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79th Annual Summer Conference, August 5–8, 2010

Wasted Opportunity? Investing in the Long Term

Speakers: THOMAS HOMER-DIXON, CIGI Chair of Global Systems at the Balsillie School of International Affairs (bio); JEFF RUBIN, former CIBC Chief Economist and author of Why Your World is About to Get a Whole Lot Smaller (bio); VELMA McCOLL, Principal, Earnscliffe Strategy Group (bio)

Moderator: WENDY FELDMAN, VP, Program, CIPA

Summary by Ian Rice, CIPA Youth Scholarship Recipient 

Opening comments from the moderator – the economic crisis is a jolt to the system, but with the environment, the crisis is insidious. This panel will ask how we will deal with environmental issues and whether stimulus packages are a help or not.

Thomas Homer-Dixon

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1. Has the economic crisis created a transformative moment for environmental issues, especially climate change? No, the crisis hasn’t proven to be positive for environmental policy, especially in Canada. There are four reasons for this:

• It was the wrong type of crisis (an economic crisis, not an environmental crisis). One exception to this is green jobs policies that boost demand and employment by investment in the green economy. Outside that, this economic crisis wasn’t the right type.

• The public policy response emphasized a return to conventional economic growth. This growth model requires debt accumulation, compounding the problem of a consumer-based growth model that is at the root of both the economic and environmental crises.

• Keynseian response involved enormous investment in carbon intensive infrastructure (i.e., roads, shovel-ready projects). This is not the type of investment that is required if we are concerned about environmental crises.

• The economic crisis was not severe enough. We ended up bailing out the bad guys (car companies, financial institutions), which creates a moral hazard and stabilizes the system without transforming it away from the petroleum-backed economy responsible for environmental destruction.

Result – the economic crisis has not been a transformative moment for our economy or environment.

2. Crisis and Change. Major change in complex systems occurs in a punctuated form. It is almost always mobilized by crisis and change. The idea is that as we move into the future, the system periodically finds itself in situations where multiple paths are available. The path that the system takes is determined by shocks, creating a path dependency that makes it difficult to go back to previous options, even if they would make us better off. Each point where is there is a fork on the path is a “moment of contingency.” People are prepared to consider alternatives and leaders are discredited. At the same time extremist groups have greater power because they are organized and motivated. This means that in the period of time before a shock, we need to prepare ourselves by developing ideas that can be put forward and implemented, and forestall the development of radicalization and extremism.

3. Significant shocks to the system will come from climate change. Temperature in the past was relatively stable until mid 20th century. 2.5–6 degree warming will put us in a new temperature regime that we haven’t seen over the past 2 millennia. All human activity has taken place within a narrow range of temperatures, and so such a rapid change will challenge adaptive capabilities.

In the arctic, remarkable change is the decline in the thickness of sea ice (multi-year sea ice in particular). This makes the ice extremely vulnerable to hot summers. The ice is breaking up fast to the point that we are ahead of projections by the IPCC. Does this matter? Scientists think that it does. The area above the arctic circle will be changed from an absorbitive to a reflective system. Changes in the jet stream caused by the breakup of sea ice can have implications around the world (e.g., weakening monsoons in China means more droughts in the wheat growing north).

The transformation will come if we are able to get off of our addiction to growth and put the environment at the centre of decision-making on policy.

Velma McColl

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Has the economic crisis helped change our approach to the environment? The economic crisis has not fundamentally changed our approach, but there is an awakening realization that the policy “ecosystem” is inextricably linked to the financial “ecosystem,” and the natural ecosystem.

As we’ve heard, the financial crisis shook the economic system. The resiliency of the financial system has been weakened and governments have responded by quick action through the G8 and G20. What progress was made in developing green economies? Did we use the economic crisis to help us deal with low carbon transition? The answer is yes and no, depending on where you look. Some countries were active supporters: South Korea, EU, China. Others were weak: Canada, Italy, Japan. Canada spent 8% on green infrastructure. Others have spent much more, even the US which spent 15%. So, in this case, for Canada it was a wasted opportunity.

This tells us something about competitiveness and innovation. We need to shift perspective so that innovation and competitiveness and green investment are linked. The long-game view is what is important. Investment in low-carbon energy systems is not only domestic in that R&D in innovation results in potential export growth in new industries.

The old paradigm of pollute first and clean up later is changing towards one that sees environmental concerns as being at the heart of development. Current Canadian government policy has stymied investment in an area where Canada has an advantage (i.e., clean tech). Now that we have spent into deficit it will be more difficult to make these investments in the future as we go into debt repayment.

Overlapping shocks between financial and environmental systems is accelerating the pace of change, compressing the time in which we need to respond. Movement on climate change is not an article of faith. We are continuing to undermine the resilience of our system by placing environment and economy at opposing ends.

Climate change is a complex issue, the mother of all horizontal issues. The challenge is to decide the best way to deal with it. It is intergenerational in nature and creates challenges related to intergovernmental cooperation in Canada. Leadership is required. The US is struggling with it, and leaders of the EU and UK who were active on climate are no longer in office. Still, the economic crisis is a moment of contingency, giving us an opportunity to reflect on how we can react to shocks from climate.

Was it a watershed moment? No, it was a wasted opportunity to green our economy, but still has potential for learning on how to deal with future crises.

Jeff Rubin

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According to conventional wisdom, the global recession was a financial crisis. Rubin’s alternative hypothesis is that it is linked to the run-up in oil prices. Other oil shocks led to recessions (OPEC 1973, OPEC 1979–1982, Iraq/Kuwait in 1991). Why is this important? In the process of bailing out financial institutions we have racked up large deficits. The US deficit is the largest since WW2. Outstanding debt in the US dwarfs that of EU countries. Our fiscal flexibility going forward is deeply constrained, limiting our ability to deal with future energy crises.

Once economic recovery takes place, upward pressure on oil prices will put us in a position in which we won’t be able to respond because our fiscal strength is depleted. We’ve used up fiscal latitude as we move to put on the brakes on spending. This will lead to inflation – the price we will pay for failing to respond effectively by bailing out financial institutions, car companies (and indirectly oil companies).

In a world in which oil supply is no longer growing, consuming oil becomes a zero sum game. New cars in India and China will require developed countries to take cars off the road as oil supply shrinks. Thus, the massive bailouts for the car industry props up a shrinking industry in North America.

Carbon is the flip-side of industry, and it is no longer coming from developed economies. China long passed coal consumption in the US. We need to put a price on carbon emissions, but we cannot ask our producers to pay twice, first paying for emissions, and second by losing market share to companies in other jurisdictions that do not have a carbon price. The carbon intensity in many industries is much higher in China than in North America (i.e., steel). Once we have a carbon price, manufacturing employment will come back home because it will be too expensive to transport and pay the carbon price.