Circular economy and technology

Source: Tim Heffernan, here

This is the third post regarding circular economy. In my first one (see here) I argued that before discussing the details we have to deal with the concept of circular economy and I put some conceptual questions. In my second one (see here) I discussed circular economy and economic growth and my conclusion was that circular economy can’t resolve (or it can only partially resolve) the conflict between environmental impacts and economic activity, even if it is 100% adopted worldwide because there are planetary, natural limits to growth. I finished this post writing that “Circular economy approaches are helpful and useful, but they are limited (and at the same time stimulated) by limits to growth.”

In this third post, I will deal with the relation between circular economy and technology development, or to put it in another way to study the dynamics between technology development and resource management.

We all know that any naturally or physically growing system can be understood in terms of stocks, flows and feedback. Stocks are accumulations of things that change over time through the interaction between inflows and outflows. Feedback occurs when changes in the size or composition of a stock affect the rates of inflows and/or outflows (feedback maybe positive or negative). As it has been proven, in a bounded natural environment, the balance between inflows and outflows is determined by different principles for renewable and non-renewable resources (for more see G. Turner “A comparison of The Limits to Growth with 30 years of reality”, Global Environmental Change 18 (2008) 397– 411 here).

Consider non-renewable resources like oil, rare metals, phosphorus etc. I think that if we use the example of oil, we can better understand the role of technology from a systemic point of view, exactly as it has been discussed by Donella Meadows at her masterpiece “Thinking in Systems – a Primer” (for more see here). 

So, when a new oilfield is exploited, part of the profits gained is invested in establishing new additional oil wells, something that results to additional oil extraction. This leads to more profits and extra investment in oil wells. This is a typical positive (or reinforcing) feedback and the economics work in such a way that the easiest (and less costly) oil resources are firstly depleted. In any case, there is a time where extraction will become more difficult and costly, so the expected benefits will be lower than the costs involved for oilfield exploitation and this will reduce the investments in new oil wells. This is a typical negative feedback or a balancing one. But this will also make oil scarcer, so its prices will rise and so more money will be available for investments in difficult and costly oilfields. This description outlines how different types of feedback determine the system’s behavior for short or long periods. Studying the history of oil exploitation certainly demonstrates the political, social and economic importance of those feedbacks (for more on this topic I strongly suggest Sonia Shah’s book “Crude: The story of oil”, see here). 

Source: New York Tines here

Nonetheless, what is the final result? As Meadows has shown and Sonia Shah demonstrated a. the potential lifetime of a newly discovered oil field (under the initial conditions and scale of operations) is substantially reduced as a result of the system dynamics b. oil companies invest for new fields in some of the most impoverished and unstable areas of the world and c. new technological advances (e.g. deep water drilling) are making new, very difficult and costly oil fields available but with substantial environmental and health risks.

In this point, I think it is useful to mention one of the key-conclusions made by the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling in its report "Deep Water: The Gulf Oil Spill and the Future of Offshore Drilling," Report to the President, January 2011 (for a summary see here).

“Scientific understanding of environmental conditions in sensitive environments in deep Gulf waters, along the region’s coastal habitats, and in areas proposed for more drilling, such as the Arctic, is inadequate. The same is true of the human and natural impacts of oil spills.”

It does seem to me that the concept of natural limits to growth is here again and technology can’t overcome it, no matter how advanced it will be. And the reason for that is that as our technologies become ever more advanced and complex, they try to resolve problems in much more complex and less understood conditions. The consequence of this exponentially increasing complexity is that “complex systems fail in complex ways”, which are not predictable!

From a resource point of view, further more advanced and efficient technologies make new oil fields available (e.g. fracking and its impact in US economy). So this provides more oil and maybe it expands the time where oil will be available, with a certain environmental cost (for details see here). Nevertheless, the big picture is that those technological advances are making the depletion of oil resources faster!

Source: here

It is not so difficult to prove that the role of technological advances is similar to renewable resources too; the main difference is that renewable resources like fish population are controlled by the balance between inflows and outflows and not but stock availability (scientifically we say that they are flow limited, while non-renewable are stock limited).

I believe the example of oil highlights the role of technology from a resource point of view. Technology developments can’t overcome limits to growth and at the same time they accelerate the process of depletion of non-renewable resources because stocks are finally limited, despite the temporal system dynamics and pricing. And certainly, as technology complexity grows, environmental and health risks are becoming more and more difficult to be managed.

