We are well used to claims that global warming (aka climate change) is being affected by emissions of CO2 from human activity. Proponents for action on climate change ignore the myriad of other factors that might affect the climate.
But has this flurry of activity purportedly aimed at reducing (or slowing) anthropogenic carbon emissions actually caused the economic crisis that has affected much of the world since 2008? Did it cause the GFC or was it a major factor leading the financial crisis?
To be sure, just as there are a myriad of possible causes of climate change, there are many possible factors that led to the GFC. Among these include complacency, moral hazard, excessive government debt and structural deficits, poor understanding of risk and the growth of highly complex derivative instruments and synthetic financing tools which the management of banks did not understand. Plus the use of VAR modelling tools which proved valueless in the face of adversity.
But I am coming to the view that the principal catalyst of the GFC – the smoking gun if you like – was the wholesale capitulation by governments and big businesses to the siren song of AGW.
The diversion of resources to “fight” climate change has been astounding. I can scarcely conceive of an area of public policy that has sucked and consumed more resources than this folly. Perhaps the construction of the pyramids in Egypt, or Versailles during the time of Louis XIV might have consumed more resources, but they were certainly less insidious.
There is not one area of public policy that has not been affected by this crusade. The eyes of the governments of the world were off the ball. Instead they were focused on climate change policy. Rather than being a second-rate pseudo-science were it belongs, climate scientists became more important that physicists, mathematicians, chemists and engineers.
More fundamentally, in their efforts to jump on the new rent-seeking band wagon, financial institutions developed new and ever more complex financial derivatives which were often driven by the desire to jump on the potentially lucrative returns of carbon permit trading. Do not forget that it was commonly claimed that the carbon market would be more valuable than every other commodity market. I knew we had moved into Alice in Wonderland territory when people thought that an anti-commodity would be more valuable than a commodity.
We have a number of reasons that climate change policies have been a key factor leading to a global recession:
- the microeconomic inefficiencies caused by the numerous extremely costly distortions
- the opportunity cost of resources – human and physical capital – being diverted to a considerably less efficient use because of government policies
- the increase in the cost of energy (present and future): affecting the growth of the economy as energy is a fundamental input in the production of goods and services (and the increase in energy prices has damaged the standard of living of many poor people in developing countries), also an increase in the risks of energy shortages and disruptions
- the macroeconomic costs of expensive climate change policies
- the wanton destruction of energy production capacity well before its end of useful life
- the corruption of financial markets with the lure of easy money but actually to a high risk trap
- attacks on the legitimacy of the free market: in the past we could expect this from communists and the Soviets; now many governments are complicit. Indeed there has been the effective brainwashing of our children by the education authorities which has succeeded in taking away from many the power of critical thinking.
I’m sure there are many other reasons.
But do you agree – is it credible to attribute blame for the state of the world economy over the past few years at the feet of climate change policy?
In response to some comments:
A couple of commentators said that recessions can really only be caused by inappropriate monetary policy. I don’t agree. It is true that inappropriate monetary policy can affect the real economy. One only needs to look at the US during the Great Depression when the Fed allowed deflation to set in and it reached something like 25% or more. With nominal wages being sticky, this led to a dramatic increase in real wages, and hence a dramatic shedding of labour. On the other side, one only needs to look at Zimbabwe, Argentina, the Weimer Republic etc to see the effects of hyperinflation on the real economy.
But my point is that a recession must ultimately be part of the real economy. Yes, faulty monetary policy can affect the real economy. But so too can real economy decisions. Going to war, for example. Or changing other policies can detract from economic growth and even cause a recession.
To take an extreme example to illustrate the point. When Pol Pot took over in Cambodia, he and his cronies destroyed human and physical capital. The economy collapsed. No matter how sound or appropriate the monetary policy might have been in response, the economic collapse could not be prevented.
The claim that AGW policies caused the GFC is overegged
Well, yes, perhaps it is. But I have said that it is one of the factors, but further it also affected institutions contributing to further factors. In that sense AGW policy is insidious.
The lack of financial regulation was not the cause of the financial crisis. Poor supervision was one factor – that is, through regulatory forbearance or through the distraction of supervisors who did not monitor properly the carbon trading market, financial institutions became ever more exposed to risk with many not realising this.
There was a misallocation of resources in the financial sector – this misallocation was helped along by AGW activism.
The sequence of the GFC rules out AGW policies
2dogs makes the point that the US had soft climate change policies but was hardest hit by the GFC. That’s true, but it doesn’t mean that AGW policies were not a significant factor. The interlinkage the world’s financial institutions helped spread the contagion. Some of the worst offenders for the carbon market were American: Lehman Brothers for example. State governments (California) have long been strongly activist in climate change policies.
Good ol’ Harry has a swing at me by stating (along with John Quiggin)
Do Sinclair Davidson and Judith Sloan endorse these views? These are (or have been) professors in universities who have studied economics. How do they respond to this idiocy?
So one needs to be a professor in a university to be a good economist?
I’ll back my economics over that of Clarke and Quiggin any day. I am not proposing a policy (a carbon tax) that cannot achieve its stated goal and which must reduce economic growth and slow the growth in living standards. Quiggin and Clarke are proposing such a policy. They – supposed economists – are supporting a policy that has purely negative consequences and not one single positive consequence (since it cannot under any assumption make a difference to the world’s climate).
What is climate change policy?
Let’s be clear: the goal of climate change policy is to increase the cost of so-called polluting energy sources. By pricing these sources sufficiently high, people will be encouraged to invest in and buy so-called non-polluting energy sources.
Since energy is essential to economic growth, there are only a couple of outcomes (recall that improving the efficiency in the use of energy is a one-off gain):
- a new non-polluting energy source will be developed that is as cheap or cheaper than present polluting energy sources in which case economic growth and the growth in living standards will be high and perhaps higher than under a business as usual scenario. That is, the gamble/investment of climate change policies has paid off (although the counter-factual is that such an energy source might have been developed without these policies). Such a energy source is nuclear fusion.
- non-polluting energy sources are never as cheap or efficient as polluting energy sources. This to me is the most likely scenario. The outcome of this is the permanent reduction (and probable decline) in economic growth and living standards. Take wind power. It is a mechanical source for generating electricity. Its efficiency in generating electricity is linearly scaleable – it cannot possibly be as cheap as current polluting energy sources. Even if wind turbines were 100% efficient and the wind blew 100% of the time the cost of construction, maintenance and distribution exceeds an efficient coal-powered station.