Strategy for Losers

2011-10-20T05:40:00.001-07:00

Make Up Your Own Mind!

This list of resources for informing yourself about the crisis includes simple 3 minute youtube videos and complicated longer pieces - it includes many different points of view that you are not so likely to see on TV or in the mainstream press. So whether you want a short explanation or you want to start a deep process of study taking years - start here!

On why there is so much debt - 3 minute Positive Money Campaign Video
http://www.youtube.com/watch?v=CrKV6bfqOck&feature=player_embedded

The Fatal Flaws at the Heart of the Banking System - 49 minute video
http://www.youtube.com/watch?v=xGkAFDKbBzo&feature=player_detailpage

Other Positive Money Videos
http://www.youtube.com/user/PositiveMoneyUK#g/u

Money as Debt - 47 minute video by Paul Grignon
http://video.google.com/videoplay?docid=-2550156453790090544&ei=mLX3SaiyIqeg-AGWhq2ECw&q=money+as+debt+full (or do a google search! )

The Largest Financial Bubble in Human History about to Burst - 6 minute video with Nicole Foss
http://www.youtube.com/watch?v=kYXA9XHFUCU&feature=player_embedded

Internet video interview about the aims of the Occupy Movement and the efforts of the crooks in the finance industry to de-criminalise fraud in their dealings
http://michael-hudson.com/2011/10/occupy-wall-st-systemic-change-please/ -

Max Keiser Report on Financial War and Fraud waged against the public and the failure of politicians
http://www.youtube.com/watch?v=NzujA6hP6IE&feature=player_embedded#

Money Theory - A Primer on the issues - Brian Davey
http://www.feasta.org/2011/07/05/money-theory-%E2%80%93-a-primer-on-the-issues/

Audio recording of money theory talk for Nottingham Cafe Economique - MPEG audio streams
http://www.4shared.com/account/dir/_EEKUqPl/_online.html#dir=103362749

Other web resources and websites - including those focusing on the energy crisis (people cannot service their debts and pay their fuel bills too - the two crises are connected...)

Nottingham Cafe Economique - Facebook http://www.facebook.com/groups/131845286897949/
http://www.positivemoney.org.uk/ - relatively easy to follow
http://maxkeiser.com/
http://www.nakedcapitalism.com/
http://michael-hudson.com/
http://theautomaticearth.blogspot.com/
http://www.feasta.org
http://www.neweconomics.org/programmes/finance-business
http://www.energybulletin.net/

Articles

On the Cusp of Collapse: Complexity, Energy and the Globalised Economy - David Korowicz

http://www.energybulletin.net/stories/2011-10-10/cusp-collapse-complexity-energy-globalised-economy

Question and answer with Richard Heinberg who argues the Occupy Movement is the "End of Growth Uprising" caused by energy and oil depletion - and calls for community resilience
http://www.blueoregon.com/2011/10/q-post-carbon-institutes-richard-heinberg/

Preparing communities for energy descent and the end of growth - blog of Rob Hopkins the founder of the Transition Movement
http://transitionculture.org/

Books

David Orrell - "Economyths. Ten Ways that Economics Gets it Wrong" Icon Books 2010 - a relatively easy read on why so much of economics is rubbish

Philip B Smith and Manfred Max-Neef "Economics Unmasked. From power and greed to compassion and the common good" Green Books 2011 - outlines the foundations of a new economics where justice, human dignity and compassion are the guiding values.

Steve Keen - "Debunking Economics. The naked emperor dethroned" 2nd edition, Zed Books 2011 - a heavyweight text - should help economics students make the life of their teachers miserable - puts a wrecking ball to the garbage in standard economic textbooks.

Donella Meadows, Jorgen Randers Dennis Meadows "Limits to Growth - The 30 Year Update" Earthscan 2005 - shows why growth cannot continue on a finite planet - which is bad news for the banks!

Yves Smith - "Econned - How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism" Palgave Macmillan 2010 - Heavyweight text - explains the explosion of fraud and criminality in the finance sector and the failure of politicians to get to grips with it

Nicholas Shaxon - "Treasure Islands" Bodley Head, 2011 - About Tax havens and secrecy jurisdictions - e.g. the Cayman Island where you can go to prison just for asking for banking secrets.

John Bellamy Foster - The Ecological Revolution - Making Peace with the Planet, Monthly Review Press 2009 - claims that Karl Marx addressed ecological issues with insight

Richard Douthwaite and Gillian Fallon (eds) "Fleeing Vesuvius - Overcoming the risks of environmental and economic collapse" Feasta Books, 2010 - a collection of essays on different aspects of the crisis, financial and environmental - appearing in the UK and Ireland, the USA and New Zealand. The essays are being published on the Feasta website at www.feasta.org where they ae available free

List compiled by Brian Davey of Cafe Economique Nottingham as a service for Occupy Nottingham

The Banking Crisis and the Ecological Crisis

2008-11-04T16:02:00.000-08:00

Context

I approach the banking and financial crisis as an ecological economist. For me the context of the banking and financial crisis is a far more important crisis in the relationship between humanity and the natural world in which we are in severe danger of creating the conditions for our own extinction and the extinction of most other species on the planet.

Significance

The significance of the banking crisis for me is that it demonstrates that we have an economic system without a reverse gear - given the nature of the banking and finance system there no means currently exists to manage an orderly contraction and reorganisation of the economy. With the banking and finance system as we have it now the economy either grows or it is collapses - there is no other way.

Money lending in historical overview

In the middle ages and through most of the history of humanity lending of money for interest has been regarded as a sin and as socially and economically destructive. If the economy did not grow, and through most of the history of humanity the economy did not grow for long, the fact that moneylenders wanted repaying with interest inevitably meant that moneylenders ended up with a greater proportion of social production - and that could not continue for long. It was socially and economically corrosive. However, when the economy started growing, at first through long distance trade, and then at the time of the industrial revolution because of the application of fossil fuels to the productive process, the finance system could grow too. In these different circumstances it could share in the increased production and wealth. There was more for everyone - at least in the first mercantile colonial powers and then the industrial colonial powers.

Limits of fossil fuel generated production growth

However, now that we have reached the ecologically sustainable limits of a fossil fuel generated production expansion we return to the old truth. Lending involves a repayment with interest. If the economy cannot grow then the repayment of interest means that bankers will get an increasing proportion of society's product and there are limits to how much that can occur.

From a credit system using physical currencies to the dominance of debt based money

Unfortunately, the situation is a bit more complicated than that. It is not only that we have "too much debt" as some people put it - the problem is that we have a money and payment system that is founded upon debt. Once upon a time currencies were commodities like the precious metals, silver and gold. Money lending involved lending a material object and the credit and money lending was an outgrowth of the money system - now however the credit system is the money system.

Over the last two centuries we have evolved a money system which is almost entirely founded on debt. When I was a boy in the 1950s a half of the money in circulation were notes and coin and a half were bank deposits. Now, however, bank deposits make up 97% of the money in circulation. All of this money came into existence when banks lent it into existence.

Common misunderstandings of money

The common misunderstanding about money is that governments create it and when people get that money they put it in their bank accounts and the banks lend the money on. Actually that's not right. The banks create the money that they lend into existence. One way of seeing that is the banks are monetizing your agreement to repay a loan with interest.

Repayment with interest requires extra income - so stagnation and contraction which bring defaults also represent a threat to the very existence of our everyday payment system.

If the debts aren't serviced the money system starts to collapse...

Thus the money supply is backed, not by gold, but by debt and the maintenance of this entire show depends on households and companies and governments being able to service their debts - which means, obviously, repaying them with interest. And, as we have said, they can only repay with interest if the economy is growing. When incomes and profits start falling the repayment of debts and the payment of interest becomes much more difficult. That means defaults. Defaults mean losses for the banks and if large enough that can create a collapse in confidence in banks and bank runs.

Since banks deposits are effectively the monetization of the agreement to repay it means that when people cannot repay, when defaults occur, the fear takes hold that the value of the assets behind bank money is in melt down. That creates a run on the banks which creates a self fulfilling prophecy. For if banks and others are forced to sell assets to raise cash this creates a fire sale in which asset prices fall dramatically. If they survive the banks then fear to lend - and in those economic circumstances everyone else fears to borrow.

Contractions become self reinforcing

Contraction leads to a debt servicing crisis leads to a further reduction in lending leads to a further reduction in money supply in circulation - a self reinforcing downward avalanche which ultimately always puts the payment system in danger. Thus instead of merely make losses you are always confronted with the possibility of a collapse - in which governments scramble to get growth going again.

This returns me to my original point - given this type of money system the economy does not have a means for orderly retreat. There is no option of managed contraction. Retreats become routs unless a successful big effort is organised get the economy growing again - even if that is immensely ecologically destructive, even if taking out increased productivity in unpaid leisure would be preferable, even if the material resources for growth are heavily in depletion and it becomes more and more expensive to get them out of the ground as with oil, gas and other resources, even if we are in danger of driving ourselves into a climate change driven extinction.

Moral Hazard

Since 97% of our money supply is bank money that means that the bankers have us all over a barrel. The problem of moral hazard is that we all depend on the money system for everyday transactions and exchange. In that sense the money system, which has evolved over centuries, is a commons. However it is a commons that has been privatised by bankers and run in their private interest and these bankers are perfectly well aware that if it looks as if the banking system will collapse there is no alternative but to bail them out. The state must step in to prop up the banks. Unless they are propped up we have no means of conducting everyday transactions so tax payers are called upon to prop up bankers.

Creating an economy that can contract without collapsing

So how do we re-create an economy with a reverse gear - how can we create a money system that doesn't spiral into collapse during contraction? The answer is to create a money system that is not based on debt.

Taking the right to create money from the banks - two examples

The first thing that is needed is that the right to create money based on debt is taken away from the banks. How would this work? Lets take an example:

Under the current arrangements lets say that I take £10,000 new money and put it into the bank. With that new money the bank will, if it thinks it can do so safely, lend £9,000 extra to a person or a company who uses the loan to make purchases. Their payment goes into a bank and lo and behold a further £9,000 deposits have been added to my initial £10,000. 90% of that £9,000 will be lent and then there will be a further £8,100 money deposits created. That continues until £90,000 extra money exists over and above my original £10,000 deposit.

If one denies the banks the right to do this they could still lend money on but they would not be able to create money. If the bank want to lend on £9,000 of my £10,000 deposits to a third party they must convince me to make them a loan for same period as they want the third party loan to last. In this case I no longer have £10,000 in the bank as a money deposit that I can spend at any time - I will only have £1,000 on deposit and will have made a £9,000 loan to the bank for a particular period of time that matches their £9,000 loan to someone else. In that case the bank would be merely acting as intermediary between myself as a long term saver and someone else as a borrower.

They could still make money doing this and the banking and financial system would be a lot more stable. I could not demand the £9,000 back until the time is up.

Alternative ways of creating money (1) - money backed by physical assets with value

But this then leads to the question - if banks are no longer allowed to create money, how would money be created? In fact there are a number of different ways to do this - both at a local or regional level, at a national and at an international level. I will confine myself to giving two examples:

As I said, there have been moneys for centuries which, like gold or silver have some kind of intrinsic value. One could create other kinds of currency with an intrinsic value backed by real assets. For example, one could create a currency backed by wood. For example, let's say that there is mass unemployment and no money to employ people. So all over the country people are encourage to plant willow as an energy crop. They do not get a payment in sterling but in notes which say that, in 3 years time they are entitled to a portion of whatever is the value of the coppiced willow when it is harvested and sold. The notes could be held for 3 years and would gain in value as
the willow grew - or they could be exchanged here and now as currency notes whose purchasing power would be a discounted value of the estimate for the future value of the coppiced energy crop.

Alternative ways of creating money (2) - money created by state fiat

Alternatively money can be accepted because the state says it must be accepted in payment for goods and services and in settlement of debts. That is so called fiat money meaning that it is made acceptable by state fiat - because the state says it has to be accepted as legal tender for payments and in payment of debts. The amount of such money created could be determined by a public body that was responsible to create money in the interests of society as a whole. How much of the money that is created should be determined by the needs of the economy and society and ecological system.

Once that is decided the money would then be made available - either to the state to be spent into circulation or distributed to citizens on some other basis. For example new money might be given to the state who use it to spend on ecological infrastructure programmes. Or it might be given to elderly people as pensions to help them cope with rising fuel bills.

Money based on the the mobile phone system

Nor do we even need to create money by printing the stuff on pieces of paper - it would be possible to create payment between balances electronically credited to accounts that could be access and used between mobile phones for example - as unique SIM cards and PIN numbers give enough security to operate a full payment system by mobile. All that is needed is that people get the balances to start with. (This is an idea currently being considered by my colleagues in Feasta)

Money creation and inflation

The idea of giving the state the right to print money alarms people who assume, ipso facto, that this will be inflationary. In fact I am suggesting an independent trust has the right, bound by certain parameters. What's more it depends on the context in which money is created, how much is created and on what it is spent. If there is unused capacity in an economy then buying production that gets this capacity into work with newly created money is not inflationary - as long as the spending can be reversed as appropriate. Indeed state expenditure that makes it possible for the economy to avoid using resources will reduce cost pressures - an example would be if buildings are insulated using state grants. This reduces the need to spend on fuels which cheapens the cost of living in the long term. It is also important to note that creating money could absolve the state from the need to raise some taxes or from borrowing money at interest from banks. In that sense it would lighten the burden on people too. Surely one of the biggest absurdities or, alternatively, one of the biggest examples of institutionalised bare faced cheek, is the way that the state borrows from the banks at interest - when the banks create the money that they lend and the state could just as easily create money itself without having to pay any interest on it.

As debt based money crashes it is rather important that alternative sources of purchasing power are brought into existence and the problem is deflation not inflation. There is likely to be social and economic chaos - which is not at all the right circumstances in which to rebuild an ecological society.

Conclusion - a money system in which the economy can contract without chaos ensuing

With these changes we could then contract the economy, which may or may not be a painful process but is necessary to take the pressure off the eco-system, without the extreme danger of a complete collapse, with the payment system going down as well. Please note that this will not be in and of itself a sufficient way to manage energy descent and the retreat from the ecological abyss - but it is very much a necessary part of the process.

Brian Davey

Nov 3rd 2008

The Banking Crisis, Peak Oil and Climate Change

2008-10-07T07:58:00.000-07:00

Yesterday at the "Urban Harvest Festival" of Transition Nottingham, one of many local groups springing up over the UK to prepare communities for peak oil and climate change, I had a conversation in which I learned that some people are saying that all this financial crisis stuff is a distraction from the climate and peak oil.

This is understandable given the threat that climate change represents and the challenges to society that peak oil will bring. It is also understandable on a very human level after activists
have spent a lot of time taking in and developing an expertise on the climate change and peak oil agendas - only to find that the message that they want to be give out and work to, the message
that they think they understand very well, doesn't interest other people so much any more - because these other people are far more interested in a set of issues on which the climate and peak oil experts do not feel particularly competent.

That's life. People who understood the economic ramifications of peak oil deeply always expected that peak oil would bring with it a financial and banking crisis. However, the banking and financial crisis has arrived anyway and it is only very partially the consequence of supply tightness in the energy market. It is far more the result of a complex of other issues -
mainly the creation of far too much debt (leverage) which people and institutions used to buy assets, thus creating a speculative bubble in asset prices that has now burst.

The result is mass misery among ordinary people - because they are losing their houses, as well as horror and terror among bankers and high flying city types - many of them young men and women whose self esteem was based on having loads of money but who are in many cases now out of a job, with huge debts.....perhaps at home with the spouses they barely know and a family to bring up. There will be a lot of mental health problems in the City.

http://strategyforlosers.blogspot.com/2008/04/mental-health-and-financial-market.html

Whatever. This narrative still isn't the one that many climate and peak oil activists would like to be talking about and working with. But the situation is horrendous for many millions of people and they need a solution to their problems. What's more, in an unpleasant kind of way this situation of danger is also a situation of opportunity - it is an opportunity not to be missed.

Here's why...

People sometimes say that money is the root of all evil - but that's not what the biblical quote actually says. It is the *love of* money that is the root of all evil. It is when money becomes the goal of exchange that the problems arise - when money becomes the master and not the servant.

But we do need money for the service that it performs to expedite everyday transactions and exchanges in a community. Without money extensive exchange relationships are very difficult indeed and all but a very simple tribal economy would collapse.

Different kinds of money system

The problems arise because there are different kinds of money and different kinds of money relationships and systems. The money system that we have at the moment, the one that is in crisis, is a debt based money system. People often think that the government creates money and then people pay it into banks who lend it on. However, this isn't true. What actually happens when a bank gives you a loan is that they create the money that they are lending you. Most of the money in circulation was created in this way - it is backed by debt. 97% of the money in circulation is made up of bank deposits and only 3% of notes and coin. In the 1950s bank deposits made up only about 50% of the money supply. Now virtually all money is deposit money that was lent into
circulation.

Now clearly there has to be a limit on how much that can be done - if people want to take cash out of a bank, to withdraw their deposits, then a bank must have liquid assets (assets which are either cash or easily converted into a known and definite quantity of cash) available. The banks need to be careful about their lending practices too so that when deposit money is created it is
backed by loans that they expect to see paid back.

The recklessness of the banks

Over the last few years however the banks, networked internationally by global telecommunication and computers, have become increasingly reckless about lending until the crash came. This was to a large degree because they assumed that the state would always bail them out. It was also because computer telecommunications technologies allowed banking to globalise and find all sorts of ways around regulations. They also slipped up on the assumption that innovations had reduced risks. Globalising banking did spread risks - but it didn't reduce risks - it meant that when the crunch came it happened globally, but above all, initially, in the USA, whose banks used the money
loaned to them from the rest of the world in a reckless and predatory way. Globalising banking also meant that relationship banking - the possibility that lenders and borrowers might actually know each other and meet face to face now and then - was no longer possible. Assessing risks became more difficult - the province of ratings agencies who could be bought to give favourable messages.

For a year we have been listening to journalists saying that the banks do not trust each other to lend to each and now the public have got the message. If the banks don't trust each other - why should their depositors trust the banks either? After lending out recklessly the banks are pulling back their lending as quickly as they can - thus plunging those individuals, families and companies who they earlier encouraged to get into debt into turmoil. But they are still left with those debts that have gone sour - the money that they should never have lent at all.

That means that the payment system on which we all depend is in crisis.

So we need a money system. But is this the way to run one? The money system which should managed to be a service to society has been run like a casino and the result has been chaos. What should be run for the public good, is run for private gain and now the result is chaos. And guess who is having to pick up the bill? The taxpayer is.

As they say - no taxation without representation. If the public is going to pay for the system then the public (i.e. some collective arrangement) should be controlling the system in the public interest.

Bankers regulating bankers

That sounds fine but what would that mean in practice? In practice it means that bankers who had changed (or lost) their jobs would be re-employed by the state to run the show in the difficult period, when things are going badly. They will be paid for by the taxpayers - until the banking system had been cleaned up and put back together again - and then the banks would be passed
back to the private sector. In the jargon the banks that are insolvent would be allowed to fail, the bits of them that could still make money would be merged with a smaller number of stronger banks who would be further strengthened by taxpayer funded money to "re-capitalise" them and then they would be floated off back into the private sector. Given the losses that the banks might make this would be very expensive for the taxpayer and may mean cuts in other government spending.

Will these banks then be regulated so that it doesn't happen again? Well, for a time they will be "well regulated". They always have been after a crash - when they barely need regulating anyway because the whole market is ultra cautious about lending in any case.

Then what happens? Well, look at the history:

Holy Roman Empire currency 1622; Tulips 1636; South Sea Scheme 1720; Northern Europe 1763; East India Company 1772; Emerging markets 1809-1838; Railways 1847-1873; Commodities 1890-1920; Great Crash of 1929; Bretton Woods collapse of 1973; Savings and Loan Collapse 1980; Third World Debt 1982; Black Monday 1987; Junk Bonds 1988; Japanese bubble 1990s; US Bond Crash 1994; Mexican
Debt Crisis 1995; Asian Crisis 1997; Russian Crisis 1998; Long Term Capital Management Crisis 1998; Dotcom crash 2000; Sept 11 2001 Disruption; Argentine Crisis 2002 and now the credit crunch beginning from August 2007....

Would it surprise you to know that after each of these crisis there was a tightening up of regulation so that it didn't happen again? In any case, who are the bankers doing the regulation. Nick Leeson, the man who broke the Barings Bank by his reckless trading has some insider knowledge on that.

According to Leeson alongside the "best brains" in the trading rooms, competing fiercely and taking risks, there are also " the grey men of the back office.... They do the paperwork behind the traders' deals and run the regulatory systems. It is their job to monitor the markets and ensure checks and balances are properly applied. These bankers are invariably not up to it. The front end of the business is far more profitable. The brightest and best are seduced by the lure of big bonuses, leaving the third-raters and burn-outs to take safe desk jobs in staid institutions such as the Bank of England."

http://www.dailymail.co.uk/pages/live/articles/news/news.html?in_article_id=482060&in_page_id=1770

It is these "third raters" who protect us from emotionally and ethically immature youngsters, straight out of university whose self esteem is based on how much money they spend. They have been investigated by a professor of organisational ethics at the Cass Business School, Roger Steare. When he undertook integrity tests on more than 700 financial services executives in several major firms and he came to the conclusion that "There is a systemic deficit in ethical values within the banking industry. This will not change by hanging a few people out to dry,".

The results of his tests indicated that as a group, they score lower than average in honesty, loyalty and self-discipline, he said. He compared traders to "mercenary hired guns", who regularly switch firms to maximise earnings. http://news.bbc.co.uk/1/hi/business/7207563.stm

Put Humpty Dumpty back on the Wall and Peak Oil will knock him off again

So putting humpty dumpty back together again, which is the current agenda, is not going to get us very far. Indeed, if we remember peak oil has not gone away, then it is difficult to see how humpty dumpty can be put together again for very long. Let's say, "optimistically" that the banking system were mended and put back into operation for say sometime between 2010 and 2012.
This will be just in time for when the International Energy Agency expects to be an even more serious oil supply crunch - as if we didn't have one already.

Now the point about energy descent and a debt based money system is that they don't mix. A debt based money system requires growth to survive or it gets into serious problems. This is because it is only practical to lend money into existence, which is what the banks do, if the loans can be repaid with interest but if the economy cannot expand then there is no additional output that the banking system can share in when it claims its interest payments.

Thus energy descent, which involves a fall in material production (though not necessarily a fall in the quality of life if we can develop other dimensions of our existence through the Transition Movement) is a no no for the banking system. It follows that an energy crunch will create another credit crunch.

Relocalised production arrangements need local currencies

Nevertheless we will need a money system that is able to function when the material production system is in retreat and that will have to be one that is not backed by debt. What's more we will need a money system that is in tune with the energy descent process which is in large part a process of re-localisation.

Ecnomic activity will more and more be about sustainable arrangements to provide the essential needs of particular communities in particular places. This re-localisation ideally means local or perhaps regional currencies which can run alongside and complement national currencies. Because such local currencies can only be spent in the locality they represent a commitment to, and encouragement of, local exchange relationships. This means that you are not using bucket loads of carbon energy transporting goods from the other end of the globe. It means that you can cut out the financial and energy expense of all those long logistical supply chains that the supermarket economy runs upon. It means that things are on a smaller scale - and power relationships are more equal.

Democracizing money creation at the local level

The other reason for local currencies is that they are created, managed and run by people that you can know personally, people that you meet in the street, people who live close to you, that you can really hold account-able. Developing local currencies also gives people experience in money matters and makes them less beholden to and in awe of the national and international money markets. It means that when the national and international money system goes into crisis there will be a movement of ordinary people out there who will not be overawed by the bankers who have been re-employed in different roles in the national state to put humpty dumpty back together again. There will be a movement that will be able to speak with experience and knowledge about how non debt based money can run because they have been running such systems at local level. People who have developed money with public and community well being as its core value.

Developing these currencies is currently a major task in hand. It is not at all a distraction from the problems of peak oil and climate change. It is totally consistent with dealing with these problems.

Brian Davey
6/7th October 2008

Energy Descent and the care and Support of Vulnerable People - Some preliminary thoughts

2008-06-07T12:47:00.000-07:00

Health and Social Care

The aging population in industrial countries will be put under the hardest pressure of this change - and self care and care of the elderly will become a major political economic issue as arrangements for pensions collapse in a savings wipe out at the same time that state funding is drying up. While the older population has personal knowledge of wartime and post-war austerity measures this group is now the old elderly and often far too frail to bring their experience to bear in practical engagement. Nevertheless to a degree this group can be given a respected social role sharing their experience of living in a make do and mend world - as suggested in the Honour the Elders notion in the Transition Initiatives. Some of the 'young elderly' may be able, in the early stages of this process, through downshifting and early retirement, to contribute to the organisation of new local economic arrangements and may even embrace and pioneer alternative lifestyles and subsistence arrangements.

For the ‘older elderly’ the situation is more challenging. A major portion of health and care costs are in the last year of life - in Germany it is one third - current moves towards easier euthanasia in several countries should be judged in that light and will be a serious challenge to health and social services when budgets are tight.

Single vulnerable people

The ability of any individual to survive in times of difficulty is powerfully determined by the amount of social capital they possess. Major life style changes to meet more needs close to home, with less energy and within the local economy, will not be possible for individuals to achieve alone. While some individuals are well connected into supportive social networks there are many who are not. In recent years there have been major increases in the number of single person households; in the 2001 census of 21.7 million households in the UK 30% were single persons - 6.5 million. 3.1million of these were one pensioner - 75% being women. 3.4 million are under pension age - 60% are men and 40% women. Single parent households will also need considerable support - there being 2.3 million single mother households in the UK - not to mention all those other households where one person is a full time carer for another chronically sick or disabled person who may not have the time to grow their own vegetables or insulating their house.

Socio-ecological self help and support arrangements for single individuals extending to those who are more vulnerable will become vital initiatives if society is to retain any traces of 'civility'.

More generally the trend to single people living alone will need to be reversed. Anyone trying to do a personal carbon calculation will notice that if they live on their own their energy and carbon usage is much higher - for example, they are not sharing the heat in a room - and a bed!

Public health difficulties

For the public authorities at the most local level the evolving difficulties, peaking periodically in specific emergencies, could take the form of a succession of public health crises - encompassing both physical and mental health. Large numbers of people will continue to require health and social care - at the same time as local health services are finding it difficult to get the money to pay the salaries and wages of their workers and the big centralised hospital complexes, that use masses of energy and energy intensive technologies, will be in difficulties.

Depending on the speed and manner in which the crisis develops large numbers of people may be suffering under chronically worrying debt burdens and a sort of culture shock when they find that their anticipated secure futures, with all their plans, have become ever more unrealisable so that anxiety, depression and breakdown will be widespread.

On the practical day to day level, an occasional and then more frequent breakdown of grid electricity and gas supply could undermine the ability of populations to maintain basic hygiene and keep warm, fed and watered. Bed bugs, fleas and lice could become a more serious issue bringing with them typhoid and other diseases. Unemployment and disorientation would have stress consequences that weaken resistance to the new diseases that are now emerging ('ecodemics' like avian influenza, lymes disease, SARS, West Nile Fever etc) plus the geographical spread of diseases as a result of climate change. It can therefore be expected that community health services will be forced to try to play a major role in organising local level community support networks and basic shared facilities for basic needs.

Education and Children's needs

Schools and other educational establishments, plus child care will also have a major role in community organisation at a local level - for training children and older people in skills appropriate to the 'new domestication' - gardening, cooking, manual skills, metal work, woodworking, energy numeracy and literacy etc. They also have resources in their buildings and grounds to be used - e.g. Land for growing, kitchens, workrooms, meeting halls, showers and changing rooms (important for the hygiene of children in a society under stress) etc. The schools will have a lot to do - a recent article in the Observer pointed out that in the UK only 8% of households cook from basic ingredients every day... but teachers would be facing these tasks while, like health workers, finding if increasingly difficult to make ends meet themselves.

Community leaders

As the central institutions of the state prove more and more unable to help, people at a local level will be thrown back on their own resources. What then happens within an individual community will depend on the community leaders who emerge. This is why it is so important that local authorities and health agencies work together with the Transition Towns movement. These will need to be clear about what is happening and have the connections and networks to draw together initiatives to recycle and rebuild local community arrangements around basic needs, food production, health and hygiene and energy. Existing councils may be able to facilitate this, with the right guidance and vision. Some new community leaders may be workers from health, education, community and voluntary sectors - who may pioneer the new economy partly out of self interest as they find the state unable to guarantee their jobs and pay.

In this regard, socially cohesive responses to major collective shocks can also be a positive as people work together and develop mutual support and solidarity which may draws in and support isolated people. However there has to be a common orientation to what is happening for this to occur and a common purpose in regard to what must be done which gives some sense of hope and direction towards a liveable future. This collective purpose will need to be organised in and through local institutions where people gather together and which they trust.

Crime and Policing

However, there is no guarantee that people will come together around considered and rational community spirited responses to the ecological/energy crisis in a co-operative relationship. While people must band together if they are to survive, the new associations may take the form of criminal gangs, sects with odd and extreme religious and/or political views - or vigilante self defence organisations. Gangs and vigilante groups are most likely to arise where the public authorities and governing elites appear powerless, or even act in a way that exploits people's vulnerability for their own ends as the crisis evolves.

The greater intensity of dependency of people on each other at a local level could easily evolve into a loss of privacy and personal space as well as a pressure for loyalty and conformity characteristic of extended families, clans and sects – which might easily develop collective secrets as attempts to protect themselves against the authorities, compete against one another and/or exploited by groups seeking to channel mass frustration at scapegoats whose expropriation or expulsion/ethnic cleansing will be held up as a solution for all ills. Criminality may be a serious problem getting a new economy up and running - e.g. crop thefts from community gardens....

This is a description of a transition to a sort of feudalism – communities in thrall to strong men or mafias who thrive in the crisis – with other finding protection in enclosed communities held together by faith ideas.

On the other hand one should be aware that many of the current trends towards increased criminality will be thrown into reverse. There will be an increased need for skilled manual labour and therefore more respected and paying social roles for the currently disaffected young people who currently cannot find a place in an office and professional focused culture. The progressive erosion of globalisations long distance communications systems may also erode some of the channels through which illegal drugs travel.

