP on average for Least Developed Countries already by 2030

• Major economies are heavily hit: in less than 20 years China will incur the greatest share of all losses at over 1.2 trillion dollars; the US economy will be held back by more 2% of GDP; India, over 5% of its GDP

However, the future doesn’t have to be so doom and gloom.  The report concludes that much of these costs can be avoided by emissions reduction investments of just 0.5% of GDP and $150 billion per year in support to mitigate the effects in the countries most vulnerable.

The Balance of Power

Few things effect international relations more than the balance of power.  Whether it be water or oil, the first societies to harness the potential of these commodities enjoy the creation of wealth and goods such as cropland in the case of water and industry in the case of oil.  Eventually each sector is going to grow and the demand for the input will outgrow the supply, leading to price hikes that make that commodity even more desired.  Problems exist when the source of these commodities are located outside of that nations borders.  The balance of power is then transferred from the first-mover user to the upstream producer of that commodity.  This is where it gets interesting.  The choice then becomes whether to use soft power (such as diplomacy, aid, or economic development) to gain influence over the producer or hard power (military action, sanctions) to force them to act.  Only by reducing demand for the commodity in question can the consumer nation wrestle back control from the producer nation.  This could include finding a substitute, developing new technology, or learning to use that resource more efficiently.  In the case of water, there is no substitute.  Downstream nations must learn to make the most out of every drop that they have.  This includes studying what crops to plant domestically and supplementing others through trade.  New technology such as desalination plants could also help secure access to clean water, but it will take an economic toll.  In the case of oil, there are several substitutes such as biofuel, natural gas, and plug-in hybrid cars, but while we further explore these technologies, squeezing the most out of every drop seems to make the most financial sense.

Water, Water, Everywhere . . .

 “Many of the wars this century were about oil, but those of the next century will be over water.”

Ismail Serageldin
Chairman of the World Commission for Water in the 21st Century and senior World Bank official

While most of my writing thus far has been focused on sustainability and the economy, I recently read a great book by Steven Soloman called Water: The Epic Struggle for Wealth, Power, and Civilization that shows that the scarcity of clean, potable, freshwater is going to be one of the greatest challenges of the 21st century and promises to redefine international relations between the Haves and the Have-Nots.  Historically there has been a link between access to freshwater and population growth, but over the past hundred years the overuse and poor management of this vital resource has left many natural aquifers in very bad condition.  The heart of the water epidemic is the fact every person, animal, and plant requires water to live.  Up until now, there has been enough freshwater to meet the needs of the population.  However, new evidence shows that humans may now be using water faster than it can be replenished into the aquifers.  The alarming dark side of this humanitarian divide include over 1.1 billion people – almost one-fifth of all humanity – who lack access to at least a gallon per day of safe water to drink.  Some 2.6 billion – two out of every five people on Earth – are sanitary Have-Nots lacking the additional five gallons needed daily for rudimentary sanitation and hygiene.  Far few still achieve the minimum threshold of 13 gallons per day for basic domestic health and well-being, including water for bathing and cooking.[1]  There are also over 3.3 million deaths every year from water-related heath problems such as diarrhea, dysentery, malaria, dengue fever, schistosomiasis, and cholera.  Not surprisingly, lack of freshwater runs hand in hand with insufficient food production and malnutrition since agriculture is such a water intense industry.  Persistent water shortages threaten governments both on the domestic front from social unrest as well as internationally through territory disputes, military threats, and trade patterns. 

Oil can be replaced by a growing number of alternatives including renewable energy but there is no alternative to water.  In your quest for sustainable living, please remember that water is the foundation of life and for the first time in history, in danger of leaving some inhabited regions dry.  This is a problem on a massive scale, but it can also be navigated effectively by understanding the issue and the reasons for it.  Hopefully the existential threat of water scarcity is enough to force nations into dialogue over their resources as well as how populations can be more efficient. 

[1] Solomon, Steven.  Water: The Epic Struggle for Wealth, Power, and Civilization.  New York: Harper Perennial, 2011.  Print. p. 370.

European’s Guide to the EU

What EU country do you think is the hardest working?  What about the most corrupt?  On May 29th, the Pew Research Center did a study on the attitudes among the populations in various countries in the EU.  I found this chart absolutely fascinating!  While the chart speaks for itself, the results (5 of 8 countries believe their government is the most corrupt) tell me that the population is losing trust in their leaders.  Not a good thing at such a volatile moment.  Let me know what you think:

From OPEC to CHAOS: How Petro-Dollars Fueled the Arab Spring

Alright, let’s get back to the economics associated with climate change here.  More specifically, the economics of oil and how the accumulation of petro-dollars by oil-producing nations (almost in some cases, did in others) bring about their downfall.  Most everyone remembers the “Arab Spring” that began in December 2010 when a 26-year-old street vendor named Mohamed Bouazizi set himself on fire to protest his continued harassment by the authorities.  As the protest spread among the arab world, the grievances highlighted the lack of opportunity for the youth, state corruption, economic decline, human rights violations, censorship, and other wrong doings on behalf of the ruling party or dictators of these countries .  By March 2011, protest had erupted in 17 countries in the region. 

