Risking value theory in the political economy of finance and nature

1 Value and value theory

First and foremost, what is value? Value is ultimately a label, a name given to something. Hence, to answer the question ‘what is value?’ is actually to answer a rather different question: what is the ‘thing’ to which the label ‘value’ is applied? Recognizing this is important, even if it does not sound like it is. Because value, at least in Marx, is not something with a tangible, uncontestable reality, like price. Price we can see, for instance on labels in shops, and thus when we use the word ‘price’ people know what we are referring to. Value is not like that. It refers to something one cannot lay eyes on.

What, then, is Marx’s value, the ‘thing’ he signifies with that label? To tackle this issue it is important first to understand that Marx works it out in a particular context, not in some free-floating, abstract register. That context is the commodity: when Marx discusses value, it is the value of the commodity, whatever that commodity happens to be. Equally importantly, value is not price. As Robertson and Wainwright (2013: 896) emphasize, the idea that ‘the value of any commodity is the same as its measure in price’ is anathema to Marx. This is not to say that measurement is irrelevant to (his) value; it definitely is not, and we shall return to it shortly. But value is not measure per se.

Marx’s value, instead, is the common factor in the socially-particular relation that holds capitalism together and to one degree or another defines it, which is the exchange relation. Value is that which makes commodities exchangeable; after all, exchangeability presupposes commensurability, or qualitative equivalence. But if value is therefore ‘the generalized relation of equivalence…that rules the world’ (Mann, 2013: 30–1), what is its particular substance and source? Value’s form, the constituent of its equivalence, is human labour. But not just any labour. The substance of Marx’s value is human labour in the abstract, regardless of its concrete form. Individual concrete labours may not be equivalent; commensurability inheres rather in the ‘abstract labour’ that remains in each commodity when, in and through exchange, the individual labour that produced it is abstracted from – that is, the simple fact of being the product of human labour in general. Exchange equates different types of labour as ‘abstract’ labour. Can value in the form of this abstract labour be quantified? Marx says it can, as ‘socially-necessary’ labour time, the amount of time needed to produce a given commodity under prevailing conditions of capitalist production.

It is the capitalist production process, therefore, that invests the commodity with value; the latter is not innate to the former. Where, though, does surplus value, the source of profit under capitalism, come from? This too is a key plank of Marx’s theory, and understanding it requires two further elements of the theory to be delineated. First, value materializes as ‘exchange-value’, which is the measure, expressed in monetary price, in which one commodity exchanges for another in the marketplace. And second, labour-power, the capacity to labour, is itself a commodity, which therefore not only embodies value but has an exchange-value of its own: namely the cost, in the form of wages, of reproducing that commodity, which is to say keeping the worker alive and labouring.

The magic of capitalism, from the capitalist’s perspective, is as follows. In selling her labour-power, the worker realizes the exchange-value of this commodity, not of the commodity or commodities that she produces for capitalists to sell. She may only have to work half a day to produce the value, embodied in those other commodities, that is necessary to meet her wages; Marx calls this quantum of labour ‘necessary labour’. But her boss does not typically then send her home to relax. She carries on working, expending ‘surplus labour’ and producing surplus value: the difference between what workers produce and what they receive for their upkeep – the value created by labour once its own exchange-value has been replaced.

No less important than understanding these core tenets of Marx’s theory of value, lastly, is understanding what it can and cannot do for us. For example, while it clearly foregrounds the conditions of possibility of a generalized system of market prices, Marx’s theory does not explain price levels. And although in conceptualizing surplus value creation it certainly provides a tool for analysing how capitalist exploitation occurs, it is not a proof thereof. Perhaps it is best thought of as a theory of the generalized reduction of social life to equivalence and exchangeability in the commodity form. ² If so, then ‘the whole understanding of what capital is’, as Banaji (2015: 24) observes, ‘depends crucially on the exposition of the theory of value’.

Of course, Marx’s theory is not amenable to empirical validation – though neither are other theories of value, which, as Cole et al. (1991: 13) note, is one reason why they (multiple) continue to exist and jostle – and this means that it will always dissatisfy those of certain epistemological persuasions. Aside from internal logical consistency, in fact, the only ‘test’ of Marxian or any other value theory is its retroductive reasonableness: in other words, is it consistent with historical observation? One might say that Marxian political economists are, by definition, those who believe it is.

2 Finance and value

Finance occupied a curious position in Marx’s work and especially in his value theory. On the one hand, Marx was fully aware how vital finance was to the workings of the capitalist economy, and quite a big chunk of the third volume of Capital is given over to careful analysis of the financial sector and of the dynamics of the credit system. On the other hand, however, his theory explicitly sited finance on the sidelines of the value drama enumerated in the previous section. How so?

