Deflating the Ecological Bubble(A)

For the last half of the 20th century-encompassing the entire adult lives of most of us-the dominant international fact of life was the Cold War. Two Superpowers-each capable of annihilating the other-were engaged in a global ideological struggle for dominance.
The Cold War provided the rationale for everything from the Interstate Highway System to the Space Race to language labs.
Ultimately, communism spun into a death spiral and democratic capitalism emerged triumphant. The former Soviet Union splintered with astonishing speed into numerous nations, even the strongest of which now have Third World economies.
Many explanations – military, cultural, and political – have been advanced for the overnight collapse of the Soviet Union from Superpower to basket case.
Many of these theories cite things that contributed in at least some small measure to the collapse.
However, the principal underlying cause was economic, and it relates directly to what I want to talk about with you today.
The Soviet Bubble
The Soviet Union was a classic bubble economy. Prices did not reflect reality. Prices were not allowed to reflect reality.
Economic success, even in a planned economy, requires good information and a Darwinian culling of uncompetitive enterprises.
But Soviet prices were set by bureaucrats. They often bore no relationship to supply and demand. They manufactured millions of items that no one wanted, and failed to grow the food that everyone needed.
Soviet resource allocations were so grossly inefficient that the Soviet economy simply could not produce enough high-quality, desirable goods and services to sustain its legitimacy.
In the end, the hidden costs finally overpowered the real assets, and Soviet society collapsed in on itself like a black hole.
The American Bubble
In the United States, we are still trying hard to shake off the ill-effects of our own recent experiences with a high technology and telecommunications bubble.
The term “bubble” has a frivolous connotation that belies the importance of the problem. About $7 trillion in stock market valuation has simply vanished in the United States (and much of the rest of the world has been sucked into our downdraft).
$7 trillion equals about $700,000 for every American household!
This bubble was partly caused by the irrational exuberance of a segment of the population that had acquired astonishing wealth during a prolonged bull market. They decided that profits and losses were a vestigial remnant of the “old economy,” and turned to a series of fluffier ways to measure value.
More shocking, it was also the product of securities fraud on a level that left even hard-noses cynics agog -greed and sleaze and mendacity carried to an art form.
Having shaved the equity markets of $7 trillion, the aftermath of the bubble is now drilling its way down to bonds.
According to Moodys, a record 22 percent of investment grade corporate bonds were downgraded in 2002. Worldwide, a record $160 billion in bonds defaulted last year.
The bubble had an interesting energy component. Last week, in the latest installment of a long-running saga, the Federal Energy Regulatory Commission cast some light on a debacle that originated in California but cast a long shadow.
The FERC report presents a mountain of evidence demonstrating that California’s shortages had nothing at all to do with environmental rules or capacity constraints. They were almost entirely created by energy companies who hired youngish energy traders to play the utility grid like a videogame. They won the game by creating bottlenecks and driving up prices.
It was, in other words, a bubble, where prices bore no relationship at all to objective reality. It left California with a budget deficit that is larger than those of the other 49 states combined. It forced the nation’s largest electric utility into bankruptcy. And it created financial havoc for poor and middle class residents of California, Nevada, Oregon, and Washington.
Summary
Under the communist bubble economy, prices were not allowed to reflect economic reality.
During the high tech, telecom, and energy bubbles, profits and losses counted for less than web site hits, miles of dark fiber, and opaque accounting techniques for clever new financial instruments filled with hot air.
My thesis today is that the world is now facing a far more serious bubble.
Throughout the global economy, prices don’t reflect ecological reality. We’ve been liquidating our natural capital and no reflecting this on our books. Indeed, when we consume a natural resource, we stick this loss in the income column. It is more audacious – and of vastly greater scope – than anything Enron ever dreamed of.
We’ve been breaking a lot of little laws for a long time, and now the larger laws – Nature’s Laws – are catching up with us.
Externalities
Environmental externalities were of mostly academic interest 40 years ago, when distinguished economists like Ezra Mishan and Joan Robinson began writing about the topic.
However, they have now outgrown the “academic” box.
Today, costs that are universally treated as “external” to economic decision-making are often larger and more important than the “internal” factors that actually drive the decisions.
Like other recent massive accounting frauds that move expenses off the balance sheets, this economic fiction contributes to a false sense of well-being.
Measured without reference to distribution issues and ignoring environmental externalities, the global economy has been an incredible triumph. Output grew from $6 trillion in 1950 to $43 trillion in 2000.
However, the rest of the world does not plan to let us ignore distribution issues, and Nature does not plan to let us ignore the environment.