Culture, the arts and Leisure services

As has been argued by David Fleming the future must also have some culture to it - some celebration, fun and something for which life would be worth living. This will be a task that local authority leisure services departments will need to look at. This has been a very doom and gloom scenario but if that is all that is on offer then there is little hope of any new sustainable social and economic arrangements emerging without crisis occurring first. In fact, the social and economic arrangements to replace the high energy economy are likely to have many positive features which the current society is lacking. Much of the current tension in some urban areas is the result of the loss of manual employment and the devalued status of what manual employment remains. That can be expected to change as skilled manual workers will be important to rebuilding the future. There will be plenty of reason to bring currently isolated and lonely people together and no lack of practical common purposes in the simple things of life - cooking, eating, growing, repairing and building together. While the transition will be painful the simpler arrangements that eventually replace our existing economic and social arrangements may at least lack some of the horrendous complication, the stresses and performance pressures of an accelerating 24 hour society.....As I've found myself, gardening with friends is much preferable to sitting in front of a computer screen and chasing targets.

Also on a positive note it is worth pointing out that irrespective of people’s belief systems they will have to eat, drink, keep warm and clean – so those people who provide a practical leadership at a local level, providing genuine practical solutions to these problems will exert an attractive force. If they prove able to construct coherent networks of project activities that genuinely support people they will find themselves very influential. That means sticking to the fundamentals at a local level. In this regard I think that recent authors in Permaculture Magazine, reviewing the various videos and literature about ‘Peak Oil’ have it right when they say:

“One of the things that struck me (on watching a video about peak oil) was that for all those people campaigning against globalisation, their time would be better spent beginning to put in place what will be needed after globalisation’s inevitable demise. Why campaign against something that will inevitably collapse, and soon? Building the sustainable, low energy yet abundant future offered by permaculture is imperative, and the alternatives too grim to contemplate.”(Rob Hopkins)

“Forget about saving the world. The world is bent on self destruction and we can’t stop it. Trying is a waste of time. What we can and must save is the knowledge that will be so essential afterwards. We must keep alive traditional skills which are now despised and being rapidly forgotten. We must also develop new skills, using the best of modern technology and design science. We must preserve as much of the vanishing biodiversity of the planet as we can, in order to rebuild as healthy a future as possible after the crash.” ((Patrick Whitefield)

Review Article of "The New Paradigm for Financial Markets - The Credit Crunch of 2008 and What it Means " by George Soros

2008-06-02T07:11:00.000-07:00

This small book is full of insights - but from an ecological economics perspective frustratingly limited to the analysis of the financial markets.

Soros sees himself first and foremost as writing a book of philosophy and draws upon his experience as one of the very first hedge fund managers. In his own words he has worked "as a successful speculator" in the financial markets since the 1960s. Before that the formative influences on his thinking were having to survive as Jew in Nazi occupied Hungary with a false identity. Then he lived through the early years of the Communist period in Hungary. After that he came to the UK - where he was deeply influenced by the ideas of philosopher of science Karl Popper.

Popper had a philosophy about 'Open Societies' that, given his earlier experience, was deeply appealing to Soros. "Popper argued that the Nazi and Communist ideologies have something in common - they both claim to be in possession of the ultimate truth. Since the ultimate truth is beyond human reach, both ideologies had to be based on a distorted and biased interpretation of reality; consequently the could be imposed on society only by the use of repressive methods." (p15).

To Popper, and to Soros, there is no such thing as being in possession of the ultimate truth. One can work towards it, and have provisional hypotheses, but theories and interpretations must always be open to questioning.

Hence, at the core of the thinking of George Soros, is a radical notion of the fallibility of human thinking. That does not mean that "any narrative goes". He especially dislikes the notion that powerful individuals and institutions can impose their own version of reality. On the contrary, it is important to Soros that one strives towards the truth, even if one only ever has a provisional and tentative version of it.

This means that a healthy democracy depends on an electorate being actively engaged in a search for what is true. They must be actively be engaged in holding people with power to account in regard to truth, otherwise the result is disaster. Soros gives Iraq as an example of how things go awry when this does not occur - citing the spokesperson for Bush, probably Karl Rove, as saying that, given its power, America's political elite could create their own reality. People like Rove manipulated the truth as if this was the superior way to do things. Naturally things went wrong after this.

Prevailing biases - illusions creating realities

For Soros the central notion of fallibility also applies in economics and the analysis of the financial markets. He recounts how, as a student of economics, he noticed that the claim that competitive markets delivered an optimal allocation of resources, when there is assumed to be perfect knowledge in those markets, was at odds with Popper's notion of the inevitability of imperfect understanding. Since that time he worked from the opposite idea - that markets are always wrong.

Indeed, he goes further. In his thinking, markets share a view which he calls a 'prevailing bias' and the prevailing bias may be self reinforcing, thus driving them away from equilibrium rather than towards it. Eventually they reverse, the bias is inverted, and a self reinforcing process drives in the other direction.

Looked at in this way the very notion of "equilibrium" is paradoxical. Indeed, Soros holds equilibrium theory to be invalid. "The behaviour of markets needs to be interpreted as a somewhat unpredictable historical process rather than as one determined by timelessly valid laws" (p 52)

In real life supply and demand curves incorporate participants' expectations about events that are shaped by those very same expectations. For example, in financial markets buy and sell decisions are based on expectations about future prices - and future prices, in turn, are contingent on present buy and sell decisions.

Thus, expectations of future price rises may encourage decisions to buy and, in turn, current decisions to buy may condition expectations of future price rises. From this it follows that, instead of, as one would expect, rising prices leading to a reduction in demand, rising prices may lead to more demand. There may be a self reinforcing process whereby market sentiment creates the conditions for its own justification.

Such a self reinforcing process is given an even more powerful forward push if there is a market reversal but this reversal proves only temporary. When the upward movement is resumed a shared interpretation can take hold that the market has "withstood a test" on its way up and has now resumed the upward path. This is, in turn, interpreted to mean that "fundamentals" really are pointing upwards. It is in conditions like these that a collective sentiment takes hold that inflates the market even more powerfully, pushing it towards a "far from equlibrium" state. "Leverage" acts as a powerful force to shove markets even more into such "far from equilibirium" states. (Leverage is where speculators are enhancing their earnings using borrowed money. This magnifies the gains on the way up - but is very painful on the way down)

Reflexivity

Processes whereby economic agents are influencing the outcomes that they forecast and expect through those very same forecasts and expectations Soros calls reflexivity. He relates reflexivity to his differences with Popper and argues that the notion has political as well as economic consequences.

Popper had insisted that the same methods and criteria apply to the study of social affairs as to the study of natural phenomena but here Soros disagrees. For Soros natural science can operate through disinterested observation and experiment but in the study of human affairs people need to be understood not only as observers but also as participants. They are not just detached searchers for the truth, using reason as their guide, they are also engaged in active manipulation of the world. This introduces elements of indeterminacy into events because participants in human affairs act on the basis of fallible understandings.

The pursuit of (an unattainable) truth

In regard to politics the pursuit of truth is still a requirement for an open society. The case for critical thinking remains unimpaired - to gain a better understanding of reality. It is only on this ground that there is a reasonably safe basis for making policy. However politics is a pursuit of power not of truth. There is a danger that politicians attempt to manipulate the perception of reality in the pursuit of their own agendas. This happened in the War on Terror and the invasion of Iraq on false pretences. Such manipulations end up badly and the results are liable to be radically different from the expectations of the manipulators. Thus "the only way in which politicians can be persuaded to pay more respect for reality is by the electorate insisting on it, rewarding those it considers truthful and insightful and punishing those engaged in deliberate decption." (p 39)

Soros is aware that this way of seeing reality is deeply paradoxical and contradictory. Precisely because humans are active in the world, they cannot possibly understand or know the larger whole of which they are a part. Their fallibility is thus inevitable, at least to some degree.

It is also the case that because people may interpret things in different ways, or they may attempt to deceive, there is an inevitable indeterminacy in human affairs. Soros compares this to the uncertainty principle in Quantum Mechanics. Despite this we must strive for the best understandings to get the best outcomes. Taking on board that we are all fallible gives rise to a critical attitude. The starting point is that all understandings are provisional. One needs to be on the look out for prevailing biases on the assumption that oneself and others can be wrong. There is a realisation that individual and collective illusions are shaping observed events too.

There is a terrible paradox in all of this. It is when markets feel that they are dealing with a certainty that they overreact and destroy the basis for that uncertainty. Soros describes this as being a bit like the Peter principle - just as people are promoted to that the point beyond which they no longer have an adequate competency to manage, so prevailing analyses and ideas become overused as the basis for actions to beyond the points where they are still valid.

Black Swan Events

The recent fall in US house prices described by the Investment Editor of the Financial Times, John Authers gives an example. The boom was overegged by the belief that a house price fall would not happen - which created the conditions for a fall after all!

"Much of the house price boom was based on buyers' belief that such a fall was impossible. Ben Bernanke, Fed chairman, said in 2005 that the US had "never had a decline in housing prices on a nationwide basis". Such a fall is under way.
Hence a national fall in nominal house prices is a perfect example of a "black swan" - an exceptional event that has not been covered in historically based models. Such events, widely discussed in recent months, can lead to extreme and unpredictable responses in financial markets. "
http://news.yahoo.com/s/ft/20080523/bs_ft/fto052320081602191319
Popper would have loved the idea of a Black Swan event since the generalisation that all swans are white would be held by Popper to be true only provisionally.

This radically destabilises the economic theory assumption that markets must tend towards equilibrium. On the contrary markets are historical processes characterised by fluctuating degrees of understanding and illusion. Even worse for economic theory - the illusion is not just an abberation it is an inevitable and integral part of the cycle - created by a herd reaction to an apparent certainty which creates its opposite, uncertainty.

Market sentiment and market mental health

The idea that individual and collective illusions are also shapers of events is a very deep insight. Although Soros does not go as far as to say so, although he perhaps does not realise it, it means that economic reality can be approached with the same type of conceptual tools that one uses to understand individual and collective mental health. The dispassionate observer who is engaged solely in the pursuit of truth is, as Soros is well aware, a long way from the engaged participant who is anything but dis-passionate. Market sentiment or the "animal spirits" which Keynes wrote about, is clearly an emotional engagement with the market. When the market is "far from equilibrium" it is euphoric or in a panic - the emotions that dominate, energetic greed or blind fear, are influencing the thinking of market participants to the point of them ignoring what, to the "dispassionate" observer, might appear to be obvious. Another way of putting this is that, just before a crash, the markets are more than just wrong, they are likely to be actively delusionary. What's more the delusion is not an abberation it is an integral part of the cycle.

Soros does not draw these parallels with mental health but why should he? Medically dominated psychiatry gives a misleading account of many mental health problems by a reductionist methodology that locates the causation of mental health issues in faulty brain chemistry. If one understands mental health problems in the medical way one will find no parallels or similarities to the account of Soros. Also, mental health issues are common assumed to be about the problems of individuals - so that collective processes, like the evolving interplay between market emotions and market cognitions, are not looked at as having any obvious similarities with the mental health problems of people. However, psychotherapeutic accounts of mental health problems contain many useful parallels which help us understand market processes. (see my Mental Health and Financial Market Cycles at http://strategyforlosers.blogspot.com/2008/04/mental-health-and-financial-market.html )

The notion that market expectations can create the conditions for their own justification is a situation that will surprise no therapist. It is a very typical topic coming up in therapy. A paranoid person, expecting the worse in regard to the motivations and actions of others, will interpret quite innocent situations as hostile and act to defend themselves, thereby provoking the very aggressive counter actions that they feared.

Self fulfilling prophecies - the profitable economics of paranoia

In that sense it is not just that the War on Terror was promoted by a misleading and untruthful practices. It is also that the War on Terror helps create the very events that could then be used to motivate and justify its further prosecution - because it is one pole of a process winding up tension in the world.

Nor is this just a matter of politics. The War on Terror is associated with a powerful economic sector - that of the military establishment, of private armies, security companies and mercenaries, of armaments and military logistics. The operations of this sector, if unchecked, make huge profits out of a self reinforcing process of economic, social and political destruction. There is a danger that an ever larger volume of economic resources get sucked into a paranoid vortex - particularly in those circumstances where the economy turns down - for example when distributional conflicts occur due to periods of greater scarcity, when serious imbalances occur that cannot be bridged or when defaults on agreed arrangements take place.

When markets and politicians are more than wrong - when they are ignor - ant

Making use from ideas from clinical psychology we can go further and claim that the market is not only wrong - it might be more accurate to claim that it is ignor - ant. By separating the word, to highlight the "ignore" in ignorant, the intention here is to emphasise that "being wrong" may take place in different ways.

One can be wrong because, although dimly aware of other possible ways of interpreting reality, one prefers not to explore those possibilities in any depth - holding certain interpretations and realities at arms length because they are too unpleasant to contemplate. One may ignore other interpretations that one is dimly aware of because these interpretations are views which are widely disparaged in the media and one does not want to risk finding out more. To ignore some viewpoints is to avoid the risk that one will end up with the inconvenience of finding oneself supporting people who are ostracised for their views and who are, in the conventional wisdom, "obviously wrong". One may ignore an idea because it is held by people who are younger, of lower status, people who one assumes must be wrong because their lack of status or different mind-set or profession denotes a lack of experience, connections and information of the sort that the powerful group, that one is oneself a member of, are party to. Or one may ignore an idea because, even without going into that idea in depth, one senses that its implications would be too far reaching to take on board superficially, when one is already overcommitted. One does not want the added stress of taking on big changes and challenges. In these cases markets (or politicians) can be wrong because they are actually avoiding looking at things for what they are - they are ignor -ant.

The world is always more complex and there is always more to learn than one knows - but frequently one has only limited time before one must act. It is therefore often most convenient to believe what one's peers believe - because not to do so is a source of immense frustration and conflict. From this point of view fundamentalism, of any kind, simplifies. (See my "Fundamentalism in Communities of Belief. Closed mindedness and the human condition" at http://www.bgmi.us/web/bdavey/Fundamentalism.htm )

In all of this one can say that one definition of socio-economic and political power is that one can ignore others and get away with it because one's own judgements and interpretations are given special and predominant weight in the society in which one lives. In our society that means that one's views are predominant in the discourse conducted in the mass media - and therefore in the collective decision making about resource allocation in business and government.

More specifically, the judgements that are made in this world are overwhelmingly judgements made in the language and concept system of orthodox economics which Soros, with justice, disparages.

In the economic mind set there are certain assumptions which, if one tries to articulate another view, one is not considered worthy of being listened to. Above all one is not considered worthy of being listened to if one questions the idea of economic growth and asserts the notion that there are ecological capacity limits to the growth economy. Growth is an article of faith for the economists - where by "faith" I mean a collection of beliefs and taken for granted truths which, to contradict, marks one out as particularly worthy of being ignored because "one has already been proved wrong".

Ignor - ance and growth fetishism

Soros is quite right to attack the misleading simplifications of market fundamentalism. There are other simplifications around too. Another one is growth fundamentalism - the growth fetish.

To Soros the natural sciences are unlike the human sciences because it is possible for their to be processes of disinterested inquiry in the natural sciences. Yet this is a simplification if ever there was one. The natural sciences explore in directions where scientists and scientific research establishments can get the money and resources to explore and research. Getting the money is not uncontaminated by human interests. And climate science, in particular, is anything but uncontaminated by political and economic interest groups. Thus, for example, David Wasdell has analysed the way in which drafts of the Climate Science Reports described as "Summaries for Policy Makers" drawn up by the Inter-governmental Panel of Climate Change have been edited before the final version of that report appeared. As he shows the editing took out the ideas which suggested that climate change was accelerating and the reasons why this was so because of positive re-inforcing feedbacks in the climate system.
(See http://www.meridian.org.uk/Resources/Global%20Dynamics/IPCC/contents.htm )

In fact, in the interplay between the economic system and the ecological system the boundaries between natural science and social science and human affairs cannot be understood as clear cut. Thus climate science is attempting to understand the impact of human economic activity on the climate system and, just as markets always get it wrong, so there are good reasons to believe that there are prevailing biases, dangerously erroneous ones, in the climate policy field too. Just as there are prevailing biases in the financial markets so there are prevailing biases in climate policy - which are based on wishful thinking and what is convenient for economic interests. These prevailing biases are in turn buttressed by the very dangerous illusion that the climate system operates in way that similar to the way the economy is supposed to operate (and doesn't) - moving from one supposed equilibrium system to another.

Climate science and economics - complacent illusions for equilibrium theorists

One can see this in the Stern Review. Its methodology is based on an assumption that for each "stabilised" level of greenhouse gases in the atmosphere at some point in the future (measured as CO2 equivalents) there will be a certain temperature rise above the pre-industrial. To be sure it is only possible to give a probability distribution of what the temperature rises might be for each stabilised level of CO2eq but, in principle, it seems possible to estimate the temperature rise from the level of greenhouse gases in the atmosphere. From these concentrations and temperature rises, in turn, further estimates are then made of the climate impacts (on sea levels, food supply, weather patterns including extreme events etc). From these, impacts, in turn, further estimates are made for the economic costs. Thus, for each stabilised level of greenhouse gas there are estimates of economic costs of the climate change that occurs at that level. So the theory.

This makes it possible for Stern to apply a (low) discount rate to compare the costs of different levels of greenhouse house gases and temperature rises with the costs of different strategies for mitigating emissions - all in net present values. From this he arrives at his famous conclusion that is worth spending 1% of global production to prevent a loss of between 5 and 20% of global production every year.

Leaving aside the huge difference between 5 and 20% the real flaw in this whole chain of reasoning is the idea of stabilisation levels of greenhouse gases corresponding to specific increases in global temperatures. Here the economists are conceptualising the climate as another system that tends to stable equlibriums. In reality climate scientists are looking at the climate in a quite different way - they are now saying that the global climate is stable only within relatively narrow temperature bands - and that it tends to whipsaw between different states and is highly volatile to small initial changes. This is because over substantial ranges the climate is subject to a great deal more positive, re-inforcing feedbacks than negative, stabilising, feedbacks.

Now that humanity has started the climate changing through CO2 emissions there are real dangers of an avalanche effect. Factors such as changing albedo (declining reflectivity as ice and snow melts) and methane releases accelerating the climate change process appear to predominate.

So, while economists fantasise that we have a choice of options between different levels of temperature increase and associated costs, compared to climate change mitigation costs, it is more accurate to say that we are in the opening phase of a global emergency and we only have only a few years to cool the planet by taking CO2 out of the atmosphere if we can find the ways to do so. This is more akin to a war emergency where we have to throw everything we have at the problem otherwise humanity is unlikely to survive.

The complacency and ignor - ance of the economists is blocking the way to this realisation - their illusions are very damaging, and not just in the financial markets.

Brian Davey

June 2008

Second Generation Climate Change Economics

2008-05-12T03:11:00.000-07:00

Thank you for inviting me to talk on the economics of climate change. It will not surprise you that I would like to start with the Stern Review. More specifically I would like to start with this diagram which gives a clear sense of the underlying method by which Stern approaches the economics of climate change.

The approach of mainstream economics as exemplified in the Stern Review

We can follow the argument by working our way down this diagram from page 330 of the Stern Review

Starting at the top the diagram shows a range of probabilities of temperature rises is associated with successive rises of concentration of CO2eq in the atmosphere.

For each increase in temperatures there is a range of impacts - for example on food supply, on water, on ecosystems, extreme weather events etc.

What Stern then does is to argue that for each of these impacts there is a level of costs expressed as a loss of gross world production. His review then compares the cost of mitigation to stabilise at each of the levels of greenhouse gas concentration compared to the (discounted) costs of impacts at that concentration level.

Using this methodology (and a low discount rate) Stern concludes that a 1% mitigation cost of gross world production is worth investing to prevent the loss of 5-20% of gross world production for ever.

In more recent statements Stern has said “We underestimated the risk, we underestimated some of the effects” May 2008. However he defends his costing of mitigation.

Flaws in the Stern Review Approach - non linearities and feedbacks in the climate system

The Stern Review is a massive piece of research and scholarship. However it is flawed in the implicit assumption of “stabilisation levels” - the idea that a stabilised concentration of Greenhouse Gases means a stabilised level of global temperatures. This is outdated climate science.

The current climate science uses system dynamics approaches which are non linear. Climate change appears to be accelerating because positive feedbacks (which amplify or reinforce the process) appears to predominate over negative ones (which would brake or dampen the process). This leads to the conclusion that the climate system can "runaway" with declining possibilities for human intervention and rising costs of mitigation to stop it happening the longer mitigation is delayed.

Positive or self reinforcing Feedbacks

An example of a positive feedback effect is that global warming melts ice, reducing the amount of energy and light reflected back into space so the earth gets warmer. This in turn means that yet more ice melts.

Note that, once started, this continues, feeding on itself, even if CO2 emissions have stopped increasing.

This is why leading climate scientists, like for example, James Hansen, are saying that "The Earth's climate is remarkably sensitive to global forcings. Positive feedbacks predominate. This allows the entire planet to be whipsawed between climate states. Recent greenhouse gas emissions place the Earth perilously close to dramatic climate change that could run out of our control with great dangers for humans and other creatures." James Hansen, Director, NASA Goddard Institute for Space Studies. 18th February 2007

It should be said that there are quite a few positive feedbacks. Another is that of methane, which is a far more powerful greenhouse gas than CO2. Global warming leads to the release of more methane from under the permafrost and from ocean beds but methane is a greenhouse gas so this leads to more global warming. Again, once started this would go on even if CO2 emissions have stopped.

The political suppression of the acceleration feedback message

It should be said that these dangers are not generally recognised and they are not getting the recognition that they deserve. According to an article by Fred Pearce in the New Scientist on 8th March 2007 the latest Intergovernmental Panel on Climate Change Assessment Report's Summary for Policy Makers Report was watered down when governments became involved in writing it.

The preliminary version produced by scientists in April 2006 contained many references to the potential for climate to change faster than expected because of "positive feedbacks" in the climate system. Most of these references were absent from the final version.

Safe greenhouse gas concentration limits dramatically revised

However a PR manipulation doesn't change the facts which is why many climate scientists are saying that we may be already over the safe limit for CO2 in the atmosphere.

For example James Hansen was recently quoted in the Guardian as saying that a safe limit for CO2 in the atmosphere may be 350ppm when we are already at 385ppm and the target of the EU and Stern is effectively 550 ppm. (The Guardian 7th April 2008)

As if this was not bad enough oil and gas depletion makes the situation even worse. Here again governments are in denial about peak oil and gas - although, following the International Energy Agency they do acknowledge problems. However, the evidence of rising energy prices is something everyone is aware of

Peak Oil and Gas makes the situation worse

India, China and other countries are joining Europe, the US and Japan on a fossil fuel powered development path at that point in history when global fossil oil and gas reserves are about one half exhausted – these were the cheap and easy to recover oil and gas reserves. What is left are the expensive to recover oil and gas reserves.

The fact that oil and gas are running out might seem to be a good thing but the currently available substitutes for oil and gas damage the climate.

The unmet demand for oil and gas is spilling over into increased demand for coal, biomass and bio-fuels.

But coal is a much more climate damaging fuel and although there are possible technologies to cope with this - like carbon capture and storage - they are unproven and 20-30 years from generalisation

Using more biomass puts pressure on land use which release soil carbon and speeds de-forestation.

again with negative climate effects.

Two Tasks for Climate Policy

This means that there are two current tasks for climate economic policy

(1) To stop putting CO2 into the atmosphere asap: This requires an effective and equitable mechanism to deliver guaranteed emissions cuts - not forgetting the need to prevent land and forest based emissions.

(2) To take CO2 out of the atmosphere asap: The only effective way to do this is using biomass and photosynthesis - then sequestering the carbon from the biomas.

Let us turn to each of these tasks in turn

Task 1. Reducing emissions asap

A policy for every emission in every context?

There are currently 30 different policy instruments at national policy level in the UK alone. Why? Well consider the dynamic of policy. Fossil fuels are used, directly or indirectly, in almost every aspect of our lives and in a huge range of settings.

One approach is therefore to introduce a policy for every setting and every kind of fuel use. You end up with a cap and trade scheme for large emitters (the EU Emissions Trading Scheme); a trading scheme for smaller emitters (the forthcoming Carbon Reduction Commitment) and then a levies, obligations, funds, codes of good practice, directives, regulations and standards for everywhere else.

The end result is a complicated and ineffective policy mix – which is arguably not adequate for delivering on the forthcoming Climate Act and is resented by everyone because they sense that they are being micromanaged by an interfering government.

The Rebound Effect - the need for a cap to "lock in" CO2 reductions

Making this worse many of such schemes are ineffective because they do not "lock in" their CO2 reduction successes.

e.g. energy saving light bulbs are cheaper to run so they are left on longer; more fuel efficient engines save money which people spend on driving further or taking an extra holiday – taken by air.

The growth imperatives on companies and economies encourages these extra uses for carbon energy – to prevent this requires absolute economy wide-caps to “lock in” the carbon reductions.

Lock in is best achieved upstream rather than downstream

"Lock in" requires an effective carbon cap, ideally for the whole economy and that is best enforced upstream. A reducing carbon cap to “lock in” carbon reductions is best imposed “upstream” on a small number of fossil fuel suppliers rather “downstream” on millions of energy users, usages and settings.

In the UK there are only 10 oil refineries, 4 natural gas terminals, 40 coal mines and 12 coal ports where greenhouse gases are introduced into the economy – this is where carbon control is ideally imposed. The strikers at Grangemouth provided a clue how to reduce carbon coming into the economy. At these places a “permit to sell” scheme could be introduced with the number of permits reduced rapidly year by year.

Despite being the current fashionable idea carbon taxes will never deliver

Unfortunately current policy fashions are turning towards carbon taxes. Although unpopular with the public taxes are well understood and tax enforcement arrangements are already in place so they can be introduced quickly. Proponents of carbon taxes argue that tax Revenue can be recycled to make their impact more equitable and palatable.

The trouble is that the opponents of a carbon tax are already organised whereas the potential beneficiaries of recycled tax revenues are not - which is why, for example in Germany, when there has been a long struggle for ecological taxes, they have not got very far. Indeed if you want to get a sense of the reasons why carbon taxes are never likely to work think of a tax which must be automatically increased every year for decades.

What makes carbon taxes worse is that they cannot deliver a definite result in terms of CO2 reductions. The same tax rate might have quite different effects on carbon emissions in a recession and in a boom. So the need to make constant adjustments would be permanent political football.

How Cap and Share Works

This is the case for Cap and Share which works in this way:

Governments make the selling of fossil fuels from upstream suppliers illegal without a permit for the greenhouse gases of that fuel when burned e.g. at refineries and gas import terminals.

The permits are denominated in the greenhouse gas content that the permitted fuels will emit when they are subsequently burned and the total number are reduced each year

Fossil fuel supplying companies are required to buy the permits.

The money from the permit sales goes to everyone equally which partially protects poorer energy
users.

The European Unions Emissions Trading System

Unfortunately for cap and share proponents the EU has already developed an emissions trading system (ETS).It is not based on these principles.

The ETS is imposed on the largest energy users (power stations, iron and steel blast furnaces etc) – about 900 in the UK and can be described as being "partially downstream".

Most permits to emit are distributed to the main emitters for free – so the companies capture the scarcity value of permits. This is effectively a “pay the polluter” principle.

More auctioning of permits is envisaged in the future so the revenue from permit sales will be captured by governments but note the implication - the right to use the earth's atmosphere is assumed to belong to polluters and/or to governments.

Who Owns the Sky?

Emissions permits are rights to use the atmosphere – they are a resource which gets a scarcity value equal to the carbon price. Current schemes like the ETS assume the carbon scarcity rent should go to polluters or governments - but doesn't it belong to us all? There are important implications as to who gets the scarcity rent.

If the scarcity rent goes to governments the revenue from permits may be spent on anything - for example road building. Indeed there were reports in the Independent last week that the Treasury are hostile to EU suggestions that permit revenues should be ring fenced for climate related projects.

If corporations get the carbon scarcity revenue then, if they use the rent for green purposes, they are likely to spend it on mega project solutions - like nuclear power, or carbon capture and storage. A heavier proportion of the costs of mitigation will be falling on those on low incomes which will exacerbate fuel poverty problems.

The alternative is that the public could get the scarcity rent on a per capita basis: those on low incomes - and the population in general - will then have more resources to spend on getting houses and communities in order – insulation, gardens, local renewable systems...

Hybrid Systems

In the field of realpolitik it seems likely that the ETS is likely to be with us for the time being. However there is nothing to stop cap and share being part of a hybrid arrangement. Thus one can have side by side: EU ETS to cover large fossil fuel users and Cap and Share to cover other emissions. Indeed the Irish Government are considering cap and share as a way of controlling transport and possibly household emissions alongside the EU ETS.

Taking CO2 out of the Atmosphere - The Options and their incentives

Finally, as I said earlier these measures will only stop CO2 increasing in the atmosphere. But the CO2 concentration is already too high so it must be brought down. At the moment the biomass is currently the only cost effective way of taking CO2 out of the atmosphere on a massive scale...as long as it doesn't go back there - for example through fire.

Thus the key question is - are there ways in which biomass captured carbon be sequestered long term? The answer is that there are - for example

(1) Burying wood anaerobically or
(2) Pyrolysis - baking biomass (e.g. agri wastes) without oxygen to drive off usable energy gases and chemicals leaving a char carbon residue. The char residue can then be put in soil and appears to be long term stable – and also appears to act as a soil improver and be long term stable.

Of the two it seems to me that the latter is preferable as there economic benefits which incentivise its use - e.g. the energy gases given off during pyrolysis as well as the soil fertility gains.

This concludes my talk - although I would just like to remember at this point my colleague Dr Will Howard, who died recently and who arranged that I come to speak to you.

Links and Further Information to Talk on Climate Economics

The Economics of Climate Change. The Stern Review

http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/stern_review_report.cfm

Feedback Dynamics and the Acceleration of Climate Change An Update of the Scientific Analysis

http://www.meridian.org.uk/Resources/Global%20Dynamics/Feedback%20Dynamics/index.htm

Critique of IPCC Report & Introduction to Apollo-Gaia

(YouTube mini-presentation)

Introduces evidence of the 'dumbing down' of the text of the Summary for Policy Makers of the current IPCC Report, followed by an outline of the need for a global response (the Apollo-Gaia Project).

http://www.meridian.org.uk/AVResources/apollogaia.htm

Political Corruption of the IPCC Report?

