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Climate and Carbon Connections to the Current Economic Crisis

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Among the many reasons for concern about the near future of the global economy, markets are looking at food price inflation in China as a factor that might increase the likelihood of a world recession.

The world has actually been under a global food price inflation for a few years, mainly due to a sequence of extreme climate events affecting grain production almost everywhere: in China; in several Asian and African countries where the monsoon regime has been disruptive; in the U.S. and Canada; in Australia; in Argentina, Brazil, and Uruguay. Over the last three years, most of these countries have gone through severe droughts and floods, extreme winters and summers.

The chart shows a clear trend, with some oscillation, of rising monthly food prices. The trend showed by the smaller one displaying annual averages is even clearer. Average prices have dropped only during the post-2008 recession.

This is one of the critical climate connections of the current financial and economic crisis. The imbalance between food supply and demand has caused the prices of agricultural commodities’ to rise steeply, feeding inflation. Inflation often leads to growth-reducing policies that in turn negatively affect the financial capabilities of corporations and governments, thus reducing investment.

There is no way to rapidly curb Chinese or global food price inflation. Differently from inflation related to other prices in the economy, reducing the pace of growth has a minor impact on demand for food. Differently from manufactured goods, there is no way to speed up the production of grains in order to balance demand and supply. Production depends on climate conditions and seasonal factors.

This year is the seventh marked by extreme climate events in several regions of the world. Right now Texas is under stress from one of the severest droughts in its history, while the Horn of Africa faces famine also because of a severe drought. The hurricane season in the Atlantic has just begun, and NOAA estimates are worrisome.

Climate events have compromised harvests in most producing countries many times over the last seven years. Food stocks have, in consequence, diminished dramatically. At the same time, the pre-crisis wave of global growth has led to a significant increase of income in almost every country, sharply increasing the demand for food. Food demand has also been pushed by the demographic growth over the last decade. As a result we have classical price inflation: increasing demand, limited supply leading to price increases.

Climate events have determined food scarcity which feeds inflation in high and middle income countries, and can cause hunger, even famines, in low income, climate vulnerable countries and regions, like the Horn of Africa, particularly Somalia, and the Sahel.

The only action available to China to balance internal demand and supply of food is to import foodstuffs. Droughts and floods have also affected Chinese agricultural production. The trouble is, if China increases its imports of low-stock foodstuffs prices will increase further.

This is the most dramatic connection between climate events and the present crisis. There are other relevant ones relating the carbon economy and global climate politics to the economic crisis.

There is a clear relationship between economic stress, and the carbon markets. The carbon market has been in dire straits since the 2008 financial breakdown. When it was starting to recover, it faced a serious credibility crisis caused by frauds in some European markets. If we consider carbon to be a commodity, it is the worst performing one of them all. Sluggish economic growth reduce demand for carbon credits. As a result, some analysts say the market is oversupplied at least until 2017. The carbon market reacts instantly to bullish factors, but oversupply turns it insensitive to bearish signs. It is unlikely that the world will see a strong economic recovery over the next couple of years. Not with the current measures of fiscal constraint in place in Europe and the US. Such a dismal performance of the carbon market may inhibit the implementation of plans to start local carbon markets in several countries. The multiplication of regional carbon markets is expected to provide the seeds of a future global carbon market.

A third critical connection has to do with the transition to a low carbon society. Although investments in renewable energy and clean tech have displayed a healthy resistance to these cyclical economic downturns since 2008, they are nevertheless negatively affected. At least the pace of growth of adoption of renewable energy and clean tech will decrease, delaying the most needed energy transition. There also is a noticeable delay in the technology pipelines both for alternative energies and clean tech. Fiscal constraints and reduced investment puts P&D and product development in standby. The pipelines continues to signal encouraging possibilities for the future, but its projects have stopped to move or are moving too slowly. Fiscal cuts also reduce the speed of state and local initiatives such as building retrofitting, and urban redesign to adapt cities to the upcoming low carbon era.

There is, finally, a political connection. Global climate talks have been clearly hit by the crisis. It is impossible to understand the failure of the heads of the major developed and emerging powers to reach a full agreement in Copenhagen if we do not bring the 2008 financial turmoil into the explanation. The small steps taken in Cancun were clearly influenced by the more positive economic prospect at the time. But Durban will feel the full impact of the current crisis. The most critical item on COP17’s agenda, financing of mitigation and adaptation for less developed countries, will hardly see any progress now, particularly regarding the short-term fund for 2010-2012.

The architecture for this financial mechanism was agreed upon in Copenhagen after strenuous negotiations. It contemplated a short-term scheme due to receive new money after the countries formally adhered to the Copenhagen Accord by March 2010. This short-term funding was thought as a means to make fast start money available to the more vulnerable countries, at a level deemed affordable by developed countries still dealing with the consequences of the 2008 crisis. More than 100 countries associated with the Accord within the deadline and more than 50, including all major carbon greenhouse gas emitters registered emission reduction quantitative targets. But no new money flowed to the fund in 2010 or this year. The long-term finance mechanism was due to start being progressively funded by 2013, to reach $100 billion a year by 2020. Climate finance is a very sensitive subject–one capable of reviving old North-South conflicts, and eroding the thin layer of trust among the parties that has been built after Copenhagen and at Cancun.

These are not the only climate and carbon connections of the current crisis or of the global economy for that matter. Nor are them short-lived circumstantial relationships. They are built into the fabric of the current political economy. Climate and carbon economic and political connections will only multiply from now on. They are a structural reflection of the concrete challenge we are already facing posed by climate change.