Viewpoint from November 11th, 2008

Opportunity or threat? The financial crisis and international climate policy

from Reimund Schwarze*

Anyone following the discussions on the financial crisis these days will come up against a peculiar contradiction concerning climate change: Whereas German Foreign Minister Frank-Walter Steinmeier sees the shock waves on the world stock markets as a bitter setback for international climate protection, his fellow party member, Environment Minister Sigmar Gabriel, is talking about new opportunities for investment in climate protection and energy-efficiency technologies. Sir Nicholas Stern, author of the highly esteemed report on the economics of climate change, agrees: "The current problems support the trend towards investments in climate protection. They highlight the dangers of global risks and the advantages of international cooperation". So does the financial crisis and the looming global economic crisis support or endanger international efforts to protect the climate?

United Nations Framework Convention on Climate Change, Montreal Canada (November 28th - December 9th, 2005)

United Nations Framework Convention on Climate Change: Eleventh session of the Conference of the Parties to the Climate Change Convention in Montreal, Canada from November 28th to December 9th, 2005
Photo courtesy: IISD/Earth Negotiations Bulletin

Coal-fired power stations account for a significant proportion of carbon dioxide emissions.

Coal-fired power stations account for a significant proportion of carbon dioxide emissions.
Photo: André Künzelmann/UFZ

This question has an economic and a political core. From a political point of view the answer is clear: a euro can be spent only once. Money that countries are spending today to shore up their financial systems cannot simultaneously be invested in climate policy endeavours.

This is particularly true in relation to developing countries, which will play an important role in the up-coming negotiations for a follow-up agreement to the expiring Kyoto Protocol in Copenhagen next year, and will make far-reaching demands of the industrialised nations. The plan this time is for the talks in the Danish capital to seek longer-term solutions - ones that will last until 2020 at least. Without the collaboration of the developing nations, such an agreement will not be meaningful or enforceable. By 2020 their emissions will have overtaken those of the industrialised nations. China is already the world’s greatest emitter of greenhouse gases in absolute terms, although its per-capita emissions are still far below those of the USA and Europe.

The developing countries are already arguing that the current financial crisis and impending global economic crisis is restricting their ability to meet their financial obligations to the United Nations. Seven countries, most of them in Africa, find themselves (have in fact found themselves for a long time) unable to pay their regular contributions to the UN. The Organisation of African Unity (OAU) is demanding that an exception be made for these states, because the financial crisis represents a force for which the states are not responsible - admissible grounds for dispensation under UN law.

The financial crisis also gives the USA, the UNO’s main financial backer to the tune of USD 440 million per year, an argument to justify its notorious late payments. The Bush administration has in the immediate aftermath of the financial crisis announced a freeze on payments as a precaution and now president-elect Barack Obama, on whom so many hopes for a change in U.S. politics are pinned, has publicly announced on his campaign trail that he will probably have to lower his sights regarding his ambitious energy and climate programmes in order to absorb the unexpected burdens on the US state budget resulting from the financial crisis. Experts on the international climate negotiations, such as the man in charge of the Bali negotiations, Yvo de Boer, are therefore talking about ‘risks’ for a climate agreement in Copenhagen. China’s chief negotiator, Yu Qingtai, is also ‘pessimistic’ about an agreement being reached next year.

From an economic point of view the situation is more complicated. If the financial crisis grips the global economy, as seems likely at present, then a fairly long period of recession or even depression can be expected. Initially, that would mean lower emissions of greenhouse gases, which would therefore take pressure off the atmosphere. However, the associated climate impacts will be limited because greenhouse gases are very persistent. When it comes to climate change we are actually battling with over a century’s worth of emissions. We cannot therefore expect a global economic crisis to lead to any change in global temperature trends. Past recessions have not changed the current trend of greenhouse gas accumulation in the atmosphere. Without a fundamental reversal of consumption behaviour, in other words, without a change to the political and economic context of energy consumption, no lasting changes can be expected in the area of climate change. A follow-up agreement to Kyoto is therefore the key and is indispensable.

It is difficult to say what long-term impacts the current financial crisis will have on energy markets. Nicolas Stern assumes that energy prices, especially oil prices, will remain high. This is unlikely - the first reaction to the financial crisis was a dramatic fall in oil prices. Energy at the pumps is therefore likely to become cheaper during the crisis, and will become more expensive again only once we have come out the other side. Cheap oil and - associated with this - cheap gas will make the use of climate-damaging coal less attractive. That is an advantage for climate protection, especially since there was a risk that the recent extreme prices for oil and gas would cause countries like Japan to return to coal.

On the other hand, falling oil prices make investments in energy efficiency and renewables economically unattractive - that would be a serious setback. This is why the EU’s call to stick to the energy and climate policy course it has embarked on despite the financial crisis is so important. It stabilises the renewables markets and the trade in emissions certificates. The question will be whether and to what extent the EU perseveres with this policy if other countries do not follow suit in Copenhagen.

Everything seems to indicate that the faster we can pull out of the financial crisis, the sooner we can achieve sustainable progress in climate protection. Does this mean we should just grit our teeth and get it over with? No, it doesn’t!

The financial crisis is at its core a crisis of the perpetual-growth model (on the US property market in this case). It shows how vulnerable our capitalist system is to a failure of the ‘logic of perpetual growth’ and how carefully the transition to the post-fossil fuel age will have to be managed. It will succeed only if it takes the form of ‘growth without environmental consumption’. And the current crisis shows what a disastrous role unregulated trade in financial market products can play. There is a lesson here for emissions trading.

Trading in ‘hot air’ and ‘hypothetical emission reductions’ must be allowed only under strict controls. The Kyoto Protocol was rigorous in providing for supervision of projects in developing countries, but negligent when it came to trade between states. We can count ourselves lucky that the market has not yet been crippled by purchases of surplus emission rights not backed by efforts in Russia or the other states of the former Soviet Union. For this reason we need strict rules in future that prevent growth processes from turning into incalculable risks and negative growth processes from becoming a source of unjust profit. This once again points to the central importance of the negotiations in Copenhagen next year.

It is an achievement that emissions of carbon dioxide now have a price, which has led to a rethinking of energy policy worldwide. Unfortunately, at the end of the day, developments on the financial market are lowering the prospects of continuing along this path.

*Professor Reimund Schwarze is an expert for international climate policy at the Helmholtz Centre for Environmental Research (UFZ) in Leipzig, Germany, and lectures Environmental Economics at the University Innsbruck, Austria.