Climate, the economy and the future — some thoughts on 1st January

We are at the beginning of a year, a time for reflection and for anticipation, a time to consider where we are and where we might be going.  Mainly though, I want to discuss the structure of the world economy, how this meshes with the environmental crisis, and how this global economy might change in the future.  I am using three primary sources – a recent report in Science on the insurance industry and how it is responding to climate change, a report from the US National Intelligence Council that anticipates the world of 2030, and an article in PLoS One that looks at the degree of connectivity among major trans-national corporations and the resulting concentration of economic power.  I will also throw into this strange mix some information from a large European research program (CLAMER) that looks at climate change effects on the North Atlantic.  (I add this because as a marine scientist, I’m disturbed by the lack of attention to what’s happening in the world’s oceans in the economic studies I am discussing.  Plus, I’m the cook, this is my potpourri, and I can combine topics as I wish.)

In 2012, we witnessed the abject failure of COP18, the 18^th annual conference of parties to the UN Framework Convention on Climate Change.  They failed to do anything much beyond agreeing to meet again next year while magically working towards a binding agreement to take action to stem the rise of atmospheric GHG to be voted on in 2015.  The failure to make any real progress means that yet another year has been wasted, ensuring that when (if) we finally do try to act, the task will have become that much more difficult.  We also witnessed plenty of evidence in weather events that climate change is starting to bite, most particularly, for North America, in the destruction caused by Hurricane Sandy on New York and New Jersey.  Changes in the ocean were also conspicuous this year with record melting of the Arctic sea ice, and this is where CLAMER comes in.

CLAMER, the Climate Change and European Marine Ecosystem Research program, is a large multi-investigator, multi-institution, multi-national research and education project funded by the European Union.  It put out several products during 2012, and I missed them all until now.  Back in June, CLAMER put out a press release that almost vanished without trace reporting on the effects of ocean warming on the geographic distribution of marine species (an article by Richard Gray in The Telegraph rescued it from oblivion).  The lead item in this press release concerned the recolonization of the North Atlantic by the Pacific Ocean diatom, Neodenticula seminae, a single-celled alga, part of the phytoplankton.  This species went extinct in the Atlantic 800,000 years ago, but has been able to recolonize because melting of sea ice has led to stronger currents flowing from west to east across the top of Canada.  While Neodenticula arrived in 1999 (reported in the technical literature in 2007 – featuring it in a 2012 press release is surprising!), a Pacific gray whale spotted off the coast of Spain, and again off Israel earlier in 2012, is believed to have made its journey via the same route.

Neodenticula seminae.  Image from the Tohoku National Fisheries Research Institute.

While neither Neodenticula nor Pacific gray whales are noxious species and may even have beneficial effects on Atlantic ecosystems, the fact that the Arctic is now becoming more open to migration means that we are likely to see more mixing of Pacific and Atlantic species, with the sometimes drastic changes to trophic webs that can result.  As part of the phytoplankton, Neodenticula is now doing its part at the base of the Atlantic food web – the food web that sustains fisheries production, including fisheries for Atlantic Bluefin tuna that I wrote about last time.  The remainder of the June press release documented northward shifts in ranges of a variety of marine species in response to ocean warming.  The problem, of course, is that not all species move north at the same rate, so that trophic webs become shuffled and productivity can be substantially changed.  For example, the copepod, Calanus finmarchicus, is moving northward, and being replaced in more southern waters by smaller, less nutritious, species of copepod.  Declines or collapses in several fish stocks in the North Sea have been attributed to the loss of this important food species.  In September, 2012, CLAMER published a 151-page report, Synthesis of European Research on the Effects of Climate Change on Marine Environments, that brought together information from numerous studies over 15 years on all aspects of the changes taking place in the North Atlantic and associated seas due to climate change – sea level rise, coastal erosion, warming, melting ice, storm frequency and intensity, changes in stratification and thermohaline circulation, acidification, riverine discharge rates and nutrient loads, ocean deoxygenation and coastal hypoxia, marine eutrophication, sediment changes and the biological effects of each of these.  There are lots of climate change impacts on the oceans, and we are largely failing to see them because we do not live in the sea.  This document gives a compelling account for one part of the globe.  Changes in our oceans are very likely to be as significant for our future well-being over the next few decades as will changes on land; they are not mentioned in any of the three other documents I am focused on today.

