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The biggest threat to long-term wealth

Environmental degradation: A wealth destroyer

I think environmental degradation is the biggest external threat to my wealth. It makes me poorer, even as I save to get richer.

Mostly your financial future is within your control. If you work hard, avoid debt, and invest, then as long as you’re healthy you’ll do fine.

But some threats are outside of your control:

  1. War
  2. Revolution
  3. Environmental degradation (see Collapse by Jared Diamond)

Of these, environmental degradation currently looks the most dangerous for Western investors.

The UN’s new Global Biodiversity Outlook says that all the 2002 targets to reduce biodiversity loss have been missed:

The report says a number of habitats are approaching ‘tipping points’ beyond which recovery will be difficult or impossible. It cites the death of large areas of Amazon forest, the collapse of coral reef ecosystems and the shift of many freshwater lakes to algae-dominated states.

If the world was a stock, it’d be going to zero.

Fears that don’t matter much

Most money bloggers are scathing of ‘greenies’. They see bigger risks in Government borrowing, taxes, foreign competition, and devaluation.

Not me. Those risks are legitimate concerns, but they’ve all been tackled many times before:

  • Worries about taxes and public and private debt are as old as civilization.
  • The IMF bailed out the UK in the mid-1970s. Yet we have a far higher standard of living now than then.
  • Foreign labour and globalisation makes us richer, not poorer. It’s why you’re not a farmer and why your jeans cost less than a decade ago.
  • Inflation is not new. Warren Buffett points out a 95% devaluation of the dollar in his lifetime didn’t stop him getting rich.

In contrast, the current rate of environmental degradation is insidious, unprecedented, rarely checked, and potentially catastrophic.

The Earth: A wasting asset

Monevator is a personal finance blog, so let’s put it in those terms:

Good investors buy assets that grow in value or that generate an income. The best investments like stocks and property do both.

Poor investors buy wasting assets. Examples include consumer electronics, fashionable clothes, cars, and non-antique furniture. These purchases start falling in value as soon as you buy them. You get use out of them, but owning them in the long-term doesn’t make you richer.

For hundreds of millions of years the Earth grew ever more productive. What started as primordial gloop evolved into myriad forms of life that grew still more productive and interconnected (give or take the odd meteor!) By the time humans arrived, every corner and deep place in the Earth had been colonised by life.

About 10,000 years ago, we invented agriculture and began multiplying in earnest. Along the way:

  • We hunted most of the world’s large mammals to extinction.
  • We severely degraded populations of everything else.
  • We burnt down forests to replace them with crops or game.

For perhaps 9,700 of those years, none of this really mattered. Humans and our domestic animals substituted for the predators and herds we’d destroyed. I’d love to see a North America with millions of buffaloes hunted by wild cats, but the ecosystem probably doesn’t need them.

But with the industrial revolution, our ability to cause environmental degradation rocketed. To cut a 300-year long story short:

  • Environmental degradation such as forest clearing and over-fishing took on industrial dimensions.
  • With the ‘green revolution’ (in farming) and medical advances, the  population soared from less than one billion in 1800 to nearly 7 billion today.
  • Our ability to create non-biodegradable trash went exponential.
  • Hundreds of millions of years worth of solar energy stored in fossil fuels was burnt in less than a century.
  • Despite recent controversies, most of the world’s scientists agree such burning of fossil fuels is altering the Earth’s climate, with unknown consequences.

Our consumptive and destructive way of life – lived by 7 billion people – has transformed our planet from a productive asset into a piggy bank that we at first raided and have now smashed to the floor to get at what’s left.

Our golden goose has become a wasting asset.

Environmental degradation and you

“What did a panda ever do for me?” some people say.

This viewpoint tries to sound tough but it’s just ignorant. Even if you don’t care for cuddly animals, nearly everyone enjoys the environment when we can – and we all need the food it supports. We take it for granted.

Economists talk about ‘utility value’ – the value you put on an investment on the basis of its anticipated performance. Utility value reveals how environmental degradation has made you poorer, and how it will make you poorer in the future, too.

Each one of us gets a load of economic ‘services’ from the environment, from fresh air to food to pleasure. But we get a lot less than most of our forefathers did – we have to go further to find a wilderness, or fish deeper, or never expect to see 10 butterfly species in our back garden again.

In this sense, we’re growing poorer by the day.

For 99.9% of human evolution, the Earth provided fresh fish from the seas, oxygen from huge forests, good hunting, and vistas from almost any hill. But such assets have been consumed, instead of being nurtured for the long-term.

