The Coming Struggle to Stay Warm

One of the first columns I wrote for The Pipeline almost three years ago employed the metaphor of the irresistible force meeting the immovable object to forecast the likely consequences of Green politics. The irresistible force was the imposition of a policy of Net-Zero carbon emissions upon the populations of the West, in particular those of Anglosphere, and the immovable object was the democratic electorates of these countries.

It might take time, I argued, but when the voters found that Green Deals and such meant higher energy prices, higher taxes, immiseration of the less well-off, and harshly puritan lifestyles for the rest of us, an almighty smash-up would ensue.

And so it has. Indeed, the smash-up has come sooner than I expected, namely this year, and it will almost certainly be harsher because the negative impact of Net-Zero has been aggravated by the Russo-Ukraine war and sanctions adopted by the U.S. and the E.U. in response to it.

To stop train, pull handle. But think first.

What I didn’t expect, however, is that the smash-up would take place in slow-motion. But that is what’s happening.

Almost wherever you look, there’s some not-very-important story that tips you off to a subterranean explosion whose full impact won’t be properly felt for a while. The effect is something like the delayed impact of depth charges or deadpan jokes.

Here, for instance, is the London Daily Telegraph telling us that the Brits will be wearing new styles of underwear this winter—and not because they’re hoping for a more exotic sex-life:

Households are stockpiling thermal underwear to avoid turning on the heating this winter as energy bills spiral. John Lewis, Britain’s biggest department store chain, said shoppers had rushed to buy warmer clothes in recent weeks, with sales of winter thermals having doubled last week compared to a week earlier. Sales of dressing gowns are up 76pc compared to last year.

That’s the precautionary principle reduced to the bare essentials. Like everyone else in the northern hemisphere, ordinary Brits are expecting a chilly winter this year because of the following factors (which didn't start with Mr. Putin’s war); Like most Western governments, the U.K. powers-that-be have neglected to invest enough in energy security because they quite consciously preferred to invest in transitioning from fossil fuels to renewable forms of energy. That is the orthodoxy of Net-Zero (sometimes enforced by treaties) in E.U. countries such as Germany, non-E.U. countries like Britain, and the U.S.

It’s a massive enterprise because until recently fossil fuels provided more than 85 percent of total energy to even the most technically advanced economies. In pursuit of this vision of a future of all-renewable energy, Germany has shut down almost all its nuclear power stations, keeps equivocating over whether the shut down the few remaining ones, and ends up relying on “dirty coal” now that cheap Russian energy is as unreliable as "renewables."

California, dreaming...

Over the Pond the Biden administration has been refusing to license oil-and-gas explorations on federal land with the embarrassing result that it has to import oil from Venezuela. And the U.K. government too has banned “fracking” that would exploit the nation's plentiful reserves of natural gas. As a result almost all of these countries are facing the risk of energy shortfalls to the point at which energy “blackouts” and rationing are seriously entertained by utilities and regulators if the winter is severe. California too.

Moreover, the costs of transitioning to renewables are not only high, they are rising. The International Energy Agency has just revised its estimate of the investment needed to limit global temperatures to meet the Net-Zero target under the Paris Accords upwards. That will now rise from the 390 billion dollars annually today to 1.3 trillion dollars a year between now and 2030. If met, those targets would eliminate emissions from the energy sector by 2035 in the advanced world and by 2040 in developing countries. But they are unlikely to be met. On present trends Net-Zero won’t be achieved until 2060—and present trends look too optimistic in the light of the present energy crisis.

The upshot of which is that almost all the West’s governments face slightly different versions of two serious problems: uncertain energy supplies, and existing high indebtedness.

Take energy supplies first. Germany is facing a serious crisis of its fundamental economic model in the post-Ukraine world, Its two foundations were exporting cars to China and importing cheap energy from Russia. For the foreseeable future, neither now looks like a reliable prospect or even a possible one. Berlin must now struggle to replace the Russian energy half-forbidden by the sanctions it supports diplomatically.

