C L I M A T E C H A N G E D E C A R B O N I Z I N G P L A N

You know that the best you can expect is to avoid the worst1

CLIMATE CHANGE IS NORMAL IN THE COURSE OF THING S

The normal temperature for the earth is very hot and little or no permanent ice. As life
has evolved, the earth has trended toward cooler temperatures. Past climate history
is that with little or no warning, there have been “dramatic shifts in temperature,
storminess, and precipitation.”2 Climate is essentially “a precariously balanced non-
linear system that lurches between very different states of coldness, dryness, wetness,
and warmth.”

There are many interacting climate processes that cause “a warm world of flowing
water and verdant growth to become a cold world of dry winds and arid
landscapes.”3 Greenhouse gases let visible light and ultraviolet radiation from the
sun reach the earth’s surface, but absorb some of the infrared radiation reflected back
to space, thus heating the earth’s atmosphere. Without the global warming effect of
the greenhouse gas CO2, the surface temperature of the earth would be ~0 degrees F,
rather than its present average of 59 degrees F. Without the cooling effect of photo-
synthesis, especially the phytoplankton in the oceans, the earth would overheat and
be uninhabitable by humans.

ANTHROPOGENIC CARBON EMISSIONS ARE NOT NORMAL

Presently, human activity adds ~8.2 billion tons of carbon into the atmosphere annu-
ally from all sources. Of this amount, the seas presently absorb 40%; therefore 4.4 bil-
lion tons are added to the atmosphere annually. Today, there is ~880 billion tons of
carbon in the atmosphere. Scientists believe that 935 billion tons may be the tipping
point beyond which the earth will experience runaway warming as it has in past cli-
mate cycles during the earth’s history. At the current rate of carbon emissions, we
will reach 935 billion tons by 2020.

Accounting for both direct and indirect annual CO2 produced from consumption no
matter where products were produced: U.S. accounts for 50% of annual anthropo-
genic CO2; Europe 35%. The breakdown of carbon accountability by region is as fol-
lows: U.S. and Australia = 5.5 tons of carbon/year per person; European countries =
3 tons per person; China = 1 ton per person; India = 0.5 ton per person.

1 Italio Calvino, If on a Winter’s Night a Traveler (1979) in William Poundstone, Prisoner’s Di-
lemma (New York: Doubleday, 1992), 53.

2Doug Macdougall, Frozen Earth: The Once and Future Story of Ice Ages (Berkeley: University of
California Press, 2004), 141, 227.

3John D. Cox, Climate Crash: Abrupt Climate Change and What It Means for Our Future (Washing-
ton, DC: Joseph Henry Press, 2005), 65, 183.

LYLE A. BRECHT 410.963.8680 DRAFT 1.4 CAPITAL MARKETS RESEARCH --- Wednesday, October 14, 2009 Page 1 of 3
 C L I M A T E C H A N G E D E C A R B O N I Z I N G P L A N

WHAT IS AT STAKE - THE CLIMATE DOOMSDAY MACHINE

The longer-term systemic risk of climate change might include global annual GDP by
2050, instead of increasing from $60 to $240 trillion, declining to $6 trillion. Worst
case might be eliminating a large portion of the world’s human population either,
directly or indirectly, by altering the earth’s biologic capacity to support life.

PLANETARY BOUNDARIES, MARKET ECONOMICS & SYSTEMIC RISK

Focus on GDP growth masks the fact that natural capital and ecosystem services are
often discounted to zero. That is, accounting profits are being recognized in GDP ac-
counting even as no real economic growth has occurred once externalities and con-
tingent liabilities are added to the purported accounting profits.

Just as any business would soon go bankrupt without understanding the condition of
its balance sheet, the global economy is incapable of prudent operations without bet-
ter knowledge of the natural capital and ecosystem services available to support the
industrial ecology of national and global interlinked economies.

Accurate market pricing of goods and services can only occur with better informa-
tion. What is presently left out of many market prices is the cost of systemic risk. For
example, trillions of dollars of CDOs (collateralized debt obligations) were sold on
Wall Street and hundreds of billions of dollars of bonuses were paid on the sale of
these CDOs. Yet, these financial instruments were not priced to include systemic risk.
When the market for CDOs collapsed, U.S. taxpayers were asked to put up $17,500
billion in reserves (through a variety of mechanisms via the U.S. Treasury and Fed-
eral Reserve) to cover the systemic risk of these toxic transactions.

