The Next Crisis

By Eoin Fahy, Thursday, 20th August 2009 | 0 comments

Although turning points in economies are rarely noticed at the time, it is my view  that the recession in the US economy has ended, and that the recession in Europe will end soon (click here for a post on this topic). But economists now have to switch attention to the next major issue for the global economy. That issue is surely the generally accepted risk of significant global climate change and the very significant measures that governments around the world are, rightly or wrongly, implementing in response.

At first, it seems odd to compare the banking and debt crisis that caused the global recession and that cost taxpayers many hundreds of billions of euros, with the issue of global warming which seems somehow more of a “soft and fuzzy” issue, seemingly not as dramatic or severe as the banking crisis. 
But the Stern Report in the UK, probably the most definitive study to date of the economic impact of climate change, estimated that the cost to the global economy of the expected climate change would be in the range of 5% to 20% of GDP, per year, which would be many times larger than the cost of cleaning up the banking crisis.
That’s the (very!) bad news. However, policy makers are responding. Hardly a week goes by without a significant announcement from some part of the world about the latest effort to counter climate change, or to deal with its effects. A recent study by HSBC showed that the “green” element of the many stimulus packages announced by various governments in recent months amounted to a whopping $478bn. 
A huge range of measures have been announced, including for example various schemes to replace old, high-polluting cars with newer more efficient cars (known as the “cash for clunkers” scheme in the US, but also available in the UK and Germany and many other countries). There are also schemes to boost insulation in housing (as in Ireland), to incentivise renewable energy sources such as wind and solar power, and to cap carbon emissions from industry. 
Many of these measures are steering very large sums into particular sectors, showing that in every crisis there is of course an opportunity to make money! And whether from a private investment point of view, or from a taxpayer’s perspective, the investment can be very profitable. A recent McKinsey Consultants report stated, “Boosting energy efficiency will … create opportunities for businesses and consumers to invest $170 billion a year from now until 2020, at a 17 percent average internal rate of return”.
Crucially, the US has had a significant change of heart on these issues since President Obama came to power, and the Democrats got more control over Congress. The “American Clean Energy and Security” bill that is making its way through the US legislative process mandates a cut of 20% in carbon emissions by 2020, relative to a no-change benchmark estimate, and would bring in a “cap and trade” system for US industrial carbon emissions as well. Climate change experts say that the bill is by no means perfect, but  a year ago such a bill was unthinkable in the US, so real progress is being made.
Some governments have been slower than others to act, of course. Poorer countries have often taken the view that they have to be allowed room to grow their economies, and that after all the richer economies have far more emissions per head of population than the poorer countries, so they need to get their own house in order before issuing instructions to the rest of the world.
But overall I think of “world economic policy” as a bit like steering a supertanker. It takes policymakers around the world a long time to learn important lessons about any new challenge or issue, and still longer to implement measures to address it. But once a global consensus emerges, and all major governments believe that change is necessary, then the momentum of changed policies, of measures to ‘steer the supertanker in a different direction’ so to speak, becomes irresistible.
In my view we are very close to that tipping point, the point where one of the single most important factors driving economic policy around the globe will be climate change. While we economists are focussed on when, exactly, the US economy comes out of recession, or how much bank rescue packages will end up costing taxpayers, we may be missing an even more important turning point.
From an Irish point of view, of course, this could be a (relative) positive for our economy. Last year’s government’s “Smart Economy” paper more or less sank without trace at the time, without much to catch the public’s imagination. But the concept of building a “smart economy” was good. What is required now is a determination to get ahead of our competitors in fields in which we think we can have a relative advantage, creating the “green collar” jobs that will be created somewhere in the world. Why not Ireland? 
That, rather than the technicalities and cost of NAMA, may be the real issue for economists to grapple with.
An edited version of this article appeared in the Irish Times on 14th August 2009.

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