The Great Disruption: Why the Climate Crisis Will Bring On the End of Shopping and the Birth of a New World - Paul Gilding (2011)

Chapter 6. Global Foreshock-The Year That Growth Stopped

When it first became clear to me in 2005 that we were heading for an ecological and economic crash, I wanted to test the idea with a broad audience. So I wrote up the arguments in a letter called “Scream Crash Boom,” and sent it to my network. Over the months that followed, I received hundreds of responses from around the world as it spread virally to thousands of people. It had clearly struck a chord, with responses from CEOs to government ministers to grassroots activists. Many people sensed that the endgame for our current economic model had begun.

As a result of the interest the letter sparked, I was invited to present my arguments around the world. I spoke to groups of business executives at corporate retreats, to activists, to policy makers, to university seminars, and so on.

The general response was one of reluctant acceptance of the potential accuracy of my thesis but it was a kind of removed acceptance. When I spoke as an invited guest at corporate retreats, I often felt as if I were there for “intellectual entertainment” rather than for the arguments being considered in the context of business strategy. This surprised me a little, given I was arguing there would be discontinuous change in the market at some point, probably in less than a decade—a meaningful time frame for senior executives.

The reason why became clearer when I more methodically tested the response through my work on the core faculty of the Prince of Wales’s Business and Sustainability Programme (BSP), run by the Cambridge University Programme for Sustainability Leadership. I was able to test the thesis over three years with a broad cross section of leaders from dozens of countries and from all sectors of society and business. These executives generally had little prior knowledge of sustainability issues, and the BSP seminars ran for four days, giving me a chance to go deeper in exploring their reactions.

The responses were wide-ranging and gave a number of insights into how the collective corporate mind works and why change is hard to achieve. One of the most significant insights was the sense of powerlessness in the face of big-picture trends. While some rejected the thesis completely, those who accepted it generally responded with a passiveness that I still find surprising. It was kind of, “Oh well, we can’t do anything about that so we’ll just have to observe it unfold.” Many of them, however, separated this quite clearly as their professional, analytical reaction. Alongside it, usually in the bar, they articulated a personal, emotional response of concern for the future, particularly for their family and their personal career choices.

For three years I traveled the world, arguing the case that we were in a slow-motion global car crash; that we were hitting the ecological and resource limits of the global economy, and the resulting economic crisis was inevitable and imminent.

Then in early 2008, it started to become clear that the moment had arrived. What I had seen from mid-2006 to mid-2008 was the emergence of the two “crash indicators” I had been arguing would show the economy had clearly outgrown the earth’s limits. The two indicators I had been looking for were: 1) resource constraints forcing prices up and 2) ecosystem changes accelerating at a scale suggesting that systemic shifts and tipping points were under way.

I saw both of these clearly emerging by early 2008. At the time, though, most of my audiences saw the global economy going gangbusters with spectacular growth, particularly in China and other parts of the developing world. The Dow had recently been trading in the 12,000 to 14,000 range, and while it had backed off to the lower end of that because of problems in the finance sector, they could see no signs of imminent danger to the global economy. So my argument—that this spectacular growth was driving us into the wall and would soon stop as a direct and causal result—was a difficult proposition for them to internalize.

It was particularly challenging for those operating daily in the global market economy. I remember one BSP seminar at Cambridge University in the United Kingdom in April 2008 with fifty delegates, mostly senior executives from global companies, with some from government and NGOs. I presented my case, with the economic consequences being put particularly firmly. I said economic collapse was now inevitable and with it the value of both their retirement savings and the companies that employed them. When I asked who agreed with the basic direction of my thesis, only three people out of fifty raised their hands! The questioning was aggressive and particularly dismissive of the idea that these ecological trends, which were generally accepted, would have this level of economic impact. They mostly wrote me off as an extremist and a merchant of doom.

The faculty at these seminars met daily to take a temperature check of the delegates’ mood and the seminar’s progress, so we discussed this reaction the next morning. While we were surprised by the strength of their response, on reflection we could see what was behind it. These business executives were deeply enmeshed in the global market, with their careers and personal lives firmly wrapped up in the system. Every day they were surrounded by people who accepted that economic growth was good for the world. To them, this view was not a political belief, but a simple fact.

They also believed that spreading the gospel of economic growth across the global economy was the only way to address the deep and grinding poverty we had addressed earlier in the seminar; poverty was in sharp contrast with their personal lives, and they genuinely felt it must be addressed.

