The Mondragon bank – an old model for a new type of finance

Oscar Kjellberg

A new type of institution is needed to handle non-debt finance. It should help promoters plan their projects and then find outside investor-partners in return for a share of each project’s income rather than its profits. This is essentially how the Mondragon co-ops’ bank used to work.

Imagine yourself as a bank manager in a small community 50 years ago. Your friends and neighbours have their current and savings accounts with you and when they need to borrow they come to tell you about their ideas. You know most of the locals and it is not difficult for you to tell whether a proposal is going to work. Your decision is based not only on the idea’s potential commercial viability but also on the individual’s personal ability, skill and support network. 

But times have changed. Bank managers in small communities do not have the authority to give bigger loans any more. Instead, the bank that owns the branch channels the community’s savings into what it believes to be the most profitable segments of a near-global capital market. It will only lend to the people in the community if it can get a safe mortgage charge over their houses but, even here, the bursting of the housing bubble has made the bank wary about their ability to repay. On average today, people, companies and governments carry much more debt than in the past. 

Banking worked very well as long as there was steady economic growth and customers were not too heavily in debt. However, economic degrowth will make it much harder for banks to find customers with a good chance of being able to repay the loan with interest in due time. 

The coming energy crunch will lead to volatile prices and an overall long-term economic contraction. The opportunities for banks to lend in this environment will shrink for two main reasons. The first is that peak oil will change the relative prices of land, labour and capital and make our contemporary society uneconomic because it uses too much energy. All our capital assets will lose value because they are energy inefficient. That will force everybody to reduce their debts much more than we have so far during the current financial crisis. The second reason is that the price volatility will make the risk of losing money on new investments much higher than in the past, especially as the process of developing a new technological and institutional structure and a new way of organising production is inescapably unpredictable. 

So, the Golden Age of banking lies behind of us, and yet we are facing the biggest need for investment in history in order to make the transition to a sustainable way of life. But if that need cannot be financed by the existing banking system, a new non-debt system for saving and finance has to be developed. 

In principle, this new system should do the exact opposite of what ordinary banks are doing. They try to avoid risk by forcing entrepreneurs to bear as much of it as possible. That will not be possible in the future. The higher level of risk has to be shared by all, under arrangements that make savers and entrepreneurs partners in their investments —for profit or loss. 

Two sorts of arrangements along these lines have been discussed in this book already. Under one, savers could exchange their money for a bond that promises to deliver real things like electricity when it matures (Douthwaite). Under the second, savers could become equity partners with the entrepreneurs (Cook). It is, however, not an easy task to knit partnerships like these together and somebody needs to have the knowledge, skill and time to do it. In other words, we need a new type of institution that would arrange the “meeting” between savers and entrepreneurs where they can develop their relations and discuss their ideas. We need professional, trustworthy and respected financial experts who can help us find sound financial solutions and create the partnership agreements. 

It is not possible for existing banks to shift from making loans to building profit-and-loss partnerships; they are much too big and too disconnected from local communities. Moreover, they are tightly regulated by the state, particularly after recent events, and they have a bureaucratic risk-avoiding outlook that does not equip them well to become members of a risk-sharing partnership.

The institutions I envisage would work in much the same way as did the bank at the heart of the Mondragon co-operatives in the 1960s. There, if a group wanted to start their own business as a workers’ co-operative, one of the group would join the bank staff, on normal pay, to work on the business plan with a ‘godfather’ — someone who specialised in helping new businesses start up. Then, when the godfather judged that the plan and the group were ready, he (they were all men in those days) put the project to the bank board and funding would be approved. The godfather then helped the new business establish itself, perhaps by advising on equipment and making sure the accounting system was running well. The money the group received from the bank was nominally a loan, so the business knew how much it was expected to pay its partner each year; but in reality the risk was shared and the bank’s agent, the godfather, and the members of the group were equally committed to the project’s success. No projects failed under this arrangement.

In its modern form, the institution we need could be a mixture of a (non-debt) savings bank and a meeting place for all the savers and entrepreneurs in a community. Instead of being a “credit union” it could be called an “investment union” (IU) to emphasise its co-operative character. The job of those running the IU would be to help an entrepreneur develop his or her idea, until the IU had sufficient confidence in it, and in the people involved, to be able to recommend that savers put up the required capital in exchange for a specific share of the project’s income. The IU would be paid for its efforts by taking a share of the income itself, as would the entrepreneurs. This would ensure that all the partners were fully committed to the project’s success. Once the project was running, the IU would make a market in the shares and, while savers would be allowed to sell whenever they wished, the IU and the entrepreneurs would only be allowed to reduce their holdings with the consent of everyone else involved.

Some investment unions could be purely local and deal with a wide variety of projects. Others could be more specialised and work over a wider area. For example, they might confine themselves to energy projects and build up a lot of technical expertise. Some might be akin to unit trusts, so that every member had a stake in everything. Others might allow savers to decide on their investment portfolio themselves.

Whatever form they took, investment unions would need to perform their social financial process continuously — because a continuous flow of saved money is required to help entrepreneurs finance their continuous stream of projects. Equally, savers need to be able to get frequent access their money to build their houses, to educate their children and to spend in old age. This continual process would be an incredible learning opportunity for the local community, over the years, as a stream of investment projects began as ideas were evaluated, financed and launched and then evaluated again and again while in operation. Apart from the incomes, much knowledge would be accumulated and strong personal ties, the bedrock of every community, would be developed.

Definancialisation, deglobalisation and relocalisation

Dmitry Orlov

Countries’ current attempts to recover from their difficulties are driving up oil prices. The world economy will be unable to cope and will collapse, just as it did in 2008. Future attempts at recovery will also fail. Anyone who recognises this should spend whatever money they have engaging with their neighbours and the land in new ways so that they stand a chance of saving something for themselves and their children.

What I want to say can be summed up simply: we all have to prepare for life without much money, where imported goods are scarce, and where people have to provide for their own needs, and those of their immediate neighbours. My point of departure is the unfolding collapse of the global economy. This started in the financial markets in 2008, and is now affecting the political stability of various countries around the world. A few governments have already collapsed, others may be on their way, and before too long we may find our maps redrawn in dramatic ways.

What does achieving sustainability mean, exactly? Is becoming sustainable sustainable itself? Chris Clugston summarised [1] his analysis of what he calls “societal over-extension” on The Oil Drum web site. Here is a summary of his summary, in round numbers. I won’t trifle with his arithmetic, because it’s the cultural assumptions behind it that I find interesting. His idea is that if we shrink our ecological footprint by an order of magnitude or so, that should make humanity’s impact on the planet sustainable once again. He expresses the shrinkage in financial terms: the GDP of the US would drop from, say, $100,000 per capita per annum to, perhaps, $10,000. Clugston draws a distinction between making this reduction voluntarily or involuntarily: we should make it easy on ourselves and come along quietly, so that nobody gets hurt. I find the idea that Americans will voluntarily lower their GDP by a factor of 10 rather outlandish. We keep the same system, just shut down 9/10 of it? Wouldn’t that make it a completely different system? This sort of sustainability seems rather unsustainable to me.

I would like to offer a more realistic alternative. Everybody should have one US dollar for purely didactic purposes. This way, all Americans will be able to show their one dollar to their grandchildren, and say: “Can you imagine, this ugly piece of paper was once called The Almighty Dollar!” And their grandchildren will no doubt think that they are a little bit crazy, but they would probably think that anyway. But it certainly would not be helpful for them to have multiple shoe-boxes full of dollars, because then their grandchildren would think that they are in fact senile, because no sane person would be hoarding such rubbish.

Clugston himself offers an alternative to the big GDP decrease: a proportionate decrease in population. In this scenario, nine out of 10 people die so that the remaining 10% can go on living comfortably on $100,000 a year. I was happy to note that Chris did not carry the voluntary/involuntary distinction over to this part of the analysis, because I feel that this would have been in rather questionable taste. I can think of just three things to say about this particular scenario.

First, humans are not a special case when it comes to experiencing population explosions and die-offs. The idea that human populations should increase monotonically ad infinitum is just as preposterous as the idea of infinite economic growth on a finite planet. The exponential growth of the human population has tracked the increased use of fossil fuels, and I have yet to see a compelling argument for why the population would not crash along with them.

Second, shocking though this seems, it can be observed that most societies are able to absorb sudden increases in mortality without much fuss at all. There was a huge spike in mortality in Russia following the Soviet collapse, but it was not directly observable by anyone outside of the morgues and the crematoria. After a few years, people would look at an old school photograph and realise that half the class were gone! When it comes to death, most people make it easy on themselves and come along quietly. The most painful part of it is realising that something like that is happening all around you.

Third, this whole budgeting exercise for how many people we can afford to keep alive is a good way of demonstrating what monsters we have become, with our addiction to statistics and numerical abstractions. The disconnect between words and actions on the population issue is by now almost complete. Population is very far beyond anyone’s control, and this way of thinking about it takes us in the wrong direction. If we could not control it on the way up, what makes us think that we might be able to control it on the way down? If our projections look sufficiently shocking, then we might hypnotise ourselves into thinking that maintaining our artificial human life-support systems at any cost is more important than considering its effect on the natural world. The question “How many will survive?” is simply not ours to answer.

What’s actually happening

There seems to be a wide range of opinion on how to characterise what is happening in the world economy now, from recession to depression to collapse. The press has recently been filled with stories about “green shoots” and the economists are discussing the exact timing of economic recovery. Mainstream opinion ranges from “later this year” to “sometime next year.” None of them dares to say that global economic growth might be finished for good, or that it will be over in “the not-too-distant future” — a vague term they seem to like a whole lot.

A consensus seems to be forming that the 2008 financial crash was precipitated by the spike in oil prices when oil briefly touched $147/bbl. that year. Why this should have happened seems rather obvious. Since most things in a fully developed, industrialised economy run on oil, the fuel is not an optional purchase: for a given level of economic activity, a certain level of oil consumption is required, and so one simply pays the price for as long as access to credit is maintained and, after that, suddenly it’s game over.

US crude oil consumption as a percent of GDP 1970-2009

In the past forty years, three US recessions have been preceded by rapid increases in the amount of national income going to purchase oil. The bigger oil bills left less money for spending in the rest of the economy. 4% of GDP seems to be the maximum the country can afford. Source: What oil price can America afford? by Steven Kopits

The actual limiting price, beyond which the economy breaks down, was experimentally established to be less than the $147/bbl. reached in 2008. We may never run out of oil, but we have already at least once run out of money with which to buy it, and will most likely do so again and again, until we learn the lesson. We will run out of resources to pump it out of the ground as well. There might be a little bit of oil left over for us to fashion into exotic plastic jewellery for rich people but it won’t be enough to sustain an industrial base, and so the industrial age will effectively be over, except for some residual solar panels and wind generators and hydroelectric installations.

I think that the lesson from all this is that we have to prepare for a non-industrial future while we still have some resources with which to do it. If we marshal the resources, stockpile the materials that will be of most use, and harness the heirloom technologies that can be sustained without an industrial base, then we can stretch out the transition far into the future, giving us time to adapt.

I hold these truths to be self-evident, roughly speaking

  1. It is sometimes helpful to ignore various complexities to move the discussion forward. I believe that these points are all true, roughly speaking.
  2. Global GDP is a function of oil consumption; as oil production goes down, so will global GDP. At some point, the inability to invest in oil production will drive it down far below what might be possible if depletion were the sole limiting factor. Efficiency, conservation, renewable sources of energy all might have some effect, but will not materially alter this relationship. Less oil means a smaller global economy. No oil means a vanishingly small global economy not worthy of the name.
  3. We have had a chance to observe that economies crash whenever oil expenditure approaches 4% of their GDP. [2] Attempts at economic recovery will cause oil price spikes that break through this ceiling. These spikes will be followed by further financial crashes and further drops in economic activity. After each crash, the maximum level of economic activity required to trigger the next crash will be lower.
  4. Financial assets are only valuable if they can be used to secure a sufficient quantity of oil to keep the economy running. They represent the ability to get work done, and since in an industrialised society the work is done by industrial machinery that runs on oil, less oil means less work. Financial assets that that are backed with industrial capacity require that industrial capacity to be maintained in working order. Once the maintenance requirements of the industrial infrastructure can no longer be met, it quickly decays and becomes worthless. To a large extent, the end of oil means the end of money.

Now that the reality of Peak Oil has started to sink in, one commonly hears that “The age of cheap oil is over.” But does that mean that the age of expensive oil is upon us? Not necessarily. We now know (or should have learnt by now) that once oil rises to over 4% of GDP, the world’s industrial economy stalls out, and as soon as that happens, oil ceases to be particularly valuable, so much so that investment in maintaining oil production is curtailed. The next time industry tries to stage a comeback (if it ever does) it hits the wall much sooner and stalls again. I doubt that it would take more than just a couple of cycles of this market whiplash for all the participants to have two realisations: that they cannot get enough oil no matter how much they pay for it, and that nobody wants to take their money even for the oil they do have. Those who still have it will see it as too valuable to part with for mere money. On the other hand, if the energy resources needed to run an industrial economy are no longer available, then oil becomes just so much toxic waste. In any case, it is no longer about money, but direct access to resources.

No need to be gloomy

Now, I expect that a lot of people will find this view too gloomy and feel discouraged. But I feel that it is entirely compatible with a positive attitude to the future, so let me try to articulate what that attitude is.

First of all, we do have some control. Although we shouldn’t hold out too much hope for industrial civilisation as a whole, there are certainly some bits of it that are worth salvaging. Our financial assets may not be long for this world, but in the meantime we can redeploy them to good long-term advantage.

Secondly, we can take steps to give ourselves time to make the adjustment. By knowing what to expect, we can prepare to ride it out. We can imagine which options will be foreclosed first, and we can create alternatives, so that we do not run out of options.

Lastly, we can concentrate on what is important: preserving a vibrant ecosphere that supports a diversity of life, our own progeny included. I can imagine few short-term prerogatives that should override this — our highest priority.

It will take some time for these realisations to sink in. In the meantime, we will no doubt keep hearing that we have a financial crisis on our hands. We must do something to shore up the banks, to deal with the toxic assets, to shore up our credit ratings and so forth. There are people who will tell you that this was all caused by a mistake in financial modelling, and that if we re-regulate the financial sector, this won’t happen again. So, for the sake of the argument, let’s take a look at all that.

Financial management is certainly not my speciality, but as far as I understand it, it is mostly about assessing risk. And to do that, financial managers make certain assumptions about the phenomena they are trying to model. One standard assumption is that the future will resemble the past. Another is that various negative events are randomly distributed. For instance, if you are selling life insurance, you can be certain that people will die based on the fact that they have been born, and you can be reasonably certain that they will not all die at once. When someone dies is unpredictable; when people in general die is random, most of the time. And so here is the problem: the world is unpredictable, but classes of small events can be treated as random, until a bigger event comes along. It may seem like an obscure point, so let me explain the difference in a graphical way.

The square on the left is a random collection of multicoloured dots. Actually, it is pseudo-random, because it was generated by a computer, and computers are deterministic beasts incapable of true randomness.
A source of true randomness is hard to come by. The square on the right is not random, even to a layman. It is like oil expenditure going to 6% of GDP. That certainly wasn’t random. But was it unpredictable? We had a few years of monotonically increasing oil prices, and the high prices failed to produce much of a supply response in spite of record-high drilling rates, investment in ethanol, tar sands, and so on. We also had some good geology-based models that accurately predicted oil depletion profile for separate provinces, and had a high probability of succeeding in the aggregate as well. So the high oil expenditure was definitely not random, and not even unpredictable.

At a higher level, what sort of mathematics do we need to accurately model the inability of our financial and political and other leaders and commentators to see it, or to understand it, even now? And do we really need to do that, or should we just let this nice brick wall do the work for us. Because, you know, brick walls have a lot to teach people who refuse to acknowledge their existence, and they are very patient with students who need to repeat the lesson. I am sure that the lesson will sink in eventually, but I wonder how many more full-gallop runs at the wall it will take before everyone is convinced.

One person I would like to have a close encounter with the brick wall is Myron Scholes, the Nobel Prize–winning co-author of the Black-Scholes method of pricing derivatives, the man behind the crash of Long Term Capital Management. He is the inspiration behind much of the current financial debacle. Recently, he has been quoted as saying the following: “Most of the time, your risk management works. With a systemic event such as the recent shocks following the collapse of Lehman Brothers, obviously the risk-management system of any one bank appears, after the fact, to be incomplete.” Now, imagine a structural engineer saying something along those lines: “Most of the time our structural analysis works, but if there is a strong gust of wind, then, for any given structure, it is incomplete.” Or a nuclear engineer: “Our calculations of the strength of nuclear reactor containment vessels work quite well much of the time. Of course, if there is an earthquake, then any given containment vessel might fail.” In these other disciplines, if you just don’t know the answer, then you just don’t bother showing up for work, because what would be the point?

The point certainly wouldn’t be to reassure people, to promote public confidence in bridges, buildings, and nuclear reactors. But economics and finance are different. Economics is not directly lethal, and economists never get sent to jail for criminal negligence or gross incompetence even when their theories do fail. Finance is about the promises we make to each other, and to ourselves. And if the promises turn out to be unrealistic, then economics and finance turn out to be about the lies we tell each other. We want to continue believing these lies, because there is a certain loss of face if we don’t, and the economists are there to help us. We continue to listen to economists because we love their lies. Yes, of course, the economy will recover later this year, maybe the next. Yes, as soon as the economy recovers, all these toxic assets will be valuable again. Yes, this is just a financial problem; we just need to shore up the financial system by injecting taxpayer funds. These are all lies, but they make us feel all right. They are lying, and we are buying every word of it.

The five fastest ways to lose all your money and have nothing to show for it

These are difficult times for those of us who have a lot of money. What can we do?

  1. We can entrust it to a financial institution. That tends to turn out badly. Many people in the United States have entrusted their retirement savings to financial institutions. And now they are being told that they cannot withdraw their money. All they can do is open a letter once a month, to watch their savings dwindle.
  2. We can also invest it in some part of the global economy. I know some automotive factories you could buy. They are quite affordable right now. A lot of retired auto workers have put all of their retirement savings into General Motors stock. Maybe they know something that we don’t? (Actually, that’s part of a fraudulent scheme perpetrated by the Obama administration, to pay off their banker friends ahead of GM’s other creditors.)
  3. How about a nice gold brick or two? A bag of diamonds? Some classic cars? Then you could start your own personal museum of transportation. How about a beautifully restored classic luxury yacht? Then you could use the gold bricks to weigh you down if you ever decide to end it all by jumping overboard.
  4. Here’s another brilliant idea: buy green products. Whatever green thing the marketers and advertisers throw at you, buy it, toss it, and buy another one straight away. Repeat until they are out of product, you are out of money, and the landfills are full of green rubbish. That should stimulate the economy. Market research shows that there is a great reservoir of pent-up eco-guilt out there for marketers and advertisers to exploit. Industrial products that help the environment are a bit of an oxymoron. It’s a bit like trying to bail out the Titanic using plastic teaspoons.
  5. Another great marketing opportunity for our time is in survival goods. There are some web sites that push all sorts of supplies to put in your private bunker. It’s a clever bit of manipulation, actually. Users log in, see that the stock market is down, oil is up, shotgun shells are on sale, so are hunting knives, and if you add a paperback on “surviving financial armageddon” to your shopping cart you qualify for free shipping. Oh, and don’t forget to add a large tin of dehydrated beans. Fear is a great motivator, and getting people to buy survival goods is almost a matter of operant conditioning: a marketer’s dream.

If you want to help save the environment and prepare yourself for a life without access to consumer goods, then doing so by buying consumer goods doesn’t seem like such a great plan. A much better thing to do is to BUY NOTHING. But that is not something you can do with money. But there are useful things to do with money, for the time being, if we hurry.

How to spend all your money but have something to
show for it

Most of the wealth is in very few private hands right now. Governments and the vast majority of the people only have debt. It is important to convince people who control all this wealth that they really have two choices. They can trust their investment advisers, maintain their current portfolios, and eventually lose everything. Or they can use their wealth to re-engage with people and the land in new ways, in which case they stand a chance of saving something for themselves and their children. They can build and launch lifeboats, recruit crew, and set them sailing.

Those who own a lot of industrial assets can divest before these assets lose value and instead invest in land resources, with the goal of preserving them, improving them over time, and using them in a sustainable manner. Since it will become difficult to get what you want by simply paying for it, it is a good idea to establish alternatives ahead of time, by making resources, such as farmland, available to those who can put them to good use, for their own benefit as well as for yours. It also makes sense to establish stockpiles of non-perishable materials that will preserve their usefulness far into the future. My favourite example is bronze nails. They last over a hundred years in salt water, and so they are perfect for building boats. The manufacturing of bronze nails is actually a good use of the remaining fossil fuels — better than most. They are compact and easy to store.

Lastly, it makes sense to work towards orchestrating a controlled demolition of the global economy. This calls for a new financial skill set: that of a disinvestment adviser. The first step is a sort of triage; certain parts of the economy can be marked “do not resuscitate” and resources reallocated to a better task. A good example of an industry not worth resuscitating is the auto industry; we simply will not need any more cars. The ones that we already have will do nicely for as long as we’ll need them. A good example of a sector definitely worth resuscitating is public health, especially prevention and infectious disease control. In all these measures, it is important to pull money out of geographically distant locations and invest it locally. This may be inefficient from a financial standpoint, but it is quite efficient from the point of view of personal and social self-preservation.

Beyond finance: controlling other kinds of risk

It seems rather disingenuous for us to treat economics and finance as a special case. Do we have any examples of risks we understood properly and acted on in time? Have there been any really serious systemic problems that we have been able to solve? The best we seem to be able to do is buy time. In fact, that seems to be what we are good at — postponing the inevitable through diligence and hard work. None of us wants to act precipitously based on what we understand will happen eventually, because it may not happen for a while yet. And why would we want to rock the boat in the meantime? The one risk that we do seem to know how to mitigate against is the risk of not fitting in to our economic, social and cultural milieu. And what happens to us if our entire milieu finally goes over the edge? Well, the way we plan for that is by not thinking about that.

The biggest risk of all, as I see it, is that the industrial economy will blunder on for a few more years, perhaps even a decade or more, leaving environmental and social devastation in its wake. Once it finally gives up the ghost, hardly anything will be left with which to start over. To mitigate against this risk, we have to create alternatives, on a small scale, that do not perpetuate this system and that can function without it.

The idea of perpetuating the status quo through alternative means is all-pervasive, because so many people in positions of power and authority wish to preserve their positions. And so just about every proposal we see involves avoiding collapse instead of focusing on what comes after it. A prime example is the push to develop alternative energy. Many of these alternatives turn out to be fossil-fuel amplifiers rather than self-sufficient resources: they require fossil-fuel energy as an essential input. Also, many of them require an intact industrial base, which runs on fossil fuels. There is a pervasive idea that these alternatives haven’t been developed before for nefarious reasons: malfeasance on the part of the greedy oil companies and so on. The truth of the matter is that these alternatives are not as potent, physically or economically, as fossil fuels. And here is the real point worth pondering: If we can no longer afford the oil or the natural gas, what makes us think that we can afford the less potent and more expensive alternatives? And here is a follow-up question: If we can’t afford to make the necessary investments to get at the remaining oil and natural gas, what makes us think that we will find the money to develop the less cost-effective alternatives?

How long do we have?

It would be excellent if more people were thinking along these lines and had started making their lives a bit more sustainable, but social inertia is considerable, and the process of adaptation takes time. So the question is, is there enough time for significant numbers of people to realise the situation and to adapt, or will they have to endure quite a lot of discomfort? I believe that people who start the process now stand a fairly good chance of making the transition in time but that it would be unwise to wait and try to grab a few more years of comfortable living. Not only would that be a waste of time on a personal level, but we’d be squandering the resources we need to make the transition.

Collapse without preparation is a defeat.

Collapse with preparation is an eccentricity.

I concede that the choice is a difficult one: either we wait for circumstances to force our hand, at which point it is too late for us to do anything to prepare, or we bring it upon ourselves ahead of time. If we ask the question, “How many people are likely to do that?” —then we are asking the wrong question. A more relevant question is, “Would we be doing this all alone?” And I think the answer is, probably not, because there are quite a few other people who are thinking along these same lines.

Even so, it is very important to understand social inertia for the awesome force that it is. I have found that many people are almost genetically predisposed to not want to understand what I have been saying, and many others understand it on some level but refuse to act on it. When they are touched by collapse, they take it personally or see it as a matter of luck. They see those who prepare for collapse as eccentrics; some may even consider them to be dangerous subversives. This is especially likely to be the case for people in positions of power and authority, because they are not exactly cheered by the prospect of a future that has no place for them.

There is a certain range of personalities that are most likely to survive collapse unscathed, physically or psychologically, and adapt to the new circumstances. I have been able to spot certain common traits while researching reports of survivors of shipwrecks and other similar calamities. A certain amount of indifference or detachment is definitely helpful, including indifference to suffering. Possibly the most important characteristic of a survivor, more important than skills or preparation or even luck, is the will to survive. Next is self-reliance: the ability to persevere in spite of loneliness and lack of support from anyone else. Last on the list is unreasonableness: the sheer stubborn inability to surrender in the face of seemingly insurmountable odds, opposing opinions from one’s comrades, or even force.

Those wishing to be inclusive and accommodating, who want to compromise and to seek consensus, need to understand that social inertia is a crushing weight. Translated, “We must take into account the interests of society as a whole” means “We must allow ourselves to remain thwarted by people’s unwillingness or inability to make drastic but necessary changes; to change who they are.” Must we, really?

