Could the Credit Crisis Drag Down the Climate Fight?

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A recent cover of The Economist magazine declares, "It's rough out there." Although the article is about deteriorating economic conditions, the cover shows a man caught in a hurricane. The image reminds me of the threat to our economy not just from the worsening credit crisis, but from unpredictable weather patterns and other adverse effects predicted to accompany climate change.

Faced with a slowing economy and the need to make tough choices, many business leaders are failing to make the connection between the health of our economy and the health of our environment.

An Accenture survey, released at the World Economic Forum in Davos, Switzerland last month, reveals that only five percent of big businesses consider global warming a top priority. Mark Spelman, Accenture's global head of strategy, said, "Climate change is not going to get nearly the same degree of attention here as it would have achieved if the economic outlook were brighter." I question whether we can really expect the economic outlook to improve without addressing systemic problems in our economic model that reinforce a bias toward unsustainable growth.

Some concepts from systems theory provide perspective on how, in the words of the Economist article, "the financial storm that blew up in America's subprime mortgage market last year has become a hurricane." In systems theory, negative feedback describes the process by which fluctuations in the system are counteracted in order to re-establish system equilibrium. A thermostat is a simple example of a negative feedback loop. When the temperature in a heated room reaches an upper limit, the heating system is switched off, and when the temperature drops to a lower limit, the heating system is switched on again.

In contrast, positive feedback describes the process by which a system responds to a disturbance in the same direction as the disturbance. While negative feedback promotes system equilibrium, positive feedback destabilizes systems and causes them to "run away" from their current position.

Due to our fractional reserve banking system, more than 95 percent of our money supply is created in the form of interest-bearing bank loans. These loans represent a claim on the real wealth of individuals, businesses, and governments. Compounding interest creates a positive feedback loop that causes the growth of our debt to accelerate over time, far outstripping our capacity to pay. During the 30-year period between 1976 and 2006, the total outstanding U.S. debt (household, government, and foreign) has increased 11.5 times compared with a 2.5 increase in GDP. The ratio of outstanding debt to GDP was 255 percent in 2006, compared to a debt to GDP ratio of 55 percent in 1976.

In his book The Economics of Happiness, Mark Anielski draws on the work of Herman Daly and Frederick Soddy to describe our predicament as follows:

Because real income from real wealth is insufficient to repay the mathematically growing mountain of fictitious money (debt), we are creating a protracted and vicious circle of debt financing and repayment from the depletion of human capital (labor) and natural capital (resources, land). This is why the system is like cancer: if compound interest is left unchecked the accumulated debt will consume its host, the life economy.

Our predominant economic model does not recognize the finite nature of the earth's resources, including its ability to process waste such as greenhouse gas emissions. Thus, one necessary step toward a more sustainable economic model requires GDP growth to be decoupled from natural resource use. Said differently, we must find ways to make more stuff while using fewer natural resources.

Dramatically increasing the efficiency with which we use resources is a good first step, but it will only slow resource depletion. We must also transition from our current linear economic model, in which natural resources flow from the environment, through the economy, and back to the environment as waste, to a closed-loop economy, in which waste from one process becomes food for another.

Using resources more efficiently and closing the loop are not new concepts to the sustainable business community. What is new is a slowing economy that threatens to undermine the urgency to act on climate change, resulting in even greater peril to our economy.

As we run up against the limits of the earth's natural resources, I expect that we will increasingly run up against limits in our economy. These encounters provide opportunities to reinvent our economic model in a way that recognizes that the economy is a subset of the environment and not the other way around. A sustainable future may ultimately depend on finding our way out of the positive feedback loop of escalating debt and developing new sustainable technologies, processes and practices to restore the health of our economy and planet.

Valerie Nibler is in her final semester at the Presidio School of Management Sustainable MBA program. She has an undergraduate degree from U.C. Berkeley in Operations Research and over 17 years experience as a project manager and business analyst in the energy and financial services industries. Her area of interest is financial innovations that promote sustainability, and she is currently working on a venture plan involving the use of complementary currencies to promote energy efficiency.

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