The key consideration is that Marx’s value theory segmented the capitalist economy into two separate but linked spheres. There was a sphere of ‘production’ and a sphere of ‘circulation’. The latter was where exchange – sale of commodities for money – took place. The former was where the commodities in question were produced. Not only that, but the sphere of production was also where value was produced; the sphere of circulation, by contrast, effected value realization. The work of circulation, to be sure, was also a crucial activity – capitalism cannot survive for long if value is not being realized through exchange – but it was not value-generative. And it was in the sphere of circulation, according to Marx, that finance belonged. Baldly stated, finance did not directly produce value; it was, in value terms, unproductive. Interest income accruing to banks was paid out of surplus value generated by other, productive capitals and the surplus labour of their productive workers.

Does this mean that finance figured solely in the distributional moment of Marx’s theory of value? No. As Marx showed in Volume 3, a well-functioning credit system could certainly boost industrial capital’s attempts to maximize surplus value production. By helping to improve labour productivity in industry, the finance sector could help squeeze necessary labour-time and expand the period of surplus labouring. In doing so, it helped give rise to what Marx called ‘relative’ surplus value. Nevertheless, the surplus value in question was not being generated in the financial sector by financial workers. Finance, judiciously managed, was merely abetting others’ creation of surplus. Without those others and their labour, there was no surplus – indeed, no value.

And another of Marx’s well-known concepts – ‘fictitious capital’ – underlined the unproductive nature of finance in his value theory. Fictitious capital was Marx’s term for financial assets like a company’s debt and equity securities (bonds and stocks/shares, respectively). These were deemed fictitious forms of capital precisely in the sense that they did not embody ‘real’ value. To be ‘real’, Marx argued, capital had to fulfil two criteria. It had to be put to work in the sphere of production; financial assets were not. And it had to bear value that had already been created, ex vi termini, by productive labour; again, financial assets were not. Rather they were, Marx claimed, merely a title to future (real) value, and thus fictitious as value forms per se. Produced within the sphere of circulation by unproductive financial workers, financial assets constituted, in short, fictitious capital embodying fictitious value.

In the remainder of this article I develop generically (the rest of Section II) and embellish in the climate finance context (Section III) a very different conceptualization of finance and value, albeit still within what I consider to be a Marxian framework. Why? Why not read the political economy of nature and finance through a conventional value-theoretic lens?

Generally speaking there can be two different rationales for theoretical innovation. One is ‘negative’, emphasizing problems with an existing theory: it has logical flaws, perhaps, or fails to explain something that it should. The second type of rationale is ‘positive’ and emphasizes instead the benefits of an alternative theoretical approach: for example, it is logically consistent and provides robust and generalizable explanations. Often both rationales are invoked, as two sides of the same coin. My rationale for trying to think about finance and value in a different way is of this last, mixed kind. It is partly a question of misgivings about Marx’s formulation, and partly a (related) conviction that an alternative framing provides fresh explanatory power.

Given space constraints, it is clearly not possible to provide here a substantive ‘negative’ critique. Suffice it to say that I am increasingly persuaded by arguments – I am definitely not the first to make them – both that Marx’s conceptualization of finance and value is internally problematic and that it struggles to account for capitalism in its modern, ‘financialized’ forms. Compelling arguments of the former type include Harvie’s (2003) critique of the distinction between productive and unproductive labour and Mann’s (2010) critique of the distinction between fictitious (financial) and real value (cf. Christophers, 2016). Compelling arguments of the latter type include Bryan et al.’s (2015) contention that a theory in which finance does not create value is ill-equipped to explain a capitalist world where finance has become more and more central and dominant. They say, in effect, that this aspect of Marx’s theory fails the ‘retroductive reasonableness’ test mentioned at the end of the previous section: ‘if theories of value cannot incorporate finance in a central role, then they are disengaged from the frontiers of capital accumulation’ (p. 308) (cf. Panitch and Gindin, 2008).

The ‘positive’ case for thinking about finance and value in a different way, meanwhile, is what the remainder of this article aims to provide. By developing and – in the climate finance context – embellishing an alternative conceptualization, one in which finance is construed as value-generative, I demonstrate how we benefit from doing so. The main benefits can certainly be summarized in advance: we gain the power to explain how and why finance reduces life (social and natural) to equivalence and exchangeability in the risk-commodity form and how and why this entails exploitation. Yet the proof, so to speak, is very much in the pudding.

Before proceeding, a final word on rationale. One reason why some Marxian scholars cling to the distinction between productive and unproductive labour and finance’s inclusion in the latter is not (or not only) that they find this conceptualization useful but that they reject the implications of relinquishing it. For many of those accustomed to seeing financiers as what Marx (1981: 678) himself called a ‘class of parasites’, the notion that finance could be construed as anything other than unproductive is unconscionable, not least in the aftermath of the biggest financial crisis in over 70 years. As Boss (1989: 103) long ago observed, if Marxian economics were ever to drop the production-circulation distinction that underwrites the productive-unproductive one then ‘possibly the hardest pill to swallow would be the implied inclusion within the productive domain of financial services’.

But the pill should not be that hard to swallow, because in distinguishing between productive and unproductive activities Marx was not saying that the former are productive for society; his was not a moral or social judgement. It was a political-economic one. He argued that ‘productive’ activities are simply those that produce value for capital and capitalists. And thus just as being unproductive is not ‘bad’ – John Stuart Mill (2004: 70) said that ‘the term unproductive does not necessarily imply any stigma; nor was ever intended to do so’, and Marx concurred – neither is being productive ‘good’. If anything, it is the opposite. The grounds for resisting a rethinking of ‘unproductive finance’, in other words, are as weak as the grounds for relying on the concept.