There are two components to human nature, the social and the solitary. The solitary is definitely the more highly evolved, and humanity has surged forward through the efforts of brilliant loners and eccentrics. Their names live on forever precisely because society was unable to extinguish their brilliance or to thwart their initiative. Our social instincts are atavistic and result far too reliably in mediocrity and conformism. We are evolved to live in small groups of a few families, and our recent experiments that have gone beyond that seem to have relied on herd instincts that may not even be specifically human. When confronted with the unfamiliar, we have a tendency to panic and stampede, and on such occasions people regularly get trampled and crushed underfoot: a pinnacle of evolution indeed! And so, in fashioning a survivable future, where do we put our emphasis: on individuals and small groups, or on larger entities — regions, nations, humanity as a whole? I believe the answer to that is obvious.

“Collapse” or “Transition”?

It’s rather difficult for most people to take any significant steps, even individually. It is even more difficult to do so as a couple. I know a lot of cases whether one person understands the picture and is prepared to make major changes in the living arrangement, but the partner or spouse is non-receptive. If they have children, then the constraints multiply, because things that may be necessary adaptations post-collapse look like substandard living conditions to a pre-collapse mindset. For instance, in many places in the United States, bringing up a child in a place that lacks electricity, central heating, or indoor plumbing may be equated with child abuse, and authorities rush in and confiscate the children. If there are grandparents involved, then misunderstandings multiply. There may be some promise to intentional communities: groups that decide to make a go of it in rural setting.

When it comes to larger groups — towns, for instance — any meaningful discussion of collapse is off the table. The topics under discussion centre around finding ways to perpetuate the current system through alternative means: renewable energy, organic agriculture, starting or supporting local businesses, bicycling instead of driving, and so on. These certainly aren’t bad things to talk about, or to do, but what of the radical social simplification that will be required? And is there a reason to think that it is possible to achieve this radical simplification in a series of controlled steps? Isn’t that a bit like asking a demolition crew to demolish a building brick by brick instead of what it normally does? Which is, mine it, blow it up, and bulldoze and haul away the debris?

Better living through bureaucracy – A 10-Step programme

  1. Formulate a brilliant plan
  2. Generate community enthusiasm
  3. Get support from industry, government, the UN, the Vatican
    and the Dalai Lama.
  4. Use mass media to generate public awareness.
  5. Form action committees.
  6. Propose new legislation. Lobby parliaments.
  7. Secure corporate sponsorship.
  8. Execute pilot programmes.
  9. Publish papers, present results at conferences
  10. COLLAPSE!

There are still many believers in the goodness of the system and the magic powers of policy. They believe that a really good plan can be made acceptable to all — the entire unsustainably complex international organisational pyramid, that is. They believe that they can take all these international bureaucrats by the hand, lead them to the edge of the abyss that marks the end of their bureaucratic careers, and politely ask them to jump. Now, don’t get me wrong, I am not trying to stop them. Let them proceed with their brilliant schemes, by all means.

There are far simpler approaches that are likely to be more effective. Since most wealth is in private hands, it is actually up to individuals to make very important decisions. Unlike various bureaucratic and civic bodies, which are both short of funds and mired in social inertia, they can act decisively and unilaterally. The problem is, what to do with financial assets before they lose value. The answer is to invest in things that will retain value even after all financial assets are worthless: land, ecosystems, and personal relationships. The land need not be in pristine or natural condition. After a couple of decades, any patch of land reverts to a wilderness, and unlike an urban or an industrial desert, a wilderness can sustain life, human and otherwise. It can support a population of plants and animals, wild and domesticated, and even a few humans.

The human relationships that are the most conducive to preserving ecosystems are ones that are in turn tied to a direct, permanent relationship with the land. They can be enshrined in permanent, heritable leases payable in sustainably harvested natural products. They can also be enshrined as deeded easements that provide the community with traditional hunting, gathering and fishing rights, provided human rights are not allowed to supersede those of other species. I think the lifeboat metaphor is apt here, because the moral guidance it offers is so clear. What has to happen in an overloaded lifeboat at sea when a storm blows up and it becomes necessary to lighten the load? Everyone draws lots. Such practises have been upheld by the courts, provided no-one is exempt — not the captain, not the crew, not the owner of the shipping company. If anyone is exempt, the charge becomes murder. Sustainability, which is necessary for group survival, may have to have its price in human life, but humanity has survived many such incidents before without descending into barbarism.

Gift-giving as an organising principle

Many people have been so brainwashed by commercial propaganda that they have trouble imagining that anything can be made to work without recourse to money, markets, the profit motive, and other capitalist props. And so it may be helpful to present some examples of very important victories that have been achieved without any of these.

In particular, Open Source software, which used to be somewhat derisively referred to as “free software” or “shareware,” is a huge victory of the gift economy over the commercial economy.” Free software” is not an accurate label; nor is “free prime numbers” or “free vocabulary words.” Nobody pays for these things, but some people are silly enough to pay for software. It’s their loss; the “free” stuff is generally better, and if you don’t like it, you can fix it. For free.

General science works on similar principles. Nobody directly profits from formulating a theory or testing a hypothesis or publishing the results. It all works in terms mutuality and prestige — same as with software.

On the other hand, wherever the pecuniary motivation rises to the top, the result is mediocre at best. And so we have expensive software that fails constantly (I understand that the Royal Navy is planning to use a Microsoft operating system on its nuclear submarines; that is a frightening piece of news). We also have oceans full of plastic trash — developing all those “products” floating in the ocean would surely have been impossible without the profit motive. And so on.

In all, the profit motive fails to motive altruistic behaviour, because it is not reciprocal. And it is altruistic behaviour that increases the social capital of society. Within a gift-giving system, we can all be in everyone’s debt, but going into debt makes us all richer, not poorer.

Barter as an organising principle

Gifts are wonderful, of course, but sometimes we would like something rather specific, and are willing to work with others to get it, without recourse to money, of course. This is where arrangements can be made on the basis of barter. In general, you barter something over which you have less choice (one of the many things you can offer) for something over which you have more choice (something you actually want).

Economists will tell you that barter is inefficient, because it requires “coincidence of wants”: if A wants to barter X for Y, then he or she must find B who wants to barter Y for X. Actually, most everyone I’ve ever run across doesn’t want to barter either X for Y, or Y for X. Rather, they want to barter whatever they can offer for any of a number of the things they want.

In the current economic scheme, we are forced to barter our freedom, in the form of the compulsory work-week, for something we don’t particularly want, which is money. We have limited options for what to do with that money: pay taxes, bills, buy shoddy consumer goods, and, perhaps, a few weeks of “freedom” as tourists. But other options do exist.

One option is to organise as communities to produce certain goods that the entire community wants: food, clothing, shelter, security and entertainment. Everyone makes their contribution, in exchange for the end product, which everyone gets to share. It is also possible to organise to produce goods that can be used in trade with other communities: trade goods. Trade goods are a much better way to store wealth than money, which is, let’s face it, an essentially useless substance.

Misleading idea 1: Local/alternative currencies can help

There is a lot of discussion of ways to change the way money works, so that it can serve local needs instead of being one of the main tools for extracting wealth from local economies. But there is no discussion of why it is that money is generally necessary. That is simply assumed. There are communities that have little or no money, where there may be a pot of coin buried in the yard somewhere, for special occasions, but no money in daily use.

Lack of money makes certain things very difficult. Examples include gambling, loan sharking, extortion, bribery and fraud. It also makes it more difficult to hoard wealth, or to extract it out of a community and ship it somewhere else in a conveniently compact form. When we use money, we cede power to those who create money (by creating debt) and who destroy money (by cancelling debt). We also empower the ranks of people whose area of expertise is in the manipulation of arbitrary rules and arithmetic abstractions rather than in engaging directly with the physical world. This veil of metaphor allows them to mask appalling levels of violence, representing it symbolically as a mere paper-shuffling exercise. People, animals, entire ecosystems become mere numbers on a piece of paper. On the other hand, this ability to represent dissimilar objects using identical symbols causes a great deal of confusion. For instance, I have heard rather intelligent people declare that government funds, which have been allocated to making failed financial institutions look solvent, could be so much better spent feeding widows and orphans. There is no understanding that astronomical quantities of digits willed into existence and transferred between two computers (one at a central bank, another at a private bank) cannot be used to directly nourish anyone, because food cannot be willed into existence by a central banker or anyone else.

Misleading idea 2: Science and technology can help

One accusation I often hear is that I fail to grasp the power of technological innovation and the free-market system. If I did, apparently I would have more faith in a technologically advanced future where all of our current dilemmas are swept away by a new wave of eco-friendly sustainability. My problem is that I am not an economist or a businessman: I am an engineer with a background in science. The fact that I’ve worked in several technology start-up companies doesn’t help either.

I know roughly how long it takes to innovate: come up with the idea, convince people that it is worth trying, try it, fail a few times, eventually succeed, and then phase it in to real use. It takes decades. We do not have decades. We have already failed to innovate our way out of this.

Not only that, but in many ways technological innovation has done us a tremendous disservice. A good example is innovation in agriculture. The so-called “green revolution” has boosted crop yields using fossil-fuel inputs, creating generations of agro-addicts dependent on just one or two crops. In North America, human hair samples [3] have been used to determine that fully 69% of all the carbon came from just one plant: maize. So, what piece of technological innovation do we imagine will enable this maize-dependent population to diversify their food sources and learn to feed themselves without the use of fossil-fuel inputs?

We think that technology will save us because we are addled by it. Efforts at creating intelligent machines have failed, because computers are far too difficult to programme, but humans turn out to be easy for computers to programme. Everywhere I go I see people poking away at their little mental-support units. Many of them can no longer function without them: they wouldn’t know where to go, who to talk to, or even where to get lunch without a little electronic box telling them what to do.

These are all big successes for maize plants and for iPhones, but are they successes for humanity? Somehow I doubt it. Do we really want to eat nothing but maize and look at nothing but pixels, or should there be more to life? There are people who believe in the emergent intelligence of the networked realm — a sort of artificial intelligence utopia, where networked machines become hyperintelligent and solve all of our problems. And so our best hope is that in our hour of need machines will be nice to us and show us kindness? If that’s the case, what reason would they find to respect us? Why wouldn’t they just kill us instead? Or enslave us. Oh, wait, maybe they already have!

We’ll need to re-skill and toughen up

Supposing all goes well, and we have a swift and decisive collapse, what should follow is an equally swift rebirth of viable localised communities and ecosystems. One concern is that the effort will be short of qualified staff.

It is an unfortunate fact that the recent centuries of settled life, and especially the last century or so of easy living based on the industrial model, have made many people too soft to endure the hardships and privations that self-sufficient living often involves. It seems quite likely that those groups that are currently marginalised would do better, especially the ones that are found in economically underdeveloped areas and have never lost contact with nature.

And so I would not be surprised to see these marginalised groups stage a come-back. Almost every rural place has its population of people who know how to use the local resources. They are the human component of the local ecosystems and, as such, they deserve much more respect than they have received. A lot of them can’t be bothered about fine manners or speaking English. Those who are used to thinking of them as primitive, ignorant and uneducated will be shocked to discover how much they must learn from them.

Rules for your new life

  1. Conserve energy. Get plenty of rest and sleep a lot. Sleeping burns 10 times less energy than hard physical labour.
  2. Save time. Avoid living to a schedule. Work with the weather and the seasons, not against them.
  3. Pick and choose. Always have more to do than you ever plan to get done.
  4. Have plenty of options. You don’t know what the future holds so (don’t) plan accordingly.
  5. Think for yourself. The popularity of the stupid idea doesn’t make it any less stupid.
  6. Laugh at the world. Make sure to maintain a healthy sense of humour.

So what are we to do while we wait for collapse, followed by good things? It’s no use wasting your energy, running yourself ragged and ageing prematurely; so get plenty of rest, and try to live a slow and measured life. One of the ways industrial society dominates us is through the use of the factory whistle: few of us work in factories, but we are still expected to work a shift. If you can avoid doing that, you will be ahead. Maintain your freedom to decide what to do at each moment, so that you can do each thing at the most opportune time. Specifically try to give yourself as many options as you can, so that if any one thing doesn’t seem to be working out, you can switch to another. The future is unpredictable, so try to plan so as to be able to change your plans at any time. Learn to ignore all the people who earn their money by telling you lies. Thanks to them, the world is full of very bad ideas that are accepted as conventional wisdom, so watch out for them and come to your own conclusions. Lastly, people who lack a sense of humour are going to be in for a very hard time, and can drag down those around them. Plus, they are just not that funny. So avoid people who aren’t funny, and look for those who can laugh at the world no matter what happens.

Endnotes

  1. ttp://www.theoildrum.com/node/5381 Dated 3 May 2009
  2. The average price of a barrel of oil in 2007 was $65.61 and production was 73.78 million barrels per day. The Gross World Product was $65,610 billion. This means that 2.7% of world output spent on buying oil. In 2008, the average price rose to $91.50, thus pushing the share of world output figure to around 4%.
  3. R,H. Tycot et al., “The Importance of Maize in Initial Period and Early Horizon Peru”, chapter 14 in Histories of Maize: Multidisciplinary Approaches to the Prehistory, Biogeography, Domestication, and Evolution of Maize, J.E. Staller, R.H. Tykot & B.F. Benz eds., Elsevier, 2006, downloadable from http://shell.cas.usf.edu/~rtykot/14%20Tykot%20et%20al.pdf

Danger ahead: prioritising risk avoidance in political and economic decision-making

Brian Davey

Now that the financial and political components of the present system have discredited themselves, a fluid situation exists that might allow more viable options to emerge. Local green initiatives, in particular the Transition Towns movement, are gaining in strength and number(s), but do they have the potential to develop the capacity needed at a national level to transform societies’ energy and transport infrastructures?

In a commentary on the Great Depression of the 1930s, the German economic historian Werner Abelshauser noted that the scale of the crisis in its early stages was often underestimated. While still in office, President Hoover saw the worst as being over, and when he came to power in 1933, Roosevelt thought the same. According to Abelshauser, the main actors in the drama lacked what he called “Catastrophe Consciousness.” They simply could not comprehend the scale of what was happening.

In this paper, I argue that the same now holds true for elite thinking and preparedness across a range of issues that were predicted in the 1970s by the group that wrote the Club of Rome Report, the “Limits to Growth”. At the time, this report received a lot of attention but it was widely rubbished by mainstream economists, who helped create a conventional wisdom that the “Limits to Growth” theorists “had been proved wrong”.

Unsustainable growth, “overshoot” and collapse

The subsequent period was marked by the rise of Thatcher, Reagan and market fundamentalism and by the collapse of the communist bloc. A long period of expansion occurred from which most people in the world either did not gain or emerged worse off. The cheap energy powering modern transport and communications enabled globalised capital to move easily to where it wanted — to take advantage of the cheapest pay, most favourable tax opportunities and lowest environmental standards. It is therefore not surprising that while the index of market-based transactions (GDP) soared, the other, less-publicised well-being measures — like the Genuine Progress Indicator or the Index of Sustainable Economic Welfare — stagnated or declined. While the media was full of adverts for the latest energy-guzzling toys and stories showing the luxurious lifestyles of the celebrities, most people could only have a taste of this lifestyle if they ran down their savings or got deeper into debt on a gamble that the equity on their home would continue to rise. The consumer toys they then purchased were bought “on the cheap” because the environmental filth generated in production is offloaded onto people living in or near the new industrial zones in India, China and elsewhere.

In short, this kind of development was highly unbalanced, characterised by the running down of financial savings and natural capital, followed by the piling up of financial debts — and ecological debts too. As the system became grotesquely unequal it became correspondingly unbalanced. The money, and hence the purchasing power, accumulated to the benefit of a few. They then lent it back into circulation, which maintained aggregate demand. After a point however, those who borrowed the money were too poor to service their debts. And when energy prices rose, this finished them off. The financial debt crisis has been very painful for millions of people but they will mostly survive it; what is not clear is whether humanity will survive the crisis of ecological debt.

The “Limits to Growth” theorists had a phrase to describe all of this: “overshoot”. They didn’t deny that growth could occur for a time at high rates, but they argued that it couldn’t last because humanity cannot permanently run down natural capital and degrade sinks — the air, seas and lands that absorb the wastes of economic activity.

Oil and gas depletion is a run-down in natural capital because natural gas and oil are non-renewable. Using them can only be described as sustainable if a proportion is set aside to build up a renewables-based infrastructure that will deliver not only an equal or greater amount of replacement energy over its lifetime, but also the energy needed to replace the renewables infrastructure itself. To date, nothing of the kind has happened.

Wherever one looks in the world, fossil water supplies have not been used sustainably. Soils are being eroded and not restored at anything near the rate required. Perhaps most seriously of all, the use of the atmosphere as a greenhouse gas dump far exceeds safe levels. In a now well-known article, scientist James Hansen and colleagues calculate that a safe level of CO2 in the atmosphere is probably far below 350, possibly as low as 300-325ppm. Yet the atmospheric concentration is already 387 ppm and rising.

Humanity is thus taking from future generations to feed its consumption now or, rather, a very tiny minority is doing so. And this tiny minority — the political and economic elite — is steering planet Earth towards a catastrophe far greater than the credit crunch. They are steering us directly towards an eco-system crunch.

Seeing the trends together: Nature does not do
ceteris paribus

The true magnitude of this crisis can only be ascertained by viewing all the different problems together. Typically, the various threats and problems are examined by specialist media correspondents and editors, specialists in academia and specialist departments in government and local government. These experts are all working within certain conceptual and administrative conventions that parse reality into bite-size chunks that journalists, researchers, officials and policy makers can cope with. The specialisation seems to help them get a better grasp of the issues.

In a generalised system crisis, the opposite is the case: the compartment-alisation that specialisation brings with it precludes a clear overview, one that would tell us that things are far more dangerous and the dangers likely more imminent than we thought. Thus specialists can tell us that a 1 degree Celsius rise in global temperatures will probably lead to a fall in global crop yields of 10%. But to calculate figures like these, specialists have to make assumptions about the context in which 1 degree C rise will happen. The normal assumption is ceteris paribus: all other things being equal or staying the same. However, in a general system crisis, most relevant “other things” are NOT staying the same. They are changing, and very often in an unfavourable way, because one problem exacerbates the others in a chain reaction that becomes a cascade of knock-on effects. Thus, for example, plants grown in warmer temperatures than they are acclimatised to will need adequate water to suit those altered conditions, and if there is a depleted level of fossil water to draw upon, then crop yields may fall a lot more.

The food crisis

If runaway climate change or the Energy Winters predicted by peak-oil theorists are not gloomy enough for you — if you really want to be frightened — then just consider together some of the well-established trends in global food production:

  1. Climate change, leading to a rise in surface temperatures and a decline in crop yields.
  2. Declining regional water availabilities. Falling water tables in countries populated by half the world’s peoples. According to figures quoted by Lester R. Brown, 175 million Indians consume grain produced with water from irrigation wells that will soon be exhausted.
  3. Soil degradation and erosion, bringing increasing desertification.
    Top soil is eroding faster than new soil formation on perhaps one-third of the world’s cropland.
  4. Increased urbanisation and non-farming activities out-compete food production for land and water use.
  5. Fossil-fuel depletion impacting on fertiliser/pesticide availability and costs, reducing access to the inputs that have increased yields over the last few decades.
  6. Decline of biodiversity of food crops, bringing vulnerability to disease just as pesticide costs rise.
  7. Crops used to feed animals rather than humans as affluent meat-based diets become more common.
  8. Biofuels; grains and crops used to feed cars rather than humans.
  9. Depletion of global phosphorous inputs. There’s no research on peak phosphorous but according to the European Fertiliser Association, phosphorous may begin to run out in the second half of the century. And without phosphorous, crop yields will fall by 20-50%.
  10. Global diseases of bee pollinators. British bee populations slumped 30% in the winter of 2007/8, the result either of pesticides, disease, mites and/or milder winters that encourage them to forage too soon. (The Independent)
  11. Rising world population, increasing at 1.14% per annum or an extra 75 million per year (Wikipedia). The cultivated area per person fell from 0.6 hectares per person in 1950 to 0.25 hectares in 2000. (Limits to Growth 30 Year Update, p. 62)
  12. Overfishing, marine pollution and decline of world fish stocks. A 2003 study by a Canadian-German research team published in Nature concluded that 90 percent of the large fish in the oceans had disappeared over the last 50 years.
  13. The bulk of global grain market in the hands of just three companies. Development of “terminator” seeds to concentrate all seed sales in the hands of a corporate elite.

Failed states

In a May 2009 article “Could food shortages bring down civilization?” in Scientific American, Lester R. Brown argues that some of these trends are creating the context for conflict, the breakdown of political administrations and the emergence of “failed states”. Of course, the disintegration caused by resource wars is one other reason for failed states. As oil, natural gas, water, agricultural land and mineral resources become scarcer, so land grabs or destabilising manoeuvres are made to secure privileged access to them; this often underpins conflicts that, at least on the surface, are about ideology or religion.

The growing number of conflicts then has its own self-feeding dynamic. Increasingly “the market” reacts by growing a security, prisons and armaments sector with a vested interest in further sales, while mass psychology becomes more paranoid and sociopathic. Frightened, hostile groups find it more difficult to co-operate to find positive responses to the situations they find themselves in. Meanwhile, quite apart from the misery of living in them, failed states become sources of refugees, disease, piracy and drugs and, arguably as a consequence, breeding grounds for psychopaths.

Disease, ill health and a global public health crisis

The risks of disease and ill health are crucial. Once again, if we put the trends together the picture is far more alarming than if we look at each issue in isolation:

  1. Climate change, bringing extreme temperature and natural catastrophes, and shifting boundaries for insects and pests like mosquitoes.
  2. Weakened immune systems due to malnutrition, stress, and water, air and soil pollution.
  3. Water shortages, creating problems of basic hygiene and health
  4. A combination of resource wars, corruption and collapse of political administrations, leading to weak or non-existent public-health infrastructures and large populations forced into migration.
  5. Extreme concentration of animal factory farming, creating ideal conditions for mutations of pathogens
  6. Urbanisation and globalisation. Rapid travel between densely populated centres creates optimal conditions for rapid transmission of diseases.

Naturally, there are trends working in the other direction. Most systems have feedback effects, including negative feedbacks that act as stabilisers. Thus, when animal diseases like swine flu sweep around the world, some people stop eating meat either temporarily or for good. That the world is in an economic recession has led to a dramatic decline in air travel, which has probably slowed the spread of swine flu.

Scaremongering versus the reasons to be cheerful

The threats, then, seem both real and in some cases imminent. But to present the picture wholly from the negative side is to be accused of “scare mongering” by those techno-optimists and politicians who are confident that while problems exist, they are still manageable. Such people argue that it is alarmist to emphasise negative trends and worst-case scenarios without also highlighting options for responding to those threats. With regard to food, water and soils there are indeed many options for organic production and ecological agriculture. Possibilities exist to improve soils, manage water resources better, enhance and extend biodiversity, integrate alternative forms of aquaculture and fish production, and disperse the concentrations of animals that have become “disease factories” and, because much of their food is made from it, act as a pressure on the price of grain. There are also ways to improve energy efficiency and to promote renewables and policies like Cap and Share that could lock in the carbon gains made.

The real problem is not a lack of potential responses to the truly colossal threats we face. What is genuinely alarming is that the political-economic establishment has a built-in inertia that stops it responding quickly, effectively and adequately to these threats as they present themselves. And while it is true that it has responded relatively quickly, and certainly on a huge scale, to the banking crisis, this is only because making money is the primary purpose of the economic system. Crucially, even though the threats it poses are far graver, as outlined above, the response to the ecological crisis has been totally different. The vast vested interests and financial clout of the corporate elite are based on a fossil fuel – and carbon-powered status quo that wants to see “business as usual” continue in perpetuity. All of which means that the money men drag their feet when it comes to addressing the ecological crisis.

Take this May 2009 quote [1] from The Guardian, for example

America’s oil, gas and coal industry has increased its lobbying budget by 50%, with key players spending $44.5m in the first three months of this year in an intense effort to cut off support for Barack Obama’s plan to build a clean energy economy.

The spoiler campaign runs to hundreds of millions of dollars and involves industry front groups, lobbying firms, television, print and radio advertising, and donations to pivotal members of Congress. Its intention is to water down or kill off plans by the Democratic leadership to pass “cap and trade” legislation this year, which would place limits on greenhouse gas emissions.

The essence of the problem can be expressed in economic terms: those with access to fossil fuel–based technologies are currently far more productive and therefore have a competitive advantage that allows them to undercut their competitors and make the most money. The wealth thus gained also allows them to undermine their political rivals where it really counts — well-connectedness. It enables direct access to those in positions of political authority so they can influence political agendas. Resources are also made available for campaigns to set agendas within the mass media, and in this way to mould public perceptions and public opinion.

Power arrogance and hubris

There is nothing new in the phenomena of power arrogance and hubris. Since the earliest civilisations, rulers have made decisions and overreached their power in the confident belief that they had God on their side. In more modern times our rulers have believed that nature rewards the fittest, in other words, them.

Irrespective of what point in history they emerge, the starting point of most elites is the comfortable assumption that, as things have typically gone right for them in the past, they will continue to go right in the future. This belief is compounded by the fact that for a long time it has been the “little people” who bear the costs while those higher up the food chain reap the benefits. Power means that they are effectively cocooned from the negative kick-back from their actions. Long before the rulers themselves are successfully challenged and fall — and this typically happens only in the final stages — millions of others have already lost out badly and immense damage has been done.

