In discussions of the underlying obstacles to progress on virtually all of the ecological crises, again and again we come back to the fact that all key decisions are currently constrained, and to a large degree dictated, by financial markets. All real decisions are based solely on an assessment of quarterly profits. Thus, in a very real sense, financial analysts rule the world. It is not governments, or even a conspiracy of corporate executives, but the operating rules of the global economic system itself which dictate the behavior of virtually all players. How can we possibly get leverage on this situation?

It would seem that what is needed is to find some way for all share values to be forced, using existing conventional institutions, operating according to the existing legal structure, and without radical new legislation, to reflect the full ecological costs and risks associated with their activities. Ideally this would operate on an absolute scale, and the market would immediately conclude, as it did with nuclear power before the artificial protection of the Price Anderson Act, that some activities simply represent too great a liability to engage in at all. But more realistically it would be enough to establish some sort of relative scale to help financial analysts establish uniform expectations of future share value discount based upon the relative likelihood that society will come to regard activities of that company as civilly, if not criminally, liable sometime in the future.

While I am not among those who believe that the market is the best system that it would be possible for humans to imagine to organize ourselves, it does seem clear that the existing economic system is so well entrenched that it is exceedingly unlikely to be replaced by anything else before it does irreparable damage to the integrity of the biosphere — if allowed to continue unchanged. If we look at the problem from a systems perspective, it seems clear that the existing economic system is suffering from an acute failure of negative feedback. But we can understand this simply without relying on any previous knowledge of systems theory, or even much economics beyond common sense.

If we look at the stock market, in the crudest terms it runs on two opposing human emotions: fear and greed. These forces exist in a dynamic balance which sooner or later (it is argued) will correct for, and counter balance, the excesses of each other. In more polite conversation these forces are described as risk and return; in any investment there is an opportunity for return and a risk of loss, or at the very least less return than would have been earned on some other competing investment.

Let's examine the behavior of an individual player, in this case a company whose stock is traded on the equity markets. For any given investment of capital from the equity market, it is the responsibility of the management of that corporation to derive as much return as possible. If there are additional costs associated with that activity due to depreciation of the environment which the company does not have to financially incur on its own books, it can ignore these costs as "externalities" i.e. costs incurred by the whole world community, and thus show a greater return on investment on paper. Even if the enlightened management of one company chooses to try address and count these additional costs in its own books, this will ultimately be self-defeating so long as the management of other competing companies choose not to, and are thus able to appear to offer the financial markets a greater return on investment.

Meanwhile our best scientists are experiencing frustration if not despair as the free market system seems incapable of understanding, much less appropriately responding to, their rationally justified fears: We are posing a very real risk to the underlying physical foundations not just of our economic system, but of our very life support system on earth.

So, lets look at how markets internalize fear i.e. risk. There are three fundamental, but interrelated, mechanisms by which risk can be calculated and thus "internalized" in financial terms. One is the risk of loss by "natural" causes i.e. situations where no one else can be held financially culpable. To manage this risk one may purchase disaster insurance which is intended to spread the risk over a large statistical pool who then share that risk together. The other possibility is that there is legal liability on the part of one party. To help manage one's own potential liability one may carry liability insurance as a member of a statistical pool. The cost of the premium will then reflect the magnitude of that individual party's estimated risk. In recent years many feel that civil litigation this has reached the level of absurdity in the United States, and yet ironically this mechanism may be the only option we have as the basis for a logical sequence which will ultimately introduce the necessary corrective fear into financial markets. The third mechanism is reflected directly in the stock price, wherein the value of any given equity as a potential investment is based on its perceived risk vs. return in the eyes of investors.

All three are closely interrelated in various ways. For instance, the additional cost of either insurance, or litigation, increases costs, and thus depresses the rate of return, on investment. If these costs can be assumed to be small, or at the very least consistent across an industry, then they often do not become critical factors in investment decisions. However, where they become, or are perceived to potentially become, significant, then they can become a key negative factor for a given company, or even a whole industry. Witness what we have seen happen with not only tobacco, and soon perhaps alcohol and firearms, but also already with asbestos, silicon breast implants, and to some extent genetically modified foods. In each of these cases we have seen the share price of firms primarily engaged in a high risk activity reduced on equity markets — sometimes suddenly and dramatically.

