Paul Gilding

If we don’t understand the problem, then we won’t choose the right solution. The so-called “financial crisis” is not, repeat not, a problem of credit or sub-prime mortgages or complex financial products. They are all just symptoms of the problem.

Climate change likewise is not a problem but a symptom.

We have a system-design problem so we need to redesign the system. The good news is we can do this, but we’re going to have to do it really, really fast, so starting soon would be good.

We have designed a system so complex and interconnected that is it full of extraordinary risks that no one can even understand, let alone manage it. We sit here comfortable in our delusional acceptance that this is a credit problem or a CDO problem, or a governance problem. So we think when we resupply credit or regulate the New York cowboys better (if there are any left) then all will be well and we’ll get back to growing the economy.

I have one response for people who believe this. Tell ‘em they’re dreaming.

Where we are now, as I forecast in my “Great Disruption” letter in July 2008, is a new state that is not a year or two long. We’re going to be here for while now while we work out how to do things very differently and also deal with the cascading consequences of our last 100 years of behaviour.

The global economy is a system, a complex interconnected, real time set of processes and relationships that thrives when it’s growing. The problem is this: we are now operating that system right up against, I would argue beyond, the limits of its capacity to function. These limits are set by two broad challenges: Ecological Limits and System Complexity. When you hit the limits of any system, the system either stops growing, increases in complexity or breaks down to a simpler form.

First lets look at the System Complexity problem. The oil market is a simple system. It is one commodity with reasonably predictable demand and supply parameters, relative to say the global financial markets overall. Yet our smartest people can’t even forecast the oil price and get it wrong by a factor of 3 to 4 on a regular basis. So the idea that we can manage the global economy and financial markets to an acceptable level of risk is, well as I said, “they’re dreamin’.” The solution is to make this a self-managing system, which requires us to redesign it. More local, more resilient and more human.

The second system limit is completely beyond our control because the limits are set in science — Ecological Limits. Think about the maths. We currently have a series of ecological strains and stresses that threaten the system’s capacity to support humanity. (This is not opinion, this is science). Lets call that “Very Big Problem” (VBP). VBP is our current economic system with its ecological impacts racing out of control.

Our plan is to take VBP and increase population by 50% making it VBP x 1.5 and then we plan to increase per capita income by around 300% by 2050. So our “plan” is to have VBP x 1.5 x 3. In case your maths isn’t so good, that = Complete Catastrophe, also sometimes referred to as civilisation’s collapse.

The good news is that it is not going to happen! Why not? Well first of all, physics and biology define physical limits and their behaviour won’t change, even with the cleverness of New York Cowboys. So we’ll have no choice but to change. Secondly we are very, very clever when we put our minds to it. So we can change very fast and that’s a good thing.

How do we need to change and how fast? Lets go back to our maths problem — the one we need to change the outcome of. Very Big Problem x 1.5 x 3 = Collapse. To avoid collapse, only three things can change:

1. “Very Big Problem”,

2. “Population Growth”

or

3. Per capita income growth.

Population is a tough one, in the time frame available. Short of mass sterilisation or global catastrophe, the population is going to increase by roughly that amount by 2050. I don’t propose either of those two solutions.

Per capita income not increasing is definitely an option. However, that’s the one we’re trying now and it doesn’t seem be a very popular solution. So we may do that, but it wouldn’t be very smart of us to plan to do that. That only leaves us one option we can deliberately pursue. That is we address Very Big Problem — the ecological impact of the current economic model. Here I will end with a statement of the opportunity. Never in history has there been an economic opportunity to compare to this one. In Australia or the USA for example, we need to effectively eliminate (>90%) the net CO2 emissions of the economy, and do so within 20-30 years. (This is the maths of a global reduction of even 50% because our starting point is so high.)

We need to act on this and we need to act now, because if we don’t our economy will suffer. As President Obama recently argued ”The choice we face is not between saving our environment and saving our economy — the choice we face is between prosperity and decline.”

So to achieve this transformation, we’re going to redesign everything and don’t think coal to gas or Fords to Priuses. Think elimination of CO2 and the end of the growth in material consumption. It doesn’t get any bigger, or better, than this.

If you think it isn’t going to happen, then think about the alternative. VBP x 4.5 = bye bye. That is not a good plan.

This is an edited version of an oped I first published at www.crikey.com

Sometimes what seems so sensible in the short term can with hindsight be a source of great regret. This is how it will be seen if efforts by some in the business community to delay or water down the proposed pricing of carbon in Australia and the USA are successful.

