Ecosystem decline and economic risk…

The question was asked by Sue Charman on the UK Finance Lab, How do we start predicting ecosystem decline, and if business is capable of changing?
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One way is to begin to use more scientific measures of the net effect of things. There are some rather major problems with “sustainability arithmetic”, you might call it.

People tend to mix statements of social values and the numbers they use in a way that is very forgiving for whatever purpose intended. I don’t exaggerate. For one familiar example, people count their own personal waste items as their environmental impacts, such as the number of plastic bags they use.  They might count their efficiency in limiting cooking and cleaning, or running the AC, etc.

The real scale of their environmental impact, adding to economic risks, is hardly related to their personal waste at all, though.

What personal impacts are directly related to is the scale of their personal income, and everyone is making every effort to increase it. Big income big demand on the resources of the earth.

Whether they cut back on one thing or another they’re still going to spend or invest all their income. In a market economy every dollar tends to have equal effect, each representing average resource use for the service provided.

The simplest starting point for estimating the total is ~6000btu/$, the global use of fuels to produce total GDP.

Using that principle correctly as we do in our paper on EROI for Wind Farms to measure the total impact of whole business systems, what you find is even the world professional standard for adding up the totals of things, Life Cycle Cost Analysis (LCA) is off by 500% due to a similar social value error. LCA measures only the impacts of the technology used… and not of the business operations, services, commerce, people, etc.

Having accurate measures for resource use for different things will then let you make legitimate comparisons and value judgments relative to the resources the earth has left. Then of course, to get to the question asked, you can assess the risk on individual businesses for whether pushing up the price of diminishing resources will prevent some industries that once used them from continuing to operate.

That’s one half of the limit question we really need to get a handle on.  The second half is asking, once we use up the affordable supplies of important resources, how are we going to operate an economy without them while looking for some affordable substitute? That’s the one that the Peak Oil people have been projecting and seeing a very bumpy downward staircase of oil supply contractions over the next 20 years.

We have no substitute for oil really, and its affordable supplies do appear to be running out as we speak whether you consider the probably underestimated costs of responding to climate change or not.

The real problem to me, though, is that time lag between running out of affordable stuff and finding an affordable substitute. The sole guiding principle of finance is to use the genius of the markets to use up all affordable resources at ever faster rates, assuming that bigger supplies of cheaper resources are around the corner.

For 60+ years we’ve been looking around the corner,… and still don’t see them coming. What the rule of finance does not consider is the “precautionary principle” of asking what’s next. I think financial balance sheets need to be required to begin showing a reasonable estimate of “what’s next ?”.

pfh

 

 

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