Financial Bubble Presages Coming Climate Crash

Hank Paulson, former CEO of Goldman Sachs and Secretary of Treasury under President GW Bush, wrote a compelling editorial in the NY Times this Sunday, comparing inaction on climate change to the financial bubble we experienced in 2008.

While at Goldman Sachs, the company made a big announcement for 2005 – that it would invest $1 billion in renewable energy projects and businesses, and promote LEED and Forest Stewardship Council certification standards. It also launched the Center for Environmental Markets, to research and develop pilot projects that inform public policy on market-based solutions to climate change, biodiversity restoration and ecosystem services. 

In 2012, Goldman Sachs announced it would reduce carbon emissions to zero by 2020 and invest $4 billion a year for the next 10 years in green economy projects.

A conservationist, Paulson chaired The Nature Conservancy for two years. In 2011, he founded the Paulson Institute, which works on the premise that the "most pressing economic and environmental challenges can be solved only if the US and China work in complementary ways." 

Hank Paulson

By Henry Paulson, Jr.

There is a time for weighing evidence and a time for acting. And if there’s one thing I’ve learned throughout my work in finance, government and conservation, it is to act before problems become too big to manage.

For too many years, we failed to
rein in the excesses building up in the nation’s financial markets. When the
credit bubble burst in 2008, the damage was devastating. Millions suffered.
Many still do.

We’re making the same mistake today
with climate change. We’re staring down a climate
bubble that poses enormous risks to both our environment and economy. The warning
signs are clear and growing more urgent as the risks go unchecked.

This is a crisis we can’t afford to
ignore. I feel as if I’m watching as we fly in slow motion on a collision
course toward a giant mountain. We can see the crash coming, and yet we’re
sitting on our hands rather than altering course.

We need to act now, even though
there is much disagreement, including from members of my own Republican Party,
on how to address this issue while remaining economically competitive. They’re
right to consider the economic implications. But we must not lose sight of the
profound economic risks of doing nothing.

The solution can be a fundamentally
conservative
one that will empower the marketplace to find the most efficient
response. We can do this by putting a price on emissions of carbon dioxide – a
carbon tax. Few in the United States now pay to emit this potent greenhouse gas
into the atmosphere we all share. Putting a price on emissions will create
incentives to develop new, cleaner energy technologies.

It’s true that the United States
can’t solve this problem alone. But we’re not going to be able to persuade
other big carbon polluters to take the urgent action that’s needed if we’re not
doing everything we can do to slow our carbon emissions and mitigate our risks.

I was secretary of the Treasury when
the credit bubble burst, so I think it’s fair to say that I know a little bit
about risk, assessing outcomes and problem-solving. Looking back at the dark
days of the financial crisis in 2008, it is easy to see the similarities
between the financial crisis and the climate challenge we now face.

We are building up excesses (debt in
2008, greenhouse gas emissions that are trapping heat now). Our government
policies are flawed (incentivizing us to borrow too much to finance homes then,
and encouraging the overuse of carbon-based fuels now). Our experts (financial
experts then, climate scientists now) try to understand what they see and to
model possible futures. And the outsize risks have the potential to be
tremendously damaging (to a globalized economy then, and the global climate
now).

Back then, we narrowly avoided an
economic catastrophe at the last minute by rescuing a collapsing financial
system through government action. But climate change is a more intractable
problem. The carbon dioxide we’re sending into the atmosphere remains there for
centuries, heating up the planet.

That means the
decisions we’re making today – to continue along a path that’s almost entirely
carbon-dependent – are locking us in for long-term consequences that we will
not be able to change but only adapt to, at enormous cost. To protect New York
City from rising seas and storm surges
is expected to cost at least $20 billion
initially, and eventually far more. And that’s just one coastal city.

New York can reasonably predict
those obvious risks. When I worry about risks, I worry about the biggest ones,
particularly those that are difficult to predict – the ones I call small but
deep holes. While odds are you will avoid them, if you do fall in one, it’s a
long way down and nearly impossible to claw your way out.

Scientists have identified a number
of these holes – potential thresholds that, once crossed, could cause sweeping,
irreversible changes.
They don’t know exactly when we would reach them. But
they know we should do everything we can to avoid them.

Already, observations are catching
up with years of scientific models, and the trends are not in our favor.

Fewer than 10 years ago, the best
analysis projected that melting Arctic sea ice would mean nearly ice-free
summers by the end of the 21st century. Now the ice is melting so rapidly that
virtually ice-free Arctic summers could be here in the next decade or two. The
lack of reflective ice will mean that more of the sun’s heat will be absorbed
by the oceans, accelerating warming of both the oceans and the atmosphere, and
ultimately raising sea levels.

Even worse, in May, two separate studies discovered that one of
the biggest thresholds has already been reached. The West Antarctic ice sheet
has begun to melt
, a process that scientists estimate may take centuries but
that could eventually raise sea levels by as much as 14 feet. Now that this
process has begun, there is nothing we can do to undo the underlying dynamics,
which scientists say are "baked in." And 10 years from now, will other
thresholds be crossed that scientists are only now contemplating?