1.2 billion people-four times the population of the United States-still earn less than $1 per day. The number didn’t change during ten years of robust global growth. Those are 1.2 billion very unhappy people, and they are getting less happy as modern telecommunications makes clear the difference between them and us.
When zealots armed with box cutters can topple the World Trade Center, when a Philippine junior college student living in a slum with outdoor plumbing can create a Internet virus that causes tens of billions of dollars of damage, when a very small scientific team with modest resources can build a “live” polio virus from scratch, such economic disparities pose obvious perils.)
The so-called “external” costs of various activities -things like
climate change, an epidemic of extinction, devastating damage to the ocean floor, permanent loss of top soil, skyrocketing childhood asthma rates, depletion of aquifers, elimination of wetlands, the disappearance of the world’s rain forests, the bioaccumulation of hormone-mimicking substances in every food chain-those external costs are growing enormous.
Refusing to include these costs in our national income accounts and in our corporate financial statements is every bit as misleading-and even more guaranteed to produce a catastrophe-as surreptitiously shifting debts to offshore corporations in the Cayman Islands.
Costs are costs, and sooner or later the piper has to be paid. The ecological bubble is of a different order of magnitude than the tech bubble.
It is almost incomprehensibly larger.
The Ecological Bubble
Biological systems can operate for a while beyond their long-term carrying capacity, but sooner or later ecological realities must be faced.
Ecological overshoots-whether of elk or prairie dogs or aphids or yeast-are analogous to bubble economies. Everything seems to be going swimmingly until suddenly, like cartoon characters, they find that they have run over the edge of the cliff.
And no matter how fast they churn their legs, they can’t avoid a long drop.
And as with bubble economies, the greater the violation of the boundary conditions, the sharper and deeper the eventual collapse.
If there were any single lesson from the science of ecology that I would like to see understood by the next generation of business leaders it is that homo sapiens is currently overshooting the long-term carrying capacity of the planet.
Because of our overshoot, the World Conservation Union reports that one-eighth of all bird species are endangered; one-quarter of all species of mammals are endangered; and one-third of all fish species are endangered.
Ten thousand years ago, Homo sapiens and his draft animals and livestock constituted less than half a percent of the mass of all vertebrates. Today, we constitute more than 98 percent of the mass of all vertebrates. We are squeezing out everything else.
There are more tigers today inside zoos than there are outside of zoos.
We have two options: we can begin working very hard to build a global economy, designed along ecological principles to operate within the planet’s carrying capacity. Or we can carry on with business as usual and race off the cliff.
The first big test, I believe, will be climate change.
A Climate of Change
Scientific support for the proposition that humans are changing the world’s climate now approximates the level of support enjoyed by the proposition that the Earth revolves around the sun, and not vice versa.
The smartest business leaders are way ahead of President Bush on this.
DuPont has committed to keep its total energy use flat through the next ten years, to obtain ten percent of its total energy in 2010 from renewable sources, and to produce 65 percent less greenhouse gases in 2010 than it produced in 1990.
You will recall that Kyoto seeks a 7 percent reduction by that date from the United States – and DuPont is aiming for 65 percent.
Promises are cheap. But DuPont has already held its energy use flat since 1991, and it has already reduced its greenhouse gas emissions by 45 percent since 1990.
BP is now the world’s third largest manufacturer of solar cells-behind two Japanese companies-and an ardent supporter of the Kyoto Protocols on climate change. Whether or not Kyoto is ratified, BP has committed to meeting Kyoto’s greenhouse gas reduction goals for the company.
Shell is forecasting that renewable energy could meet half of all global energy demand by 2050-a market opportunity of tens of trillions of dollars.
Johnson & Johnson has also pledged to implement Kyoto whether the U.S. Senate ratifies the treaty or not. As a company, it will reduce greenhouse gas emissions seven percent below 1990 levels by 2010-with an interim goal of four percent in the first five years. This pledge covers 150 facilities in 50 countries.
IBM, which has already reduced its CO2 emissions by 20 percent from 1990 levels, has stunningly committed to further reductions of four percent a year into the indefinite future. The pledge covers its 30 manufacturing facilities in 14 countries.
Toyota and Honda have leaped ahead of the Big Three again, with efficient new cars for sale in America. Toyota’s Prius has a great sound system, comfortable seats, power everything, and a spacious trunk. My Prius, fully loaded, cost $21,000, and it averaged 52 miles per gallon on my trip down here this morning from Seattle. The new Prius, coming this fall, will be 15 percent more efficient – and the increased efficiency comes entirely from reprogramming its software!
