Sunday, 27 November 2011

Living with limits

I have been reflecting on the Grantham Institute for Climate Change Annual Lecture given by Martin Wolf: Living with limits: growth, resources and climate change. Sometimes ideas need to time to brew before their true value becomes apparent; this lecture was one such occasion.

The lecture outlined the positive sum game of economic globalisation with all the associated benefits of prosperity and alleviating poverty. This has been successful through the lens of economics and Martin Wolf, economist at the Financial Times, has been one the most eloquent proponents. He opened the lecture by declaring that he is no expert on climate but he went on to talk about areas in which he is expert explaining that, as the world reaches the limits of resources, the game cannot continue. The challenge is how to rein in expectations to live within limits. He closed by stating that he had no idea how this could be done and throwing the challenge back out to the audience.

After the lecture, the immediate impression was that he had told us nothing new, simply explaining that the world has a problem and we do not have a clue how to solve it. We adjourned to a reception where there were a number of useful and animated conversations about climate change, the economy, resources and the general theme of where next? We did not solve the world’s problems that evening, but strolling towards the train station with James Smith the new chairman of the Carbon Trust, we shared optimism that the job can be done but leaving open the question of how.

During a period of quiet reflection on Martin Wolf’s words reveals that a very useful foundation stone has been laid. Martin Wolf is a leading exponent of economic globalisation and a gifted communicator, who writes for the readership of the Financial Times – rather different to the greenies who read the Guardian. Martin Wolf has the ability to start a dialogue with the mainstream to persuade policy makers to back off from unquestioning adherence to the policies of economic globalisation. This is a vital first step in shifting the debate onto ground where it is possible to find solutions.

I wish Martin Wolf well and congratulate him on a lecture that is hugely valuable in defining the problem as the pre-stage of finding the solution.

Monday, 21 November 2011

Astride the Chasm

The bond markets have calmed a little this morning after Spain elected a government with the mandate for cutting Spain’s deficit but this snippet of news should be treated with caution. The chasm opening up within the euro zone could become a long deep depression for Europe with a credible risk of bringing down the entire global financial system. When David Cameron and Angela Merkel met last week they represented the two sides of Europe; Merkel for the 17 countries in the Euro zone and Cameron for the 10 EU countries outside. They tried to find common ground but failed. Europe’s politicians stand astride tectonic plates as they slowly move apart. Each time the earth moves, their legs open a little wider until they are stretched so wide that it becomes impossible to step back onto one side or the other. They must decide which side of the divide they choose or risk being dashed on the jagged rocks below.

Angela Merkel wants to rescue the euro zone without Germany paying the price. For a single currency to work requires that rich regions transfer capital to poorer regions. Within a country with a single currency like the UK, the government transfers funds from the relatively rich South East region to the North East and other relatively deprived areas. In the United States, there are mechanisms that transfer funds from strong to weak states. Germany has done well out of the euro; its strong export-led growth has been driven by an exchange rate that is much lower than it would have been had Germany retained the Deutsche Mark. For the euro to survive intact requires closer integration between euro zone countries which should include transfers from the strong to the weak, from North to South, from Germany to Greece.

The popular view in northern Europe is that the hardworking and frugal Germans should not have to bail out the spendthrift and lazy Greeks but these stereotypes do not give the full picture. Germans and Greeks are not the same; there are deep cultural differences between Teutonic northern European values and laid back Mediterranean ways of living. This is part of the rich tapestry of Europe to be retained and celebrated not forced into some sort of homogenised amalgamation of European values.

Germany cannot have it both ways; reaping the benefit whilst avoiding paying the price. There are two options: to draw the euro zone together into a federal structure with all the responsibilities that implies, or to dismantle the Euro – fully or in part. Whilst politicians pursue a third way, of fudging the issue, they make their lives easier from one meeting to the next, from one week to the next, but the crisis gets deeper and the resolution harder.

Europe’s politicians should stop trying to hold Europe together with parcel tape; it won’t work. Clear-eyed analysis and bold decisions are required. A sustainable Europe needs a series of credible currencies that reflect the diverse nature of Europe. The euro will have to be split; the only question is into how many bits.

Monday, 14 November 2011

FAA sticks the boot in

The US Federal Aviation Administration (FAA) has made an official submission to the UK’s Department of Transport’s consultation on Sustainable Aviation. It is unusual for a foreign government agency to get so closely involved in UK policy making, but in certain circumstances this can be useful in ensuring that policy takes into account a range of stakeholders including key allies and trading partners. In this case it looks like the FAA is lobbying to defend the status quo and resist efforts to drag aviation into the 21st century.