As a result of all this, accepting my argument would require them to question their lives at a deep level. These were good people who had chosen to attend a seminar about global sustainability and social issues out of concern for the world and their role in it. So accepting the idea that the market they were driving, the machine they spent every day maintaining and expanding, was going to fail to deliver people out of poverty, destroy the global environment, wreck their children’s future, and in the process cost them their personal financial security was never going to be easy.

I always found such push-back personally challenging. Even putting aside the ego challenge of being rounded on by a room of highly educated, successful people, it always made me question again whether my analysis and assumptions were right. I recognized that in general when you think you’re right and everyone else in the room is wrong, you may well be slightly mad!

In my case, I have often been the only one in the room who believed what I was saying, but that was because I chose to go to that room to spread the message. I also have the good fortune to have regular contact in my work with the Cambridge faculty and elsewhere, with some of the world’s top scientists, economists, and technology experts, who by 2008 largely agreed with the logic of my view, with the major question being timing.

So while I challenged myself constantly in case I was missing something, the evidence that reinforced my case continued to mount. The scientific evidence over late 2007 to early 2008 had been particularly distressing. The most dramatic was the accelerated melting of the northern polar ice cap. In the summer melt season of 2007, the arctic sea ice reached a new record low, with more than one million square kilometers less ice than the previous record low set only in 2005, and 41 percent below the 1978–2000 average.1

The IPCC climate models had predicted consistent melting, but this was so far ahead of their forecasts that it sent shock waves through the science community. Professor Mark Serreze, director of the U.S. National Snow and Ice Data Center and an arctic ice expert, reported his shock at how the ice levels had “simply fallen off a cliff.” Along with others, he argued that if trends continued, all summer ice might disappear by 2030, a full seventy years earlier than many of the models had predicted. We were and are witnessing a classic feedback cycle—recent research suggests that one of the greatest causes of the warming arctic is the lack of ice itself, as seawater reflects less solar radiation than ice.2 As there is less ice, so there will be even less in following years.

To me this was just one of a number of indications of the emerging breakdown of the planet’s ecological systems. While individual glaciers, droughts, and floods all give some indication of direction, something as large and significant as the northern polar ice caps was an indication of a systemwide shift. It was also a positive-feedback risk globally, with dark blue water absorbing heat whereas ice reflected it. This meant local melting led to local and global warming, leading to more melting, and so on.

Other scientific reports around that time showed more early signs of acceleration and systemwide impact. Examples included the reports of methane bubbling to the surface in lakes of meltwater in the massive area of frozen tundra. This frozen earth keeps billions of tons of methane locked out of the atmosphere, and its release is perhaps the single biggest tipping-point risk. The methane involved is such a powerful greenhouse gas and is there in such large quantities that its release could dwarf human emissions and accelerate warming beyond anything we could control.

On the broader issues of systemic change, the oceans were showing signs of major shifts as well. A series of reports indicated the oceans were acidifying with unexpected speed. This process, caused by the oceans absorbing excessive CO2 in the atmosphere, has two impacts. First, it becomes a self-reinforcing climate feedback loop because it threatens the ocean ecosystem’s ability to absorb CO2, leaving more in the atmosphere to heat the planet. Second, it has the potential to wreak havoc on the global marine ecosystem by preventing marine creatures like prawns from producing hard shells and slowing coral growth, threatening changes across the whole marine food chain.

Making these individual signs worse was that every global parameter we could measure was tracking at or worse than the upper end of the IPCC forecasts that create the basis for policy. These included the amount of sea level rise, the rate of sea level rise, the volume of emissions, the levels of CO2 concentrations in the atmosphere, the recorded increases in average global temperatures, and so on. This meant we had two things happening in parallel: The causes of the problem were worse than expected, and the response of the ecosystem was worse than expected. It was a sobering period.

I knew, however, from previous experience that while ecosystem indicators of accelerating change were evidence to me of the limits being reached, they were not evidence to most people and wouldn’t get much attention except from those already aligned.

It would require economic indicators that we were actually hitting the limits to really gain attention. The most obvious candidates for these were commodity prices, particularly food and oil.

Oil was a good candidate for convincing evidence because it had long been predicted that we would at some point reach “peak oil”—the point after which oil extraction can no longer be increased. There was a clear and established link between economic growth and oil consumption that made the “growth hitting its limits” logic simple for people to understand. This would also be a good test of the techno-optimist view—that markets self-correct because as resources run out, prices rise and alternatives come onstream. (While this is obviously correct in theory and over time, there are considerable challenges in the politics and economics of the transition and timing unless the price rises are steady and slow, which they rarely are.)