It is bad for business because not only has “change come to America”, it is coming to the world. We live a globalised economy, as we’re being reminded brutally right now. So whether you like it or not, whether you accept the justification or not, we are going to shift the economy to a low carbon one. This means business leaders that are resisting the process (and remember this is not all or even most) are resisting change that is inevitable and healthy, even if difficult right now.

Of course people resist change, as companies affected by the decline of protectionism resisted change. It is understandable, but it is not OK, either for those businesses or for the broader economy. If change is inevitable and in the greater good, then it is always better to guide it intelligently and early, than to wait for the crisis that forces it to be rapid and brutal.

I don’t argue it is somehow surprising that some companies are behaving as they are – I accept how markets work. I just note that self-interest, which is what drives markets, will always resist change. Good or bad economic times are not relevant to that behaviour. Sure, it would have been great if the economy was booming when we did this, but it’s not – and delay will make the economic impact later much harsher. Then there will be some other excuse – the recovery will be delicate, or the new boom needs to carry on for a while to build reserves again, or whatever. Resistance will be with us still.

So now is the time we need to apply a bit of tough love to the business community. If countries have industries that can’t survive with a low carbon price, then they’re not going to survive later with a high one either. Protectionism doesn’t work.

And if you need a self-interest argument to proceed, then for Australian companies, think about the political context. Delay is bad political strategy for the business community. This government has bent over backwards, I think too far, to compensate business for the change. A business friend of mine in the US, facing an Obama administration, wrote to me the other day and asked “don’t your guys get it? What more do they want? To be paid to pollute more?”

The proposed Australian emissions trading scheme is as good a deal as business will get. It is easy to imagine a future government, when the icecaps have melted, the cyclones are hitting and the fires are burning, imposing a much tougher regime than the one currently on the table. The proposed Australian scheme is a bad deal for the climate but it’s a great deal for business. My advice would be take it and run or you’ll rue the day you didn’t.

The latest calls for delays to action on climate change in Europe and Australia shows just how weak our captains of industry and their political supporters are when it comes to their commitments to markets. It exposes their Stalinist, command and control tendencies and reminds us, despite their protestations otherwise, they really are more comfortable with oligopolies and private gatherings in the old club, than with the rough and tumble of a genuine market.

The transformation of the economy to a low carbon one requires change driven by new incentives. This should be music to the ears of anyone who believes, as I do, in the innovative power of people and markets when given the right incentives. Yes, change can be hard work and must be managed, but it sorts out those who are innovative and courageous, those prepared to have a go, from those lazy, over protected sections of the economy that need shaking up for the greater good.

This of course is what our captains of industry argue about markets, that if we expose our ideas, technology and management capacity to the rigours of an open process of capital allocation then the best will rise to the top. That is why many of them are so nervous and now scream for protection, because they fear that their day is coming to an end and more innovative technologies and companies will replace them. So they seek any excuse to slow down that process.

A classic example of this is the debate over trading vs taxes. The corporate sector argued strongly for trading as the most effective and efficient method of identifying where capital should be directed to cut CO2 emissions. They were right to do so as a well-designed market for carbon, without free allocation of permits, is the right answer. It lets government guarantee a steadily reducing level of CO2 pollution (the cap and trajectory) and lets the market find the right price to achieve it.

Having argued for this, many so called market advocates then wimped out and started complaining about “certainty” – that they would face uncertainty on price. Well duh, that’s what markets are, a way to set the price given limited but unknown supply. So now the market advocates seek government intervention – compensation, price caps, longer term trajectories and delay – anything to avoid this being a real market.

There are notable exceptions, such as Grant King at Origin Energy. Origin has long recognised the inevitability of a carbon price and argued strongly in favour of one, even when it was very unpopular in the corporate sector to do so. King was a part of a small group of CEOs – the Business Roundtable on Climate Change – that pushed the Howard government to act, despite derision from the conservative members of the BCA.

Beyond policy advocacy, Origin saw the writing on the wall and invested in gas and renewables and positioned their brand as a green one with consumers. So now while the market wimps are calling for protection and delay, Origin is saying “bring it on”. Their recent submission to the government called for stronger targets than Garnaut. No wimps there.

The business community needs to decide if they want a market solution or not. Either they face up to the market and let it do its work or get out of the way and let government regulate a command and control solution. You can’t have it both ways and if we don’t get to work on the market approach soon, the heavy hand of government will be the only option left.