It is true that there is uncertainty
about the timing and magnitude of these risks and many others. But those who
claim the science is unsettled or action is too costly are simply trying to
ignore the problem. We must see the bigger picture.

The nature of a
crisis is its unpredictability. And as we all witnessed during the financial
crisis, a chain reaction of cascading failures ensued from one intertwined part
of the system to the next. It’s easy to see a single part in motion. It’s not
so easy to calculate the resulting domino effect. That sort of contagion nearly
took down the global financial system.

With that experience indelibly
affecting my perspective, viewing climate change in terms of risk assessment
and risk management makes clear to me that taking a cautiously conservative
stance – that is, waiting for more information before acting – is actually
taking a very radical risk. We’ll never know enough to resolve all of the
uncertainties. But we know enough to recognize that we must act now.

I’m a
businessman, not a climatologist. But I’ve spent a considerable amount of time
with climate scientists and economists who have devoted their careers to this
issue. There is virtually no debate among them that the planet is warming and
that the burning of fossil fuels is largely responsible.

Farseeing
business leaders are already involved
in this issue. It’s time for more to
weigh in. To add reliable financial data to the science, I’ve joined with the
former mayor of New York City, Michael R. Bloomberg, and the retired hedge fund
manager Tom Steyer on an economic analysis of the costs of inaction across key
regions and economic sectors. Our goal for the Risky Business project – starting
with a new study that will be released this week – is to influence business and
investor decision making worldwide.

We need to craft national policy
that uses market forces to provide incentives for the technological advances
required to address climate change. As I’ve said, we can do this by placing a
tax on carbon dioxide emissions. Many respected economists, of all ideological
persuasions, support this approach. We can debate the appropriate pricing and
policy design and how to use the money generated. But a price on carbon would
change the behavior of both individuals and businesses. At the same time, all
fossil fuel – and renewable energy – subsidies should be phased out. Renewable
energy can outcompete dirty fuels once pollution costs are accounted for.

Some members of
my political party worry that pricing carbon is a "big government"
intervention. In fact, it will reduce the role of government, which, on our
present course, increasingly will be called on to help communities and regions
affected by climate-related disasters like floods, drought-related crop
failures and extreme weather like tornadoes, hurricanes and other violent
storms. We’ll all be paying those costs. Not once, but many times over.

This is already happening, with
taxpayer dollars rebuilding homes damaged by Hurricane Sandy and the deadly Oklahoma tornadoes. This is a proper role of government.
But our failure to act on the underlying problem is deeply misguided,
financially and logically.

In a future with more severe storms,
deeper droughts, longer fire seasons and rising seas that imperil coastal
cities, public funding to pay for adaptations and disaster relief will add
significantly to our fiscal deficit and threaten our long-term economic
security. So it is perverse that those who want limited government and rail
against bailouts would put the economy at risk by ignoring climate change.

This is short-termism. There is a
tendency, particularly in government and politics, to avoid focusing on
difficult problems until they balloon into crisis. We would be fools to wait
for that to happen to our climate.

When you run a company, you want to
hand it off in better shape than you found it. In the same way, just as we
shouldn’t leave our children or grandchildren with mountains of national debt
and unsustainable entitlement programs, we shouldn’t leave them with the
economic and environmental costs of climate change.

Republicans must not shrink
from this issue. Risk management is a conservative principle, as is preserving
our natural environment for future generations. We are, after all, the party of
Teddy Roosevelt.

This problem
can’t be solved without strong leadership from the developing world. The key is
cooperation between the United States and China – the two biggest economies,
the two biggest emitters of carbon dioxide and the two biggest consumers of
energy.

When it comes to developing new
technologies, no country can innovate like America. And no country can test new
technologies and roll them out at scale quicker than China.

The two nations must come together
on climate. The Paulson Institute at the University of Chicago, a "think-and-do
tank" I founded to help strengthen the economic and environmental relationship
between these two countries, is focused on bridging this gap.

We already have a head start on the
technologies we need. The costs of the policies necessary to make the
transition to an economy powered by clean energy are real, but modest relative
to the risks.

A tax on carbon emissions will
unleash a wave of innovation to develop technologies, lower the costs of clean
energy and create jobs as we and other nations develop new energy products and
infrastructure. This would strengthen national security by reducing the world’s
dependence on governments like Russia and Iran.

Climate change is the challenge of
our time
. Each of us must recognize that the risks are personal. We’ve seen and
felt the costs of underestimating the financial bubble. Let’s not ignore the
climate bubble.

++++

Here is the Paulson Institute website:

Website: [sorry this link is no longer available]     
(Visited 12,463 times, 1 visits today)

Post Your Comment

Your email address will not be published. Required fields are marked *