What we term hubris is the cruel arrogance that arises from a failure of bottom-up feedback in systems where vast social and geographical distances exist between the powerful and the powerless. The punishment of Nemesis, the Greek goddess who was supposed to re-impose limits on those who overstepped their power, typically befalls entire societies before it befalls the rulers. Today the vast distance that separates the global elite from ordinary people is magnified further by the high-power technologies of communications, transport, production and weaponry. Nemesis, when she comes, will be global.

Power relationships in the transition

What to do? Marxist acquaintances of mine would probably suggest armed revolution but that would be futile. It would only enhance and exacerbate the current trends towards greater surveillance, paranoia, police powers and militarisation, a war that the powers-that-be would win before we’re all dragged into the vortex of the ecological crisis.

The situation demands that we re-think what political and economic power involves. Because there are a host of things that can and must be done to re-organise society at the level of the household and local community, there’s no need for people of goodwill to wait for politicians to set an example. The Transition Towns movement has shown that immense potential exists for people to organise to do what they can now to get their homes, gardens, local transport arrangements and communities in order for the coming crisis. Increasingly, local politicians are taking their point of departure from the Transition Initiatives. This shows that power comes not solely, or even mainly, from positions of formal political authority; it comes with having the kind of initiative to which others respond and which acts through the power of personal influence and example.

The exercise of power in human society occurs by means of various initiatives. And these initiatives don’t always need to be big. Many of the biggest and most powerful institutions originally started very small.

As individuals and groups we have both needs and problems. To meet the needs and solve the problems, we structure our activities in purposeful ways. And a purpose pursued over time, through an arranged sequence of activities, is an initiative. When we pursue this purpose with other people, we set up organisations and institutions to help us. We agree (or in an authoritarian system impose!) to shared purposes, develop the skills for attaining them, and then assemble and apply the energy, material and financial resources required.

It is a challenging job to get new organisations off the ground around new purposes, bringing together people who may not know each other, developing and applying new skills, and accumulating the other resources for the job — and all from scratch, too. This process is commonly called “capacity building” and it requires all-round leadership.

Capacity building is a process of empowerment in the sense that the group has a growing capacity to achieve its aims. As groups grow they develop a capacity for planning and designing their activities over time, implementing their decisions and then monitoring and reviewing their results. The more a group can achieve, the more resources it will tend to attract and the more it will get noticed in the political process, irrespective of whether any group member occupies a formal position of political power.

Now that we have exceeded the limits to growth, the new conditions of resource scarcity require many initiatives to meet individual and community needs in different ways, closer to home, with less energy and materials. Transition Initiatives highlight a major area for change, one in which most ordinary people can and must participate: the acquisition of new skills, networking, organising initiatives and developing projects. As this process evolves, it’s inevitable that participants will recognise that the state and politics must also change to complement, rather than undermine, what they’re trying to achieve.

It’s obvious to many that to deal effectively with climate change or environmental chaos, energy is best spent seeking to influence or replace those in power, i.e. people in senior positions in politics and business. Politicians typically pass the buck, however, claiming that citizens should change, that they can’t do much until we are ready. This, however, is nothing but an excuse for not getting down to the issues at hand. The truth is that some things we can do on our own, some with state support and some mainly (or only) at state level. If the state is unwilling to act, we can still get on with things locally and join with others nationally and internationally. And when we do, we build the organisational power and the moral authority to eventually transform the state.

Proximal and distal power

Personal circumstances determine the purposes that people pursue. Most ordinary people have, at best, proximal power — the ability to influence that which is immediate in their lives, e.g. what they buy, who they spend time with and so on. But this kind of proximal influence can be considerably extended by networking together in Transition Initiatives and skilling up on a different model. In the end, more ambitious goals for transformation means influencing and changing the structures of distal power.

Distal power transcends proximal power [2]. It is the world in which high politics, high finance and business operates, often behind the scenes, informally in clubs, in social networks of the well connected, in official offices of state. Distal power is the ability to determine the contexts in which others operate. In terms of political power, this means the ability to influence things like interest rates, public expenditure priorities, programme priorities for grant-aid funding, legal frameworks, minimum standards regulations for health and safety, buildings etc.

The danger of co-option: sticking to transitional purposes

I do not wish to deny the usefulness of intervening in the political arena, nor of trying to influence policy. On the contrary, movements like the Transition Initiatives will hopefully become more able to work the system, i.e. find their way around and use the structures of distal power to develop more resilient communities. At the same time, it is to be hoped that engagement with the system does not lead to compromise. Where movements or individuals engage prematurely with more powerful networks, they tend to get co-opted, lose their own agenda and adopt the agenda of the more powerful players. The danger in our case is that that “involvement” would be manipulated to legitimise “greenwashing” and resource-wasting growth. It is important that we stick to our own purposes.

With the vital caveat about the dangers of co-option in mind, we can nevertheless envisage a process where groups like the Transition Initiatives secure changes in the structures of distal power so that they are more amenable to their different purposes. Specifically, it would involve state structures prioritising resilience as the number one item on the public agenda. Resilience would be seen by all as being not only different from a growth agenda, but incompatible with it. Priorities like public health, social cohesion (a priority for vulnerable people who will otherwise become a source of public-health risk), the conservation and maintenance of sustainable energy supplies, would shift to a position where they have the power to trump the provision of more inessential consumer goods.

We will know we have made it in the U.K. when we rewrite the mission statement of the U.K. Treasury, which currently says that its

aim is to raise the rate of sustainable growth, and achieve rising prosperity and a better quality of life with economic and employment opportunities for all.” Its aim ought to be “to secure economic resilience to protect and ensure that the basic needs of all can be met fairly through assisting transformation of the economy in the face of natural capital depletion and environmental limits.

With this kind of state it would be possible to develop a collaborative working relationship between communities, officials and a community economy sector. This last sector would establish ethical living as its goal. It would help communities provide for their basic needs while adjusting to, and coping with, difficult times. The community economic agenda would prioritise fairness and equity to help maintain social cohesion. And as resources become scarcer, social and community enterprise would stand a better chance of surviving conflicts arising from distribution.

Unless and until we can change the state to support these kinds of processes, it will be necessary to grow our abilities to develop purposes in ways that are largely independent of the structures of distal power. This means the development of confidence, skills and resources that do not rely on anything bestowed by the structures of social authority; we will need to development the ability to use our own unutilised energies for the organisation and management of “powerdown” processes.

Contradictions between different parts of the state
and public sector

Firstly, confronted by the limits to growth, current political-economic establishments are having great difficulty acknowledging that citizens will have to change their lifestyles. On the one hand, there is no desire to sponsor a movement in which people might — horror of horrors — lose interest in shopping. After all, what is growth without consumption?

On the other hand, some politicians recognise that many people are having great difficulty holding onto their “lifestyle packages” and these politicians don’t want to give the impression that they’re going to make life even more difficult for these people. Each of us holds in balance a habitat and consumption throughput that must match an income and credit capacity related to our work and sources of income, and which sustains our dependencies and emotional relationships in ways appropriate to our age, health and aspirations. In a time of generalised crisis, people are subjected to agonising decisions because the choices are no longer about which brands to pick on supermarket shelves, but about how to hold the entire lifestyle together without losing one’s home, seeing one’s relationships break up or being unable to cope in a job whose security is in any case precarious. It is therefore no surprise that establishment-based “green” think-tanks and consultants base policy frameworks on the assumption that the public would not be obliged to substantially change their lifestyles. It is simply too unpalatable a message.

As a result, mainstream politics largely cedes the very space where much of the real work of change is needed: the creation of a movement focused on post-consumerist, low-energy lifestyles. I write “largely” because health-promotion agencies and sustainability officials will typically lend their support to projects that promote allotments, community gardens, local food, warmer homes and the like. But such schemes are far from the mainstream and have tiny budgets. And in terms of political traction, they can be a bit toothless.

The politics of the future is therefore one in which these fringe groups, aided and abetted by officials and practitioners working to an increasingly important public-health agenda, are likely to move increasingly into the mainstream, while “economic development”— the industrial and financial activities of the state and the networks in which they operate —come to be seen as largely irrelevant, are discredited or are (rightly) perceived as operating in a way that is eco-socially toxic.

Government decisions that affect the ways the
public changes

While the state will increasingly recognise that it must urge the public to take action to reduce carbon emissions and unnecessary waste, the reverse of this also holds true: that the public will be more sensitive to whether, and in what ways, major government decisions either enhance or undermine what they are being urged to do. People are increasingly aware that unless society as a whole, and unless nations as a whole, take action on climate change, what they do as individuals and communities is futile.

This is a crucial part of the argument for policies like Cap and Share because it cuts through the backsliding and evasion that currently passes for climate policy. If fossil fuels create climate change they should be banned from sale unless with a permit. Period. The limited permission to sell fossil fuels now is temporary. It arises only because we cannot wean ourselves off our addiction to fossil fuels overnight. The number of permits, denominated in greenhouse gas quantities, has to be reduced as quickly as possible down to zero. A policy like this must also be administered in an equitable manner. In contrast to the European Emissions Trading System, which gives away permits, the fossil-fuel suppliers should have to buy in a Cap and Share system. The bulk of the revenue from these sales should go back to the people, shared out on a per-capita basis. The people need these revenues to invest in establishing their houses and communities as the top priority.

If people are to be encouraged to take action at the proximal level and this action is not to be undermined by actions at the distal level, the frameworks themselves must be changed in a complementary way. Cap and Share is one part of ensuring this happens. But it’s not enough on its own. Consistent industrial, transport and agricultural policies are also needed.

Shaping strategic infrastructure decisions

Over and above the reorganisation of local space (homes, gardens and neighbourhoods), some very large-scale bits of engineering are needed to create the broad-scale renewable-energy and transport systems of the future. The techno systems are so large that national-level strategic political decisions have to be made, with major implications for resource allocation. At this point in time the carbon lobby is far too dominant and well entrenched for government to get behind even the most modest non-carbon energy and transport. It will take time to grow a citizens’ movement with the economic clout, momentum and networked resources needed to change this situation, though the pressure for this change will certainly build.

People who take the climate crisis seriously and start to act in their private lives and community are obviously going to be outraged when government takes the sorts of decisions that they have recently in the U.K. by agreeing to a third runway at Heathrow. In the age of the Internet, people can see now only too clearly what is going on when big government and carbon interests cut deals to develop coal power based on the slender hope that Carbon Capture and Storage will work sufficiently and on time. We are therefore likely to see a growing polarisation against big government and big carbon business alliances that currently have a stranglehold on national energy and transport policy.

The scope for change for millions of people is not simply a matter of individual wishes and willpower. The term “lock in” is often used to describe how our economies and societies operate with a technical infrastructure that is replaced only very slowly and at considerable investment cost. While individual and communities can start to change their lifestyles at the local level to a considerable extent, further change will hinge on decisions taken about engineered infrastructures by the organisations that decide on them.  At some point a full follow-through in ecological transformation will be dependent on huge collective planning and investment decisions about the technical infrastructure of society — the fabric of buildings, the transport systems and the power station architecture.    

I use the word “systems” here deliberately because there is a danger of thinking in terms of individual technologies and not seeing that we are actually talking about larger techno-social systems with cross-economy complementarities. Central to the energy system, for example, is the problem of how to deal with intermittency if renewables are to be used to their maximum capacity. There are clearly ways to deal with this — through matching electricity demand to the supply when it’s available (when the wind blows, batteries for electric cars are charged up) as well as through the development of electrical storage capacity. However, the decisions that need to be taken here are big strategic decisions involving industrial, energy and transport policy.

Furthermore, large-scale engineering and building programmes can develop only at a certain pace, and, while it can perhaps be speeded up if we all accept that an emergency exists or is imminent, limits are still set by the time needed to plan, clarify technological, legal and administrative issues, raise finance, train people and get them together in functioning and effective teams. These time issues cannot be wished away.

Capacity building for ‘Powering Up’

The Transition movement has a good chance, over several years, of making an impact on the “Power Down” agenda, but for a “Power Up” agenda to be realised, well-thought-out, strategic decisions must be made in the fields of energy, industry, agriculture and transport. Ideally, taken together these decisions would comprise a consistent plan. But getting such a plan worked up and implemented is not merely a matter of political will; we also need organisation, resources, logistics and skills. The politics cannot move faster than the build-up of the eco-economic capacity.

Free-market fundamentalists might well say that the state is likely to do a thoroughly bad job if it has too much influence over big infrastructure decisions. They might thoroughly dislike my implied dirigiste argumentation. They might be right. However, rather than states backing the wrong systems, I fear we’re more likely to see a failure of states to back any coherent large-scale system plans at all.

Given the short-term nature of the parliamentary system and the huge scale on which we now have to re-cast the entire energy, transport, agricultural and industrial systems, given the competing vested interests with their rival approaches, given the credit crunch, given peak oil and its capacity to bring the economy to its knees, given the enormous complexity of all these things, I believe that politicians and the state are simply incapable of making strategic decisions on the scale necessary. What we will get instead is a lot of floundering and procrastination disguised with rhetoric. Indeed, although there has been a lot of rhetoric about Green New Deals, there has been almost no spending on climate or environmental agendas.

This situation echoes the ideas of Joseph Tainter: that societies collapse not because of stress surges per se, but because, when stress surges occur, circumstances have become so complex that the authorities are overwhelmed by all the complications to the point of being unable to provide a response and see it through. This dynamic defines the larger and longer term challenge. We are threatened with a future of breakdowns, extreme weather events and epidemics, all observed by an increasingly paralysed state and an elite that masks the collective self-deception using the machines of the PR industry and the mass media. The race will be on to develop a coherent ecological package to forestall the growth of extremist parties. These parties will focus on people’s mass anger and despair and on simplistic messages of hatred — blaming and persecuting scapegoats like ethnic minorities, immigrants, the rich or the growing numbers of environmental refugees.

Can a new movement of ecological activists unfold to the extent that one is needed? Can it move from proximal to distal agendas without co-option? As it evolves, can it find within itself the necessary financial acumen, skills and organisational resources to create realistic and realisable plans? Will it be able to create the minimal necessary renewable-generating capacity and the minimal necessary alternative transport network and cultivational system? Given the collapse in the credibility and legitimacy of the carbon mainstream, can this nascent movement find sufficient popular political support to take over and transform the state in a peaceful process to oversee the development of an alternative ecological resilience package? I believe that yes, of course it can.

Endnotes

  1. http://www.guardian.co.uk/environment/2009/may/12/us-climate-bill-oil-gas
  2. This terminology of ‘proximal power’ and ‘distal power’ is taken from David Smail’s The origins of Unhappiness HarperCollins, 1993)

Energy and water – the real blue-chips

Nate Hagens and Kenneth Mulder

Today’s prices and costs provide a very bad basis for making investment decisions because they reflect temporary relative market scarcities rather than long-run underlying physical ones. The world needs to abandon money as its measure for determining energy and economic policy if it is to invest its scarcest, most limiting resources in the best possible way.

The economy is a wholly owned subsidiary of the environment,
not the reverse.
~ Herman Daly, Steady-State Economics (1977)

Because standard economic analysis relies on money that no longer has any link to the physical world as its measuring stick, it does not adequately account for the physical depletion of its resources. Money, credit and debt can be created with no underlying physical foundation whereas energy and scarce natural resources, not dollars, are what we really have to budget and spend.

Certainly, marginal cost pricing does not reflect true scarcity in a world of non-perfect substitutes. Oil this year (2010) is at roughly the same inflation-adjusted price as it was 35 years ago, yet the world has consumed almost 900 billion barrels in the interim as oil-powered transport became the foundation of global trade. Basing energy and economic policy on dollar-based signals alone may therefore lead to serious long-term dislocations. Instead, calculating our costs in terms of critical natural resources may be a more fundamentally sound investment paradigm.

The two most important natural resources are water and energy. In most cases, each is required to procure the other. First, we use water directly through hydroelectric power generation at major dams, indirectly as a coolant for thermoelectric power plants, and as an input for the production of biofuels. By sector, the two largest consumers of water in the United States are agriculture and electrical power plants. If we count only fresh water, fully 81% of U.S. use is for crop irrigation. For American corn production, an average of 2,100 gallons of irrigation water is required per bushel which yields 2.7 gallons of corn-based ethanol [1]. This means that 206 gallons of water is needed per gallon of gasoline substitute, ethanol, before refining.

Several studies suggest that up to two-thirds of the global population could experience water scarcity by 2050. The shortages will be driven by the agricultural sector, which is currently responsible for up to 90% of global fresh-water consumption. Water shortages could become much more acute if there is widespread adoption of energy-production technologies that require water as a significant input, such as biofuels. If large quantities of water are diverted to energy production because the market dictates this as society’s priority, there would be a significant loss of food production and a decline in human welfare.

The interdependency between water and energy goes both ways. In California, for example, where water is moved hundreds of miles across two mountain ranges, water delivery is responsible for approximately 15% of the state’s total electricity consumption. Cities without nearby reservoirs require energy to pump water from below ground to their citizens. Irrigated crops also require energy, including those crops used for alternative energy production, like corn. Dryland farming produces significantly lower and more volatile crop yields. For example, from 1947-2006, irrigated corn acreage in Nebraska had a 43% higher yield than dryland corn.

Combining figures for the energy return on energy invested (EROI) with the water invested per unit of energy for various technologies suggests that fossil fuels also have a strong advantage in terms of their energy return on water invested (EROWI). The most water-efficient fossil electricity source we and colleagues examined yielded almost 600 times the energy per unit of water invested as did the most water-efficient biomass source of electricity reviewed [2]. So, not only is the development of bio-energy on a scale sufficient to be a significant source of energy likely to have a strong, negative impact upon the availability of fresh water, but it would require energy inputs far in excess of what we have traditionally allocated to the fossil-energy sector.

Water requirements for energy production
(litres per megawatt hour)

Petroleum Extraction

10-40

Oil Refining

80-150

Oil shale surface retort

170-681

NGCC* power plant, closed loop cooling

230-30,300

Coal integrated gasification combined cycle

~900

Nuclear power plant, closed loop cooling

~950

Geothermal power plant, closed loop tower

1900-4200

Enhanced oil recovery

~7600

NGCC*, open loop cooling

28,400-75,700

Nuclear power plant, open loop cooling

94,600-227,100

Corn ethanol irrigation

2,270,000-8,670,000

Soybean biodiesel irrigation

13,900,000-27,900,000

*Natural Gas Combined Cycle

The water required for various energy technologies [5]. Unlike energy, water can sometimes be recycled. For example, cooling water withdrawn for use by a nuclear power plant may be returned and withdrawn again farther downstream to irrigate biofuel crops.

Energy derived from finite and renewable resources is a function of multiple inputs including land, labour, and raw materials — any of which may become a limiting factor for energy production. A technology might have a high EROI and yet require sufficient levels of scarce, non-energy inputs as to be extremely restricted in potential scale. For example, the amount of land required for biofuels is between 100 and 1,000 times more than the land area required for conventional fossil fuels. In addition to non-energy inputs, energy technologies vary in their waste outputs and impact on environment. Within the biofuels class itself, there is a large disparity of pesticide and fertiliser requirements. For example, per unit of energy gained, soybean biodiesel requires just 2% of the nitrogen, 8% of the phosphorous, and 10% of the pesticides that are needed for corn ethanol, inputs that impact groundwater quality and stream runoff [1]. As such, future refinements to an energy and water policy framework will probably have to look beyond energy and water supplies.

How much water does it take to provide energy?

The net Energy Return on Water Invested (EROWI) for selected fuels Source: (2) This graph has a logarithmic scale so the bars rrepresent orders of magnitude. The actual amounts are shown at the top of each bar. As it takes 250 times more water to produce ethanol from sugar cane to run a car than it does to run one on ordinary diesel, the availability of water is likely to place a tight limit on biofuel production.

In a world constrained by energy and increasing environmental limitations, but with a growing human population, adherence to accounting frameworks based on natural capital will be essential for policymakers to assess energy, water and other limiting factors. Such a framework will help us discard energy dead-ends that would waste our remaining high-quality fossil sources and, perhaps equally importantly, our time and effort. The world as a whole needs to build a renewable-supply investment portfolio that achieves the highest returns on our scarcest inputs rather than on money that is based on nothing scarce at all.

Endnotes

  1. “Environmental, Economic, and Energetic Costs and Benefits of Biodiesel and Ethanol Biofuels”. Hill et al,. Proc. Acad. Nat. Sci. 103:11206-11210 (2006).
  2. “Burning Water: Energy Return on Water Invested”, Mulder, K., Hagens, N., Fisher, B. Volume 39, Number 1/February, 2010 AMBIO — Journal of Human Environment
  3. “The Water Intensity of the Plugged-In Automotive Economy”, Webber, M., King, C., Environmental Science & Technology 2008 42 (12), 4305-4311
  4. Cleveland, C. “Net Energy from the Extraction of Oil and Gas in the United States”. Energy, 2005, 30, 769–782.
  5. “Another Biofuels Drawback: The Demand for Irrigation”, Robert F. Service, Science 23 October 2009:Vol. 326. no. 5952, pp. 516 – 517

Transition thinking – The Good Life 2.0

Davie Philip

We need to make an evolutionary leap in the way we do things if we are to make a controlled, planned transition to a post-industrial, low-carbon society. The initiatives developed by the nascent Transition Towns movement suggest that we are up to the challenge, and provide a model for how the more resilient communities needed for the future might be built.

The Emergency

As we slide deeper into an economic recession, one question we often hear is, “how long is this downturn going to last?” There is a commonly held belief that it is only a matter of time before we get back to ‘business as usual’. But what many fail to grasp is the severity of the problems we face and the ‘once-in-a-species’ opportunity that these challenges offer us.

The shape of the recovery is being hotly debated within economic circles, with three possibilities being mooted. One, the possibility of a ‘V’-shaped recovery in which the economy quickly bounces back, is falling out of favour, displaced by the idea that there will be a ‘double-dip’ — a rapid partial recovery followed by another sharp decline. Others still think that the recovery will be ‘U’-shaped — that growth will be restrained and that the economy will take a bit longer to recover. In a 2009 Post Carbon Institute posting, Richard Heinberg argued that the recovery will actually be ‘L’-shaped; that instead of returning to high levels of growth, society will have to get used a much lower level of economic activity. As economic growth is dependent on abundant and growing energy supplies, the expected constraints in global oil availability mean that a ‘V-‘ or ‘U’-shaped recovery is highly unlikely.

Of course, as well as attempting to ‘fix the economy,’ we will need to radically decrease our vulnerability to an over-dependence on oil, coal and gas. This means looking beyond the obvious, i.e. electricity supply or fuel, and rethinking our food, health and almost all other systems. Currently everything we do is dependent upon a non-renewable, climate-changing source of energy: oil. I was born in the year that global oil discovery peaked and in the 45 years since we’ve failed to discover more oil than we had back then. Today we consume four barrels of oil for every barrel discovered and have reached, or will soon reach, the peak in global oil production.

Not that it needs to be explained here, but ‘peak oil’ is the geological term used to describe the time when the amount of oil that can be extracted reaches its limit and begins to decline. Extracting oil after the peak becomes more difficult and expensive, and the amount of oil produced begins to decrease. The term ‘peak oil’ usually relates to worldwide production, but the majority of oil-producing countries have now reached the point where their oil production has peaked and is now declining. Before the recent economic crash, when oil was touching on close to $150 a barrel, awareness of the oil issue was high. With the price now around $80 a barrel, and with the economy collapsing, society seems to be forgetting all about the energy problem.

Climate change has also been slipping from our awareness recently, just as the urgency of taking appropriate responses has become more apparent. According to the Climate Safety Report published by the Public Interest Research Centre in 2008, climate change is accelerating more rapidly and dangerously than even the IPCC had expected. The earlier-than-predicted onset of ice-free Arctic summers will cause additional heating, greenhouse gas emissions and sea-level rise, over and above what has been predicted to date. The melting glaciers, the famine in Darfur, the changing monsoon patterns, the enduring drought in Australia and the widespread loss of species — these all illustrate the global nature of the crisis. Climate change is already impacting the majority of people on this planet, but despite apparent scientific consensus on the issue, the debate in the media, here in Ireland at least, still focuses on whether or not it is happening at all.

Some scientists have warned that the rapid disappearance of all kinds of life, from bacteria and insects to plants and animals, is as dangerous as climate change, and closely related to it. In a Eurobarometer survey taken in 2008, most Irish people said they did not know anything about the loss of biodiversity, despite up to half of all Europe’s birds, butterflies, fish and animals being threatened with extinction.

So it is clear that we are facing not a financial, energy, climate or even a biodiversity crisis per se, but a systemic crisis for which we are completely unprepared. We have now reached the long-predicted ‘limits to growth’ and find ourselves facing a convergence of challenges that are inextricably connected. Through over-population and over-consumption we have overshot Earth’s carrying capacity. We now urgently need to take an evolutionary leap in the way we do things and to design systems from the bottom up in a way that fits the planet’s carrying capacity. And we need to do this together.