Analysis of changes in the Final Text of the "Summary for Policy Makers" of the Fourth Assessment Report, WG1: The Physical Science Basis, throws light on the direction in which political and economic interests have influenced the presented scientific material.

http://www.meridian.org.uk/whats1.htm

Oil and Gas Depletion plus coal and Bio-Mass

http://www.energybulletin.net/
Weekly round up of Oil Depletion Analysis Centre http://odac-info.org/newsletter/

Carbon Capture and Storage and Coal as an energy source

Brian Davey "The Future for Coal Power" Web Essay http://strategyforlosers.blogspot.com/2008/04/future-for-coal-power.html

Greenpeace Report on Carbon Capture and Storage
"False Hope:Why Carbon Capture and Storage Won't Save the Climate" -

http://www.greenpeace.org/raw/content/international/press/reports/false-hope.pdf

Pressure of Biomass and Biofuels on Climate

http://www.biofuelwatch.org.uk/
http://www.hiye.org.uk/climatechange/lecture05.htm

Carbon Trading and Carbon Markets

http://strategyforlosers.blogspot.com/2008/04/architecture-of-carbon-trading-who-owns.html
http://strategyforlosers.blogspot.com/2008/04/phoney-war-against-climate-change.html

Cap and Share

http://www.capandshare.org/
http://www.rsacarbonlimited.org/viewarticle.aspa?pageid=887
http://www.newstatesman.com/200801310021
http://www.feasta.org/energy.htm

Use of Biomass to Take CO2 out of the atmosphere

http://www.feasta-multimedia.org/2008/Peter_Read.mov
Fritz Scholz and Ulrich Hasse Permanent Wood Sequestration: The Solution to the Global Carbon Dioxide Problem at www.chemsuschem.org

Bio-Char to take CO2 out of the atmosphere

http://www.biochar.org/joomla/
http://www.css.cornell.edu/faculty/lehmann/biochar/Biochar_home.htm
http://www.biochar-international.org/aboutbiochar.html

The De-Growth Economy and Lifestyles

2008-04-30T14:24:00.000-07:00

Paper produced for Economic De-Growth for Ecological Sustainability and Social Equity, Paris, 18/19th April 2008 http://events.it-sudparis.eu/degrowthconference/en/themes/

Abstract

The transition to a de-growth economy cannot be effected in gradual incremental change and will be experienced by most people as a lifestyle transition from one life style "package" to another. Most of the time people manage their lives in largely stable routines in which they more or less hold in balance an age related job with a pattern of skills and abilities, a level of income (and debt), habitat and domestic arrangements including their diet, a state of health and disability, a network of emotional and instrumental relationships. All of these reflect and give rise to a corresponding mind-set of assumptions, aspirations, expectations and social and community values. Inside this interrelated complex structure there is an inertial weight which bestows on certain behaviours addictive features. For example the network of relationships and geographical habitat make it difficult to break consumption patterns that are shared by peers without risking damaged relationships - e.g. meal routines and rituals with close relations provide security in a changing world or again a routine weekend leisure journey may provide the binding features to a close relationship.

A transition to a de-growth economy caused by oil and gas peaks, responses to climate change and the credit crisis will create radical disjunctures and a break up of these routines for millions of people in a way that will be frightening and disorientating for many. There is a danger that groups will channel their anger at scapegoats - perhaps led by demagogic thugs with simple explanations for the crisis that blame vulnerable people and foreigners. Millions of single unsupported people will find it difficult to cope. Practical movements like that of the UK Transition Towns are needed to provide people with new models for their lifestyles in order to avoid a community health crisis. The Transition Towns are beginning to provide a social network in which people support each other to develop new skills to conserve resources and supplement their means of living close to their habitats. They help collectively develop alternative energy and resource-light lifestyle packages and community focused value systems. A movement like this will be needed to provide people with an alternative basis for self respect and dignity as more and more recognise the futility and destructiveness of living according to the values and goals of the debt burdened consumer society.

End of Abstract

"The great advantage of being in a rut is that when one is in a rut, one knows exactly where one is" Arnold Bennett - British novelist and playwright 1867-1931

Routines

It is sometimes by re-examining the most mundane and obvious, that which we take for granted, that we learn the most.

Most of the time most people live in routines which are the constants, the stability in their lives. It is very difficult not to - no individual and no society could function if all its members were constantly on the move, constantly changing jobs, constantly changing instrumental and work relationships. Although nomadic lifestyles and a range of agriculture and pastoral skills can make for great variety even they must happen in known locations. They must involve arrangements between people in conformity to routines imposed by the seasons and nature - the need to sow and to harvest at the same times of the year. Matching temporal rhythms are also necessary if people are to sustain relationships - to be in a relationship people must not only spend time together they must to a degree synchronise their emotional states and practical inclinations. Thus it is that to find their identity people must hold in balance a habitat with all its domestic arrangements and chores of eating, sleeping, toilet and hygiene with their work and income and their network of instrumental and emotional relationships. These are constituted as interrelated patterns - as a generalisation we cannot have a large habitat without a large income. The number and quality of our relationships will depend upon the size of our habitats. Our income will depend partly on our work and skills. Our work, skills and incomes will determine our relationships. These in turn will affect our state of health, our morale and aspirations. How these arrangements are managed together depends on our age, gender, state of health and disability. They also embedded in spatial, economic and cultural arrangements which will affect what kind of neighbourhood or settlement we live in, how it organises the supply of essential means of life, how far we must travel to work.

Lifestyles considered as "packages" and lifestyle transitions

Because the different elements in our lives have to be managed as a package - as interrelated elements which must be consistent with each other - the routines and the ordinary features of our lives can be thought of as having an inertial character. To be sure, even a routinised lifestyle will have some variety and novelty in each day, up to a point - however, beyond that point, adjusting one aspect of our lives to a greater extent will mean that we must adjust other elements in our lifestyle package. In turn this will is likely to bring with it a degree of uncertainty and unpredictability. To take an example - if we decide to move where we live then we will be faced with different financial circumstances and that will have a knock on effect on work, relationships and so on.

As is obvious periods of comprehensive lifestyle change are of different types. There are some changes which are inevitable age specific processes - the obvious cases being late adolescence and early adulthood when most people start living independently, move from education to a job (if they are lucky) with an independent income and set up their own adult sexual relationships. As they are doing this all at once it is a difficult and challenging time - but it is happening with all the others of their age group. At the other end of life there are the challenges associated with retirement. In between there are also typical lifestyle transitions triggered when children leave home, parents die, people evaluate their lives so far and perhaps have a mid life crisis, deciding if they really want to live as they have been doing for the rest of their lives. As should be clear there are situations where a life style shift is happening to all one's peers - for example when a firm goes bust and there is mass redundancy which affects an entire community and there is the rather different situation in which only one person, or a family, decides to launch out in a change of direction. There are situations too which are willed, which are entered into deliberately and those which are entered into because people are forced to change - as in the redundancy situation.

The risks of launching into the unknown

Now it is clear that all these situations share in common that they involve largely launching out into the unknown. As such all these situations involve risks. As the English author Arnold Bennett expressed it:

“Any change, even a change for the better, is always accompanied by drawbacks and discomforts.” Arnold Bennett

At its worst a change in life launched into with insufficient skills, resources and friends can go badly wrong. Indeed there are arguments that mental breakdowns sometimes have this character. The stresses, tedium and limitations of an existing lifestyle may become too much and a person decides to launch into new territory - risks leaving a job without a new one, risks changing where they are, leaving a relationship and giving up a secure habitat in the process. To others this seems like a crazy choice as they do not have the resources and skills and support to make the move - and indeed they fall in the process. Their emotional turmoil therefore becomes greater. This is described by the psychiatrist Anthony Storr in psychological terms

"Suppose that I become dissatisfied with my habitual self, or feel that there are areas of experience or self understanding which I cannot reach. One way of exploring these is to remove myself from present surroundings and see what emerges. This is not without its dangers. Any form of new organisation or integration within the mind has to be preceded by some degree of disorganisation. No one can tell, until he has experienced it, whether or not this necessary disruption of former pattern will be succeeded by something better". (Anthony Storr, "Solitude", HarperCollins 1994 page 35)

This is a very good description of how madness might arise in a lifestyle transition that goes wrong. Sometimes the new surroundings and new setting are not better and the people in the old relationships resist or counsel against the change. Sometimes the change, which has financial implications, is badly managed. Sometimes the new surroundings requires skills and an orientation that we do not have. In those circumstances the psychological stresses that have impelled our movement become even worse in our new surroundings. To those who observe the process it appears that we have gone mad, that we have chucked ourselves recklessly into a new lifestyle for which we are not suited and not equipped.

Degrowth as a political-cultural movement for lifestyle transitions

In so far as the idea of "de-growth" becomes a cultural movement that inspires people to change their lifestyles it is enormously helpful that there are other people who are treading the same path and helping each other along the way. This gives some sense of what to do and what to expect. In this sense de-growth as a movement, with complementary and similar movements like permaculture, can be a powerful support for change. The risks are that much less when one is not on one's own in the change process. It is perhaps for this reason that movements that form around causes can be so intoxicating. Although one knows that change will be challenging and discomforting the fact that other people are making these changes in the services of a cause is actually making it easier.

“A cause may be inconvenient, but it's magnificent. It's like champagne or high heels, and one must be prepared to suffer for it.” Arnold Bennett

Without such causes the danger of being stuck in a rut is that one does not explore sides of oneself and that by staying in situations of safety one limits what one can become.

“The real tragedy is the tragedy of the man who never in his life braces himself for his one supreme effort, who never stretches to his full capacity, never stands up to his full stature” Arnold Bennett

It is in this way that one can understand the attraction and the possibility that people would decide to adjust their lives and be prepared to sacrifice their income and purchasing power to be able to do so. The attraction of de-growth is clearly that by having less income and purchasing power to acquire consumer goods one will be able to get certain experiences and satisfactions in life that money cannot buy directly. Perhaps it is more time to spend with one's children as they are growing up. Perhaps it is too learn a new trade that is regarded as more interesting, more challenging and more socially responsible. Perhaps it is to engage with social and community responsibilities. At such times the absence of work and contractual obligations may free people up to be more creative and use their time better. The purchase of freedom by less money is often a very good bargain.

Downshifting and upshifting

The number of people who have made this choice over recent years, for a preferred lifestyle at a lower income, is not inconsiderable in rich industrial countries. The term "downshifting" has been used to describe what is happening. In his book, 'Growth Fetish', Clive Hamilton, reports a number of studies on the extent of downshifting. For example 19% of the US adult population declared that over the previous five years they had voluntarily decided to make a change to their lives that resulted in making less money. This fifth excluded those taking a scheduled retirement. A similar survey in Australia found that 23% of 30-60 year olds had downshifted, citing as their reasons a desire for more balance and control in their lives, more time with their families and more personal fulfilment. ("Growth Fetish", Pluto Press, 2004, page 206)

For all of those people who have chosen to make a lifestyle change of this type there will be others who want to make this kind of change but who, whether because of a lack of support, knowledge or resources may lack the will to take the plunge. Perhaps, with more support, they can be persuaded to do so. However there are also people who will have only recently entered into lifestyle choices which are fundamentally antithetical to a de-growth agenda - perhaps they will just be starting or consolidating a lifestyle which is fundamentally growth focused and within the mainstream values of the current economic system. After all there are powerful forces encouraging them to do so. Perhaps they will be too tightly bound into the messages and values of the growth system, its routines and its obligations, particularly debt and a consumption lifestyle to even consider or be aware of a degrowth approach to life. At the moment it has to be said that this group probably constitutes the majority of the population and this group are only amenable to change messages at those points where they are going through fundamental changes - like moving job or house, or having a child, which compel a re-evaluation of self and behaviour.

Growth and mainstream institutions

This group are bound into a relationship with the mainstream institutions of our society who can only run smoothly if the future is predictable and mostly organised in bureaucratic routines. Growth gives the arrangements and routines of an increasingly complex society leeway for adjustment and for coping with stresses and change. Access to additional resources is typically seen as the way to solve problems and these resources are seen as arising out of extra income, extra production or through borrowing. In the last case extra resources to solve problems are generated by shifting payment into the future and paying an interest payment to buy the right to do this. However any macro growth of output and real income is ultimately only possible through an increase in physical energy available to the economy multiplied by the efficiency with which the energy can be applied to the production process. Once the amount of energy available is no longer rising the scope for real output growth dries up. At that point solutions for problems cannot be found in extra resource availability but must be found in greater ingenuity for improvised solutions working with the same or less. This means more psychic work and stress levels may rise.

Downshifters as a pioneering minority

This majority are however currently stressed and challenged by the difficulties of the economy. So far this paper has described the situations of people who have decided to change their lives in a degrowth direction. These people may be acting, whether they are aware of it or not, as the leaders and pioneers of new life styles. They create the community gardens, the social enterprises, the community exchange systems, the cultural arrangements which provides seeds for a new de-growth economic order. Hopefully those who have voluntarily changed their lives will have created the lifeboat institutions and arrangements which can support millions who are compelled to change when the existing economic system can no longer continue.

Degrowth as an involuntary process

As is obvious some life transitions are not voluntarily entered into. Sometimes abrupt lifestyle shifts take place across society that most people do not want. In the early stages of wars and economic catastrophes people may watch with interest the novelty of things going seriously awry. They may even, perversely, celebrate in the hope that change will make a normally humdrum existence more exciting and dramatic. However grim experience may take away the excitement, replacing it with unwanted and unpleasant experiences that had not been expected. Fundamental change may confront a lot of people with painful and frightening challenges.

This possibility cannot be avoided. Most people are likely to be forced into degrowth lifestyle changes that they have not wanted. They may enter the process enormously stressed, very angry, frightened and unhappy. This would be very dangerous - historical experience suggests that millions of people can be mobilised by channelling their emotions of frustration and fear against scapegoat minorities and foreign enemies. We are already seeing how shortages of oil and gas are being conceptualised by governing elites and the media as "energy security" issues in which nations are pitted against each other. Military intervention to secure oil and/or gas fields and pipeline routes has inflamed and polarised cultural and religious divisions. Such conflicts are in the short term interests of armaments manufacturers, aerospace, military logistics, security companies and the builders of gaols. Opportunities for profit in these circumstances will increasingly arise out of what Naomi Klein has termed 'disaster capitalism' or 'shock capitalism'. The degrowth movement will have its work cut out to develop a positive alternative to this frightening scenario of increasing conflict and destruction.

Reaching the limits to growth

Degrowth as an involuntary process which people are flung into looks increasingly likely as the outcome of both the credit crunch and the oil and gas supply crisis. The degrowth agenda derives from the sustainability agenda. 'Sustainability' has been a word in circulation for over a decade and the people who use the word have mostly lost sense of its original meaning. To be sustainable means to be able to continue. If something is unsustainable then it cannot continue and comes to an end. If there are limits to growth then, at some point, growth will no longer happen.

The climate crisis occurs with a time lag which has lulled political and economic elites into a false sense of security. However, the increasing costs of recovering depleting fossil fuels compared to the global demand for those fuels is taking place in real time. The credit crisis, which is as an over extension of the globalised banking system, is also taking place in real time. Together with imbalances arising out of the uneven development of the global economy these processes look set to throw millions of people into a period of economic chaos. Taken together they will compel lifestyle changes which provide the possibility and necessity to change to a de-growth economy and society.

There is thus no doubt that degrowth will happen - but not mainly as the result of a political and cultural degrowth movement but, rather, because of the consequences of passing the peak of global oil production, then global gas production, and because of the overextended position of the global financial system which cannot any longer be propped up.

The financial system has 'dis-credited' itself in both senses of the world - though a radical loss of reputation and as a loss of its ability to lend into an economy where debt had reached its mathematical limits of financial sustainability. In the financial newspapers we read over and again the idea that the banks do not trust each other. This is ironic because the original meaning of the word "credit" is trust and belief. Without trust and belief the financial system cannot continue to expand and it will not continue to expand - it will collapse.

This does not mean that the promotion of degrowth economics and politics has been a waste of time. To prevent the coming collapse turning into a catastrophe we need the prior development of a movement which can show how a degrowth economy and society might be managed. Without this ability to show how things might be organised differently we will be tipped into a catastrophe of wars and conflicts. We need arrangements to manage life within the capacity constraints of the global ecological system in ways that are felt as equitable and fair. Otherwise the eco-system will be destroyed and society will tear apart.

Common resources which we share must be managed in the interests of everyone in contemporary society as well as in the interests of future generations. For example, in rationing and reducing greenhouse gas emissions, the scarcity rent for permits for using the earth's atmosphere should go to citizens directly - not to the state and certainly not to the big companies. The atmosphere is a commons and should be managed as such - that means propertising it but not privatising it. A Global Atmosphere Trust should be under a legal obligation, enforceable by the courts, to manage the atmosphere in the interests of everyone equally. The monetary system can also be regarded as a common arrangement that should be managed in the interests of all. Currency trusts with duties, enforceable by the courts, need to be set up to manage the money system in the interests of everyone in a currency zone equally. Instead of debt money, repayable with interest, created and owned by private banking corporations, with an inherent growth dynamic, we need a non debt money supply made available for and through the people, including at a local level.

These are the kinds of overarching framework institutions that we need in an ecological society. They will complement the local projects and arrangements to meet basic needs that people will be forced to make to try to re-stabilise lives which are in turmoil. That means creating initiatives like local community gardens and food arrangements; make do and mend initiatives for clothes; mutual aid and simple support for building and rebuilding structures to make them energy efficient; arrangements to help people share resources, tools and skills for energy light lifestyles. We need to create local renewable energy systems where we can. We will need cultural and artistic programmes for people to find new reasons for living and simpler pleasures.

Transition Initiatives and the Degrowth Process

In the UK the Transition Initiatives movement is beginning very much to occupy the space for this movement. The prospect of energy famine requires the organisation of a response and Transition Initiatives are a way of preparing at a community level. There are now many Transition Initiatives springing up around the country - initially in small towns like Totnes, Stroud, Lewes, Falmouth, Penwith but increasingly also in cities like Bristol, inner city areas like Brixton and in Nottingham.

The thinking behind Transition Initiatives (formerly Transition Towns) is simply that settlements using much less energy and resources than we presently consume could, if properly planned for and designed, be more resilient, more abundant and more pleasurable than at present. Transition
Initiatives develop Energy Descent Action Plans as a tool for designing a positive timetabled way down from the oil peak AND as a response to climate change.

The basic formula for the development of Transition Initiatives is a number of steps

1. Awareness Raising about peak oil and gas as well as climate change and its implications.

2. Lay the Foundations of groups and networks to respond to the crisis.

3.The Official "Unleashing" - telling the public with much publicity that you are there and what it is all about.

4. Forming Groups - for example around food and peak oil, transport, health and social welfare and the support of vulnerable people etc etc

5. Use Open Space - this is a way or organising meetings where the agenda is not pre-fixed but is created by and from the people who have come to the meeting.

6. Develop Visible Practical Manifestations of the Project - for example in Totnes they have started to plant nut trees as a way of re-developing local food sources. This should not be a talking shop!

7. Facilitate The Great Reskilling helping people with the skills they will need in the very different economy that will develop on energy descent - e.g. skills to grow, cook and prepare food, repairing bicycles etc.

8. Build a Bridge to Local Government - obviously we want support if we can get it and need a harmonious working relationship. At some point we will need policy support - the sooner the better.

9. Honour the Elders - elder people will still have skills developed in a less energy intensive era. (They will also be vulnerable in energy descent)

10. Let it Go Where It Wants to Go and Reflections…not pre-planning or trying to fix or steer such a big process too much.....

To conclude with another quote from Arnold Bennett:

“Pessimism, when you get used to it, is just as agreeable as optimism.”

Brian Davey
March 2008

Land, Land Values and Land Tax after peak Oil

2008-04-29T13:49:00.000-07:00

As we approach peak oil a major challenge for society is going to be the re-organisation of
the agricultural and food supply system to grow enough food. The current rise in food prices is just an indicator of things to come. Another challenge is likely to be how we can grow enough biomass to take CO2 out of the atmosphere and then convert into bio-char.

In both cases a major challenge is where is the land going to come from for all of this? The answer is not as straightforward as one might think - as food prices rise, and as the money and banking system wobbles and returns from money lending becomes insecure, the clever money is now trying to transfer wealth into the place from which the food comes in the first place - into agricultural land, pushing up its price. This is a world wide trend. (See the articles from the Financial Times at the bottom of this e mail).

People in Transition Nottingham (and other Transition Initiatives) might like to think about the implications of this. As we consider how we are going to grow more food close to home the scope for growing food in allotments and gardens is going to be rather limited. So it will be important that we turn a lot of land, currently lawns and other sterile spaces, into cultivated areas.
But that is not going to provide us with bulk foodstuffs which will require a substantial amount of land close to the cities and close to home.......

But it will not be straightforward doing this is the land that we want to use is owned by financiers who charge higher and higher rents for the privilege of working to put something in our mouths.

One prospect for the future would be a situation where competition for land means that you slog your guts out to grow food, but can only keep just enough to live on while the landlord makes an extremely nice living on your efforts (and does not invest this money into increasing agricultural yields either - preferring to invest the money into buying yet more land an a rather luxurious lifestyle).

A good part of human history has been the story of this kind of parasitism.

In fact it is surprising how little people who are social and economic radicals know about land and land rent. For decades radicals have focused the relations between labour and capital but how the land property system works is a closed book to most people.

It was not always so. At the same time that Karl Marx was expounding his ideas about the exploitation of the working classes another author, Henry George, was writing a different account of how one might understand poverty and exploitation. It is still relevant today. Few people realise how, despite the progressive tax system, poor people who pay taxes are actually subsidising the rich people. It works like this. Taxation revenues and council taxes are used to build a social infrastructure of roads, parks, social facilities, in which some places are very nice to live or very favourable business locations. Public expenditure on the infrastructure near these places builds up capital values and helps them command high rents. In other words state
expenditure bestows real monetary value on places that are already owned by the rich and they capture this value for themselves. This far outweighs anything that they pay in taxes, if indeed the rich pay anything in taxes at all - so the poor end up subsidising the rich.

In general terms the most favoured locations for business, the best agricultural land (in terms of fertility and in terms of proximity to markets) commands a premium value that the landowner has done nothing at all to earn - rather the extra value is created because this land cannot be
created and reproduced at will but is scarce in relation to society's needs. It is society that creates the value, not the landowner who does nothing at all to earn their income - except capturing an asset that others want.

So what's the solution? As peak oil morphs into a deeper and deeper food crisis are we all going to end up paying a nouveau landed gentry for the privilege of growing our food when they have done nothing except cleverly escaped out of the collapsing financial sector in time and bought up the land that we need to grow food?

Well, if we let it happen! But there is another way. That other approach is a land value tax. Rather than trying to expropriate the landlords we can let them keep their land on condition that they pay back the additional income in rising rentals and land values back through rising taxes. And that land value tax is then used as a revenue that would allow the abolition of income tax
and/or as a way of supporting vulnerable and socially dependent people.

This requires a bit more spelling out. A land value tax is not a tax on the additional income that arises from your work and effort on improving some land by building or growing on it. It is a tax on the value that the land has - even if nothing is happening on it - because of its favourable location in relation to a community (and the collective expenditures and developments of
a community).

The point about a land value tax is that this not only it gives the community back a value that rightfully belongs to the community but that it liberates land and makes it available for use. The reason is this. When land is owned by a landowner and the land value from the piece of land accrues to the landowner as a capital gain then landowners typically have an interest in
holding back land from development for speculative reasons. However, if rising land values are taken back by the community then landowners have no reason to do this - indeed the reverse is the case. If a landowner hangs onto land and does not use it, but, nevertheless finds that they must pay a tax on the land equal to its value, then they give it up pretty quickly and makes
the land available to someone who can use it.

That way land gets into use and is used by the people who can use it best - to grow food on if that's the best use.......and the community gets the additional revenue that accrues because of favoured locations...and can use that revenue in the interests of all.

Here are a few links which explain the idea from the Labour Land Campaign (including a YouTube Video) plus some FT articles about rising agricultural land prices...

http://www.labourland.org/

http://www.labourland.org/the_campaign/latest/movie.php

http://www.labourland.org/manifesto/

Link to Financial Times article:

European farmland hits record prices

By Andrew Bounds in Brussels

http://www.ft.com/cms/s/0/55c8dc0c-1159-11dd-a93b-0000779fd2ac.html

Last updated: April 24 2008 08:23

With prices of commercial and residential property falling, investors are increasingly turning to a more traditional asset: farmland. Long seen as a declining industry, farming has received a fillip in the last few months as global demand for food has increased. As a result, the cost of agricultural holdings across the European Union has risen to record levels.

In response several funds have recently been set up to buy farmland. In particular the UK, where prices have risen 40 per cent over the last year, has been active. Braemar, a fund manager, is one example. The Manchester-based group has been swamped with offers since it launched a fund
this year.....

The Architecture of Carbon Trading - Who Owns the Sky?

2008-04-29T13:39:00.000-07:00

The Public do not understand and distrust carbon trading

I think it true to say that when most lay people approach the issue of carbon trading they do with a degree of scepticism, bewilderment and not a small amount of distrust. The immediate gut reaction is to say " If you want to reduce emissions of carbon dioxide in the atmosphere how on earth is having the right to trade in permits to emit CO2 going to help? You want to stop this thing happening not make money out of allowing it to happen".

They smell a rat and suspect that business and government are trying to pull a fast one - letting money making in markets take priority over the real job of reducing carbon emissions which should occur through regulation and through carbon taxes driving technological innovations and behavioural changes.

The public are right to be suspicious of offsets

Unfortunately there is quite enough in the early experience of voluntary carbon markets - the sorts of schemes called "offsetting" to promote "carbon neutrality" - and also in the early experience of the European Emissions Trading scheme to justify suspicion. Just under a year ago the Financial Times did some research and ran an article which said this:

“Industry Caught in Carbon Smokescreen – Companies and Individuals rushing to go green have been spending “millions” on carbon credit projects that yield few if any environmental benefits. A Financial Times investigation has uncovered widespread failings in the new markets for greenhouse gases, suggesting that some organisations are paying for emissions reductions that do not take place. Others are meanwhile making big profits from carbon trading for very small expenditure and in some cases for clean ups that they would have made anyway” http://www.ft.com/cms/s/0/48e334ce-f355-11db-9845-000b5df10621.html

And the public are also right to be suspicious of the European Union Scheme

So there is actually good reason for being sceptical - and there is good reason to be sceptical too of the European Union's Emissions Trading scheme which, in its first phase did not really succeed in reducing carbon emissions in Europe, is so complicated that most people and politicians do not understand it and, for a time, was seen to be giving rise to windfall profits to big power companies.
(£1.2 billion electric utilities 2005. DTI in addendum to CCBill)

Pendulum swinging to carbon taxes and regulation

Given this bad start it is not surprising that many politicians and campaigning organisations are now tending to favour carbon taxes and regulations rather than carbon trading - for example the Lib Dems, perhaps the Conservatives, or the Green Fiscal Commission, a think tank set up by the great and the good in the environmental, business and government policy making world.

What has been discredited are poorly designed schemes

Despite this what I want to argue is that there are many different possible architectures for the control of carbon emissions in a way that involves markets and that what has been discredited have been poorly designed systems not the per se possibility of having a system that could bring greenhouse gases under control.

In order to make this point strongly in a complicated field I want to try to get over three very basic points about any scheme to control carbon emissions.

The necessity for an overall cap

Firstly the necessity of having an overall cap that is enforced - otherwise a reduction happening at one place in the economic system simply slips into being energy and carbon that becomes available and is then used and emitted somewhere else. Thus - you buy carbon credits to offset the carbon emissions of your flight to India and the money goes to buy low energy light bulbs which are given to people in Goa. Hurray. However the power station burning coal to supply the light bulbs of Goa now has some surplus capacity which is available for another use - and the people using the low energy light bulbs have more cash in their pockets because their electricity bills have gone down. When most people buy low energy light bulbs what happens is that they leave them on longer. Without an absolute cap on the amount of energy and carbon used there is what is called a rebound effect. The existence of this rebound effect has been known to economists for almost 150 years. The emissions from your flight are still in the atmosphere and there is no net gain to the climate. Voluntary offset schemes which have no caps are ineffectual.

Control of carbon emissions should take place "upstream" and not "downstream"

The second point I want to make is that it matters a great deal where you enforce your control of carbon emissions. Here the key point that I want to make is that, to be effective, one really ought to control emissions, in the jargon, "upstream". Unfortunately most current schemes, and also most proposed schemes to extend current arrangements, are what are called "downstream systems".

The Garden Hose and Sprinkler analogy - two choices to reduce flow - the tap is upstream and the sprinkler is downstream

Let me explain these terms. Imagine you are watering the garden with a hose attached to a tap in your house at one end and a sprinkler at the other. After watering your garden you decide that you want to stop the flow of water. You have two choices. You can try to plug up the holes in the sprinkler - for example by stuffing match sticks into each of the sprinkler holes - or you can turn down the tap. The former is the upstream control mechanism. The latter is the downstream control mechanism. Which would you do?

Now think of fossil fuels entering and moving through the economy until they reach the point where they are purchased by the organisations and the individuals that will burn them giving rise to greenhouse gas emissions. We are talking about coal, natural gas and oil which is refined into petroleum and diesel and then sold on. It is burning these fuels that causes 3/4 of the emissions.

The upstream fuel taps - 10 oil refineries, 4 natural gas terminals, 40 coal mines and 12 coal ports

These fuels enter the economy though 10 oil refineries, 4 natural gas import terminals on the North Sea coast, 10 deep mines and 30 open cast mines and 12 dedicated coal port facilities - in all under 70 locations. These are the upstream locations - and figures are collected at these locations about exactly how much oil, gas, coal enters the economy.

Downstream - Sprinkler "holes" of varying sizes - including 900 larger users

The fossil fuels are then sold and distributed to users across the whole country. About a half of the fuel - a large part of it coal and natural gas - goes to very large users like power stations and iron and steel furnaces and blast furnaces - there are about 900 such large users in the UK.

Tens of thousands of organisations and smaller companies and millions of individuals

The rest goes to smaller companies, local authorities - and to us, the general public - every time we buy gas for the house or for the cooker or every time that we buy petrol or diesel for the car.

So our garden hose analogy has to be stretched a bit but is basically still true. There are a number of energy hoses attached to about 70 taps and they go on to sprinklers with a range of different size holes. There are 900 largish holes on the sprinklers and tens of thousands for smaller ones and about 60 million small ones for each of us as individual energy users.

Two possible approaches - at 70 locations or

Now there are two ways of controlling emissions through a permits system.

One can either impose a permit system on the upstream suppliers and require them to have permits before they sell fuels into the economy. This would be a system imposed at most at 70 locations.

Or one can try have a permit system downstream - requiring organisations and individuals to have permits before they can buy and use fossil fuels.

At 900 larger downstream locations - the EU ETS

And this, is exactly what has happened. With the EU Emissions Trading Scheme ETS they have started with a system requring the ETS at the 900 larger users to have permits.

.....then at thousands of smaller companies and local authorities - the Carbon Reduction Commitment

They are now moving to an extension with carbon trading extended to smaller units - hotels, supermarkets, local authorities and the like. This is the so called Carbon Reduction Commitment.

