Economic Fixes Should Not Worsen Environmental Crisis

During economic crises, political leaders often urge suspension of environmental protections to save jobs. That is a mistake, argues economist Dodo J. Thampapillai, with the Lee Kuan Yew School of Public Policy, National University of Singapore, because the economy ultimately depends on a healthy environment and sustainable use of resources. The current financial crisis presents an opportunity for governments to restructure their economies in sustainable ways. Yet standard measures of economic performance fail in detecting environmental harm, even as researchers connect increasing global reliance on fossil fuels with extreme events that cause massive loss of human life. Competitive emerging economies are repeating unsustainable patterns of fossil-fuel dependence started by developed nations. Recent financial packages to aid the global economy not only neglect environmental rescue but exacerbate risks by reinforcing the dependency on fossil fuels. Clinging to unsustainable traditions will not lead to financial recovery, Thampapillai warns, and a shift toward alternative sources of energy is inevitable. – YaleGlobal

Economic Fixes Should Not Worsen Environmental Crisis

By ignoring environmental protections in financial-recovery packages, governments invite new crises
Dodo J. Thampapillai
Wednesday, October 19, 2011

SINGAPORE: Rescue responses that followed the financial crisis first surfacing in the northern hemisphere around 2006 before burgeoning into global crisis in 2008 were speedy, intense and even overwhelming. Yet nearly three years on, the signs of recovery remain mixed. While some countries have made questionable recoveries, others display either stagnation or a slow shuffle forward, with some trapped in yet another crisis – the debt crisis.

The purported recovery is questionable because standard measures of economic performance fail to recognize accompanying environmental damages. Both the financial crisis and the environmental crisis have common drivers, many in the making over the past several decades.

The financial crisis aside, the past decade has witnessed an escalation in the frequency of extreme events, including earthquakes, tsunamis, floods and wildfires. The skeptics deny this, but a body of literature connects the extreme events to the factors that drive environmental damage and climate risks. Dominant among these factors is the continued reliance and expansion of fossil-fuel utilization to drive economic growth.

Regardless of this connection, the gravity of the environmental crisis stemming from growth without safeguards has been on the policy agenda for more than three decades. Yet concerted efforts to comply with these safeguards, for example, the Kyoto protocol, have been long drawn out, too often bordering on lip-service. During both the lead-up to the global financial crisis and recovery efforts, little attention was paid to the environmental crisis already gripping the globe. Though belated, there remains a clear need to revisit the rescue packages, re-navigating them towards dealing with the environmental crisis.

Drivers behind the financial crisis have not only hindered genuine efforts to limit environmental risks, but also exacerbated these risks. In such a context, the rescue packages should have been directed towards economic activities that strive to minimize environmental risks. Prominent among these should have been the establishment of an energy infrastructure that would quickly replace fossil-fuel utilization. Instead, many rescue efforts themselves – support for the automobile industry and expansion of road infrastructure – depended on and even expanded fossil-fuel resources.

Hence, the rescue packages have turned out to be drivers that magnified the risks.

As many commentators concede, the main driver of the financial crisis was the prevalence of gross irregularities within an unregulated financial sector. Foremost of these irregularities is perhaps the excessive wages commandeered within the financial sector – driven primarily by the pervasion of asymmetric information and the formulation and delivery of risky financial products – which in turn sustain high wages. The emergence of an elite high-income group delivered clear demand-price signals for the market entry of goods and services that are energy intensive and environmentally damaging. Consider the manufacture of:


  • Airbus A-380 and Boeing 787 Dreamliner, massive aircrafts, which despite claims of fuel efficiency dig deep into fossil-fuel dependency,

  • The Oasis Ocean Liner that boasts of shopping promenades and energy-consumption regimes that could power more than 100,000 homes,

  • Record numbers of SUVs for meeting modest family needs.


The notion that expanded use of such items would hike greenhouse gas emissions and deepen fossil-fuel dependency went unnoticed by policymakers.

Regardless of perverse market signals, fossil-fuel dependency is a paramount issue, particularly with rapid growth of emerging economies. Consider the reliance on coal, the biggest culprit behind greenhouse-gas emissions: An analysis of recent World Bank data on energy consumption reveals that the amount of extra electricity generated each year from coal in China is a staggering 50 billion kWh. For the United States, this amount is 40 billion kWh, and for India, it’s 10 billion kWh. If current trends continue, these three countries alone would add each year some 300 million tons of CO2 to an atmosphere already congested with CO2.

The adverse effects of fossil-fuel extraction extend far beyond greenhouse-gas emissions. Several studies have reported a correlation between fossil-fuel extraction and seismic activity, including Yerkes and Castle in 1976 and Van Eijs et al. in 2006. There are also contested claims that the extraction of oil and coal beyond threshold levels could increase frequency of earthquakes – some claim that this threshold level has been surpassed. The Earthquake-Database of the US Geological Service reported 1,405 earthquake events exceeding 5 on the Richter scale in 1980. In 2010, there were 2,136 of this type of earthquake events, and for the first eight months of 2011, the number is already 1,956.