The availability of cheap and easily available energy has led to an unprecedented time of individualism; now most of us know the characters of our favourite soap opera better than the people we live amongst. We might be the first generation who has no need for real neighbours, and that loss of community means a loss of resilience. Our global economy is designed to work without any need for community. Our food and energy come from halfway around the world and we have no relationship with the people who produce it. Very little is local and as Robert Putnam notes in Bowling Alone, social capital has been falling in the US and over the past 25 years, attendance at club meetings has fallen 58 percent, family dinners are down 33 percent and having friends visit has fallen 45 percent. It looks like just when we are going to have to have to depend a lot more on our neighbors, we are actually doing less and less together.

We’ve been aware of these unfolding crises for a long time. The “Limits to Growth” report was written over 35 years ago, climate change has been known about for over a century and resource depletion is an issue that many have understood and been trying to alert more people to for decades. The biggest difficulty we face is that the majority of the planet’s citizens still haven’t grasped that a problem exists at all. Or if they do, they can’t comprehend the scale of it.

What I want to explore is how we rise to the challenge of engaging as many people as possible in making the transition to a post-industrial society. How do we build sustainable communities that can survive and thrive in a future that will be characterised by change, uncertainty and surprise? Can we do this in a way that liberates the ingenuity of the human spirit and galvanizes our most powerful impulses to create and evolve? Can the new social movement called Transition Towns be a catalyst towards the development of low-carbon, resilient and healthy communities we need? Are the emerging Transition initiatives up to the challenge, and what more could this nascent movement be doing?

The Good Life 2.0

Web 2.0 is the term used to signify the new upgraded Internet, which is community-based, interactive and user-driven. As the emerging crisis is too overwhelming for individuals to face alone, I want to propose a ‘Good Life 2.0’ — a response to the challenges of the current era based on an “upgrade” of the ideas of the 1970s self-sufficiency movement and the values of community, together with everything we have learned in the 30 years since.

Do you remember The Good Life, the TV show that ran from 1975 to ’78? One of Britain’s favourite sit-coms, it popularised the notion of getting out of the rat race and being self-sufficient. Tom and Barbara, Richard Briers’ and Felicity Kendal’s characters, converted their suburban garden into a farm, kept pigs and chickens and grew their own food.

The first series was launched just after the first oil shock, amid one of the UK’s worst economic downturns. It was actually based on the writings of John Seymour, the father of self-sufficiency. His books give a comprehensive introduction to the ‘Good Life’, covering everything from growing your own crops, animal husbandry, wine making and bee keeping, to building, renewable energy and much, much more. John gained considerable experience living a self-sufficient life, first in Suffolk, then Pembrokeshire and then in Ireland, where he established the School of Self-Sufficiency in Co. Wexford. He also travelled around the world and wrote and made films exposing the unsustainability of the global industrial food system. Sadly, on the 14th of September 2004, John Seymour passed away at the ripe old age of 90.

Over the last five years of his life I had an opportunity to spend some time with John. We campaigned together to stop the planting of genetically engineered sugar beet, which culminated with seven of us in a New Ross court-house. But that’s another story.

Surprisingly, John once told me that he was actually wrong about self-sufficiency. On a visit to his smallholding in Wexford, he shared with me his conclusion that it would be too difficult to sustain the noble effort of living off-grid and providing for all your own needs on your own land. Self-sufficiency wasn’t enough. His new thinking was something he called co-sufficiency — self-reliant local communities that could provide the social relationships essential for facing an uncertain future, together. Seymour predicted that we would need strong, connected communities that could work together to meet their needs and make the transition to a post-industrial economy that is not dependent on fossil fuel.

If Tom and Barbara of The Good Life were striving to be self-sufficient today, they would probably have joined their local Transition Town group and be engaged in the building of food and energy security with their neighbours.
That’s ‘The Good Life 2.0’, a community approach to building local resilience, because, as Richard Heinberg writes in his book Powerdown, “personal survival depends on community survival.”

Making the Transition

At the heart of the Transition Towns movement is the building of relationships with our neighbours and working with them on projects of common interest. In the coming years we will need to live more locally and work co-operatively in our neighborhoods and towns. The process is taking root throughout the world, with thousands of communities now adopting the model. Even the fictional town of Ambridge in the Radio 4 programme The Archers has become a Transition Town.

Construction work at Cloughjordan ecovillage in early summer 2010. Photo: Albert Bates.

I often say that the Transition process was born in Ireland, a statement with some truth to it. Rob Hopkins, who is recognised as the founder of the Transition movement, lived in Ireland for 12 years and it was here that the seeds were sown. I first met Rob in 1997 at one of the Sustainable Earth Fairs at Maynooth University where I was studying. This was an early gathering of advocates of sustainability from around Ireland, and Rob’s passion for Permaculture and sustainability was infectious even then. It was around this time that Marcus McCabe, one of Ireland’s early adopters of Permaculture, held a meeting on the subject of eco-villages in Monaghan. He expected about 20 people to turn up but so many people arrived that it had to be relocated to a bigger venue. At this meeting Rob met Greg Allen and Gavin Harte and, with them, set up Baile Dulra, an idea for a sustainable community based on permaculture principles; they spent the next couple of years developing the idea and looking for land. This project was the precursor to the Hollies in West Cork and the Ecovillage in Cloughjordan, Co. Tipperary (where I now live).

Following an amicable parting of ways, Rob went on, with his partner Emma and Thomas & Ulrike Riedmuller, to found The Hollies, the centre for practical sustainability in West Cork, Ireland. From here Rob developed and taught on the two-year Permaculture course in Kinsale community college. In the years leading up to the development of the energy-descent action plan prototype by Rob and his students in Kinsale, FEASTA had held a number of events that introduced and popularised the ideas of peak oil and explored the ramifications for our economy and society. I remember seeing Colin Campbell speaking at a FEASTA event in Dublin in the year 2000 and just not getting the importance of the geological turning point of peak oil. It wasn’t until FEASTA’s landmark three-day conference in Thurles in 2002 that I got it. There, Richard Douthwaite, David Fleming, Colin Campbell and many other ‘early toppers’ really illuminated the issues at stake. Interestingly, the event was called Before the Wells Run Dry, Ireland’s Transition to Renewable Energy. Indeed, it was this conference, and of course Greg Green and Barry Silverstone’s now classic film The End Of Suburbia, that were responsible for many of Ireland’s sustainability advocates’ ‘peak oil moment’. Sustainability, seen through the lens of resource depletion, makes even more urgent the work of developing resilient communities, permaculture and systems thinking.

In Kinsale in 2004, on the first day of a new term, Rob Hopkins and his Permaculture 2nd-year students watched The End of Suburbia and heard a talk that followed by Colin Campbell. This “peak oil double bill” culminated in what Rob describes as a week of PPSD, post-petroleum stress disorder in the college, and led to the development of the Kinsale Energy Descent Action Plan as their end-of-year project. This document, and the landmark event that launched it in 2005, changed the landscape of peak-oil response forever. David Holmgren, Richard Heinberg and a host of others including our now Minister for Energy, Eamon Ryan, spent three days in West Cork planning how we would best manage our transition to a low-energy future. This event led in turn to the formation of a new group in the town driven by some of the students, local activists and residents of Kinsale. Known as Kinsale Transition Town, the group enjoyed some initial successes, but it wasn’t until Rob and Emma relocated from West Cork to Totnes in Devon, England, that the Transition process emerged. In Totnes, Rob began working with locals on what would become Transition Town Totnes, the Transition process and the Transition Network.

In a few short years, Transition culture has gone viral and an international network of Transition initiatives has rapidly grown as cities, islands, towns and rural villages sign up to the process. Thousands now exist, with communities setting out to radically reduce their carbon emissions while at the same time developing further their ability to cope with a future that is very uncertain. Transition is a process that offers pathways, new ways of thinking and a set of tools that could help us respond to the shocks that we will inevitably face.

The Transition model helps communities come together to develop the capability to provide most of its essential needs — food, energy, water and raw materials — from a number of local sources. The model ensures that in the event of a system failure, communities can look after themselves. The process comes with a ‘cheerful disclaimer’ that states that it is a social experiment on a massive scale; it is not known if it will work.

One of the most striking characteristics of ‘Transition’ communities is their positivity and creativity; the process is purposely designed to be non-threatening and engaging, so people feel at ease to explore different ideas and approaches. Its strength lies in its ability to bring all sorts of people together and to be greater than the sum of its parts. There is room for everyone.

Planning our energy descent

Through a loose process Transition initiatives set out to build the capacity of the community to plan its energy descent. The goal is to envision a desirable post–fossil fuel future and then “backcast” the incremental steps needed to realise that future. This is called an Energy Descent Action Plan, and is the process at the core of Transition thinking: planning how to wean ourselves off fossil-fuel energy and do a lot more for ourselves.

“The concept of energy descent, and of the Transition approach, is a simple one: that the future with less oil could be preferable to the present, but only if sufficient creativity and imagination are applied early enough in the design of this transition.” Rob Hopkins, The Transition Handbook

Underpinning the Transition process is a belief that life with less energy is inevitable and that it’s better to plan for it than be taken by surprise. This may sound like prudent advice, but it is surprisingly difficult for us to imagine the future and plan the transition needed to get there.

Instead of waiting for someone else, or some other agency, to do something about the emergency we face, the communities embarking on the Transition process are endeavoring to act for themselves, knowing that if they don’t do something, no-one will. Examples of Transition initiatives include starting community gardens and allotments, creating community-supported agriculture systems (CSAs), localising energy production, starting car clubs and “future proofing” their houses and public buildings. Some have even introduced local currencies to keep money circulating in their local area. All of these build community and offer the potential of an extraordinary transformation in our economic and social systems.

From vulnerability to resilience

Transition initiatives maintain that building local resilience will help us weather the fast-approaching storms. The flip-side of vulnerability, resilience is the ability of a system to hold together and function in the face of disruption and shock. This means having the capacity to deal with adversity and to find new ways of doing things when current approaches become redundant or fail. An authoritative definition is offered from a report commissioned by the International Council for Science (ICSU) in preparation for the 2002 World Summit on Sustainable Development (WSSD):

“Resilience, for social-economic-ecological systems, is related to

(a) the magnitude of novelty or shock that the system can absorb and remain within a given state

(b) the degree to which the system is capable of self-organization

(c) the degree to which the system can build capacity for learning and adaptation

When massive transformation is inevitable, resilient systems contain all of the necessary components for renewal and reorganization. Intentional management that builds resilience can sustain social-economic-ecological systems in the face of surprise, unpredictability and complexity.”

Because the possibility is rising fast of abrupt breakdown in our vital social, economic and environmental systems, we need to find ways to accelerate the building of resilient local communities.

We in Ireland are more reliant on imported oil for our energy requirements than almost every other European country. This leaves us very vulnerable to interruptions in supply. In response to this, Transition initiatives facilitate the design of a ‘powerdown’ strategy that helps us cope with such shocks and at the same time greatly increases our ‘well-being’ and resilience. Although debate about energy futures and the top-down strategies needed for a low-carbon economy has focused mainly on technology and supply-side replacements for fossil fuels, much work is underway by Transition initiatives on reducing our energy demand and exploring the prospects for community responses to this “new emergency”.

Going further

So, are Transition initiatives up to the challenge of building community resilience and preparing us for the new emergency? One problem that needs to be overcome is that, generally, the people attracted to Transition are the usual suspects, making it a case of preaching to the converted. This emerging social movement must therefore explore ways to move beyond the familiar demographic, get their message out to the ‘unconverted’ and bring much greater diversity into their initiatives.

Ecology is all about relationships; the more diverse a system, the better. In Transition initiatives in Ireland and the UK, I’ve noticed a predominance of greenies, slow foodies, and the middle-class, middle-aged, white, urban types. Where are the working classes, middle Ireland, the new ethnic communities, faith communities, the youth and the traditional left? If the movement fails to build diversity and get these sectors of society on board, prospects are poor for a gentle descent.

One barrier to getting more people involved in Transition may be a perception that it is full of “New Age” principles or ‘hippy dippy’ notions. Nothing turns some people off more than the thought of being asked to sit in a circle and share how they feel about the state of the world or, worse, themselves. No-one wants to feel uncomfortable, that they don’t know enough to participate or that it all might be some kind of cult. This constitutes a massive barrier to the building of resilient communities and the Transition movement needs to consider how to develop relationships with people that hold different values.

We need to live with those people in our communities with whom we don’t necessarily share the same worldview or values. We’re all in this together and we need to get through it together. Transition initiatives need to liaise with other local groups and networks as well as finding innovative ways of creating forums for bringing people together and maximising the opportunities to share ideas and freely express opinions. That in many respects it does so already is one of its strengths; the movement offers many examples of the bringing together of young and old, rich and poor, male and female, the business man and the activist — even the right and the left.

Building a mass movement demands an understanding of where people are at. It means not turning people off before they hear what we have to say. For me, it highlights the need, above all, for flexibility and the ability to adapt the language and techniques we use. Discussing the potential for safe communities, warm homes and local jobs might be more palatable to traditional middle Ireland than attempting to, initially at least, discuss climate change and peak oil with them.

In 2008, Paul Chatterton and Alice Cutler of the Trapese Collective, a Popular Education non-profit organisation, wrote a critique of the Transition process called “The Rocky Road to a Real Transition.” They argued that unless we identify and confront the vested interests in the media, government and business, and reject all systems of control, we will be unable to make a real transition. This was an interesting critique as in my experience many people involved in Transition initiatives see themselves as activists and aren’t opposed to challenging power. As Rob Hopkins points out in his response to the paper, ‘I make no apologies for the Transition approach being designed to appeal as much to the Rotary Club and the Women’s Institute as to the authors of this report.’ One of the strengths of the Transition movement is the blame-free dialogue it encourages in this same spirit.

People involved in Transition tend not to dismiss global movements struggling for justice around the world and many, in their own capacity, do what they can to support the oppressed. However, the Transition process is more about coming together to demonstrate what is possible and what can be done rather than taking to the streets. Transition nurtures a common purpose: to facilitate the self-organisation needed to rebuild community and at the same time massively reduce our fossil-fuel dependency.

In response to the Trapese Collective’s argument that Transition shies away from confronting politics, Hopkins writes in his blog that, for him, ‘Transition is something that sits alongside and complements the more oppositional protest culture, but is distinctly different from it. It is a different tool. It’s designed in such a way as to come in under the radar.’

When you scratch the surface, Transition is highly subversive, but most of all it’s positive and can be fun. As Richard Heinberg says, ‘Transition is more like a party than a protest march.’ We can’t smash the system entirely as we are part of it. We need to short-circuit the system by building an alternative one that works.

I do think that the future will be rocky. And I understand, too, that while planning for a gentle transition is one thing, there’s a concern out there that the energy descent may not be as slow as the classic slope of Hubert’s curve suggests. For most, it seems, the future may be chaotic, confusing and violent. The nexus of challenges will probably lead to increases in criminal activity and, in many places in the world, to war or unrest, both civil and transnational. In some places, the new emergency will most likely bring with it a rise in extreme right-wing and religious fundamentalism. It is said that it is easier to slide down a slope rather than climb up it, but as we move into the unchartered waters of energy descent, we may find that preparing for civil disruption is just as important as building our local economies and growing our own food.

Emergency preparedness

I am often accused by some friends of being overly pessimistic and constantly told that things are not as bad as I think they are. Conversely, many colleagues accuse me of being overly optimistic and that things are a lot worse than I think they are. On top of the credit crunch, rising unemployment and the unfolding environmental crises, what if, as Feasta’s New Emergency conference suggests, we are actually on the cusp of collapse? Will the community building and bottom-up approaches of Transition be enough? At the 2009 Transition gathering in London, Richard Heinberg was beamed through the Internet to give a presentation titled “Emergency Preparedness.” In this session he introduced the idea of top-down emergency planning and the formation of disaster-management groups. He stressed that the development of these would not compete with Transition strategies; they would just be working at a different level.

While disaster-management groups don’t sound as much fun as Transition initiatives, this approach will be very much required as part of our response to the problems we face; the two are not mutually exclusive. Heinberg also stressed that we will all have to get ready for rapid and deep shocks and play a part in the development of short-term emergency plans for our communities, regions and nations. Emphasising the need for more preparedness for such rapid change, he proposed that Transition initiatives should form working groups to identify people and organisations with something to offer emergency planning. He suggested contacting mainstream organisations responsible for the systems needed in an emergency in our area, working with them to develop contingency plans and strategies for emergency preparedness in their own fields and helping them scale these up quickly.

Building resilient communities

For ten years I have been involved with a disparate group of people in a unique and innovative project that is striving to create a fresh blueprint for modern sustainable living in rural North Tipperary where resilience and community are very much to the fore.

I have moved into one of the first houses to be occupied in this innovative development, which is integrating with the existing town of Cloughjordan; this makes it a very different model to most established eco-villages. Work has started on over 30 eco-homes and 45 families from the project have now located to Cloughjordan. The development, which is being progressed by a community-owned educational charity, Sustainable Projects Ireland, is a lot more than an eco-housing estate and has many elements that will provide community resilience.

Homes will be surrounded by an edible landscape of fruit and nut trees, vegetables and herbs. A tree nursery has been established to nurture hundreds of trees for planting along the pathways and in the community gardens that are dispersed throughout the residential area. Larger community and personal allotments have been established to provide more space for growing food. The remaining eco-village land is dedicated to farming and woodland. The Cloughjordan Community Farm is located on 28 acres on the outskirts of the village and also utilises two fields on the eco-village land. This example of CSA, Community Supported Agriculture, has been a fantastic way to build a bridge between the residents of the new community and the old.

This paper has focused on the need to build community resilience in a world that is rapidly crashing around us. From its Irish roots the Transition process has taken off and provides a way to mainstream the ideas of sustainability and help us to revitalise our local economies. I believe that Transition, although still a young movement, can be a catalyst towards the development of low-carbon, resilient and healthy communities. Its strength will be its ability to share what is working and what is not through a global network of motivated and enthusiastic people who are learning how to cope and adapt to the challenges of these turbulent times.

There is an old African proverb, quoted by Al Gore in his Nobel Prize acceptance speech: “If you want to go quickly, go alone. If you want to go far, go together.” To make the transition, we need to go far and we need to go quickly. To maintain a good life in the 21st century we will need to rebuild our social, economic and environmental systems, localise our communities and most importantly, we will have to learn to do all this together.

Here are ten steps or action points that I think could help us to develop our personal and community resilience.

Understand the context – We need to understand where we are at and be observant of limits, both ecological and our own. Awareness of what the converging challenges facing us are and what the responses might be is an essential first step in developing our resilience to cope.

Take a helicopter view – We live in a complex living system so we have to be able to see systems at work. Being able to take a whole systems perspective is of the highest importance and it is fundamental to understand our human systems through the lens of living systems. Taking a Permaculture course will give us the tools to begin to apply this thinking to the development of local resilience.

Build community – Make social networks real, get to know your neighbours and develop a stronger sense of place. Focus on building relationships with others and developing trust. In these times it is vital that we break out of our specialist silos of interest, establish partnerships and strengthen the bonds with others pursuing similar objectives. Join or start a Transition Initiative.

Map your assets – As a community, identify and strengthen your physical, social and human assets. Value the tangible and the intangible, especially the skills and talents of local people.

Develop new skills – In a changing world new skills and knowledge will be needed. Identify what capacities you and your community need to build.

Powerdown – Do everything you can to reduce your dependency on fossil fuels. Future proof your homes and buildings and minimise your need to travel.

Eat locally – Learn to produce food, start a garden and build relationships with local food producers. Develop community food systems.

Lead – As a key aspect of resilience is the ability to self-organise; a leader in this context needs to help people move away from a culture of dependency and become leaders themselves. We need to equate leadership not with being in charge but rather with the ability to inspire initiative and new thinking with those around us.

Catalyse – The journey to resilience will be a challenging one. New capacities are required — ones that catalyse new thinking and action. The ability to kindle a shared vision or a common purpose is vital.

Keep learning – Education happens throughout life, formally and informally and reflecting on, and learning from, our collective experiences will build resilience.

The supply of money in an energy-scarce world

Richard Douthwaite

Money has no value unless it can be exchanged for goods and services but these cannot be supplied without the use of some form of energy. Consequently, if less energy is available in future, the existing stock of money can either lose its value gradually through inflation or, if inflation is resisted, be drastically reduced by the collapse of the banking system that created it. Many over-indebted countries face this choice at present — they cannot preserve both their banking systems and their currency’s value. To prevent this conflict in future, money needs to be issued in new, non-debt ways.

The crux of our present economic problems is that the relationship between energy and money has broken down. In the past, supplies of money and energy were closely linked. For example, I believe that a gold currency was essentially an energy currency because the amount of gold produced in a year was determined by the cost of the energy it took to extract it. If energy (perhaps in the form of slaves or horses rather than fossil fuel) was cheap and abundant, gold mining would prove profitable and, coined or not, more gold would go into circulation enabling more trading to be done. If the increased level of activity then drove the price of slaves or steam coal up, the flow of gold would decline, slowing the rate at which the economy grew. It was a neat, natural balancing mechanism between the money supply and the amount of trading which worked rather well.

In fact, the only time it broke down seriously was when the Spanish conquistadors got gold for very little energy — by stealing it from the Aztecs and the Incas. That damaged the Spanish economy for many years because it meant that wealthy Spaniards could afford to buy from abroad rather than using the skills of their own people, which consequently did not develop. It was an early example of “the curse of oil” or the “paradox of plenty,” the paradox being that that countries with an abundance of non-renewable resources tend to develop less than countries with fewer natural resources. Britain suffered from this curse when North Sea oil began to come ashore, distorting the exchange rate and putting many previously sound firms out of business.

19th-century gold rushes were all about the conversion of human energy into money as the thousands of ordinary 21st-century people now mining alluvial deposits in the Amazon basin show. Obviously, if supplies of food, clothing and shelter were precarious, a society would never devote its energies to finding something that its members could neither eat, nor live in, and which would not keep them warm. In other words, gold supplies swelled in the past whenever a culture had the energy to produce a surplus. Once there was more gold available, its use as money made more trading possible, enabling a society’s resources to be converted more easily into buildings, clothes and other needs.

Other ways of converting human energy into money have been used besides mining gold and silver. For example, the inhabitants of Yap, a cluster of ten small islands in the Pacific Ocean, converted theirs into carved stones to use as money. They quarried the stones on Palau, some 260 miles away and ferried them back on rafts pulled by canoes, but once on Yap, the heavy stones were rarely moved, just as no gold has apparently left Fort Knox for many years. According to Glyn Davies’ mammoth study, The History of Money, the Yap used their stone money until the 1960s.

Wampum, the belts made from black and white shells by several Native American tribes on the New England coast, is a 17th-century example of human-energy money. Originally, the supply of belts was limited by the enormous amount of time required to collect the shells and assemble them, particularly as holes had to be made in the shells with Stone Age technology – drills tipped with quartz. The currency was devalued when steel drill bits enabled less time to be used and the last workshop drilling the shells and putting them on strings for use as money closed in 1860.

The last fixed, formal link between money and gold was broken on August 15, 1971, when President Nixon ordered the US Treasury to abandon the gold exchange standard and stop delivering one ounce of gold for every $35 that other countries paid in return. This link between the dollar and energy was replaced by an agreement that the US then made with OPEC through the US-Saudi Arabian Joint Commission on Economic Cooperation that “backed” the dollar with oil. [1] OPEC agreed to quote the global oil price in dollars and, in return, the US promised to protect the oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coups. This arrangement is currently breaking down.

The most important link between energy and money today is the consumer price index. The central banks of every country in the world keep a close eye on how much their currency is worth in terms of the prices of the things the users of that currency purchase. Energy bills, interest payments and labour costs are key components of those prices. If a currency shows signs of losing its purchasing power, the central bank responsible for managing it will reduce the amount in circulation by restricting the lending the commercial banks are able to do. This means that, if energy prices are going up because energy is getting scarcer, the amount of money in circulation needs to become scarcer too if it is to maintain its energy-purchasing power.

A scarcer money supply is a serious matter because the money we use was created by someone somewhere going into debt, and if there is less money about, interest payments make those debts harder to repay. Money and debt are co-created in the following way. If a bank approves a loan to buy a car, the moment the purchaser’s cheque is deposited in the car dealer’s account, more money — the price of the car — comes into existence, an amount balanced by the extra debt in the purchaser’s bank account. Consequently, in the current monetary system, the amount of money and the amount of debt are almost equal and opposite. I say “almost” as borrowers have more debt imposed on them every year because of the interest they have to pay. If any of that interest is not spent back into the economy by the banks but is retained by them to boost their capital reserves, there will be more debt than money.

Until recently, if the banks approved more loans and the amount of money in circulation increased, more energy could be produced from fossil-fuel sources to give value to that money. Between 1949 and 1969 — the heyday of the gold exchange standard under which the dollar was linked to gold and other currencies had exchange rates with the dollar — the price of oil was remarkably stable in dollar terms. But when the energy supply was suddenly restricted by OPEC in 1973, two years after the US broke the gold-dollar link, and again in 1979, the price of energy went up. There was just too much money in circulation for it to retain its value in relation to the reduced supply of oil.

The current “credit crunch” came about because of a huge increase in the price of energy. World oil output was almost flat between September 2004 and July 2008 for the simple reason that the output from major oil fields was declining as fast the production from new, smaller fields was growing. Consequently, as more money was lent into circulation, oil’s price went up and up, taking the prices of gas, coal, food and other commodities with it. The rich world’s central bankers were blasé about these price increases because the overall cost of living was stable. In part, this was because lots of cheap manufactured imports were pouring into rich-country economies from China and elsewhere, but the main reason was that a lot of the money being created by the commercial banks’ lending was being spent on assets such as property and shares that did not feature in the consumer price indices they were watching. As a result, they allowed the bank lending to go on and the money supply — and debt — to increase and increase. The only inflation to result was in the price of assets and most people felt good about that as it seemed they were getting richer, on paper at least. The commercial banks liked it too because their lending was being backed by increasingly valuable collateral. What the central banks did not realise, however, was that their failure to rein in their lending meant that they had broken the crucial link between the supply of energy and that of money.