Peak oil is a good example of limits being reached because of the suddenness of the impact, comparable conceptually to the collapse of fisheries we discussed earlier. It’s not that oil will soon run out; in fact nowhere close to it. Part of the way through global supplies, the rate of extraction of oil reaches a maximum as remaining reserves become increasingly difficult to extract. It’s thus not the amount of oil that limits global supply, but rather the rate at which we can extract it. While production slows, demand continues to rise and in combination the price becomes volatile and increases rapidly. This is because oil is such a crucial part of our economy and is hard to replace quickly. The U.S. Department of Energy reported that the only way to avoid massive economic loss from a serious energy crisis would be to start preparing twenty to thirty years in advance. That was a good thought but would have been a more useful one thirty years ago!

So as oil prices hit new highs in 2008, it started to look like game on. However, while it’s easy to explain resource limits being hit with a single commodity like oil, it’s harder to communicate the linkages between systemwide resources and ecological limits and their economic impact. This is partly because of the incredible system complexity we have now built into the global economy. Food was therefore going to be an even more important example than oil because it brought this complex system of ecological, social, and economic drivers into a single indicator—global food prices. Food prices effectively measure all the issues we’ve been discussing around sustainability. Ecological drivers like soil quality, water supply, and extreme climate events mix in with social trends like increasing wealth-driving food choices and economic trends such as the shift of the corn crop into biofuels with government subsidies for corn-based ethanol.

From 2005 onward, we had seen increasing impacts of environmental and social pressures on food supplies. As argued by global experts like Lester Brown of the Earth Policy Institute, these pressures were coming together with great momentum after years of forecasts that they would do so. On the supply side, these included a challenging array of issues such as less unused arable land, loss of cropland to development and industry, overpumped aquifers, falling water tables, overallocated rivers limiting irrigation expansion, slowing growth in crop yields, increasing soil erosion, and deserts expanding due to overgrazing, overplowing, and deforestation. Many of these were assessed as ecosystem services in the Millennium Ecosystem Assessment we discussed earlier.

On the demand side, of course, we had an extra eighty million people to feed globally each year, along with increasing wealth leading to a desire to eat more grain-intensive livestock and the shift of corn in particular to use as a biofuel feedstock.

So as we moved toward 2008, alongside these underlying issues of supply and demand, we saw the impacts of climate change, with widespread droughts reducing harvests in many countries and floods destroying crops in others. Thus the conditions emerged for a perfect storm of economic growth hitting the system limits.

Sure enough, over the second half of 2007 and the first half of 2008, the logic of the sustainability argument found its way into the economy. For those who still think the environment is a place you visit on weekends, consider what actually happened over this period.

Food prices started to rise, driven by the array of system challenges referred to above, including climate-induced water shortages and degraded soil quality. As booming economic growth drove oil consumption, oil prices rose to historic highs, and as the techno-optimists argue, this drove investment in the alternatives. One of these was corn, which competes strongly for fuel with oil when oil prices increase. This caused U.S. farmers to switch from soybeans for food to corn for oil partly because of the subsidies for corn-based ethanol in the United States. Together these drove up both corn and soy prices globally.3

The gap in the soy market caused by the exit of U.S. farmers encouraged Brazilian ranchers to convert their ranches into soy farms, grabbing the opportunity presented by higher soy prices. This caused a gap in the meat market, which drove other ranchers to increase deforestation in the Brazilian rain forests to get new grazing land. There was also rain forest clearing for more soy farming. This deforestation is a huge driver of climate change. Climate change is blamed by many for the worst drought ever in Australia over this period, which saw wheat output decline, and for crop-destroying floods in America, both of which further drove up grain prices globally.

Food and oil prices soon soared to levels way above all historical highs. As Lester Brown points out, with people in poor countries spending 50 to 70 percent of their income on food, increasing food prices in 2007–2008 caused major political instability. Food riots and unrest spread across dozens of countries, and governments moved to ban food exports to protect their national supplies, further tightening global food supply and driving up prices. Even developed countries faced political unrest over spiking oil prices.

In another insight into the future, the food price rises in 2007 and 2008 drove those countries concerned about security of supply to invest in taking over agricultural land in other countries. While foreign investment in agriculture is not new, what is different this time around is an emphasis by some states on controlling land and growing food exclusively for export to the investing country, driven by concerns around food security. No one yet knows the full scale of land involved, in part because states are reluctant to publicize what has been called by some a “new colonialism.”

