Monday, 4 May 2009

Carbon Economics

Did you know that the industry most responsible for high levels of carbon emissions, and also with the biggest potential role in mitigation is… banking?

There is a direct relationship between economic (GDP) activity and carbon emissions. The UK had claimed that since 1990 we had succeeded in reducing carbon emissions by 15% while the economy had grown. But this turned out to be false accounting since (under UN carbon guidelines) we did not count those emissions we had outsourced to overseas manufacture and shipping. When the footprint of all the flat screen TVs, cars, clothes and out of season vegetables we import is included then rigorous recent studies show the UK has grown its carbon emissions by 19-20% since the early 1990s (Helm, 2007, Stockholm Environment Institute, 2008).

When you measure your carbon footprint, using online calculators, you find that consumer goods – fashion, electronics, food and so on don’t count. What they measure is your direct energy consumption. It’s a good basis for measuring the relative value of leaving things on standby (low), your flying (medium to high) and your car and space heating (high). But it leaves a lot out. That’s because indirect emissions are hard to calculate. But they are known to account for a large proportion of emissions. For instance, in the case of a house the embodied energy in construction is equivalent to 10-20 years worth of energy use by the home (Cole, 1993). It’s a lot not to count.

A better way to measure your overall carbon emissions would actually be to look at what you spend money on. Very broadly (according to the Office of National Statistics) for every £1 you spend, you emit 0.82kg of carbon. The figure varies for different goods (electronic gadgets are more like 2kg per £1). Energy efficiency is taken into account by looking at how much money you spend on energy. For petrol in the average car, you are emitting around 1.3kg per £1. If you buy a more efficient car then the lower kg/km are taken into account by the decreased money you spend on fuel.

This direct relationship between energy, money and carbon explains why banking is the biggest source of carbon emissions. That’s because banking today is mostly about credit. And credit is spending tomorrow’s earnings on today’s carbon. Charity Credit Action estimated that by late 2006 the average UK household debt was £26,747, rising to £50,918 when you take mortgages into account. Based on the carbon to money equivalence, £26,747 equates to 22 tonnes of carbon – more than two years’ worth of emissions.

If we want to tackle carbon emissions we need to tackle consumer spending. That’s why the new mood of caution and thrift is a positive development. I’ve been arguing for several years that a savings account is the only proven method of carbon sequestration. Because it has the opposite effect of credit – by delaying spending you are reducing carbon emissions. It’s the only way to ensure that the money we save from lagging our loft doesn’t get spent on other equally energy intensive goods; the so-called indirect rebound effect. But that means we need to find a completely new way of managing our economy, our companies and our lives. One based upon value, not debt. I’ll look at these macroeconomic implications next time.


Anonymous said...

What an interesting piece John. Brilliant.

It's crying out for some visual interpretation. You could create some really delicious chart porn around some of those propositions. Looking forward to the next chapter already x

paul macfarlane said...

As a long-term advocate of true-cost accounting and pricing, I feel your pain about the lack of measurability.

A rough rounded estimate formula may work for those of us closest to conversion, but for the masses, a systemic conversion of doing and having less (to enjoy more!) is still the misty lake in the far-off mountains. A lake I still climb to reach.

AlanG said...

John says: "I’ve been arguing for several years that a savings account is the only proven method of carbon sequestration. Because it has the opposite effect of credit – by delaying spending you are reducing carbon emissions."

Er, no. Putting money into a savings account increases the money a bank can lend which *increases* the money supply via increased bank activity.

This process of multiplying the spending power of money via banks is known as fractional reserve banking - a process which explains why M1 and M2 are always larger than M0.

You are advocating the reverse of what you want to achieve - as demonstrated by the credit crunch in which the savings ratio was insufficient, leading to undercapitalised banks and the credit crunch (this is how Northern Rock was undone).

Awkward stuff, economics.

John Grant said...

er... good point. But of course we'd looked at that (in a way I didnt explain in that piece/off the cuff comment)

What was actually proposed - because of what you've written as the problem with just priming banks to lend more, was as follows:

1. launch a savings account called Rainy Day, to encourage people to save for climate change and an uncertain future
2. roll this up in either an american style municipal bond, ie government guaranteed, or a big securitised fund with an insurance company; to take the risk out of...
3. working not with a conventional bank who would use this as a fractional reserve, but a localised energy fund, to build new renewable energy infrastructure; instead of an interest rate you would get a dividend from the income from that

there were some quite heavy duty economics bods involved in some of those conversations, it is tricky stuff but it wasnt maybe quite as naive a point as it may have looked?

(the other thing we looked at was sharia compliant finance, their concept of sukuk eg deriving income from an owned asset is quite close)

I pitched this to various people in banking & government, their worry was a more direct one - that encouraging people to save money rather than spend it at the shops was "political suicide" because we must all sacrifice at the altar of economic growth, or else

NB Northern Rock was undone by their business model which relied on sourcing funds from the capital markets, it wasnt just the savings ratio it was a deliberate 'close to the wind' play and they paid the price of what in many previous years allowed them to be top of the interest rate league tables.

exclusivelimo said...

Great article. Who will think banking with the biggest potential role in mitigation