In December 2012, the US National Intelligence Council (NIC) published Global Trends 2030: Alternative Worlds, the fifth in a series of forward-looking reviews that began in 1996-97.  The NIC describes itself as supporting the Director of National Intelligence in his role as head of the Intelligence Community (IC) and serving as the IC’s center for long-term strategic analysis.  It was formed in 1979.

This 137-page document makes for fascinating reading.  After a brief introduction, it examines four megatrends, then considers the possible effects of what it terms six game changers.  Finally it presents four scenarios for the world of 2030.  The megatrends include 1) growing individual empowerment, 2) diffusion of power away from current world leaders and further limits on the usefulness of hard power, 3) demographic trends, and 4) what is termed a growing nexus of food, water and energy brought about by trends in population, wealth and climate.  The game changers are 1) that the global economy is changing in ways that may make it more fragile, 2) that there will continue to be serious gaps between governance that is needed and governance that can be achieved, 3) that risk of interstate conflict may rise, 4) that several regions of the world are changing in ways that may make them less stable politically than at present, 5) that unanticipated new technologies, particularly in information, manufacturing, resource extraction, and health sectors may bring substantial unanticipated change, and 5) that the geopolitical role of the USA might change in any of several ways.  Out of this mix of trends and disruptors are developed the alternative worlds – four scenarios called Stalled Engines, Fusion, Gini-out-of-the-bottle, and Nonstate World.

The expected distribution of real global GDP in 2010, and under each of four scenarios for 2030.  Source: Global Trends 2030, National Intelligence Council.

Stalled Engines is described as the most plausible worst case scenario – the authors admit there are still worse cases, but ones considered very unlikely.  Stalled Engines is a world with increased interstate conflict in Asia and a US and Europe that turn inward, no longer interested in sustaining their global leadership. Under this scenario, the euro zone unravels quickly, causing Europe to be mired in recession. The US energy revolution fails to materialize, dimming prospects for an economic recovery.  It’s a slower-growth world than any of the other scenarios, although with global GDP ($106 trillion) still about 57% above 2010 levels.

Fusion is described as the most plausible best-case scenario.  The authors describe it as a scenario in which “the specter of a spreading conflict in South Asia triggers efforts by the US, Europe, and China to intervene and impose a ceasefire. China, the US, and Europe find other issues to collaborate on, leading to a major positive change in their bilateral relations, and more broadly leading to worldwide cooperation to deal with global challenges. This scenario relies on political leadership, with each side overruling its more cautious domestic constituencies to forge a partnership.”  They clearly like this future, describing it as one in which “all boats rise substantially. Emerging economies continue to grow faster, but GDP growth in advanced economies also picks up. The global economy nearly doubles in real terms by 2030 to $132 trillion in today’s dollars. The American Dream returns with per capita incomes rising $10,000 in ten years. Chinese per capita income also expands rapidly, ensuring that China avoids the middle-income trap. Technological innovation—rooted in expanded exchanges and joint international efforts—is critical to the world staying ahead of the rising financial and resource constraints that would accompany a rapid boost in prosperity”.  I sense a bit of a pipe-dream.

Gini-out-of-the-bottle is described as a world of extremes, with clear winners and losers among countries.  In this scenario, the EU falters because of pronounced economic differences among its members, contrasting opportunities between cities and countryside in China put strains on the Party and order is maintained by invoking greater nationalism, many energy producers suffer from falling prices having failed to diversify their economies, but the US remains preeminent because it achieves energy independence.  The world economy does reasonably well (global GDP $112 trillion) but there is more friction between nations, more failed states and a lessening of global cohesion.

The Nonstate World is described as one in which “nonstate actors—nongovernmental organizations (NGOs), multinational businesses, academic institutions, and wealthy individuals—as well as subnational units (megacities, for example), flourish and take the lead in confronting global challenges. An increasing global public opinion consensus among elites and many of the growing middle classes on major global challenges—poverty, the environment, anti-corruption, rule-of-law, and peace—form the base of their support. The nation-state does not disappear, but countries increasingly organize and orchestrate “hybrid” coalitions of state and nonstate actors which shift depending on the issue.”  This is a world in which authoritarian governments have greatest difficulty operating while democracies strongly wedded to concepts of sovereignty and independence also have difficulties.  Smaller nations with better integrated elites may do better than larger countries, but it remains a patchwork world with some problems solved and others not.  Economic performance (global GDP $123 trillion) is slightly better than in the Gini-out-of-the-bottle world.

