The Environmental Paradox of Economic Slowdown

While the effects of economic development on environmental degradation in the short-run are well established; the ongoing financial and economic crisis may actually hamper development and adoption of alternative energy that is so vital for sustainable economic development.

Deutsche Bank forecasted the economic slowdown will cause Europe's industrial CO2 emissions to fall by about 100 million tonnes next year compared with last year. Australian Climate Exchange, which operates a joint-venture trading platform for carbon offsets and abatement credits, said economic cycles were linked to emission trajectories. As a result of this economic slowdown, carbon emissions at major industrial nations are likely to remain inside their Kyoto cap.

Kuznets curve is the graphical representation of Simon Kuznets's theory that economic inequality increases over time while a country is developing, then after a critical average income is attained, begins to decrease.

Another situation where the Kuznets curve is alleged to appear is the environment. Many environmental health indicators, such as water and air pollution, show the inverted U-shaped curve. The argument for the environmental Kuznet's curve is based on the following argument. In a developing industrial economy, little weight is given to environmental concerns, raising environmental pollution byproducts. After attaining a certain standard of living from the industrial production system and when environmental pollution is at its greatest, the focus changes from self-interest to social interest. The interests give greater weight to a clean environment by reducing and reversing the environmental pollution trend from industrialization. This parabolic trend occurs in the level of many of the environmental pollutants, such as sulfur dioxide, nitrogen oxide, lead, DDT, chlorofluorocarbons, sewage, and other chemicals previously released directly into the air or water.

A recent New York Times column argued that for all the support that the presidential candidates are expressing for renewable energy, alternative energies like wind and solar are facing big new challenges - because of the credit freeze and the plunge in oil and natural gas prices. The column states that advocates are concerned that if the prices for oil and gas keep falling, the incentive for utilities and consumers to buy expensive renewable energy will shrink. That is what happened in the 1980s when a decade of advances for alternative energy collapsed amid falling prices for conventional fuels.

Venture capital financing for some advanced solar projects and for experimental biofuels, like ethanol made from plant wastes, is drying up. Worldwide project financings for new construction of wind, solar, biofuels and other alternative energy projects this year fell to $17.8 billion in the third quarter, from $23.2 billion in the second quarter, according to New Energy Finance, a research firm in London.

Renewable energy now meets 7 percent of America’s energy needs. Renewable energy has become a big business worldwide, with total investment increasing to $148.4 billion last year, from $33.4 billion in 2004, according to Ethan Zindler, head of North American research at New Energy Finance.

The current financial and economic crisis is indeed a paradox for environmental sustainability. While it may slowdown the pace of environmental degradation in the short-run due to reduced demand – in the long run, an economic slowdown will undoubtedly prove to be a disincentive for development and adoption of clean energy. 

Theory of Fear and Greed

In a recent New York Times article, Thomas L. Friedman opines that at their core, markets are propelled by fear and greed. “They’re just the balance at any given moment of those two impulses. Over the long run, you cannot spin the market. You cannot sweet talk it into going up or beg it not to go down. It’s going to do whatever it’s going to do — whichever way greed and fear tug it” says Friedman.

Despite active Government interventions around the world, including the G7, the European Union, Asia, Middle-East and Africa, capital markets around the world remain bearish, and as many experts believe, will continue to be bearish. Ofcourse, the collapse of the old financial order on the back of US-mortgage crisis exacerbated the global economic situation, which was already reeling under tremendous pressure. But equally important is the contribution of greed and reckless spending by everyone, and specifically the Western world led by the United States. Ergo, no amount of sweet talk is likely to allay the fear factor that has become deeply embedded in the minds and hearts of people – post the collapse of the old financial order.  

Consider the following - The Finance Minister of India is a cabinet position in the Government of India. He drafts the general budget of the country, and is in charge of the national economy. The current India’s Finance Minister, P Chidambaram came out openly to persuade investors to stay tight! I quote Chidambaram’s statement in a recent press briefing - “Before you sell, you must remember that for every seller there is a buyer. You must ask yourself why the buyer is buying in these times of perceived uncertainty and, therefore, ask yourself the further question whether there is a need to act in haste or in panic. In my view, there is no reason at all to act in haste or to give room for panic”. What was he thinking, and what was he trying to accomplish?

What mankind needs today is not just some piece-meal measure or sweet-talk, but a new financial order – one which will not only compel the rich economies to curtail reckless spending; but also encourages the developing countries to use their hoard of forex reserves in a much more prudent fashion. There must be an immediate end to developing countries’ financing the consumption binge of rich nations. Indeed, the perpetrator of the current financial crisis, the United States, must be brought under the supervision and oversight of the IMF- not just to ensure economic stability, but also to ensure confidence and morality around the world.