11 Jun 2020
Unless you reside among lost tribes deep in a remote, forgotten rainforest - or parts of some advanced economies - it hardly needs to be repeated the world confronts two existential crises - one acute and the other chronic.
The acute one, COVID-19, however it ends, will inexorably change the way we live and work, the very structure of society, albeit in ways still not known.
"Failing to protect the environment has contributed - directly or indirectly - to the emergence of the novel coronavirus which causes COVID-19.”
The chronic one, climate change, will do the same, albeit over a more protracted period - but with even greater consequences.
These two crises are not distinct although they appear of different orders. Both are caused by humans. Both are versions of the “tragedy of the commons” - the phenomenon where dispersed responsibility for a common good leads to that good being devastated. Be that global health or the environment.
At one level however, failing to protect the environment has contributed - directly or indirectly - to the emergence of the novel coronavirus which causes COVID-19.
Air crash disaster
As Frank Snowden, author of the remarkably prescient Epidemics and Society: From the Black Death to the Present, has explained, climate change has been shown to increase the range of insect “spreaders” such as mosquitoes, in turn spreading diseases like zika, malaria and dengue fever.
Another book, the superbly entertaining On Pandemics: From Bubonic Plague to the Coronavirus by David Walten-Toews, explores the latest contagion in greater detail. While the exact origins and narrative of COVID-19 are yet to be traced conclusively, Walten-Toews has made the point environmental breakdowns have played a role.
He says if, as seems likely, COVID-19’s epicentre was a poorly managed wet market in Wuhan, one of the factors which increased demand for the wild animals carrying the virus was the recent histories of swine and bird flus.
Those animal epidemics, African Swine Flu and avian influenza, wiped out 200 million pigs across China and untold number of chickens in the province of Hubei which contains Wuhan. The citizens of Wuhan then, facing a lack of pork and poultry, switched to other sources of protein, including wild animals - the vectors of the virus.
Thus climate change, environmental mismanagement, poor governance and regulation, human demand and simple bad luck create an air crash disaster scenario where a chain of events, none catastrophic in isolation, leads us to where we are today.
One of the many possible, even likely, implications of climate change will be greater interaction between human and wild animal populations, more intensive farming - to meet demand as climate change impacts agriculture - and more opportunity for disease to cross the animal-human barrier.
Of course, even if we hadn’t been so unlucky with the coronavirus, progress on tackling climate change has to date been inadequate to prevent the dangerous warming credible models predict.
As ANZ’s chief economist Richard Yetsenga wrote recently on bluenotes: “COVID-19 is an enormous challenge. It is nested, however, within the broader challenge of climate change. To prioritise one over the other risks misdiagnosing the problem and missing the practical lesson offered by the COVID-19 crisis.”
The European Central Bank (ECB) concurs. At a virtual roundtable on "Sustainable Crisis Responses in Europe", organised by the INSPIRE research network, ECB executive board member Isabel Schnabel noted the effects of COVID-19 had been “so large and so disruptive that total carbon dioxide (CO2) emissions in 2020 will be about 4 to 7 per cent lower than estimated before the crisis”.
“In the past 120 years, there has never been an event that had such a dramatic impact on global CO2 emissions,” she said. “Yet, studies show that even the substantial restrictions in production and mobility that were necessary to contain the spread of the virus would not be sufficient to limit the global temperature increase to the 1.5 degrees Celsius above pre-industrial levels, as aspired under the 2015 Paris Agreement.”
If the world is to meet that goal, the United Nations figures global emissions would need to drop by 7.6 per cent each year between 2020 and 2030.
“Given the economic and social hardship associated with this year's reduction, such a drop is hardly feasible by simply reducing economic activity,” Schnabel pointed out.
“The pandemic is therefore a stark reminder that preventing climate change from inflicting permanent harm on the global economy requires a fundamental structural change to our economy, inducing systematic changes in the way energy is generated and consumed.”
Even if the climate change threat is being ignored or denied or deferred in some sectors and by some governments, it isn’t in the financial services sector and in particular not by regulators.
The global bank regulator the Bank for International Settlements (BIS) has a rigorous program in train. National regulators, like the Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia (RBA), are encouraging institutions in their charge to model and report climate risks. Regulators have clearly endorsed the view climate change is a financial risk and should be prioritised as such (with the attendant responsibilities on management to manage the issues and boards to adequately supervise their response in line with their fiduciary obligations.
The RBA was part of a posse of more than 60 central banks which warned global gross domestic product (GDP) could fall by 25 per cent by 2100 if the world does not act to reduce global greenhouse gas emissions.
That grouping, the Central Banks and Supervisors Network for Greening the Financial System (NGFS), said central banks and prudential supervisors are “stepping up efforts to integrate climate-related risks into their work, in particular financial stability monitoring. In addition, central banks increasingly focus on the potential impact of climate change on price stability and its implications for monetary policy”.
So too a growing list of very major providers of capital to financial institutions are demanding action on climate change. For those investors, the human cost is real but what hits their bottom line is if the institutions in which they invest misprice risk.
Critically though, despite simplistic arguments to the contrary, measures to address the health risk of pandemics or global warming do not have to be paid for by the economy. It is not a question of preserving health or the environment - or the economy.
The data are there that, long term, economies fare better when health outcomes are prioritised, stretching right back to the Spanish flu.
We are seeing live experiments in the world today where the long-term economic outcome is going to be worse in those regions where “the economy” is elevated above the health outcome, worryingly in Sweden, catastrophically in the US.
As The Economist noted about the US failure: “the federal government has accumulated a $US2.7 trillion deficit in nine months - more than 10 per cent of GDP - while caseloads have reached record highs at some 78,000 per day. In treating the symptoms without containing the underlying disease, America has chosen a costly and Sisyphean road.”
(Sisyphus being the mythical Greek king doomed to push a huge boulder up a hill everyday only to have it roll back down every night. For eternity.)
So too with climate. For example, according to University of New South Wales research, the transition to a renewable energy future will have environmental and long-term economic benefits and is possible in terms of return on energy invested (EROI).
The research, published in the international journal Ecological Economics, disproves the claim a transition to large-scale renewable energy technologies and systems will damage the macro-economy by taking up too large a chunk of global energy generation.
And this is only the latest in a growing bank of data demonstrating protecting the environment generates positive economic outcomes, despite rent-seeking claims to the contrary. That’s not to say there aren’t costs – to incumbents, to communities, to industries – as unfortunately there always are.
Much loved small, local, family retailers were put out of business by big box hardware and white goods chains but society chose longer term economic efficiency.
Andrew Cornell is managing editor of bluenotes
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
11 Jun 2020
01 Jul 2020