If we look into the description of the food, water, energy nexus, there are some comments about the role of climate change, but surprisingly few, and I do not believe the authors have adequately factored in the consequences.  The nexus section begins correctly by noting the substantial growth in demand for food, water and energy due to population growth (to 8.3 billion) and continuing rise in living standards in many developing countries.  They estimate, by 2030, a 35% increase in demand for food, a 40% increase in need for water, and a 50% increase in demand for energy.

For food, they report annual productivity gains have fallen from 2% to 1.1% in the past 30 years, and the trend continues downwards, while the world has consumed more food than it has produced in 7 of the last 8 years.  They then note 1) the growing demand for meat due to rising living standards and the substantially larger demand for grain and water that production of livestock entails, 2) the fact that virtually all arable land is now farmed, 3) that agriculture uses 70% of all freshwater used, and 5) that climate change is having major impacts on patterns of precipitation and snow melt such that many arid regions are becoming dryer still, while many wet regions are becoming more wet.  The extra rain is also being delivered more episodically leading to more droughts and more floods, both of which hamper agriculture.  The progressive covering up of agricultural land through urbanization and the competition for grain crops from the well-subsidized biofuel industry are also reported.

Putting this litany of problems together, it is obviously going to be difficult to achieve a 35% increase in food supply so how do they propose this will be done?  Increased efficiency, particularly in use of water, greater use of fertilizers, use of unspecified, not-yet-invented technologies to boost yields, and vertical farming using tall towers all get brief mention.  So, too, does use of “supply-side management practices to boost crop production”, whatever that means.  I am not sure these words constitute much of a solution to the demand for a 35% increase in food.  It is not as if countries have not been trying hard to feed their people during recent years while agricultural yields have scarcely grown; to advocate use of unspecified new methods and greater efficiencies to achieve a 35% increase in yields in 20 years seems unrealistic to me.  Yet by the end of the document, in the descriptions of the four scenarios there is just one mention of food crises – prices may be higher in the Stalled Engines world.

Comments on water shortages are even more cursory, and comments on energy are focused almost entirely on the changed future for oil and gas due to use of fracking technology and the consequences of energy independence in the US due to this.  Indeed, the success of fracking seems set to stifle any significant move towards alternative energy in countries that have shale deposits (many outside the US).  In other words, the authors see the need for 50% more energy as not a real problem because fracking has made hydrocarbons vastly more accessible.  Now, it is true that fracking is leading to a resurgence in US capacity to produce hydrocarbons, and ‘energy independence’ is very likely to be achieved.  But these putatively good outcomes should not mask the fact that the increase in availability of fossil fuels is also reducing any market pressure to seek alternate forms of energy, and this report sees no problems in that disturbing trend.  Just how pernicious market forces can be is well illustrated by the different consequences of fracking on prices of oil and gas.  Because the US natural gas market has not been internationalized, the upsurge in production via fracking has already cut prices from the peak of $10.79 per 1000 ft³ (wellhead price) in July 2008 to under $3.00 per 1000 ft³ today, and this collapse is already leading producers to move their equipment from gas to oil fields where fracking yields a product whose price is more closely tied to the international market.  This shift reduces the availability of gas relative to oil, yet natural gas should be the preferred fossil fuel because of its lower releases of GHG on burning.  Do not expect fossil fuel companies to ‘do the right thing’ when that ‘right thing’ is not in line with their bottom line objectives!

Another effect of the US fracking explosion, a good one in my view, is the very likely slow-down in extraction of Canadian tar sands oil because of the lower prices that abundant fracked oil and gas will cause.  This weakening of prices is already having slowdown effects on Canadian operators.  While this may be bad news for the Canadian economy, short term, it is actually a wonderful opportunity for Canada to rethink its energy economy, move towards refining more oil within Canada, ship Canadian gas and oil to sections of the country that currently import, and adopt a ‘slow-but-steady’ plan for development of the tar sands.  (After all, if we are set on exploiting our tar sands, lets ensure we sell high value-added products instead of raw resources, keeping more of the value within the Canadian economy, and let’s turn this into a long-term, sustainably managed, environmentally responsible part of our economy instead of continuing the current reckless, boom-and-bust, make-millions-for-oil-tycoons, environment-trashing game plan.) (And, no, I do not expect the Harper government to listen!)