It’s like spending your capital instead of investing it for the future.

  • 70 years ago, Americans could visit stunning coral reefs in the Florida Keys. Now they’re near-dead, and the recent BP oil slick could finish them off.
  • 70 years ago, Europe still enjoyed seemingly unlimited seafood. Now most stocks are gone, even tuna is endangered, the seabed has been scraped bare, and the farthest fishing grounds are on the point of collapse.
  • 70 years ago, your father’s father grew up in a landscape full of birdsong and wildflowers. Now – even after 20 years of ecological awareness – songbird populations in the UK are still falling. Even hedgehogs are declining.
  • Animals are going extinct at a very fast rate – up to 1,000 times the historical background rate. In one poll, 70% of biologists agreed we’re experiencing the fastest mass-extinction in the Earth’s history. A trip of a lifetime to see lions and elephants could soon mean a trip to the library.
  • When I was a student it was still possible to go to Thailand and get a boat to somewhere pretty much untouched by man. These places have almost vanished in 20 years. (Even the remotest Indonesian islands have seen their reefs dynamited in a crazy fishing method that destroys the coral reef).

The world keeps getting warmer, the sea more acidic because of it, rainforests are being cut down to grow beef and palm oil, and the waters are rising.

Yet we keep on breeding and carelessly consuming, seemingly oblivious to it.

The ultimate price of environmental degradation

The great unknown is whether environmental degradation will prove catastrophic to humanity. (The planet and life itself will survive).

James Lovelock – the scientist who coined the Gaia thesis – reckons it’s already too late. He thinks we’ll be lucky to see more than couple of hundred million people huddling at the poles by the end of the century.

Let me repeat that, before anyone quips about enjoying it while we can:

  • Our society, art, culture, science and great cities – not to mention our children and grandchildren – will be wiped out, according to a man who advanced our knowledge of planetary science more than anyone alive. A 91-year old man with nothing to gain from saying so, and who is no fan of environmentalists.

Though I’m not optimistic, I’m not quite as gloomy as Lovelock.

I’m typing this on a brand new Mac that sings of human ingenuity. We already have most of the tools at our disposal to stop climate change and our dependence on oil (and the dodgy regimes that own it). I agree we probably won’t take the steps required to reverse the damage, but we could if we truly tried.

  • Hard-headed expert Sir Nicholas Stern put the cost of halting global warming at 2% of GDP in his Stern review a couple of years ago – much less than the loss from the recent recession.
  • The worldwide ban on commercial whaling in the 1970s enabled whales to recover. It’s not impossible to reverse and rebuild stocks of threatened species.
  • Even human population growth – the elephant in the allotment of environmental degradation – could be halted. Europe and Japan have proven advanced societies can voluntarily have fewer children. If pundits stop turning that into a pension scare (and if the religious, who have more kids, get on-board) then there’s some hope.

Your future wealth in the balance

Most time bombs don’t explode. We’ll probably learn to grow food in vats. Perhaps they’ll be fuelled by solar power and nuclear fusion.

But even if we can stave off environmental collapse through technology, what kind of world do you want to leave your children?

  • A world where a trip to the coast is a visit to a lifeless beach to see the offshore fish farms on the horizon?
  • One where the only tigers are robot toys made in Korea?
  • A world where you can only ski in giant domes that are artificially cooled from the globally warmed breezes that melt the Alps, even in winter?

By all means complain about petrol prices, the cost of sustainable seafood, and schemes to save forests and wildlife.

But don’t expect your grandchildren to thank you for making them poorer.

Further reading on environmental degradation:

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{ 14 comments… add one }
  • 1 ermine May 14, 2010, 10:56 am

    the problem with this

    Even human population growth – the elephant in the allotment of environmental degradation – could be halted.

    is that some estimates indicate that we are already 60% above the natural carrying capacity of the earth, without the stored ancient sunlight a.k.a. fossil fuels.

    Kudos for taking the wider view. The rate of destruction might be changed by peak oil, however, so the recent past is not necessarily a guide to future performance 🙂
    .-= ermine on: we can generally have anything we want, we can’t have everything we want =-.

  • 2 The Investor May 14, 2010, 11:01 am

    @ermine – I agree, but it’s hard to argue for death on a widespread scale. The fact is this would be a more beautiful world with just a billion people in it, but who wants to volunteer to go? Not me. Let’s hope technology can catch up.