Artifacts of an ancient civilization, if Greens get their way.

Similarly, because Britain neglected nuclear investment—its target of 25 percent of energy from nuclear power stations will be reached in 2050!—the country is heavily dependent on imported natural gas which it needs to solve the renewables’ “intermittency problem”: there are days when the wind doesn’t blow nor the sun shine. As Andrew Stuttaford points out, that makes the earlier decision of the U.K. government to close down its biggest natural gas storage capacity an especially shortsighted one. Even the French, who sensibly went nuclear in a big way in the 1970s, now have to spend on repairs and modernization.

What of the second aspect of the crisis: overspending? Two sorts of spending need to be financed here—that for Net-Zero, and that to finance the energy security national governments have neglected. Unfortunately, however necessary they are, they come on top of the massive sums of money that the same governments have already spent during the Covid-19 pandemic on locking down their economies and paying their people to stay at home. That backlog of indebtedness explains why the financial markets are becoming nervous of lending money to governments that don’t make financial responsibility their top priority. Interest rates are rising again in response to rising inflation, and that's a problem for governments that want to borrow money.

We saw that very recently when the British government fell because the markets thought it was adopting a cavalier attitude to debt. That impression was both exaggerated--the U.K.’s national debt as a percentage of GDP is one of the lowest in Europe--and largely the result of rash but trivial political misjudgments by ex-Prime Minister Liz Truss and her Chancellor Kwasi Kwarteng. All the same, the market brought them down because they were planning to add to an already high total of government spending.

Long johns, here we come.

When that happens, every spending program becomes the enemy of every other program. If restoring energy security becomes a priority for governments, then spending on Net-Zero will—and should—come under pressure. After all, Britain's short financial crisis became a political one in part because it was leading to a rise in mortgage payments. Like rising sales of warm thermal underwear, rising mortgage payments are another symptom of the price that the Brits will be paying for ill-judged energy policies. Voters' shoes are beginning to pinch; the immovable object is beginning to stiffen.

Of course, the irresistible force (in the form of support for Net-Zero from an alliance of the establishment and radical Green anarchists) has neither vanished nor much diminished. At almost every stage it has objected to policies that looked likely to prioritize energy security over the transition to renewables. With the arrival of a new prime minister, Rishi Sunak, it has been flexing its muscles to warn him that it will tolerate no lifting of the ban on fracking that the doomed Liz Truss tried to bring about. Net-Zero is an obstruction to restoring the energy security that it undermined in the first place. The circle closes.

My impression is that Sunak is taking his time to assess what Leonid Brezhnev used to call “the correlation of forces.” On the one hand, he has said that he will keep the ban on fracking unless evidence appears that suggests it is not dangerous to the environment; on the other, he has decided not to attend the U.N.’s COP 27 Climate Summit on the grounds that, in effect, he’s got more important things to do in London. My translation: he doesn’t want to attend and be trapped into making commitments on Net-Zero that might later be inconvenient to his overall energy and budgetary policies.

He may also think that Winter when the snow falls and Britain’s bedrooms freeze will be time also when the irresistible force of Net-Zero becomes much less irresistible and the immovable object of voter resistance much more resistant. And irremovable.

Diary of an Acclimatised Beauty: Hardworking

Happy Easter from the Bahamas where I’m still working very hard. Not everyone who left the pandemic to take advantage of the Bahamas pro-business work environment is really all that focused on work—but I certainly am. I’ve made the determination about others based on the fact that they are having breakfast at 11—about the time I’m finishing up. 

Thanks to Instagram I’ve found out I have several more friends visiting here than I’d ever dreamed possible, and they are mad-posting and hashtagging.  All day long it’s ding-ding—#lyford #albanyyacht #catcayyacht #eleuthra… ding, #pandemic ding-ding.

In the interest of work, (and despite looking so tanned and rested), I’ve decided not to post until I have at least three new clients. Or maybe one really juicy new client.  My focus, since I now have time to focus, is going to be to search out only the clients whose sensibilities are most closely aligned with mine. 