One study by the UN’s Food and Agriculture Organization and international NGOs found that in the five African countries of Ethiopia, Ghana, Madagascar, Mali, and Sudan, about 2.5 million hectares of agricultural land were acquired by foreign investors between 2004 and 2009.4 This staggering figure represents almost half the arable land of the United Kingdom—but represents only a fraction of the land involved internationally. One estimate by the International Food Policy Research Institute put the total figure at 30 million hectares in 2009. Another estimate by the Oakland Institute puts the total at 50 million hectares (an area equivalent to half of all the arable land in China).5Prominent examples include an attempt by China to secure 3 million hectares for oil palm production in the Democratic Republic of the Congo, a signed deal for a South Korean company to grow wheat on 690,000 hectares in Sudan, and a large Saudi fund focused on buying up or long-term leasing foreign agricultural land.6 When food runs low, it is the foreign power that has control over the land and the rights to its produce—media reports already indicate that Pakistan plans to deploy one hundred thousand troops to defend foreign-owned farms.7

It is inevitable there will in future be political unrest and geopolitical instability caused by poor countries losing their arable land to wealthier countries, especially when those countries bring in their own farmworkers to grow the food, displacing poor local farmers.

While on the one hand some would see all the above as the market at work, in reality it’s more like a chaotic and risky scramble for resources in a world of diminishing availability. Lester Brown points out that unlike previous food price increases that were driven by a particular drought or monsoon failure and therefore returned to normal on the next harvest, these were unresolved long-term trends that were limiting food supply and increasing demand. It’s harder for the market to respond with more supply if there is insufficient land and water.

This view has been reinforced by price movements since that time. While of course prices dropped with the global financial crisis hitting demand so strongly, even then they stayed well above historical levels, suggesting that we are now facing systemic shifts. As I am writing, wheat prices are spiking again, driven by floods and droughts across many countries, and Russia has just banned wheat exports to protect its food supplies. So these types of problems are rapidly becoming the new normal as we bounce around up against the system limits.

While in any particular crisis experts will argue as to the key causes, there always being many, 2008 certainly showed us what the Great Disruption will feel like. It presented a particularly good example of how resource constraints and ecosystem changes can create havoc in the human economy and do so in complex and unpredictable ways.

It is easy to forget in light of subsequent events that in early 2008 most market participants remained optimistic about the growth prospects for the global economy. Problems in the U.S. economy and rising global oil and food prices were seen as temporary blips that did not suggest anything other than business as usual.

And yet the signs were there, with these issues merely indicators of deeper structural problems in the global economy. When the banks started collapsing later in 2008, this became abundantly clear.

While I couldn’t see the detail of what was to come, by early 2008, it was clear to me that the Crash was no longer a forecast but actually under way. As a result, I got to work on my follow-up letter to “Scream Crash Boom,” this one called “The Great Disruption.”

Although only a few thousand words, it took me over four months to write. I think in hindsight I was fearful of making the call in such a public way. Despite the oil and food price rises, we were at this stage still in boom times. I remember in the first month I was writing that the Dow soared from 11,800 back up to 13,000. Many saw this whole period as the triumph of globalized capitalism. The shakiness in the financial markets in 2007 and early 2008 was seen as a minor blip in an endless boom and an era of supercycles. Saying it was all over felt like exposing myself to serious ridicule.

Nevertheless, in July 2008 I sent the letter out far and wide. The first page read as follows:

And so the moment arrives.

In my first “Scream Crash Boom” letter of 2005 I forecast the inevitable crash of the global ecosystem. I said the resulting economic and social crises would then drive an investment boom in a new industrial revolution and economic transformation. I thought I was forecasting events a decade or two away. Now, just three years later, look around us. The global economy is trembling under its own weight. We see:

•  riots and political crises across Asia as surging food prices, driven by extreme climatic events and surging economic growth, put severe pressure on the daily lives of billions of people;

•  protests, strikes and political upheaval across the world as oil prices respond to the reality of limited supply, threatening recession, or worse;

•  global financial markets lurching from crisis to crisis as complexity, greed and interconnectedness drives the financial system to the edge;

•  debate about external military intervention in countries that can’t deal with the humanitarian consequences of extreme weather, such as Burma;

•  scientists mystified by dramatic increases in melting at the Northern Polar and Antarctic icecaps, at rates way beyond their forecast models;

•  and countless more impacts with floods and fires in the United States, droughts and dying rivers in Australia, melting glaciers all over the world, and on and on.