    By the way, if anyone saw the ‘rich friends’ post that went up earlier, that was an accident! It’s meant to go up next week. I’ve taken it down and rescheduled! 😉

  • 3 Macs May 14, 2010, 12:45 pm

    As with personal finances, so with sustainable economics:

    1) Live within your means
    2) Don’t draw down capital faster than it can replenish

    Of course, few really ‘get’ those ideas when it comes to money, how will they ever grasp the necessity of applying them to truly vital resources?

    The ‘dismal science’ has much to answer for. Human beings are biological creatures, we evolved from the biosphere not the economy, yet economists would have us believe the environment is a sub-set of the economy and that environmental costs are ‘externalities’ to be discounted. A sound ecosystem is a prerequisite for a sound economy, not something that can be ‘substituted’ for from economic activity.

    Sure, we COULD produce oxygen on an industrial scale to replace the trees and algae, but how much would it cost? How much energy would it take? There’s no way we could afford to substitute those environmental services, yet the economists insist on valuing the resources at zero when in fact it should be recognised as a subsidy from the ecosystem to the tune of trillions of dollars a day.

    The market is supposed to be efficient, and the market would be able to produce oxygen – at some cost. Then it would need to address the other services we get from trees – let’s make a synthetic wood factory! Oh, and then we have to do something about regulating regional temperatures like forests do. Woowee, let’s make some air conditioning installations. Groundwater regulation? Loads of pumps and sumps and pipes, says the market solution. Air filtration? More big factories… Soil building? MORE big factories…

    Yeah, right, the market is efficient. NATURE is efficient, forests do all of this for free using only a fraction of the incoming solar energy available. THAT is efficient, thermodynamically, biologically and economically. But because there is not a person somewhere making MONEY out of it, it is all valued at zero, and the services are uncosted.

    And that’s why I’m not convinced we can avoid collapse – our priorities are skewed. Infinite growth in a finite system is impossible, but it’s what we’re trying to do. In nature, growth is a phase, followed by maturity and then senescence. I fear humanity will jump straight to senescence without ever reaching maturity.

    Barring sterilising the planet by unleashing our full nuclear arsenal, we will not ‘destroy the planet’, but we are very much in danger of shifting it to such a position as it will no longer be hospitable to bipedal primates like us. Once we’re out of the way, the system will revert to the mean and evolve something else. But any awareness of ecology will show that populations in overshoot will eventually collapse, and a human population of seven billion or so is seriously into overshoot made possible only by huge energy subsidies. We’re now between the rock of environmental degradation, and the hard place of peak oil. Something soon will have to give. We are the Easter Islanders about to cut the last tree.

  • 4 The Investor May 14, 2010, 1:47 pm

    @Macs – Brilliant commentary, I couldn’t agree more. (Sadly 🙁 ).

  • 5 Forest May 14, 2010, 4:52 pm

    This is an excellent, excellent post. Money is not my motivator in life and being able to enjoy nature in all it’s glory far outweighs any paychecks…. If the future only holds paychecks and no nature it will likely be miserable… Very often sci-fi mimics reality long before it happens…. In Wall-E, Avatar and a long list of recent sci-fi the theme is that we left our planet because we destroyed it….. Let’s hope they are the sci-fi stories that are not true!
    .-= Forest on: Does A Minimalist Lifestyle Breed Laziness? =-.

  • 6 Macs May 16, 2010, 1:47 am

    @the investor: thanks for your kind reply.

    Personally, I’m stuck between this awareness of just how *fizznucked* our current economy appears, and trying to build a passive income to give me the financial independence necessary to escape the 9-5. It’s hard to reconcile, I will gladly admit. Now more than ever, I feel, the traditional retail investors’ caveat of ‘past performance is no guarantee of future returns’ applies. Looking forward… well, what can we see?

    There are serious issues to address, and I have been convinced that one of (if not THE most) important issues is peak oil. Ten years ago I would have said without a doubt that climate change was the number one issue. Of course the two are related, but as an individual I have to decide which is the most pressing within my lifetime. I’m not too proud to admit that my analysis swings between extremes. Sooner or later, our economy is due a dramatic ‘phase change’. The big question is how long ‘they’ can keep things looking normal – our energy use is pivotal to our economy, and the most relevant factor to our current population overshoot. If (when) energy costs become excessive, then globalisation has to go into reverse gear, and a lot of what we have taken for granted in the last few decades becomes unfeasible.

    So, as someone not quite in a position to start serious investment for a few months yet, I wonder what view you’re taking, and how you’re shaping your portfolio?

  • 7 FinEngr May 18, 2010, 3:19 pm

    M –

    Well-written, thought-provoking post. Your outlook on our future is bleak yet graphic.

