Don’t Bet on Wall Street: The Financializationof Nature and the Risk to Our Common Resources
Fact Sheet • June 2012
A
ll too often when an economist or banker looks out at an expanse of virgin forest
or free-owing river, she doesn’t see nature — she sees “natural capital.” Thisconcept promotes the view that our natural resources should be attached a value andmanaged using market-based principles of supply and demand. It is the cornerstoneof the “green economy” that many free-market proponents and market-orientedenvironmentalists assert will provide environmental sustainability.
But relying on the market to sort out resource con-straints and pollution problems is no solution at all. Infact, it provides a means through which global nancialinterests can prot off of the things we need most tolive — like water. Instead, our essential resources shouldbe viewed as a public trust, and part of the commons— managed collectively in the public interest, not forprivate prot.In July 2011, Willem Buiter, chief economist at Citi-group, wrote that he expects “to see a globally integrat-ed market for fresh water within 25 to 30 years. Oncethe spot markets for water are integrated, futures marketsand other derivative water-based nancial instruments— puts, calls, swaps — both exchange-traded and OTCwill follow.”
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Valérie Issumo, a Switzerland-based econ-omist, has developed what she terms an “Ethical WaterExchange” designed for the “commoditization of treatedwater” on which futures can be traded or “be the condi-tions for credit lines.”
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Rarely do we get such a clear-cut view of the desires of global nancial interests. Both Buiter and Issumo repre-sent a movement to nancialize our common resources,
a movement that lobbies against common-sense regula-
tions (often rejecting them as “anti-business”) and seeksinstead to reap large prots in the name of protectingthe environment.Relying on market-based schemes to protect the en-vironment and ght climate change is misguided. In2007, former World Bank chief economist NicholasStern described climate change as “the greatest andwidest-ranging market failure.”
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In the wake of the larg-est nancial crisis in 75 years, one both created andspread by the use of ‘innovative’ nancial instruments,the impulse of nanciers to push more market-basedschemes and more reliance on nancial instruments toght climate change or distribute water makes no sense.Yet, this same nancial crisis has motivated actors in thenance sector to look for new ways to earn the hugeprots to which they have become accustomed, and tosee natural resources as the next horizon for growth.But as we saw with the global food crisis of 2008, theincreased size and role of nancial actors in commod-ity markets can fuel price increases and spread short-ages. During 2008, real food prices reached near-recordhighs. The commodity price escalation between 2002and 2008 was the steepest, most pronounced commodi-ty price surge in decades — prices were higher for morecommodities and for a longer period of time. The 2008food price increases closely followed record-breakingprices in the commodity futures markets.These commodity market price increases did not stayconned to nancial markets. Food processing com-panies, like breakfast cereal manufacturers, ended upcompeting against giant investment rms on inatedcommodities auctions to buy corn and wheat contracts,which drove up grocery prices for consumers. Similarly,during the mortgage crisis, we saw nancial instrumentslike credit default swaps create a system that rewardedspeculators to the great detriment of homeowners. Like-wise, deepening our reliance on nancial instruments tomanage our essential resources is a recipe for disaster.
COMMON
RESOURCES
What Is Financialization of Nature?
Financialization can mean different things in differentcontexts, but generally it means “the increasing role of nancial motives, nancial markets, nancial actors,and nancial institutions in the operation of the domes
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tic and international economies.”
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As such, nancial
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ization is a way of organizing society that places thenancial sector of the economy in a position of primaryimportance.The nancialization of nature follows upon the com
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modication, privatization, and marketization of ourcommon resources. Strictly speaking, commodicationis the commercialization of something not generallyseen as a product. Whereas a widget is a commercialproduct, water has not traditionally been viewed as acommodity. Commodication turns an inherent valueinto a market value, enabling it to be bought and soldon a market. Privatization transfers control and man
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agement of these commoditized resources from publicownership to private ownership. The commodities canthen be priced and a market can be created for them.At this point, nancialization acts upon the commodityas an asset and applies various nancial instruments toit, such as through a water futures contract or a carboncredit option.Water, for example, is not a commodity; it is a commonresource, access to which each of us has a right.
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In thevision of Willem Buiter, however, water will become thepremier commodity. It will be traded in a globally inte
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grated market, just as wheat or oil is today. In order tobe traded in this way, water will have to be given a mar
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ket price, and that price will be dependent on supplyand demand, as well as on the inuence on the marketof speculators looking to make a quick prot.
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At this
point, water would be able to serve as an asset, againlike wheat or oil, upon which various nancial instru
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ments could be worked. Thus, water will have becomenancialized. It will serve as the underlying asset of avariety of nancial instruments, and its control will passmore and more into the hands of the nancial sector.The nancialization of nature is a means of transferringthe stewardship of our common resources to privatebusiness interests. It makes the stewardship of those re
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sources secondary to the prots of nancial actors, suchas banks and hedge funds. To the extent that commodi
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cation, privatization, and marketization pave the way forthe nancialization of nature, they can all be considereda part of the process of nancialization.
The Growth of the Finance Sector
Since the economic slowdown of the early 1970s, thenancial sector has played an increasingly large rolein our economy. The nance sector’s share of domes
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tic corporate prots rose from below 16 percent in the1970s and 1980s to as high as 41 percent in the decadebefore the 2008 nancial crisis.
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In the wake of the
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nancial crisis, after seeing its prots plummet, the sectoris back to accounting for about 33 percent of domesticcorporate prots.
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The growth of the nance sector has not been limited tothe United States. According to a policy brief publishedby the United Nations Conference on Trade and Devel
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opment, “the proportion of national income accruingto the nancial sector has increased across all countriesand regions.”