The term “throughput” is frequently used to describe the flow of energy and matter from ecological resources through the economy and back to ecological sinks. At this point, I will use the phrasing from the article “A systems and thermodynamics perspective on technology in the circular economy” (written by Ramelt & Chrisp, available at Real World Economics Review, issue 68, see here).

“For industrial systems, a low throughput of matter and energy implies a smaller ecological footprint and greater life expectancy and durability of goods and infrastructure; a high throughput implies more depletion of resources that will need to be renewed and more waste that will need to be disposed of (Meadows and Wright 2008). System dynamics and thermodynamics tell us that a tolerable rate of throughput and entropic transformation is ultimately dictated by the natural system, not by economics or engineering.

A possible task for engineering, within limits, would be to maximise the durability of stocks by minimising inflows of low entropy natural resources and by minimising outflows of high entropy waste and emissions. The role that industrial societies have assigned to technology is, however, much more Herculean. We have asked it to simultaneously and boundlessly minimise environmental impacts and maximise economic growth.”.

The direct consequence of this analysis is that as long as we maintain high throughput, as long as we keep high material and energy consumption patterns (as nations, industries and citizens too) we can’t expect technology to manage the existing biophysical limits of the planet, independently of how circular we will make the economy. And the waste generation will keep growing because waste is the product of a high throughput and technologies can only accelerate its generation. 

Going to Haiti

On my way to Haiti, changing one airplane after another, I was obliged to stop thinking my usual activities and focus to a usually forgotten reality.

According Wikipedia, with a Gross Domestic Product (GDP) estimate of US$6.56 billion in 2009, Haiti is routinely regarded as one of the poorest nations in the western hemisphere. Based on estimates by the World Bank in 2005, the percentage of people living below the US$1 per day poverty line in Haiti is 54%, and the percentage of people living below US$2 per day is at 78%!

Trying to understand the situation in the country, I discovered that it has the world’s lowest electricity coverage, just a little bit above 12%! And the high Infant Mortality Rate of 64 deaths per 1000 live births is a result of the poor healthcare system, and the lack of a well-planned education system is the cause of low literacy rates (45%) in the country.

And regarding waste management, the situation is maybe even worst. The current waste management system includes collection of maximum 35% of waste generated. The rest is left in the streets where it is usually burned.

In Port-au-Prince, Haiti’s capital and major urban centre, the inefficiency of the solid waste management system represents a critical risk to public health. The current solid waste management system has never been fully integrated into the metropolitan public services system; instead, it is characterized by a high level of institutional instability, poor governance, limited human and financial capacity, and improper solid waste-disposal practices by urban communities. Moreover, the 7.3 earthquake that shook the capital city on January 12 of 2010 and destroyed over a quarter million homes and businesses has further compromised an already strained formal and informal waste management sector. And of course it left more or less 20.000.000 tons of debris waste that are still waiting to be managed.

Well, going to Haiti, just before my airplane will be landing, I realize once more that what is called Poverty Trap is very real and very strong and it concerns more or less 50% of the planet’s population.

I am also feeling deeply in my heart that the Poverty Trap and the Environmental Degradation (what a nice scientific phrase we use to describe the daily misery of living within any kind of waste, without access to clean water and elementary sanitation rules) will never be separated. As long as the Trap exists, it is further reinforced by Environmental Degradation and vice-versa.

But there is something more. Does anyone from the western world thinks or speaks about the situation in Haiti today? Does any NGO campaign for it? Or the countries trapped at the Poverty Trap simply do not provide business opportunities, not even for NGOs, so there is no reason to campaign about them?

I am thinking much more but I will write them after some days, as soon as I will have finished my trip to Haiti and I will have a much better idea about it.

Until then, please do not forget that if we leave Haiti alone, it will never be able to escape the Trap.  

Are we heading towards a Carbon Bubble?

It seems that there is a growing doubt regarding the efficiency and the results that will be achieved through the Carbon market.

Even worst, recent findings document that there is a potential for a Carbon Bubble which will have tremendous negative effects to carbon trading and subsequently to the efforts for Climate Change abatement.

Here are some of the latest developments, as they are described in the Carbon Tracker report available at the relevant web-site. 

The Carbon Tracker initiative is a new way of looking at the carbon emissions problem. It is focused on the fossil fuel reserves held by publically listed companies and the way they are valued and assessed by markets. Currently financial markets have an unlimited capacity to treat fossil fuel reserves as assets. As governments move to control carbon emissions, this market failure is creating systemic risks for institutional investors, notably the threat of fossil fuel assets becoming stranded as the shift to a low-carbon economy accelerates.