This break damaged the economic system severely. The rapid increase in energy and commodity prices that resulted from the unrestricted money supply meant that more and more money had to leave the consumer-countries to pay for them. The problem with this was that a lot of the money being spent was not returned to the countries that spent it in the form in which it left. It went out as income and came back as capital. I’ll explain. If I buy petrol for my car and part of the price goes to Saudi Arabia, I can only buy petrol again year after year if that money is returned year after year to the economy from which my income comes. This can happen in two ways, one of which is sustainable, the other not. The sustainable way is that the Saudis spend it back by buying goods and services from Ireland, or from countries from which Ireland does not import more than it exports. If they do, the money returns to Ireland as income. The unsustainable way is that the Saudis lend it back, returning it as capital. This enables Ireland to continue buying oil but only by getting deeper and deeper into debt.

As commodity prices rose, the flow of money to the energy and mineral producers increased so rapidly that there was no way that the countries concerned could spend it all back. Nor did they wish to do so. They knew that their exports were being taken from declining resources and that they should invest as much of their income as possible in order to provide an income for future generations when the resources were gone. So they set up sovereign wealth funds to invest their money, very often in their customers’ countries. Or they simply put their funds on deposit in rich-country banks.

The net result was that a lot of the massive increase in the flow of income from the customers’ economies became capital and was lent or invested in the commodity consumers’ economies rather than being spent back in them. This was exactly what had happened after the oil price increases in 1973 and 1979. The loans meant that, before the money became available again for people to spend on petrol or other commodities, at least one person had to borrow it and spend it in a way that converted it back to income.

This applied even if a sovereign wealth fund invested its money in buying assets in a consumer economy. Suppose, for example, the fund bought a company’s outstanding shares rather than a new issue. The sellers of the shares would certainly not spend the entire amount they received as income. They would place most of their money on deposit in a bank, at least for a little while before they bought other assets, and people other than the vendors would have to borrow that money if it was going to be spent as income. As a result, it often took quite a lot of borrowing transactions before the total sum arrived back in people’s pockets.

For example, loans to buy existing houses are not particularly good at creating incomes whereas loans to build new houses are. This is because most of the loan for an existing house will go to the person selling it, although a little will go as income to the estate agent and to the lawyers. The vendor may put the money on deposit in a bank and it will have to be lent out again for more of it to become income. Or it may be invested in another existing property, so someone else gets the capital sum and gives it to a bank to lend. A loan for a new house, by contrast, finances all the wages paid during its construction so a lot of it turns into income. The building boom in Ireland was therefore a very effective way of getting the money the country was over-spending overseas and then borrowing back converted into incomes in people’s pockets. Direct foreign borrowing by governments to spend on public sector salaries is an even more effective way of converting a capital inflow into income.

We can conclude from this that a country that runs a deficit on its trade in goods and services for several years, as Ireland did, will find that its firms and people get heavily in debt because a dense web of debt has to be created within that country to get the purchasing power, lost as a result of the deficit, back into everyone’s hands. This is exactly why the UK and United States are experiencing debt crises too. The US has only had a trade surplus for one year — and that was a tiny one — since 1982 and the UK has not had one at all since 1983.

Table 1: The worst external debtors per $1,000 of GDP in 2006

1

Ireland

$6,251.97

2

United Kingdom

$3,530.89

3

Netherlands

$2,887.82

4

Switzerland

$2,836.01

5

Belgium

$2,686.21

6

Austria

$1,843.11

7

Sweden

$1,554.06

8

France

$1,551.52

9

Denmark

$1,471.46

10  

Portugal

$1,413.50

DEFINITION: Total public and private debt owed to non-residents repayable in foreign currency, goods, or services. Per $ GDP figures expressed per 1,000 $ gross domestic product.
Source: CIA World Factbooks 18 December 2003 to 18 December 2008

Table 2: Ireland’s gross external debt triples over five years

CSO data for the final quarter of each year (m)

2002

521,792

2003

636,925

2004

814,446

2005

1,132,650

2006

1,338,747

2007

1,540,240

2008

1,692,634

2009

1,611,396

Table 3: The world’s biggest balance of payments deficits at the height of the boom in 2007

Deficit, millions

Ranking of absolute size of deficit

Population, millions

Deficit per head

Greece

-$44,400

6

11.0

$4,036

Spain

-$145,300  

2

41.1

$3,535

Ireland

-$14,120  

13

4.0

$3,530

Australia

-$56,780  

4

19.7

$2,882

United States

-$731,200

1

294

$2,486

Portugal

-$21,750

10  

10.1

$2,153

United Kingdom

-$119,200

3

59.3

$2,010

Romania

-$23,020

9

22.3

$1,032

Italy

-$51,030  

5

57.4

889

Turkey

-$37,580  

7

71.3

$527

France

-$31,250  

8

60.1

$520

South Africa

-$20,630  

11

45.0

$458

Poland

-$15,910  

2

38.6

$412

It is notable that all the eurozone countries experiencing a debt crisis — the “PIIGS” Portugal, Ireland, Italy, Greece and Spain — appear in this table and that the three worst deficits on a per capita basis are those of Greece, Spain and Ireland. The countries in italics have their own currencies and are thus better able to correct their situations.

Source: CIA World Factbook, 18 December 2008, with calculations by the author.

The debts incurred by the current account–deficit countries were of two types: the original ones owed abroad and the much greater value of successor ones owed at home as loans based on the foreign debt were converted to income. Internal debt — that is, debt owed by the state or the private sector to residents of the same country — is much less of a burden than foreign debt but it still harms a country by damaging its competitiveness. It does this despite the fact that paying interest on the debt involves a much smaller real cost to the country since most of the payment is merely a transfer from one resident to another. (The remainder of the payment is taken in fees by the financial services sector and the increase in indebtedness has underwritten a lot of its recent growth.)

Internal debt is damaging because a country with a higher level of internal debt in relation to its GDP than a competing country will have higher costs. This is because, if the rate of interest is the same in both countries, businesses in the more heavily indebted one will have to allow for higher interest charges per unit of output than the other when calculating their operating costs and prices. These additional costs affect its national competitiveness in exactly the same way as higher wages. Indeed, they are the wages of what a Marxist would call the rentier class, a class to which belongs anyone who, directly or indirectly, has interest-bearing savings. A country’s central bank should therefore issue annual figures for the internal-debt to national income ratio.

While internal debt slows a country up, external debt can cause it to default. In their book This Time Is Different, Carmen Reinhart and Ken Rogoff consider external debt in two ways — in relation to a country’s GNP and in relation to the value of its annual exports.

Table 4: How oil imports commandeered an increased share of Ireland’s foreign earnings.


Mineral fuel imports

GNP

Fuel cost as % of GNP

Exports

Fuel cost as % of export earnings

2001

2,219

98,014

2.26

92,690

2.39

2002

1,932

106,494

1.81

93,675

2.06

2003

1,969

117,717

1.67

82,076

2.40

2004

2,814

126,096

2.23

84,409

3.33

2005

4,020

137,265

2.93

86,732

4.63

2006

4,719

152,456

3.10

88,772

5.32

2007

5,728

161,210

3.55

88,571

6.47

2008

6,595

158,343

4.17

86,618

7.61

Source: CSO data with calculations by the author.

The second ratio is the more revealing because exports are ultimately the only means by which the country can earn the money it needs to pay the interest on its overseas borrowings. (A country’s external debt need never be repaid. As its loans become due to be repaid they can be replaced with new ones if its creditors are confident that it can continue to afford to pay the interest.) The book examines 36 sovereign defaults by 30 middle-income countries and finds that, on average, a country was forced to default when its total public and private external debt reached 69.3% of GNP and 230% of its exports.

Poorer countries lend to the world’s richest ones

Graph 2: Rich countries have borrowed massively from “developing” and “transition” countries over the past ten years. This graph shows the net flow of capital. The funds borrowed came predominantly from energy and commodity export earnings. Source: World Situation and Prospects, 2010, published by the UN.

Table 5: The most over-indebted countries at the height of the boom in 2007

 

Total state & private external debt, billions

Export

earnings billions

Ratio

total

external debt to exports

GDP

billions

Ratio

total

external debt to GDP

1

United Kingdom

$10,450  

$442.2

2360%

2,674

391%

2

Ireland

$1,841  

$115.5

1590%

268

687%

3

United States

$12,250  

$1,148

1070%

14,093

87%

4

France

$4,396  

$546

810%

2,857

154%

5

Switzerland

$1,340  

$200.1

670%

492

272%

6

Australia

$824.9  

$142.1

580%

1,015

81%

7

Netherlands

$2,277  

$456.8

500%

871

261%

8

Italy

$2,345  

$502.4

470%</span>

2.303

102%

9

Spain

$1,084  

$256.7

420%

1,604

68%

10

Belgium

$1,313  

$322.2

410%

504

261%

11

Germany

$4,489  

$1,354

330%

3,649

123%

12

Japan

$1,492  

$678.1

220%

4,911

30%

Countries that exceed the average level at which countries in the Reinhart and Rogoff study defaulted are marked in a darker shade.

As Table 5 shows, almost a dozen rich countries are in danger of default by the Reinhart-Rogoff criteria. The total amount of debt in the world in 2010 is roughly 2.5 times what it was ten years ago in large part as a result of the spend-and-borrow-back process. This means that there is 2.5 times as much money about, but not, of course, 2.5 times as much energy. If much of that new money was ever used to buy energy, the price of energy would soar. In other words, money would be devalued massively as the money-energy balance was restored. The central banks are determined to prevent this happening, as we will discuss in a little while.

World debt more than doubles in ten years

Graph 3: Rich-country debt has grown remarkably in the past ten years because of the amount of lending generated by capital flows from fossil energy– and commodity-producing nations was used to inflate asset bubbles. The emerging economies, by contrast, invested borrowed money in increasing production. As a result, their debt/GDP ratio declined. Source: The Economist.

Most of the world’s increased debt is concentrated in richer countries. Their debt-to-GDP ratio has more than doubled whereas in the so-called “emerging economies” the debt-to-GDP ratio has declined. This difference can be explained by adapting an example given by Peter Warburton in his 1999 book, Debt and Delusion. Suppose I draw 1,000 on my overdraft facility at my bank to buy a dining table and chairs. The furniture store uses most of its margin on the sale to pay its staff, rent, light and heat. Say 250 goes this way. It uses most of the rest of my payment to buy new stock, say, 700. The factory from which it orders it then purchases wood and pays its costs and wages. Perhaps 650 goes this way, but since the wood is from overseas, 100 of the 650 leaks out of my country’s economy. And so I could go on, following each payment back and looking at how it was spent and re-spent until all the euros I paid finally go overseas. The payments which were made to Irish resident firms and people as a result of my 1,000 loan contribute to Irish national income. If we add up only those I’ve mentioned here — 1,000 + 250 + 700 + 550 — we can see that Irish GDP has increased by 2,500 as a result of the 1,000 debt that I took on. In other words, the debt-to-GDP ratio was 40%.

As debt increases, US economy grows by less and less

Graph 4: Because borrowings have been invested predominantly in purchasing assets rather than in production capacity, each increase in borrowing in the US has raised national income by less and less. The most recent bout of borrowing — to rescue the banking system — actually achieved negative returns because it failed to stop the economy contracting. Graph prepared by Christopher Rupe and Nathan Martin with US Treasury figures dated 11 March 2010. Source: http://economicedge.blogspot.com/2010/04/guest-post-and-more-on-most-important.html

Now suppose that rather than buying furniture, I invest my borrowed money in buying shares from someone who holds them already, rather than a new issue. Of the 1,000 I pay, only the broker’s commission and the taxes end up as anyone’s income. Let’s say those amount to 100. If so, the debt-to-GDP ratio is 1000%.

So one reason why the debt burden has grown in “rich” countries and fallen in “emerging” ones is the way the debt was used. A very much higher proportion of the money borrowed in some richer countries went to buying up assets, and thus bidding up their prices, than it did in the poorer ones. After a certain point in the asset-buying countries, it was the rising price of assets that made their purchase attractive, rather than the income that could be earned from them. Rents became inadequate to pay the interest on a property’s notional market value, while in the stock market, the price-earnings ratio rose higher and higher.

Only a small proportion of the money created when the banks lent money to buy assets was spent in what we might call the real economy, the one in which everyday needs are produced and sold. The rest stayed as what the money reform activist David J. Weston called “stratospheric money” in his contribution to the New Economics Foundation’s 1986 book The Living Economy; in other words, money that moves from bank account to bank account in payment for assets, with very little of it coming down to earth. The fraction that does flow down to the real economy each year is normally balanced — and sometimes exceeded — by flows in the other direction such as pension contributions and other forms of asset-based saving. The flows in the two directions are highly unstable, however, not least because those who own stratospheric assets know that they can only convert them to real-world spending power at anything like their current paper value if other people want to buy them. If they see trouble coming, they need to sell their assets before everyone else sees the trouble too and refuses to buy. This creates nervousness and an incentive to dump and run.

If all asset holders lost all faith in the future and wanted to sell, prices would fall to zero and the loans that the banks had secured on their value would never be repaid. The banks would become insolvent, unable to pay their depositors, so the huge amounts of money that were created when the asset-backed loans were approved would disappear, along with the deposits created by loans given out to finance activities in the real economy. In such a situation, the deposit guarantees given by governments would be of no avail. The sums they would need to borrow to honour their obligations would be beyond their capacity to secure, particularly as all banks everywhere would be in the same situation.

No-one wants such a situation so, since a decline in asset values could easily spiral downwards out of control, the only safe course is to keep the flow of money going into the stratosphere greater than that coming out. This keeps asset prices going up and removes any reason for investors to panic and sell. The problem is, however, that maintaining a positive flow of money into the stratosphere depends on having a growing economy. If the economy shrinks, or a greater proportion of income has to be spent on buying fuel and food because their prices go up, then less money can go up into the stratosphere in investments, rents and mortgage repayments. This causes asset values to fall and could possibly precipitate an investors’ stampede to get into cash.

In effect, the money circulating in the stratosphere is another currency — one that has only an indirect relationship with energy availability and which people use for saving rather than to buy and sell. Because there is a fixed one-to-one exchange rate between the atmospheric currency and the real-world one, the price of assets has to change for inflows and outflows to be kept in balance. As we’ve just discussed, the banking system will collapse if asset values fall too far, so governments are making heroic efforts to ensure that they do not. As 20% of the assets involved are owned by 1% of the population in Britain and Ireland (the figure is 38% in the US), this means that governments are cutting the services they deliver to all their citizens in order to keep the debt-money system going in an effort to preserve the wealth of the better-off.

In 2007, the burden imposed on the real economy by the need to support the stratospheric economy became too great. The richer countries that had been running balance of payments deficits on their current accounts found that paying the high energy and commodity prices, plus the interest on their increased amount of external debt, plus the transfer payments required on their internal ones, was just too much. The weakest borrowers — those with sub-prime mortgages in the US — found themselves unable to pay the higher energy charges and service their loans. And, since many of these loans had been securitised and sold off to banks around the world, their value as assets was called into question. Banks feared that payments that they were due from other banks might not come through as the other banks might suddenly be declared insolvent because of their losses on these doubtful assets. This made inter-bank payments difficult and the international money-transfer system almost broke down.

All asset values plunged in the panic that followed. Figures from the world’s stock markets show that the FTSE-100 lost 43% between October 2007 and February 2009 and that the Nikkei and the S&P 500 lost 56% and 52% respectively between May-June 2007 and their bottom, which was also in February 2009. All three indices have since recovered some of their previous value but this is only because investors feel that incomes are about to recover and increase the flow of funds into the stratosphere to support higher levels. They would be much less optimistic about future prices if they recognised that, in the medium term at least, a growing shortage of energy means that incomes are going to fall rather than rise.

This analysis of the origins of the current crisis leads to four thoughts that are relevant to planning the flight from Vesuvius:

  1. It is dangerous and destabilising for any country, firm or individual to borrow from abroad, even if they are borrowing their own national currency. Net capital movements between countries should be prohibited.
  2. An inflation is the best way of relieving the current debt crisis. An attempt to return the debt-GNP ratio to a supportable level by restricting lending would be a serious mistake. Instead, money incomes should be increased.
  3. A debt-based method of creating money cannot work if less and less energy is going to be available. New ways of issuing money will therefore need to be found.
  4. New ways of borrowing and financing are going to be required too, since, as incomes shrink because less energy can be used, fixed interest rates will impose an increasing burden.

We will discuss these in turn.

1. Borrowing from abroad

We have already discussed the problems that servicing foreign debt can create and, in view of these, it is hard to see why any country should ever borrow abroad at all. Foreign capital creates problems when it enters a country and further problems when it leaves. When it comes in, it boosts the country’s exchange rate, thus hurting firms producing for the home market by making imports cheaper than they would otherwise be. It also hurts exporters, reducing their overseas earnings when they convert them into their national currency. As a result, when the loan has to be repaid, the country is in a weaker position to do so than it was when it took the loan on — its imports are higher and its exports reduced. Foreign borrowing is so damaging that it has even been claimed that the Chinese policy of pegging its currency to the dollar at a rate which makes its exports very attractive and keeping that rate by lending a lot of the dollars it earns back was designed by military strategists to destroy America’s manufacturing base. [2] The strategists are said to have argued that no superpower can maintain its position without a strong industrial sector, so lending back the dollars China earned was a handy way to destroy the US ability to fight a major war.

For a country with its own currency, the alternative to borrowing abroad is to allow the value of its currency to float so that its exports and imports are always in balance and it never need worry about its competitiveness again. As eurozone countries no longer have this option, they have very few tools to keep exports and imports in balance. Indeed, it’s hard to know what they should do to deter foreign borrowing because, while the state may not borrow abroad itself, its private sector may be doing so. In Ireland, for example, the net indebtedness of Irish banks to the rest of the world jumped from 10% of GDP in 2003 to over 60% four years later, despite the fact that some of the state’s own borrowings were repaid during these years. All the state could have done to stop this borrowing would have been to restrict lending that was based on the overseas money. For example, it could have placed a limit on the proportion of its loans that a bank could make to the property sector, or stipulated that mortgages should not exceed, say, 90% of the purchase price and three times the borrower’s income. This would have dampened down the construction boom and limited the growth of incomes and thus import demand. But such indirect methods of control are not nearly as potent as allowing the market to achieve balance automatically. Their weakness is a very powerful argument for breaking up the eurozone.

Although one might accept that borrowing abroad for income purposes comes at the cost of undermining its domestic economy, it could be argued that capital inflows for use as capital will allow a country develop faster than would otherwise be the case. Let’s see if this argument stands up.

The danger with bringing capital into a country with its own currency is that part of it will become income in the ways we discussed and thus boost the exchange rate and undermine the domestic economy. So, if we restrict the capital inflow to the actual cost of the goods that the project will need to import, is that all right? Well, yes, it might be. It depends on the terms on which the capital is obtained, and whether the project will be able to earn (or save) the foreign exchange required to pay the investors. If the world economy shrinks as we expect, it is going to be harder to sell the product and its price may fall. This might mean that interest payments took a greater share of the project’s revenue than was expected, causing hardship for everyone else. So, as we will discuss later, the only safe approach is for the foreign investor to agree to take a fixed portion of the project’s foreign revenue, whatever that is, rather than a fixed sum of money based on the interest rate. This would ensure that the project never imposed a foreign exchange burden on the country as a whole. The foreign capital would be closer to share capital than a loan. This should be the only basis that any country should allow foreign capital in.

At present, however, so much foreign capital is moving around that its flow might need to be limited to prevent destabilising speculation. As Reinhart and Rogoff point out, “Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically.” One solution to this, again for countries with their own currencies, is to have two exchange rates; one for capital flows, the other for current (i.e. trading) flows. This would mean that people could only move their capital out of a country if others wanted to move theirs in. Rapid, speculative flows would therefore be impossible. Ireland had this system when it was part of the Sterling Area after World War 2 until Britain abandoned it around 1979. It was known as the dollar premium. South Africa had a capital currency, “the financial rand,” which gave it financial stability throughout the apartheid period. It dropped it in 1995.

Keeping capital and current flows apart would greatly reduce the power of the financial sector. After they were divided, no-one would ever say as James Carville, President Clinton’s adviser, did about the bond markets in the early 1990s when he realised the power they had over the government, that they “can intimidate everybody.”

Of course, the threat to its power will mean that the financial sector opposes capital-flow currencies tooth and nail. Yet its power, and income, must be reduced, especially if incomes in other sectors of the economy are going fall. According to the OECD, the share of GDP taken by the financial sector (defined as “financial intermediation, real-estate, renting and business activities”) in the United States increased from 23% to 31% between 1990 to 2006. The increase in the UK was over 10% to about 32% and around 6% in both France and Germany.

The rise in the sector’s share of corporate profits was even more striking. In the United States, for example, it was around 10% in the early 1980s but peaked at 40% in 2007. Mentioning these figures, Már Gudmundsson, the deputy head of the Monetary and Economic Department of the Bank for International Settlements, told a conference in the US in 2008 that the financial sector needed to become smaller and less leveraged: “That is the only way the sector can be returned to soundness and profitability in the environment that is likely to prevail in the post-crisis period.” I would put it much more strongly. The British sector’s income is bigger than those of agriculture, mining, manufacturing, electricity generation, construction and transport put together, and the sector’s dominance in other economies is similar. It is a monstrous global parasite that needs to be cut down to size.

The financial tail wags the societal dog

Graph 5: The financial sector in five rich-country economies, the US, Japan, the UK, France and Germany, has been taking an increasing share of national income over the past twenty years, in part because of the increasing debt burden. The sector is now bigger in each country than all the productive sectors put together. Source OECD.

2. Allowing inflation to correct the debt-income imbalance

As the amount of energy in a litre of petrol is equivalent to three weeks’ hard manual work, having power at one’s disposal can make one much more productive. A country’s income is consequently largely determined by its direct and indirect energy use. So, whenever less energy is available, incomes fall and debt becomes harder to service unless an inflation is allowed to increase money incomes and reduce the real burden imposed by the debt.

This has been demonstrated by two real-world experiments. After OPEC’s first oil-supply restriction in 1973, the world’s central banks allowed the inflation created by the higher oil prices to go ahead. By reducing the burden of existing debt, this made room for the commercial banks to lend out the money that the oil producers were unable to spend. The US came out of the recession quickly and Britain did not have one at all. Developing countries did well too even though they were paying more for their oil, because the prices of their commodity-exports increased more rapidly than the rate of interest they were being charged on their external debts and, although they borrowed from abroad, their debt-export ratio stayed constant.

After the 1979 restriction, however, the story was different. This time, the central banks resolved to maintain the purchasing power of their monies in relation to energy and they did all they could to fight the inflation. In Britain, an ultra-tight fiscal and monetary policy was adopted. Interest rates were set at 17% and government spending cuts of £3.5bn were announced for the following year. The result was the “Winter of Discontent” with 29m working days lost through strikes, the largest annual total since the General Strike in 1926. In the US, the prime rate reached 20% in January 1981. Unemployment, which had dropped steadily from 1975 to 1979, began to rise sharply as the deflationary measures were put into effect.

The OPEC countries themselves moved from a small balance of payments deficit of $700 million in 1978 to a surplus of $100 billion in 1980. They put most of this money on deposit in US and British banks. But what were the banks to do with it, since none of their rich-country customers wished to borrow at the prevailing interest rates, especially as their domestic economies had been thrown into recession by the central banks’ policies? The answer was to lend it to the developing countries, since the loans made to these countries after 1973 had worked out well.

The result was the Third World Debt Crisis. In 1970, before it began, the 15 countries which it would affect most severely — Algeria, Argentina, Bolivia, Brazil, Bulgaria, Congo, Cote d’Ivoire, Ecuador, Mexico, Morocco, Nicaragua, Peru, Poland, Syria and Venezuela — had a manageable collective external public debt. It amounted to 9.8% of their collective GNP and took 12.4% of their export income to service. [3] By 1987, these same nations’ external public debt was 47.5% of their GNP and servicing it took 24.9% of their export earnings. This doubling had come about because they had borrowed abroad to avoid inflicting drastic spending cuts on their people like those made in the US and the UK. They could, of course, have avoided borrowing and tried to manage on their reduced overseas earnings but this would have forced them to devalue, which would have itself increased their foreign debt-to-GDP ratio. They really had very few options.

Just how deep the commodity-producing countries devaluations would have had to have been is indicated by the decline in net farm incomes in the US. In 1973, these reached a record high of $92.1 billion but by 1980 they had dropped back to $22.8 billion, largely because of a decline in overseas demand, and by 1983 they were only $8.2 billion. Not surprisingly in view of the high interest rates, many US farmers went bankrupt. In 1985, 62 agricultural banks failed, accounting for over half of the nation’s bank failures that year. The high interest rates were also a factor a few years later when 747 US mortgage lenders, the savings and loans or “thrifts” had to be bailed out. The cost was around $160 billion, of which about $125 billion was paid by the US government.

