The Financial Crisis and Global Environmental Policy

The Financial Crisis

• In 2007 and 2008, high default rates on subprime mortgages caused the housing bubble to burst.

• Due to the reliance on Mortgage Backed Securities and other toxic assets in the American financial system, defaults caused a near collapse in the international financial system.

The Financial Crisis

• Since both MBS and CDO were purchased globally, the crisis quickly spread beyond US borders.

• The result has been a global recession which can be seen in increased unemployment, decreased GDP and stock devaluation in many countries worldwide.

History of Global Environmental Policy

• Environmental legislation in the United States and Western European countries began in the 1940s and 50s.

• However, International environmental agreements are a more recent phenomenon. Historically, most multilateral environmental meetings have focused on the issue of Climate Change. Some important meetings include:– Vienna Conference (1985): concerned chlorofluorocarbons and ozone

depletion. Successfully banned CFCs in many countries. – Kyoto Protocol (1999): concerned control and reduction targets for

greenhouse gases. Citing economic reservations, the United States did not sign. Other criticisms of the protocol include the lack of targets and requirements for developing countries.

– Copenhagen Climate Conference (2009): resulted in voluntary commitments with no legal binding.

Connection of Environment to Financial Crisis

• Historically, both developed and developing nations have chosen not to unite in international environmental agreements for economic purposes (ex. Kyoto). This shows that global environmental cooperation may be possible only in times of economic prosperity.

• Although unilateral cooperation is yet to be achieved and this crisis will make any agreement harder to accomplish, there are concrete beneficial and detrimental effects of the crisis on the environment.

• Individual projects highlight other effects of the financial crisis on global environmental policy.

1997 Asian Financial Crisis

• Gives an indication of possible outcomes in emissions and pollution that will result from the current crisis.

• Showed that as GDP dropped, reductions in projected energy consumption.

• Reduction in energy consumption accompanied by reduction in emissions of air pollutants.

Impacts of the Current Financial Crisis in China

• The fall of exports by the global financial crisis led to a decrease of 7.33% in GDP and a reduction of 9.21% in energy consumption.

• The stimulus plan ($586 billion) against the crisis will lead to an increase of 4.43% economic growth and an increase of 1.83% in energy consumption.

• Overall, during the crisis, energy consumption per unit of GDP will fall in China.

• China suffered a large fall in exports. Energy consumption will decrease because of the reduction of energy consumption imbedded in exports.

Discussion on Possible Results of the Crisis• Positives:

– Factory bankruptcy, reduction in consumption of resources and technologies that emit pollution.

– Long-term, crisis has forced the acceleration of the Chinese Communist Party’s original strategy to restructure economy. China has traditionally fueled its growth by being the world’s factory, has left the environment second to growth. Mass-producing, energy-consuming industries have taken their toll on the nation’s water supply and air quality. The regime can use the recent factory closings and enterprise bankruptcies to develop a cleaner, high-technology industrial sector.

• Negatives:– Momentum of global environmental movement has been diverted as a result

of the crisis.– Government may prioritize quick economic development and employment

fixes.– Approved policies may be shelved because of cost.– Fear of the regime’s stimulus investment in heavy industry will result in more

pollution in the future.

• Economic downturns cause people to drive less, fly less, and overall consume less energy.

• Causes price and production of energy to declines.• Coupled with a lack of availability of credit, this causes firms to invest less

in programs that exploit resource development.– Slows environmentally costly projects like strip mining and oil drilling.

• Government stimulus packages can alleviate some of this financial burden for renewable energy industries.

A Green Financial Crisis

Note: This graph is based on MSHA-based final data for all four quarters of 2007 and 2008, revised production data from MSHA for January through September 2009 and preliminary EIA production estimates for October through December 2009 and January through February 2010.

U.S. Coal ProductionFebruary 2008-January 2010

(Million Short Tons)

• The financial crisis has resulted in the foreclosure in a large number of homes and businesses.

• This will lead to the renovation and destruction of outdated and energy inefficient homes and factories.

• New houses and business will be built to current environmental codes and will take advantage of the competitive prices of renewable power.

• Factories will be more efficient.• Many of the foreclosed houses have been auxiliary houses that use energy

inefficiently when the owner is occupying them.• Homes and businesses will use cost effective building techniques that

utilize natural lighting and passive heating and cooling.• Construction will shift to more lightweight and innovative techniques

Foreclosures

• Many expect that the financial crisis will give China a chance to restructure economy.

• Having been the world’s factory for many years the Chinese government has been looking to diversify production throughout the country.

• The foreclosure of outdated and inefficient factories will allow a reallocation of resources.

• The growth of fossil fuel consumption may also cause a shift in production to areas with the lowest production costs.

• Dan Ries, an analyst with Collins Stewart, expect these firms to be based in China.

China

• Fears the downturn in production of fossil fuels will result in tremendous price increases once the demand returns.

• The capital that would currently be required to meet the growth in energy use under the Reference Scenario would amount to 26 trillion dollars by 2030.

• This doesn’t consider that 80% of the growth will occur in developing countries.

• Says that crisis presents an unprecedented opportunity to curtail energy use and shift to cleaner fuels.

International Energy Agency

Green Aspects of Stimulus Packages

• Intervention with the market - Bailout => Stimulus packages• Why have green aspects? - Increasing pressure to “go Green” - Dangers with the income effect• Results - Economic - Environmental

Korean Stimulus Package

• Decided to make their stimulus package predominantly “green”

• My paper will look at the environmental and economic efficiency of the Korean “green” stimulus package in comparison to other developed countries’ packages

• Measurable variables: GDP and unemployment changes in numerous comparable countries, qualitative analysis on how “green” the programs really are

Cap-and-Trade as Foreign Aid in Sub-Saharan Africa

Link to the Economic Crisis

• From 2009 International Monetary Fund Regional Economic Outlook Sub-Saharan Africa (April), Washington, DC: IMF.

Link to the Economic Crisis

• The Economic crisis has led to a slowdown of private capital inflows to Sub-Saharan Africa. According to Britain’s Overseas Development Institute, even a 10% drop in FDI inflows may lead to a .5% decrease in Sub-Saharan income per capita.

Main Question:Could Cap-and-Trade Serve as a means of foreign aid in light of

decreased FDI/portfolio investment in Sub-Saharan Africa since the financial crisis? How so?

Evidence and Research

Research will consist of reviewing the capital accounts of Sub-Saharan countries to determine the extent of damage done by the financial crisis. From there I will review the most popular cap-and-trade policies discussed thus far, comparing the benefits of different allocation strategies to LDCs in Sub-Saharan Africa.

This topic concerns the different possibilities and effects of different policies since cap-and-trade has not yet become a global reality.