The negative-sum choice

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Dr Ben Habib

E-mail: b.habib@latrobe.edu.au


 

The fiasco at COP-17 in Durban must force developed nations to confront some home truths about their commitment to perpetual economic growth if the UNFCCC process is to survive.

For twenty years, developed countries have attempted to simultaneously negotiate reductions in carbon emissions and preserve economic competitiveness.  The harsh lesson of Durban is this: it can’t be done.

Greenhouse gas mitigation and perpetual economic growth are diametrically opposed goals.  It is not difficult to understand that all our material wealth and consumption derive from economic activities that necessarily consume resources and produce a carbon footprint. There is a clear correlation between gross domestic product and energy usage.  In modern industrial economies powered by fossil fuels, this therefore means that there is also a clear correlation between economic activity and greenhouse gas emissions, the by-product of burning fossil fuels.  Therefore, if levels of economic activity increase, then necessarily, the level of greenhouse gas emissions will also increase.

It is obvious then that the most direct way to curb carbon emissions is to reduce economic activity.  So why hasn’t this been the focus of UNFCCC negotiations?  Of course there are powerful vested interests in carbon intensive industries that wield undue influence over government policy-making and by extension the international negotiating process.  However our commitment to perpetual economic growth has deeper systemic roots.  The growth imperative is created by structural features of the international monetary system: fractional reserve banking and fiat currency.

Let’s start with fractional reserve banking.  Banks do not retain all of their customers’ savings deposits, but generally invest these funds to other customers as interest-bearing bank loans.  Therefore the reserves, the available funds a bank has at any one time are only a fraction of the amount of deposits held by that bank. 

Because they lend more money than they hold in reserve as deposits, banks effectively create new money out of thin air, which is a factor in the rate of inflation and devaluation of the money supply over time.  Depositors need to grow the size of its investment portfolio at a rate above rate of inflation to maintain the same level of wealth, and borrowers need to grow their investments above the rate of interest in order to avoid default.

As we have seen since 2008, economic contraction makes it difficult for people, businesses and even countries to repay their loans, which is problematic in societies where a vast proportion of economic activity takes place on credit.  Growth is necessary so that borrowers can produce the surplus necessary to make loan repayments upon which compound interest is calculated. 

If mass defaults occur, loans that were previously income-bearing assets for the lending institutions become liabilities that eat into their fractional reserve, making bank runs and bankruptcies more likely as lenders find they have insufficient funds to fulfil their obligations to deposit holders.  Lending tends to stop under these circumstances, curtailing economic activity and therefore economic growth.  This, of course, is another positive feedback loop in which economic contraction leads to additional loan defaults and therefore more pressure on banks, which adds further pressure to curtail lending, and so on.

The growth bias of fractional reserve banking and fiat currency is very clear.  It is no wonder that governments have studiously avoided any provisions within the UNFCCC process that would limit economic activity because of danger of recession and the likely impact on the global monetary system.  All the while, global greenhouse gas emissions continue to increase.

Yet the scientific community is telling us that we have only a handful of years to begin substantially reducing global emissions output.  The disconnect between the scale of the climate change threat and the international response to it is glaring. 

To advance the international climate mitigation regime, governments will have to confront an unenviable choice: do they act to reduce greenhouse gas emission to the level and within the timeline mandated by the scientific evidence, or do they choose to service the survival imperatives of big capital?  This is a negative-sum choice where everyone is a loser, but a choice that has to be made nonetheless if the global community is serious about greenhouse gas mitigation.

Dr Ben Habib is a Lecturer in Politics and International Relations at La Trobe University, Albury-Wodonga

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