Money’s exchange rate with energy fell in both 1973 and 1979 because there was too much of it in circulation in relation to the amount of oil available. In 1973, the inflation removed the surplus money by requiring more of it to be used for every purchase. The results were generally satisfactory. In 1979, by contrast, an attempt was made to pull back the price of oil by jacking up interest rates to reduce the amount of money going into circulation and thus, over a period of years, bring down the “excessive” money stock. The higher rates caused immense hardship because they ignored the other side of the money=debt equation, the debt that was already there. So, by setting their faces against allowing money to be devalued in relation to energy, the central banks’ policies meant that a lot of the debt had to be written off. Their policy hurt them as well as everyone else. Yet the same policy is being used again today.

So which policy should be adopted instead to remove the current surplus stratospheric money? Incomes in the real economy need to be increased so that they can support current asset values in the stratosphere and, since there is insufficient energy to allow growth to increase them, inflation has to be used instead. Attempts to use 1979-type methods such as those being promoted by the Germans for use in the eurozone will only depress incomes, thus making the debt load heavier. A lot of the debt would then have to be written off, causing the banking system to implode. Even if this could be avoided, such a policy can never work because the money is being taken from the real economy rather than the stratospheric one.

The choice is therefore between allowing inflation to reduce the debt burden gradually, or trying to stop it and having the banking system collapse, overwhelmed by bad debts and slashed asset values. In such a situation, account holders’ money would not lose its value gradually. It could all disappear overnight.

The inflation we need cannot be generated with debt-based money as it was in 1973 because in today’s circumstances that would increase debts more rapidly than it raised incomes. As Graph 4 shows, each $100 borrowed in 2006-7 in the US only increased incomes by around $30 whereas in 1973, the return was higher and the level of debt the country was carrying in relation to its income was about half what it is today. The same applies to most other OECD countries; their public and private sectors are already struggling with too much debt and do not wish to take on more.

The solution is to have central banks create money out of nothing and to give it to their governments either to spend into use, or to pay off their debts, or give to their people to spend. In the eurozone, this would mean that the European Central Bank would give governments debt-free euros according to the size of their populations. The governments would decide what to do with these funds. If they were borrowing to make up a budget deficit — and all 16 of them were in mid-2010, the smallest deficit being Luxembourg’s at 4.2% — they would use part of the ECB money to stop having to borrow.

They would give the balance to their people on an equal-per-capita basis so that they could reduce their debts, or not incur new ones, because private indebtedness needs to be reduced too. If someone was not in debt, they would get their money anyway as compensation for the loss they were likely to suffer in the real value of their money-denominated savings. Without this, the scheme would be very unpopular. The ECB could issue new money in this way each quarter until the overall, public and private, debt in the eurozone had been brought sufficiently down for employment to be restored to a satisfactory level.

The former Irish Green Party senator, Deirdre de Burca, has improved on this idea. She points out that (1) we don’t want to restore the economy that has just crashed and (2) that politicians don’t like giving away money for nothing. Her suggestion is that the money being given to ordinary citizens should not just be lodged in their bank accounts but should be sent to them as special credits which could only be used either to pay off debt or, if all their debts were cleared, to be invested in projects linked to the achievement of an ultra-low-carbon Europe. These could range from improving the energy-efficiency of one’s house to investing in an offshore wind farm or a community district heating system.

Creating money to induce an inflation may seem rather odd to those who advocate buying gold because they fear that all the debt-based money that has been created recently by quantitative easing will prove inflationary by itself. What they have failed to recognise is that most of the money they are worried about is in the stratosphere and has very few ways of leaking down. It is in the accounts of financial institutions and provides the liquidity for their trading. The only way it can reach people who will actually spend it rather than investing it again is if it is given out as loans but, as we saw, that is not happening. Even paying it out to an institution’s staff as wages and bonuses won’t work too well as most are already spending as much as they can and would use any extra to buy more assets, thus keeping it stratospheric.

A common argument against using inflation to reduce debts is bound to be trotted out in response to this idea. It is that, if an inflation is expected, lenders simply increase their interest rates by the amount they expect their money to fall in value during the period of the loan, thus preventing the inflation reducing the debt burden. However, the argument assumes that new loans would still be needed to the same extent once the debt-free money creation process had started. I think that is incorrect. Less lending would be needed, the investors’ bargaining position would be very weak and interest rates should stay down. Incomes, on the other hand, would rise. As a result, if the debtors continued to devote the same proportion of their incomes to paying off any new or remaining loans, they would be free of debt much more quickly.

3. The end of debt-based money

Output in today’s economy gets a massive boost from the high level of energy use. If less and less energy is going to be available in future, the average amount each person will be able to produce will decline and real incomes will fall. These shrinking incomes will make debts progressively harder to repay, creating a reluctance both to lend and to borrow. For a few years into the energy decline, the money supply will contract as previous years’ debts are paid off more rapidly than new ones are taken on, destroying the money the old debts created when they were issued. This will make it increasingly difficult for businesses to trade and to pay employees. Firms will also have more problems paying taxes and servicing their debts. Bad debts and bankruptcies will abound and the money economy will break down.

Governments will try to head the breakdown off with the tool they used during the current credit crunch — producing money out of nothing by quantitative easing. So far, the QE money they have released, which could have been distributed debt-free, has been lent to the banks at very low interest rates in the hope that they will resume lending to the real economy. This is not happening on any scale because of the high degree of uncertainty — is there any part of that economy in which people can invest borrowed money and be sure of being able to pay it back?

Some better way of getting non-debt money into the real economy is going to have to be found. In designing such a system, the first question that needs to be asked is “Are governments the right people to create it?” The value of any currency, even those backed by gold or some other commodity, is created by its users. This is because I will only agree to accept money from you if I know that someone else will accept it from me. The more people who will accept that money and the wider range of goods and services they will provide in return, the more useful and acceptable it is. If a government and its agencies accept it, that increases its value a lot.

As the users give a money its value, it follows that it should be issued to them and the money system run on their behalf. The government would be an important user but the currency should not be run entirely in its interest, even though it will naturally claim to be acting on behalf of society, and thus the users, as a whole. Past experience with government-issued currencies is not encouraging because money-creation-and-spend has always seemed politically preferable to tax-and-spend and some spectacular inflations that have undermined a currency’s usefulness have been the result. At the very least, an independent currency authority would need to be set up to determine how much money a government should be allowed to create and spend into circulation from month to month and, in that case, the commission’s terms of reference could easily include a clause to the effect that it had to consider the interests of all the users in taking its decisions.

This raises two more design questions. The first is “Should the government benefit from all the seignorage, the gain that comes from putting additional money into circulation, or should it be shared on some basis amongst all the users?” and the second is “Should the new money circulate throughout the whole national territory or would it be better to have a number of regional systems?” I am agnostic about the seignorage gains. My answer depends on the circumstances. If the new money is being issued to run in parallel with an existing currency, giving some of the gains to reward users who have helped to develop the system by increasing their turnover could be an important tool during the set-up process. On the other hand, if the new money was being issued to replace a collapsed debt-based system, giving units to users on the basis of their previous debt-money turnover would just bolster the position of the better off. It would be better to allow the state to have all the new units to spend into use in a more socially targeted way.

A more definite answer can be given to the second question. Different parts of every country are going to fare quite differently as energy use declines. Some will be able to use their local energy resources to maintain a level of prosperity while others will find they have few energy sources of their own and that the cost of buying their energy in from outside leaves them impoverished. If both types of region are harnessed to the same money, the poorer ones will find themselves unable to devalue to improve their exports and lower their imports. Their poverty will persist, just as it has done in Eastern Germany where the problems created by the political decision to scrap the ostmark and deny the East Germans the flexibility they needed to align their economy with the western one has left scars to this day.

If regional currencies had been in operation in Britain in the 1980s when London boomed while the North of England’s economy suffered after the closure of its coal mines and most of its heavy industries, then the North-South gap which developed might have been prevented. The North of England pound could have been allowed to fall in value compared with the London one, saving many of the businesses that were forced to close. Similarly, had Ireland introduced regional currencies during the brief period it had monetary sovereignty, a Connacht punt would have created more business opportunities west of the Shannon if it had had a lower value than its Leinster counterpart.

Non-debt currencies should not therefore be planned on a national basis or, worse, a multinational one like the euro. The EU recognises 271 regions, each with a population of between 800,000 and 3 million, in its 27 member states. If all these had their own currency, the island of Ireland would have three and Britain 36, each of which could have a floating exchange rate with a common European reference currency and thus with each other. If it was thought desirable for the euro to continue so that it could act as a reference currency for all the regional ones, its independent currency authority could be the ECB. In this case, the euro would cease to be the single currency. It would simply be a shared one instead.

The advantages from the regional currencies would be huge:

  1. As each currency would be created by its users rather than having to be earned or borrowed in from outside, there should always be sufficient liquidity for a high level of trading to go on within that region. This would dilute the effects of monetary problems elsewhere.
  2. Regional trade would be favoured because the money required for it would be easier to obtain. A strong, integrated regional economy would develop, thus building the region’s resilience to shocks from outside.
  3. As the amount of regional trade grew, seignorage would provide the regional authority with additional spending power. Ideally, this would be used for capital projects.
  4. The debt levels in the region would be lower, giving it a lower cost structure, as much of the money it used would be created debt free.

In addition to the regional currencies, we can also expect user-created currencies to be set up more locally to provide a way for people to exchange their time, human energy, skills and other resources without having to earn their regional currency first. One of the best-known and most successful models is Ithaca Hours, a pioneering money system set up by Paul Glover in Ithaca, New York, in 1991 in response to the recession at that time. Ithaca Hours is mainly a non-debt currency since most of its paper money is given or earned into circulation but some small zero-interest business loans are also made. A committee controls the amount of money going into use. At present, new entrants pay $10 to join and have an advertisement appear in the system’s directory. They are also given two one-Hour notes – each Hour is normally accepted as being equivalent to $10 – and are paid more when they renew their membership each year as a reward for their continued support. The system has about 900 members and about 100,000 Hours in circulation, a far cry from the days when thousands of individuals and over 500 businesses participated. Its decline dates from Glover’s departure for Philadelphia in 2005, a move which cost the system its full-time development worker.

Hours has no mechanism for taking money out of use should the volume of trading fall, nor can it reward its most active members for helping to build the system up. It would have to track all transactions for that to be possible and that would require it to abandon its paper notes and go electronic. The result would be something very similar to the Liquidity Network system that Graham Barnes describes in the next article.

New variants of another type of user-created currency, the Local Exchange and Trading System (LETS) started by Michael Linton in the Comox Valley in British Columbia in the early 1990s, are likely to be launched. Hundreds of LETS were set up around the world because of the recession at that time but unfortunately, most of the start-ups collapsed after about two years. This was because of a defect in their design: they were based on debt but, unlike the present money system, had no mechanism for controlling the amount of debt members took on or for ensuring that debts were repaid within an agreed time. Any new LETS-type systems that emerge are likely to be web based and thus better able to control the debts their members take on. As these debts will be for very short periods, they should not be incompatible with a shrinking national economy.

Complementary currencies have been used to good effect in times of economic turmoil in the past. Some worked so well in the US in the 1930s that Professor Russell Sprague of Harvard University advised President Roosevelt to close them down because the American monetary system was being “democratized out of [the government’s] hands.” The same thing happened to currencies spent into circulation by provincial governments in Argentina in 2001 when the peso got very scarce because a lot of money was being taken out of the country. These monies made up around 20% of the money supply at their peak and prevented a great deal of hardship but they were withdrawn in mid-2003 for two main reasons. One was pressure from the IMF, which felt that Argentina would be unable to control its money supply and hence its exchange rate and rate of inflation if the provinces continued to issue their own monies. The other, more powerful, reason was that the federal government felt that the currencies gave the provinces too much autonomy and might even lead to the break-up of the country.

4. New ways to borrow and finance

The regional monies mentioned above will not be backed by anything since a promise to pay something specific in exchange for them implies a debt. Moreover, if promises are given, someone has to stand over them and that means that whoever does so not only has to control the currency’s issue but also has to have the resources to make good the promise should that be required. In other words, the promiser would have to play the role that the banks currently perform with debt-based money. Such backed monies would not therefore spread financial power. Instead, they could lead to its concentration.

Even so, some future types of currency will be backed by promises. Some may promise to deliver real things, like kilowatt hours of electricity, just as the pound sterling and the US dollar were once backed by promises to deliver gold. Others may be bonds backed by entitlements to a share an income stream, rather than a share of profits, as Chris Cook describes in his article in this book. Both these types of money will be used for saving rather than buying and selling. People will buy them with their regional currency and either hold them until maturity if they are bonds, or sell them for regional money at whatever the exchange rate happens to be when they need to spend.

These savings currencies could work like this. Suppose a community wanted to set up an energy supply company (ESCo) to install and run a combined heat and power plant supplying hot water for central heating and electricity to its local area. The regional currency required to purchase the equipment could be raised by selling energy “bonds” which promise to pay the bearer the price of a specific number of kWh on the day they mature. For example, someone could buy a bond worth whatever the price of 10,000 kWh was when that bond matured in five years. The money to redeem that bond would come from the payments made by people buying energy from the plant in its fifth year. The ESCo would also offer other bonds with different maturity dates and, as they were gradually redeemed, those buying power from the ESCo would, in fact, be taking ownership of the ESCo themselves.

These energy bonds will probably be issued in large denominations for sale to purchasers both inside and outside the community and will not circulate as money. However, once the ESCo is supplying power, the managing committee could turn it into a bank. It could issue notes for, say, 50 and 100 kWh which locals could use for buying and selling, secure in the knowledge that the note had real value as it could always be used to pay their energy bills. Then, once its notes had gained acceptance, the ESCo could open accounts for people so that the full range of money-moving services was available to those using the energy-backed units. An ESCo would be unlikely to do this, though, if people were happy with the way their regional currency was being run. Only if the regional unit was rapidly losing its value in energy terms would its users migrate to one which was not.

Conclusion

Up to now, those who allocated a society’s money supply by determining who could borrow, for what and how much determined what got done. In the future, that role will pass to those who supply its energy. Only this group will have, quite literally, the power to do anything. Money once bought energy. Now energy, or at least an entitlement to it, will actually be money and energy firms may become the new banks in the way I outlined. This makes it particularly important that communities develop their own energy supplies, and that if banks issuing energy-backed money do develop, they are community owned.

As energy gets scarcer, its cost in terms of the length of time we have to work to buy a kilowatt-hour, or its equivalent, is going to increase. Looked at the other way round, energy is cheaper today than it is ever likely to be again in terms of what we have to give up to get it. We must therefore ensure that, in our communities and elsewhere, the energy-intensive projects required to provide the essentials of life in an energy-scarce world are carried out now. If they are not, their real cost will go up and they may never be done.

Working examples of both backed and unbacked forms of modern regional and community monies are needed urgently. Until there is at least one example of a non-debt currency other than gold working well somewhere in the world, governments will cling to the hope that increasingly unstable national and multinational debt-based currencies will retain their value and their efforts to ensure that they do will blight millions of lives.

Moreover, without equitable, locally and regionally controllable monetary alternatives to provide flexibility, the inevitable transition to a lower-energy economy will be extraordinarily painful for thousands of ordinary communities, and millions of ordinary people. Indeed, their transitions will almost certainly come about as a result of a chaotic collapse rather than a managed descent and the levels of energy use that they are able to sustain afterwards will be greatly reduced. Their output will therefore be low and may be insufficient to allow everyone to survive. A total reconstruction of our money-issuing and financing systems is therefore a sine qua non if we are to escape Vesuvius’ flames.

Endnotes:

  1. Petrodollar Warfare: Oil, Iraq and the Future of the Dollar, William R. Clark, New Society Publishers, British Columbia, 2005. p31. See http://books.google.com
  2. Qiao Liang and Wang Xiangsui, both colonels in the Chinese army, wrote a book, Unrestricted Warfare, which appeared on the Internet in English 1999 about strategies China could use to defeat a technologically superior opponent such as the United States through a variety of means including currency manipulation. Extracts from the book can be found at http://www.cryptome.org/cuw.htm
  3. Debt Crisis in the Third World, by Yanhui Zhang, 2003.
    See http://www.grin.com/e-book/39036/debt-crisis-in-the-third-world

Featured image: Stone money of Uap, Western Caroline Islands Source: Wikimedia Commons

Equity partnerships – a better, fairer approach to developing land

Chris Cook

The conventional way of financing property development entangles those involved in a web of debt and conflicting business interests. A new way of organising developments promises better buildings, more affordable rents and a stake in the outcome for everyone.

“It is to be observed, that in common speech, in the phrase ‘the object of a man’s property’, the words ‘the object of’ are commonly left out; and by an ellipsis, which, violent as it is, is now become more familiar than the phrase at length, they have made that part of it which consists of the words ‘a man’s property’ perform the office of the whole.” — Jeremy Bentham, “An Introduction to the Principles of Morals and Legislations” (1789)

We are accustomed to thinking that property is an object — typically, a productive asset — that may be bought and sold, but as Bentham points out above, this is incorrect. Property is the relationship between an individual — the subject — and the asset, which is the object of the individual’s property. So the productive asset of land is not property but rather the object of a man’s property or something that is “proper” to the man. It follows that property is the bundle of rights and obligations that connect the subject individual to the object asset.

The Land Equity Partnerships that I describe in this chapter (I’ll just call them equity partnerships from now on) are an example of the new types of arrangement that can be made when people think of property in terms of rights and obligations rather than ownership.

Land, or perhaps more accurately location, has a value when it is put to use. Its value may perhaps derive from crops that grow on it, or from animals or fish that feed there. It may also derive from its use by individuals to live there, or to conduct business there, or for use as public infrastructure such as transport. This use value then has a value in exchange; individuals are prepared to exchange something of value in return for the use of land at a specific location.

The bundle of rights and obligations relating to land/location is typically recorded in the form of legally binding protocols, although in less-developed nations the rights and obligations relating to land may be a matter of oral tradition. Some cultures are unable to understand that anyone can have absolute rights over land. Others insist that absolute ownership is God’s alone; but the convention in many societies is that the state has absolute ownership of land and that exclusive property rights may then be granted to individuals or to enterprises with legal personality (corporate bodies).

Conventional private-sector property development is transaction based. Land-owners sell land to developers who obtain any necessary permissions, improve or build on the land and sell it to a buyer. Developers typically obtain as much of the development finance as possible by borrowing at interest from a credit institution or investor. Buyers typically finance their purchase with loans secured by a legal charge or mortgage. After a time, they will sell the property to another debt-financed buyer, or find a tenant, and so on through the years.

In most cases a developer has no interest in high-quality standards or energy efficiency because he will not be associated with the site once the development has been sold. He simply wishes to maximise the transaction profit. He will therefore attempt to ensure that any investment in amenities, infrastructure or transport is made by the public sector rather than by him.

A new legal entity

On 6 April 2001, a new legal entity, the Limited Liability Partnership (LLP), came into effect in the UK and, despite the fact that its objective was to protect professional partnerships from the consequences of their own negligence, it made possible a new way of handling and financing property development. Confusingly, an LLP is not legally a partnership. It is, however — like a company — a corporate body with a continuing legal existence independent of its members. Also, as with a limited liability company, members cannot lose more than they invest in an LLP.

An LLP need not have a Memorandum of Incorporation or Articles of Association and is not subject to the laws governing the relationship between investors and the directors who act as their agents in managing the company. The ‘LLP agreement’ between members is totally flexible. It need not even be in writing, since simple provisions based upon partnership law apply by way of default. As a result, an equity partnership set up as an LLP is a consensually negotiated contractual framework for investment in and ownership, occupation and use of land.

An equity partnership (EP) does not own anything, do anything, contract with anyone or employ anyone. In other words, it is not an organisation: it is a framework agreement within a corporate “wrapper.” The EP agreement sets out the relationship between the different stakeholder groups, and each stakeholder group may also have its own specific sub-agreement at whatever level of formality (e.g. an organisational constitution) its members agree. The EP encapsulates the entire property relationship within a corporate entity and related framework agreement.

An EP has a minimum of four types of partner:

  1. The custodian — who holds the freehold of the land in perpetuity
  2. The occupier(s) — individuals and/or enterprises occupying the property
  3. The investor(s) — individuals and enterprises who invest money and/or money’s worth (such as the value of the land)
  4. The developer/operator — who provides development expertise and manages the EP

Potential partners in an equity partnership

(Source: James Pike)

The landowner

The landowner may be a private individual or investor, a local authority or a developer. The landowner transfers the land to the custodian, and becomes an investor in the partnership.

The custodian

Holds the freehold of the land in perpetuity on behalf of the partners. The custodian is probably a board of independent experts with legal, financial, property and construction expertise. The custodian sets up a Charter of Co-operation between equity partners.

The developer

The developer may be the owner of the land, or he may have set up an agreement with the landowner, or he may be brought in as an investor to contribute his expertise to the development. He may also be the contractor.

The manager

The manager is appointed by the custodian to manage the development, its maintenance and transfers of investors. The manager is likely to be a property management company with valuation and property transaction expertise.

The local authority

The local authority zones and grants planning permission, which adds value to the land. It also imposes obligations such as Part V and charges for infrastructure services.

It may be the owner of the land. If not, it may be an investor to maintain a say in the development on behalf of its tenants under the Part V requirements or other community interests.

The investors

The investors would include the site owners. They could also include the bank or the housing finance agency funding the local authority, or the bank funding the developer. Once the development is completed and fully let, it would be an ideal, low-risk investment for a pension fund or other investment fund, which could buy out the equity shares held by the landowner, and/or the local authority, the developer and the contractor if they wished to sell.

The contractor

The contractor may be brought in as an investor by the custodian, the local authority or the developer. He would be expected to invest at least part of his profits from the contract to align his interests with those of the other partners.

The insurer

The development will require insurance once it is occupied. This is normally obtained by the manager. The insurance company providing the insurance could be an investor in return for preferential rates.

The occupier

The community of individuals who occupy the properties on the land. While the majority of occupiers will be residents, equity stakes can also be built by enterprises operating on the land, e.g. a local shop or hairdresser. The occupier rents the property at an affordable basic rent. This should be sufficient to cover interest charges due to the investors. The occupier has a right to pay an additional amount to purchase equity shares in the development. Once the income from these equity shares is equal to the rent being paid, the occupier effectively owns the dwelling but not, of course, its site. This feature enables them to buy their dwellings over the years without taking out a loan. Occupiers vacating their dwellings receive the full value of any equity shares they hold.

How an equity partnership works

Landowners invest the agreed value of their land/location in the partnership in exchange for “equity shares” which are millionths of the flow of rentals to be paid by the occupiers when the development is complete. This gives the landowner a share in any development gain. While not every development goes to plan, the partnership model ensures that everyone involved has an interest in ensuring that it does. If the land invested does not have planning consent, the local authority can invest the value of that consent, hoping to receive a greater return on its equity shares than it would conventionally.

The custodian becomes steward over the land in perpetuity, with rights of veto over land use, and also safeguards the EP’s purpose and values as expressed in the EP agreement. The custodian may be an individual, a board of independent experts with legal, financial, property and construction expertise, or a public body such as a local authority.

Investors then invest “money’s worth” or money to allow the development to be carried out, and in return they receive a proportionate number of equity shares. Once the development is complete, the occupiers pay an agreed rental in money or “money’s worth” of services for the use of the capital that has been invested in the location. This capital rental is set at an affordable level initially and may rise according to an agreed index of inflation. The occupiers also make a payment or provision for the maintenance/ depreciation (and possibly heating) of the building. The developer/manager manages the development or use of the building in return for equity share in the rentals. If an occupier pays more than the affordable rental, he invests automatically in equity shares, and thereby acquires a stake in the property in which he lives. Once he has acquired enough shares, the income which he derives from them cancels out the capital rental he has to pay.

The pool of rentals created by development is shared out amongst the holders of the equity shares in proportion to their holdings. This form of EP is essentially a Real Estate Investment Trust (REIT). REITs have become extremely popular recently because rents flow through them without tax having to be paid by it. Instead, any tax due is collected from the shareholders.

Investors, who have seen their income dwindling as interest rates spiral towards zero, should be extremely interested in an investment such as this. Equity shares offer a reasonable, index-linked return based on property. There is a very low risk that the return will not be paid since affordable rentals are by definition more likely to be paid. Equity shares are a perfect investment for risk-averse investors such as pension funds and sovereign wealth funds. In particular, this investment is perfect for Islamic investors since no debt or interest is involved.

Worked examples

Capital rental to develop five eco-houses

A landowner invests land in exchange for a 20% equity share in the rentals from the developed property. A provider of eco-friendly and energy-efficient wooden buildings is prepared to sell five units at a cost of 200,000 plus a 10% equity share since he is investing part of his profit margin. The occupiers-to-be dig the foundations and provide other non-skilled labour. In return they receive a 10% equity share. In addition to the 200,000 spent on the houses, a further 100,000 is used to purchase heat pumps, a wood-chip boiler and pay for other investments in energy efficiency.

As 40% of the rental income has been allocated, 60% is left to pay for ongoing maintenance and management and to give a return on the 300,000 money investment. Let us suppose that a 10% share goes to maintenance and 50% goes to pay the investors. A 4% initial return on investment requires a capital rental of 24,000 in the first year. It would be divided as follows.

  • Management and maintenance charge is 10% or 2,400
  • The former landowner receives 20% i.e. 4,800
  • The building manufacturer receives 2,400
  • Investors receive 12,000.

The occupiers pay 4,800 per house per annum gross initially. This is reduced by 480 (their equity share), to give an affordable rent of 360/month each.