.....then at individual level - personal carbon allowances or TEQs

The next steps being considered by Defra might require every individual in the country to have a personal carbon allowance - there is quite an army of officials and academics researching this idea.

If you ask me this is plain bonkers but it is exactly what is happening.

What they ought to be doing is turning down the taps, or spigotts, at 70 different upstream locations which would be very simple and cost virtually nothing to administer.

So that is my second point - imposing carbon caps upstream rather than downstream. The basic principle is simple - as 3/4 of the global climate crisis is caused by burning fossil fuels you say that it is not allowed to sell fossil fuels into the economy without a permit. Fossil fuels are toxic goods and we need to get off them asap. You denominate the permits in the greenhouse gas content of the fuels when burned and you screw down the cap. In this way you can control the entire greenhouse gas content emitted from burning fossil fuels throughout the entire economy.

Who Owns the Sky? A resource that was though to be unlimited has to be made scarce

My third point concerns ownership rights - the question - who owns the Sky? For what I have not talked about is to whom and how should the permits be issued? Permits are in effect tradeable permissions to use the sky as a greenhouse gas dump. Up to now the right to use the earth's atmosphere in this way has not required anyone's permission. It has been free - now we are restricting that right so that it becomes valuable in the sense that companies and people will be prepared to pay money for it.

Scarce resources acquire a price, a scarcity value. Who get this scarcity rent?

So we can think about the right to use the earth's atmosphere in this way as a resource - it is a limited resource. No individual or company created this resource. They didn't invent it so can claim no intellectual property right over it. They didn't work or invest capital to create it. The income that arises from selling the permits arises solely from the fact that there is a scarcity which, in this case, is created legally and administratively. This is what economists call a scarcity rent. And a key question is - who gets this rent? Who owns the sky? There are logically only 3 possible answers to this question - either we all own it collectively, or the state and governments of the world owns it, or polluting companies own it.

3 Possible ownership and payments arrangements - each affects the design of carbon trading

Each of these different possibilities has a different consequence for how a carbons emissions scheme would run.

Possibility 1 - States and governments own the sky

If states or governments own the sky then they would sell or auction the permits to whoever wants to buy them and keep the auction revenues for whatever purpose they think important.

Possibility 2 - the people own the sky as a common resource - per capita shares

If the sky is owned by the people then one would either initially distribute all the permits to the people and require those who need them to buy them from the people - intermediary market makers like banks or post offices might buy them and sell them on. Or, another way of organising a people owned sky would be through a Sky Trust, operating on behalf of the people which would auction the permits and make per capita cash payments to the people. So what I am envisaging here are two different ways of recycling the sky rent to the people on a per capita basis.

Possibility 3 The sky belongs to the polluting companies - grandfathering free permits distributions

The other possibility is that the sky belongs to polluting companies. For example, in a downstream system you could say that, if Eon's Ratcliffe on Soar power station is currently creating, say, 3% of UK emissions covered in the ETS (that’s a guess) then next year when the permits for the Emissions Trading Scheme are distributed it would be given, for free, 3% of them. The jargon word here is "grandfathering". "Grandfathering" means that, when you set a cap or a limit then the principle for distribution of the limited number of permits is to match the proportional use that existed prior to the scheme. And the permits would be given for free. In this case the assumption is that the right to use the earth's atmosphere belongs to the companies.

So there are these three approaches. The atmosphere is owned by the state, the people or the polluting companies. Would you cynics like to guess which principle has been adopted for the European Union's ETS?

The EU System

At present the EU ETS gives some 90% of permits to big polluters free. There is an argument about whether it should auction them in the future, the figure of 50% has been mentioned after 2012.

You may read in the papers how many big companies are very keen on carbon trading. For example in the USA they are pressing Bush to have it. The PR machines of these companies love to give the impression that they are keen to be green if only there is a level playing field for the policy.

The enclosure of the sky - comparison to the enclosure of the common lands

Maybe... but the cynical view is that the big companies smell money. One way of seeing the situation is as an enclosure of a commons. In the 16th to 18th century the idea that the common lands could and should be enclosed into exclusive private property and no longer available to all for grazing livestock or collecting firewood and other foraging was seen by the poor as a theft by their masters. What we are looking at here is another enclosure process - this time of the atmosphere in favour of the corporate giants who want to take the Sky rent for themselves.

What there are is not is any idea that since this is a commons it doesn't belong to the state either. To me there is a real danger that if the sky rent went to the state it would be spent on big industrial schemes of dubious benefit like subsidising nuclear power. The earth's atmosphere could and should be managed as a commons and that means that the rents should come to us equally - in which case the money will go into the base of the economy and help ordinary people with the resources to insulate their homes and get their own lifestyles in order for a time of more expensive energy.

Equity implications - who will lose as there is less carbon energy and the price rises?

This is actually quite important because who gets the Sky rent has considerable equity and social justice implications. The consequence of any effective permits scheme will be to put up the price of energy considerably. Without any adjustments this will fall heaviest on the poor and so when it comes to making the reductions in energy use it will be them that take the heaviest hit as they will not have the purchasing power to pay for the rising energy prices. So we could face a situation in which the energy companies are making money which are coming out the pockets of the poor. That is in fact what we have in the EU ETS - if you want to sum it up you could describe it as a "poor people pay the polluter" principle.

Cap and Share

The policy I think would work is called 'cap-and-share'. Here a cap is set yearly, permits are sold to primary fossil fuel companies and the money rebated direct to all adults on an equal basis. The control is fully upstream and everyone, including the poor are compensated for rising energy and food prices. The higher price of embedded carbon makes green products and services more competitive and so start to transition the economy to a low carbon future.

As many people and companies gain from the system, deep cuts can be made in emissions and the price of carbon pushed up-and-up over several decades. If we want to make 90% or deeper cuts by 2050, I’d argue that it is the only system that is going to work. And here, therefore, lies a major thread of our hope to stabilise the climate – a hope that should not be delayed any longer.

Sources of further information

www.capandshare.org
www.feasta.org

The Phoney War Against Climate Change - the Crisis of Trust in Carbon Markets

2008-04-29T13:35:00.000-07:00

There is no greater challenge in the world today than responding adequately to the threat posed by climate change. As time goes by the scale of the challenge gets bigger and bigger. It exists on may different levels - technological, economic and political. But above all, as Al Gore said in his film, "An Inconvenient Truth" the climate crisis is an ethical challenge. It is this not only because it compels us to re-consider personal lifestyle and consumer choices but because, as a society we must find ways of responding to the climate crisis together and that involves deciding on equitable burden sharing and human relationships.

Leading climate experts are now telling us that we have a very short window of opportunity to make a massive transformation in our economic and social arrangements as a world society and that the nearest comparable situation is that it is as we are all entering a war together - not against each other but a war to transform our ways of living profoundly in the space of one generation. Thus Lester R Brown in his latest book Plan B write of the need to reduce carbon emissions by 80% by 2020. Meanwhile leading climate scientist, James Hansen and colleagues, writing of the need to phase out all coal power generation without carbon capture in the next 20-25 years, refers to this task as "herculean, yet feasible when compared with the efforts that went into World War II." They go on "The stakes, for all life on the planet, surpass those of any previous crisis. The greatest danger is continued ignorance and denial, which could make tragic consequences unavoidable."
"Target Atmospheric CO2: Where Should Humanity Aim?" by James Hansen, Makiko Sato, Pushker Kharecha, David Beerling, Valerie Masson-Delmotte, Mark Pagani, Maureen Raymo, Dana Royer, James C. Zachos

So what are the tools to do this collctive job that is akin to the challenge of a war? In a war people have to bind together against a common enemy - in this case the problem is not other people but the threat of climate change. Or is this actually true?

To make a massive transformation like a war possible there needs to be a sense that everyone is looking after and responsible to everyone else. If a society becomes divided in a war, if there is a sense of injustice, that some people have to bear a heavier burden than others, that some profiteer while others do the fighting and the dying, that some people are half hearted and do not really support the fight, then this will eventually lead to a break down of trust, a bitterly divided and fragmented society and victory will not be possible.

It has to be said that this describes well the current phoney war against climate change. A large part of the political and business elite that run the global economy is uninterested in, ignorant of, unprepared for, reluctant or even hostile to doing anything about climate change. They are pre-occupied with other power agendas - making money - and have to be constantly pressured to do something about climate change. In consequence, although the rhetoric has changed in recent years the policy mechanisms put in place so far are, at best, half hearted gestures that show clear signs that they don't really mean it. While there are a tiny number of business and political leaders who have studied the climate crisis, and who have become appropriately alarmed, there are not many of these. According to MPs who should know there are, for example, probably only 20 British parliamentarians who understand anything about climate change.

For most of the rest of the business and political elite it seems self evident that the only way action will be taken on climate change is if there is some money in it for them. Thus the idea of developing carbon markets has struck a chord because it will make carbon more expensive and thus drive a process to use less carbon. For most politicians and business people their thinking does not go further than that. As we are using war analogies here this is rather like the way arms manufacturers support a war effort.

It should come as no surprise then that while the official rhetoric of carbon markets is all about fighting climate change the reality is far more to do with making money. This is why so many people who have devoted huge amounts of time and emotional energy at their own personal expense to thankless tasks of being the bearers of bad news about climate change are cynical and contemptuous of this way of fighting climate change. If these campaigners who have got the issue taken up had been in it for the money then nothing at all would happen. At the interface between the campaigners and the political economic elite is the deepest of all cultural divides - where people meet who simply do not share the same purposes. Indeed the market focused elite have no place in their concept system for the campaigners as, in the world of theology of market economics in which they believe, everyone is supposed to be principally motivated by making money.

That explains why many campaigners reject any idea of carbon trading and regard it, with some revulsion, as self evidently a veritable ethical swamp whose manner of operation is the very same as the problem that needs dealing with.

Looking at the situation from across the cultural divide the other way, from the markets, there is either indifference, incomprehension, irritation or cynicism. It is a hallmark of power that one single mindedly pursued one's agendas (i.e. money making), that in the time pressure of everyday decision taking one does not have the luxury, like academics to take a wider view and explore all the wider issues before one acts. To do that is to prevaricate, to lose the initiative to others, to load oneself with additional complications and additional costs. In large measure decision making is a process of self fulfilling prophecies - well resourced action in a well connected and powerful network creates a momentum that others fall in with, follow and then facilitate - this way political and business leaders make headway. This means that single minded pursuing money agendas and the self confidence to ignore others goes with the territory. The mind set is one in which all other issues are re-constructed - so that it is self evident that climate change is a fantasy or exaggerated idea in order to trip up business leaders and be used as a further excuse for taxation.....Either that or it is another way to make money. If the customers are concerned with climate change - then charge them more and use the money to do the things that one was going to do anyway. As the Financial Times put it:

“Industry Caught in Carbon Smokescreen – Companies and Individuals rushing to go green have been spending “millions” on carbon credit projects that yield few if any environmental benefits. A Financial Times investigation has uncovered widespread failings in the new markets for greenhouse gases, suggesting that some organisations are paying for emissions reductions that do not take place. Others are meanwhile making big profits from carbon trading for very small expenditure and in some cases for clean ups that they would have made anyway” http://www.ft.com/cms/s/0/48e334ce-f355-11db-9845-000b5df10621.html

A year later with global financial markets in turmoil the UK Financial Services Agency have produced a report saying something very similar.

" FSA warns of false 'green' claim risks

Emissions trading firms risk damaging the integrity of the nascent market by making false claims about their green credentials, the City watchdog has warned.

In a 37-page study, the FSA identified a number of risks specific to the emissions market, including investors being sold unsuitable products, confusion over the regulation of emissions traders and insufficient official data.

It warned that these could "pose a risk to the FSA's statutory objectives" if they spilled over into the emissions derivatives markets that it regulates. The FSA's objectives include a duty to maintain market confidence in the financial system and a duty to protect consumers.

"Some authorised firms are seeking to positively market themselves as 'carbon neutral'. This marketing must be credible, sustained and accurate to avoid jeopardising the firms' and the market's reputation," warned the paper.

"There may be instances where unsuitable products are sold to investors, either at the request of the firm or of the investor itself, because of the climate change association. This could potentially lead to damage to consumers, or to disorderly markets, and so a lack of confidence in the market."

The paper added: "The market is also at risk if the perceived favourable reputational dividend of participating in it is jeopardised by unsatisfactory advice being given to investors. There have been claims of firms that have held out their FSA, or other, authorisation in emissions-related business as
a mark of endorsement for activities that do not fall within the FSA's regulatory perimeter.

"Aside from being misleading and leading to a potential enforcement action, this type of behaviour undermines confidence in the market."

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/04/01/cnemissions101.xml

It is important to note that this is happening at the same time that the financial markets in general are in the grip of a serious crisis that is caused by a break down in trust. In the newspapers it is repeatedly said that the banks do not trust each other because they are aware that they have been sold securities from the sub prime sector of the USA which are of little or no value. Indeed a closer look at the entire sub prime debacle reveals that it was a massive exercise in predatory lending that was contrary to US law. However, the Federal government blocked action against the institutions making huge fees out of making loans to people that should never have taken them on and then selling them on to pensions funds and banks the world over. Now that the banks that were responsible for this catastrophe are being bailed out and their executives walking away with huge pay offs the cultural and ideological shock should not be underestimated. So the crisis of trust in the carbon markets is taking place against the backdrop of a collapse of trust in the cornerstones of the global economic system - the banks. Against this backdrop too the political system is showing itself for what it is - in the pockets of the bankers and incapable of effective and real control.

This creates huge dangers - but it also creates huge opportunities. For the politicians, business leaders who have been leading the phoney war against climate change are the ones currently being discredited and in panic and confusion. The time is therefore ripe for a New Deal that seriously addresses the climate crisis, peak oil and the economic crisis at once. Such a New Deal must be carefully constructed so that it is seen to be fair to all and constructs unity to use economic resources for a transformation of the economy and society in the short window of opportunity that still exists to save the planet from a climate catastrophe. This is nothing like the current arrangements with the European Union's Emissions Trading System which starts from the assumption that the right to emit belongs to the polluting companies.

Policies like Cap and Share must be part of that comprehensive New Deal. At the moment the big financial interests seeing the financial market in turmoil are trying to turn their wealth into real commodities like foodstuffs, oil, metals and gold. Huge volumes of financial power is currently seeking to get out of traded paper instruments into real goods. This is likely to push out the ordinary people of the world who have done nothing to create this crisis but are in danger of being set up to be its victims - priced out of the market for food and fuel. It is important in this situation that those who own the fossil fuels must buy their right to bring it to market from the ordinary people of the earth. This matches the Cap and Share agenda neatly.

Under Cap and Share the right to sell fossil fuels into the economy is limited to those companies that have permits for the greenhouse gas content of the fuels when later burned. The money from the sale of permits is rebated to the people on a per capita basis from a Trust set up for the purpose of protecting the atmosphere in the interests of everyone equally. Such a Trust would be responsible for auctioning the limited number of permits to primary energy producers and then ensuring that all are treated equally (or, in alternative arrangement the permits must be bought from the people by the energy companies via intermediaries).

Under a system like this, if it were applied globally, the vast majority of the earth's population would benefit from a high carbon price that would go to them. They would get what economists call the scarcity rent arising from limiting the use to the earth's atmosphere. Most people on a low income could get a revenue from the sale of their permits that would be more than they had to pay out extra. The people who would be paying this extra amount would be the people with the carbon intensive lifestyles - this is when the prices of goods rose because the cost of carbon was passed on to fuel purchasers and then passed on again to those who bought carbon fuel intensive goods.

If we are to build trust in the transformation of the world it must be those who have and are using most carbon that must pay most and those who have not caused this problem, those who are the poorest, must be supported and get most out of it. Trust can only be built on equity.

The Future for Coal Power

2008-04-29T13:06:00.000-07:00

Abstract

After a century in which it was overshadowed by oil and then gas as an energy source, today it looks as if coal is going to make a comeback because reserves of oil and gas are not sufficient to meet growing energy demands. Coal generates 40% of the world’s electricity, and with the International Energy Agency predicting a supply crunch for oil in as little as five years, this share is growing. By 2010, coal is projected to become the largest source of CO2 emissions from fossil fuels. But at least in the mainstream media, and certainly according to “official” sources, coal appears to be losing its “dirty” image and is now widely touted as a “clean” fuel thanks to the development of carbon-mitigation technologies designed to convert and store safely underground the CO2 produced when coal is burned. However, the main technologies being promoted remain largely untested on the scale demanded by an energy supply crunch. Perhaps more significantly, even if their effectiveness is proven, these technologies are almost certain to arrive too late to prevent the damage done by the resurgence of coal power and the substitution of coal for oil and gas. The consequent enormous rise in CO2 emissions will mean that humankind will pay a terrifying price in terms of climate change for what is likely to prove a very temporary energy fix, as worst-case scenarios envisage coal peaking in as little as 15 years. It would be far better to recognise that we have reached the limits of growth within a fossil-fuel economy and to invest as quickly as possible in energy efficiency, renewable energy systems and developing energy-lite lifestyles, while we still have the resources to do so. Cap and Share and the Transition Towns movement are presented as examples of a policy and movement, respectively, that present alternative, more equitable solutions to the climate crisis.

Contents

PART ONE: UNCERTAINTIES AND THE PRECAUTIONARY PRINCIPLE

PART TWO: COAL AND THE LIMITS TO GROWTH

PART THREE: THE SUBSTITUTES FOR COAL ARE RUNNING OUT

PART FOUR: COAL AS AN ENERGY SOURCE - THE RATE OF DEPLETION

The Depletion of Coal

Official reserves assessed against rising energy demand

The pessimistic viewpoint. Are estimates of the official reserves too high?

Increasing coal reserves - the optimistic viewpoint

New extraction technologies

Accelerating depletion — coal as a substitute energy source

Coal to Liquid (CTL) conversions

Plug-in cars

The Energy Returned on Energy Invested (EROEI) of coal

PART FIVE: COAL AND CARBON CAPTURE AND STORAGE

“Optimism Bias” and “Strategic Misrepresentation”

Will the technology work — and work well enough? What percentage of the CO2 can be captured?

The risk of leakage of CO2

Available underground storage capacity

Transport of CO2

Deadlines for coal power mitigation technologies

"Capture ready" power stations - a misnomer for power stations not yet ready to capture CO2

Why it will take so long - evolving a highly complex process

Competition from renewables

PART SIX - POLITICAL ECONOMY: ALTERNATIVES AND HOW TO ACHIEVE THEM

The power struggle for Power Down

The power elite’s agenda

Loss of control - when stress surges meet too much complexity and resilience breaks down

Pre-figuring a simpler society - energy descent planning and Transition Towns

The Cap and Share approach to carbon control - the people controlling the energy giants and taking the scarcity rent for the earth's atmosphere

A global movement for change

PART ONE - UNCERTAINTIES AND THE PRECAUTIONARY PRINCIPLE

We know that climate change poses enormous risks for the planet but there is still much that is uncertain. Precautionary policy should therefore be guided by scenarios of the future that are pessimistic, as long as those scenarios are credible.

Anyone attempting to predict the future of the world's energy system is soon faced with huge uncertainties and, if their viewpoint hasn’t been distorted by vested interest(s), they cannot fail also to perceive the extraordinary risks facing humankind as a result of climate change, not least the threats to energy security. Official versions of the future, i.e. those put forward by government and industry, do not favour scenarios with high levels of uncertainty and risk, however. Indeed, in an increasingly complex society where investment decisions involve the commitment of huge levels of resources, the ideal future is seen as one that is predictable—or at least one where risks can be carefully calculated so that clear decisions can be made about investments. Maintaining business and elector confidence is seen as crucial because, without it, investment and growth falter and elections are lost. That confidence is bolstered largely by a vast public-relations industry that seeks not only to frame but also influence the issues and debates as they are reported in the mass media. In the course of the 200 years or so of development since the Industrial Revolution, a mindset has emerged that argues that economic problems will always be solved through a combination of markets and new technologies. This mindset is reflected in official versions of the future, which forecast investment in a variety of technological solutions to resolve crises in the energy economy arising from climate change and the peaking of fossil-fuel supplies. The mass media is concerned mostly with selling us this viewpoint, and the political and economic elites that invest in it frequently believe their own propaganda.

But precisely what is the situation with coal and coal power? Various studies and sources present radically different versions of the future for coal power. Study the literature and one can find forecasts in which fossil-fuel supplies, including coal supplies, deplete rapidly, undermining the basis of the current economy but sparing humankind the worst possible effects of the climate crisis. There are also scenarios that envisage sufficient coal reserves to accelerate the climate crisis beyond a tipping point that would see world temperatures spiral out of control. But these scenarios are presented not in the mainstream media, but in reports destined for experts, industry and politicians. Meanwhile, most stories aimed at the general public are full of publicity about the new technologies that governments claim will make coal power a clean energy source. The emerging "mainstream story", the one that governments and the energy giants would have us believe, is that although there is a surge in the use of coal power, new technologies can make this “safe” by capturing the carbon dioxide arising when coal is burned and storing it safely underground in a liquefied form. This process is called carbon capture and storage, or CCS. But there are good reasons to question the effectiveness of CCS, its practicability in many places in the world and whether it is really more cost efficient than an alternative strategy that would invest scarce resources in renewable energy and energy efficiency. Above all, it’s important to note that even if CCS can prove its effectiveness, it is almost certain to arrive too late to prevent the damage done by the resurgence of coal power and the substitution of coal for oil and gas.

Faced with a bewildering variety of future energy scenarios, what should one believe and what policies should the public be calling for? Given that the world appears to be on the edge of an economic and ecological precipice, this report leans towards the pessimistic rather than the optimistic scenarios. It adopts this stance not because of some perverse desire to be a harbinger of doom; rather, such an approach is consistent with the precautionary principle. Whereas governments and big industry try constantly to sell us the optimistic view, the responsible approach, in a highly dangerous situation, is to be a pessimist. To quote from a recent essay by economist Richard Douthwaite, co-founder of Dublin-based systems think-tank Feasta: The Foundation for the Economics of Sustainability (www.feasta.org):

"As Philip Sutton, an Australian thinker on ecological sustainability, has written, we “wouldn't fly in a plane that had more than a 1% chance of crashing. We should be at least as careful with the planet.” Yet..... there is far less than a 99% chance of maintaining a satisfactory climate at the CO2 concentration levels being recommended by Stern and other environmental economists. This is basically because environmental economics is a branch of political economics and its practitioners tailor their findings to suit what they think their audience will accept rather than what is necessary. As a result, they have failed both to research and to recommend the really radical changes to both the economic system and the distribution of income around the world that a lower-risk response would entail. One can see why. According to Sutton, “the greenhouse gas levels in the air now pose an unacceptably high risk of damage to nature and an unacceptably high risk of triggering runaway heating. The only way to bring the risk down to an acceptable level is to cut greenhouse gas emissions to zero, to take the excess CO2 out of the air as fast as possible, and to find environmentally acceptable ways to cool the planet. The transformation of the economy from a business-as-usual structure to a sustaining structure must be physically accomplished within 10 years.”

This report on coal power is written in that spirit.

PART TWO - COAL AND THE LIMITS TO GROWTH

The coal sector illustrates the dilemmas of a world economy that is growing past its sustainable scale. The sector is resurgent because of the depletion of preferable substitutes such as cleaner natural gas and oil. This puts pressure on the climate and speeds up the depletion of coal. One scenario being presented envisages the world being spared the worst excesses of climate change thanks to the limits to economically recoverable coal, gas and oil. But even if that were to occur, the limited energy resource for the economy would create its own severe problems.

Coal at the capacity limit of the growth economy

The mainstream assumption that economic growth can, will and must continue is driving the global economy past its sustainable scale. Nowhere is this clearer than in the coal sector. Coal provides over one quarter of the world's primary energy needs and generates 40 per cent of the world's electricity. Two-thirds of global steel production depends on coal. Its emissions are also the most damaging of the fossil energy sources when it comes to pressure on the absorptive capacity of the eco-sphere in general and as a cause of climate change in particular. Depending on the power-generation technology, coal emits roughly twice the carbon emissions of natural gas per kWh, although this comparison is further complicated by supply chain emissions, particularly when using liquefied natural gas (LNG)

In recent years, the continued growth of the world economy and the depletion of oil and natural gas have led to a resurgence in the use of coal. According to the International Energy Outlook for 2007, produced by the International Energy Agency (IEA), coal’s share of total world energy consumption is projected to increase to 28 per cent by 2030, while in the electric power sector its share is projected to rise from 43 per cent in 2004 to 45 per cent by 2030. Although coal currently is the second-largest fuel source of energy-related CO2 emissions (behind oil), accounting for 39 percent of the world total in 2004, it is projected to become the largest source by 2010. By 2030, coal’s share of energy-related carbon dioxide emissions is projected to be 43 per cent, compared with 36 per cent for oil and 21 per cent for natural gas.
(See http://www.eia.doe.gov/oiaf/ieo/coal.html)

Using more coal speeds the depletion of coal reserves and strains the absorptive capacity of the eco-sphere, so coal depletion and climate change are of course connected. Various technologies are being developed to reduce the environmental and climate impact of burning coal, and the installation and use of these technologies have an energy cost. This means that, while coal technologies are undoubtedly becoming more efficient—for example, the heat at which coal can be burned in power stations—mitigating the climate effects of coal will still exact an energy penalty. Depending upon the process chosen, an additional 20 to 44 per cent energy input of coal for the same electricity output by power stations is to be anticipated, according to the calculations of the Wuppertal Institute in Germany.
(See http://www.wupperinst.org/uploads/tx_wibeitrag/II-Kap4-8-RECCS-Endbericht.pdf )

If, as it should be, that penalty is paid in order to protect the climate, the rate of depletion of coal put through systems equipped with CCS technology will speed up by between 20 and 44 per cent. If the energy penalty is not paid then the climate crisis will be that much worse.

Another connection between coal depletion and climate change might give rise to something more optimistic. This possibility is explored by Dave Rutledge of the California Institute of Technology in his paper (published on the internet) "Hubbert's Peak, The Question of Coal, and Climate Change".

In his lecture, Rutledge combines projections for future global coal depletion and for oil and gas depletion. He then works out the consequences of this depletion for the climate, basing his calculations on the argument that if all the fossil fuels decline in the near future then so too will the emissions that arise from burning them. In fact, Rutledge projects trends for future fossil-fuel production and combustion which are less than any of the 40 UN scenarios considered in climate-change assessments. The implication is that producer limitations could provide useful constraints in climate modelling. (See http://rutledge.caltech.edu/ and also http://www.theoildrum.com/node/2697)

If we ignore those voices, and they exist, that we may already be in the early stages of runaway climate change then this analysis from Dave Rutledge would give us some grounds for hope about the climate crisis at least —and the climate crisis is certainly the problem we should worry about most. However it would still not be cause for celebration from an economic perspective because a developing energy famine would undermine the global economy dependent on huge inputs of energy for further growth. More importantly perhaps, it would indicate the danger that there will be a shortage of energy resources that will be needed to develop a renewables energy sector. The conclusion that follows from this is that renewables sector needs to be built now, while the resources are still available.

PART THREE - THE SUBSTITUTES FOR COAL ARE RUNNING OUT

An imminent peak in global oil production and "continental peaks" for gas production will drive the demand for coal as a substitute. This has not been not the “official” view however. This section describes how this view is now seen as being increasingly out of touch and is currently changing to be more in line with unfolding events. After many years in which oil and then gas have been substituted for coal, it now looks as if the reverse will be the case.

Until recently, the official viewpoint has denied any fundamental problem with oil and gas supplies, although today it does concede there are "challenges". When a recent report appeared claiming that oil had already peaked, a British government spokesperson said: "Over the next few years, global oil production and refining capacity is expected to increase faster than demand. The world's oil resources are sufficient to sustain economic growth for the foreseeable future. The challenge will be to bring these resources to market in a way that ensures sustainable, timely, reliable and affordable supplies of energy."

This view has relied heavily on the positions of the IEA, the major adviser and forecaster for the world's leading economic powers on energy. Its "reference scenarios" have been taken as gospel by many, including the British government. The IEA, meanwhile, has until very recently remained unconvinced by peak oil arguments.

The IEA approaches the depletion issue using standard economics. It assumes that if oil and gas become scarce their prices will rise and that this will encourage the search for more oil, as well as making it more of a paying proposition to develop and use technologies to extract more oil from wells (so-called reserve growth). The key idea was that increased profits arising from rising prices to the oil and gas companies will flow into new investment and that this investment will eventually bring more oil and gas on stream. This is further based on the idea that there are still ample reserves of oil and gas to be found, as predicted by the US Geological Survey (USGS) in 2000.

In the last year the IEA has been gradually altering its position, however, in recognition that discoveries have not been made at the anticipated rate and that new investment in new fields is simply not happening at the rate that it expected. This should not come as a surprise. The idea that higher oil prices will automatically lead to higher profits and thus higher investment and then more oil, overlooks a few salient economic points. As depletion proceeds, more and more investment is needed to get smaller and smaller additional returns. Furthermore, the price of energy is not just a revenue variable, it is also a cost variable. This means that a greater volume of energy—energy that is also more expensive per unit—has to be used to prospect for and develop a greater number of smaller and smaller fields. When the energy returned is less than the energy invested, the process is no longer worthwhile from an energy viewpoint, and a supply crunch becomes inevitable. Recognising the reality at last, the IEA has now forecast a "supply crunch" for oil in as little as 5 years, causing Barclays Capital to liken its forecasts to “Not quite full blown King Lear territory” but “certainly up to Richard III’s levels of despair and foreboding”.

Sometimes things really are as bad as they seem. The IEA prediction matches the forecast of peak oil theorist Chris Skrebowski of the Petroleum Review, who has tabulated details of 'mega oil projects'. More large projects bringing new oil supplies on stream are needed if oil supply is to continue to increase, because there are now 60 countries where oil production is in decline. Large new production projects must be initiated to offset these declines, and, as more countries go into decline, progressively more production from mega projects is needed. Skrebowski has found, however, that fewer mega projects are being started. New discoveries that could be turned into new production are simply not happening.

Towards the end of 2007 the IEA moved its thinking yet more towards acknowledging the imminence of peak oil. It has revisited the issue of how much oil there is by questioning the USGS World Petroleum Assessment published in 2000. With good reason: Seven years later, the USGS predictions appear highly unrealistic. As economics writer David Strahan has pointed out:

"For the USGS numbers to come good the world would need to discover 22 billion barrels of oil per year between 1995 and 2025. But as the USGS has now acknowledged, so far the world has only discovered 9bn bbls per year - a massive 60% less than forecast. Even if the rate of oil discovery were now to plateau at that level for the next two decades, the USGS resource numbers would still be 500 billion barrels too high. But since oil discovery has been in long term decline since 1965, despite rising oil prices and advancing technology, it is rather more likely that discovery will continue to fall and the USGS numbers prove yet more astray.....