3 Risking value theory

How have Marxian scholars unconvinced by Marx’s conceptualization of finance as unproductive previously sought to rework it? At the risk of oversimplification, one can point to three main approaches, although these are not necessarily mutually exclusive. First, some theorists usher finance into the value-generating fold by effectively moving the location of the boundary between Marx’s spheres of ‘production’ and ‘circulation’, expanding the scope of the (still uniquely value-producing) former to encompass rather than exclude certain financial activities (see the discussion in Bryan et al., 2015: 315–18). In such accounts, ‘circulation’ remains unproductive, but finance is no longer considered entirely circulatory. In other accounts, finance is ‘made’ productive (cf. Christophers, 2011) not by moving the boundary between the value-productive and unproductive but rather by decoupling value-generation from ‘production’. The suggestion here is that ‘circulation’, which includes but is not limited to finance, can produce value too. One of the first and most influential versions of this thesis was developed by anthropologists, LiPuma and Lee (2004: 15) going so far as to claim that ‘wealth generation seems to have seismically shifted from productive labour…to cultures of circulation’. More recently, Marazzi (2011: 40) has written comparably of an ‘externalization of value production…into the sphere of circulation’. ³ The third approach is to focus on risk and to conceptualize the production of financial risk as the production of value. This is the approach I take here, following the lead of Bryan et al. (2015) and others. I proceed through a series of linked propositions.

As I emphasized in introducing the rudiments of Marx’s value theory, value is not free-floating; prior to being realized through exchange it is always embodied in a commodity. The first question that therefore arises in relation to finance and value is what it is that finance commodifies. What is the locus of financial commodification, the underlying ‘thing’ that comes to embody value? The answer, at least in the context of modern market-based finance, is clearly risk (cf. Amato and Fantacci, 2012: 67–72).

Financial markets are social mechanisms for enabling the monetization and exchange of financial instruments. Historically, capitalist firms and state institutions have increasingly used such markets to finance their operations, raising money-capital by issuing tradable debt or equity securities rather than by, for instance, taking out non-tradable bank loans. The instruments that circulate in such markets, including not just equities and debt instruments but derivatives thereof, are plainly commodities in the Marxian sense of their being priced, bought and sold. But they are a special type of commodity insofar as they all commodify risk. Think of it this way. Risk, generically speaking, is future uncertainty; creating financial instruments such as shares is, pace Green (2000: 82), about ‘putting prices on future unknowns’ (e.g. in the case of shares, uncertain future profit streams); and to trade these commodities is to ‘bring [such] imagined futures’, which is to say, risk, ‘into the realm of the market’ (2000: 82). It is to turn general risk into tradable financial risk – that is, ‘uncertainty commodified’ (2000: 82).

If the staple function of modern finance is to commodify risk and thus enable it to bear value, its staple technique for doing so is abstraction. Pushed to nominate one word to capture what modern ‘finance’ does, most people would likely opt for something different – perhaps ‘speculate’, or ‘intermediate’, or ‘fund’. But abstraction is finance’s crux. The future uncertainty priced as risk by financial instruments comes, after all, in myriad shapes and forms. Liquid trade in such instruments and the commodified financial risk they constitute is only possible if such uniqueness is successfully abstracted from to produce commensurability. Thus finance’s task, as Wigan (2010: 110) recognizes, is to create ‘fungible globules of risk’ out of ‘idiosyncratic financial uncertainty’. So if the abstraction that occurs in labour markets enables labour-power to bear value and the abstraction that occurs in environmental (e.g. ecosystem services) markets enables nature to bear value (cf. Robertson, 2012; Bracking, 2015), then the abstraction that occurs in financial markets enables risk – financial risk in the form of financial assets – to bear value.

Abstraction is the reason why derivatives and derivative markets take pride of place in the emerging political-economic literature on finance, value and risk (Christophers, 2015). Financial instruments literally derived from underlying products, an example of which would be an option to buy a ton of maize at a given price at a given future date, derivatives are seen as the quintessential instruments of financial abstraction and commensuration. In Bryan and Rafferty’s (2006: 12) terms, they blend, or render fungible, all manner of different types of assets, ‘convert[ing] things as economically nebulous as ideas and perceptions, weather and war into commodities that can be priced relative to each other’; or as Cooper (2010: 181) puts it, ‘derivatives abstract from the substantive nature of things and forces’.

Hence, the central significance of derivatives pertains precisely to value. Concrete, particular risks cannot bear value. Abstract financial risk, which is what remains in the derivative once idiosyncrasy has been priced (out) and commensurated, can. The derivative is therefore the embodiment par excellence in the financial space of value understood, after Marx, as a generalized relation of equivalence. It potentially absorbs the whole world into its normalizing calculus, ‘objectifying different, globally distant, and incommensurable social relations as a single priced thing’ (LiPuma and Lee, 2004: 30). That thing is risk, now abstracted as ‘an objectified form of global social connectivity’ (2004: 145).