All work and no play, that's productivity.

Daddy said if I made self-sufficiency my priority I’d find I’m aligned with a great many but I know he’s just being daddy. It’s easy for him to say… I think engineering focuses one’s thinking in such a way that you are really too science-minded to think about meaningful change. 

Earlier in the week I had a little hiccup… with such an influx of visitors and corresponding drain on the internet, I wasn’t getting my emails. Especially in the late afternoons when kids who should be swimming or in school are mad-gaming. The internet provider suggested I opt-out of using Wi-Fi and hard-wire my computer to the router— and which is so like a service provider to just make up some excuse as to why you can’t have what you clearly understood you were paying for. Plus it defeats the whole purpose of coming here to work. Luckily the yacht clubs are selling international hotspots so I can now work from wherever is most conducive to my productivity.

I had received a query from a global environmental movement that had “nearly” one hundred academics enrolled in fighting global warming. My first thought was how near to one hundred are you? Near enough to just recruit a couple more to make it an even hundred?  Which would have been my suggestion to them once we started working together. Further details explained that they “hoped” to rally worldwide support. Again…can you really not assert (with confidence) something so vague as “worldwide support”? They were going to need every bit of help they could get. 

I was however impressed with their aim to using “nonviolent civil disobedience” to achieve their goals. But on second thought, the word “aim” scared me. And after some research it seemed aim was indeed the right word, as they’d blockaded five bridges in London as a protest. Technically this qualified as non-violent but it had the makings of a wholly man-made disaster. 

Just now I was missing my rather bad-tempered client who’d made a killing in the cosmetic device industry, and whose presentation for the Audubon Society I’d painstakingly crafted just prior to being sacked.  

Nonviolence was definitely the way to go, but try telling that to Greenpeace who’d made a name by insinuating themselves between a Russian whaler and a whale just in time to witness and film the gruesome death of said whale and sell the footage to the news media. In years to come Greenpeace would continue to sell their goodness until they became a $336 million a year multinational behemoth. Some questioned the integrity of these donations when China’s abysmal environmental record dropped off of Greenpeace’s radar. 

As an avid environmentalist I have to care that we don’t look or act crazy, and in this way we can achieve greater results not to mention greater trust from the public. In the end what saved the whales from extinction was greed. With ever increasing demand for whale oil, man looked for alternatives and soon after creating petroleum, production from one petroleum well outpaced what a whaling expedition could garner in four years. This is of course all stuff I learned as a kid, but now as an adult I continue fighting both the evil destroyers of our planet and the movements that delegitimise those of us who are doing truly good work.  

I was feeling rather down that this briefly promising client had evaporated as quickly as they’d arrived so I rang my father in London to see if he had any ideas. He nudged me again toward the grub worm food factory he had suggested last week but even he knew I wasn’t having it.  And then he dropped the bomb saying, 

“Some of your friends had a good go of it on Thursday.” 

My friends?” I asked, not knowing what he was referring to. 

“Spraying fake oil on the Bank of England to win friends and influence enemies,” he said. 

Ah, environment nutters, he meant. “Friends” was his loving jibe. 

“Fake oil?” I asked.

“Pond scum if you must know. Pond scum and guar gum is what they used. Pity none of the news media seized on that…I thought Pond Scum Protestors had a nice ring to it.”  

What could I say? These were my people in a fashion, and they were dragging us all down.

“Listen…” he continued, I’ve got to run but let me send you the link, they sure need help.” He was nearly chortling before saying goodbye. 

It was both embarrassing and tragic. After pond-scumming the bank, they’d gone on to demand the Bank of England “make banks integrate climate risks."

Firstly I don’t think they meant to say "integrate risks" and second, asking banks to regulate themselves, is, I am sure, also not what they meant but something banks would be all too-willing to agree to do. 