What is important to recognize here is that the actual share price, the market's valuation of the risk of risk, can be independent of any actual litigation or successful lawsuit. Indeed the way that the markets themselves believe they are supposed to operate is to anticipate events, and discount them fully, prior to their actually occurring. This is perhaps why so many financial analysts are employed. Their job is to anticipate and assign value to the risks and opportunities that various investments pose, so that these factors can be reflected in the share price that investors pay prior to the events themselves ever actually happening. Thus, the possibility that some corporation, or whole sector of the economy, might sometime in the foreseeable future face large additional costs due to litigation needs to be immediately reflected in the evaluation of the share price today, because even if that precipitous drop does not occur tomorrow, there is always some chance that it could happen at any moment in the future when a significant number of share holders become so uncomfortable with the possibility that they suddenly decide to sell. This all points to the underlying nature of the equities markets as places where investors place bets based on the probability of success or failure. All financial equities markets are, after all, like casinos, odds making operations. Rumor, perception, fear, panic, mass hysteria and the herd instinct all play tremendously important roles.

Thus, what we are really claiming is that the real risk, the real cost to society, which society, or certain sectors of society, might someday (soon) decide to try to recoup through civil litigation, is not being accurately reflected in current share values. In fact, since no one knows how to do anything in a completely sustainable manner, almost all corporations have some potential liability in this area to one degree or another. However, it should be possible to identify those which are more or less likely to be viewed as criminally irresponsible by all future generations, and assign the greatest relative negative value to them. Casting this in terms of the values of all future generations may seem too far removed from the current emphasis on quarterly profits to be of any relevance, but follow the line of thinking here:

If value is theoretically assigned in a market based on supply and demand, then that which is ubiquitous (free everywhere) has no value, while that which is now totally unavailable, but was once available, theoretically might have infinite value. Similarly, any tort (legal wrong doing) against the population of a single generation is in theory measurable, but anything affecting all future generations is in theory infinite. Thus, the value (cost) of the liability which results from denying all future generations access to any portion of the previously existing genetic diversity on the earth is in theory infinite (actually two times infinite, or arguably infinity squared). One could argue that it will take a very long time for the plaintiffs to arrive on the planet and press their case, but in fact this class could start with the first generation which experiences the loss, or can even foresee experiencing the loss. These people are already alive now, in both cases.

As to the question of why it is reasonable to assign economic value to bio-diversity in the first place, we have but to look to the emerging fields of biotech, genetic engineering and specifically pharmaceutical engineering to see examples of incalculable potential value. But even if one were to make an argument based on purely reductionist genetic analysis that it is only unique DNA which has value, and not the actual living species, the nascent field of biomimicry already shows us that distinct autonomous organisms do have inherent potential economic value as prototypical examples of potentially valuable engineering principles and processes quite apart from their genetic make up.

[Please Note: I am in no way arguing that such hyper-reductionist machiavellian thinking is philosophically correct, but instead pointing to specific evidence which even one choosing to take such a position must ultimately acknowledge as supporting the validity of the argument for the infinite valuation of bio-diversity.]

However, what is actually at issue here is economics and law, not pure mathematics (where infinity divided by a real number is normally considered infinite) so what we need to bear in mind is that what we are actually dealing with are the relative potential future liabilities of various companies i.e. we grade on a curve. And even then the market will further discount that potential future exposure to arrive at the actual reduction in value of the current stock price. This is standard practice in financial terms. What is not (yet) standard practice is to turn the process toward as yet unassumed ecological costs, particularly those which arise out of the aggregate behavior of many players — this begins to look more an insurance pool, i.e. how much do you have to pay for your C02 insurance? Well, how large is your contribution to greenhouse gasses?

This may sound far fetched, but the insurance companies, which are increasingly paying the cost of the immediate consequences of global climate chaos (global warming) seem to still be in denial about the causes of the situation — at least publicly. One has to wonder how long it will be before this powerful lobby is asking Washington for a carbon tax, or more likely, a targeted carbon tax/premium to fund a bailout for them when they can no longer cover the cost of the massive losses from mammoth hurricanes, which used to come once every century, and now come every year.

Returning to the core question of the valuation of equities. How is this carried out? How does the market establish a price? In theory it is all supply and demand. Buyers and sellers simply bid the price up and down, but in reality there are at least two other factors at work. One is "the financial analyst," people employed by financial institutions, banks, brokerages and others who evaluate companies and prognosticate not only what the company is worth, but how it should perform next quarter. These quarterly predictions, or "expectations," then become gospel in the financial market and if the stock fails to meet them, the price drops. Actually it goes up or down well in advance of the actual figures based on peoples expectation about whether or not it will meet the expectation etc., etc., ad infinitem. The other area is the secondary, or derivative, market, i.e. options, puts, futures, etc. These financial instruments are essentially financial bets that some particular stock will go up or down over some particular time frame in the future.

