Wednesday4 March 2020 ★ FINANCIAL TIMES 9

ENVIRONMENT

Izabella

Kaminska

Opinion

T

hespread of coronavirus

around the world is alarm-

ing, but not surprising. Glo-

balisation creates systemic

risks.As trade, finance,

travel, cyber and other networks grow

in scale and interact, they become more

complex and unstable.

Edward Lorenz,father of chaos the-

ory, showed that a butterfly flapping its

wings over Brazil could cause a tornado

in Texas. An intrinsic outcome of the

growing integration and complexity of

the global economy is that it too suffers

from “a butterfly defect”.

The super-spreaders of the goods of

globalisation, such as major airport

hubs, are also super-spreaders of the

bads. The 2008 global financial crisis

provided a dramatic example of how

contagion could spread from the US to

global markets overnight. So too has the

rapid spread f cyber viruses.o

When the central banks turned on

their monetary fire hoses in the after-

math of the financial crisis they resolved

the immediate problem, which was the

lack of cash. Their attempts to boost

markets now, such as yesterday’s 50

basis point rate cut by the US Federal

Reserve, will have less impact.

This is because markets remain

swamped with excess liquidity. With

interest rates at record lows there is lit-

tle scope for further reductions. It is also

because diminishing responsiveness to

successive interest rate cuts is starkly

evident in tepid growth rates in Japan,

Europe and the US. Much more could,

and should, have been done with fiscal

policy, but that too will be less effective

now — and could even be inflationary, as

meetingexisting demand ill be harderw

due to worker quarantines, closure of

factories and disruption tosupply

chains during this outbreak.

The backward-looking focus of finan-

cial authorities seeking to prevent a

repeat of the last crisis has come at the

expense of building resilience against

new threats such as pandemics.

For example, regulatory policy has

largely ignored risks associated with the

concentration of finance in a small

number of locations. Competitors’

headquarters are in neighbouring build-

ings. As a result, when a pandemic or

other event leads to the closure of Wall

Street (Hurricane Sandy nd 9/11 camea

close to this) or the City of London, the

risk to the global economy is amplified.

The parallel between the compla-

cency, which gave rise to the financial

crisis, and the lack of preparedness for a

pandemic is striking. Rapid growth in

profits and incomes in the decades lead-

ing up to the financial crisis, and the

shortlived nature of other crises, fos-

tered a dangerous confidence that the

threat of another Great Depression had

been vanquished. The result was that

new systemic risks escalated.

In health,rising life expectancyand

success in preventing a repeat of the

devastating influenza pandemic of 1918,

which infected about one-third of the

world’s population and killedas many

as 50m people, has created a false sense

of security. But the world is now more

interdependent. China represents

almost one-fifth of global output, is inte-

gral to global supply chains, and its tour-

istsspend over $260bnannually.

Globalisation and surging trade and

travel within countries and across

national borders has lifted billions out

of poverty, but it also spreads infectious

diseases.

The epicentre of Covid-19,Wuhan, is

typical f many midsize Chinese cities.o

In 30 years, it has grown from 2 to over

11m people, and average incomes shot

up. As in other mushrooming cities,

poor hygiene and lax enforcement of

regulations coexist with people and ani-

mals living in proximity, near airports

from which a virus can spread anywhere

in 36 hours.

As threats escalate, governments are

turning their backs on the international

system. The World Health Organization

is starved of resources and authority,

not least by the US and other rich coun-

tries. Covid-19 has hit at a time when

national public health systems face

huge strains, with capacity undermined

by austerity and privatisation. The UK’s

National Health Service as also beenh

hit by chronic staff shortages worsened

by misguidedimmigration policies.

Pandemics are unlike other global

risks in that they can originate any-

where. In the case of threats posed by

financial systems, climate change, anti-

biotic resistance or in cyber space, afew

actors an reduce the risk. Not so withc

pandemics, where capacity to monitor

and intervene to isolate outbreaks eve-

rywhere is vital, especially in the poor-

est countries. A global effort to develop

vaccines is needed. Sharinginformation

and resources is essential.

High walls will not stop pandemics, or

any global threat. Our integrated and

complex systems are only as strong as

their weakest links. Pandemics pose the

gravest threat to the world economy

and our lives. We must give them the

attention and resources they deserve.

What is being tested is our will to co-op-

erate and the stakes could not be higher.