The fashioning of Wigan’s ‘fungible globules of risk’, I suggest, can be conceived as value-generative work. And, crucially, this work is not performed only by workers in the financial sector. ‘We’, as in society at large, are also deeply engaged. Bryan et al. (2015: 320–1) explicitly provide one example: households making regular contractual payments of household bills, which financiers securitize – i.e. convert into exchangeable financial commodities – and trade in financial markets. Langley (2007), implicitly, provides another: ‘responsible’ everyday investors responding to the withdrawal of social welfare provision and to the concomitant neoliberal imperative to, in Dean’s (1998: 27) words, ‘make one’s life into an enterprise’ by creating and tending personal investment portfolios.

One way to conceptualize ‘our’ work and value-creation potential in this respect is in terms of a process of colonization by finance: labour at large (still) producing value, but doing so specifically through the production of risk, and thus within or through financial processes rather than externally to them. As scholars of ‘financialization’ (e.g. Martin, 2002) have shown, finance has penetrated ever deeper into the pores of social reproduction, such that social processes formerly insulated from financial rationalities and relationships are subjected to them and spawn new financial assets as a result. Such assets are indisputably coproduced (Bryan et al., 2015: 320–1): by ‘ordinary’ people who in the course of social reproduction find themselves making increasing numbers of contractual payments (e.g. loan interest, pension contributions, utility bills, and of course all manner of insurance premia); and by the financiers who perform the technical work of turning these payments into fungible risk assets.

If this represents a productive framing, how might it figure the one key dynamic we have not yet broached, and on which Bryan et al. (2015) have little to say: the source of surplus value? In the classical Marxian production context, as we saw earlier, the worker’s remuneration for creating value for the capitalist is monetary payment (wages). Surplus value is that element of the value created by the worker in production for which she is not paid – the unpaid part of the working day, in other words. The worker is thereby exploited, surplus arising from underpayment. So, how are ‘we’ remunerated for creating value through financial-risk production, and what kind of exploitation must occur in order for surplus to arise? This, it seems to me, is a useful way of approaching matters.

As an example let us take insurance. In the case of, say, health or motor cover, what value does the insuree create for the insurer? The answer is commodified financial risk materializing as a regular flow of premia, which the insurer can exploit in any number of different ways – including, most simply of all, investing them. Of course, the insuree gets remunerated for the work of producing and continuing to reproduce this commodity and the value it embodies. Her payment takes the form of risk absorption: the insurer relieves the insuree of the risk that the latter is seeking to avoid by taking out the insurance – the risk of incurring costs for vehicle repair or medical treatment, for example. So where, if anywhere, is the surplus?

Surplus can and does arise because the insuree, like the wage worker, is remunerated according to the exchange-value of her power and willingness to create value, not the value she actually creates. It is this power and willingness that the insurer, like the factory owner, procures in the marketplace – the power to create financial risk, or widgets, respectively. And since that which we as financial-risk producers create for insurers is not what we are selling to them, the amount we are paid in risk absorption bears no necessary relation to the value of the financial risk we crystallize. Instead, it depends on conditions in the market for our risk-generative capacity. Insurers clearly covet that capacity and the commodity it creates, but only if the cost in risk absorption is not too high. Therefore just as the factory-owner endeavours to squeeze wages, so the insurer, guided by its actuaries’ calculations, endeavours to absorb less risk: stipulating coverage exemptions, raising deductibles, and so forth. And in doing so, it increases surplus value: the gap between what labour is paid and what it generates for the payer; the extent, in short, of under-remuneration and exploitation.

More generally, we can propose that it is helpful to think about surplus creation in relation to financial-risk production by focusing on the value generated in the process, on the nature, basis and quantum of remuneration for this ‘work’, and on the gap between them. What form does remuneration take and what scope does capital enjoy to under-remunerate the risk producer for her actual risk-related value contribution? These, I think, are the questions to ask. To take Sheppard’s (2002) term, what is each individual’s ‘positionality’ vis-à-vis finance capital within the proliferating constellations of financial risk that increasingly scaffold social reproduction? How are risks and rewards shifted between the different counterparties to financial contracts in such a way as to extract surpluses? We turn now to such issues in the context of financial risk and climate change.

1 Catastrophe bonds

The use of catastrophe (‘cat’) bonds has grown in recent years in line with expectations regarding the frequency of extreme weather events associated with climate change. How do these instruments enable insurers to transfer to investors some of the risk of catastrophic events triggering significant pay-outs on (typically) property insurance? The mechanism is quite straightforward.

The insurer borrows money by issuing the cat bond. In most respects this cat bond is just like any other bond. It is a negotiable debt security that investors buy and can trade on secondary markets. It generates a periodic interest payment, its ‘coupon’, from the insurer-issuer to the bondholder. It has a fixed maturity date. And, if the bond matures without a triggering catastrophic event having occurred, the insurer repays the bond principal (the amount borrowed in the first place) to its holder – again, as with any other bond. If a triggering event occurs during the bond’s lifetime, however, the cat bond suddenly becomes a very different animal: the bond principal is forgiven and the insurer uses it to pay its insurance claimants.