Oh, and they were dressed like jesters. Actual jesters. If the visual was not bad enough, the historical association was that of fools, who existed to entertain the Crown.  

Ding-ding. Instagram calling.

Fiduciary Responsibility, Charity, and Other People's Money

Mark Carney leaves his job as Governor of the Bank of England in March, stepping easily into several new positions: notably, U.N. Special Envoy for Climate Action and Finance and special advisor to the British Prime Minister for the Glasgow COP26 conference on climate change in November. More broadly, Carney is moving from the world of central banking and high finance into that of international political activism on climate at the highest U.N. level.

That’s also a move from a world in which he had sustained success and a high reputation—with one significant misstep to which I’ll return—to one in which he wields less expert knowledge and yet is taking on a much more controversial task. And he clearly relishes this more adventurous role in which he seeks to use his experience as a banker to get the international financial system, both central banks and private financial markets, to become engines of climate policy.

In fact he’s been auditioning for this role since his early days in the Bank of England. In 2015 he established an industry-led task force on the disclosure of climate-related financial risks under Michael Bloomberg (a useful ally) under a mandate from G20 ministers. His particular concern has been to seek to persuade, “nudge,” even compel banks, corporations, and other economic actors to integrate climate risks into our understanding of fiduciary duty; managers must incorporate these risks into their prudent management of their clients’ money. Carney himself has warned several times that managers may in future be held to account for energy investments that turn out badly for their clients because they underestimate the market failures of fossil fuels. And he has used his banking leadership to encourage banks and others to write down the values of fossil fuels in their portfolios.

Now, this is a sophisticated version of an argument that has been going the rounds for about fifty years. That argument begins as a claim that managers and markets should take a wider range of factors than profitability and shareholder value into account when making investment and other decisions. What makes Carney’s argument more sophisticated than my crude version here is that he disguises an essentially ethical argument as long-term prudent investment advice (plus warnings that managers who ignore him may face shareholder suits for losing money.)

Milton Friedman was an early critic of this kind of thing when he attacked the highly respectable concept of corporate charitable giving. He was misinterpreted, of course, by those who believed (or pretended to believe) that he was advocating a capitalism red in tooth and claw that was contemptuous of compassion and idealism. One critic at the time dismissed his argument as “romantic brutalism.”

In fact Milton was a kind and beneficent man, but a realist first. His target was what we now call “virtue-signaling” or, to be even more romantically brutalist, virtue-signaling at the expense of other people. If corporate managers wanted to give money to poor villagers in the Third World, or local symphony orchestras, or National Public Radio, they should write cheques to those causes on their own accounts. Their wives could then legitimately boast about these donations at the Annual Planned Parenthood ball.

What they were not entitled to do was to give money belonging to their shareholders to causes of their own choosing. Friedman was not dissing compassion here. Their shareholders might be feeling generous too, conceivably more generous, but towards causes like Wounded Warriors, Mother Teresa’s missions, or Adoption Services. They would have less to give to their favored causes if the corpocrats had siphoned money from their dividends into the Philanthropy Department. (Please switch donations between corporate managers and shareholders if it makes you feel happier with the outcome and with my argument.) And, after all, the money belonged to them.

Managers in corporations, like managers of pension funds vis a vis pensioners, have a fiduciary duty to act in the interests of their shareholders. That obligation is a key restraint which prevents managers looting the funds entrusted to them. It is clear and has legal force. Corporate executives find it irksome, however, because it restricts their freedoms to allocate funds as they might wish. Hence their attraction towards the idea that vaguer responsibilities to several classes of “stakeholders” should replace this clear fiduciary duty to shareholders. With one bound they would be free.

Such notions rest on highly dubious ethical foundations. The Victorians, who invented the Joint Stock Corporation, saw this very clearly. Half of their popular melodrama depict a villainous guardian who seeks to marry a well-endowed ward (no sniggering at the back) in order to get control of her fortune, conceal the fact that he has embezzled half of it, and benefit from the rule that a wife cannot give evidence  against her husband. A Victorian audience would hardly have been soothed if, after his exposure, the villain had stepped forward to explain that he had merely redistributed her fortune on charitable grounds that left her comfortably off and lifted scores of the poor out of dire poverty. We can’t justify spending other people’s money on our favored causes because we think the causes are virtuous.

