Sustainability During the Credit Crisis

With a sudden rash of failures and dirt-cheap buyouts of investment banks and consumer lending institutions, the credit crisis is dominating the mainstream media, and rightly so. Let us consider for a moment, the effect it might have on sustainability.

The old stereotype is that environmentalism is a luxury good, and that if people get poorer in real terms, they will have to sacrifice it. Of course, this simply is not true. Environmental responsibility can save money, in the form of lower energy bills, lower water bills, or offsetting material costs through recycling, to name a few. So one might expect even more sustainable behavior in order to cut costs. Unfortunately, this is probably not true either.

Oil demand has collapsed to levels far below typical, thanks to a substitution away from driving and energy-intensive behavior, and in part because of falling standards of living that come with a recession. Unemployment and lower factory production also means less energy is used. As a result, prices have tumbled recently, all the way to around $93 a barrel.1 Of course, part of this is that suppliers had incentive to overachieve and boost output when prices were high.

Falling oil demand has always been a goal. The key however, is that drops in oil consumption that result from falling real income are not sustainable. As soon as people get rich again, they’ll be driving, flying, and spending money on goods that have to be shipped around the world. In order for lower oil demand to be considered progress, it has to be part of real systemic changes and not a shrinking of the global economy. In fact, the lower short-term oil demand may deceive firms and individuals into undervaluing energy-saving investments. Perhaps a firm was thinking about ordering new, more efficient trucks. If oil is $93 /barrel, perhaps that will seem less attractive and they will spend their money elsewhere, but oil is unlikely to stay at such a low level when the economy recovers.

Even a firm does want to make investments to boost the long-term sustainability of their operations, they likely are unable to do it. Banks have pulled back the reins on loans so severely that very, very few businesses can get credit to invest in new equipment, even if would result in huge savings each and every month. When cheap credit is available, if a project saves a business $10,000 a month in energy costs they could make monthly payments smaller than that and not need a huge cash outlay. However, with even highly rated, safe debtors strapped for credit, a firm might choose to waste money making piece-meal repairs to keep an old, shoddy machine barely-working instead of buying new, or might make other inefficient choices. The same is true of individuals. If someone has a chance to spend a few thousand more to get a much more fuel-efficient car it would be a wise investment–unless that few thousand came at a crippling interest rate.

It’s not just firms and individuals that will be strapped for cash. States and municipalities may be the hardest hit of all. This will cause real consequences for public transit, leading them to cut routes, cut investment in equipment, and raise fares. We’ve touched on the so-called public transit paradox before. When the economy is in its worst shape, and more consumers would turn to public transit because they need to save money, the municipalities have less money than ever to spend on public transit. Public transit is funds from sales tax and property tax are highly dependant on the health of the economy. Plus, local and state governments are typically already constrained from getting credit by their own laws. Often, they are required to have a balanced budget unless they get voter permission to issue debt for specific project. It’s certainly not an option to raise sales taxes or property taxes during a recession. Again, the consequences to sustainability will be painful, as public transit systems continue to have higher than necessary energy costs and to be underutilized.

Not that anyone should need additional reasons to be upset about the credit crisis, but it is important to acknowledge these side effects that are often overlooked. Clearly, a plan to increase liquidity is important not just for the financial markets, and not just for those seeking work, but for the environment itself.

However, there are things to be learned from this study beyond just the immediate consequences of the crisis. Generally, anyone who talks about sustainability is assumed to be a borderline Marxist who decries all globalization and consumerism. Clearly, this simply is not true. Private investment, capitalism, and prosperity are dear friends of the sustainability movement, and vice versa. Their fates are intertwined, especially during this trying time. The sooner people acknowledge that sustainability is not a one-time sacrifice to placate our guilt, but is a way of doing things more efficiently, the better off we’ll be.

1. http://www.time.com/time/business/article/0,8599,1841586,00.html?xid=feed-cnn-topics

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2 Responses

  1. Related – funding becoming harder to get for green startups

    http://www.reuters.com/article/smallBusinessNews/idUSTRE49N3SA20081024

  2. […] across the board, including sustainability projects, but we cannot allow this market failure (see this for how it might happen). However, even though investment plays a role, that’s not the whole […]

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