According a research made by the Potsdam Institute, in order to reduce the chance of exceeding 2°C warming to 20%, the global carbon budget for 2000-2050 is 886 GtCO2. Minus emissions from the first decade of this century, this leaves a budget of 565 GtCO2 for the remaining 40 years to 2050.

But the total carbon potential of the Earth’s known fossil fuel reserves comes to 2795 GtCO2. 65% of this is from coal, with oil providing 22% and gas 13%.

This means that governments and global markets are currently treating as assets, reserves equivalent to nearly 5 times the carbon budget for the next 40 years. The investment consequences of using only 20% of these reserves have not yet been assessed!

The fossil fuel reserves held by the top 100 listed coal companies and the top 100 listed oil and gas companies represent potential emissions of 745 GtCO2. This exceeds the remaining carbon budget of 565 GtCO2 by 180 GtCO2.This means that using just the listed proportion of reserves in the next 40 years is enough to take us beyond 2°C of global warming. On top of this further resources are held by state entities.

 Given only 20% of the total reserves can be used to stay below 2°C, if this is applied uniformly, then only 149 of the 745 GtCO2 held by listed companies can be used unabated. Investors are thus left exposed to the risk of unburnable carbon. If the 2°C target is rigorously applied, then up to 80% of declared reserves owned by the world’s largest listed coal, oil and gas companies and their investors would be subject to impairment as these assets become stranded.

The top 100 coal and top 100 oil & gas companies have a combined value of $7.42 trillion as at February 2011. The countries with the largest greenhouse gas potential in reserves on their stock exchanges are Russia, (253 Gt CO2), the United States, (156.5 Gt CO2) and the United Kingdom, (105.5 Gt CO2). The stock exchanges of London, Sao Paulo, Moscow, Australia and Toronto all have an estimated 20-30% of their market capitalization connected to fossil fuels.

The UK has less than 0.2% of the world’s coal, oil and gas reserves, and accounts for around 1.8% of global consumption of fossil fuels. Yet the CO2 potential of the reserves listed in London alone account for 18.7% of the remaining global carbon budget. The financial carbon footprint of the UK is therefore 100 times its own reserves.

London currently has 105.5 GtCO2 of fossil fuel reserves listed on its exchange which is ten times the UK’s carbon budget for 2011 to 2050, of around 10 GtCO2. Just one of the largest companies listed in London, such as Shell, BP or Xstrata, has enough reserves to use up the UK’s carbon budget to 2050. With approximately one third of the total value of the FTSE 100 being represented by resource and mining companies, London’s role as a global financial centre is at stake if these assets become unburnable en route to a low carbon economy.

The Carbon Tracker report mentions that “In the past decade investors have suffered considerable value destruction following the mispricing exhibited in the dot.com boom and the more recent credit crunch. The carbon bubble could be equally serious for institutional investors – including pension beneficiaries - and the value lost would be permanent”.

The authors believe (and I also share the same opinion) that today’s financial architecture is not fit for purpose to manage the transition to a low-carbon economy and serious reforms are required to key aspects of financial regulation and practice firstly to acknowledge the carbon risks inherent in fossil fuel assets and then take action to reduce these risks on the timeline needed to avoid catastrophic climate change.

They also add that “The regulatory regimes covering the capital markets need realigning to provide transparency for investors on the assumptions behind valuing unburnable carbon. With the global economy following the fortunes of the financial sector, it is essential to create capital markets which are robust enough to deliver an economy which can prevent dangerous climate change. Unless a more long-term approach is required by regulators, the shift in investment required to deliver a low carbon future will not occur.”

Greek Rescue: are you kidding?

I closed my previous post (Greece’s collapse and the EU Titanic) writing that “As far as Germany, the captain of the Titanic, does not change its behavior, even if Greeks manage to do their best, they will manage to collapse as first class passengers”.

Well, I was wrong. According the discussions between troika and the greek goverment even if Greeks do their best they are going to collapse in extreme poverty. Because here are the terms and conditions offered by Germany (and consequently EU) and IMF (apologies for not listing other actors like the French and the Dutch prime minister – they are simply members of the cast with secondary roles).

