Precarious Economies: Exploring the Use of Environmental Indicators to Predict Economic Instability

Résumé 0

On August 5th, 2011 the Standard and Poor’s (S&P) international credit bureau, one of three agencies that provide national credit assessments of a country’s ability to take on and pay down debt, downgraded the United States’ credit rating from its highest level, AAA+, to its second best rating, AA+. The downgrade marked the first time in history that the U.S. did not receive the highest rating from any of the three credit scoring firms. The S&P report limited its critique of the U.S. economy to the current fiscal crisis. However, this paper speculates that the economic failings that led to the downgrade could perhaps have been foreseen by observing specific environmental indicators. In particular, national petroleum consumption, CO2 emissions per capita (both high, in the case of the U.S.), and the return on investment that a nation receives for its pollution (annual GDP/annual CO2 emissions; low, in the case of the U.S.) could be useful environmental indicators of a country's future fiscal performance. Moreover, these environmental indicators may be a sort of “early warning” system that can predict a nation’s financial collapse before it is predicted by standard financial indicators (such as debt levels). This article suggests a possible mechanism for such a link, and uses these indicators to speculate which other AAA+ countries may be the next to encounter fiscal challenges that lead to credit downgrades.