"In an interview with lastoilshock.com Mr Birol went on to reveal that the IEA would also review the oil resource base afresh, and would be "addressing the limitations and uncertainties" of the USGS data. The Agency would also incorporate other sources of information to assess the "implications of different type[s] of data on our long term thinking".

Given the widely acknowledged over-inflation of the USGS figures—the Survey recently slashed its estimate for East Greenland from 47bn barrels to 9 billion—it is likely the IEA's reappraisal will prompt a major downward revision in its long-term production forecast. And this in turn will undercut the generally sanguine view held by many IEA member countries such as the United States and Britain. "

(See http://www.davidstrahan.com/blog/?p=69#more-69)

The reluctance by the IEA to acknowledge peak oil is understandable. The IEA has a position of status and for it to give out a peak oil message would create a major shock to business confidence. The decision-makers of the growth economy need to feed on an optimistic view that continued growth will continue as the norm; they simply cannot cope with the idea that there are capacity limits to the global economy.

The issues for natural gas are slightly different. When gas passes its peak production it declines very rapidly. This has serious implications for the UK as the North Sea gas fields are now in decline and Britain became a permanent net importer of gas in 2004. The new Langeled pipeline that supplies gas to the UK from Norway has the capacity to supply a maximum of 20 billion cubic metres (bcm) to the UK from Autumn 2006. This is roughly equal to the amount that the UK will lose to North Sea gas depletion over a period of two to three years. Langeled is therefore likely to defer Britain’s potential gas supply crisis only until the end of this decade. Britain is also going to get gas indirectly from Russia, though Russian gas production is also peaking.

Until recently facilities have not existed to transport natural gas except through pipelines connecting gas reserves and gas users in relative proximity to each other. Rather than an imminent global gas peak, the key problem with gas depletion is one of “continental peaking”. In North America, Britain and elsewhere there have been strenuous efforts to set up facilities so that gas can be sent by sea (liquefied natural gas, or LNG). This is one of many processes where the energy costs of imported gas can be seen to be hugely more expensive than for gas piped from fields nearby. LNG entails an energy loss of between 15 and 30 per cent for liquefaction, transportation and regasification, as LNG must be cooled to –165 C for transportation by ship, with attendant greenhouse gas emissions.
(See http://www.aspo-usa.com/fall2006/presentations/pdf/Hughes_D_NatGas_Boston_2006.pdf)

Gas and oil production are commonly associated with each other in the extraction process because what typically comes out of the ground is usually a joint gas and oil stream. Early in the extraction process from oil and gas fields, the oil content is high and the gas content low. Towards the end of field exploitation the reverse is the case. In theory, as the oil gives way to gas, the production emphasis would switch from one to the other but in most cases this is not what is happening. This is because when oil prices are very high it makes more commercial sense to concentrate on recovering the oil and to re-inject the gas underground to enhance oil recovery and/or flaring the gas produced. High oil prices in fact discourage the switch to natural gas production and also force up gas prices. In addition, building a gas infrastructure is very expensive indeed, particularly the costs of transport when compared to oil, which can be moved around far more conveniently or cheaply. The same arguments apply to stranded natural gas, which is gas produced in areas associated with oil production; the cost and time constraints of developing an LNG infrastructure are very considerable.

To take the US example. Covering predicted shortfalls of 4-11 tcf (trillion cubic feet)/year from declining US production will require nearly two to three times the world's present LNG capacity—involving 200 new 3 bcf (billion cubic feet) capacity LNG tankers; 30 New 1 bcf North American receiving terminals, 56 New Foreign based 200 bcf/year liquefaction trains; and capital investment of the order of $US100-200 Billion. It would take 10-20 years to develop this capacity.
(See “Natural Gas in North America: Should We be Worried?” at
http://www.aspo-usa.com/fall2006/presentations/pdf/Hughes_D_NatGas_Boston_2006.pdf )

Like every other economic sector, the gas industry is guilty of “optimism bias” and “strategic representation” (these are explained below) about both the costs of developing a gas infrastructure and the time it will take to do so.

As energy economist Andrew McKillop explains: "Taking only the time constraint, increasing world LNG to say 10% of current world oil production in energy terms (producing about 8.6 Mbd oil equivalent of LNG) is likely impossible in less than 15 or 20 years even if unlimited capital spending was given to this quest."

To this should be added a degree of misrepresentation (or over-optimism) about the size of gas fields. The availability of natural gas has been subject to a fair amount of misrepresentation. Many observers now believe, for example, that Russian firm Gazprom’s claims that it has “almost unlimited” gas reserves are no more than boasts, identical to the oil reserve bragging by OPEC countries; it’s designed to suck in capital and bolster investor confidence. In the real world, the diminishing but critical gas reserves of the three biggest west Siberian gas fields are unable to meet even short-term gas demand of Russia’s domestic, CIS (Commonwealth of Independent States, consisting of 11 former Soviet states) and EU consumers. Only massive capital spending and immense luck would make it possible for Russia to meet projected gas export demand in the 2009-2015 period.

(Peak Oil to Peak Gas is a short ride, by Andrew McKillop. See also http://www.energybulletin.net/23462.html)

But that massive capital spending is showing no signs of coming on stream and the IEA is clearly very worried. In a recent report it argued that: "Investment in the gas sector is a serious cause for concern, having worsened in comparison to the GMR 2006 [Natural Gas Market Review 2006]. Current upstream investment to 2015 is considerably below the amount required, with particular weakness in several regions."

Meanwhile, countries like Russia are in no hurry to raise production because of contango?the idea that future prices for gas will be much higher than current prices; this means that it makes sense to leave the gas in the ground for now to develop it much later. Nor is Russia (or countries like it) keen to see foreign investment in the development of its own strategic resource.

Are there alternative energy sources available?

It must be conceded that the people who believe that technology and human ingenuity will always find a solution can point to possible candidates for new energy sources. Later we will examine the claims for underground coal gasification. It would be unwise to deny that these sources exist. The argument here is that with world energy demand growing ever larger we do not know yet what these sources will yield - energy technologies have appeared promising in the past and decades later have failed to me to fruition - like fusion energy for example or fast breeder nuclear reactors. These are the other candidates:

Oil from Algae

They can double their mass several times a day and produce at least 15 times more oil per hectare than alternatives such as rape, palm soya or jatropha. Moreover, facilities can be built on coastal land unsuitable for conventional agriculture. However this does not tell us directly what the net energy from the process is -
arrangements to keep water circulating to prevent the algae settling and interrupting photosynthesis will require water treatment plants to keep the correct balance of minerals and nutrients and that's going to involve an energy cost for the process and reduce net energy.
http://www.shell.com/home/content/media-en/news_and_library/press_releases/2007/biofuels_cellana_11122007.html

Tapping seabed methane hydrates with sequestered CO2

There is a lot of interest in this in China and India. According to the pressure at the specific sea bed environment (laboratory) research suggests one methane molecule can displaced and captured for very 3 to 5 CO2 molecules injected into hydrate deposits. The methane hydrate resources that might be tapped are on the edge of continental shelves in great quantities but the danger might be that tapping them creates sea bed slippage which, in turn, might create Tsunamis.
http://en.wikipedia.org/wiki/Methane_clathrate
http://www.ozean-der-zukunft.de/presse/poster/clusterflyer2007-en.pdf

Nuclear power

It is not the purpose of this paper to argue the claims of the nuclear industry but there are good reasons to be sceptical of them. As David Fleming argues: "1. The world's endowment of uranium ore is now so depleted that the nuclear industry will never, from its own resources, be able to generate the energy it needs to clear up its own backlog of waste..... Shortages of uranium - and the lack of realistic alternatives - leading to interruptions in supply, can be expected to start in the middle years of the decade 2010-2019, and to deepen thereafter. 4. The task of disposing finally of the waste could not, therefore, now be completed using only energy generated by the nuclear industry, even if the whole of the industry's output were to be devoted to it. In order to deal with its waste, the industry will need to be a major net user of energy, almost all of it from fossil fuels. 5. Every stage in the nuclear process, except fission, produces carbon dioxide. As the richest ores are used up, emissions will rise." The greenhouse gases from uranium include large volumes of uranium hexafluoride, a halogenated compound (HC). Other HCs are also used in the nuclear life-cycle. HCs are greenhouse gases with global warming potentials ranging up to 10,000 times that of carbon dioxide. It is a myth, perpetuated by the nuclear industry that it can dig us out of the energy hole just as it is a myth that it is a climate clean energy source. http://www.theleaneconomyconnection.net/nuclear/summary.html

Without extra clean energy the era of economic growth is over

The deeper significance of all of this is that it will be very difficult for the economy to continue to grow, since other energy sources, like natural gas, coal and nuclear, will struggle to make up the shortfall, especially as adjusting the infrastructure of the economy to this situation will take several years, perhaps a decade. Analysis has shown that virtually all the production growth in the economy can be accounted for by increases in the energy available, adjusted for improvements in the efficiency by which energy is turned into physical work. If the available energy is not increasing, because fossil-fuel supplies cannot be sustained, then the economy will go into a deep crisis. The last time this occurred, in the 1970s, the result was “stagflation”—a period in which the economy was stagnant but inflation was occurring. But to build up renewables as an alternative will require huge expenditure of the remaining energy resources—resources that will have to come out of what is currently consumption. At the time of writing there is no sign that this will happen and every reason to believe that governments and the energy sector will revert to coal as their main response to oil and gas depletion.

PART FOUR: COAL AS AN ENERGY SOURCE - THE RATE OF DEPLETION

Given the growing consumption of coal and its substitution for other energy sources, it is misleading to quote coal reserves in terms of the number of years’ supply at current rates of use. Recent studies also cast doubt on whether coal reserves are as large as is often claimed. One credible, pessimistic view is that coal supply will be highly constrained in a few years and that a lot of energy will be needed to recover lower grades safely, further reducing the available net energy from coal. Underground coal gasification (UCG) might change this picture but it is still largely an unknown quantity.

The Depletion of Coal

The official coal story is usually based on the assumption that coal is "abundant and cheap" (See, for example, the recent MIT interdisciplinary study on coal power and CCS at http://web.mit.edu/coal/). However, recent studies reveal there are fewer economically recoverable reserves than previously supposed. In any case, depletion will be accelerated by the rising demand for coal that will result from economic growth. So too will oil and gas depletion, which is likely to put pressure on coal as an energy source for transport. On the other hand, there are optimistic scenarios that see new extraction technologies like UCG turning coal resources that were previously unrecoverable into new sources of energy.

Official reserves assessed against rising energy demand

According to the World Coal Institute global coal reserves at the end of 2006 were 909,064 million tonnes and, using a formula currently found in official and industry publications, these reserves would last for 147 years at current production levels. This is not a very useful formula however, since coal consumption is projected to rise considerably; China, for example, is currently building a coal power station a week. The US Department of Energy (USDoE) predicts that annual global coal consumption will grow by 2.5 per cent a year up to 2030, by which time world consumption will be nearly double that of today. At that rate, coal reserves current reserves would last 77 years. Whichever way you look at it, even using "official" figures, coal reserves would be exhausted by the end of the century. (See http://www.energybulletin.net/29919.html)

The pessimistic viewpoint. Are the official reserves assessed too high?

But even this prediction for exhausted coal reserves by the end of the 21st century may be optimistic. An EU-sponsored research project at the Institute of Energy (B. Kavalov and S. D. Peteves, authors) argues that "World proven reserves that are economically recoverable at current economic and operating conditions are decreasing fast.....Coal production costs are steadily rising all over the world, due to the need to develop new fields, increasingly difficult geological conditions and additional infrastructural costs associated with the exploitation of new fields" (See http://ie.jrc.cec.eu.int/)

Other credible studies exist that suggest smaller reserves. A German research group called Energy Watch has conducted a comprehensive critical analysis of available statistics, country by country, to provide an outlook on coal production in the coming decades. Its conclusion? That there is probably far less coal left to burn than most people think and that global coal production may peak in as little as 15 years. (See http://www.energywatchgroup.org/files/Coalreport.pdf)

Energy Watch claims that oft-quoted coal reserves are based mostly on old data that have not been updated. A study of the US National Academy of Sciences claims likewise:

"Recent estimates of coal reserves” which take into account location, quality, recoverability, and
transportation issues, are based upon methods that have not been updated since their inception in 1974 and much of the input data were compiled in the early 1970s. Recent programs to assess coal recovera-bility in limited areas using updated methods indicate that only a small fraction of previously estimated reserves are actually recoverable." (See http://dels.nas.edu/dels/rpt_briefs/coal_r&d_final.pdf )

Increasing coal reserves - the optimistic viewpoint

Coal reserves are calculated on the basis of what is "economically" recoverable, so industry and official viewpoints hold that rising coal prices would mean that more would become recoverable and thus be counted in the reserves. This stance envisions mines that were once closed possibly being re-opened if they have not been too damaged either during or following closure; it might also be economic to prospect for coal in new locations. Given that the reserves to current production ratio are about 150 years, it has hardly made sense to go looking for more coal in recent years, particularly if, as local resources of coal deplete, there are plenty of places in the world where it can be purchased. Should it become necessary to look for more coal in the future, it will probably be possible to find more.
This stance views the decline in past coal reserves as the consequence of the interaction of declining production from mines as a result of depletion and an available coal price. At a higher coal price, driven up because oil and gas are so expensive, resources that were previously uneconomic to mine might once more become economic. One factor in the economics of this process would be the ability to find men willing to work in a difficult and dangerous job for relatively low wages. There may indeed be circumstances in which this would occur but if it did, this in itself would reflect growing desperation arising from the energy crisis at that time.
That isn't all. More expensive oil will not only drive up the demand for coal, it will also increase the costs of its production. Something like 50 per cent of the energy used to mine coal comes from oil. As oil becomes more expensive the coal industry will increasingly have to use CTL for its own fuel needs. The amount of (coal) energy required to recover any given amount of (coal) energy will rise so that the net energy from mining will fall. This will reduce the amount of economically recoverable coal, and meanwhile, rising oil prices dragging up coal prices may not create nearly the amount of extra economically recoverable coal reserves that the optimists might expect. (See http://wolf.readinglitho.co.uk/subpages/coal.html#future)

'New' Extraction Technologies

Nevertheless, new coal sources are likely to be found and new technologies are likely to be developed to extract coal energy. CTL technologies might add to resources where they tap previously stranded coal—coal that was too far away to be transported easily to markets. The main “new” technology, however, appears be underground coal gasification, or UCG.

In the future, UCG might conceivably give the coal industry a new lease of life, because it may allow the tapping of previously unrecoverable coal seams that were out of reach for conventional mining. Strictly speaking this is not a new idea. The first mention of the idea of gasifying coal in its original deposits was by William Siemens in 1868 in Great Britain, and in 1913 Lenin spoke in favour of in-situ gasification as a means of freeing coal miners from their back-breaking work. For a long time it was only in the USSR that the technology was developed to a technologically mature stage, with three commercial power stations driven by underground gasification at Podmoscovia, Yuznho Abinsk and Angren. (Source: "Kohleveredelung", by H. G. Frank, A. Knopp, Springer Verlag, 1979).

According to the theory, UCG works as follows. Air or oxygen is injected into a cavity in a coal seam, water enters from surrounding rock, and partial combustion and gasification take place at the coal seam face after ignition. The resulting high-pressure syngas stream is returned to the surface, where the gas is separated and contaminants are removed. UCG thus offers the potential to produce fuels and hydrocarbon feedstock from coal deposits which may otherwise be unrecoverable. According to a World Energy Council 2007 Survey of World Energy Resources studies suggest that the use of UCG could potentially increase world coal reserves by as much as 600 billion tonnes - that would add a further 70% in magnitude to the existing estimates of recoverable coal reserves.

Proponents of UCG argue that it can operate in thinner seams than mining and at depths inaccessible through conventional mining. UCG also requires no coal handling at surface and no mining or ship transportation, all of which have significant emissions of CO2 and reduce the net energy from coal extraction. Re-injecting the CO2 underground in the vicinity of the UCG extraction process, either offshore or onshore, will result in near-zero emissions.

A UCG project would take about the same time to develop as a new oil and gas field. Hence the process could make an impact in the short to medium term, if sufficient resources were put into its development; in contrast, an oil or gas field will take about 7 or 8 years to develop.

The US did much of the pioneering work in applying new drilling technology to UCG, in some 20 or so trials, but cheap natural gas prevented widespread adoption of the process. There is now a renewed interest, and demonstration projects have started up again. The process has parallels with coal bed methane, which currently contributes around 8 per cent of the gas supply in the US. Other trials have occurred elsewhere in the world, some with success.

Much of the energy involved in coal mining is used to put miners underground and keep them safe, but none of that would be required with UCG.

For over a century, however, technical problems have frustrated the development of UCG and its predicted potential has not be realised; problems such as underground water contamination and uncontrolled fires have prevented what initially seemed a promising idea from coming to fruition. In response, UCG proponents argue that new technologies offer innovative ways of dealing with these problems; for example, the oil industry has developed directional drilling at depth, which provides new ways to create channels through coal seams.

Many are still sceptical though, arguing, among other things, that the processes will be hard to control in cases where there are many faults to be found in mine seams and in underground geological strata, particularly when no-one is down there to see what is going on at great depth. Directional drilling by the oil industry is fine in theory but drilling into coal seams involves drilling into a far smaller target than drilling into an oil reservoir. And the CCS part of the idea remains largely untested.

UCG is one of the major uncertainties in a resurgent coal sector. It seems that research is called for but it does not seem sensible to assume that UCG will save the coal sector; one should adopt a degree of pessimism appropriate for the precautionary principle. If UCG is viable as a major source of energy, it will have to carry a lot of substitutions for the declining oil and gas sector, and be accompanied by a method of underground storage of CO2 that actually works.

Accelerating depletion - coal as a substitute energy source

The demand for coal is likely to rise considerably as it is used as a substitute for oil and gas. If we accept that oil and gas will peak soon, then we can expect that coal will be used as an energy source to replace gas and—to a degree—oil in electric power generation. Between 1973 and 2005, the share of oil in electric power generation in the world fell from 24.7 per cent to 6.6 per cent. This will fall even further as oil peaks. A much bigger substitution will occur away from gas power generation.

Pressure is also likely to grow for substitutions of coal for oil in transport, through either CTL conversions or the use of coal in electric power generation; this would then be used to charge 'plug-in' electric cars and/or in hydrogen-powered vehicles.

CTL conversions

CTL conversion would involve the least amount of change in existing transport fuel arrangements but would entail the greatest drain on coal reserves. It is also a very dirty process giving rise to large greenhouse gas emissions. For this reason, equipping CTL conversion with CCS carbon capture is sometimes proposed. But CCS makes the whole process yet more costly - and requires yet more coal to produce the same amount of transport fuel.

With regard to emissions, one study predicts that "Gasoline derived from CTL plants with no CCS could increase GHG emissions from vehicles by almost 60%. If CCS is available, then a reduction of less than 6% could be obtained." (See http://www.greencarcongress.com/2007/06/cmu_plugin_hybr.html#more).

In terms of depletion, one tonne of coal can be converted to produce two barrels of oil. Since two barrels of oil is equivalent to 0.273 tonnes of oil, that is a conversion ratio of 3.6 tonnes of coal to produce one tonne of oil. (See C. Lowell Miller, “Coal Conversion—Pathway to Alternate Fuels” US Department of Energy March 2007 at www.eia.doe.gov/oiaf/aeo/conf/miller/miller.ppt)

This ratio gives rise to some revealing hypothetical comparisons. World oil consumption in 2006 was 3,889 million tonnes. If all the oil had to be derived from coal, there would be enough coal for 65 years at this rate.

According to the IEA, 3,936 million tonnes of oil were produced in 2006 compared to 5,370 million tons hard coal and 914 million tons brown coal, or 6,284 million tons coal of mixed grades. Applying a conversion of three tonnes of coal needed to produce one tonne of oil would mean that if all the coal were used to produce oil, it would produce 2,095 tons of oil—only 53 per cent of total global oil production. To replace all of the oil would therefore require double the current rates of world production. To maintain existing uses for coal as well would take then three times current coal rates.

The conclusion is unavoidable: If peak oil occurs soon and CTL technologies are brought into play, any remaining coal reserves would be used up very soon indeed AND there would be an enormous increase in greenhouse gases without CCS.

Plug-in cars

Plug-in cars would be far more efficient and a smaller drain on coal reserves if coal was the fuel used for the electric power source.

“Plug-in hybrids look more promising as a pathway for reduction of GHG emissions. Even if coal electricity without CCS is used, plug-in hybrids could lead to a GHG emissions reduction of almost 25%. This demonstrates the worst case for plug-in hybrids, as GHGs would be further reduced with a low-carbon electricity portfolio. It is important to note however, that this analysis does not include the emissions from manufacturing the storage battery used in plug-in hybrids. If GHG emissions from lithium-ion batteries for plug-in hybrids are included, total annual GHGs from plug-ins would increase by about 800-1,500 pounds of CO2 equivalents, depending if a twelve or eight-year vehicle life is assumed (Samaras and Meisterling 2007). Battery technologies are difficult to predict, but even when emissions from current battery production are included, plug-in hybrids result in substantially lower emissions than CTL pathways."
(See http://www.greencarcongress.com/2007/06/cmu_plugin_hybr.html#more ).

An economic development with plug-in cars has many advantages. Unfortunately for the proponents of coal power, the main case for plug-in cars is that they could be a valuable adjunct to a renewables-based energy system. The chief barrier to the development of wind energy and other renewables is their intermittent character; wind turbines generate electricity when the wind blows and not necessarily when it is wanted by consumers, so a key problem for wind power is how to store the electricity it generates. A study by the UK Centre for Alternative Technology in Wales explains a possible solution:

"As a form of transport, electric vehicles combine a high level of energy efficiency with the ability to use renewably generated electricity. In addition, their batteries can double as energy stores for the Grid. Technologies have been developed to allow energy to flow in either direction between vehicle batteries and the Grid, while at the same time preventing discharge below a minimum level (set according to the owner’s anticipated requirement).

Known as vehicle-to-grid power(V2G), the concept involves harnessing the energy storage of electric vehicle batteries for load balancing. When the Grid’s supply exceeds its demand, the surplus is used to top up the batteries of all connected vehicles. When demand exceeds supply, those batteries are used to make up the shortfall. This effectively turns connected vehicles into additional grid storage.

The National Travel Survey (2005) found the average car in Britain travels around 25 miles per day. Thus, cars remain parked for about 23 out of every 24 hours. If they are connected to the grid, their storage capacity can be used to smooth the fluctuations of electricity supply and demand, thus reducing the necessary peak generating capacity." (ZeroCarbon Britain Chapter 10, see http://www.zerocarbonbritain.com/)

This seems much more promising, but even here, a closer look at the figures reveals some problems. The emissions that arise in making the batteries are just one. Some back of envelope calculations reveals that, in a 2050 global economy in which everyone had an electric car, just making the battery in their car would use up almost all of an individual’s very much smaller annual CO2 budget at that time. That's before one even begins to take into account the emissions from the energy source to power it up. Of course technologies will improve but it all remains so much speculation.

The EROEI of Coal

In an energy-scarce world, the ratio of energy returned on energy invested (EROEI) is crucial. When the steam pump to drain the water out of coal mines was first invented it transformed mining because, for the investment of a relatively small amount of coal energy to fuel the pump, a huge amount of new coal energy became available from mines that had previously been flooded and unworkable. It may be that UCG will be the technological innovation that will again increase the EROEI in coal mining and coal power technologies. However, in every other respect the EROEI of coal and coal power is moving in the other direction. More of the coal that is being recovered is of lower energy content, and more is recovered from smaller seams available in more difficult mining conditions. The EROEI therefore declines. The coal is also being recovered further away from where it is used, which means more energy is used in building and using the coal transport networks. This decline in the EROEI takes place against the background of a similar decline across the whole hydrocarbons sector. Thus the oil used in mining becomes more expensive, forcing the mining sector to create its own using CTL technologies, and so once again the energy that one must invest to get energy increases, or, put the other way round, the EROEI declines. And when one uses coal instead of oil as a transportation fuel, energy is lost in the conversion process. For society as a whole, once again, the EROEI can be seen to be declining. More and more energy resources are needed to recover the coal resources.

And coal production brings with it other considerations too, such as the need to restore landscapes destroyed by mining and to prevent damage to human and environmental health from soot and fly ash, nitrogen oxides, sulphur oxides, mercury, dioxins and polycyclic aromatic hydrocarbons? This takes energy too and further reduces the EROEI of coal. As the fossil-fuel economy evolves it reaches a point where the amount of energy needed to gain energy starts to squeeze the resources available for consumption.

From Hall C., Powers R. and Schoenberg W Peak oil, EROI, investments and the economy in an uncertain future (forthcoming). The diagrams are explained in Professor Hall's lecture on

www.feasta-multimedia.org/2007_feasta_lecture/Charles_Hall_Lecture.mov

The latest and final act of the drama of a resurgent coal sector is the need to use even more energy to build up an infrastructure to capture the climate-destroying gases of coal and hydrocarbons. One can ask - should we really be concerned? As Sir Nicolas Stern says in his report for the British government, it will all bring jobs and further growth. However these jobs would be created by in the construction of an ever larger technological infrastructure owned and run by the carbon energy sector for which we will all pay dearly in the form of a high carbon price - and out of this progressively large technological infrastructure we will not actually see any increase in consumer welfare. What's more, as we will see in the next section, the chances are very slim indeed that the climate strategy of the energy giants embodied in all this technological kit will actually work.

PART FIVE - COAL AND CARBON CAPTURE AND STORAGE

Current policies for coal are based on an optimistic faith that a largely untried technology can clean up coal power and make it climate safe. The available evidence casts doubt on the effectiveness of CCS, however, and suggests that even if it does "work", it will be generalised only when it is far too late. By the time CCS comes on stream renewables would be cheaper anyway. Research on CCS should go ahead but no more power stations should be built until CCS has proven itself.

Can the resurgence of coal be made climate-change safe? Probably not, and certainly not within the time frame needed. At the time of writing the IEA forecasts an increase in coal power generation capacity of 1800GW up to 2030. At current power station technological efficiencies, 1800GW of coal power capacity, when built, would be emitting 3 giga tonnes of carbon a year (3 gt C/ year). When we compare this figure with the current total global emissions of 7 gt C/year we can easily see that it would be a disaster for the global climate system. Unless they are willing to risk being seen as involved in a venture of catastrophic environmental irresponsibility, it is in the interests of the coal and power companies to have us believe that they can capture all of this CO2, liquefy it and pump it into safe underground storage. Yet to capture and sequester 3 gt C/year would be an absolutely gigantic undertaking, involving pumping underground a volume of liquefied gas equal to three times the amount of oil currently flowing out of the earth. And this would just be to cover emissions from electric power generation. It does not take into account the CO2 that would have to be sequestered if CTL technologies were being developed on a wide scale because, as has already been explained, the emissions from CTL conversion are considerable. It is thus vitally important to critically examine the CCS project and its consequences.

There are three main areas of focus when it comes to assessing CCS:
(1) whether the technology will work - or how well it will work
(2) whether it can be developed in time to prevent a climate crisis
(3) whether it is the least costly option when measured against the alternatives, such as the development of a mix of renewables.

All of these issues must be assessed critically and empirically tested, bearing in mind what management-theory literature terms “optimism bias” and “strategic misrepresentation”. Since there is a huge amount of money and capital that depends upon CCS being effective, cheap and on-time, there are also vested interests that one would reasonably expect to be prone to “wishful thinking”, misrepresentation or even, in the worst cases, lying.

Optimism Bias and Strategic Misrepresentation

Wikipedia defines "Optimism bias” as “the demonstrated systematic tendency for people to be over-optimistic about the outcome of planned actions. People tend to see the future through "rose-colored glasses," as the saying goes. Optimism bias applies to professionals and laypeople alike, and arises in relation to estimates of costs and benefits and duration of tasks. It must be accounted for explicitly in appraisals, if these are to be realistic. Optimism bias typically results in cost overruns, benefit shortfalls, and delays, when plans are implemented." (See http://en.wikipedia.org/wiki/Optimism_bias).

There are arguments about the degree to which "optimism bias" is actually accounted for by "strategic misrepresentation"—the deliberate underestimation of costs and overestimation of benefits in order to get projects approved, especially when projects are large and organizational and political pressures are significant.

Such “wishful thinking” and misrepresentation are the norm in business. A study by Flyberg et al found that in 9 out of 10 transport infrastructure projects in the USA, costs were underestimated. Moreover, he continues: "In addition to cost data for transportation infrastructure projects, we have reviewed cost data for several hundred other projects including power plants, dams, water distribution, oil and gas extraction, information technology systems, aerospace systems, and weapons systems..... The data indicate that other types of projects are at least as, if not more, prone to cost underestimation as are transportation infrastructure projects.” (Flyvberg, Bent et al "Underestimating Costs in Public Works Projects: Error or Lie”? Journal of the American Planning Association, vol 68, no 3 Summer 2002 pp 279-295)

While Flyberg et al's study relates to cost, the same issues arise in relation to project duration; project time overruns are so much the norm that governments actually take steps to re-calculate time expectations. For example the British Treasury issues guidance to government officials in order to correct for optimism bias. The rational is as follows: "There is a demonstrated, systematic, tendency for project appraisers to be overly optimistic. To redress this tendency appraisers should make explicit, empirically based adjustments to the estimates of a project’s costs, benefits, and duration.....it is recommended that these adjustments be based on data from past projects or similar projects elsewhere, and adjusted for the unique characteristics of the project in hand."
(See www.hm-treasury.gov.uk/media/D/B/GreenBook_optimism_bias.pdf)

As far as the British Treasury is concerned, "non standard civil engineering" projects are typically between 3 and 25 per cent over-optimistic about their duration. Projects of an "equipment and development" character have typical duration overruns of 10-54 per cent. In order to arrive at realistic time frames, the Treasury adopts a correction method in which it takes the upper figure and then revises it downwards to the extent that optimism-bias risks have been mitigated.

In the case of CCS it can be said that the "capture ready" concept requirement for new power stations will be a mitigation of time overruns, but this covers only part of the whole process. It would be prudent to apply correction factors to stated expectations about CCS, and all statements from official sources should be treated with scepticism. With this in mind let's look at all the issues in turn.

Will the technology work (well enough)?
What percentage of the CO2 can be captured?