The rescue package consists of a new 130 billions € loan, which will replace the almost 80 billions € that will be cut by the “haircut” applied to private sector debt holders. Actually the Greek debt will be much higher as soon as the “Rescue package” will be agreed. Someone could say that’s fine because the new bonds will be with a better interest rate and with longer pay-back period. But this is just the top of the iceberg, because the new bonds will be ruled by the British Law and not (as the current ones) by the Greek law, which means that any haircut will be almost impossible. So Greece will exchange 80 billions € of debt controlled by the Greek Law with 130 billions € of debt controlled by the British Law!

Even so, I could discuss such an investment made by our European partners as a form of support to a struggling economy. But it is really disgusting to notice that during last 40 days, every time the Greek government was close to finalize an agreement with the so called Troika (EU, ECB and IMF representatives), the Troika put new terms and conditions, worst than it has asked 10 days ago.

Such a behavior can be explained in only one way:  it seems that Troika’s order was to test the limits of our society and make an agreement not as a partner but as a financial Dictator.

This has resulted to unbelievable terms and conditions offered and not negotiated. Here are some of them:

• 20% reduction of the minimum salary, which will drive in a downward spiral all salaries and will make recession much deeper
• 25% reduction in all pensions, which are already very low in most of the cases
• Massive and blind dismissals through the public sector which will boost unemployment from 18% to 25%

And the best: 95% of the new 130 billion € bailout will be used just to ensure pay-back of the new and the remaining (after the rescue) loans! Merkozy proposed that a specially supervised bank account should be used in order to ensure that no money of the bailout funds will be used for non-approved activities like pensions, education and healthcare system.

Well, I am not complaining – the blame is put firstly to the ridiculous and completely incapable Greek political system, but also to all of us who finally left our country to become a pariah like this. We have to find the way out of the crisis and we will do it, sooner or later. After all, we have survived during much more difficult periods and we still have huge resources of creativity and imagination. And last year, we managed to have a primary budgetary surplus, for the first time after many years.

Burning German flags
outside the  Greek  Parliament (7/2/2012)

But on the other hand, I do not believe that the only way out of the current Euro crisis is to drive some societies to collapse.  I wonder if the EU officers and politicians do understand that they create long-term anti – EU feelings and feed nationalist movements. I revolt when I understand that Banks are above all, the top-priority of the EU policy. And I understand that the recent humiliations against Greece are a clever way to draw our attention away of the real problem: the banking system that is the real cancer of Europe.

I believe that Greece has no other option than to make an agreement with its EU partners. This agreement will create huge negative long-term impacts to Greek society, but who knows, maybe EU policies will change later. If this will not happen, Germany and its colleagues create the playground to push Greece (and not only) out the Eurozone, in order to secure their economies.

I have to say that they will be proved wrong once again.

Two years ago, they fought against any “haircut” option. Now they are obliged to do it.

One year ago, they were predicting the success of the austerity programs applied to Greece, Portugal and Ireland. Now they admit that they are not enough and new rescue plans are required.

Few months ago, at the end of October 2011, they said (more or less) the crisis is over because they found out a long-term solution regarding Euro debt crisis. Two weeks later the markets sent Euro at the bottom and few weeks later France (and others) lost the AAA rating.

Simply, you can’t stop a fire just closing the door of the room which is on – fire.

As it was written recently (7/2/2012) in Spiegel:

“But it is already clear that this aid package will not save the country. It appears it will only delay a Greek insolvency -- and it will serve to create new hardships for the country's population. It is time for politicians to admit that their carrot and stick strategy has failed. The idea that the country can be freed from its debt quagmire though austerity programs and aid pledges tied to conditions just isn't going to work. It won't even work if private creditors forgive part of the country's debt”.

By the way, the title of the above mentioned article was “It's Time to End the Greek Rescue Farce”.

Greece's collapse and the EU Titanic

The Greek drama is going to its end within next 30 – 50 days. And as it is well known from the ancient Greek drama, no matter if the end will be a happy one, the major messages have already sent and their importance is global.  

Greeks themselves have done a lot of nasty things that resulted in today’s drama. An incapable political system, corruption, nepotism, a useless growth of public sector, tax evasion, and a spirit of “making money with the less or even no effort” have been some of the characteristics of our society for the last 10 years.   But still, most of the society and especially the private sector work a lot, much more than the EU average. As for social benefits, the Greek welfare state simply never happened.

A lot of infrastructure has been delivered using EU funds, but also a lot of money has been spent for “white elephants” that were used just for 15 days during Athens Olympic Games and now they are hanging around as symbols of an incapable state. And decades of billions are spent on a permanent basis for new weapons (aircrafts, submarines, armored vehicles etc.) in order to keep a high level of army readiness against the possibility of a war with Turkey. USA, Germany and France together control around 90% of the Greek army supplies.