Essentially, what I am proposing is to find a way to explicitly formalize and calculate an ecological liability discount index value for individual stocks relative to each other in any given market. While obviously no one has the authority to impose such a scheme on any market, everyone is free to engage in analysis and public disclosure. If a large consortium of knowledgeable people started making public disclosure of coherent financially relevant information — and over time it started to correlate with actual performance, even conventional analysts might start to take notice. If it became more than a little influential, they would have to take notice, as it would be shirking their fiduciary responsibility, and thereby risking liability of their own, not to advise their clients. This is of course a little tongue in cheek, but not entirely, in a system based on perception, and the perception of mass perception, as much or more than tangible reality.

At perhaps the absurd end of this line of thinking carried to its logical extreme is the "environmental put" a secondary instrument, derivative, or "bet," based explicitly on the expectation of severe environmental financial liability for a given firm. One nice thing about such a bet is that they could also become like blood in the water for sharks, i.e. enterprising law firms looking for likely targets for lucrative class action suits on behalf of a population suffering under a passionate sense of visceral ecological loss. For the public buying them they would be a way for investors to intentionally make war on the share prices of offending companies, while also benefiting financially if the very existence of a large number of those bets also hastened a climate of panic selling which made those bets a self-fulfilling prophesy.

So far, this has all been written in terms of negatives, negative feedback, liability, costs etc., but it is also important to recognize that the kind of truly rational economic system being described is absolutely essential to allowing any corporate executive or manager the freedom to do the right thing, without being punished by financial markets. Here's why. Let's return to our initial brief example of a manager who wants to internalize, and count, a previously ignored environmental cost of some profitable activity. Unless that manager can point to some tangible savings or benefit on the bottom line, his action would represent, in the world of the financial analysts, an irrational charge against earnings and thus return on investment. However, if in doing so, he can show that the potential liability they had been incurring was reduced or eliminated, it is apt to be viewed by the financial markets more like restructuring, a one time charge against earnings that will be applauded, as it indicates that the firm is getting its house in order and will soon be more profitable. Not only that, by reducing, or better yet eliminating, the source of the potential future liability, the firm is removing an unknown variable, which might even have been greater than estimated, thereby making the estimation of the share value more certain now because it is not clouded by a future liability of unknown magnitude. In general, financial markets like predictability and hate negative wild cards, like unresolved lawsuits, floating around. One could imagine, if such a process took hold, a wave of ecological restructuring as corporations rushed to "get to zero" and eliminate the ecological discount on their future share value. Those that didn't might suffer from panic sell-offs as investors scrambled for safer ground.

All of this is based on back-casting from a not too distant future generation's most likely attitude toward our behavior. I'm speaking here of the very near future, even within most of our lifetimes. To do this, start with one observation about human psychology, we tend to take for granted that which is provided, while feeling resentful and wronged over that which has been lost or denied. So, assuming that a growth economy and technology are delivered to them in tact, but we experience the ecological holocaust already in progress as extrapolated from current trends, mass extinction will almost certainly become an emotional issue of unimaginable magnitude, making our attitudes toward the Nazi's or our concern over who "lost" China in the 1950's pale in comparison. This is just focusing on the "intangibles" of genetic diversity and extinction. Even more likely, if one simply extrapolates the trends, will be serious concerns about food, and the ability of the biosphere to support us. We are talking here about the big three: fish, forests and soils. Needless to say it is not going to be recycling or landfills that people are concerned about when they convene the Nuremberg trials on who lost the environment. It is going to be at best the immense emotional impact of mass extinction, and at worst the basic survival triage for our civilization, if not species. This is so far off the radar for most Americans that it is necessary to explain the issues in a little more detail here.

First, on the mass extinction front, 75% of biologists surveyed agree that we are now living through the sixth, and most rapid, extinction spasm in the history of the planet. Over 25% of all mammals, as well as similar percentages of all other forms of life, are expected to be lost if current trends continue. We have yet to recognize the psychological impact of this on ourselves, but if you don't get it yet, just try interviewing a knowledgeable child on the subject. Believe me, this is going to make tobacco look like nothing by the time these kids get done with us in court when they grow up.