The writer is a professor at Oxford univer-

sity and author of ‘The Butterfly Defect’

Our integrated and

complex systems

are only as strong as

their weakest links

Rate cuts alone cannot halt global contagion

on banking union, a step generally seen

as essential to shore up the eurozone’s

defences against future crises.

Even more ominous is the erosion of

the technological edge that once

ensured Germany’s command of world

markets in cars, chemicals and other

20th-century manufacturing sectors.

Much of the Mittelstand, the family-

owned firms that are the backbone of

the German economy, is inadequately

equipped for the digital era.

Industrial success injects pride into

the Federal Republic’s political identity,

especially in the CDU, so it can be safely

predicted that efforts will be made to

reinvigorate the German economy. But

it will not happen under Ms Merkel. She

is too wedded to unspent budget sur-

pluses and consensual policies that keep

German society in its comfort zone.

Germany and the EU need fresh blood

at the top in Berlin. Once the CDU has

named its leader, Ms Merkel should pre-

pare to quit as chancellor, so that Bun-

destag elections are held early next year.

[email protected]

In the CDU leadership contest to be

held on April 25, the frontrunner is

Armin Laschet, who is state premier of

North Rhine-Westphalia and Ms Mer-

kel’s preferred choice. His support for

Bashar al-Assad as a guarantor of stabil-

ity in Syria, and for coal-fired power

plants in Germany, inspire confidence

neither in his foreign policy touch nor in

his understanding of why Germans

want swift action on climate change.

Ms Merkel’s economic legacy is like-

wise mixed. Germany is the European

economy’s anchor, but quarterly growth

since mid-2018 has averaged a feeble 0.

per cent. Her governments have taken

no measures comparable in scope to the

labour market and welfare reforms of

Gerhard Schröder, her predecessor.

Despite large fiscal surpluses racked up

year after year under Ms Merkel, public

sector investment has been pitifully low.

The German banking system is one of

Europe’s most fragmented, least profit-

able, most open to manipulation by

local politicians and least enthusiastic

about a full European banking union. As

a result, Ms Merkel has dragged her feet

Merkel, want to neutralise the AfD by

taking a leaf from the book of Sebastian

Kurz, Austria’s chancellor, and moving

sharply to the right on matters of cul-

ture and identity. But this would make it

difficult for the CDU to form a ruling

coalition with the liberal-minded

Greens, a combination untried at

national level but widely seen as one

way out of Germany’s stalemate.

On February 23 the CDU scraped 11

per cent in Hamburg’s state elections,

the party’s worst performance in a

regional vote since 1951. The terrible

result owed much to the mess that Ms

Merkel has made of handing over

power. Annegret Kramp-Karrenbauer,

her handpicked successor as CDU

leader, was so out of her depth that she

resigned after just 14 months n the job.i

responsibility for the problems that are

piling up. The erosion of the western-led

liberal world order, the fraying of the

US-European alliance and the EU’s ina-

bility to get a grip on its economic and

foreign policy challenges have roots in a

multitude of factors, many of them

entirely separate from Ms Merkel’s poli-

cies and style of leadership.

Furthermore, Germany is a model of

prosperity and stability next to other

European countries. Think of Italy, its

mainstream political classes discredited

and its economy stagnant for two dec-

ades; or Spain, paralysed by Catalan

independence demands; or Belgium,

unable to form a government ince itss

May 2019 elections; or the UK, lurching

since Brexit into a rightwing populism

that some compare to Poland under the

Law and Justice party.

For many of Germany’s difficulties,

though, Ms Merkel must take her share

of the blame. Her preference for “grand

coalitions” between her Christian Dem-

ocratic Union and the Social Democrats

— three out of four governments since

2005 — has fragmented and polarised

the political landscape in ways unseen

since 1949. A hard-right party, Alterna-

tive for Germany, not only has Bun-

destag seats for the first time in the post-

war era, but is the main opposition. The

AfD spits hatred at political elites, immi-

grants and Muslims, making it the party

of protest par excellence in former com-

munist eastern Germany.

The AfD’s troublemaking is tearing

apart the CDU. Conservatives such as

Friedrich Merz, an acerbic critic of Ms

T

he OECD hasslashed its

forecast for global growth.

A new refugee crisis is tak-

ing shape on Europe’s

south-eastern borders

because of fighting in the Syrian prov-

ince of Idlib. At an acrimonious summit

two weeks ago, EU leadersfailed to set-

tle their 2021-27 budget.