Even so, all the previous are not enough to explain the Greek tragedy today. The real problem is much more than a Greek one.

Allow me to start with some stereotypes that create a lot of confusion. Those stereotypes are repeatedly used by international press, in some cases just due to ignorance and in other cases on purpose.

Stereotype 1: Greece will collapse because it does not follow the rules that IMF and EU are insisting to be applied. I know a couple of other countries like Portugal and Ireland that are applying the rules with religious dedication and much more social consensus than Greece. But unfortunately they are very close to collapse too – needless to remind you that Ireland collapsed in 2008 just few months after  a storm of articles that praised its competitive and open economy that was built as the rules said. And I can also add a lot of other European countries that are not so close to collapse but they are not so far too, independently of their compliance with IMF and EU rules.  

Let me put it in another way. Do we know any country around the world where the application of the rules proposed by IMF and EU for my country (25% reduction in private sector salaries, massive privatizations of everything that has value, collapse of the public utilities, and austerity until death etc.) has resulted in good results? I do not think so.

Stereotype 2: Greek governments did not implement the specific measures IMF and EU have proposed and this is why the situation goes worst. In fact, what happened is rather the opposite. Greek governments said yes to everything that was proposed (as everyone knows there was no negotiation at all) and applied all major suggestions: they increased VAT from 11 to 23% (which killed the tourist sector), they cut salaries in public sector by 20%, the average private sector salary reduction is about 25%, they increased the direct and indirect taxes to unbelievable levels, they cut pensions from 20 to 50%! Of course the tax system was not reformed and privatizations were not promoted as IMF and EU wanted. But this was practically impossible with the public sector on strikes and the society in demonstrations.

What was the result of the bold plan that EU and IMF suggested? An 18% unemployment rate and thousands of young people searching to migrate. Also, a 10% reduction of the National Gross Domestic Product. As a result, there is a substantial increase of current-account deficit and the debt as percentages of GDP. As ECONOMIST magazine wrote in its last issue (January 28^th ) the proposed plan simply it is not working!

Stereotype 3: I heard someone saying that German tax payers (and not only) have already paid a lot to support Greece. This is much more than a lie. It is an upside – down of the reality.

In fact Greece has taken no money for free during last years from any European or other country. Greece borrows money with 5% interest from Germany and Germany borrows money with 0.5% from the markets. That’s really a good investment, right?

Everything is clearly written in thousands of papers in Internet. Event the European Task Force that has arrived to Athens in order to support Greek reforms is not working for free. Recently, an officer from Brussels informed me that France and Germany will be paid by EU in order to provide their technical support.

Stereotype 4:  It is a debt crisis not a crisis of Euro. This is the favorite of Merkel. Unfortunately, she is one of the very few that understand it that way. Still Germany has all the power to create a media campaign to promote its position, but the reality doesn’t change. Greek debt is just the cherry upon the pie. The pie is Euro problems: lack of EU-wide tools for common fiscal policies, absence of any coordinating mechanism related to tax issues, myopic competitiveness management by Germans and most of all a completely incapable political leadership for the last 10 years. All those have transformed Euro from the most ambitious experiment in Europe to the worst nightmare.

Well, the truth is that Greece is the weakest link of a very weak European chain. And no matter what will be the future of Greece, inside or outside the Euro Zone, the weakness of EU will not change. EU goes like the Titanic towards the iceberg, although the iceberg was visible for more than 3 years now.

But the captain (in this case Germany) shouts that it will leave the boat first unless everyone on board agree and obey to its demands. This is a no way - out situation.

We do not know if there is still time to save the boat, even if we all agree to captain’s rude orders. And the captain knows well (I hope) that out of the boat it has no chance to survive in the global ocean.

Greeks must work hardly to change their own society and make it more competitive and productive. They have to make it business – attractive in order to fight unemployment. They have to transform their political and administrative system; they have to clear out corruption and nepotism; they have to create a fare tax system. They also have to keep education and health-care services alive and provide a minimum social support to the poorer part of the society.  

Bu I really doubt if all of them can be implemented with the current behavior of IMF and EU. As far as Germany, the captain of the Titanic, does not change its behavior, even if Greeks manage to do their best, they will manage to collapse as first class passengers. Not so attractive and inspiring…