Capital rental and land rental to reconstruct seven local authority dwellings

Seven existing properties are in municipal ownership. Two of them are to be converted into three units of 1-bed each, while the other five will each be converted to give a 1-bed unit on the ground floor and a 2-bed unit on each of the two floors above. Accommodation for, say, 20 people in eleven 1-bed flats and five 2-bed flats will result. A common space and shared facilities will also be provided at ground level and ground-source heating and other energy-efficient features will be installed.

Capital rental

Each of the seven sites on which the dwellings stand is valued at 100,000. The current value of the two buildings to become 1-bed units is put at 125,000 each and the five other buildings at 100,000. The redevelopment cost is 70,000 per building or 490,000 so the total cost of the scheme, allowing 10,000 contingencies, is 1,950,000.

The municipality puts in half the value of the land (350,000) and 20% of the value of the buildings (150,000) in return for equity shares. The remaining 1,450,000 is contributed by an investor prepared to accept an initial 3% return or 43,500 per year. This capital rental would be inflation-linked and would therefore provide a real asset-based return of 3% to the investor regardless of movement in interest rates. The 20 occupier members would pay 2,175 each per year in rent, or just under 42 per week.

Land rental

In addition to the capital rental, the equity partnership members agree to include a land rental payment in their EP agreement. This rental is a pre-distributive mechanism internal to the EP and utilises two separate parameters: an income pool and a land-use pool.

(i) Income pool

Assume a contribution to a ‘pool’ at the rate of 5% of income.

5 members on 50 per week state benefits pay in total 12.50

5 members on 100 per week pay in total 25.00

5 members on 150 per week pay in total 37.50

5 members on 200 per week pay in total 50.00

The outcome is a total income pool of 125 per week, which is then divided between the 20 members giving a dividend of 6.25 each. This gives a net rebate to those earning less than 125 per week and a net contribution by those earning more. This is intended to subsidise the capital rental payments for those least able to afford them. The contribution rate could be higher or lower than 5%.

(ii) Land-use pool

The land occupied by the EP members would be assessed using Land Rental Units (LRUs). In the example, five properties each occupy three units of land, while the other two are bigger and occupy five units — a total of 25 LRUs. The members agree a value payable per LRU by the occupants of each property into a pool. Again, net-value transfers (payments or receipts) result from those enjoying above-average land use per person to those with below-average land use.

A comparison with conventional refinancing

EPs may be used to refinance existing secured debt through “unitisation.” Take a 1bn nominal value portfolio consisting of 5,000 25-year mortgage loans averaging 200,000 and paying interest at 6% per annum. On average, each borrower must currently repay 1303.77 per month or 15,645.24 pa for the life of the loan.

Under an EP arrangement, a capital rental could be set at an “affordable” level, say, an average 500 per month or 6,000 pa. This would be index-linked. The total rental income would be 30m in the first year and would rise with inflation. The 5,000 properties would be “unitised” into (say) a million “units” or “millionths”, each consisting of one millionth of the economic interest/”ownership” of the relevant properties. A unit would bring an income of 30.00 in the first year, rising with inflation thereafter. What would the market price of these units be?

i) At 1,000 per unit the initial return is 3%, and the proceeds 1bn which refinances the debt at 100% of nominal value;

ii) At 750 per unit the initial return is 4%, and the proceeds 750m or 75% of the nominal value. And so on.

It will be seen that the absence of debt repayment dramatically reduces financing costs.

Improved affordability and sustainability

Affordability

The problem in most urban areas is not the affordability of housing but rather the affordability of land, since construction costs are relatively uniform. In essence the issue relates to land rental values, since a land purchase price is simply the capitalised net present value of future land rentals. The issue of supply relates primarily to planning, land use and an absence of incentives to bring land into use. The use of a land rental will tend to incentivise occupiers to bring land into productive use.

The use of the EP allows land-owners to invest the value of their land and to receive an agreed share of the rental value of the developed land. Similarly, local authorities’ participation in EPs allows them to invest the value of planning consents, and to use their resulting share of the rental value of developed land to cross-subsidise affordable property rentals. If local authorities were to specify that development could only take place within an EP framework, then the result could be a major increase in development of affordable housing. This might require legislation. In fact, the structure is similar to the use of statutory Development Corporations in the UK, except that land-value capture is addressed consensually within the EP framework, rather than adversarially within a statutory framework.

In the UK, the statutory “right to buy” in the public sector has seen a transfer of housing from the public to the private sector. The EP gives occupiers both an indefinite “right to rent” and a “right to invest” in the co-owned property in which they live.

They may not only buy equity shares conventionally, but also acquire them as “sweat equity” through:

  • self-build or partial self-build;
  • carrying out maintenance to agreed standards, to be monitored by the EP operator member.

As occupiers acquire equity, then their net capital rental obligation gradually falls so when their investment reaches a level at which the notional capital rental income equals their capital rental obligation they are, in economic terms, the owner, although the land remains in custody. Moreover an investor/occupier may flexibly release equity at any time simply by selling equity shares.

Governments that give rental subsidies, grants or subsidised loans for property merely increase rents or the price of land. The EP model takes land ownership out of the equation by putting the land into the ownership of a custodian, and the land price therefore cannot become inflated because it is never sold again.

Where landowners are reluctant to give up ownership, it is possible for them to retain ownership as the custodian member. In that case, the EP agreement essentially operates as an evergreen lease of indefinite duration — that is, the occupier is entitled to use of the land for as long as he pays the rental. The measure of control, such as restrictions on use, retained by the owner would affect the amount and nature of the return they could expect through the EP, in their other stakeholder role as an investor of the value of the land.

An EP improves affordability by drastically cutting long-term financing costs because:

  • there is no return of capital, as there would be with debt, since the capital value is unitised into tradable equity shares in the EP, just like the units in a unit trust;
  • the return on capital bears no relationship to interest rates. It gives an index-linked return reflecting the risk of property-based investment.

Stakeholders’ participation means that the need for development finance is minimised. For example, the land is not bought with loan finance but invested in return for equity shares.

Sustainability

In the EP model the developer/operator is a service provider, rather than an intermediary, and need neither risk equity capital nor put his business at risk by obtaining secured loan finance. His interests lie in minimising the total cost of occupation over time, because this will maximise the rental revenues and therefore the value of the units that he gets in return for his services, expertise and time committed.

Similarly, any contractors responsible for design and construction can be given the option of being paid in equity shares instead of money. Even if they chose money, they would be expected to take their profit in units so that their stake in the outcome was aligned with the interests of the other stakeholders. As a result, it is in the interests of all stakeholders that the buildings are constructed to high standards of quality and energy efficiency, since to do so minimises the total cost of ownership over time. The result is a genuinely sustainable development.

Implementation

There are three key areas to which attention must be given in order to set up an equity partnership: the availability of the necessary legal form; the taxation regime; and the regulatory regime.

The legal form

The enabling legislation is the recognition of an “open corporate” enterprise. This is a new type of legal entity, which is a corporate body with no stipulations about what its governing agreement should be, and only simple default provisions based upon partnership principles about its governance. In the UK this was achieved in two pages of legislation and one page of default provisions. The other (relatively few) provisions in the UK legislation dealt with technical matters relating to taxation and limitation of liability. Anyone wishing to set up an EP in the Republic of Ireland could do so in Northern Ireland under the British legislation until equivalent legislation is passed by the Dail.

If open corporates are permitted, then limitation of liability could be available subject to payment of a bond (as in Jersey); an insurance premium; or a provision into a default fund. However, since an EP is a framework agreement linking all stakeholders and the EP doesn’t actually do anything, there is no need for limitation of liability because no-one outside the EP can be adversely affected by it.

Taxation

An EP is “tax transparent.” It does not pay tax on any capital gains or income that flow through it. Its members pay instead according to their personal or corporate liability.

Regulation

Statutory provisions that protect investors in relation to the actions of financial services intermediaries are unnecessary in relation to an EP, because any financial services take place within the EP framework and are subject to the EP agreement.

Using equity partnerships to rescue building projects hit by the downturn

James Pike

Community land partnerships provide an alternative way of becoming a property owner and gaining a voice in the management of the development in which one lives. They should also be very stable and secure investments for pension funds.

As an architect working on both public regeneration projects and private residential and mixed-use developments which have run into serious problems over the past two years, I have an obvious interest in finding alternative ways to finance such developments. I have also been aware for some years of the problems of managing residential developments, where the current model is selling individual apartments or houses to investors who then rent them on short-term leases. The tenants have no say in the management of the development and the investors no interest. The result is that the owner-occupiers, often a very small proportion of the occupiers as a whole, are the only active participants in the management company. I know from managers of such developments and as an owner-occupier myself that this creates many problems.

One other major problem with public or private developments is rebuilding or redeveloping them when they become obsolete. Currently, each house or apartment is owned freehold and many local authority estates have been sold to the tenants. I have found over the years that bringing a large number of owners together is an almost impossible task.

When I came across the Community Land Partnership ideas put forward by Chris Cook of the Nordic Enterprise Trust, I recognised that this model could be an answer to both our financial and management and redevelopment problems. It offers an alternative path to property ownership and a stake in the management of developments for all tenants. It also presents a very stable and secure development model which should be attractive to pension and other investment funds. It shares some features with current tenant-purchase schemes and rent-to-buy schemes but provides a much more flexible framework.

I got together with an accountant, Kieran Ryan, who has considerable experience in property development, and a solicitor, Kevin Ryan, to investigate the feasibility of the model in the context of current finance, tax, management and property legislation in Ireland. We have consulted a number of interested parties, including banks, property developers, local government officers and property managers.

We consider that the proposed model can work satisfactorily in Ireland without any change in legislation though some adjustments might be made if it became common practice. There could also be considerably wider benefit in revising current 100-year-old legislation on Limited Liability Partnerships in line with recent legislation introduced in the UK and many other countries.

Applying equity partnership to urban regeneration projects

Set out below is a worked example of a major urban regeneration project in central Dublin within the canal ring. The calculations are based on a scheme selected following consultation with the existing tenants.

The land is owned by the local authority and its value is taken as nil when calculating “Capital Rent”. If land is valued at 1m or say 23,000 per dwelling, this would be added in calculating sum required to purchase Equity Shares. If own-door duplex/apartments are located at ground level in all apartment blocks, except those with commercial uses, more than one-third of all dwellings would have own-door access. This represents the general proportion of households with children across the city.

Therefore, the ‘capital rental’ is very affordable and there should be no problem letting the whole development. Tenants of the existing development or other prospective occupiers on the local authorities list would receive the appropriate level of subsidy.

Once the development is fully let, therefore it presents a very secure form of investment, so that if tenants or occupiers leave they can be easily replaced. They are not under pressure to pay more than the ‘capital rent’ but even at low current market rents, they can build up a substantial equity share within a reasonable period. If they have financial difficulties such as losing their job, they can just pay the current capital rent or even reduce their equity share until they are in a position to pay the required level of rent. If, on the other hand, their financial position improves, they can purchase additional equity shares.

The potential role of a pension fund

Such a secure form of investment must be attractive to pension funds. The basic capital rent at, say, 2,5% currently represents a good return for a pension fund but the figures also show that a 3% return does not make the scheme unaffordable. This return is independent of service charges. In addition to his basic capital rent, which is index linked, the occupiers are buying equity shares with their surplus rent which goes to pay off the original capital invested which the pension fund can now invest in further projects, but they are likely to hold a substantial share in perpetuity because, when occupiers leave, they are paid the full value of their share but the dwelling reverts to the partnership. It is proposed that a pension fund could purchase a portion of the equity partnership to either buy out the original investors or a substantial portion of their investment. The payment would include the sum invested plus a reasonable return in the current market for that sum. A reasonable figure in the current situation would be say 10%. This would increase the capital rental required by 10%.

The occupier

As shown in the above figures, equity partnerships offer many attractions to a potential occupier. It gives him/her much more certainty than current rent-to-buy schemes. It requires no borrowing and offers great flexibility depending on his/her financial circumstances at different times. It also involves occupiers in ownership and an input into the management of the scheme which tenants to not normally have. If occupiers want to leave the scheme, they are paid the full value of their equity share. If they have bought out their full share, they will receive the full market value of their dwelling.

The level of total rent required by the tenant to acquire the full equity share over a thirty-year period is calculated as the capital rent which will reduce by the proportion he pays above the capital rent each year plus an annual repayment at 1/30 of the capital cost, plus the operating / maintenance cost:-

Payments required to purchase full equity share over 30 years.

Capital Rent at 3.0% requires a total rent of – 11,641 p.a. = 10,574

Capital Rent at 4.0% requires a total rent of – 12,533 p.a. =11,861

Average projected net market rental payment is – 11,784 p.a.

Therefore the owner can purchase a full equity share in thirty years at a net rental payment less than market rents if Capital Rent is at 3.0% or just above if Capital rent is at 4.0%.

I have not included the commercial elements of the project. If the density was increased to achieve say 900 units it would reduce the land cost per dwelling to 19,000. The density would still be a relatively low 51/acre for an inner city site and could be achieved in a low height format. This demonstrates the attraction for occupiers who may well be able to purchase their equity shares in a much shorter period if their financial circumstances improve. If their circumstances deteriorate then they can revert to paying the capital rent only or even sell some of their equity shares if necessary. Note: the figures shown are for 2010 Future rents will vary with the cost of living index.

The investor

For a local authority or a government agency, particularly one wishing to undertake a regeneration scheme, the equity partnership model offers an attractive alternative to conventional fiance particularly if a pension fund can be persuaded to take on the bulk of the funding once the development is fully occupied. It also offers an excellent management structure in which the tenants can be engaged and is much better alternative than selling dwellings to tenants in the current way because the local authority or agency does not lose the opportunity to redevelop schemes when they eventually deteriorate after a long period.

The operator

Housing associations might be strong candidates for the Operator role, as some of them have a good reputation for managing not only their own social element in current housing projects but also the public realm in the private element of such schemes. They could perhaps also act as the Developer / Operator on behalf of local authorities or government agencies and take on the Custodian role as their boards and senior staff include a wide range of appropriate professionals.

Advantages and disadvantages

Advantages:

  • The model is not a straitjacket; it is inherently flexible and would be tailored to each regeneration opportunity.
  • The model offers the potential to attract outside investment when fully let and demonstrably in successful operation. It should be particularly attractive to pension funds.
  • For occupiers, they can own their dwelling, in time, without having to borrow. They also have an input in the management of the development as a member of the equity partnership: something they would not have as a renter of an investment property. They also become members of a community of stakeholders with a shared future. This core feature should make for more stable tenancies and a better experience for the occupier than possible in the private rental sector. An equity partnership also offers greater security of tenure compared to the private rental sector.
  • For the local authority / investor – the model has many advantages, particularly its flexibility; it can give the local authority continuing control over key issues of social policy, while being able to dispose of a substantial element of its investment at early stage, to a pension fund or other investor.
  • The development company has a project which it can easily let and which, when let, has a ready market for investors to buy out its share.
  • It presents a much better framework for reconstruction or redevelopment, when the development becomes obsolete.

Disadvantages:

  • The model is new and unproven in Ireland. While we do not see it as unduly complex or “over-engineered”, it may be viewed in that light.
  • For those on low incomes and / or paying social rents, the possibility of building an equity stake may remain quite abstract.
  • Residents may be reluctant to commit resources towards an equity share until the regeneration scheme is a proven success.

Examples of additional projects:


Conclusion

I consider that the equity partnership model presents a much better alternative to the current public-private partnership one as it does not require a private development company but only a contractor. It can recover the capital invested by the public body at an early date at a much lower cost to the taxpayer. It could form a major element in current proposals by the Construction Industry Council for funding major infrastructure projects using pension funds.

In the private sector, particularly in relation to projects whose funding loans will bring them into the NAMA portfolio, the equity partnership model must be a strong candidate as an appropriate development structure.

Current Irish legislation for Limited Liability Partnerships probably needs bringing up to date in line with recent legislation in the UK and elsewhere. The Limited Company is not a suitable vehicle for such developments. Equity partnership presents a model for future housing and mixed-use development which is very flexible and which promises home ownership to the occupier without the burden of a mortgage while at the same time offering a stake in the management of the development. For the developer and a bank, it substantially reduces the risk which has been so catastrophically exposed in the current market collapse. For the public authority, it presents a much more economically- and socially-sustainable model for development. If we wish to reduce the risk of future property bubbles, we should seriously consider using equity partnerships.

July 2011 update

While there is considerable interest from Funds for financing affordable housing, interest rates here have increased. It’s therefore thought necessary to consider an interest rate of 5% for calculating Capital Rent. However further decreases in land value and building costs help to balance the equation.

A further study of the Dolphin House Regeneration Project, using a lower rise solution without underground parking and using current service charges on a comparable scheme, shows that Capital Rent, plus service charges are very affordable, and the purchase cost of a full equity share is close to the current market rent.

Dolphin House Regeneration Project: July 2011

A second study of a further publicly owned site in the outer suburbs shows comparable results. Both studies are based on designs costed by a leading construction company.

Dublin Fringe Rail Based New Build: July 2011

Below are links to further recent outline studies based on a 4% interest rate, which would be still be very viable at 5%. We are hoping to undertake a detailed study on a “Ghost Estate” shortly.

New Build Development in Limerick Regeneration Area: July 2011
Ghost Estate: July 2011
Dun Laoghaire Apartments: July 2011
Sandyford Site for HCSA: July 2011

Future global climate institutions

Alex Evans

Any framework for dealing with the climate crisis should be based on a scientifically derived stabilisation target. Such a framework should also distribute the global carbon budget among the world’s nations according to a transparent, equitable formula. To achieve this, global climate institutions will have to change.

In 2009, when David Steven and I embarked on a study for the UK government of future global institutions for tackling climate change, we felt that the world had spent almost nothing investigating the sort of global institutions we’d need in future in order to solve the issue. By comparison, millions of pounds had been invested in understanding the science of climate change — above all through the Intergovernmental Panel on Climate Change (IPCC) — and the economics of the issue, especially the Stern Review.

This, we thought, was surprising. In the past, whenever nations or peoples have faced an existential, systemic challenge, the new settlement that follows is almost always marked by new institutions. Think of how national sovereignty evolved out of Europe tearing itself apart in the Thirty Years War during the 17th century, or how the UN emerged, phoenix-like, from the ashes of the Second World War.

It’s already clear that climate change is the defining challenge of our age. Why then is so little thinking underway about the kind of institutions needed to solve it? It’s this nagging question that motivated us to produce our May 2009 paper “An Institutional Architecture for Climate Change”.

We were guided from the outset by two principles. The first was that we didn’t want to fall into the trap of thinking that institutions were the same as organisations. Instead, we liked Douglass North’s definition that institutions are “the rules of the game in a society or, more formally, the humanly-devised constraints that shape human interaction”. He continues: “institutional change shapes the way societies evolve through time and hence is the key to understanding historical change”. That sounded a good starting point to us.

The other principle we wanted to stick to was a really rigorous focus on function over form. As we know only too well, energy spent on reforming the international system all too often gets dissipated in setting up new organisations, closing them down, or otherwise trying to create some sort of perfect international organogram — without necessarily asking what it is we actually need international institutions to achieve.

So, those were the two principles underpinning our study. Which leads on to the question: what do we need international institutions to achieve on climate? David and I argue that the short answer to that question is that they need to send back signals from the future.

Let me explain that phrase. When you look at what determines how policy actors behave on climate change, you realise that how they act today is fundamentally determined by their expectations of what will happen in the future. So if countries — or companies, or citizens — expect a slow transition to a low-carbon world, then it makes sense for them to ‘free-ride’ internationally and to protect incumbents and vested interests. Moreover, given the long investment horizons involved, everyone shares an interest in predictability. If, on balance, people expect a slow transition, then it’s rational for them to reinforce that dynamic by seeking to slow the process down themselves. But if, on the other hand, perceptions tip to the other side — towards expecting a rapid transition to a low-carbon world — then a virtuous circle is much more likely to develop, because actors will have incentives to lead the change, nurture innovators and co-operate internationally.

Where institutions can make a difference, then, is by sending ‘signals from the future’ that shape people’s expectations. Institutions can give people confidence that we are going to solve this problem and, in doing so, create a self-fulfilling prophecy that brings about that very outcome.

This subtle feedback loop shows in microcosm a much wider point about where we are today in terms of international cooperation, with globalisation challenged not only by climate change, but also by the credit crunch, growing resource scarcity, the risk of protectionism and so on. As these and other stresses on globalisation increase, it’s likely that we’ll see either a significant loss of trust in the system, as globalisation retreats and countries focus on narrow, short-term national interests, or a significant increase in trust, as countries move decisively to increase their interdependence and invest in the institutions needed to make globalisation more resilient, sustainable and equitable.

Muddling through in some ways looks the least likely outcome. That’s why we argue that the issue of “signals for the future” is so important, and why we believe international institutions matter so much in this context. How do today’s climate institutions shape up?

Well, let’s start with the good news. Our institutional framework has a clear objective, set out in Article 2 of the UNFCCC: stabilise concentrations of (GHGs) at a safe level that avoids dangerous interference with the climate. That treaty also represents a pretty much universally agreed-upon reference point, with only Iraq, Somalia and Andorra not having ratified it.

Other items on the ‘credit’ side of the institutional ledger include the IPCC, which has been not only a neutral arbiter of the science but also a kind of anchor for the global conversation about climate change; Kyoto’s system of binding targets, plus cap-and-trade, for developed countries; some basic mechanisms for emissions abatement in developing countries, including the Clean Development Mechanism; and methodologies for countries to report on their emissions.

Unfortunately, these elements don’t add up to a clear signal back from the future. Here are a few reasons why not:

First, although we’ve defined stabilisation as the goal, our institutional framework doesn’t actually cohere with that end. We’ve neither quantified, nor even seriously discussed, the level at which GHG concentrations should be stabilised to avoid dangerous climate change, much less agreed a binding global ceiling on GHG levels in the air.

Second, Kyoto’s targets for developed countries weren’t in any way scientifically derived. Instead, they were based on countries’ own political and economic assessments of what they could manage.

Third, the lack of quantified targets for developing countries makes it impossible to forecast overall global emissions with any certainty. On top of that, there’s the problem of ‘carbon leakage,’ so in the UK, for instance, while production of GHGs fell 12.5% between 1990 and 2003, consumption of them grew by 19% over the same period. Why? In effect, it’s because the UK, like other rich countries, has ‘exported’ its dirty industries to the developing world, which then have to pay the cost of investing in clean technologies.

Fourth, Kyoto’s enforcement system is weak. Sanctions on countries that fail to meet their targets are weak; systems for monitoring, reporting and verification are ineffective; and there are no penalties on countries that refuse to join in the first place. Indeed, the fact that the US stayed out of Kyoto is likely to help it to generate a much more generous target this time around.

Fifth, there’s a similar lack of clarity on finance, adaptation and technology.

  • On technology, there are now numerous funds, but they lack clear terms of reference or a sense of exactly what they’re supposed to deliver. The amount of public R&D spent on energy, meanwhile, is half what it was 25 years ago.
  • On adaptation, debate is focusing more on the question of “how much?” than the question of “how?” National Adaptation Plans of Action are highly focused on short-term measures and far less on the challenge of really mainstreaming resilience through development programming.
  • On financing, there’s a lack of clarity over how financing flows on mitigation, adaptation and low-carbon technology cut across each other, and how they relate to other flows like development aid and private-sector investment.

And last but not least, there’s a lack of coherence between climate change and other key policy areas, such as trade, energy, food security, land use and economic stability.

Ultimately, for all that policymakers stress the scale of the climate challenge and the need for radical action, the fact remains that our current institutional set-up is saying something different. In effect, the signal actually being sent back from the future by today’s institutions is that:

  1. The likely impact of climate change will be considerably less than that predicted by the IPCC.
  2. The cost of reducing emissions far exceeds the benefits, while there is little need to insure against catastrophic impacts.
  3. Short-term economic imperatives outweigh longer-term interests, including both economic and, especially, non-economic ones.
  4. The needs of the poor should be given less weight than those of the rich.

All of which poses the question: what would it look like if we had an institutional framework that provided the opposite signal from the future — the unequivocal message that the world was clearly resolved to tackle climate change over the full term of the problem, and that individual countries, companies and citizens should position themselves to get out of carbon as swiftly as possible?

Let’s start by being clear about the three most fundamental functions for the system. It must:

  • Constrain emissions and manage sinks in a way consistent with stabilisation
  • Provide mechanisms to take account of equity, in both the mitigation and the adaptation contexts
  • Include enforcement mechanisms tough enough to make the regime effective and credible

So what might these mean in practice? Well, first and foremost, we think countries will need to agree a quantified, binding stabilisation target as the bedrock of the whole system. Today, we work from the short term — 5-year emission targets — out towards the long term: an aspiration of eventual stabilisation, at some unspecified level.

It’s time to reverse this trend and ensure that what happens today is driven by what needs to happen over the full term of the issue. A defined stabilisation target, like 450 parts per million CO2, would achieve that. And once we have it, we can use it to derive the size of a safe global emissions budget over the same period.

The next question is how to share out this budget. In the scenarios we did for the report, David and I argue that the only way that 192 countries are going to agree on the distribution of emission permits is through some kind of standard allocation formula to reconcile countries’ different equity claims. We call this “the Algorithm”.

At one end of the spectrum, emerging economies like China and Brazil want permits allocated in proportion to historical responsibility; at the other, many developed countries assume that ‘grandfathering’ permits in proportion to GDP is the only feasible approach.