Of course, the causal factors of earthquakes are not confined to fossil-fuel extraction. Nevertheless, the underlying thesis cannot be ignored. Removal of crude oil and coal from layers beneath the earth prompts pressure reduction, which in turn induces seismic activity. But, the quest for energy has led to the cumulative extraction of vast amounts of oil and coal.  Another reason the correlation between the cumulative extraction load of fossil fuels and increased frequency of earthquakes should not be readily disregarded is the acknowledged correlation between earthquakes and tsunamis. For example Kanamuri and Kikuchi describe the 1992 earthquake in Nicaragua and the tsunami that followed. Australian geoscientist Dale Dominey-Howes reported in 2006 that more than 60 percent of Australian tsunamis were generated by earthquake events suggesting that earthquake sources represent the biggest tsunami source and threat.

Rather than repair economies, the rescue packages restored economies to their unhealthy pre-crisis state.

And the debate on these packages coincided with a claim from biologist Chris Field, a leading scientist from Stanford on the Intergovernmental Panel on Climate Change, that the IPCC had underestimated the climate risks. Economist Kenneth Arrow has explained that the concerns of global warming and climate change were raised as early as the 1940s in response to the raised levels of greenhouse gases following the industrial revolution. The physical evidence in the Stern Report of 2007, despite the controversy and the skepticism, is compelling. The levels of greenhouse gases have more than doubled since the preindustrial revolution period, and if status quo prevails, these levels would increase exponentially. Even if emissions are reduced, the cumulative buildup of pollutants still bears deleterious effects, including sea level rise and fewer coastal assets, increased intensities of tropical storms and wildfires, and loss of water supplies.

The financial crisis presented an opportunity for governments to restructure their economies and navigate them towards sustainable incomes and lifestyles.

To prevent future economic calamity fueled by speculation and hoarding of limited resources, the focus needs to be on ventures such as


  • Developing renewable and low greenhouse-emission technologies instead of further exploration of fossil fuels,

  • Expanding public transport in lieu of car manufacturing plants and roads,

  • Facilitating innovative methods and “closed-loop” production systems that reuse wastes and emissions without filling up environmental sinks.


Of the various rescue packages floated across the world recently, some included environmental initiatives. But these initiatives represented a small fraction of the overall monetary outlay. And their record is mixed. Investigations into the federally guaranteed loan of $500-million-plus to Solyndra – the solar-panel manufacturer that went bankrupt less than 15 months after the US president toured the plant, touting stimulus funding and jobs – gives the skeptics ammunition. But meanwhile, other nations gain ground in developing solar, wind and other alternative energies.

If the correlation between fossil-fuel usage and extreme events is true, then the incremental transition towards energy alternatives needs to be replaced by a revolutionary and abrupt change in energy utilization. Such an abrupt change is probably vital if not inevitable.

The sad irony is that many of the recovery efforts seem centered on preventing such change.



Ashton, W., Chertow, Marian., and Shenoy, M., 2009. “Industrial Ecology – Developing Systemic Solutions to Climate Change and other Environmental Challenges in Indian Industry,” Sustainability Tomorrow, Volume 4, Issue 4: 48-55.

Arrow, K. J., 2007. "Global Climate Change: A Challenge to Policy," The Economists' Voice: Vol. 4: Iss. 3, Article 2.

Berger, D., 2009. "Climate Change Worst-Case Scenarios: Not Worst Enough," The Science Magazine News Blog, February 14. Available:

Dominey-Howes, D., 2007. “Geological and historical records of Australian tsunami,” Marine Geology, 239, 99-123.

Kanamori, H. and Kikuchi, M., 1993. “The 1992 Nicaragua earthquake: A slow tsunami earthquake associated with subducted sediments,” Nature, 361, 714–716.

Stern, N., 2007. The Economics of Climate Change. Cambridge, UK: Cambridge University Press. Available:

United States Geological Service:

Van Eijs, R.M.H.E; Mulders, F.M.M.; Nepveu, M.; Kenter, C.J.; and Scheffers, B.C., 2006. “Correlation Between Hydrocarbon Reservoir Properties and Induced Seismicity in the Netherlands,” Engineering Geology: Vol. 84, Issues 3-4: 99-111.

Yerkes, Robert F., and Castle, Robert O., 1976. “Seismicity and Faulting Attributable to Fluid Extraction,” Engineering Geology: Vol. 10, Issues 2-4: 151-167.



Dodo J. Thampapillai is an economist at the Lee Kuan Yew School of Public Policy, National University of Singapore. He holds a Personal Chair in Environmental Economics at Macquarie University in Australia.

Copyright © 2011 Yale Center for the Study of Globalization

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