The first point to note in respect of questions of value is that although Johnson (2013a) does not actually say it, the ‘bringing-into-being’ of the financial-risk commodity that is the cat bond through catastrophe-insurance models and comparable tools of commensuration enables that risk to bear value. Johnson is clear about what the underlying risk is: namely, geophysical contingency, or ‘the particular liquidity-destroying possibilities of physical processes’ (p. 37). She also demonstrates that this geophysical risk is rendered as a financial-risk commodity when, through techniques of abstraction, it is packaged and priced as a bond. But she does not explicitly couple this financial risk to the value that comes thereby to inhabit it. That, though, is clearly what happens.

If we then follow the lead of Bryan et al. (2015), we would propose that the sequential process of financial-risk production beginning with the household taking out property insurance, continuing with the insurer effectively securitizing the household’s insurance premia as a marketable commodity, and ending with same insurer issuing its cat bond, is what creates value for capital. ⁴ And although this is demonstrably value production in a very different guise from that conceptualized by Marx, parallel value dynamics can be identified. ‘As wage labour generates capital’s appropriation of surplus value, which converts to profits of commodity production’, write Bryan et al. (2015: 324) of the classical Marxian workplace figuring, ‘so household contracts generate capital’s transfer of financial risk, which converts to profits of security production’.

And, with our earlier generic insurance example, we have already seen how surplus value can arise in such a scenario, at least in terms of the phase involving the basic insurance contract. Since the relevant mechanism of under-remuneration is already familiar to us we can deal with it – shortly – in relative haste, but first we need to clarify the value dimensions of a different facet of cat-bond dynamics, because they have a much wider pertinence. These concern the processes of cat-bond de- and re-valuation discussed by Johnson (2013a). Two features of these processes are especially important.

First, as Johnson suggests, where financial-market participants make capital gains from the movements in market price of tradable cat bonds, they are engaged in surplus extraction, not generation. This, in Marx’s terms, is pure exchange; value is being realized, not created.

However, second and equally important, it would nevertheless be misleading – if not outright inaccurate – to suggest, as Marx himself did, that the devaluation in financial markets of financial assets such as cat bonds is not a real value loss. ‘As long as their depreciation was not the expression of any standstill in production and in railway and canal traffic, or an abandonment of undertakings already begun, or a squandering of capital in positively worthless enterprises’, Marx (1981: 599) wrote of falling share and bond prices in the 1840s English financial panic, ‘the nation was not a penny poorer by the bursting of these soap bubbles of nominal money capital’.

The problem with this figuring is that it relies on the problematic idea that financial values are ‘fictitious’ rather than ‘real’ ones. To say today that ‘paper’ value losses are not ‘real’ is, as Mann (2010) argues, to misconstrue value in its contemporary guises. Like all commodities, derivatives and other ‘complex’ financial products like cat bonds can bear value. But markets do not necessarily price this embodied value accurately. When the global financial crisis blitzed financial asset prices, it exposed those particular assets not, pace Marx, as ‘fictitious’ but rather, pace Mann, as ‘just plain valueless’ (p. 181).

While the movements in cat-bond market value discussed by Johnson are real enough, it is of course not in such movements that value and surplus value are created. Value is created through the work of those, inside and outside the financial industry, who produce the financial-risk commodity in the first place. In the case of cat bonds, the ‘primary’ such commodity is the financial risk generated by the household: that which crystallizes regular premia to the insurer. Workers within the financial sector then use this commodity as the raw material from which to fashion a derivative commodity: that which pays regular coupons to investors – in other words the cat bond itself. In both cases, surplus materializes in the gap between the value labour creates for capital and its remuneration for doing so. The latter is a wage for the financial-sector employee and, as we saw earlier, risk absorption for the insured household.

2 Carbon credits

‘Cap-and-trade’ markets in ‘carbon credits’ represent arguably the archetypal capitalist creation at the febrile interface of modern finance and climate change. But if the carbon credit is the commodity that circulates in such markets (of which there are many in operation), how can we understand this particular commodity? What is the specific locus of commodification, and thus in what essential form does value come to be borne? These must be our opening questions.

The carbon credit is ultimately an instrument for commodifying the unknown future of greenhouse-gas emissions within the capitalist political economy. How stringently, in particular, will future emissions be regulated, how rapidly will society transition to alternative energy sources, and thus how will demand evolve for the ‘right’ to emit? This is a future shot through with risk – social, political, regulatory, technological, economic – and carbon markets are social mechanisms for congealing all such risk into current market prices.

The ‘credit’ commodity bought and sold on such markets is a permit to emit a given quantum of carbon or other greenhouse gases. The state magics most such credits into existence and allocates them to major emitters, who can trade the credits among themselves according to their relative appetites to emit. Meanwhile, additional credits (‘offsets’) can be created by reducing, avoiding or sequestering emissions, for example through reforestation or renewable energy projects; and these offsets can be sold either to hungry emitters needing to comply with emissions ceilings or to actors seeking voluntarily to mitigate their carbon footprints. As such, the carbon credit is a financial invention in which value is borne by commodified uncertainty over social-nature’s future.