But back to the NIC report.  Its authors seem to see little difficulty in satisfying the anticipated 50% increase in demand for energy, nor any climate problems in achieving this through widespread fracking.  Completely omitted are costs for adaptation to, or mitigation of climate change, yet these cannot fail to reduce the scope of other spending, thereby diminishing the benefits of the anticipated 2% annual growth in average GDP.  Now, perhaps I should not be surprised that the NIC, a component of the US intelligence community, should release a US-centric analysis of the next two decades, one that sees average global GDP growth of 2.3% per annum as a ‘worst case’, one that glosses over environmental and climate concerns, and one that welcomes the gift of fracking from the oil and gas industry.  Still, I am disturbed that this is the apparent quality of advice used by the world’s leading nation.  In summary, interesting, thought-provoking, but way too optimisitic about the future.

It seems possible that the multinational insurance industry may have a more clear-headed perspective on the next couple of decades than does the National Intelligence Council.  Insurance companies (included here are insurers, reinsurers, and insurance brokers) deal in risk as a core part of their business, and changing climate means changing risk.  Worldwide, insured claims paid for weather catastrophes average $50 billion per year, about 40% of all company costs, and this amount has been doubling every decade since the 1980s.  In his December 14^th report in Science, Evan Mills of Lawrence Berkeley National Labs, enumerates the several ways in which the insurance industry is responding to climate change risk.  Their responses fall broadly into three categories: promoting climate change mitigation and adaptation through direct investment in projects, support of climate research, and public education; designing and promoting climate-sensitive insurance products that reward climate-responsive behavior; and leading-by-example in making their own operations energy-neutral and climate-responsive.  The extent of their engagement is impressive:  Some $23 billion has been invested over the last decade in climate mitigation and adaptation.  Numerous insurance products now exist that adjust risk and therefore policy cost according to the climate-change mitigation efforts undertaken by the client.  These range from car insurance policies that reward low-mileage or low-fuel-use drivers, to home insurance policies that reward for energy efficient construction and design.  About 7% of the 378 insurers surveyed are now carbon-neutral in their buildings, activities and travel.

Figure showing the distribution of 1148 specific actions taken by insurers surveyed in Mills’ study.  Image © Science.

It is clearly in an insurer’s self-interest to undertake actions to promote climate-change mitigation or adaptation.  However, collectively, insurers represent a major component of the global business community, and this leads me to the study of connectivity among the major trans-national corporations (TNCs) worldwide.

In their October 2012 paper in PLoS One, Stefania Vitali and colleagues at ETH Zurich, Switzerland, undertook to examine the structure and connectivity of the network of global corporate control.  They sampled the Orbis 2007 marketing database which contains about 37 million economic actors, corporations and other entities, in 194 countries.  They found 43060 trans-national corporations active in 116 countries (of which about 5.6 thousand were listed on one or more stock markets).  They then performed an analysis to identify all companies in which each TNC executed some control, usually as an owner, and all direct and indirect shareholders of each TNC.  The resulting network of 43 thousand TNCs included 77 thousand shareholder companies and 480 thousand subsidiary companies.  Most interesting was the tightly connected but relatively small set of core entities which had numerous ownership connections with each other (the typical core TNC had ownership links to at least 20 other core TNCs).  In fact, about 40% of the ownership in TNCs is held by just 147 core TNCs that collectively hold near total ownership of each other.  The peculiarities of the connectivity among TNCs raise questions about global financial stability and global competition.  From my perspective they demonstrate in a concrete way the very strong centralization of control over the global economy.  Not surprisingly the list of the top 50 TNCs is dominated by a number of banks and financial institutions, the major insurers, and certain large investment houses.

This study confirms that the global economy is very tightly interconnected, raising the interesting possibility that collaboration among entities to achieve shared goals may be relatively easy to achieve.  This contrasts, in my view, with the situation among nations, which seem to have great difficulty identifying common goals and then collaborating to achieve them – just witness COP18.  Now, while the insurers have shown themselves to be responsive to climate change, this seems less likely to be the case for other types of TNCs  (banks in the recent past have not shown themselves very conscious of anything beyond profits – the larger the better).  Still, perhaps businesses are better able to learn how to respond collectively to environmental crises than are countries?  If so, this may make NICs Nonstate World of 2030 a future devoutly to be wished for, and maybe it is time for environmental science to seek links with the insurance industry, and through them, with the economic system.  Or maybe not?