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The Financial Crisis and Global
Environmental Policy
The Financial Crisis
• In 2007 and 2008, high default rates on
subprime mortgages caused the housing
bubble to burst.
• Due to the reliance on Mortgage Backed
Securities and other toxic assets in the
American financial system, defaults caused a
near collapse in the international financial
The Financial Crisis
• Since both MBS and CDO were purchased
globally, the crisis quickly spread beyond US
• The result has been a global recession which
can be seen in increased unemployment,
decreased GDP and stock devaluation in many
countries worldwide.
History of Global Environmental Policy
• Environmental legislation in the United States and Western
European countries began in the 1940s and 50s.
• However, International environmental agreements are a
more recent phenomenon. Historically, most multilateral
environmental meetings have focused on the issue of
Climate Change. Some important meetings include:
– Vienna Conference (1985): concerned chlorofluorocarbons and
ozone depletion. Successfully banned CFCs in many countries.
– Kyoto Protocol (1999): concerned control and reduction targets
for greenhouse gases. Citing economic reservations, the United
States did not sign. Other criticisms of the protocol include the
lack of targets and requirements for developing countries.
– Copenhagen Climate Conference (2009): resulted in voluntary
commitments with no legal binding.
Connection of Environment to
Financial Crisis
• Historically, both developed and developing nations
have chosen not to unite in international
environmental agreements for economic purposes (ex.
Kyoto). This shows that global environmental
cooperation may be possible only in times of economic
• Although unilateral cooperation is yet to be achieved
and this crisis will make any agreement harder to
accomplish, there are concrete beneficial and
detrimental effects of the crisis on the environment.
• Individual projects highlight other effects of the
financial crisis on global environmental policy.
1997 Asian Financial Crisis
• Gives an indication of possible outcomes in
emissions and pollution that will result from
the current crisis.
• Showed that as GDP dropped, reductions in
projected energy consumption.
• Reduction in energy consumption
accompanied by reduction in emissions of air
Impacts of the Current Financial Crisis in
• The fall of exports by the global financial crisis led to a
decrease of 7.33% in GDP and a reduction of 9.21% in energy
• The stimulus plan ($586 billion) against the crisis will lead to
an increase of 4.43% economic growth and an increase of
1.83% in energy consumption.
• Overall, during the crisis, energy consumption per unit of GDP
will fall in China.
• China suffered a large fall in exports. Energy consumption will
decrease because of the reduction of energy consumption
imbedded in exports.
Discussion on Possible Results of the Crisis
• Positives:
– Factory bankruptcy, reduction in consumption of resources and technologies
that emit pollution.
– Long-term, crisis has forced the acceleration of the Chinese Communist Party’s
original strategy to restructure economy. China has traditionally fueled its
growth by being the world’s factory, has left the environment second to
growth. Mass-producing, energy-consuming industries have taken their toll on
the nation’s water supply and air quality. The regime can use the recent
factory closings and enterprise bankruptcies to develop a cleaner, hightechnology industrial sector.
• Negatives:
– Momentum of global environmental movement has been diverted as a result
of the crisis.
– Government may prioritize quick economic development and employment
– Approved policies may be shelved because of cost.
– Fear of the regime’s stimulus investment in heavy industry will result in more
pollution in the future.
A Green Financial Crisis
• Economic downturns cause people to drive less, fly less, and overall
consume less energy.
• Causes price and production of energy to declines.
• Coupled with a lack of availability of credit, this causes firms to invest less
in programs that exploit resource development.
– Slows environmentally costly projects like strip mining and oil drilling.
• Government stimulus packages can alleviate some of this financial burden
for renewable energy industries.
U.S. Coal Production
February 2008-January 2010
(Million Short Tons)
Note: This graph is based on MSHA-based final data for all four quarters of 2007 and 2008,
revised production data from MSHA for January through September 2009 and preliminary EIA
production estimates for October through December 2009 and January through February 2010.
• The financial crisis has resulted in the foreclosure in a large number of
homes and businesses.
• This will lead to the renovation and destruction of outdated and energy
inefficient homes and factories.
• New houses and business will be built to current environmental codes and
will take advantage of the competitive prices of renewable power.
• Factories will be more efficient.
• Many of the foreclosed houses have been auxiliary houses that use energy
inefficiently when the owner is occupying them.
• Homes and businesses will use cost effective building techniques that
utilize natural lighting and passive heating and cooling.
• Construction will shift to more lightweight and innovative techniques
• Many expect that the financial crisis will give China a chance to restructure
• Having been the world’s factory for many years the Chinese government
has been looking to diversify production throughout the country.
• The foreclosure of outdated and inefficient factories will allow a
reallocation of resources.
• The growth of fossil fuel consumption may also cause a shift in production
to areas with the lowest production costs.
• Dan Ries, an analyst with Collins Stewart, expect these firms to be based
in China.
International Energy Agency
• Fears the downturn in production of fossil fuels will result in tremendous
price increases once the demand returns.
• The capital that would currently be required to meet the growth in energy
use under the Reference Scenario would amount to 26 trillion dollars by
• This doesn’t consider that 80% of the growth will occur in developing
• Says that crisis presents an unprecedented opportunity to curtail energy
use and shift to cleaner fuels.
Green Aspects of Stimulus Packages
• Intervention with the market
- Bailout => Stimulus packages
• Why have green aspects?
- Increasing pressure to “go Green”
- Dangers with the income effect
• Results
- Economic
- Environmental
Korean Stimulus Package
• Decided to make their stimulus package
predominantly “green”
• My paper will look at the environmental and
economic efficiency of the Korean “green”
stimulus package in comparison to other
developed countries’ packages
• Measurable variables: GDP and unemployment
changes in numerous comparable countries,
qualitative analysis on how “green” the programs
really are
Cap-and-Trade as Foreign Aid in
Sub-Saharan Africa
Link to the Economic Crisis
From 2009 International Monetary Fund Regional Economic Outlook Sub-Saharan Africa
(April), Washington, DC: IMF.
Link to the Economic Crisis
• The Economic crisis has led to a slowdown of
private capital inflows to Sub-Saharan Africa.
According to Britain’s Overseas Development
Institute, even a 10% drop in FDI inflows may
lead to a .5% decrease in Sub-Saharan income
per capita.
Main Question:
Could Cap-and-Trade Serve as a
means of foreign aid in light of
decreased FDI/portfolio
investment in Sub-Saharan Africa
since the financial crisis? How so?
Evidence and Research
Research will consist of reviewing the capital
accounts of Sub-Saharan countries to determine
the extent of damage done by the financial crisis.
From there I will review the most popular capand-trade policies discussed thus far, comparing
the benefits of different allocation strategies to
LDCs in Sub-Saharan Africa.
This topic concerns the different possibilities and
effects of different policies since cap-and-trade
has not yet become a global reality.