Somewhere in the middle is a compromise, probably with allocations ending up on an equal per-capita basis at the end of a negotiated convergence period.

Even then, the problem with a per-capita allocation is that it’s impossible for developed countries to deliver in the short term, and a tough sell politically. At the same time, it’s also inequitable for poor countries, which receive a disproportionately small share of emissions while convergence to equal per capita equity takes place; these countries are also not rewarded for having low emissions prior to taking on targets.

Happily, there’s quite a lot that policymakers can do to increase equity. One is to make emission permits a tradable property right, so that emissions trading provides compensatory finance flows during the convergence period. Another approach involves directing resource flows through non-market mechanisms, like technology transfer. A third is resource flows for funding adaptation.

But we need to take a far more integrated approach to climate finance than we do today. At present, most of the push on financing is around making adaptation finance additional to the 0.7% of GNP target for development aid. And it’s far from clear to me how we put ourselves on strong ground by arguing on the one hand that adaptation is all about mainstreaming, while on the other insisting on separate financial flows.

More fundamentally, imagine what a truly global cap and trade system, coupled with an equitable allocation algorithm, could do for finance for development. Official Development Assistance is currently worth about $100 billion a year. Emissions trading markets are already worth two-thirds of that level a year — $64 billion in 2008, according to the World Bank — and they’re still in their infancy. Yet because they have no targets and hence own no assets, developing countries are missing out on these markets. Instead, they get the Clean Development Mechanism, which doesn’t deliver real finance for development or real emissions reductions. Such inequity is startling. You couldn’t make it up.

Finally, let me say just a word about enforcement. Our current set-up does not work — not on enforcing targets, not on penalising countries that stay out of the regime and not on checking that financial commitments actually get delivered.

In the long run, David and I argue that a climate deal will have to require an ‘all or nothing’ approach to international participation. Either countries play a full part in the system, and thus have access to international frameworks on finance, trade, development, energy and other resources, and perhaps even security; or they sit outside the international system and are effectively barred from all forms of international co-operation. Carbon default would therefore become as weighty an issue as sovereign debt default or failure to comply with a UN Security Council resolution. Right now, of course, such a scenario seems totally inconceivable, but it does indicate the extent of the shift in understanding that is still needed.

We certainly don’t claim to have all the answers about future climate institutions, nor does our report purport to be a full blueprint. Our aim is simply to start a broader, deeper, more engaged conversation about a dimension of the climate challenge that’s been seriously under-considered. This is also why we call for a ‘Stern Review’–type process to look at climate institutions much more comprehensively. Only when we embark on both of these can we begin to glimpse a real, workable model for our global institutions on the horizon.

Cap & Share: simple is beautiful

Laurence Matthews

Cap & Share is a fair, effective, cheap, empowering and simple way to reduce emissions from the burning of fossil fuels. It could form the basis of a wider global climate framework but how realistic is it to call for its introduction?

Humanity faces many challenges in the current crisis: development issues; global poverty and inequality; security of energy, food and water supplies; and a range of environmental problems which stretches far beyond limiting carbon emissions. Maintaining greenhouse gas concentrations at safe levels is just one requirement for survival but it is a prominent, important and symbolic one. Any response to it needs to be effective and, if possible, efficient in economic terms. But in order to be effective it has to be adopted and this means it must be acceptable in terms of issues such as equity, development agendas and parochial political struggles. If a framework is simple, it can more easily be tested for alignment with these other concerns.

Simplicity has other virtues too. Simplicity is important when rallying emotional support for a measure — no matter what the economic incentives might be. Inspirational ideas are usually simple. Simplicity fosters a feeling of inclusion, rather than the alienation and exclusion that results from discussions by ‘experts’. An insistence on simplicity also forces naysayers to state clearly what they object to, which clarifies the discussion immensely. We are facing a planetary emergency here and we need to be clear-sighted if we are to solve our problems in time.

Simplicity should not be confused with naivety; indeed naivety is often displayed by concentrating on some aspects of a problem in sophisticated detail while completely ignoring others. Concocting elaborations and complications may be useful for addressing technicalities and can be useful for finessing stumbling blocks in negotiations, but this process risks getting out of hand and is prone to being blind to errors which would be elementary to others less immersed in the details. Proponents of a simple system might do well to consent to discussions on elaborations only if the basis for the simple framework is agreed first.

The next section describes Cap & Share, recently selected by the UK’s Sustainable Development Commission as one of its ‘Breakthrough Ideas for the 21st Century’ (SDC 2009). Cap & Share is an example of an effective, fair, efficient and, above all, simple method for capping carbon emissions.

Cap & Share

Cap & Share (C&S) is a system for limiting the carbon emissions from burning fossil fuels (Feasta 2008); it is an alternative to carbon rations or carbon taxes. It could work on a global scale, or nationally for a single country’s economy. We’ll return to this later, but for the moment imagine a national scheme. As the name implies, there are two parts to C&S:

Cap: The total carbon emissions are limited (capped) in a simple, no-nonsense way

Share: The huge amounts of money involved are shared equally by the population

There is a trick to each of these. First the cap. This is set in line with scientific advice, at a level each year that will bring concentrations (of carbon dioxide in the atmosphere) down to a safe level. But how do we ensure this cap is met? The trick here is to go ‘upstream’. This is often explained (Barnes 2008) by the analogy of watering a lawn with a hosepipe connected to a lawn sprinkler, with lots of small holes spraying water everywhere. If you wanted to save water, you could try to block up all the holes one by one — but wouldn’t it be simpler to turn off the tap a bit? It’s the same with fossil fuels, where the sprinkler holes correspond to the millions of houses, factories and vehicles, each emitting carbon dioxide by burning these fuels. By controlling the supply of fossil fuels coming into the economy (corresponding to the tap) we automatically control the emissions that occur when those fossil fuels are burnt somewhere down the line. So instead of focusing on the emissions, we focus on the fossil fuels themselves. The primary fossil-fuel suppliers (e.g. oil companies) are required to acquire permits in order to introduce fossil fuels into the economy (by importing them or extracting them from the ground). A permit for, say, 1 tonne of carbon dioxide entitles the fossil-fuel supplier to introduce that amount of fossil fuel that will emit 1 tonne when burnt. The number of permits issued equates to the desired cap.

Next, the Share. Since the fossil fuel suppliers have to buy the permits, they will pass on this cost by increasing the fuel price. This flows through the economy (like a carbon tax), making carbon-intensive goods cost more. This sounds like bad news for the consumer. But the trick this time is to share out the money paid by the fossil-fuel suppliers, back to the people, which compensates for the price rises. There are two possible mechanisms for getting the money to the population. In one, the version called Cap & Dividend (Barnes 2008) in the US and based on the Alaska Permanent Fund, permits are auctioned and the auction revenue distributed to the citizens on an equal per capita basis. Under ‘classic’ C&S (Feasta 2008) each adult receives free of charge — say, monthly or annually — a certificate for his or her share. These certificates are then sold to the primary fossil-fuel suppliers (through market intermediaries such as banks) and become the permits. Under ‘classic’ C&S people thus receive certificates instead of money, so that if they should wish to, they can retain (and destroy) a portion of their certificates — and thus are able to reduce the country’s carbon footprint by that amount.

That’s Cap & Share in a nutshell.

To many people, however, the ‘obvious’ mechanism is not Cap & Share but either a carbon tax (discussed below) or a version of cap and trade applied ‘downstream’ where the emissions take place. Such a cap and trade system has two parts, as follows. The first applies to the fossil fuels we buy directly (petrol, gas, coal) and burn ourselves, causing emissions; these direct emissions account for half of our ‘carbon footprint’. For these direct emissions, some form of personal carbon trading is envisaged, typically based on ideas of ‘rationing’ familiar from petrol and food rationing during the Second World War. Personal Carbon Allowances (PCAs) typically involve giving an equal allowance to each adult citizen, and each purchase of petrol, oil or gas is deducted from the allowance (typically using swipe card technology). The other half of our carbon footprint consists of indirect emissions, the ’embedded’ emissions in goods and services, which arise when companies produce these goods and services on our behalf. These indirect emissions are controlled with an Emissions Trading System (ETS) for companies, such as the European Union ETS. (The EU ETS is already up and running, and has had its teething problems; but its faults — lax caps through too many permits being issued, free allocation windfalls to large utility companies, partial coverage only of the economy, leaks through dubious CDM projects — are now widely accepted and these shortcomings are being addressed in the next phase).

Taken together, PCAs and an ETS-like arrangement for companies can constitute an economy-wide scheme; variants have names such as Domestic Tradable Quotas or Tradable Energy Quotas (Fleming 2005). Under the scheme individuals or companies who use more than their allowance can buy extra from those who can make do on less, but the total amount in circulation is finite, set by the cap. This downstream approach is compared with Cap & Share’s upstream approach in research commissioned by Comhar, the Irish sustainable development commission, and carried out by AEA Technology and Cambridge Econometrics (Comhar 2008). C&S came out well from the comparison.

Benefits of Cap & Share

It is worth listing the benefits of C&S because they are so multi-faceted. Firstly, there are some obvious consequences of the way C&S works:

Effective

C&S delivers; it is not just an aspiration. Individual countries like the UK and blocs like the EU may have targets (and various institutional arrangements), but so far they have no mechanism to ensure that the targets are achieved. C&S guarantees a cap.

Fair

The framework clearly has at its root a simple, robust form of equity. This serves as a focal point for agreement, in the same way that one-person-one-vote serves as the basis for democracy. C&S is exactly as fair as rationing would be, or more so, given the inequity typically built in to the ETS half of such systems.

Simple

A typical country will have at most 100 or so fossil-fuel suppliers, so C&S is simple to operate and police. Meanwhile all other companies, and all individuals, are free to go about their lives without the need for swipe cards or carbon accounting, making their decisions based on price alone. Contrast this with the EU ETS, which has been described as ‘more complicated than the German tax system.’

Fast

A result of this simplicity is that the system is easy to introduce very quickly — and we don’t have the time to wait another decade before getting started.

Cheap

This is also a direct result of the simple, upstream nature of the cap.

Transparent

With scrutiny focused on the small number of fossil-fuel suppliers, there is much less scope for cheating than with a complex system like an ETS.

Next, there is an important political point:

Robust

This arises from looking at the winners and losers under C&S. Although the payments to people compensate them for price rises, this is only true on average. If you have a lower carbon footprint than the national average, you will come out ahead: your payments from C&S will more than compensate for any price rises. People with higher than average carbon footprints will be worse off, but the skewed nature of income distributions means that there are many more winners than losers (for the same reason that there are more people on below-average incomes than above-average incomes). There is thus a natural constituency (McKibbin & Wilcoxon 2007) in favour of maintaining a tight cap, to counterbalance the vested interests that would push for a cap to be relaxed or abandoned. Indeed, C&S could be sold politically under the slogan ‘save the world — and get paid for it.’ This gives a certain robustness in the face of shocks and political events, necessary for a scheme that will need to survive for decades. (Consider, by contrast, carbon taxes. These are also simple, and a carbon tax is equivalent to an upstream cap if the tax level is set high enough. But the robustness incentives disappear if the money disappears into general taxation, and so taxes are unpopular. So it is much less likely that the tax level would be set high enough).

Next come some technical benefits of C&S:

Efficient

Because permits are subject to supply and demand, and price signals then flow through the economy, C&S uses markets to guarantee that the cap is met with optimal economic efficiency.

Scalable

C&S can operate at the level of a country, a bloc like the EU, or globally. This is discussed further in the ‘Global/International’ section below.

Flexible

An upstream system can easily form part of hybrid schemes (see the next section).

And last but not least, C&S has some intangible, psychological benefits:

Positive

People can relax slightly, knowing that this problem, at least, is being addressed. They no longer need to feel guilty; on the contrary, the people are part of the solution rather than part of the problem. (Even the ‘losers’ mentioned above have non-monetary compensations; for example, since everyone knows that the problem is being addressed, the rich can counter criticism from environmentalists by responding, ‘my emissions are all within the cap too, so stop criticising!’).

Empowering

C&S has a lack of intrusiveness and micromanagement. People are free to get on with their lives, without any need to keep to an ‘allowance’. There is no hassle and no intrusive tracking of individual purchasing transactions. Better still, people are in control: they are controlling the system rather than the system controlling them. You have control over ‘your share of the country’s carbon footprint.’

Resonant

C&S has an ‘all in this together’ feel to it, and resonates with many other movements concerned with equality (Wilson & Pickett 2009), justice and development issues; it also resonates with initiatives at a local community level, which need to have national and global frameworks in place if their work is not to be undermined.

To summarise, we have a combination of emotional appeal, psychology and hard cash.

Of course, C&S is not the answer to everything. A framework such as C&S is a complement to, not a substitute for, measures closer to home. On the ground, people will be making behavioural changes (improving home insulation, shopping more locally, etc.) for a variety of reasons. Some of these reasons will be financial, driven by the economic incentives provided by the framework. But technology standards can help here, as can tax regimes (e.g. support for renewables), education, and efforts to envisage and communicate a low-carbon future as a desirable one. It will not be sufficient to put the framework in place and ‘let people get on with it’. But it is the framework that ensures that the numerical target set by the cap is met.

Elaborations

The basic idea of C&S is capable of embracing a number of elaborations quite easily. All these have merits, although each eats into the basic simplicity so should be undertaken with care.

Equity

C&S is based on simple equity between all adults. Now one can argue about whether or not this equity represents justice (Starkey 2008), and arguments can be made for adjustments to simple equity — allocating extra to rural households, partial shares to children, etc. Everyone can claim to be a special case, but equity is the undoubted starting point, just as it would be for food rations in a lifeboat. Recognising that special-case pleading could go on indefinitely, in practice there will be a compromise between adjustments that target particular groups and the simple guideline of equity. One could argue that the details of the distribution are less important than the fact that the cap is in place: the Cap is more important than the Share. But equity is an important factor in rendering the scheme publicly and hence politically acceptable, thus allowing the introduction of the cap in the first place. It may be better to keep it simple and tackle special needs with explicit, separate arrangements.

Scale

As mentioned above, C&S is scalable, applicable to a nation alone, or on a global scale. But instead we could introduce C&S just for personal direct emissions, or even just in a single sector (for example, an initial introduction for the transport sector only).

Hybrids

As an upstream system, C&S also could adopt a ‘hybrid’ approach (Sorrell 2008) to dovetail with an existing ETS as a transitional measure (Matthews 2008). It is thus flexible enough to accommodate other ideas — within an underlying simple framework.

Transitions

Hybrids are one way of introducing C&S ‘gently’ to allay fears and incorporate learning from other schemes. Other pathways are possible too. For example, a government initially reluctant to impose a cap might introduce a carbon tax levied upstream; but this can easily morph into an upstream permit system with ceiling prices (see below), and then (by raising the ceiling prices) into an upstream cap.

Offsets

Although leakage through spurious offset ‘projects’ should be avoided, offsets might be allowed against sequestration, either capture at the point of combustion or direct sequestration of atmospheric carbon dioxide (by high-tech scrubbers, or low-tech methods like biochar).

Extensions

C&S is presented here for carbon dioxide, but the same principle applies to other greenhouse gases (which would be hardly feasible for a downstream system). In fact any other common resource such as a fishery could be incorporated: it is easy to maintain a cap using permits, and distribute the share to the population. This has a deep resonance with emerging ‘commons thinking.’

Funds

Some of the revenue could be kept back to fund collective projects to smoothe the transition to a low-carbon economy. There could also be a fund to help specific countries (or individuals) with adaptation. Some proposals in fact, such as Kyoto-2 (Tickell 2008), commandeer all the funds for such purposes. However, hiving off a significant fraction of the revenue undermines the ‘robustness’ incentives, and there is again a strong argument for separate arrangements to tackle these issues. C&S would complement, not replace, parallel efforts to encourage R&D, set technology standards, aid with adaptation and so on.

International / Global

In an ideal world, C&S would operate as a global scheme, a single policy for the planet considered as a whole, A global scheme needs a global institution such as a Global Commons Trust, presumably run by the UN, to operate a worldwide system of permits (which in this case would apply to extraction of fossil fuels only, since there are no ‘imports’ from other planets), with the resulting revenue returned to the (world) population. Global schemes thus bypass nations, except perhaps as a vehicle for transmitting the funds to their populations.

An alternative approach is the international one, which seeks to add up and link together actions taken by sovereign nations. In this approach a global cap is apportioned using a formula agreed by all; each nation then operates its own scheme (such as national C&S). The apportionment formula is of course a thorny question: the formula might be based on Contraction & Convergence (C&C), promoted by the Global Commons Institute (Meyer 2000) and accepted at various times by various national governments, and under which national shares of a global emissions budget start at the current shares of global emissions and converge over (perhaps a short) time to equal per capita shares. If countries sign up to the general principle of a global cap, it is quite possible that the actual pathway ends up resembling the framework proposed by Frankel (2007), which is an ingenious set of elaborations on C&C performing a tricky balancing act of incentives. Or, as soon as the world recognises the extent of the emergency, we may be into Greenhouse Development Rights territory (Baer et al 2007) — an approach that also explicitly addresses inequality within nations. The negotiations might get messy, but the rallying cry must be simple.

Global C&S is equivalent to C&S in each nation with national caps calculated on an equal per capita basis, so the eventual destination of many global and international frameworks would be the same. Global C&S is just C&C with immediate convergence, and with ‘the permits going to the people.’

Now, global frameworks would require global institutions (and probably other things like monetary reform). Many authors regard this overruling of national sovereignty as hopelessly unrealistic — although others see climate change as a catalyst for wider reform, perhaps ushering in some form of global democracy (Holden 2002). Global institutions would seem to be an obvious long-term goal, but many would see the problem as simply too urgent and complex: we should not attempt to tackle too many things at once. Advocates of this view would stick with an international system. Of course, even international systems need global elements too: greenhouse gas concentrations are global entities and the cap must be set accordingly. Whatever one feels about this, it seems certain that the current emergency caused by humanity bumping up against the finite limits of the planet will force a reassessment of many of the tacit — but clearly unrealistic — assumptions underlying ‘conventional’ economics, politics and much else.

Which leads us finally to asking, ‘what is realistic?’

A choice of realisms

There is no sign of Cap & Share being introduced by any nation, never mind as a global scheme, any time soon (although Ireland has been considering C&S for the transport sector). Instead, government communication to the public concentrates on individual ‘small actions’: on doing one’s bit, with exhortations to switch off standby electrical equipment, use low energy light-bulbs, and calculate personal carbon footprints. There is a nagging tone and a strong implication that ‘people are the problem.’ This message fosters guilt, perpetuates ignorance and misconceptions (e.g. that climate change can be halted by recycling), and encourages the perception that climate change is not important (or else the government would be doing something serious about it).

It is easy to read into this a picture of governments scared of facing up to the truth and of telling that truth to the people. But there is some truth in government assertions that the public is as yet unwilling to curb its carbon emissions. Despite a blossoming Transition Towns movement in the UK and elsewhere which seeks to build local resilience ahead of climate change and peak oil, at the moment it appears that the majority of the population want to tackle climate change only if it isn’t too much ‘hassle,’ and only if it doesn’t cost too much money.

So, what can we ‘realistically’ hope for?

In the international arena, proposed international climate architectures (Aldy & Stavins 2007) lie on a rough spectrum from top-down formula-based plans aiming at universal participation by all nations, through to bottom-up arrangements of piecemeal actions taken by nations unilaterally. Let’s call proponents of these schemes ‘Builders’ and ‘Growers’ respectively (with no disrespect intended to either group). A Builder wants to plan, and suggests building a tower; while a Grower wants to let things happen, and suggests planting trees. Growers, pointing to game theory, say that building a tower is ‘unrealistic’. Builders, pointing to the urgent need to avert runaway climate change, say that waiting for a tree to grow is ‘unrealistic’. These are clearly different uses of the word ‘unrealistic’.

This Builder-Grower spectrum is correlated with another spectrum concerning transfers of wealth from rich countries to poor. Suggestions for allocation of the global ‘pie’ range from grandfathering (pegged to current emissions, that is, rich countries get more) through equal per capita allocations (everybody gets the same) to proposals ‘beyond’ equal per capita allocations that compensate for the legacy of historic emissions (rich countries get less). Planners’ frameworks typically involve transfers of funds, whereas unlinked and unilateral actions (by default based on grandfathering) typically don’t. Large transfers are dismissed by some in the developed world as utopian, unrealistic or unacceptable. But there is also hostility from developing countries to proposals that seem to limit their development, especially if these ignore ‘ecological debt’ (Simms 2005, Roberts & Parks 2007).

There is also a correlation with another spectrum concerning strength of caps. Should they be tight, quantity-based targets related to ‘safe levels’ of greenhouse gases; softer price-based targets balancing benefits and costs; or should targets be abandoned altogether in favour of encouraging unilateral ‘efforts’? A Grower might say that a quantity-based target, or cap, is unrealistic as costs must be taken into account. A Builder might say that any cost-benefit analysis that tries to put a price on a stable climate is unrealistic. Which sort of ‘unrealistic’ do we choose?

Price-based policies often involve ‘ceiling’ prices. To guard against the price of permits rising unacceptably high, governments undertake to issue more permits and sell them at the ceiling price. (The government may also agree to buy permits at a ‘floor’ price, should the demand for permits fall ‘too much’ and undermine green investment). A ceiling price offers to convert a quantity-based policy, based on ‘safe levels’ of greenhouse gases, into a price-based one, balancing benefits and costs, when the going gets tough. Ceiling prices are often described as a ‘safety valve’.

The safety valve metaphor conjures up the image of a steam engine or pressure cooker, where if the pressure builds up excessively it can be released before there is an explosion. By analogy the pent-up demand for permits might put excessive pressure on the permit price. (Even the phrase ‘ceiling price’ has a comforting ring of ‘limiting the anguish’ to it). Governments naturally seek the reassurance of a mechanism existing to release this (political) pressure, and this seems eminently sensible; after all, letting off steam is a benign image. Yet this image contains no hint of any external limits or constraints.

Consider instead the following story. Passengers are queuing at check-in at the airport; they are attending a coin-collecting convention and each wants to bring his coin collection along. Unfortunately there is a weight limit, and the passengers are unhappy about being refused their requests. The check-in supervisor nervously watches anger mounting, and worries that this might explode unless the weight limit is relaxed. Yet now we can clearly see the problem with giving in to this pressure: the plane crashes on takeoff. In hindsight it would have been better to face up to the metaphorical explosion — of anger, of tantrums at not getting one’s way — in order to avoid the literal explosion (at the end of the runway).

The analogy with the global climate is clear. Seemingly sophisticated arguments about ‘stock-pollutants’ notwithstanding, it is surely better to come to terms sooner rather than later with what a finite planet means. The view that it is naive to expect governments to agree to any scheme that does not have a ceiling price is offered as ‘realism’. But there is a choice of realisms here.

As debate continues, the problem is increasingly urgent as scientists point to feedbacks and tipping points. To avert catastrophic climate change we will need a mobilisation of resources akin to that in wartime, and if this mobilisation is to be forthcoming, we need to realise and accept that we are all in the same boat — and a sinking one at that, despite claims from some that “it’s not sinking at our end yet.” It is in the self-interest of all that the boat does not sink. Yes, it is political realism to recognise that the temptation is to ‘free-ride’ — to leave the effort of doing something about it to someone else — but pointing to this situation and shrugging is a wholly inadequate response. This type of realism is only a starting point. A tougher — and necessary — biophysical realism insists that this situation is addressed robustly.

A global cap may be agreed by policymakers, but should be based on science (for example as recommended by the IPCC); that is, it should be based on what is required to stop runaway climate change, not merely ‘what is politically feasible’ or ‘the extent of popular or political support’. In one sense it is tautological to say that the extent of popular support will set the cap, but the onus must be to change this support to align with scientific necessity. An emergency demands a scale of response commensurate with the gravity of the situation.

It is too easy to regard an acceptance of current political realities as pragmatic, and regard as utopian any insistence that they change. Human nature might be pretty fixed, but ‘political realities’ are more malleable. We need to think through which realism we are choosing. Some types of realism are not an option — at least not an option consistent with survival. As the residents of Easter Island could tell us, scientific realism will trump political realism in the end.

Conclusion

One of our overriding needs is for statesmanship, deploying rhetoric of the calibre of Gandhi, Lincoln, Mandela, Confucius or Churchill, to prepare the world for, and lead it into, swift and far-reaching changes. The messages are not easy, and the rhetoric will need to draw on simplicity and to extend the discussion beyond economics. Governments might engage in cool calculation, but people are inspired by rhetorical appeals to deeply held values and visceral feelings. At the moment, the populations of most countries are largely in psychological denial, ‘yearning to be free’ of the knowledge, deep down, that we are collectively on the wrong road. The abolition of slavery overrode economic arguments by appealing to basic human values. Surely averting climate chaos, and hence ensuring our survival and that of much of the natural world, is an equally inspiring goal?

Any framework such as C&S would be adopted alongside other measures, such as a push on R&D, infrastructure projects and funding for adaptation; research into geo-engineering and sequestration technologies; agreements concerning land use; and so on. We will need them all. But we will also need a dramatic change in global popular opinion — a change of world-view. Adoption of a simple, fair and realistic framework for cutting global carbon emissions — such as Cap & Share — would be inspirational, resonating with this change and with efforts to solve the other problems that face us collectively on our finite planet.

References

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