Needless to say, methods of abstraction from localized natures are equally fundamental to carbon markets as they are to cat-bond markets, and scholars, including geographers (e.g. Cooper, 2015), have therefore paid close attention to these. As Lohmann (2009: 167–8) argues, there is a presumption of equivalence and fungibility between emissions that are in reality differentiated along multiple axes; markets ‘have to abstract’, inter alia, ‘from place, substance, technology and history’. For instance: ‘Emissions of carbon dioxide molecules from coal-fired power plants in Britain [are] commensurated not only with, say, emissions from gas-fired plants in Spain, but also with nitrous oxide emissions from adipic acid plants in South Korea’. Capital’s calculative impulse is herein reflected in complex comparative systems of emissions measurement that Cooper (2015) labels ‘metrological regimes’. Their task is to translate disparate emissions into a unifying language of capitalist equivalence and thus to convert incommensurate geophysical processes into fungible, value-bearing globules of financial risk.

All manner of actors are implicated in the processes whereby the commodification and exchange of such risk are effected. Clearly major carbon emitters, such as electricity producers, play a significant role, as the biggest strategic buyers and (where they have a surfeit) as sellers of credits. Investment banks, especially through buying and selling credits on behalf of industrial clients, are also heavily involved. But if we specifically want to understand the creation of the value that capital exploits when consuming carbon credits (i.e. when emitting), we need to focus on those who manufacture such credits. ⁵ There are two broad categories of credit manufacturer. The first, as noted, is the state, which also figures prominently as carbon-market operator (the European Union Emissions Trading System is currently the world’s largest); and the second comprises the wide array of actors, often operating at small scales, who create offset-credits through projects ranging from wind farms to water filtration plants to clean cookstoves.

If value is created by these two categories of manufacturer, how and where does surplus value arise in each case, and to whom does it accrue? In the case of offset credits, the manufacturer receives the exchange-value of its labour-power (expended, for example, in building and operating a wind farm), and this remuneration takes the form of monetary payment – credits are paid for in cash. Surplus, as always, crystallizes by virtue of under-remuneration: lower payment than the value created by the manufacturer, embodied in the financial risk represented by the carbon credit, and consumed by the emitter. In the carbon-credit markets where remuneration is priced, the possibilities for such under-remuneration are legion. One important reason for this, though by no means the only one, is that prices for offset credits are not regulated. They vary widely – by a factor of nearly one thousand, according to one report (Peters-Stanley and Yin, 2013: 39), which provides a useful account of some of the main reasons for this variation. In such variegated market conditions, the idea of surplus not arising – not necessarily in all cases, but certainly in some – is inconceivable.

Meanwhile, the case of credits created by the state and distributed as allowances to major emitters clearly represents a different scenario. To be sure, social ‘labour’ is invested in the creation of these credits and the value they bear – not so much the immediate bureaucratic work of credit formalization and delivery but, more fundamentally, the entire fund of society-wide historic-and-future labour that goes into the creation and maintenance of the state per se and thus into the legitimation of its very ability to ‘grant’ pollution rights. But where is the remuneration for such work, and thus any possibility of surplus? On the face of it, there is none – credits are freely allocated.

In reality, however, the polluter is expected to ‘pay’ by passing this subsidy on to consumers, and thus back to the society whose beneficence underwrites the state’s grant. Emitting has a legible cost, as recognised through the arrangement of markets for the right to emit; that cost, therefore, should ordinarily be incorporated in the price charged to consumers. But if the cost is avoided by capital thanks to gratis state allocations, the consumer should avoid it too.

Surplus value, we can therefore say, arises to the extent that the state’s subsidy is not passed on and ‘back’; not passing it on represents, precisely, under-remuneration for value created. And it suffices to observe here that the evidence shows that such surpluses have been widely generated. The European electricity industry affords perhaps the most notable example, researchers having shown that emitters were historically granted free emissions allowances but nonetheless included the market price of emissions in electricity prices charged to consumers. ‘As is now widely recognised’, one prominent researcher (Newbery, 2009) wrote in a memorandum submitted to the United Kingdom’s Environmental Audit Committee in 2009, ‘the price of EUAs [European Emission Allowances] was passed through fully in the final price of electricity (the industry for which we have the best data) and hence the free allocation was cashed in at the EUA price by the fossil generators, resulting in a massive windfall gain’. The researcher in question even helpfully foregrounded the (surplus) value implication. ‘There is no case’, he went on, ‘for repeating such a wilful misuse of the value of a common property resource that should be owned by the country’.

3 Green (climate) bonds

Green bonds are bonds where the monies raised by the issuer are earmarked for specific, environmentally-friendly purposes; climate bonds, which increasingly go by the generic ‘green’ moniker, represent the largest sub-category, where the purposes are explicitly climate-change mitigation and/or adaptation.

