In addition to war in Ukraine and fiscal policy, climate change plays a behind-the-scenes role in the inflation and the cost-of-living crises.
One dramatic example of how this happens came in March 2021, when the container ship Ever Given got stuck in the Suez Canal and made news across the world. It was a spectacular picture with a 400-meter-long vessel blocking a 200-meter-wide canal. It delayed hundreds of other ships and caused shortages in shops and factories for months. The financial cost came to over $2 billion in insurance claims.
Ever Given got stuck because climate change is making sandstorms stronger and more frequent in the area, and one such storm blew the vessel into the bank. It showed how fragile our modern world is to disruptions from climate change.
The on-going energy crisis is also, in part, the result of disruptions from climate change. Last year, European countries experienced unprecedented heat waves which led to below-average levels of wind. Wind drought is now a thing. Energy companies failed to generate enough electricity from wind farms and turned to natural gas to make up the shortfall. In turn, this led to a shortage in natural gas, which drove wholesale prices to historically high levels. Energy companies started to lose money, and some collapsed.
The price-rise chain began to affect fertilizers. Natural gas is a key ingredient in making them. As natural gas prices tripled in Europe, fertilizer producers could not stay profitable and shuttered their operations. Then a climate-change boosted hurricane season got underway in the United States, leading to the closure of chemical plants that make fertilizer, further limiting supplies.
Without fertilizer, farmers were unsure if they could plant crops. Food prices rose in response.
The production of other essential materials like copper are also impacted by climate change. We need copper for wind turbines and electric vehicles, and it requires a lot of fresh water to produce. Climate change brought on a multi-year drought in Chile's copper producing region. The drought forced production to drop, pushing prices to record highs, and many wind turbine makers almost went bankrupt at the start of 2022.
When the Ukraine war started at the end of February, financial markets reacted by anticipating shortages in oil, gas, and coal. So far, globally, oil and coal production have actually increased, and gas production has stayed more or less unchanged. Energy prices, however, have gone up largely because climate change brought on unprecedented heatwaves and droughts. The heatwaves increased energy demand and the droughts reduced energy production.
China lost so much hydroelectric power to drying rivers that factories had to shut. In France, nuclear power had to be cut because there was not enough water to cool reactors.
The heatwaves and droughts affected more than just electricity. In India, the world's second-largest wheat producer, early heat waves made it harder to grow wheat. In the U.S., which is a top wheat exporter, the levels of Mississippi River dropped so low that barges could not take full loads of grain to market, raising transportation costs.
Our modern economy takes it for granted that resources will always be available, but, of course, all things come to an end. Consider, we may pay a fee to use water, but that fee does not reflect the true cost to businesses and livelihoods if the next drop is the last there is. The same goes for the price of oil, gas, and coal. It may be high, but it still does not reflect the cost of climate change systematically destroying our rivers, crops, and businesses. This tricks us into using resources until they are exhausted. It is how economic models underestimate the cost of climate change and mislead governments into the wrong policies.
The right policies have to start by accepting that climate change has put us into a very tight box.
Prevailing wisdom is that we can get out of the problems posed by climate change by investing to grow faster, promoting technologies to leapfrog our way out. This pushes us to use more energy and bring on faster replacement cycles to bring onboard new technologies. This pressure to make changes at panicked speed takes us to a place where if we are wrong about the solutions we have pursued, we are making climate change so bad our economy will go bankrupt and our society will collapse.
The box climate change is putting us into requires us to ask a different question: "how slow can our world go to keep us safe?" Climate change is caused by using oil, gas, and coal which still provide almost all our energy. This makes climate change fundamentally an energy problem. The slower we can go, and the less energy we use, the more time we buy for ourselves. Unfortunately, we are addicted to all the benefits that cheap energy brings.
The only thing that will make sure climate change does not get worse is to reduce oil, gas, and coal use, even if we are not ready. How much will this cost? It doesn't really matter. If we do not stop, then we risk the whole edifice of our economy collapsing. That is hundreds of trillions of dollars and decades of recession. On the other hand, to take ownership of the oil, gas, and coal companies to stop production will only cost a few percent of our current wealth.
This is like the cost of a suit compared with the cost of your whole wardrobe. It is a cheap price to pay. We need control of production to make sure that no energy is produced from oil, gas, and coal reserves that we are not using or have pledged not to use, so no one else can use them either. Doing this keeps us inside the box, but we still need innovations to help us survive and thrive.
These innovations should cut emissions now, reduce energy use, and alter expectations. They may be design innovations like building a shipping network, for example, with strict speed limits that immediately reduce emissions and save energy; retiring vessels do not all need to be replaced. The fundamental question is, 'how many goods do we actually need to transport around?'
We also need pricing innovations. Energy is and will stay scarce. Tiered pricing can make this clear. For example, the first 1,000 units of energy which we all need can be charged at the cost of production, say $1 per unit. The price for the next 1,000 units needs to reflect energy is a scarce, so say $10 a unit. After that, it needs to punish usage, say at $100 or more per unit. This is better than a single price that increases to hurt everybody.
It will also lead, importantly, to innovations that bring about subtractive changes. Too many of our business-as-usual procedures have developed by patching on top of existing procedures. A road junction with many signs distracts drivers' attention and cause accidents. We instinctively reach to additive solutions—putting up more signs, installing traffic cameras, and even altering the location of ambulance response units to deal with the problems. All this takes up more energy and resources. Subtractive change looks instead at how to give drivers more time and space to navigate the junction—remove the distracting signs. It rips off the crystallised layers of band aids we have accumulated in our processes to expose what is really necessary and frees up resources.
We have no choice. We will not outrun climate change.
David Ko and Richard Busellato are co-founders of Rethinking Choices and co-authors of The Unsustainable Truth. They have worked over 30 years in the investment industry in senior positions and recognize that sustainability cannot be resolved by investments. Get in touch with them on transformational ownership and how to survive climate change via www.rethinkingchoices.com
The views expressed in this article are the writers' own.
Uncommon Knowledge
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
