A wasted opportunity
Sunday, November 23, 2008
It will be a wasted opportunity, if decision makers deal with the current global market failure, the financial crisis, while ignoring the last and still largely unaddressed global market failure, the climate change crisis.
Obviously, reform of financial institutions is critical to restoring the strength and reputation of financial markets – but that focus is too narrow and, in any event, institutional reform will not happen suddenly. The original Bretton Woods deliberations took two years of preparation, and then weeks of concentrated negotiation. Most important, those negotiations took account of failures in the market system as a whole, not simply in the institutions which then governed it.
One of the critical system-wide failures now is that the global economy and governments have not put a price on carbon. Any serious systemic reform needs to price and internalize environmental costs into economic decision making, harnessing the positive forces of the market economy to address climate change and related issues including water management, and biodiversity.
The Stern Report of October 2006, estimates climate change imperils 20 % of global GDP, an economic cost greater than the two world wars and the great depression combined. Stern estimates that ameliorative steps to sufficiently reduce carbon would cost about 2% of GDP. Stern’s analysis has been largely validated by the 2007 Intergovernmental Panel on Climate Change report.
Ask yourself: Is the science of climate change less valid today as it was before the financial crisis?
Have the economic and planetary risks of climate change been reduced by the financial crisis? How could we claim to be serious about basic reform if we ignore an issue which puts at risk a full fifth of our global GDP?
As we rebuild the global economy out of this period of recession, let’s use the opportunity to build the institutional framework for sustainable prosperity. Governments must partner with the private sector to not only fix this financial mess, but to also address climate change.
In the short term, Developed countries can focus stimulus packages on greening their domestic economies through investments in green retrofit, design, infrastructure, energy and technology.
There is an urgent need for the wealthy world to help the poor world increase its capacity for sustainable development. The challenge is to help provide developing economies with the scientific, educational or financial capacity to leapfrog from rudimentary energy and environmental systems to sustainable ones.
In the medium term, it is essential that we put a meaningful global price on carbon -- the most effective way to spur the transition to a low-carbon future economy. The next 13 months, as the post-2012 climate rules are crafted, is a crucial period for making this happen.
Arguably, two weaknesses of capitalism are distribution and dealing with externalities, particularly environmental ones. After the Great Depression, Roosevelt’s new deal sought to address distribution issues, by helping the economically disadvantaged in one country, the USA. In this globalized 21st Century, “New Deals” need to address both, and a way to start is to deliberately and consistently address the 3Es together: energy, the economy, and the environment.
Discussions on the reform of global financial governance could be an important opportunity to reform global environmental governance. As leaders determine the best way forward on financial governance, on issues such as Basel II and the IMF, they can determine the best approaches for environmental governance, such as whether to strengthen the U.N. Environment Programme or to create a new World Environment Organization.
The World Economic Forum is well positioned to help advance and shape this opportunity. I was inspired by the green focus of the agendas at both the 2008 Davos and 2007 Dalian conferences. In both cases, the WEF had engaged the world’s top economic, financial, and political thinkers in the environmental debate.
Engaging both economic and environmental leaders simultaneously is essential because issues like carbon pricing and water management are as economic as they are environmental. Climate change resulted in part from keeping economic decision makers in one room, and environmental thinkers in another. As the January 2009 Davos Conference approaches, we have a responsibility not to repeat the same mistake.
If we simply relegate the environment to the back burner it will show that we’ve really learned very little, indeed. That would be more than simply an inconvenient truth; it would be an inexcusable one.
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