The green/climate bond market has been growing rapidly. Climate Bonds Initiative (CBI), a London-based not-for-profit, estimates that total 2015 issuance amounted to approximately $42 billion, up from less than $5 billion as recently as 2012. ⁶ As The Economist (2014) observed, this is of course still small beer in the context of a total global bond market worth some $80 trillion. Yet, as it also noted, ‘compared with most streams of income for environmental purposes, it is huge’.

Following the conceptualization offered in this article, we can figure such bonds and the risk exposures they represent as bearers of value. The first question then becomes: what forms of abstraction enable such value to be borne and to be legible across heterogeneous economic-geographic contexts? What type of commensuration is involved?

To begin with, needless to say, such bonds must be rendered analogous simply in terms of all being green. Greenness is what differentiates them from non-green bonds. Yet such product standardization has proven anything but straightforward. In the formative period of the green-bond market the World Bank was the main issuer and proposed its own eligibility criteria ( The Economist, 2014). But as issuance has diversified, the bank’s authority to commensurate has dissipated. International standards are in the process of being developed (CBI, 2015: 6; Bracking, 2015: 2345–7). At the time of this writing, however, a bond is essentially green if the issuer says it is. The issuer has the option of providing independent verification in the form of a ‘second opinion’ – a leading provider of such second opinions, Norway’s CICERO, recently disaggregated the space of commensuration by grading bonds in ‘shades of green’ (CICERO, 2015) – but it is not obligated to do so.

If green-labelling is necessary for green bonds to be valued as green bonds, however, it is not sufficient. To become a tradable commodity the green bond must be economically as well as conceptually fungible, and simple labelling processes clearly do not impart such fungibility. The latter derives instead from the same stable of techniques used to commensurate and commodify all bonds, green or not: those of risk weighting and credit rating. It is these that turn idiosyncratic underlying risk into exchangeable financial risk.

We have, of course, encountered already another example in the climate space of bonds being assembled through such financial abstraction – catastrophe bonds. But there is a crucial difference between the two, beyond the obvious functional distinction (one enables raising finance for mitigating climate change, the other enables displacing the risk of suffering financially from its consequences). In the case of catastrophe bonds, the bond is rated on the basis of the specific catastrophic contingency (e.g. hurricane occurrence) to which it pertains. Green bonds, however, are not rated on the basis of the specific projects or assets (e.g. infrastructure assets) they fund, even as this is the basis for their categorization as ‘green’. Instead, as CBI (2015: 7) explains, ‘the risk of the bond is determined by the issuer’s full balance sheet’.

In other words, the risk imputed to the bond, which is the risk on which it is graded by credit-rating agencies and priced in the market, reflects the creditworthiness of the issuer rather than the characteristics of the specific project financed by the bond. As we shall see, this particular feature of green bonds is pertinent not just to the question of abstraction and commodification – to, that is, the locus of fungibility – but to the value creation and surplus generation processes entailed in their production.

What work, then, is implicated in a bond’s life as a value-bearing asset? Aside from the niche work of the financiers and lawyers who technically enable a bond to be issued and circulated, there are two main productive constituencies.

The first is the issuing entity, which raises the question: who actually issues green bonds? According to CBI (2015: 6), a market initially dominated by the World Bank and other development banks is increasingly dominated by corporations. Capitalist, for-profit companies are now the main green-bond issuers: Unilever, for instance, issued a $416 million bond in 2014 ( The Economist, 2014). And it is clearly the corporation’s workforce as a whole that underwrites the issuance of such bonds inasmuch as its work – in its totality – underwrites all future debt servicing.

The second productive constituency is the community of investors in the bonds. As value-bearing commodities, financial assets are always co-produced by their issuers and their holders. Without the work involved in selecting, making and holding investments, whether conducted by individual investors or by investment managers on their behalf, coupon-paying bonds and other market-traded securities could not exist. To be sure, such investment is partly a matter, in Marx’s terms, of exchange, since ownership transfers from issuer to investor and then, in secondary markets, from one investor to another. But from the perspective of the buying-investor and the bond, the moment of exchange is not the end (a mere segue to final consumption) but the beginning: the beginning of a period of investment-as-productive-work. It is indispensable to the bond’s ongoing reproduction as an embodiment of value.

Where the question of surplus is concerned, we know, of course, from Marx, how the first of these two productive constituencies is remunerated and exploited. But what of the second? This is where the fact that green bonds are rated according to issuer rather than specific ‘green assets’ assumes a special significance. In view of the fact that climate-friendly projects are, in CBI’s words, often ‘seen as risky by investors’ (2015: 7), the cost of capital for actors seeking to pursue such projects has typically been high; and reducing the cost of capital, ‘particularly the cost of debt’, has, in turn, been seen as ‘a crucial mechanism to facilitate investment in these projects’ (2015: 3). This is where green bonds come in. By allowing credit to be priced according to the attributes of the issuer and not of the (risky) project to be financed, they generally lower capital cost, making them an ‘efficient way’ (2015: 7) to fund such projects.