Carney would object here that in expanding the notion of fiduciary duty, he’s not favoring a cause but giving prudent advice that will save investors from foreseeable losses. For that to be true, he would need to have some ability to see the future better than the market. Does he possess that faculty?

That question brings me to my earlier reference of a misstep in Carney’s career. He has been seriously mistaken twice in his forecasts of how the UK economy would perform following Brexit. The first occasion was when he predicted prior to the 2016 referendum that the economy would be badly damaged merely by a No vote in the referendum. In fact, the economy improved and has performed better than its EU neighbors since the vote.

The second occasion was in 2018 when the Bank of England issued predictions on how Brexit itself might damage the UK economy. Paul Krugman, a strong opponent of Brexit, expressed some considerable skepticism about what struck him as exaggerated forecasts in successive tweets. I quote from Krugman's tweetstorm:

  1. As best I can tell, the big results depend on assumed relations between trade/FDI flows and productivity. It’s really important to understand that this channel does not follow from basic trade theory and comparative advantage; it’s a black-box story. And:
  2. What we have are correlations between trade and investment flows and productivity that don’t really follow from standard models. Are these causal? There is surely room for skepticism . . . So I’m worried. And:
  3. Again, I’m anti-Brexit, and have no doubt that it will make Britain poorer. And the BoE could be right about the magnitude. But they’ve really gone pretty far out on a limb here.

These judgments were a win for Krugman over Carney. The Bank’s forecasts were adjusted heavily to make them less Brexit-phobic a short time later.

If Carney lacks a general infallibility, then we need to look at the plausibility of his particular forecasts. He makes two sets of forecasts in this debate. He forecasts that the rise in temperatures is proceeding at a very rapid rate and that the markets for fossil fuels will fall: As the Guardian reported:

Carney said [Greta] Thunberg was right to point out that climate science showed that the world had only eight years of emitting carbon at its current rate if there is to be a 67% chance of limiting the increase in global temperature to 1.5 degrees. “That’s a legitimate point to make,” he said. “There have been many positive contributions from Greta Thunberg.”

That forecast seems to be considerably more precise than most official forecasts of carbon emissions and temperature increases -- a field already distorted by activist scholarship and political alarmism in the direction of exaggeration. UN forecasts themselves offer a range of possible outcomes which indicates uncertainty on the part of forecasters. To assign these kind of numbers -- eight years of continuing carbon emissions leading to a 67 % chance of holding temperature increases to 1.5 degrees -- all this about a process fed by innumerable factors reminds one of the difference between getting something roughly right versus precisely wrong. Such calculations are taking place, moreover, in a public atmosphere in which the speeches of a young adolescent woman are accorded undue weight by policy-makers. As in earlier controversies, such as Lysenkoism in the Soviet Union, we should subject them to firm skepticism.

Yet if these climate forecasts are either exaggerated or simply uncertain, what is the test which would tell us with some reliability that the market demand for fossil fuels is likely to fall along with the value of companies that extract them. It cannot be the additional stress tests or capital requirements that regulators may want the banks to impose on energy companies, for then the regulators would be using their own interventions as the justification for intervening. As yet, however, non-official market participants can’t seem to see spontaneous causes for this threat to the energy sector.

Recently, I wrote an article on Greta and the rise of the Crankocracy here. It concluded:  "Could you have a better illustration of the coming crankocracy than the assembled leaders of the world nodding solemnly and applauding timidly as a 17-year-old adolescent condemns them angrily for not halting the medieval plague about to descend on them unless they replace their business suits with sackcloth and ashes?"

I would be distressed to see Mr. Carney join their flagellant ranks. If he does, though, don't ask him for fiduciary advice.