(Black = Government Overthrown; Dark Blue = Sustained Civil Disorder and Governmental Changes; Light Blue = Protests and Governmental Changes; Red = Major Protests; Beige = Minor Protests)

Now we know the reasons for the protests and the scale of the uprisings, lets take a look behind the scenes at the conditions that set the stage for this upheaval. 

Current Account
In Economics, the Current Account is the broadest accounting of a country’s trade and investment with the rest of the world.  The Current Account measures 4 areas of trade – Merchandise Trade (goods), Services, Investment Income Flows, and Unilateral Transfers such as foreign aid or remittances from workers sending money back home.  The Current Account provides a snapshot on the financial health of the country, and of how much the country is importing and exporting of each area measured.  While there is no direct impact on the stock or bond markets, the Current Account does show how much money is coming in (surplus) or leaving (deficit).  Consistent and increasing deficits could impact the value of the dollar if creditor nations begin to doubt our ability to pay back the borrowing.  If other countries balk at our debt levels, the dollar will depreciate.  Below is a graph of our current account since 1980.

Now when you think of the America’s current account deficit, you probably think of China’s account surplus.  Images of container ships filled with cheap, disposable goods probably came to mind.  But in fact, the largest creditors of America’s current account deficit have been oil-producing nations.  I was recently brushing up on some economic terminology and this theory was confirmed by my Macroeconomics textbook from 2008.  Amazing that the problem was identifiable even back then.  Recently, The Economist published an article called Petrodollar Profusion that contained the graph outlining the current account surpluses as a percentage of GDP for these oil-producing countries.

So what is the problem?  The problem is that the oil exporting countries have been hoarding these dollars instead of spending them.  They could either spend them on imported goods from oil importing countries (machinery from USA for example) or they could put them to use by investing in their own economies and building out infrastructure, improving education, healthcare, housing, or agriculture, thereby creating jobs and building a middle class.  Spending on imports from other countries would grease the wheels of the global economy and balance out the payments.  After all, that is what keeps the world trading.  Instead, most of this wealth was transferred to sovereign wealth funds who further line the pockets of the ruling class.  For more info on sovereign wealth funds and the rise of state capitalism, please see the book The End of the Free Market by Ian Bremmer.  The point is that building the middle class was not what they chose to do, and the protests continued.  

One of the most prominent cries coming out the protests was the lack of opportunities for the young population.  In many of these countries there is a young (age 15-24) and growing population but a disproportionate lack of jobs for them.  Throughout the Middle East, the unemployment has historically hovered around 12% overall, but the unemployment rate for the youth is averaging 27%.  Aside from the high unemployment rate, there is the mysterious fact that there is an inverse relationship between education level and employment.  This means that the most highly educated young people are also the most likely to be unemployed.  Of those with jobs, many find themselves working in the public sector instead of the private sector where market forces would spur innovation and growth and thus create more jobs.  Across the region, the labor force participation rate is at 48%, compare that to 63.6% in the US, our lowest level since 1981.  

Over a year later we have seen significant changes in the mid-east (except Syria where the fighting continues) but only time will tell what results the arab spring ushered in.  One thing is certain, the oil keeps pumping and the money keeps flowing.

I know it is horrible to think about, but every time we fill up at the pump, we are sending our dollars overseas to strengthen these regimes and prolong the behavior that has kept them in power for so long.  It is a brutal reality, but it is the world we live in.  Until we develop a clean and renewable source of power, our money is going to chase the fossil fuels that power our lives.  But when you follow the money to the source, it isn’t a very pretty picture at all.

In His Own Words . . .

Near the polar cap, waterways are opening that we could not have imagined a few years ago, rewriting the geopolitical map of the world.  Rising sea levels could lead to mass migrations similar to what we have seen in Pakistan’s recent flooding.  Climate shifts could drastically reduce the arable land [available that is] needed to feed a burgeoning population as we have seen in parts of Africa.  As glaciers melt and shrink at a faster rate, crucial water supplies may diminish further in parts of Asia.  This impending scarcity of resources compounded by an influx of refugees if coastal lands disappear not only could produce a humanitarian crisis, but also could generate conditions that could lead to failed states and make populations more vulnerable to radicalization.  These troubling challenges highlight the systemic implications – and multiple-order effects – inherent in energy security and climate change.

Admiral Mike Mullen
Chairman of the Joint Chiefs of Staff
Joint Forces Quarterly, January 2011