The ecosystem crash I thought was decades away is now underway and the resulting economic crash is not far behind, perhaps the slide has already begun.

It went on to talk about how this would all unfold over the years ahead and how the global financial markets were inevitably going to be hit by their own complexity:

We have built an incredibly complex, interlinked global society and economic system. While we’re very proud of our creation, its very complexity makes it highly prone to shocks. The interconnectedness we marvel at could well be our downfall as parallel shocks bring the whole system down.

It was clear to me that whereas my friends in business would marvel at the incredible connectedness of the global marketplace, I like many others saw risk in bright red flashing lights.

The response to the letter was very strong. Unlike my 2005 letter, this was not being taken as a forecast of intellectual interest. This time people could feel something was wrong. There was a sense that the world was facing a serious, destabilizing period. While the financial and economic consequences were yet to unfold and the mainstream market had yet to feel any substantial effects, there was sufficient evidence—for those wanting to see it—that something was deeply wrong.

So the responses, even from corporate leaders, generally acknowledged the system was shaking, that there were now risks that could bring it all down. As a CEO of a major Australian company wrote to me, “This resonates very closely with how I’m feeling.”

Another common response was to agree directionally but to be more optimistic about our ability to change. For instance, the CEO of a major company listed on the New York Stock Exchange said in an e-mail to me, “Directionally I feel you are right. I would debate the degree and how fast we will adjust when we see reality.”

Of course, over the next year the economy went into its worst decline since the Great Depression. After the first flurry of blame on investment bank cowboys and weird financial products, people started to wonder if something deeper was going on. They started to question the system.

Thomas Friedman, long a passionate advocate for markets and globalization, wrote a New York Times column in March 2009 that asked:

What if the crisis of 2008 represents something much more fundamental than a deep recession? What if it’s telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall—when Mother Nature and the market both said: “No more.”

My view, firmly held at the time and since, is that 2008 was the year that growth stopped. It was the year, as Thomas Friedman said, “when Mother Nature and Father Greed hit the wall at once.”

While I was naturally very focused on the environmental drivers of the Great Disruption, market advocates like Friedman were looking at the appalling behavior of the investment banks with horror. It was greed gone mad, bad enough in its own right but incredibly dangerous when it happens at the center of a complicated, interconnected system. Everyone had become addicted. When Iceland almost went broke, Friedman described the country as being like a “hedge fund with glaciers.” But now the hedge fund had melted and the glaciers weren’t far behind.

What brings these two drivers together is growth. The demand for growth drives investment bankers to take greater risks in order to deliver the profits and growth their CEOs and shareholders demand. Their cleverness in designing new products that no one else even understands ensures they deliver that growth and personally get their bonuses and promotions. They lend other people’s money to people who can’t afford to pay it back and offset the risk to themselves. The government dares not intervene because these bankers are driving the growth that keeps the masses happy and them elected. All growth is good, no questions asked.

In fact government actively supports the process and in doing so increases the risks further. They borrow to stimulate the economy, with the resulting massive debt putting the economy further at risk, while hoping growth will sufficiently increase government revenues to pay back the debt. Thus the system locks itself in to further addiction.

Of course no one will ever be able to prove what caused the particular crisis in 2008 because the system is too complex. We can’t even forecast the oil price, a single commodity in a relatively simple market. So the idea that we can know in detail how the global economy and society behave in any particular year is not realistic.

What we can know, however, with a high level of certainty is how a system behaves when it reaches its physical limits. It is on that analysis I conclude we hit the limits in 2008. While the crisis may have manifested as food and oil prices spiking followed by a credit crisis, was that credit crisis caused by our addiction to growth and the need to provide cheap credit to drive it? Or did the doubling of oil and food prices take money out of the economy and reduce consumption of other goods on which growth depended?

We can’t know. What we can know, because we can prove it with simple math and physics, is that the global economy is now bigger than the planet, and that means the economy at some point will stop growing. Whether that was 2008 or is still to come in 2012 or 2015 is of historical interest only. It is certainly going to come.

Furthermore, all the evidence to date says we’re not going to have a smooth landing. It will be 2008 on steroids with volatility and a mad scramble for diminishing resources. We’re going to drive growth up against the wall again and again, and it’s going to hurt.

Then, when we get sick of the pain, we will change. But not yet.