Reading most mainstream PR material on CCS, one can be forgiven for assuming that it will capture all the greenhouse gases arising from the power generation process. This is not the case. No capture technology will be 100 per cent effective. A World Coal Institute report on CCS claims that CCS will reduce emissions by 80-90 per cent. However a study conducted by the Wuppertal Institute and a number of other German research organisations points out that 5 per cent of the CO2 emissions associated with a power station occur in the production chain leading up to the delivery of the fuel—in the mining and in the transport of the fuel to the power station. Because CCS reduces the efficiency of the power station there will have to be far more mining and transport - and the dirtier the power station, and the higher its emissions, the more that this is true. Anything between 20-44 per cent more energy input is needed. When one takes that into account, the real reduction of CO2 begins to look more like 72 to 78 per cent (starting from an assumption of 88 per cent capture at the power station itself). However, it gets worse because not only is more CO2 released in mining and transporting extra coal, but there will also be more methane released too - so the effect of the extra mining of the coal could mean that the greenhouse gas reduction, measured in CO2 equivalents, is more like 67-78 per cent. (See http://www.wupperinst.org/uploads/tx_wibeitrag/II-Kap4-8-RECCS-Endbericht.pdf )

Leakage of stored CO2

A question that is more commonly posed is - will the CO2 actually leak back to the surface?

This is a valid question. A Wuppertal Institute study argues: "Basically all the geological storage options have a risk of leakage; either though unsealed or insufficiently sealed drill holes or galleries (oil and gas fields and coal mines), along unknown or newly appearing faults or interruptions in channels in the geological formation intended for storage or though leakages caused by seismic activity. These can lead to CO2 coming to the surface or into other rock strata such as those through which groundwater flows. In aquifers the introduction of CO2 can lead to the acidification of the water already present and the corrosion of rock formations and the seals on some tunnel holes. CO2 storage in deep coal seams also risks displacing methane, which has a much higher greenhouse gas potential than CO2. In disused coal mines, the risk of leakages into densely populated areas (like the Ruhr settlements) would be quite high due to the limited depth of the covering geological layers, the multi-branching nature of the underground passageways with connections to active mine areas and partly "forgotten" mine galleries with pervious connections (the author’s translation; Wuppertal Institute Study, page 183).

Of course the leakage rate will be low when a storage area is first being set up, but when it is full it will be much larger. With a 1 per cent leakage rate per year, only about one half of the CO2 stored after a 30-year build-up would be still underground 70 years later. For CCS to make sense at all it must have a leakage rate of much less than 1 per cent.

Leakage rates depend on the availability of suitable storage locations, ideally close to the places where the CO2 would be generated. What information on that is available?

Available underground storage capacity

So, much is clear: There are plenty of places in the world where CO2 can be stored. But are they in the right places? The answer is, not entirely. Many thermal power plants in the US are located near depleted oil fields which perhaps have potential for CCS, but for Japan, China, and Korea, the potential for underground storage is very poor, which is why those countries are examining undersea storage as a possibility.

http://jp.fujitsu.com/group/fri/en/column/economic-topics/200606/2006-06-16-1.html

Another desk study for the Asia Pacific Economic Cooperation Zone (APEC) countries assesses the prospectivity for CCS in a variety of Asian countries (prospectivity is a perception of the likelihood that a resource is present in a given area based on available information; it considers if it’s worth prospecting there). The study compares emissions levels against prospectivity for emissions storage. This reveals that there are areas where there would be a considerable mismatch between close storage options and sources of emissions. This is true, for example, of Taipei and the Republic of Korea.

In China itself the study shows that: "sources in Western China are negligible in relative terms. Sources are concentrated in Northern China.....Southern areas (e.g. Guangzhou) are challenged to the absence of any obvious high prospectivity onshore basins - offshore basins may offer a solution."

(See www.co2crc.com.au/PUBFILES/STOR0405/APEC/APEC_Ph1_FinalReport_Summaries.pdf)

Transport

From an ecological, economic and energy point of view, it makes sense to transport CO2 only via pipelines and large ocean tankers. This will require the prior agreement of many different stakeholders and agencies. Transport represents probably 10 per cent of the financial costs of the overall process. More important, however, are the costs and logistics of transporting the fuel and existing grid connections, which will create a pre-disposition to use existing power station sites. The increased freight in and out of the plants will put a considerable extra load on the transport system, and although the risks per ship or per mile of pipeline will be small they will still be greater than before.

Because CO2 does not burn there would be no danger of fire but, because it is heavier than air, leakages would be focused on specific land topographies and give rise to a risk of suffocation. It would therefore be necessary to regulate pressure and temperature carefully; CO2 has to be kept cold or it may suddenly and uncontrollably go over into gaseous form. This would mean that pipelines and installations would have to be monitored and, worse, that installations may become targets for military or terrorist attacks. Offshore pipelines can also be damaged by ships' anchors and fishing nets. With already existing onshore US CO2 pipelines, there were ten accidents between 1990 and 2002?a rate of 0.032 accidents per 100 km per year. Onshore gas pipeline accidents in Western Europe in 2002 were 0.02 per 100 kilometres per year. (Wuppertal Institute Study part 2 p.77).

The consequences for human populations, animals and vegetation from too much leakage are not negligible. For geological reasons there is a location in the USA where significant amounts of CO2 are emitted from underground - at Mammoth Mountain in the Sierra Nevada, in California. "Mammoth is outgassing large amounts of carbon dioxide out of its South flank, near Horseshoe Lake. The concentration of carbon dioxide in the ground reaches over 50%. Measurements of the total discharge of carbon dioxide gas at the Horseshoe Lake tree kill area range from 50-150 tons per day. This high concentration causes trees to die in six regions that total about 170 acres (0.688 km²) in size. Camping has been prohibited in the tree kill area since 1995, to prevent asphyxiation of campers due to accumulation of carbon dioxide in tents and restrooms.... in March 1990, a United States Forest Service ranger became ill with suffocation symptoms after being in a snow-covered cabin near Horseshoe Lake. Doctors later determined the cause: carbon dioxide poisoning. Measurements around the lake found that restrooms and tents had a greater than 1% C02 concentration (toxic), and a deadly 25% concentration of CO2 in a small cabin. " http://en.wikipedia.org/wiki/Mammoth_Mountain

The key point here is that although the risks are small, they are tangible and, if they are to be acceptable to the public, they will demand careful consideration in consultation with interested parties. But this will all take time, and the problem is that humanity does not have the time.

Deadlines for coal power mitigation technologies

One huge failing in many presentations of clean coal technology is that the timescales given for the development of CCS are based on the technological and institutional requirements of that development. They do not reflect the time that humanity actually has left to take the necessary action to deal with the climate crisis.

Unfortunately, the earth's climate system has not been calibrated to the timescales that researchers, engineers and legislators can achieve. A recent paper by the Institute for Public Policy Research (IPPR) showed that, to be confident of keeping the increase in global temperatures to below 2 degrees centigrade, emissions of CO2 will need to peak between 2010 and 2013, achieve a maximum annual rate of decline of 4-5 per cent between 2015 and 2020, and fall to around 70-80 per cent of their current levels by the middle of the century. That, it should be stressed, is what needs to happen globally; if there is to be any space for growing emissions by developing countries then the reduction in the EU will have to be much greater.

This IPPR target is also likely to be an underestimate. In the last few months the climate debate has been altered by news of the melting of the Arctic sea ice some 20 years sooner than predicted, and by new, more complex “coupled climate models”. Coupled modelling means the effects of some of the positive feedbacks from vegetation are now included in mathematically modelled assessments of how much, and how quickly, all human emissions need to be reduced to keep below two degrees temperature rise and so avoid ‘runaway’ rates of climate change. Evidence from the Intergovernmental Panel on Climate Change in its Fourth Assessment Report, AR4, shows that zero net emissions globally by 2060 are required if we are to keep below 450 ppmv atmospheric CO2 concentration.
(See http://ww.gci.org.uk/briefings/Channel_Four.pdf)

"Capture ready" power stations - a misnomer for power stations not yet ready to capture CO2

CCS does not measure up against these time lines. It will be 2020 at the earliest before the EU feels it will be able to require all European coal power stations to be equipped with CCS. It would then take four years to retrofit so-called "carbon ready" plants.

Moreover, the main increase in coal power generation capacity is occurring in developing countries. China, India and other developing countries do not see why they should bear primary responsibility for the costs and risks of developing CCS, and they are strongly indicating that the onus is on developed countries to show leadership and to prove the validity of the technology, firm up costs and reduce the technical risks before they act. This in turn means that it would not be before 2025, at the earliest, that there would be generalised introduction of carbon mitigation technologies for coal power in developing countries.

Thus until 2020 the optimistic estimates are that CCS will have reduced global CO2 emissions below what they would otherwise be by no more than 3 per cent, rising by 2030 to at most a 16-20 per cent reduction. Until 2020 the EU will merely require that new power stations are "capture ready". This will mean that the technology of the power stations does not preclude retrofitting capture technologies, that there is enough space on-site at power stations for the technology, and that the power companies have done a desk study showing where the CO2 from their station will be pumped to. The same idea of "capture readiness" is being adopted as a policy idea all over the whole world. Yet while they are merely "capture ready," power stations are not mitigating CO2 emissions. In effect, “capture ready” means that any station is still 4 years away from actually capturing any CO2 at the point where retrofitting begins.

These estimated timelines ought to be further corrected for optimism bias and strategic misrepresentation. Applying British Treasury optimism bias corrections to these time lines would add 25 to 54 per cent to the expected times. This means that through most of the world CCS is pretty irrelevant for climate mitigation until 2030.

Why it will take so long - evolving a highly complex process

Doubtless industrial and official representatives would say that this is too pessimistic. But, as we have argued above, the precautionary principle is based on reasoned pessimism. Governments and companies should not be gambling with the future of life on the planet. There are good reasons to believe that CCS will take too long time to come through. Certainly, if it is to become a generalised reality, various technical, legal and regulatory issues must be worked out, as well as financial and economic ones. Certain events must unfold before any company will risk embarking on the very considerable capital investment in CCS. Legal and regulatory questions cannot be sensibly formulated until the features of the technology are known, for example, yet that knowledge cannot emerge until research and development of commercial-scale trials have taken place. The trials make better knowledge of capital and running costs available, and without that knowledge the financial requirements of the process cannot be firmly established. Any company considering investing in CCS will need not only a functional legal framework and knowledge of costs, but also some kind of long-term guarantee that the costs can be met in some way. So, things are far from simple.

Unravelling the tangle of issues may take considerably longer than people imagine. Some thorny issues must be resolved. For example, there is a problem, common to the nuclear industry, about legal and other issues for a waste product that will be in storage for centuries, long past the likely lifetime of individuals and corporate institutions. Who owns or is liable for this commodity CO2 - or this waste product CO2 - and how is it classified? Who will be liable in generations to come if and when companies go bust? What arrangements are in place to monitor storage, who will be liable and what procedures will be followed if leakage occurs on a significant scale? How can you insure a process the dimensions of which are so unclear? Legal issues in environmental, spatial planning, mining, water and waste law all need to be worked on - in all of the countries in which CCS will be implemented. Of course, to amend laws is a political process and such processes do not always run smoothly.

In order to be clear about the technical issues that will shape any relevant legislation, the EU and other countries are driving the research and development process forward. One key milestone will be the construction and operation of a number of demonstration projects to work through the technical issues in practice. In the EU it is hoped that 10-12 of these projects will be up and running by 2015. The technical issues arise with both capture and storage, and the whole situation is made more complex for the legislators by the fact that there is a range of potential technologies on offer for both capture and storage.

There are three potential CO2 capture technologies, each with its own technical issues: a post-combustion process of flue gas scrubbing; a process (oxyfuel) that involves burning coal not in air but in oxygen, which leaves a flue gas consisting almost entirely of CO2; and what is known as the integrated gasification combined cycle process – which first turns the coal into syngas, that is then burned.

Testing the effects of these technologies will require investment for which the EU currently does not have a budget. It is relying on member states to supply the necessary funding. Current estimates are that the demonstration plants would cost $500 million and $1,000 million for the first 250 MW – 50 per cent of which would be for the CCS installations. It is estimated that the CCS will add less later; according to the IEA it will then add 20 to 25 per cent to capital costs. The cumulative investments with carbon capture in OECD power generation over 30 years will then be in the region of $517 billion to $641 billion. By way of comparison Gulf Oil revenues in 2006 were of the order of $500 billion.

Capital investment on this scale will not happen unless and until the economics of the carbon market are put on a much more secure footing, based on any successor regime to Kyoto, so that companies can feel secure about carbon prices in the long term. Yet to date this has not been established.

Working through this complex maze will take much time and there is plenty of room for conflicts to arise to delay the process further, such as when governments decide they want to favour some approaches but not others. On 22 October, 2007, an article by Russell Hotten appeared in British newspaper the Daily Telegraph titled "Carbon Capture Plea from Energy Firms,” which explains how "British Gas owner Centrica, ConocoPhillips, and Richard Budge's Powerfuel, are among those companies that considered seeking a judicial review when they were excluded from a contest to build the world's first green coal plant......Almost two weeks ago John Hutton, the Secretary of State for Business, said the companies' pre-combustion carbon capture technology was barred from the race to build a clean coal plant. Instead, the Government would support an alternative post-combustion method. The companies said Mr Hutton's decision went back on a Government promise that both technologies would be supported." (See http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/10/22/cnets122.xml)

It should be stressed that this is not an argument against CCS or against research into it; rather, it is an argument against a policy that allows and encourages the construction of coal power stations based on the implied prospect—that CCS is the solution to climate dangers. As we have seen, this is not true, because CCS will not be up and running in time to make a difference to the operation of these coal power stations. It is hard to avoid the conclusion that the public is being “sold a line” about coal power. To use a particular analogy, it is rather like telling someone with six months to live that medical science stands every chance of finding a cure for their condition in two years’ time.

In any case, given the lengthy time lines the consideration of alternatives that are less costly at the time that CCS might be generalised should be considered.

Competition from renewables

One of the great ironies of a coal resurgence is that by the time CCS comes on stream in a generalised way there is a strong probability that renewables would in any case be more competitive. If we take the view that CCS will have been able to cover only 20 per cent of coal power by 2030 then it is worth taking account of other things that will be happening by that date. According to research by the Wuppertal Institute, a mixture of renewable-energy systems has the competitive advantage over both coal and gas with CCS from 2030 onwards. (See http://www.wupperinst.org/uploads/tx_wibeitrag/0-Inhalt-RECCS-Endbericht.pdf Zusammenfassung, p.18)

The coal and power industries have made much of estimates in the Stern Review that coal power with CCS is a cheaper alternative than renewables. But it is worth pointing out that cost estimations for most renewables are based on real experience for an already existing industry, whereas cost estimations for CCS are based on almost no experience of actual practice at all. This makes it legitimate to suggest that the optimism bias and strategic representation are more likely to be found in the CCS figures.

The Wuppertal Study is summarised by Dr Klaus Brendow of the World Energy Council in one of his slides

PART SIX: POLITICAL ECONOMY—ALTERNATIVES AND HOW TO ACHIEVE THEM
The political and economic systems have co-evolved so that the huge companies dominating energy production have immense power to shape policy and policy perceptions. In consequence the political-economic elite continues to give scant priority to the immense dangers of a climate catastrophe and/or energy winter. Rather than the top-down, large-scale, costly and complex solutions presented by the current elite , what is needed is a bottom-up re-development of communities centred on energy efficiency, renewables and energy-lite lifestyles. The resources for a move towards re-organising everyday life as we know it could potentially come from a new type of greenhouse emissions control —an economic policy known as Cap and Share (see www.capandshare.org). Cap and Share would oblige energy giants to buy production-authorisation permits for fossil fuels from the general population; only then could they sell a capped, and reducing, volume of climate-destroying fuels. The money generated would pass the scarcity rent for using the Earth's atmosphere to the base of the economy and society.

The Power Struggle for Power Down

Frequently politicians and the media speak about the need to stay below an increase in 2 degrees centigrade for the average global temperature. They rarely mention that this is 2 degrees above pre-industrial levels and that it actually means only 1 degree above 2000 levels. Nor do they mention that with a time lag of 30 years between emissions and the consequences of those emissions for the climate, there is only a short time left in which humanity can make the necessary changes. The risks are very high indeed that the climate system will go over a tipping point into a different state, accelerated by amplifying feedbacks. The gravity and seriousness of our collective situation should be seen to be analogous to a war emergency. In a war, societies can be mobilised to deal with extraordinary changes in resource allocation. This is the real challenge now facing humankind.

e.g. Military outlays as a percentage of national income

UK

1939 15
1940 44
1941 53
1942 52
1943 55
1944 53

If this is the situation we face, then the idea of 1800 GW of new coal power stations represents a disaster and a “declaration of war” on the climate system by energy companies and any governments or regimes that support their corporate interests. CCS as it is currently being touted should then be regarded as little more than a colossal case of “wishful thinking”.

On the other hand, there are enormous uncertainties about the future. One scenario, for example, envisions a situation where, because of depleting oil, gas and coal reserves, emissions cannot continue for long on their upward trends and will start to decline, simply because the economically recoverable reserves will not be available to burn. If this scenario is accurate, then the boom in building coal power stations is in any case a waste of resources because in a few years there will not be enough fuel for them.

But there is another, more serious challenge. If coal reserves do deplete at the rapid rate that some predict, there will not be sufficient recoverable fossil energy resources to build up a renewables-based energy sector to take over from it.

In an ideal world the transition to a renewables-based economy would look like this:

This is a scenario in which fossil energy reserves are sufficiently available and can be diverted into the investment necessary to build up a renewables sector. However, developing a renewables sector on the back of a rapidly depleting fossil-fuel base would not be nearly so easy; the physical energy resources from the renewables sector are not yet available, nor is the energy to do the physical work. In that case then something more like this will occur:

From: Mulder HAJ and Biesiot W (1998) Transition to a Sustainable Society - cited in JJ Battjes, "Dynamic Modelling of Energy Stocks and Flows in the Economy. An Energy Accounting Approach" ISBN 90 367 1063 4 page 46

The power elite agenda
There is no indication that the world’s power elites are able to acknowledge the likelihood of such a scenario. This should not come as a surprise. For over 200 years the carbon energy sector has co-evolved with the industrial, economic, political, social and cultural life of society. Not only does the energy sector provide the physical motive power that underpins virtually all economic activity, but it also has vast purchasing and political power to match. The energy sector, banks and financial institutions are closely intertwined, as are the institutions of national states, international state agencies and the big media empires. Finally, the armed forces or mercenaries and security companies work closely to protect the companies that help to fuel the war machines of the different states. To call the energy sector well resourced, well connected and well informed is to understate its vast power to shape all political-economic agendas, including matters of war and peace. In country after country around the world, the state and energy companies enjoy a symbiotic relationship: the state owns the energy companies and the energy companies virtually “own” the state. In the USA the Bush presidency is based in the oil and military logistics sector. In Russia Putin's government is based in the gas and oil industry. When asked who was more powerful than himself while he was chancellor, the now British premier Gordon Brown indicated that he considered Lord Browne, then head of British Petroleum, as the most powerful person in the UK.

The coal industry has for many years been in decline in this network of influence. Now it is making a comeback. Coal, oil and gas companies are finding that their interests are converging and they are offering us a corporate version of sustainability that on close inspection appears to recklessly ignore huge dangers while pursuing a direction completely at odds with the precautionary principle. In the European Union, for example, we appear to be locked into a process that is explicitly in favour of a resurgence of coal power. In recent years the European Commission has confirmed its coal revival strategy in its Green Paper “A European Strategy for Sustainable, Competitive and Secure Energy” (March 2006), in the 7th Framework Program for R&D (2006-13) and in the Communication on Sustainable Fossil Fuels (January 2007).

At the same time, an alternative to the corporatist growth agenda is emerging, in recognition, perhaps, that an entirely different way of living is needed. An increasing number of people see that there is no chance that current Western “affluenza” lifestyles can be reproduced globally. In any case, the most advanced thinkers in the field of economics now recognise that human welfare is not based primarily on ever-increasing levels of consumption. (Richard Layard. "Happiness. Lessons from a New Science," Penguin Books 2005). Energy-lite ways of living that support human well being are both possible and necessary. But the emergence of new lifestyles must coincide with the move to a renewables-based energy system and an urgent drive toward energy efficiency. In this alternative vision, the fossil fuels that remain should be used only for the production of absolute essentials and otherwise ploughed as a matter of urgency into the development of a renewables sector.

Loss of control - when stress surges face too much complexity and resilience breaks down

The problem facing humankind is that the existing political economic system is locked into a different dynamic and is still too inflexible to evolve the bottom-up approach described in this report. Various systems theorists and historians provide us with the clues for understanding our current condition. The climate crisis and resource depletion are "stress surges"—huge challenges for a civilisation that has simply become too big and too complex to be able to respond effectively on the scale and in the time-frame necessary. We have reached the outer limits of growth, and the political economic system is attempting a techno-response based on old paradigms. As we have seen, there is a huge risk that this solution will not work well enough, will arrive too late and may even be irrelevant if the coal reserves run out too fast.

In his book The Collapse of Complex Societies, archaeologist Joseph Tainter describes how civilisations become ever more complex and how, after a point, this level of complexity is so great that they cannot find the mechanisms to respond to a threat and thus collapse. Other theorists argue that human and natural systems evolve on different time and geographical scales in three dimensions: interrelatedness, productivity and resilience. After a new system first emerges it becomes more interrelated and its productivity increases, but only up to a point. Beyond that point the dense relationship of interdependencies becomes a vulnerability. Problem management becomes more difficult because problems become increasingly complex. When breakdown occurs it cascades through all the interrelated features of the system. The resulting collapse is a reduction of productivity, interrelatedness and complexity. If we are describing a human economic system this means a decline in production, which frees up resources for new forms of socio-economic and ecological organisation. (See Joseph A. Tainter, The Collapse of Complex Societies, CUP, 1988 and Gunderson L. H. and Holling C. S. , Panarchy Understanding Transformations in Human and Natural Systems, Island Press, London 2002)

Systems are also nested inside each other: The economic system is nested inside the ecological system. A key issue then is on how many levels the collapses happen when they do occur - will a collapse of the economic system also be a collapse of the ecological system? That is certainly a danger - but we can at least hope and work to try to ensure that things do not reach that stage.

Pre-figuring a simpler society – energy-descent planning and Transition Towns

Ideas like these help us with a wider view, a broader orientation, as we consider responses. Humankind must begin now to develop the simpler ways of living, the skills and the resource-lite ways to welfare which pre-figure a post-growth economy. There is a need for a movement with a practical approach to the reorganisation of economic life that realistically matches up to the features of the global ecological and economic emergency. Such a movement cannot come out of the existing growth system. Instead it is emerging in the form of initiatives, experiments, projects and networks outside of the mainstream, a prime example being the growing Transition Towns network. The agenda of the Transition Towns movement is not an attempt to cling onto the carbon infrastructure but, on the contrary, calls for dispersed small-scale initiatives to re-organise everyday life along energy-saving lines. Welfare is seen as residing in a healthy, resilient community that can meet most of its needs locally in a clean environment. At the same time, renewable energy systems are developed in such a way that they can be integrated into the new arrangements.

A movement like this needs a distinctive political style that, while being critical of the mainstream, remains constructive, not least because violent revolutions waste scarce resources and leave everyone poorer. The movement can however work towards demonstrating how the state could be organised in a way that would really assist in getting us out of our present dilemmas. (Roy Madron and John Jopling "Gaian Democracy." Schumacher Briefing no. 9). When it is shown that the mainstream economy and its political superstructure are in a state of destructive paralysis - when it becomes apparent that it is incapable of responding to the complexity and all the many features of the crisis - growing numbers of people are likely to gravitate to these bottom-up, constructive grassroots initiatives, initiatives that revolve around simpler and less energy-intensive forms of living and push people towards an alternative politics.

The Cap and Share approach (a potential approach to an international climate treaty) to carbon control - the people controlling the energy giants and taking the scarcity rent for the Earth's atmosphere

A central feature of such an alternative politics is a different approach to the control of carbon emissions. Current approaches in operation are far too complex, with their focus on the billions of places around the globe where the combustion of fossil fuels takes place. A simpler approach—one advocated by cap-and-share — is one that focuses on the far smaller number of locations where the fuel comes out of the ground and enters the economy “upstream,” controlled by only a few hundred companies worldwide. To use an analogy, it is as if greenhouse gases enter the economy through a relatively small number of pipes attached to thousands of sprinklers with billions of holes. Instead of trying to plug up billions of holes, policy should focus on turning down the taps feeding the pipes—by requiring fossil-fuel producers to have production-authorisation permits for the greenhouse gas content of their fuels, when burned. The number of these permits would be capped and brought down year by year as quickly as possible. This means putting limits and controls on some of the most politically powerful organisations and industries in society - the fossil fuel producing organisations and industries which will otherwise lead us in the direction of collective suicide.

But for a policy like cap and share to evolve on the scale required it will require a global political movement and an attendant struggle to impose a “power down” approach on the energy giants whose production is destroying the global environment.

Just how might such a movement be developed? And can global levels of discontent over rising fuel prices be neutralised? The answer to both questions is the same: The bulk of production-authorisation permits should be distributed to adult populations on an equal per capita basis. The fossil-fuel companies would then have to purchase the permits from the population (via intermediaries) and the population would capture the scarcity rent that arises from limiting use of the Earth's atmosphere. This is not only equitable—because if the sky belongs to anyone it belongs to us all equally—but it also puts money into the base of the economy. It would draw the bulk of the population into climate change politics in a way that policy makers have so far failed to do. It would also help to provide the general population with some of the capital resources they need to develop millions of localised small-scale solutions to energy transformation at a dispersed local level.

There are at the moment excellent beginnings for the transformation of sociey and economy at the base of society, like the Transition Towns movement. This movement needs resourcing and help to involve the bulk of the population. There are few better ways to involve everyone than to give them permits that are worth money - which can then lead to a dialogue about the ideal way of spending it. (It is not suggested that this should be the official policy of Transition Towns as this might be divisive, but many people in Transition Towns and similiar movements may wish to support such state policies alongside the practical work they do locally).

A Global Movement for Change

The full potential of this idea would be realised at a global level, because it would alter the balance between rich and poor in favour of the latter, both within countries and between them; because poor people use little fossil energy, they would therefore gain more than they lose through rising prices. Such a system would be likely to benefit the majority of the world’s population.

When a common understanding emerges, and when societies and communities realise that they are in an emergency situation, then and only then can great sacrifices be asked of people and only then will people make these sacrifices willingly. At this point nothing less will do. There is no avoiding a future in which great sacrifices are called for. Our task now is to recognise these and create a society in which today's children have a chance. Otherwise we are sending them to an early grave.

Mental Health and Financial Market Cycles

2008-04-29T13:05:00.000-07:00

About 30 years ago, having just trained as an economist, I became mentally unwell and a psychiatrist diagnosed manic depression. As I struggled to understand manic depression independently I at first reached for ideas from economics - from trade cycle theory which is about boom and bust cycles. As the years went by I had reason to re-think this first approach to my problems. I went on to understand them using the medical model. Later I took ideas from psychotherapy and psycho-social explanations. Later still, employed as a development worker in the mental health voluntary sector, I developed my own ideas about mental health. Eventually I was fortunate enough to publish in respected academic journals, and to lecture. With a stable job and income, with a complete rethink about my relationship to life and society, I stopped taking the medication and stopped seeing a psychiatrist. Now, like some Rip Van Winkle character after 30 years sleep I have returned to being an economist - an ecological economist - and spend a lot of time reviewing and trying to understand the operation of the financial and other markets in their current crisis.

And I have come round full circle. Although I don't think economics has much to offer in explaining manic depression I suspect that an understanding of the sorts of psycho-dynamics that underlie manic depression may have a lot to offer in the understanding of financial and other economic cycles. The euphoria, over-optimism and frantic hyper activity of the boom is not some different kind of emotion from the emotion felt by a manic person. The panic and fear at the time of a market crash is not a different emotion from the panic, the fear and the stress -induced aggression felt by a person whose life is spiralling out of control, who cannot make sense of what is happening and resorts to fantasies and goes crazy. Finally, the super cautious way of operating of business people who have, or have come close to, going bust is not a very different emotion from that of someone who is clinically depressed.

The parallels are actually very striking. One problem here is that just as medical psychiatrists tend to de-personalise manic depression and take the explanation away of anything that resembles the impacts of the effects of everyday life, so economists tend to de-personalise their economic explanations in the language of market entities: prices, interest rates, capital ratios. In the process the human actors in these dramas, their judgements and the emotional responses which shape their judgements, somehow cease to be a part of the explanation.

As a former mental health worker I find this very strange. Well being in the mental health field has something to do with emotions at the core of the quality of life. Yet economists claim to be practising "a science" that has important things to say about how resources are allocated in the interests of human well being and welfare, and yet only peripherally refer to emotions at all. Most of economics is about modelling variables, and although there appears to be some sense that market 'sentiment' is important, the analysis of this seems to be quite shallow. As a former worker in the mental health field it seems to me that to understand the market one needs to understand the emotional dynamics of market cycles as a core part of the process and in some depth.

When we look at the financial markets from an emotional and mental health angle we immediately find something very worrying. Let us take, for example, the creditor-debtor relationship and let us look at it from a mental health point of view. In fact there is a striking correlation between mental ill health and debt - on both sides - lenders as well as borrowers.

Among other things it is now well documented in academic studies that self reported anxiety increases with the ratio of credit card debt to personal income; that the onset of mortgage debt has a negative impact on mental health on males; that, of people receiving debt advice, a high proportion (62% in a UK study) reported that their debt led to stress, anxiety and depression - which they are likely to consult their doctor about; that there is a relationship between debt and post natal depression; that debt is the strongest predictor of depression; that difficulties in repaying debts are strongly connected with suicidal ideation and self harm; that debt is associated with feelings of shame, social embarrassment, a sense of personal failure, negative self identities and is implicated in isolation, social exclusion and strained relationships. (Chris Fitch, Robert Chaplin, Colin Trend, Sharon Collard, " Debt and mental health: the role of psychiatrists" Advances in Psychiatric Treatment (2007), vol. 13, 194–202 See also)

Now let is turn to look at the situation on the other side - among the people who lend money, or at least those who manage and direct the credit markets.

Mental health problems can be severe in the heat of financial competition. Drugs and alcohol are commonplace on Wall Street. A 2001 study of brokers by Florida's Nova Southeastern University found that 23% were clinically depressed, compared with 7% overall among American men.....