But even the best companies are not putting serious political muscle behind public policies that would internalize the costs of climate change.
For reasons that continue to baffle me, companies are extremely unlikely to lobby for tough environmental standards, even when they are head and shoulders above their competitors, and such standards would advance their own narrow economic prospects.
The Role of Shareholders
This, then, is where shareholder activism comes in.
The history of shareholder actions on behalf of the environment goes back at least to 1970, with Campaign GM. Ralph Nader, Bess Myerson Grant, GM heir Stewart Mott, and others went to the shareholders’ meeting in Detroit and demanded that GM clean up its cars.
In those days, this sort of thing was very suspect. There was never any chance of a victory against management. It was pure guerilla theater, weighed in terms of its ability to generate press.
With the advent of ERISA, the growth of huge pension fund assets, the mutual fund revolution, and so forth, shareholder activism is no longer just a diversion. And in the post-Enron era, a great many professional investors who in the past just scrutinized 10-Ks and other SEC filings are now looking at the broader picture with a much more independent eye.
Environmentalists have joined with shareholder activists to support changes in governance. And shareholder activists have joined environmentalists to support environmental transparency.
It is not at all uncommon today to obtain 20 to 30 percent shareholder support to oppose management – and the era of regular shareholder victories may not be far off.
Climate change may well be the first arena in which this sort of change takes hold. It has a number of attributes to recommend it.
It is big enough to warrant the effort. The International Panel on Climate Change says greenhouse gases, worldwide, must be reduced by 80 percent over the next few decades. That means that the United States’ share must be substantially higher.
There appear to be few opportunities to move at this issue in Congress or the Administration in the immediate future.
Several States Attorneys General have been meeting to discuss a possible class action suit in climate change – modeled on the recent tobacco action.
Seven Northeastern Attorneys General recently announced plans to sue the EPA to restrict power plant emissions of carbon dioxide. The group is led by Elliott Spitzer, the NY Attorney General who has largely supplanted an inactive SEC and US Justice Department in bringing securities fraud actions.
Many corporations have already taken action at the board level.
Most of the board members of those companies serve on other corporate boards where they can share what they learned with their colleagues.
The issue has enormous implications for corporate well-being, and for the future health of the planet. At the Bonn climate conference, the US stood alone, losing the final vote 162 to 1.
It will help American companies keep up with developments abroad at a time when our political leaders are completely out of step. To look quickly at a few of the consequences of our current posture:
From 1992-2000 the U.S. solar industry grew at 16 percent a year, while Japan’s grew at 43 percent and Germany’s grew at 46 percent annually.
The U.S. share of the global solar market has gone from 44 percent in 1996 to 27 percent in 2001.
Wind energy has increased nearly five-fold since 1995, while coal powered electricity has declined nine percent worldwide
The U.S. share of global wind power has gone from 77percent in 1990 to 18 percent.
By hiding the costs of fossil fuel use, we are creating a bubble that is sure to burst. Other countries are moving far more aggressively than we are to internalize these costs.
The voluntary Bush Administration greenhouse gas goals are, in fact, not “goals” at all. They are merely a projection of the actual experience of the last ten years into the next ten. In fact, the Bush goals envision very significant increases in greenhouse gas emissions while the world scientific community is calling for significantly decreased emissions.
Leadership is manifestly not coming from our elected leaders. So we will have to turn to ourselves. I don’t just mean that generically. I mean the people in this room.
Conclusion
Soviet ministers fought to the very end to maintain an economic system that was divorced from economic realities, and they sowed the seeds of their own collapse.
The Internet Revolution genuinely believed that all the rules had changed. They bought companies on a whiff or a dream, and rode them to financial ruin.
Most American business executives continue to fight vigorously to keep the economic system divorced from ecological realities. To the extent that they succeed, they, too, are sowing the seeds of their own eventual collapse. It will be bad for the company – and in the aggregate, it will be catastrophic for the world.
Corporate activists and environmental activists – joining hands with pension funds, insurance companies, state & city treasurers, universities, foundations and others – are starting to get engaged. We need to nurture and encourage that trend, and tell the managers of our endowments and retirement funds to participate.
Environmentalists have joined with shareholder activists to support changes in governance. And shareholder activists have joined environmentalists to support environmental transparency.
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Denis Hayes is President of the Bullitt Foundation, an environmental philanthropy located in Seattle. The opinions expressed in this talk do not necessarily represent the views of the Bullitt Foundation or its board