Wherever you look, darkening clouds

are on Europe’s horizon and vital Ger-

man interests are at stake. Yet leader-

ship from Berlin is lacking because the

domestic political scene is in deadlock.

Nothing will change until Chancellor

Angela Merkel steps down. For the sake

of her country and the EU, she needs to

change her plans and go well before

October 2021, the latest possible date

for the next Bundestag elections.

Unlike many democracies, the Fed-

eral Republic does not let go easily of its

heads of government. In 70 years, there

have been only eight chancellors. Ms

Merkel, in power since November 2005,

has held office for a fifth of that time. For

all her undoubted achievements, how-

ever, her formula has lost its magic. The

longer she holds on, the more question-

able her legacy will be.

She does not, of course, bear exclusive

Merkel is

running

out of road

The economic legacy is

mixed: since mid-

quarterly growth has

averaged 0.1 per cent

I

n the past decade, US oil and gas

companies have become so suc-

cessful in finding and getting oil out

of the ground that they have started

burning billions of dollars worth of

gas each year. When a company pro-

duces oil, natural gas often comes out of

the ground with it. Because oil is so valu-

able, it is often cheaper to burn the gas

than build the infrastructure to sell it.

But the practice — flaring — is both

wasteful and environmentally harmful.

In 2019, companies set fire to 810m

cubic feet of gas a day in the Permian

Basin alone, the US’s most prolific shale

patch —enoughto meet all the residen-

tial gas demand inTexas nda Oklahoma.

If the industry and its regulators want to

have a future, they need to stop, quickly.

Flaring rates have soared along with

oil production. Burning gas is far better

for climate change than venting it into

the atmosphere, but it still emits carbon

dioxide and local pollution. A flaring tax

would sharply reduce the practice.

The surge in flaring comes as the role

of natural gas in addressing climate

change is increasingly being challenged.

Opponents arguethat leaks of methane

(a potent greenhouse gas), cheaper

renewables and a dwindling timeframe

to meet climate targets mean we must

move beyond gas as a “bridge” to a

cleaner future. A growing number of US

cities are proposing to ban new connec-

tions for homes to the natural gas grid.

New York City just announced it would

no longer approve ew natural gas pipe-n

lines. Former mayor Michael Bloomb-

erg, who previously supported gas as a

bridge fuel, last week called it “not all

that much better” than coal.

With natural gas already under

attack, flaring is a self-inflicted black

eye for the industry, as oil and gas execu-

tives acknowledged at a recent flaring

workshop organised by Columbia Uni-

versity’s Center on Global Energy Policy

and University of Texas at Austin. Scott

Sheffield, chief executive of Pioneer

Natural Resources, subsequently called

onenergy investorsto divest from

companies with high flaring rates.

If the industry wants to preserve a

role for natural gas in the energy transi-

tion, it must act quickly to curb flaring

and methane leaks, especially as

sharper scrutiny is coming. Scientists

will be using newsatellite data o delivert

much clearerviews of the problem. And

European lawmakers are considering

regulations to favour oil and gas imports

with lower carbon footprints.

Environmentalists should support

this effort, even if they are opposed to

fossil fuels. Natural gas produced by the

US shale boom has been the key driver

of reductions in American greenhouse

gas emissions in the last decade, as

cheap gas displaced coal. Globally, natu-

ral gas in emerging markets can help

expand access to energy while curbing

air pollution, as in China, where gas has

beenreplacing the use of coal or heat.f

But low gas prices encourage flaring

and stymie investment in the infra-

structure needed to deliver gas to mar-

kets. Flaring may be necessary at times

for safety, but that should be for very

limited duration. At present, there is no

price on the environmental harm. This

is the sort of market failure that justifies

government intervention. To date, reg-

ulation has been lacking. The Texas

Railroad Commission, which grants

permits for flaring, has not onlyrarely

rejected a requestto do so, but just

issued areport seeming to minimise het

problem by comparing the intensity of

flaring in Texas with that of major pro-

ducerssuch as Iran and Iraq.

As US oil production surges, the coun-

try is now the world’sfourth largest

flarerof natural gas. With mounting

scrutiny, more industry leaders will

recognise that abandoning the wasteful

and damaging practice is in their self-

interest. Yet good intentions won’t be

enough. Policymakers need to penalise

flaring to change behaviour, and oil and

gas companies should be demanding

they do so — if not for the planet then for

their own social licence to operate.

