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Close parallels can be drawn between the causes of the current economic crisis and the marketing innovations associated with carbon trading. Studying the financial crisis and the climate crisis together can provide useful tools for understanding how to tackle both, says a report by The Corner House.

Link to full briefing: When Markets are Poison: Learning about Climate Policy from the Financial Crisis

28th September 2009

Introduction

18th September 2009 - Larry Lohmann, The Corner House

Around the world, progressive groups have been quick to associate the unfolding financial crisis with concurrent crises of climate, food, energy, health care and militarism. Hailing the apparent breakdown of the neoliberal experiment, they have called for the building of integrated popular movements for greater “democratic control over financial and economic institutions”2 – a “new paradigm” that:

“puts the financial system at the service of a new international democratic system based on the satisfaction of human rights, decent work, food sovereignty, respect for the environment, cultural diversity, the social and solidarity economy and a new concept of wealth.”

“The most obvious crises we face collectively today are all linked and the solutions to them must be linked as well,” goes one manifesto. “Properly targeted and used,” the financial crisis “could open the door to the quantitative and qualitative leap we must make.” “The financial crisis of 2008,” insists another:

“presents the best opportunity in over a century to simultaneously reform money systems and create additional mediums of exchange and financing mechanisms to accelerate the shift from the fossil-fuel/nuclear-Industrial Era to the greener information rich Solar Age.”

“[T]he current situation of crisis is also an opportunity,” agrees still another, proposing “food sovereignty” as a slogan under which to agitate against deregulation and the “ferocious offensive of capital and of transnational corporations to take over land and natural assets” and to speculate in food futures contracts. “The two crises of our times — economic recession and global warming — should be tackled together,” urges yet another. “The trillions of dollars earmarked for economic recovery can be spent to fight climate change.”

Progressives, of course, are not the only ones being spurred by current crises to reorganise. Despite having been caught off guard by financial meltdown, governments and business elites are attempting to free up credit with a bewildering variety of their own responses. While ordinary citizens take to the streets to demand help for ordinary families, governments have deposited billions of dollars into the accounts of large banks.8 Financial institutions have been nationalised, interest rates cut to near zero, ratings agency reforms promoted, and proposals made to set up clearing houses for credit derivatives or curb them sharply. Plans are being discussed to institute “a new national Keynesianism along Sarkozyan lines,” invest in vast tracts of land in the global South, and tackle global warming and economic reversals simultaneously through “Green New Deals” or investments in geoengineering, agrofuels and synthetic biology. In the meantime, financial institutions are planning new waves of securitisation, while the interests of Wall Street and the richest one per cent of the US population are being defended at the highest levels of the Barack Obama government through figures such as Treasury Secretary Timothy Geithner and Lawrence Summers, Director of the White House's National Economic Council.

Somewhere near the centre of this confused post-meltdown global landscape lie the carbon markets set up under the Kyoto Protocol, the European Union Emissions Trading Scheme (EU ETS), the Chicago Climate Exchange and many other initiatives. Although they form part of a 35-year-old pattern of neoliberalism and financialisation that is now being called into deep question, carbon markets remain the dominant official response to climate change worldwide.

After roughly doubling in size each year from 2005 through 2008, they are set for a further explosive expansion in the US under the Obama administration, as elsewhere. While the carbon trade’s current volume of over US$100 billion11 cannot yet compare to the half-quadrillion dollar- plus nominal value that the overall financial derivatives markets reached in 2007, it is being heralded as the “world’s biggest commodity market” and prospectively “the world’s biggest market overall,” with “volumes comparable to credit derivatives inside of a decade.” As a welcome new “asset class”, with a low correlation to many others and many arbitrage opportunities, carbon has proved a magnet for hedge funds, energy traders, private equity funds and large global investment banks such as Barclays, Citigroup, Goldman Sachs, Credit Suisse, BNP Paribas and Merrill Lynch as well as index providers and European exchange-traded commodity sponsors.14

The largest carbon markets are those created and maintained by government regulation and supported by a consensus of the middleclass environmentalist movement in industrialised countries (which tends to see them as “better than doing nothing about climate” or “the only show in town”) as well as, more recently, by many ruling elites in the South. Yet carbon markets’ nature and their links to financialisation are still little discussed among social movements and intellectuals preoccupied with more traditional terrains of corporate control, privatisation, trade, globalisation, inequality and so forth, and carbon trading has not normally been placed by political economists in the same analytical basket as other issues concerning power, ownership and redistribution.

Carbon markets thus pose a challenge to progressive movements seeking a common response to the financial crisis and to official failures to address climate change. This briefing paper suggests concrete ways of holding both within the same strategic vision by proposing parallels between the rampant financial innovations that have contributed to the current crisis and the innovations feeding carbon trading. Relying on groundwork laid by Karl Marx and economic historian Karl Polanyi, it also calls on recent advances in the social studies of finance as well as the insights of both financial and carbon market practitioners and grassroots communities on the receiving end of the new trade arrangements.

The first section of the paper proposes that the enormous growth in the derivatives markets since the 1970s constitutes a wave of commodification of certainty/uncertainty countered by a Polanyian “counter-movement” of societal self-defence.15 New commensuration practices transforming this “fictitious commodity” into a target for expanded investment – practices that were developed by “quants”, financial institutions and regulators – helped make possible a huge expansion, then a catastrophic collapse, of credit; in the process, they created a vast if temporary opportunities for profit-taking by financial firms. After reviewing some of the basics of carbon markets, a second section explores some parallels between carbon and uncertainty markets:

- Both markets have seen the construction of similar abstract commodities, largely by centralised corps of “quants” and traders.

- Embedded in neoclassical economics and its over-ambitious institutions of calculation, both markets heighten systemic dangers, necessitating movements of societal self-protection.

- Both markets involve regressive redistribution and the destruction of crucial knowledge.

- Both are vulnerable to bubbles and crashes.

- Both erode notions of transparency and conflict of interest.

- Both call into question the assumption that all imaginable markets can be successfully regulated.

A concluding section draws some of the threads together in reiterating the value of considering the two new markets together.

Link to original source