The beneficiary, of course, is the corporate borrower, which realizes a surplus measurable as the delta between actual capital cost and the (higher) cost that would otherwise obtain, or between actual project risk and the (lower) risk-as-priced. Surplus value arises, meanwhile, from under-remuneration of our second (investing) productive constituency. How so?

This constituency creates value for the corporate borrower by financing its operations. But its remuneration is not tied to the quantum of such value. It is based on the exchange-value of that which the investor sells: specifically, her ability and willingness to hold the bond. This exchange-value depends on market conditions and actualizes as interest payments on the debt. Clearly for debt securities in general, under-remuneration can arise for any number of reasons; but where green bonds in particular are concerned we have already identified a crucial one: the active lowering of interest payments by distancing the perceived risk of the bond from the riskiness of the actual climate project it will be used to finance. CBI (2015) refers to this distancing with the concept of a ‘risk-bridge’. The space spanned by this bridge contains, if you like, the surplus element of the value created by the investor.

4 Index insurance

Our fourth and last capsule case study at the interface of climate change and global finance takes us back to where we began – to insurance, and to the work of Johnson, who has also written about this particular phenomenon: index insurance (Johnson, 2013b). Targeted primarily at smallholders in the Global South, the key innovation of index insurance is to link pay-out not to actual losses sustained by smallholders but to generalized, or non-individualized, proxy variables (‘indices’) that, ceteris paribus, would be expected to correlate, positively or negatively, with such losses – things like average crop yields or total rainfall. Index insurance is widely seen as, and has been retailed to potential customers as, a mechanism for smallholders to cope with the growing production risk associated specifically with climate change (Collier et al., 2009; Bobojonov et al., 2014).

Johnson’s (2013b) analysis of index insurance deals primarily with the question of risk and with how smallholder insurees become what she terms, after Maurer (1999), ‘risk-bearing subjects’. Of course, such farmers bear risk even – perhaps especially – in the absence of these insurance contracts. But taking out index insurance sees them come to bear particular types of financial risk. Arguably the most important is what is known in the industry as ‘basis risk’: the risk that local conditions on the ground (and therefore a smallholder’s own experience) prove worse than the index implies and thus that eventual pay-out does not cover actual losses sustained.

In identifying how smallholder subjects become risk-bearing, however, Johnson fails to note that risk – financial risk – simultaneously becomes value-bearing. This, for our purposes at least, is the critical effect of index insurance. À la Bryan et al. (2015), and as with catastrophe bonds, the individual’s production of financial risk creates value for capital. What do index insurers do with this commodified risk? Where they do not simply retain it, they generally ‘sell’ it to reinsurers, who underwrite the underlying insurance contracts through the provision of reinsurance.

Since securing reinsurance for index-based contracts means forging a financial market and thus manufacturing fungible financial-risk commodities just as surely as creating cat bonds from non-index-based insurance contracts does, it is no less dependent on methods of abstraction and commensuration. This, after all, is what the value equation always demands: equivalence in the face of heterogeneity, in this case among and between insurance contracts written on different indices with different customers in different places. Thus, while the pricing of index insurance per se may, pace Johnson, be relatively straightforward, the abstractions involved in converting primary contracts into fungible and thus marketable globules of re-insurable financial risk – abstractions typically undertaken by reinsurers themselves – tend to be ‘inordinately technical’ (2013b: 2674).

As with other types of insurance, we can theorize surplus value in index insurance in terms of the gap between, on the one hand, the value created for capital by the insuree and, on the other, the measure of value for which the insuree, through risk absorption, is remunerated. The former is embodied in the insurance contracts that the index insurer leverages, inter alia, to secure its own (re)insurance. The latter – the extent of risk absorption – is actually harder to delimit than the various ways in which it is restricted and thus surplus value accruing to the insurer is generated. Albeit without framing things in value terms, Johnson identifies three such ways, all amounting to leaving risk ‘behind’ with the smallholder customer. One form of such non-absorbed risk is the aforementioned ‘basis risk’; a second is the risk of payment default, borne, unlike in a lending relationship, by the customer rather than the financial provider; and a third is the risk of the insurer, for whatever reason, being unable to meet valid claims. In short, smallholders create value for finance, but the risk absorption they are granted as payment may not fully compensate them for this work.

In closing, though, we should dwell momentarily on the word ‘may’, for nothing about value creation and surplus generation in finance is certain – least of all in the fuzzy, immature, experimental context of climate-change finance – and index insurance is no different. As Johnson (2013b: 2675) observes, while insurees may indeed fare worse than ‘would be predicted by a reading from their nearest weather station or a satellite-based area average’, they may also fare better than the index. While basis risk, in other words, may be positive (which is to say, adverse from the insuree’s perspective), it also may be negative. In such a scenario, there will be no surplus value because smallholders are being overcompensated, through ‘excessive’ risk absorption, for the value they create for capital. Consistently generating surplus means the industry’s actuaries consistently getting their probability calculations right. The fact that the sector is struggling to become profitable (2013b: 2672–3) suggests, inter alia, that they are yet to do so.