Now for the serious stuff. We are currently using roughly 50% of the biological output of the planet for human purposes. This includes agriculture, forestry, fisheries etc. Here's the key problem: the doubling period is currently ten or twenty years, and the rate of use is still accelerating. That means that sometime in the next decade or two we will simply exceed the ability of the biosphere to provide what we demand from it. Worse yet, the way in which we are using those resources in many case is so shortsighted and stupidly wastefully that it destroys them, denying the whole world future access to them for the sake of short term profits for a few. This will invariably be a target for future prosecution, if our civilization survives the upheaval to our basic physical life support systems which will be the direct result of the cumulative effect of these practices. Remember, it is not unprecedented for civilizations to collapse due to mismanagement of their agricultural resources. Indeed, what is virtually unprecedented is for them not to.

While the Coal Council and other fossil fuel industry groups have succeeded in confusing the issue in the United States to the point where politicians can still get away with calling it a debate on global warming and claiming we still need more study, in the rest of the world the only issue open to debate is how fast the climate is changing as a result of our behavior and whether there is anything else we might try to do about it beyond reducing CO2 emissions. Even on Shell Oil's own website there is a very disturbing graph showing the correlation between atmospheric CO2 levels and temperature over geologic time scales. The correlation is absolutely consistent, and the most frightening part is that over at the right-hand edge the (current) CO2 level spikes straight up off the scale, with temperature not yet having followed. There is some legitimate scientific question between various climate models about exactly how fast the temperature will rise, but no question that it will, dramatically, and that the severity and frequency of storms will as well. Although there is now some perhaps even more disturbing evidence suggesting that as the ratio of fresh water in the North Atlantic suddenly changes due to the polar ice cap melting, (which we are already seeing) the ocean current delivering warmth to Europe could suddenly disappear throwing Europe into a mini ice age — in as little as ten years.

Finally there is the depletion of atmospheric ozone over both the north and south polar regions, but now reaching further and further into the temperate zones. In addition to the direct effects on human health in the form of increased risk of skin cancer and blindness, there are similar effects on animals, but also as yet unmeasured negative effects on plants, including substantially reduced yields of agricultural food plants and susceptibility to outbreaks of disease. But perhaps the most frightening wild card is the potential effect on phytoplankton in the oceans. Many biologists suspect that over some critical threshold of UV these photosynthesizing plankton living near surface may simply suddenly die off, throwing the whole climate into an even more sever imbalance as the last great source of oxygen is removed. This would result in the collapse of the biosphere as we know it.

While it is not clear whether even this last scenario actually portends the outright extinction of human beings, virtually all of these threats in their most serious form, and especially taken together, strongly suggest the collapse of human civilization. It is simply criminally irresponsible to continue to move in a direction that leads to that kind of risk when we know better and can see alternatives. The question is whether our prevailing economic system is really so dysfunctional that it can not absorb and adapt appropriately to that information in advance of the actual catastrophe. We very likely have very little time left to act.

If we want to grapple with these large scale systems problems we will need some way to structure our thinking. One way is to notice that all of the most serious problems have implications of the type indicated after the =>, in one or more of three dimensions:

1. Duration => permanent

one or more orders of magnitude longer than cumulative human existence to date

2. Scale, Geographic => global

affects the whole planetary system in a fundamental way

3. Severity => life threatening

threatens the continued life of humans, human civilization, or extinction of other species

With these dimensional axes it is possible to construct a matrix which might be used to arrive at a single overall value. While that value is necessarily based upon subjective decisions used to assign the relative weighting of the three axes, at least that weighting remains consistent for any given set of assumptions used to construct a particular matrix.

Notice also that the type of problems which are most likely to become the focus of our attention through this lens are not NIMBY issues, or petty distractions, such as landfills or recycling. They are instead the core issues of resource overuse and depletion, especially those which cause directly, or indirectly, collateral habitat loss and resulting extinction. For example, this list explicitly includes: deforestation, particularly in tropical areas, ocean trolling with huge drag lines, top soil loss through industrial agricultural practices, and large scale surface mining or oil production where it results in despoliation of entire downstream ecosystems, as well as the global climatic issues of ozone depletion and CO2 emissions.

This becomes important because if an analyst needs to determine potential exposure to future liability, one needs to focus first and foremost on those issues which are in fact most likely to be regarded as serious environmental torts by courts in the not too distant future. If a network of individuals and organizations could formulate a plausible system for calculating the relative environmental liability, and thus discount rate, for individual corporations, this metric might spread to become embraced by the mainstream financial community. This in turn could have truly earth shaking consequences leading to sudden massive corporate ecological restructuring. This scenario does admittedly sound far fetched, but it is at least plausible and may actually be possible in the near future.