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At the same time, the level of debt com
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pared to revenues has increased and there has been anincrease in speculation on nancial assets.
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As the nance sector grew in size, it also grew instrength. Policies in Washington came to reect theinterests of nancial actors. The 1980s saw a push forderegulation. The Reagan administration pursued de
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regulation of industries ranging from energy companiesto banking. The move for deregulation became broadlybipartisan in the 1990s and culminated in the passageof the Gramm-Leach-Bliley Act of 1999, which removedregulations put in place during the Great Depression toprotect banks from the hazards of speculation.At the same time, so-called market-based approachesto regulation became popular among policymakers. Inthe place of regulatory structures that prohibited certainactivities, policymakers began to favor providing eco
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nomic incentives for promoting or discouraging certainbehaviors. Perhaps the most prominent example of thisis the push for cap-and-trade schemes. Touted as a mar
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ket-based solution to disincentivize pollution, it actuallysells the right to pollute, given that a company can frontthe cost to do so.
Both Buiter and Issumo have made clear that it is thegoal of the nance sector to develop nancial instru
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ments on the ground for these new commodities. If trades on a globalized water market can serve as thebasis of water-asset derivatives, as Buiter suggests, thenso can trades involving a variety of pollution credits. Inother words, these new assets, based on commoditizednature, will work in the nancial markets like any othercommodity. And, their prices will be subject to the sameforces as those commodities.
Examples of Financialization of Nature
Cap-and-Trade
Cap-and-trade is a radical shift in how environmentalregulation works. Traditional environmental regulationrelies on permission, prohibition, standard setting andenforcement to meet environmental ends.
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Regulatedsectors need to meet the standard set or face enforce
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ment penalties. Most classic U.S. regulation, includingthe Clean Air Act, rst enacted in 1970, and the CleanWater Act, rst enacted in 1972, ts that mold.In contrast, cap-and-trade attempts to create markets in
actual or potential pollution to create an economic in-
centive to pollute less.
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Many, but not all, systems alsoinclude a cap, a system-wide limit to the amount of pol
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lution that can be emitted. Instead of limiting what anindividual plant may emit, each polluter is given an allo
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cation of emissions. If it doesn’t use up that allocation ina year, it may sell those emission allowances to anothercompany that polluted more than its allocation.
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Cap-and-trade is commonly proposed by those whooppose simply regulating pollution as a more “free mar
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ket” approach to environmental problems. The marketis used to allocate costs, rather than using the perfor
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mance-based indicator of meeting a regulated standard.Proposals for cap-and-trade systems range from using
them to limit greenhouse gases to using them to control
water pollution.
Trading Water Quality
In theory, water quality trading, a type of cap-and-trade,reduces pollution of our waters by allowing polluters tobuy offsets from other polluters who act to reduce theirown pollution. In practice, water quality trading is justa great way, as Delmarva Poultry Industry, Inc. says, “tohelp farmers earn money while providing polluters withthe opportunity to increase their pollution.”
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Pollution trading is an attempt to introduce market-based principles to pollution control — an activity thathas been achieved historically through strict regulatoryoversight of pollutant sources under federal laws like theClean Water Act and the Clean Air Act. These and otherair and water laws are premised on the notion that it isillegal to pollute, and they employ a “technology-driv
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ing” effort to force more stringent and more protectivedischarge standards on polluting industries. In responseto these laws, industry has had to develop new means toreduce production advancing their technology. Pollutiontrading, in contrast, allows polluters to buy and sell fromone another the right to pollute our common resources.The Obama administration has been promoting waterquality trading in the Chesapeake Bay watershed. Theplan is to establish an interstate market in nitrogen andphosphorous runoff. Once established, the ChesapeakeBay model could then be taken to watersheds through
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out the country.
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In Europe, the European Commissionis planning to propose similar water quality tradingschemes, as well as water trading, in its Blueprint toSafeguard Europe’s Waters.
Pricing Water
In 2009, the Organisation for Economic Co-operationand Development (OECD), an international economicassociation of wealthy nations, released a report thatpromoted the use of market-based water pricing reformsto combat water scarcity, address environmental con
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cerns and efciently allocate water resources.
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This wasanother attempt to shoehorn water into a market modelthat cannot accommodate its unique, life-sustainingqualities and to bring water under what one WorldBank water expert calls “the hegemony of the marketmodel.”
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But in the United States, household water use consti
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tutes a tiny fraction of total water withdrawals, so anywater savings would have little impact on scarcity. Do
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mestic water use was 8 percent of freshwater withdraw
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als, compared to 40 percent for irrigation, livestock andaquaculture and 52 percent for industrial, commercial,mining and electric utilities in 2005.
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This means thateven a 5 percent increase in agricultural water efcien
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cy could make enough water available to supply a quar
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ter of America’s residential consumers with water.While unlikely to have much of an effect on householdwater use, water pricing could pave the way for theintegrated water markets that Willem Buiter foresees.Once residents have been conditioned to view water asa commodity with the aid of water pricing, the market
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ing of water could become much easier. This processof commodication got started with the introduction of portable bottled water in the 1970s and 1980s. But thepricing of household water would bring all water undermarket forces.
Trading the Right to Fish
When people think of shing, they probably imagine anindependent sea captain and his crew braving the ele
-ments in a small vessel to bring a fresh catch to shore
and to our plates. But the current focus of global policyfor managing our sheries, called catch shares, is de
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Don’t Bet on Wall Street: The Financialization of Nature and the Risk to Our Common Resources
All too often when an economist or banker looks out at an expanse of virgin forest or free-fl owing river, she doesn’t see nature — she sees natural capital.” This concept promotes the view that our…
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