    I must commend you on two points. First, bringing up that permanent locales & the advent of agriculture could be considered the start. I would recommend the book: Plows, Plagues, and Petroleum.

    Second on bringing up Lovelock. Sadly not many people know of him, his books, or his theories.

    If I am going to profit on the degradation – it will be through water. Beyond every other environmental concern, this one goes severely undervalued and is the most fundamental.
    .-= FinEngr on: Don’t Be Fooled by Sneaky Labeling! =-.

  • 8 The Investor May 18, 2010, 9:16 pm

    @FinEngr – Thanks for your generous thoughts, and for stopping by. Water could indeed be a big issue – I’ve invested in small cap water consultancies in the past – but I have to admit I suspect water is one of those things that may be solvable through science given a bit of political and financial pressure. In contrast, biodiversity seems to me a case of ‘abuse it and lose it’, unless one entertains thoughts of resurrecting species from dried specimens in museums and so on, which my scientific genius ex-girlfriend told me forlornly once was pretty much impossible.

  • 9 FinEngr May 19, 2010, 5:36 pm

    Yes – given the advances in desalination, the reality is we have a strong Plan B to clean water if conventional methods fail. Same with energy – there’s always nuclear.

    So could I surmise that she’s your “ex” because she hasn’t seen Jurassic Park and therefore doesn’t know that it is indeed possible? 😉
    .-= FinEngr on: Don’t Be Fooled by Sneaky Labeling! =-.

  • 10 The Investor May 19, 2010, 9:04 pm

    The thing I keep meaning to research with nuclear is the amount of fuel available. I seem to remember reading once that even if the Western world alone switched to nuclear, there’d only be a few generations of fuel left. In someways it just gets us back to where we started – and all solutions have to work for everyone anyway, if the climate truly is being affected by man’s activities.

    The sun is the answer I feel. Freeman Dyson saw all this with his Dyson Sphere’s 50 years ago – a true visionary.

    We’d need to combine solar/alternatives with a manageable amount of society restructuring (does anyone like sitting in car for 45 minutes twice a day? I couldn’t stand it. One day I suspect it’ll seem as inhuman as mining or sweatshops). But I don’t think progress needs to stop, more the truly wasteful consumption.

  • 11 Financial Samurai May 21, 2010, 3:08 pm

    I’ve read this post before on my PDA on my bus ride home, and just realized I never commented cuz it’s hard on the thing!

    The funny thing is… you can be a billionaire in China for example, and life kind of sucks b/c the pollution is so bad!

    There’s a reason why despite high taxes, there is a migration out West to California. The weather really does make us happier, and the sun really does shine longer and brighter.

    The good thing about living in a pollution zone is that you can move since the world is so big. Think on the bright side and escape dreary London!

    Sam
    .-= Financial Samurai on: The Emergency Fund Fallacy =-.

  • 12 The Investor May 21, 2010, 4:44 pm

    @Sam – You could be right mate. At the moment I am sort of rooted in the UK due to family health issues (plus carbon guilt, though I always offset FWIW) but I think a stint in Sydney or the Balearics might beckon after that.

    Ten years ago I’d have said San Francisco, but I don’t think I could wrangle a work permit now! What a wonderful city it is.

  • 13 Aury (Thunderdrake) May 27, 2010, 8:52 pm

    Wow. This post just… Pulled me in and I read it very deliberately.

    You have an absolutely phenomenal way with writing.

    Unfortunately… For most huge institutions out there… I’m afraid there’s nothing that can really stop them from environmental destruction. And the really tragic part? All of this destruction and induced scarcity works in their favor.

    Corporate veils are too strong and there’s no real liability that can cause any relent. Life and human rights are secondary to corporate and government profit.

    I couldn’t ever conceive a child. Let alone the bad laws in being a father, but a world I wouldn’t want to leave behind for future generations. I’m afraid working towards sustainable environments far exceeds that now.
    .-= Aury (Thunderdrake) on: Hoarding Dragon Basics – The Stock Market =-.

  • 14 TJT July 23, 2011, 1:58 pm

    Thanks you for writing this, it was a great summary of the financial perspective of our environmental destruction.

    As I stand on the side of the road with my bike, waiting for the thousands of cars to go by so that I can cross, I often wish that we would go ahead and run out of oil so that the destruction can stop.

    Running out of fossil fuels will be painful at first, with huge economical and lifestyle impacts, but at least the earth could begin it’s beautiful recovery.

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