The global economy doesn’t reflect the Earth’s crisis and its warming climate. Might ecological interest rates help link them?
Andrew Simms, a political economist and co-author of the original Green New Deal, believes ecological interest rates could prevent financial institutions investing in fossil fuels and connect the monetary system to the reality of the planet’s finite ecosystems. This is an edited extract from his new pamphlet written jointly for Prime Economics, the New Weather Institute and the Rapid Transition Alliance.
We need a new global economy, one which recognises the deepening crisis facing life on Earth and is designed to help to solve it. And a good way to build one, experts say, is to switch to something called ecological interest rates.
Interest rates usually capture people’s attention only if they have savings, when they’re bothered by low rates, or borrowings such as a mortgage, which means high ones. But economists are becoming unusually preoccupied with them, partly because it’s very likely that they will soon do something shocking and unusual: go negative.
There’s another reason, though. With intense focus on a green economic recovery after the pandemic, there’s a growing realisation that there is no real link between money, its cost and our ecological life-support system.
The global economy has outgrown the biosphere’s carrying capacity, as a conservative annual assessment of ecological overshoot makes clear. It is as if we were trying to shove size 10 economic feet into size six planetary shoes.
The size of the economy, in turn, is fuelled by the supply of credit in different monetary forms. More money in circulation tends to increase conventional economic growth.
Excessive economic footprint
This doesn’t necessarily mean the productive economy is getting bigger, though. For example, if banks lend money in a risky way – as happened with the sub-prime mortgage debacle behind the 2007-08 financial crisis – they can create an asset bubble which, when it bursts, can trigger recession.
Interest rates are the price we pay to borrow money, and when the price of money is positive, which it usually is, we have to pay back more than we actually borrowed. So interest also motivates orthodox growth, which relies on exploiting the biosphere and human labour.
What matters with an issue like climate breakdown is what happens in aggregate, and how this relates to any change in impact needed for the economy to operate within a particular planetary boundary – in effect, to fit its shoe size.
The economy’s footprint is already too big. So, to be environmentally sustainable, improvements in material efficiency must be big enough not only to compensate for the effects of growth, but also to reduce absolute consumption in line with getting back to the right shoe size again.
For example, there’s a lot of hype about improved aviation fuel efficiency. But, between 2013 and 2019, aviation passenger traffic went up four times faster than fuel efficiency improved. Elsewhere, the carbon emission benefits of supposedly efficient hybrid cars were shown to be only around one third of those promised.
The International Resource Panel (IRP) report, Resource Efficiency and Climate Change: Material Efficiency Strategies for a Low-Carbon Future, found that emissions from the extraction and production of materials such as metals, minerals, woods and plastics more than doubled from 1995 to 2015, accounting for a quarter of global emissions. Measures to improve resource efficiency did not come close to cancelling out the rise.
“The global economy has outgrown the biosphere’s carrying capacity. It is as if we were trying to shove size 10 economic feet into size six planetary shoes”
Global resource use continues to grow. UN Secretary General Antonio Guterres recently spoke of humanity waging a “suicidal war” on nature: global material use is projected to rise to 170-184 billion tonnes by 2050.
Money is a means of exchange, a store and a measure of value, or a unit of account. In essence, though, it isn’t a note or a coin but a social contract, an agreement about how to allocate resources. And the way our current money system is allocating resources is pushing us rapidly over a climate and ecological cliff.
That’s because money – a social construct, “a promise to pay” – cannot be finite. We can always make another promise. But the ecosystem’s ability to fulfil that promise – to meet the liability – is finite.
A price is what you pay, in money, for goods or services. But in practice prices often don’t carry vital information − the human cost of production, the impact on human health, or current and future environmental damage.
And there are larger issues. If someone planned to build on a much-loved meadow, you would face two questions: how much would you pay to save it, or how much compensation would you demand for its loss? Two very different prices would result, one limited by your ability to pay, the other possibly infinitely high. It could be no price.
Prices are judgements of value. How would you set the price of the notional tonne of carbon which, when burned, tipped the balance towards irreversible runaway global warming? You’d ask the price of a climate capable of supporting human civilisation.
Heading for 4°C
Mark Carney, former governor of the Bank of England, has said that the financial sector is investing in fossil fuels so “that if you add up the policies of all of the companies out there, they are consistent with warming of 3.7-3.8°C”. The globally agreed target is to keep climate heating below 1.5°C.
Many currencies are too big, covering areas that are too large and include a range of economic circumstances for which no single interest rate can be optimal. There are always some areas likely to be “overheating” and others that are struggling. You cannot set an interest rate that suits everyone; money is likely to be too cheap in one place or too expensive in another. Many people therefore argue for more currencies.
One way of reconnecting the money supply to the real world of natural resources is to have currencies which are backed by something real – like commodities. Several could address economic inequality (think various ways of providing universal income and/or services, such as access to energy and built-in incentives to veer away from carbon use).
It’s a sign of the times that alongside the base rate on the Bank of England’s website, the large-scale public creation of money (quantitative easing) has gone from being a seemingly exotic tool to one so standard that it is now one of the two default tools of monetary policy.
Ultimately, though, overuse of the biosphere requires limits on resource consumption. This still leaves quite a lot of room for action, such as making money expensive for what you want to avoid, like more fossil fuel, and cheap for what you need, a switch to job-creating, and clean, renewable energy. So credit should be more expensive for what you want less of.
Mark Carney says banks currently have portfolios of investment that will lead to catastrophic global heating of around 4°C. That shows the cost of borrowing should be made much higher for those investors who are fuelling the crisis.
Lessons from the pandemic
An ecological rate of interest would price money in terms of environmental limits. Current interest rates rarely if ever do this. A few banks are starting to incorporate so-called ESG factors (environmental, social and governance). A few are ceasing to lend to some of the most climate-damaging activities and to vary the cost of capital to reflect environmental risks. But they’re not even scratching the surface of the problem.
One way to do this would be to raise sharply the so-called risk weighting of all high-carbon loans, whether from a bank to a coal mine or for the purchase of a petrol-driven car, making the loan more expensive and sending a decisive market signal.
Central banks and supervisory monetary authorities have as their core mandate the maintenance of financial and monetary stability. Acting to prevent the allocation of vast financial resources to climate breakdown, with its catastrophic implications for humanity and the wider economy, is therefore directly aligned with their fundamental purpose.
What the world needs is something which goes beyond a greener money supply, something which deals with the aggregate size of the economy. There is a growing consensus among a wide spectrum of progressive voices about how a range of economic and social problems could be addressed at the same time as moving away from a growth-dependent economy.
With a rapid, just transition, to live within our ecological means (and the potential for radical policy and behaviour change has been widely demonstrated by responses to the coronavirus pandemic) what might it mean to align the economy with planetary boundaries?
Climate scientists say we should be aiming to return to a carbon concentration in the atmosphere no higher than 350 parts per million of CO2. An ecological growth rate would then be one compatible with stabilising greenhouse gases at no higher than this level.
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