New York newspapers have revelled in stories over the past year of stressed-out traders reaching breaking point. One broker, Christopher Carter, has been charged with assault for throwing a hedge fund manager, complete with an exercise bike, at a wall in an upper east side gym. The hedgie's
offence? He grunted and shouted, "you go, girl!" too loudly during a spin class.

In London, a hedge fund manager, Bertrand des Pallières, made news last summer because he was so busy shorting stocks that he didn't notice for three months that his £80,000 Maserati had been towed away.

Jim Cramer, a hedge fund manager turned television stockpicker, told the New York Times that drugs tended to reinforce traders' inability to spot a looming downturn: "Prozac and all those other drugs banish the 'this is the end of the world' thoughts. Which means you are not as anxious as you should be about an obvious downside.”

http://www.guardian.co.uk/business/2008/jan/05/useconomy.usa

While therapists report that there is currently an epidemic of psychological illnesses in the finance sector, some of the managers find the oldest of psychological strategies for coping - avoidance, denial, switching off mentally in the heat of the crisis. An example is James Cayne, chief executive office of the Bear Stearns bank. The German news magazine Der Spiegel describes Cayne's work style thus " Even in times of the greatest crisis the boss of investment bank Bear Stearns did not let himself be distracted from his hobbies. Last July, as one of his Hedge Funds broke down, the head of the board travelled undisturbed to a several day long bridge tournament in Nashville, Tennessee. While his troops fought for survival Cayne was not contactable. He had turned his mobile phone off. Its ring could have disturbed the many times American bridge champion. " (Der Spiegel,
22.03.08 article titled "Die Bank-Raeuber" - translator BD )

So even a cursory glance reveals that, from the point of view of community mental health, the credit system is highly dysfunctional. The idea of some economists that these arrangements are somehow contributing to human welfare appears to be questionable, to say the least.

Of course mental health workers meet desperately unhappy people living absurd lives all the time. Meeting people trapped in belief systems that, from the outside, seem crazy goes with the job. Normally, to be unlucky enough to qualify for a mental illness diagnosis, the apparently strange belief system that you have, and your strange way of making sense of the world must be unique to you. It will be seen as part of your inability to communicate with others. Then a psychiatrist can damn you with a variety of diagnostic labels like "thought disorder" which are said to be the symptoms of something deeper. Over the last couple of decades it has become clear that a lot of these strange thoughts are actually interpretable with a bit of effort. Psychologists, therapists and counsellors who become good at this quickly note wider patterns of emotional response patterns in society at large - the common cultural assumptions that help form collective emotional responses made by whole groups of people. In fact there is nothing new in this - Freud applied his ideas out of the consulting room in observations about the wider world and his ideas were picked up by the advertising industry. Most advertisements work to influence people by setting up emotional associations between a product and those things and situations which people commonly desire. For example, fizzy drinks with sugar in them, are advertised by association with adolescent sexuality in blue jeans.

Using what we know about group emotions it seems to me that it ought to be possible and would indeed be valuable, to integrate the knowledge of group psycho-dynamics into our understanding of the way that markets evolve, including financial markets.

For example during a boom phase, as long as asset values continue to inflate it is easy to make money using borrowed money. For the non economists reading this paper an exaggerated simple example will make the point - suppose I have £1million to invest and can borrow £99 million and buy an asset at £100 million. If the price of this asset goes up just 1% to £101million I can then sell it and, leaving aside the interest payment, I have doubled my money, from £1million to £2million. This is called leverage and the point about leverage on the way up is that it can get out of control. Betting that asset values will go up with borrowed money creates a further pressure pushing those values up even more in a self fulfilling prophecy. Such self fulfilling prophecies are common in mental health - confidence leads to success and builds confidence even more. However there are limits to this process or we are talking about mania.....

In the circumstances of a leveraged boom it is not only asset values that get pumped up but egos. Ordinary mortals who, in other circumstances would see themselves as no more or less important than everyone else, suddenly become very rich and acquire the symbols of social success. It is thus not only bank balances that swell in size when the size of bonuses are announced.

Trading rooms are fiercely competitive places and action is happening fast and furiously. In finance, just as in any other branch of life, the more one devotes one attention wholeheartedly to the matter at hand the better that one will do. The broader and deeper one's knowledge will be the more edge that one will have over everyone else. What needs to be noticed here, however, is that this has some resemblance to addictive behaviour. In an addiction everything and everyone takes second place to the addiction. The guru who understands the markets better than anyone else probably understands the other things in life rather less - and certainly gives them little priority. For such finance experts it will probably seem self evident, ultimately, that the way out of problems is to buy one's way out of them. This will not make for happy relationships.

"I was probably one of the biggest currency traders in the world, including the banks. It was very exhausting because it was already a 24 hour market. When I went to sleep I would wake up every two hours to check the market as it opened: Australia, Hong Kong, Zurich and London. It killed my marriage." (quoted in Leon Kreitzman, The 24 Hour Society, Profile Books 1999 p 26).

This way of living is akin to mania - the fact that it might be a collective process merely serves to make it interpreted in a different way but does not change its essential character. The euphoria of mania is no different from the excitement of a small child the day before its birthday, who cannot sleep because the next day will bring a pile of presents, a party and lots of attention. The manic person cannot find a way to switch their feelings off and is constantly on an adrenalin high. Often enough in these circumstances more and more commitments are taken on - and what is missing is the idea of a personal limit to one's practical and work capacities.

In the life of a person who is not wealthy these practicalities and the urgent adrenalin charged character of their relationships will eventually mean that they will come unstuck. Making more and more commitments means that one over reaches. Complications are not foreseen. Other people do not play ball with ones grandiose designs. If one does too much one doesn't have time to wash one's clothes and do the washing up. Life, practicalities, projects and relationships fall apart as one goes past ones limits.

A rich person may not have some of these complications of ordinary life which would floor a manic person. Their money can buy servants and with enough wealth sex (though not love) is no problem either. Many of the practical problems in life can be solved with money or a credit card.

Until the crash. The whole history of the market economy tells us that a crash comes eventually. Euphoria impairs judgement. The overconfidence of the rich and powerful people, because it cannot be held in check by the countervailing power of those who are not as strong economically or politically, nevertheless reaches a point beyond which it cannot go further. This has been the case throughout history, and not just for those active in finance. As I pointed out in an article for a Psychotherapy Journal:

"The ancient Greeks already knew how to describe situations like this. This was a job for the Goddess Nemesis whose role it was to maintain equilibrium on earth 'rebalancing' happiness from time to time. In fulfillment of her role, Nemesis had a tricky relationship with the goddess Tyche - who was irresponsible in handing out Luck and Fortune, indiscriminately heaping her horn of plenty, or depriving others of what they had. In particular Nemesis would wreak havoc on those favoured by Tyche if they failed to give proper dues to the gods, become too full of themselves, boasted of their abundant riches or refused to improve the lot of their fellow humans by sharing their luck" (Brian Davey "What Future?" in Journal of Critical Psychology, Counselling and Psychotherapy Vol 7 no 2 Summer 2007)

People who become too full of themselves eventually believe that they can get away with anything in the pursuit of their addiction. In all of the literature about the current financial crisis what we hear over and again is that the banks do not trust each other. This is ironic because in its original meaning the word 'credit' is from the Latin credere and means to believe and to trust. When trust breaks down we have a very specific kind of psycho-dynamic occurring between people.

A Professor of Organisational Ethics at the Cass Business School, Roger Steare, undertook integrity tests on more than 700 financial services executives in several major firms and came to the conclusion that "There is a systemic deficit in ethical values within the banking industry. This will not change by hanging a few people out to dry," says Professor Steare.

The results of these tests indicate that as a group, they score lower than average in honesty, loyalty and self-discipline, he said. He compared traders to "mercenary hired guns", who regularly switch firms to maximise earnings. http://news.bbc.co.uk/1/hi/business/7207563.stm

Behind the technical language of liquidity, a language that distances us from the deeper reality, the truth about the credit crunch is that it is a reputational collapse of the participants of an entire economic sector - the people running this sector have overreached themselves and are meeting their Nemesis.

The road that took them to this point was one where there were plenty of illusions which are really little different from the illusions that a manic person will create. Cassandras who try to express the folly of pushing beyond the limits are ignored.

In the case of the financial markets, because the manic process is a collective one, the illusions have been embodied in institutions and have been dignified with the term "financial innovations". Rather as the mad person will split off the part of their personality that does not fit their cosy self image - for example the murderously angry and hateful self - so the financial institutions have split off their financial junk that earned them fees making predatory loans to people who cannot afford to pay them back. The splitting hived these mortgage backed securities off balance sheet into special purpose institutions. Rather as the mad person will wishfully believe what they want to believe rather than hard realities, the banks paid other organisations to give AAA ratings to the worthless pieces of paper that they were issuing so that everyone including themselves could believe that everything would be OK.

Such strategies have their parallels in reality of avoiding mental mechanisms, the pathologies unravelled by clinical psychology. But then, to use the terminology of Freudian analysis, the repressed truth, the reality that has been held at bay, returns. The worthless assets have to be taken back onto the books. Reality bursts through illusion.

In the here and now there are about 10,000 city workers who are about to lose their jobs and are likely to find severe problems of re-adjustment. This is not only because they will have no way of immediately occupying their time, the fact that they will lose the regular routine that structures their day, the fact that their relationships mediated through work will be lost, the fact that they will now be parting from their source of income. The re-adjustment will be so difficult because it will not be obvious what kind of job or life they might re-adjust themselves to. There will be identity problems here of the most profound kind. Given their previous world view and mind set that celebrated winning and competitive success they are likely to see themselves as "losers". What is more many of them will find to their horror that no one in the wider society is the least bit sympathetic to their plight as there will be a widespread assumption, which one can hardly question, that the banking and finance industry has brought this down on their own heads.

These are the sorts of circumstances where the hubris is likely to be psychologically crushing and it would not surprise me in the least if quite a lot of the former "masters of the universe" find themselves in the orbit of the mental health services with severe depressions of the clinical kind. However they are unlikely to find the psychiatric wards havens from the cruel world - for it is likely that on the same wards will be the borrower victims of the credit crunch too. In these circumstances the emotional dynamics might get a touch difficult.

To conclude, it would be valuable to integrate into our theorisation of what happens in the course of the credit and other economic cycles and events, the emotional changes of the people involved as they act and live through these events. Very often people live with their emotions but barely notice them - they have no language or concept systems to describe their emotional responses and we may describe them as emotionally illiterate or immature. Not having reflected deeply on their own emotional responses and those of others, they may act in ways which are unconscious, lacking in self awareness. In my view the idea that human welfare can be best optimised by market actors who are not emotionally aware of the full effect on themselves and others of their actions, and who are just responding to price signals, is not believable. Further evidence for this is likely soon to be found in the psychiatric consulting rooms and on the hospital wards.

Brian Davey

3rd April 2008

The Financial Crisis and what we can do about it - A Green Economic Perspective

2008-04-29T12:48:00.000-07:00

Summary

Throughout history lending against interest has been associated with misery, inequality and injustice. It still is. Credit arrangements have a place enabling the acquisition of large assets and productive investments. Inevitably such arrangements have a risk element. However herd euphorias, using borrowed money to acquire assets whose prices are appreciating, pushing their prices up even more and leading to yet more borrowing, have a long history. So too have the crashes that follow. At this time a series of complicating financial innovations which were supposed to reduce risk and did the reverse; a break down in financial ethics; the incentivisation of predatory lending together with the globalisation of finance have brought the system to the point of collapse. The banks have quite literally dis-credited themselves and tax payers will be expected to bail them out and/or a write down of debts through an inflation is likely to occur. This will be incredibly unjust. Rich people are already parking their wealth in real assets like food and oil, driving commodity prices up just when the poor can least afford to pay. It appears that most politicians will support their banking friends while calling for more regulation which has already been shown to be ineffectual. Ordinary citizens will need to support each other developing local and complementary currencies and preparing the mass understanding and support for a different kind of money system. Money creation trusts should be responsible in law to ensure that if additional money is issued then the distribution of money, when it is first put into circulation, goes to everyone equally. If there is an inflation then everyone should equally share in the money creation process.

Lending and Borrowing in Historical Perspective

Throughout the history of humanity religious leaders, rulers and politicians have either banned lending against interest altogether or put strict limitations on the interest that can be paid on loans. This was hardly surprising - usury was either regarded as immoral or unjust because it typically arose in conditions of distress in which, instead of helping the people in difficulties,those who were vulnerable had that vulnerability exploited and fell under the power of the lenders, often enough into debt slavery. Or people were forced to borrow money to pay taxes from rulers who used tax revenues for wars. Or the rulers themselves got in hock to pay for their vanity and their violent adventures. In these pre-industrial times it was obvious to all that production and wealth was dependent on natural processes, in particular the weather, that determined how good the harvest would be. The modern idea of an economy on a perpetual growth path was completely alien. So if lending increased in a society then it was self evident that the interest repayments would only be possible through an increasing transfer of money and purchasing power away from the borrowers and its concentration in the hands of the money lenders. Just a knowledge and observation of the exponential maths of an accumulating interest rate made it obvious that this was unsustainable - for example "one penny invested at the birth of Jesus Christ at 4% would have bought in 1750 a ball of gold of the weight of the earth." (Quoted in "Interest and Inflation Free Money" by Margrit Kennedy, Permakultur Publications, Steyerberg 1990 p13 ).

Processes which involved money concentrating in the hands of the money lenders had inevitable limits and 'adjustments' were made from time to time - either in explosions of rage against usurers and possibly their expulsion from cities or countries, or in a more organised way, by institutions like the Jubilee Year. In the Biblical book of Leviticus, a Jubilee year is mentioned to occur every fifty years, in which slaves and prisoners would be freed, debts would be forgiven and the mercies of God would be particularly manifest.

Without arrangements like the Jubilee debt undermines societies where incomes are not growing but debt is and there is growing misery and a danger of social upheaval. That is also the case today where whole social groups are not sharing in the growing income of a society but try to keep up with the rest of society by borrowing more. The wealth and power of a society may grow overall but in a very unequal way, forcing those whose income are not growing to borrow if they want to try to keep up with the lifestyle that the society proclaims as the good life to which "successful" people should aspire. This is why problem debt is socially patterned and disproportionately affects those on
low incomes. UK Government research published in 2005 indicates that although only 4% of all UK respondents have problem debts, this rises to 64% among those on annual incomes less than
£9500. Particularly affected are people with mental health issues or with an addiction - whose mental health problems are likely to be at least partly caused or exacerbated by their debt worries (C. Fitch, A Simpson, S. Collard and M. Teasdale "Mental health and debt: challenges for knowledge, practice and identity" in Journal of Psychiatric and Mental Health Nursing, 2007, 14, 128–133)

Debt, Misery and Mental Health

That these processes still lead to a great deal of unhappiness and distress, as they have through all of history, is very evident in recent times from psychiatric research. Among other things it is now well documented in academic studies that self reported anxiety increases with the ratio of credit card debt to personal income; that the onset of mortgage debt has a negative impact on mental health on males; that, of people receiving debt advice, a high proportion (62% in a UK study) reported that their debt led to stress, anxiety and depression - which they are likely to go to their doctor about; that there is a relationship between debt and post natal depression; that debt is the strongest predictor of depression; that difficulties in repaying debts are strongly connected with suicidal ideation and self harm; that debt is associated with feelings of shame, social embarrassment, a sense of personal failure, negative self identities and is implicated in isolation, social exclusion and strained relationships. (Chris Fitch, Robert Chaplin, Colin Trend, Sharon Collard, " Debt and mental health: the role of psychiatrists" Advances in Psychiatric Treatment (2007), vol. 13, 194–202 See also)

Because people with money tend to dominate social discourse and have a great deal of influence over the media the discourses about debt and finance are typically written in positive language. Most of what we read and hear about borrowing and lending celebrates the benefits. Indeed the word "debt" is not used very much - the preference is for the word "credit" because it has more positive connotations. This paper has not started like this because we are in a crisis where borrowing and lending are revealing their negative sides. However, we cannot understand credit/debt without understanding the positives too.

Borrowing and lending as a temporal adjustment in resource allocation

Looking at lending and borrowing in a neutral way we can see that it is essentially a relationship between people or institutions entered into in order to be able to adjust the allocation of resources in a temporal fashion. If you or the organisation that you represent do not have the money to buy something, perhaps something that is very expensive when compared to your existing cash resources and your income flow, then you have two options in order to buy it. Either you can save up to buy it, putting aside a part of current income over a period of time and waiting until you have enough purchasing power - or you can borrow. Borrowing is therefore a way to bring forward what would otherwise be a deferred expenditure. This is possible where you or your organisation is able to convince a lender that future income flows will be sufficiently large and sufficiently certain to be able to repay the loan plus make an interest payment.

To give the lender added security they are likely to require that you put up a proportion of the money for the purchase and make a collateral arrangement. If the loan arrangement breaks down, they can require you to sell the asset to raise the money to pay them back. If you are forced to make this sale there is, however, the possibility that you will raise less money than you originally paid for it. That's why the prudent lender will not usually give a 100% loan. If the price that is raised by selling the collateral is lower than original purchase price the lender will be calculating that the loss is born by you out of the bit of the purchase price that you paid for with your own money.

In an era of rising asset prices the risks of this happening may appear to be low and both lenders and borrowers lulled into a false sense of security. Lending standards, like the proportion of a payment covered by a loan, may slip. This has happened in recent times and partly accounts for the current crisis.

In a growth economy where incomes are rising borrowing to buy assets often makes sense. It may allow you to buy productive and income earning assets that you would not otherwise have been able to access and perhaps these assets can be used to repay the loan, the interest and still leave you better off. The inhibition and resistance to usury broke down, first of all, in those areas of commerce where the people who borrowed the money were able to use it to expand trade and production leaving both them and the money lenders better off. As industrialisation took off the application of fossil fuels to the production process, and the use of more effective energy transformation technologies like electricity, made for 200 years growth of output in which the banks, traders and industrialists could all grow and share the income from growth - at least in the developed economies.

The meaning and significance of Leverage

Using loans to acquire capital assets to enhance your income and wealth is called leverage and it is the oldest of the financial strategies. An extreme example to make clear how leverage works in a booming economy is given here. (There is a description of how leverage works in a collapsing economy later).

Say a Hedge Fund buys a financial assets for £100 million and does this with £1million of their own money and £99 million in loans from an investment bank. Now say the value of the financial assets rises just 1% to be worth £101 million. The Hedge Fund can sell the assets at that price, pay the bank back and end up with £2 million. Although the price of the assets rose by just 1% the Hedge Fund will have seen their own money rise from £1million to £2million. If assets values are rising there is a powerful temptation to borrow money to buy them and ride on the backs of this leverage process. It is what the Hedge Funds, managing money for rich people and many other financial institutions have been doing. And this process, of buying up financial assets on leveraged credit has been bidding up the price of assets even more. It has created a self fulfilling spiral of rising confidence, more borrowing, more asset purchases, more inflation of asset values and even greater (over)confidence......until recently.

Over the last few years it has not just been the rich and beautiful that have been playing the leverage game. So too have many middle class people and, in the sub prime mortgage and housing market, even poor people were drawn into the game without being required to have any income or capital at all. With incomes in the form of wages stagnating, and with house prices rising, the only way to get on the property ladder was to do this. In this process not only has the credit structure been inflated so too was the money supply. In order to understand this here is another example.

Lending and the creation of bank money

Let's say a middle class person goes to my bank to arrange a loan to cover 90% on a £100,000 house
secured against the building itself. They put up the missing 10% (£10,000) personally.

After the sale has gone through, the vendor lodges my £90,000 cheque in her bank.

This gives that bank funds to lend out and, since its business is lending money, it lends out 90% of its customer's deposit, keeping back 10% as a reserve.

Thus the £90,000 loan creates another deposit in another bank, and 90% of that will be lent out too.

From bank to bank the deposits can go, each creating the basis for another, smaller loan, so by the time the effects of my initial £100,000 purchase have worked themselves through the system, loans totalling £1m will have been generated.

Most of the money generated by this lending cycle, which the original house purchaser and borrower started off with just £10,000, their 10% deposit, will have been spent on buying property or some other asset. With lots of other people doing the same thing, borrowing to buy assets, the price of assets will go up, thus creating the collateral values against which the banks can lend even more money. When they lend this will push the price of assets even higher and more and more people will rush to borrow from banks and mortgage companies to get on the property ladder.

Speculative Bubbles

This is what economists call a "bubble". The process would and should be self limiting if lenders acted with a certain amount of restraint and kept an eye on lending standards. After all, people have to be able to re-pay their loans with interest. The ability to make repayments on loans - the most common lending standard is to set a limit as a multiple of your income - say 3 to 3.5 times your income if you are buying a house on your own.

However, and this is the crucial point, the lenders have not acted with restraint and the financial regulators have let them get away with it.

In recent years there has been a clear trend towards higher multiples, in some cases as much as 7.5 times annual salary (although 4 to 5 times salary is more common).

This is mainly because interest rates, since the late nineties, have been consistently low, much less volatile and there was an assumption that they would stay low. Lenders were lulled into a belief that the threat of borrowers being overstretched by sudden interest rate rises had gone down. They were happy, therefore, to lend more and more. Because mortgages were cheaper to repay it was assumed that there was less chance of borrowers defaulting, even on bigger loans. Further reductions in lending standards occurred when 100% mortgages were offered. Then lenders started offering 40 or even 50 year mortgages as compared to 25 year ones.

In each case the lending standards went down and the financial regulators did nothing about it. They let it happen because there was a conviction that a wave of "financial innovations" in the finance industry was making the management of the risks of lending much more effective.

The Minsky Cycle - Financial Euphorias

During a boom a collective mentality usually develops that "this time is different" . This collective euphoria, somewhat akin to the manic phase of manic depression, leads to misjudgements, to an overshoot and then to a market collapse. To a large extent each of these euphoric "bull run" repeats mistakes already made by other lenders and borrowers somewhere else and some time else. In fact there have been so many that various academic economists have studied the process and the cycle in the credit markets is named after an economist called Minsky

For those interested in the history here is a list Holy Roman Empire currency 1622; Tulips 1636; South Sea Scheme 1720; Northern Europe 1763; East India Company 1772; Emerging markets 1809-1838; Railways 1847-1873; Commodities 1890-1920; Great Crash of 1929; Bretton Woods collapse of 1973; Savings and Loan Collapse 1980; Third World Debt 1982; Black Monday 1987; Junk Bonds 1988; Japanese bubble 1990s; US Bond Crash 1994; Mexican Debt Crisis 1995; Asian Crisis 1997; Russian Crisis 1998; Long Term Capital Management Crisis 1998; Dotcom crash 2000; Sept 11 2001 Disruption; Argentine Crisis 2002and the credit crunch beginning from August 2007....

Because each crisis is different is difficult to assess in the early stages of the crash to what extent it is going to be worse, or not as bad, as comparable crises that have come before. Naturally when the slide starts to happen a lot of people are very preoccupied by how bad it will get - while at the same time being anxiously aware that, to a degree, market sentiment has something of the character of a self fulfilling prophecy and that if everyone thinks it will be bad then, indeed, it will get very bad.

Leverage on the way down - accelerating collapse

What is particularly frightening at such a time as this is how leverage works on the way down. In the earlier example of a Hedge Fund it will be remembered that the Fund had purchased financial assets for £100 million using £1 million of its own money and £99 million loans. (Leaving aside the interest payment). If the value of the financial assets rises 1% so that the asset is worth £101million it doubles its £1million investment. But what if the value of the asset goes down 1%? Clearly it has lost all of its own money. And if the market value goes down even more? It is dynamics like this that explain why highly prestigious and lucrative Hedge Funds like the Carlyle Group suddenly collapse.

There is nothing new about collapses caused by over-leveraged financial institutions so is the 2007/2008 crisis any worse than all the others? There are reasons to believe that it might be - because of waves of financial innovations that have happened over the last few years. This wave of innovations was made possible by the deepening of computer telecommunications and by globalisation - but these innovations are now revealing fatal flaws.

Financial "innovation" securitisation and the decline of relationship banking

One of these innovations was the so called 'originate and distribute' approach to creating loans. In the 'good old days' if you borrowed money from the bank then the bank remained the institution to which you owed the money. Your debts were managed by a bank manager that knew something about your financial affairs. This kind of 'relationship banking' is the sort of model for Captain Mainwaring in the BBC comedy series "Dad's Army" - pompous perhaps, but having an intimate knowledge of local bank customers and borrowers like the butcher, the undertaker and so on.

Now, however the banks and mortgage institutions lent money and then, so to speak, consolidated the IOUs from their customers, and sold them on as bonds to other financial institutions for a fee. This was the process of "securitisation" and the securities thus created - for example mortgage backed securities - were sold all over the world. Replacing the bank manager that knew his customers is a kind of banking based on making calculations about the known probability
that one can turn the debt owed by strangers on another continent into a specific quantity of cash in a liquid market at specific point in time provided by calculations on a computer screen.

Under this new 'originate and distribute' regime, the more the banks lent the greater the fees - but it no longer mattered to them whether the people who they were lending to were credit worthy or not credit worthy as it was other institutions that ended up holding the debt, not them. They had sold it on and picked up a nice sale fee. It became in the interest of financial institutions to sign up anyone to a credit deal and then pass the parcel to another investor. The so called sub prime debacle ended up lending so called NINA loans - loans in which people with No Income and No Assets were enticed into buying their houses by deals which seemed highly advantageous but which they really could not sustain - for example starting with very low interest rates which were to be re-set later.

Home is where the heart is and a source of security - or collateral for a debt fuelled shopping spree

One of the most basic of all arrangements in life is having somewhere to live. Home is the place where one is supposed to feel secure and where one's intimate relationships and the care of dependents takes place. A home also used to be where long run wealth accumulation could be stored by families as they got older. The shopping economy and the finance industry, working together, succeeded into turning the home, where the heart is supposed to be, into "an investment" for the home owners and a debt delivery mechanism for themselves. As author James D. Spurlock explained, just before the boom turned to bust:

"......an entire, increasingly unregulated industry exists to ensure that the house is not a vehicle for saving but for spending and even for speculating. Armed with euphemisms like 'Release the hidden value of your home" and fuelled by American's gratitude for credit and our short memories, this industry has become hugely profitable and almost unfathomable in size. The total amount of debt in the United States is now greater than the value of all the stock markets combined. It's a similar story in the UK, where consumer debt recently passed the £1 trillion mark for the first time." (James D Spurlock, "Maxed Out", Harper Collins 2007, p33)

It is this that is now crashing down on the heads of all involved - which, because we all use the banking system, is everyone.

Banks not trusting each other - how the banks dis-credited themselves

It is said frequently that the cause of the current banking difficulties is that banks do not trust each other and will not lend to each other. This is not surprising as the bankers are well aware that they have been selling each other worthless junk. What they now fear if, they lend to one of these institutions that has been sold rubbish, that is covering up its losses, is that they might be lending to an organisation, like their own, that will go bust.

There is a rich irony here. In its original meaning "credit" is derived from the Latin and means to
believe or to trust and arose in relationships in which lender and borrower knew each other. The banks manager took a direct interest in the management of the finances of debtors.

The wave of financial innovations put paid to all of that. At the end of decades of computerised telecommunications it apparently became possible to do finance in a completely depersonalised way through securitisation and the securities, bundles of financial obligations, could be 'sliced and diced' and traded anywhere in the world so all possibility of a knowledge link between borrowers and lenders has become impossible.

This should perhaps be spelled out as clearly as possible - globalisation of finance has destroyed the personal knowledge base for the credit relationship. It has therefore dissolved the trust basis of the banking system. The banking and finance system has, in a quite literal sense "dis-credited" itself.

In this kind of financial environment safety came, apparently, in yet more clever innovation - a whole series of arrangements whereby one group would sell reassurance through the credit ratings that they gave to products or through insurance against default - i.e. but the fancy word "insurance" here was really accepting payment in a bet that things would not go wrong.

Credit insurance, risk management and the credit system as a global casino

Thus you couldn't possibly lose out if you brought the NINA loans because they had been given an AAA rating by a credit ratings agency. Never mind that the credit rating agency was actually paid to give an AAA rating. It sounded good. Additionally there were lots of other clever wheezes invented to make it feel just right. For example, you could insure the debt that you held against default. When lots of money is being lent and times appear good getting paid money to insure against the possible default of AAA rated bonds seems like a pretty safe gamble. However, it was a gamble and, in retrospect it doesn't appear that it was a good one.

There were lots of these kind of operations which appeared to reduce the risk of business. Let's say you were investing in another country then there was always a risk that changes in foreign exchange rates would move against you. If that happened then, when you tried to move your money back into your own currency, you would lose out. So another kind of trade started to carry that risk for you, again for a fee.

Taking a risk for money is not very different from gambling - this is not on a horse or a card game of course but nonetheless the taking of fee against the risk that another company might default or against the risk of an unfavourable movement in an exchange rates is a gamble just the same. To win it to keep the fee when nothing goes wrong. To lose is that a default does in fact occur or an exchange rate does move unfavourably. So one company's risk reduction was another company's risk increase.

The financial markets started to boast that these new "financial innovations" as they called them were super sophisticated ways of managing risk. As risk was now "better managed" the aggregate amount of risk went up and up. In the financial markets the view took hold that they couldn't lose - the easiest way to make money was to help other companies "manage their risk" and the "appetite for risk", to use the finance jargon, got larger and larger.

This is a typical feature of the euphoria at the end of a boom phase. It must be acknowledged that some level of risk is intrinsic to any large allocation of resources because the future cannot be known with certainty. Losses are inevitable from time to time. Without taking risks no economic activity is possible. However when most of a market share the same sentiment that believes that risks are low at the end of a "bull run" the speculative fervour can get out of hand . This point was made 70 years ago by the economist John Maynard Keynes:

"Speculators may do no harm as bubbles on a steady stream of enterprise. But the situation is more serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes the by product of the activities of a casino, the job is likely to be ill-done." ( John Maynard Keynes, The General Theory of Employment, Interest and Money, 1936)

The growing complexity of financial instruments

In the last few years many of these complicated casino style activities were actually ways of getting round the financial regulations supposedly set up to make the whole system safer. For example let's say that your country's financial regulations are such that you are not allowed to speculate with other people's money in other countries financial systems. The regulations say that all your assets must be denominated in your own currency. No problem, Credit Suisse First Boston invented a financial derivative just for you. It was called the Quanto - this was a financial security issued by a bank in which the interest payments are based on interest rates in another country but paid to you in your own currency.

To make accurate assessments of the risks of holding financial instruments like this is actually a very complicated. And if you don't understand the risks you are not managing risks better, on the contrary, you are making them worse. As this tangle of complicated "risk management arrangements" is now tumbling down it has been repeatedly admitted that the financial "products" are often so complicated that no one understands them.