The UK is taking a lead in developing sustainable policy for aviation; which – if it is to be effective – must tackle deep-rooted resistance from a highly conservative and globalised industry. The current policy framework locks the industry into an outdated framework in which aviation fuel for international flights is free of tax. This anachronism dates back to the end of the Second World War when aviation was seen as a key component of building the peace and emissions from the small fleets of aircraft were not seen as a threat to the global climate. Agreed in Chicago in 1944, the Convention on International Civil Aviation still rules aviation today. Article 24 prevents countries from levying tax on fuel carried on board aircraft. No country will lead in taxing aviation fuel as airlines would reconfigure their operations not to need to pick up fuel in that country and shift long-haul hubs to other jurisdictions. There is a stalemate in which all commercial decisions are taken on the assumption that aviation fuel is tax-free and will remain so.

The green aircraft designs needed in the 21st century are on the drawing board but have little chance of getting into the air as the engineers have to compete with conventional 20th century gas guzzlers burning cheap fuel. Even the newest plane on the block, the Boeing 787 Dreamliner is just the final model of 20th century aviation, more efficient, yes, but nowhere need the efficiency needed in the future. The Dreamliner has a future beyond the introduction of a tax on aviation fuel, for passengers who can afford high ticket prices such as time-poor business passengers and the rich, but those of more modest means will fly in highly efficient, but slower, aircraft. To develop these new aircraft requires a proper business case by levelling the playing field through removing the tax exemption for aviation fuel. The oddity is that there is a much better aviation industry waiting to launch if only policy makers could understand fully the opportunity.

The FAA does not agree, according to the UK newspaper, the Sunday Times who have seen the submission. The Office of Environment and Energy at the FAA expresses their ‘serious concerns about the UK’s approach to aviation’ and climate change worried that the policy will constrain aviation rather than support sustainable growth. There is also dislike that the UK is taking a more realistic viewpoint to the extent that biofuel can replace conventional aviation fuel. My detailed examination of aviation shows that the UK government is not being bold enough in the policy it proposes. To me the FAA viewpoint looks like stuck in the past trying to defend the indefensible.

Advanced orders now being taken for Peter McManners’ next book Fly and Be Damned: What now for aviation and climate change?

Monday, 7 November 2011

Financial Transaction Tax

The Financial Transaction Tax (FTT) proposed for Europe comes from muddled thinking but, oddly, if the objectives were clarified this could be a good tax, not just for Europe but for the world.

Chancellor Merkel and President Sarkozy have proposed a Financial Transaction Tax (FTT) levied at a rate of 0.1% and expected to raise €57bn. The UK Chancellor of the Exchequer, George Osborne is opposed, arguing that such taxes need to be brought in globally if London is not to suffer at the expense of other financial centres. In the United States, Democrat Senator Tom Harkin and Representative Peter DeFazio are calling for a tax on stock, bond and derivative trades but the Republicans who control the House of Representatives have always opposed transaction taxes and will be hard to persuade of the benefits. I would like to see the deadlock broken by shifting the dialogue from raising tax to improving the operation of the financial system.

American economist , James Tobin put forward a proposal in 1978 to introduce a tax on all currency trades to limit the role of the speculator. He suggested that the receipts could be held centrally to help fund aspects of the work of the UN; it was this secondary objective that caught the headlines. The Tobin tax became the Robin-Hood Tax in common parlance.

In my book Adapt and Thrive: The Sustainable Revolution, I proposed a share transaction tax with the clear objective of reducing volatility and lengthening the time horizon used by investors so that the long-term planning needed for sustainable business becomes the norm. A Robin-Hood tax it was not. Investors that have to pay a small but significant percentage to switch ownership change their behaviour. Instead of grilling the management over their plans for the next quarter or the next year (a huge disincentive to adopting sustainable strategies) investors will examine the plans for the next decade and beyond. My proposal recognised the need to include in principle the major global financial centuries such as London, Frankfurt and New York but, crucial to acceptance, the revenue would remain with national governments to use as they see fit.

Financial markets provide liquidity and capital but an often quoted metric is that financial trading is one hundred times the level of trading required to support the real economy. Each successful speculative trade takes a profit from the market to appear in the bottom line of a hedge fund, investment bank or fund manager. If this is curtailed by the McManners tax then the market is more stable and supports the real economy better. Resistance arises because traders in the financial centres would see their incomes go down and there would be complaints that the tax was a drain on the market. What would we prefer; a stable market from which the government harvests some of its tax revenue or an unstable market in which the speculators rule?

Merkel and Sarkozy are misguided to argue for a FTT to raise money to bail out the euro zone; but a transaction tax to stabilise the financial system, brought in across all the main markets, with revenues retained at the national level, would be a step towards healing the financial system.