The downsides to not including the economic cost of managing systemic risk are
that: (a) systemic risk may not be managed adequately as its costs are not included in
market transactions; (b) accounting profits are reported and compensation provided
for efforts even as no economic value added may be achieved; (c) capital is misallo-
cated as an improper discount rate is often chosen that make projects look more at-
tractive than they actually are in practice. Not managing systemic risk is ultimately
destructive of capital.

Every day, the global economy disavows the cost of systemic risk of exceeding limits
to the environmental support systems that underlie these economic transactions. Es-
sentially, that is where global warming comes from. As anthropogenic discharge of
CO2 emissions to the atmosphere is free, it makes perfect business sense to discharge
CO2, even though, from a systems perspective, these discharges are dis-economic
(e.g. if 350 PPM is limit, remediation may cost $20,000 billion - the unaccounted for
cost of managing systemic risk that was discounted in the market transactions where
CO2 emissions occurred).

LYLE A. BRECHT 410.963.8680 DRAFT 1.4 CAPITAL MARKETS RESEARCH --- Wednesday, October 14, 2009 Page 2 of 3
 C L I M A T E C H A N G E D E C A R B O N I Z I N G P L A N

MANAGING SYSTEMIC RISK OF CLIMATE CHANGE BOTTOM LINE

Decarbonizing the economy is required. 4 Best data of the speed of climate change
and tipping points suggest that the U.S. may need to reduce its carbon emissions
by 100% by 2020 if per capita CO2 emissions are used as a metric.5 If carbon off-
sets are purchased from developing countries, this may be extended by as much
as ten years;

For rational investment decisions to be made for reallocating capital and labor to
achieving decarbonization of the economy, market transactions need to reflect
current cost estimates of the systemic risk from climate change;

Additionally, to achieve rapid adoption of technological improvements addi-

tional economic pricing incentives may be required. The objective of these mar-
ket pricing incentives would be to speed-up the technological adoption cycle
from its normal 10-30 years to 7-10 years; 6

The U.S. Intelligence Community (IC) and Department of Defense (DOD) have
both done substantial work on the national security issues related to climate
change. The national security risks and potential costs to the economy for signifi-
cantly increased defense budgets as a consequence of conflicts engendered from
climate change have not been factored into the discussion over climate change
legislation;

The U.S. media has produced an ongoing air of uncertainty regarding climate
change where there is none and allowed corporatist and ideological actors to de-
grade discourse on this very real and physically substantiated scientific knowl-
edge. The result is comparable to British appeasement advocates prior to WWII
or Wall Street “free-market/no-regulation of the derivatives market” advocates
prior to the 2008 meltdown of the CDO (collateralized debt obligation) markets.
Denying climate change is comparable to yelling “fire” in a crowded theatre.

4 The intent is to focus on all greenhouse gases (GHGs) including heat-trapping methane, ni-
trogen compounds, low-level ozone and soot emissions that are responsible for almost half of
the man-made emissions accused of driving climate change.

5 See Hans Joachim Schellnhuber et. al., WBGU (German Advisory Council on Global Change)
(2009) Solving the climate dilemma: The budget approach. Special Report 2009. WBGU, Berlin at
http://www.wbgu.de/wbgu_sn2009_en.pdf. “The study applies the per capita principle to the
world population of 7 billion people and arrives at an annual emissions quota of 2.7 tons of
carbon dioxide per person.” Americans presently emit 20 tons per person annually. Germany,
Italy and other industrial nations must be carbon free by 2025-2030. “China only has until 2035,
and the world as a whole must be carbon-free by 2050. Mark Hertsgaard, “Climate Roulette,”
The Nation (Oct. 7, 2009) http://www.thenation.com/doc/20091026/hertsgaard.

6Such a speed-up of the normal technology adoption cycle could potentially add millions of
new jobs to the economy.

LYLE A. BRECHT 410.963.8680 DRAFT 1.4 CAPITAL MARKETS RESEARCH --- Wednesday, October 14, 2009 Page 3 of 3