The writer is the founding director of the

Center on Global Energy Policy at Columbia

University

A flaring tax can

end this wasteful

and damaging

practice

Because oil is so valuable,

it is often cheaper to burn

the gas than build the

infrastructure to sell it

T

he case for relocating man-

u f a c t u r i n g c l o s e r t o

demand is growing, espe-

cially as risks from global

pandemics, weather anom-

alies and geopolitical tensions rise.

Shutdowns due to the coronavirus in

keymanufacturing hubs, such as China

or South Korea, have exposed just how

vulnerable global supply chains are.

But there is another equally good rea-

son to rethink the nature of our global

supply chains: sustainability.

For most of this century, China’s lower

labour and energy costs made it hard for

western recycling and paper processing

centres to compete. Outsourcing made

even more sense, given that inbound

container ships bearing Chinese goods

were empty on the outbound and thus

available to carry trash cheaply on their

return trips.

Two years ago, however, China

shocked the world when it decided it

wasno longer prepared to be a dumping

ground or the developed world’s trash.f

It raised the quality threshold for

acceptable materials to levels that were

impossibly high for anyone in the west

to achieve. For the recycling industry,

the move equated to the sort of supply

chain shock that most other sectors are

only just getting a flavour of now.

The industry was initially very crea-

tive at finding new homes for the vol-

umes locked out of China. But it soon

transpired that many of them lacked

the facilities and skills to deal with the

rubbish responsibly. To curtail the envi-

ronmental damage inflicted by irre-

sponsible processing, countries includ-

ing Malaysia, Philippines and Indonesia

soon followed China in lifting quality

standards to restrictive levels. A glut of

recycling rubbish with nowhere to go

has been building up ever since.

In the past few months, the recycled

paper market has begun to take the

brunt of the pressure.Prices or mixedf

paper and cardboard collapsed late last

year. They are negative now, meaning

paper mills have to be paid to take rub-

bish that they previously paid for.

In Australia — which was particularly

dependent on Chinese waste processing

— the problem is so bad that local

authorities have stopped asking for

paper to be sorted altogether. There is

simply no point.

Meanwhile, in countries that still have

their own paper processing capacity,

such as the UK, mills are dictating

increasingly tough standards. This

could have knock-on effects on local

councils. Many are committed to multi-

year contracts for commingled pick-

ups, which means they can’t easily

improve quality by forcing households

to do more of the sorting at home.

But even if that happened, it seems

unlikely that better-sorted rubbish can

solve the long-term problem. As one

senior waste practitioner told me, the

old globalised recycling set-up repre-

sented a harmonious and virtuous cir-

cle. After all, China’s export-led econ-

omy was flooding the west with the

cheap disposable goods that were con-

tributing to our ballooning waste prob-

lem. But as the world’s manufacturing

hub, China was also best positioned to

make use of the recovered material.

Investing in domestic sorting and

processing is all very well. But for it to

work, the real solution lies in generating

final demand for the reprocessed mate-

rials domestically. That’s hard when the

manufacturing and packaging activity

occur abroad.

On that front there is hope. New pro-

ducer responsibility policies, to be

introduced over the next few years in

the UK and EU, pass the liability of pol-

lution to the manufacturer. This could

stimulate that demand, and reshoring.

The theory is that if developed world

corporations are made responsible for

the pollution associated with the full

lifecycle of their products, that would

remove the cost advantage of using sup-

pliers from areas with lower environ-

mental standards.

That, in turn, creates an incentive to

bring production and packaging activity

closer to the source of recyclable mate-

rial. To compete, the developing world

would then have an economic incentive

to raise environmental standards for its

export-focused manufacturing.

This might finally end the not-at-all

virtuouscircle of the west effectively

outsourcing pollution to the developing

world every timeit raises its own

domestic standards.

[email protected]

There is green gold in reshoring rubbish

It seems unlikely

that better-sorted

trash can solve the

long-term problem

EUROPE

Tony

Barber

Ian

Goldin

Jason

Bordoff

MARCH 4 2020 Section:Features Time: 3/20203/ - 18:39 User:charlotte.middlehurst Page Name:COMMENT USA, Part,Page,Edition:USA , 9, 1