This was illustrated recently when the UK Parliament's Treasury Select Committee had hearings on the Northern Rock debacle and the Committee criticised investors for buying into complex financial products that “they did not always fully understand” in the hope of obtaining high returns.

Some such products are described in the report as “ludicrously complex” a point illustrated by the occasion upon which Lord Aldington, chairman of Deutsche Bank UK, could not explain to the committee what a CDO-squared was, despite the fact that Deutsche Bank is involved in the CDO market.

Complexity cycles - the ideas of Joseph Tainter

Behind the "Minsky cycle" of alternating financial euphoria and market panic there is a bigger cycle, let us call it a complexity cycle, in which, at the present time, decreasing returns to increased complexity has reached a point that can only lead to collapse of the financial system. (And then, we must hope, a simpler but functioning system). The marginal productivity of further financial complexity is now negative. “Marginal productivity” here means additional benefit with a
further step of a process - like financial innovation.

In 1988 an archaeologist called Joseph Tainter wrote a book called 'The Collapse of Complex Societies' which is still in print, the fourteenth printing being in 2005, because it appears to have lost none of its relevance. The central thesis of the book is that societies collapse because, as they try to solve their problems, they do so by investing more and more in complex socio-political organisation. However as societies become more complex the benefits of additional complexity decline and the costs of the complexity go up. In the jargon of economics - the marginal productivity of investing in complexity declines and, at some point, yet further additions of complexity makes things worse - there is a "negative return".

Those who are aware of the collapse of the Western Roman Empire probably immediately think of the barbarian invasions as its 'cause'. However, Tainter would describe these invasions as "stress surges". Apart from wars and invasions, other 'stress surges' would be things like disease pandemics (the plague), and climatic change producing crop failure. In the financial world a stress surge happens, for example, when it is discovered that too much finance has been lent out and a chain or domino effect of bankruptcies is threatened.

Tainter is at pains to argue that 'stress surges' do not in and of themselves provide the reasons why complex societies collapse - one typically finds that in the decades or centuries before the collapse 'stress surges' of equal, or even greater magnitude, have occurred and the society has withstood
them. What is important is to understand why the final stress surge, the one that brings down a society, does not produce the necessary robust coping response which the society had displayed in earlier crises. In his analysis it is because the society is managed in too complex a way.

This provides a useful way of looking at the current financial crisis. Clearly there have been here lots of financial "stress surges" in economic history. The crucial question here is whether this situation is different. The banks do not trust each other with good reason. The financial sector has become so complex that it is quite impossible for the bankers to look at the balance sheets of those they might do business with (their counterparties) and know whether they are reliable as partners or not. Participants in this immensely complex globalised financial network has no way of knowing how valuable the assets of many of the other parties are - and so are not able to tell how valuable are the assets on their own balance sheets. This is because they have lost personally mediated contact with their debtors in dense tangle of long distance opaque relationships. This poses the most fundamental question of all. Can they any longer survive?

Banking culture, the ethical crisis and informational asymmetry

What makes this systemic problem of confusion even worse is that the financiers know each other well enough to know that they cannot trust each other to tell the simple truth even when they know it. The growing complexity has been paralleled by the development of a culture of finance which is marked by a complete ethical collapse. Not long ago a Professor of Organisational Ethics at the Cass Business School, Roger Steare, undertook integrity tests on more than 700 financial services executives in several major firms and came to the conclusion that "There is a systemic deficit in ethical values within the banking industry. This will not change by hanging a few people out to dry," says Professor Steare.

The results of these tests indicate that as a group, they score lower than average in honesty, loyalty and self-discipline, he said. He compared traders to "mercenary hired guns", who regularly switch firms to maximise earnings. http://news.bbc.co.uk/1/hi/business/7207563.stm

This ethical collapse is poisonous in the context of what economists called "informational asymmetry". The growing complexity that no one can understand is a wonderful jungle in which all sorts of bandits can hide. The more complex the system the more it is open to fraud and abuse. A "sophistication gap" opens up between lenders and borrowers and becomes highly exploitable so
that, instead of financial risks being carried by the institutions with the greatest ability to bear the risks, others, who were out of their depth were enticed into taking on risks and ultimately making losses which they should never have been ventured into. As we have seen it is this sophistication gap which has been used to ensnare people who should never have borrowed at all. These people were bamboozled by sophisticated strategies of financial ensnarement - which for years have bombarded people with pieces of plastic and offers of credit - this in turn has been made possible by the absolutely huge data bases on every conceivable detail of the finances of individuals which the credit companies are able to get access to.

In these circumstances one must ask if regulation would or could make things any better. There are already regulations against predatory lending in the USA and if these had been used it would have largely prevented the sub prime debacle happening. The main significance of the fall of Elliot Spitzer was that he was leading a campaign to protect homeowners against the predatory lending attack upon them - in this he had the backing of the attorney generals in 50 US states and 50 state
level banking superintendents but was up against the Bush backed Office of the Comptroller of the Currency. Spitzer fell because of sexual indiscretions that would in other circumstances get overlooked - as journalist Greg Palast commmented.

http://www.gregpalast.com/elliot-spitzer-gets-nailed/#more-1979

These asymmetries and ethical deficits have made possible a host of predatory lending and financial practices. For example even big name companies like Proctor and Gamble came unstuck as they gambled in derivatives - retrospectively admitting that they did not know what they were doing. This was when they were seduced into making business arrangements by bank traders whose own motivations were to make multi-million pay bonuses rather than focusing on customer care. (Frank Partnoy "Infectious Greed" Profile Books 2004). Likewise there is currently a large number of companies that have been caught out holding securities that were given ratings which did not reflect their true values that are considering taking legal proceedings against investment banks that left them in the lurch.

Mental Health Problems in the Finance Industry

Earlier in this text there is a description of the misery and mental health problems associated with debt. It should be added at this point that in the trading rooms and executive suites that have been creating this crisis there are mental health problems too. Just as the euphoria of a bull run has
similarities to the loss of judgement in a mania, so the period at the end of the boom has been seen plenty of mental health problems according to reports coming out of the newspapers and the consulting rooms of the therapists for this group of people.

"mental health problems can be severe in the heat of financial competition. Drugs and alcohol are commonplace on Wall Street. A 2001 study of brokers by Florida's Nova Southeastern University found that 23% were clinically depressed, compared with 7% overall among American men.....

New York newspapers have revelled in stories over the past year of stressed-out traders reaching breaking point. One broker, Christopher Carter, has been charged with assault for throwing a hedge fund manager, complete with an exercise bike, at a wall in an upper east side gym. The hedgie's
offence? He grunted and shouted, "you go, girl!" too loudly during a spin class.

In London, a hedge fund manager, Bertrand des Pallières, made news last summer because he was so busy shorting stocks that he didn't notice for three months that his £80,000 Maserati had been towed away.

Jim Cramer, a hedge fund manager turned television stockpicker, told the New York Times that drugs tended to reinforce traders' inability to spot a looming downturn: "Prozac and all those other drugs banish the 'this is the end of the world' thoughts. Which means you are not as anxious as you should be about an obvious downside."

http://www.guardian.co.uk/business/2008/jan/05/useconomy.usa

While therapists report that there is currently an epidemic of psychological illnesses in the finance sector, some of the managers find the oldest of psychological strategies for coping - avoidance, denial, switching off mentally in the heat of the crisis. An example is James Cayne, chief executive office of the Bear Stearns bank. The German news magazine Der Spiegel describes Cayne's work style thus " Even in times of the greatest crisis the boss of investment bank Bear Stearns did not let himself be distracted from his hobbies. Last July, as one of his Hedge Funds broke down the head of the board travelled undisturbed to a several day long bridge tournament in Nashville, Tennessee. While his troops fought for survival Cayne was not contactable. He had turned his mobile phone off. Its ring could have disturbed the many times American bridge champion. " (Der Spiegel,
22.03.08 article titled "Die Bank-Raeuber" - translator BD )

This is the same market economy that mainstream economists, the theologians of money power, sincerely believe is the best set of arrangements for allocating resources to maximise human welfare.

Information asymmetry between regulators and bankers - the incompetent state

The sophistication gap and information asymmetry also applies to the would be banking regulators - as has been shown when the Northern Rock crisis developed in the UK and the Financial Services Agency, the watchdog that should have seen it coming was caught totally unawares. In the context of the current crisis the idea that more regulation will make things better is a nonsense as a large element of the current crisis was caused as sharp legal minds sought to find a way around the existing regulations - as in the example of the Quanto, already given.

In the fairy tale for the children the central banks and the financial regulatory authorities control the banks so that they act responsibly. What happens in practice is that the financial regulators and central bankers are bankers themselves and are usually out of their depth. The truer picture of financial regulation is told by someone like Nick Leeson, a trader whose illegal operations broke the Barings Bank.

According to Leeson alongside the "best brains" in the trading rooms, competing fiercely and taking risks, there are also " the grey men of the back office.... They do the paperwork behind the traders' deals and run the regulatory systems. It is their job to monitor the markets and ensure checks and balances are properly applied. These bankers are invariably not up to it. The front end of the business is far more profitable. The brightest and best are seduced by the lure of big bonuses, leaving the third-raters and burn-outs to take safe desk jobs in staid institutions such as the Bank of England."

http://www.dailymail.co.uk/pages/live/articles/news/news.html?in_article_id=482060&in_page_id=1770

Moral Hazard

This is immensely important in regard to what can be done about the current financial crisis (end of March 2008). Current discussions about the banking and financial crisis are circling round and round the dilemma of what is called "moral hazard" - the dilemmas for the government and the central banks that arise if they bail out the banks versus the problems that will arise if they don't.

In an article on the Financial Times web site Martin Wolf, their economics correspondent, and a visiting professor of economics at Nottingham University argues that:

"The world has witnessed well over 100 significant banking crises over the past three decades.....No industry has a comparable talent for privatising gains and socialising losses. Participants in no other industry get as self-righteously angry when public officials – particularly, central bankers – fail to come at once to their rescue when they get into (well-deserved) trouble. Yet they are right to expect rescue. They know that as long as they make the same mistakes together – as “sound bankers” do – the official sector must ride to the rescue. Bankers are able to take the economy and so the voting public hostage. Governments have no choice but to respond.....It is the nature of limited liability businesses to create conflicts of interest – between management and shareholders, between management and other employees, between the business and customers and between the business and regulators. Yet the conflicts of interest created by large financial institutions are far
harder to manage than in any other industry."Regulators should intervene in bankers’ pay
http://www.ft.com/cms/s/0/73a891b4-c38d-11dc-b083-0000779fd2ac.html by Martin
Wolf

Just a few weeks after Martin Wolf was writing this the US Federal Reserve was helping to organise a bail out operation to save the investment bank Bear Stearns with the help of the JP Morgan bank. The rescue broke with previous precedents because Bear Stearns is not a bank that takes deposits. Hitherto, only deposit taking banks were entitled to Fed rescues. However times have changed because Bear Stearns is part of the swamp of credit default swaps and other "risk management arrangements". Many other banks and financial institutions depended on Bear Stearns so that if it collapsed the crisis would be take on a "systemic" character. (Not a crisis of one bank but of the entire banking and financial system)

But the question of "moral hazard" looms large. Where will these rescues, dependent on public money, end? If the banks are bailed out every time then will governments and central bankers be conveying the idea that the bankers can never lose? If they do this will not the bankers take irresponsible risks all over again?

The future and futility of further regulation

In order to counter the problem of "moral hazard" the talk is now of more regulation. But what if, as the evidence seems to suggest that the regulators are not up to the job? What if more regulation will make the finance sector even more complex and complicate things even further? The fact that the regulators might not be up to the job was shown when the UK Financial Services Authority it effectual role in the downfall of the Northern Rock banks confessing to a lack of supervision and dedicated resources. The man responsible for supervising Northern Rock has now left.

Various participants in this discussion either accept or reject the idea that banks and a wider network of financial institutions should be bailed out and either accept or reject the apparently necessary complement to that idea - that these banks and other financial institutions will need to be regulated more tightly - or at least have accept more state intervention in their operation. Unfortunately, what this entire discourse fails to acknowledge is that the complexity of the financial markets arose to a large degree as a way of financial institutions finding their way around regulations. Thus, if it is the complexity of the market that has made it opaque and unmanageable, then a proposal to do more of the same - pump in more liquidity to bail the financial institutions out and have more regulation - is more of the same and will make the situation worse, not better.

What the discourse also fails to acknowledge is that in the tangled web of banking interrelationships there comes a point in a banking crisis when ANY AND EVERY major failure has systemic consequences - as was discovered by the Bank of England when it rescued Northern Rock the rescue had consequences for the entire banking system.

Various proposals have been put forward, for example, by Professor Martin Wolf who opines in the Financial Times that bankers' income should be tied to their long term achievements and not to short run gains. Proposals like this would suffer the same difficulties. It seems doubtful that Professor Wolf could draw up the terms of such a scheme without financiers experiencing it at some future point as a bureaucratic constraint that smart city lawyers would be hired to "innovate" their way round and get paid a high sum to do so. Would it note merely add a further level of complexity on the Jenga Tower of world finance.

It is in this context that one can see the proposals to regulate the US banking system differently that were made at the end of March 2008. These proposals were in fact dead on arrival. Here's how the New York Times describes the proposals on 29th March - it doesn't look like greater regulation to me:

"Many of the proposals, like those that would consolidate regulatory agencies, have nothing to do with the turmoil in financial markets. And some of the proposals could actually reduce regulation.

"According to a summary provided by the administration, the plan would consolidate an alphabet soup of banking and securities regulators into a powerful trio of overseers responsible for everything from banks and brokerage firms to hedge funds and private equity firms.

"While the plan could expose Wall Street investment banks and hedge funds to greater scrutiny, it carefully avoids a call for tighter regulation.

"The plan would not rein in practices that have been linked to the housing and mortgage crisis, like packaging risky subprime mortgages into securities carrying the highest ratings."

From this it appears that the banking system and government are so tightly intertwined that it is incapable of effective regulation. This follows from an analysis which goes beyond looking at the economics and acknowledges the realpolitik of the situation. The banks are too powerful and
the crash that is coming is one of hubris - this financial crisis is a moment of Nemesis.

The credit crisis as a slow motion pile up - liquidity crises and solvency crises

The banks are not just any businesses. In our current economic system the banks not only look after our money they actually create our money. If the banking system goes belly-up then the money with
which to conduct all our economic transactions simply dries up.

To watch the financial markets since last August has been like viewing a multiple car pile up on a motorway, in slow motion. Each month that passes a new link in a chain reaction of spreading chaos and fear has emerged as a new bank, a new market, and a new institution has reluctantly admitted that it is in deep trouble. Each time journalists and commentators from the big financial companies and the regulatory authorities comment on what this means for the future. Each time their prophecies get gloomier and more panicky. Comparisons are made with economic and financial crises of the past and gradually the comparison with the Great Depression of the 1930s is creeping
in to the financial columns.

Some commentators saw this coming a very long time ago while others have been more slow to adjust greed driven euphoric optimism - but increasingly the hard data supports the pessimists. Nowadays one hears a view that the pessimists were saying a long time ago, repeated over and again - in the jargon of economics: this is not a liquidity crisis this is a solvency crisis.

What's the difference? A liquidity crisis is a temporary shortage of cash that short term borrowing arrangements can get you through because your business is basically sound. A solvency crisis cannot be solved by borrowing because anyone looking at your business can tell you are broke and no one with any sense lends to a business that is broke - it is throwing good money after bad.

Transmission of the credit crunch into the real economy

Increasingly the financial sector crisis is being transmitted into the real economy. The hard edge of this process has been felt in the housing market - as house prices fall and interest rates rise the level of economic activity has fallen in housing building because there is build up of unsold houses and people are reluctant to spend on DIY and other house related goods. The next stage is that other consumption expenditure falls as people cut back on discretionary consumer expenditures like new cars, alarmed at the increased interest payment and the negative equity that they face. This in turn means lay-offs and falling income elsewhere in the economy. Non banking corporations find that borrowing is becoming more expensive for them and the market for what they are wanting to sell is declining so they cut back investment expenditure. There is thus a decline in orders for new buildings, new machinery and machine tools. This decline in the real economy, in turn, transmits back to the banks undermining their profitability even more.

Quite how much money the banks will eventually lose is a matter for important debate among economists and financial market watchers. As the months have gone the estimates of the potential losses have got bigger and then bigger again. The economist who first saw this problem coming, a Professor Nouriel Roubini of New York University’s Stern School of Business, believes as of March 2008 that total financial sector losses could be as much as $2,700 billion. On the Financial Times web site Martin Wolf comments:

"Suppose, then, that Prof Roubini were right. Losses of $2,000bn-$3,000bn would decapitalise the financial system. The government would have to mount a rescue. The most plausible means of doing so would be via nationalisation of all losses. While the US government could afford to raise its debt by up to 20 per cent of GDP, in order to do this, that decision would have huge ramifications. We would have more than the biggest US financial crisis since the 1930s. It would be an epochal political event."

Professor Wolf then concludes by saying

" I suspect Prof Roubini’s latest estimates are excessively pessimistic. But I am not certain this is so, given his record: just look at the vicious interaction between falling asset prices, financial stress and spending. We must pray that the Fed can clean it all up, without excessive collateral damage. Unfortunately, such prayers often go unanswered."

In an earlier discussion Professor Wolf had suggested that $1,000 billion losses by the banks would compel a reduction in bank lending of $22,000billion - presumably £3 trillion would involve three times that amount. That would be the death of all our existing economic arrangements......

A short time later the Investment Bank, Bear Stearns, has collapsed and the rescue was being organised by the Federal Reserve Bank in the US in order to stop a domino effect of banking and financial sector collapses.

The scary scenarios - debt deflation leading to liquidity black holes and banking runs

What might lead to a complete melt would be a debt deflationary spiral whereby people with debts find that the value of their assets is falling while the money valuation of their debts remain the same - so their situation would be getting worse. In response they would try to save more and be forced to sell their assets - but this would mean that economic activity would sink even lower and the distress sales of assets would push the price of assets like houses down even further. The negative equity problem - debts in excess of the sale value of collateral assets would get worse. As income declined too so the debt to income ration would get worse and worse. Japan get caught in a crisis like this through most of the 1990s and has still not emerged from it.

Japan is a country with a large trade surplus and is very competitive in the world economy. The USA (and Britain) are the reverse. As a result it is not inconceivable that the financial crisis might slip into what Professor Avi Persaud calls a graphically a "liquidity black hole" . Usually if the price of something falls there are less sellers and more buyers appear so that the market comes back into equilibrium. However, if we are talking about financial assets then, in a "liquidity black hole" the very opposite happens. As the price of financial assets fall their holders get in a panic and sell them lest the price falls even further - so there are more sellers - and, correspondingly, buyers become more and more reluctant to enter the market. The losers in a liquidity black hole are the people who sell last.

In circumstances like his depositors would try to take their money from the banks and chaos would ensue. Of course it is true that banking regulations insure that depositors have a guarantee for so much of their money - but if they have money above that level many people would lose out - and below that level the administrative tangle and delay of sorting out the mess would be considerable. If it involved millions of people it might take months or years before people got access to their money again to spend - during which time people would still need cash to be making transactions. So even a deposit guarantee scheme is not the complete safety net that it seems at first sight.

Storing value when the financial system is wobbling and the economy hits the limits to growth

A sure sign that the financial system is wobbling is that the price of gold is high - and rising. This demonstrates that rich people are looking for somewhere safe to park their wealth until the crisis has passed. In this crisis other commodities appear to be the subject of speculation for the same purpose - for example, to a degree metals and foodstuffs like grains that are not rapidly perishable. Above all oil is turning into a commodity into which speculators have been putting their assets. When the banking system is unstable and most of the money in our economy takes the form of bank deposits there is doubt that holding ones assets as bank deposits is the best strategy to protect one's wealth.

What appears to be happening is that many institutions and rich people are acquiring commodities whose values are increasing. They are doing so not for speculative reasons but because the global economy appears, in many respects to be approaching its ecological capacity limits. This has meant that the natural resources needed the by the global economy cannot any longer be found and produced in the magnitudes needed. When this happens the price of these materials are being bid up on global markets.

The crisis of the global financial system is interacting with the crisis of the global economy as it hits the physical limits to growth. Since the year 2000 the metal prices have increased nearly 4 to 6 times, the price of foodstuffs and grains have rocketed and the price of oil, gas and coal has risen too.

The businesses that are still booming even in the middle of all the other difficulties are in the mining and energy sectors - partly because prices are holding up so well. This is counter-intuitive as one would think, with a recession coming on, that the price of oil and other materials would have fallen. These falls may yet happen but the other reason that commodity prices may have held up is that an increasing number of investors have picked up the message about peak oil, have taken it in and are finding it credible. In the recent past the International Energy Agency is saying much the same thing about the future availability of oil as the peak oil prophets are saying - even if the narrative about the causes of future shortages is slightly different. (Geo-politics rather than geology).

While it is true that high energy and materials costs acts as a burden on companies and countries that must pay more it is also true that those that receive the higher prices will see their income swell and may spend more of it. A re-distribution of incomes like this may, in the aggregate, even inflate world incomes as the gainers spend more.

However, there will come a point, past the oil peak, where the aggregate amount of energy available to the global economy will start to shrink and, at that point, the global economy will also start to shrink due to running out of its fuel source. At this point the financial system will be in even worse trouble than it is at the moment. It will be akin to the days, described at the beginning of this paper, where the economy as a whole was not growing, so that an expansion of the debt system cannot continue as there is not an expanding amount of wealth to be shared with the bankers and the bankers gain could only be someone else's loss. At this point the limiting factor on production will be the energy system rather than money. The banking system, to the extent to which it has not already collapsed, again be in difficulties - and their will be a renewed tendency for moneyed interests to rush to put their wealth into energy, oil, land, metals, water and other real assets . The possession of these scarcer natural resources will allow them to charge rents (scarcity prices on non reproduceable assets) from all those desperately in need of vital but naturally scarce resources.

Market traders are starting to see the writing on the wall - a sure sign of this is that oil prices for future deliveries for as far ahead as 2016 are now $100 a barrel. So those investors who are wanting to hold their wealth in a reasonably inflation-proof form have started to think about holding their wealth in oil. To use the jargon oil is not only being purchased speculatively it is being purchased as a "hedge against inflation". One thing moneyed people and company treasurers can be sure of - oil is always going to be in demand and it is becoming an alternative bolt hole for the magnates and companies to hold their wealth in difficult times. This demand for oil, some of it funded by the money being sloshed out by the central banks as they try to hold up asset prices, is holding up the price of oil.

This is particularly the case now that many moneyed interests must be very worried about the threat, not only that the banks will go bust, but that there will be an inflation, cutting back the value of those who hold their wealth in a money form.

Cutting debt down to size with an inflation

To understand this imagine that a desperate government decided that it had to do something about a collapsing economy and it tried to bail out some of the people in desperate financial straits (or the banks that lent to them) by cutting taxes as well as by finding other means of letting them have more money. Let's say that the government pays for this not by taxes or by borrowing money from the financial markets - which don't have any more to lend - but by simply printing money. If that happened the value of money (measured as its purchasing power) would go down as prices rose and nominal money incomes would chase up prices in a wage price spiral - but in the process financial debts would also be cut down to size.

If someone over-borrows and owes, say, £10,000 and then finds both the prices that they normally pay as their cost of living AND their income doubles - then they are no better or worse off in regard to their income compared to prices. However their debts will have been cut down to half the size that they were in real terms.

It is a sort of solution - but not one that financiers like. Financiers absolutely hate inflation - but the truth is that, when there has been so much lending that people cannot pay then one way of dealing with that over-lending is through an inflation - because it means that the value of debts shrivel. Debtors gain - lenders lose. Such an inflation is not, in other respects a very happy thing and may be most unfair to people on a fixed income like pensioners. Those who can drive their income up can stay above water in their day to day financial management - but those who can't go under.

As people liquidate their loans and turn them into cash the last thing they will want to do is to continue to hold their money as cash or on deposit when prices are rising at a higher and higher rate.

The two are radically incompatible. A day of reckoning is therefore coming with the financial and credit system. This is a situation in which there is a real danger that huge injustices will be done and a lot of very vulnerable people will get hurt. There is lots of evidence that debt is a major source
of anxiety, stress and distress, depression and suicide and these will only get worse as economic conditions deteriorate. If the debt problem is solved at the expense of vulnerable, poor elderly people on fixed incomes then that will not be a just solution either unless they also get a fair share of any increased money sloshing around. That's the reason that the money system must
be managed in the future in the interests of all.

If the banking and financial system does collapse in this way - and it is not impossible - it does not mean that nothing can be done. But it does mean that we will have to start again with a radically different and much simpler approach to finance.

Managing money as a commons

In this simple approach to finance we need to recognise that the money system is a social institution that we all depend upon for exchange transactions and so it should be managed in the interests of everyone. When one wants to manage things for the common good, rather than for private gain, one
establishes trusts to manage them. In the case of a money system trust the trustees would be given a legal duty to manage the money system in the interest of all equally. If they failed to work within those legal rules they could be challenged in the courts.

Seigniorage

That would mean that if there is money to be created that it should be distributed to everyone equally. This is an important principle. A key aspect of money creation is seigniorage - someone gets the benefits of the initial creation of money and do not have to sell anything or work to receive the purchasing power. Banks get the seigniorage when they create debt money and they create too much for everyone's interests and then have to be rescued. They should lose this right. We should all share the seigniorage. A money creation trust responsible to us all would distribute any more money
directly to us all equally. This, I may say, would be more socially just than dropping money from helicopters over the financial districts. ('Dropping money from helicopters' is the metaphor used frequently by economists to describe getting money to people to spend in order to prevent an economy falling into a depression or recession).

State abuse of its influence in the money system

Some people may think that money should be created by the state and spent into circulation. However we have seen in recent years that the state is in the hands of the financiers, the energy barons and the military-security and armaments apparatus and have dis-credited themselves too. While the increased complexity is key to explaining the current banking crisis it is not the whole
story. Another part of the story is the abuse of debt finance by the governments to fund their military and other adventures.

A winner of the Nobel prize for economics, Joseph Stiglitz working with Linda Bilmes has been working out the maths on the cost of US (and UK) military adventures and comes to the conclusion that these could be as much as $3trillion in the long term - $25,000 for every household in the US. In a $13 trillion economy this is a huge sum. The huge military expenditures of the US have only been possible because the US government has been able to abuse the financial power of the US government. This has inflated the government deficit which has been borrowed by flooding the world with dollars. In the UK our own government is looking to spend over £3 billion this year which does not help the already strained finances here either. Stiglitz and Bilmes see a direct connection between the credit crisis and the enormous bill for the Iraq war.

http://www.washingtonpost.com/wp-dyn/content/article/2008/03/07/AR2008030702846.html

The idea of giving back to the state and away from banks the ability to create money therefore lacks credi(t)ability. Governments have told us for years that monetary policy is too important to be controlled directly by the government itself and handed this over to bankers. Now the bankers have shown they cannot be trusted and are dis-credited too. So does this mean it should be handed back to the state? Hardly - the principle of independence of the monetary authorities from the state is a good one - but to prevent money creation being a lawless and chaotic process a social organisation must be created with responsibility to somewhere to manage the money system in the interests of all. There is no other alternative then but to make this a trustee system whose terms of reference - can be defended in the courts.

Money Trusts

The crisis of the money system is a crisis of trust of the banks. We are told continually in the newspapers that the banks do not trust each other having sold each other financial junk. So why should citizen's trust the banks? And if we cannot trust them then how much more appropriate can you get than to re-establish the money system than by running it by a Trust with a duty to manage money in the interests of everyone?

How will we get there? We cannot expect the existing powers-that-be to bring such a system into existence, at least not at the moment. At some point there will be a need for a comprehensive reform package of the type described here but it will take time and effort to build a political movement for it. In the meantime the gradual breakdown of the financial system, as its nears the edge of the liquidity black hole, will mean that responsible citizens are likely to have but to try to improvise their own currency and exchange systems to bridge a period of turbulence and chaos - if possible with the support of local authorities. The precedent for doing this can be found elsewhere - e.g.
the provincial currencies of Argentina in the banking crisis there of a few years ago. At one time these created nearly 16% of Argentina's money supply.

Thus a popular movement to help people re-create vital local exchange relationships in desperate times will help to create the expertise, the networks and the mass understanding for the re-establishment of a new simpler national financial system to be run in the interests of all.

Heading off the flight of capital into rent seeking take-overs of scarce natural assets

The reform of the banking and monetary system that will, in all probability, have to start through the improvised arrangements of people at a local level into a movement for political change will also need to be combined with a movement to head off the flight of capital into the rent seeking take- over of scarce natural assets and a general economic programme to move as quickly as possible away from dependence on fossil fuels. The drama and immediacy of the banking crisis threatens to divert attention to what will, in the not too distant future, appear as even bigger threats - peak oil and gas and then an accelerating climate catastrophe. Paradoxically a banking induced economic recession will take the pressure off global greenhouse gas emissions. It has hitherto only been in recessions that greenhouse gas emissions have actually fallen. A banking crisis which pushes people out of the routine lifestyles focused on debt fuelled consumption might create the circumstances in which people will be prepared to consider less energy intensive ways of living working with the resources closer to home of the type currently promoted by movements like Transition Towns.

That is not all. With the key source of economic power being ownership of fossil energy resources and raw materials being increasingly where the rich and powerful will sink their resources it is important that the right of the powerful to bring these resources to market is itself put under political control, in the interests of the mass of the people. Thus while energy resources are likely to be concentrated into ever fewer hands globally and nationally it is important that these few hands have to buy the right to bring their resources to market from the people. That is why policies like cap and share are so important. Cap and Share is an upstream carbon permit system that requires energy suppliers to first have permits before they can sell their energy into the economy based on the greenhouse gas content of the fuels. These permits should be first purchased from the people or from a Sky Trust who will rebate the revenues raised to the people on a per capita basis.

Policies like these not only makes it possible to capture the rent from scarcer fossil fuels and distribute it to protect the people, particularly vulnerable people, it also speeds the process of mitigating climate change and forces the pace at which economies make an adjustment away from fossil fuels. This is important because fossil fuels will get progressively scarcer and, while they are cheap, these energy resources need to be prioritised for use in a transition in the economic structure towards energy efficiency, renewables and energy lite lifestyles. Since Cap and Share or a Sky Trust would direct the resources to the base of the economy they would make possible an economic and ecological transition as the Green New Deal to bring the economy and society back up after the economic crash that is coming.

Brian Davey 2nd April 2008