Guest post by Isuru Seneviratne, Founder & Portfolio Manager, Radiant Value Management. Isuru has specialized in energy sector analysis and investing since 2004. Visit www.radiantval.com for more information on the author and firm.
“Let’s welcome our fifth-grade scientists!” called out Ms. Aruba-Tate.
[The door to the classroom opened and four students shuffled in.]
Shayna tossed her hair over her shoulders. “This is a report on global warming,” she said. “Adrian, show the desert. This is a picture of the Gobi Desert, but pretty soon almost everywhere is going to look like this because of global warming. Juan, now show the polar bear.” Juan held up a picture of a worried-looking polar bear. “Now!” Shayna said loudly, “Global warming is a total disaster and it’s all our fault.”
On the rug, the second graders looked at one another. This did not sound good.
– Ivy + Bean: What’s the Big Idea, Annie Barrows
Image Credit: Theresa Harris – Thrive Art School
While modern energy is essential to human development, greenhouse gas emissions from burning fossil fuels are disrupting global weather patterns. As weather-related catastrophes around the world accelerate (Exhibit 1), reinsurance companies are developing methods to quantify the degree to which the intensity or frequency of certain events is influenced by man-made climate change.
Solutions that enable equitable energy access while decarbonizing the energy mix already exist. However, the debate on who should pay has stymied global accords. In the U.S., while the Trump administration is attempting to rescind on commitments made at COP 21 in Paris, a group of senior Republican statesmen have proposed the ‘capitalist solution’ to the problem (The Climate Leadership Council, clcouncil.org). This is a technology-neutral, market-driven solution that can get populist backing, in contrast to the prescriptive Clean Power Plan (CPP) of the Obama administration.
Exhibit 1: Source: Munich Re’s Topics Geo: Natural catastrophes 2016 Analyses, assessments, positions 2017 issue, March 2017 Evolution of major (termed ‘relevant’) loss events shows an increase of weather-related incidents over the last 36 years. At US$ 175bn, 2016’s cost of natural disasters reached a four-year high.
The relationship between access to modern energy and human development is well established. Affordable and reliable grid electricity improves factory output and employment. Refrigeration allows hospitals to store life-saving vaccinations and households to reduce food waste. In a study of policy impact on health of populations in 60 low-income countries, the World Bank found that in urban areas only access to electricity has a significant health impact. This outcome was independent of income levels. Electricity also contributes to economic development by increasing the economic output per unit of energy. Between 1850 and 1990, energy use in France, Germany and the UK increased by 4.7 times, while real GDP increased 21.5 times.
The poorest three-quarters of the world’s population consumes merely a tenth of the energy. This is after two centuries in which affluent countries burnt the cheapest and most reliable energy resources – coal and oil. The cumulative energy use enabled these countries to unlock the human potential for dynamic, prosperous societies. Today, over one billion people around the world do not have any electricity while 2.5 billion people have no access to clean cooking and heating fuels. This energy poverty obstructs development goals in health, prosperity and a liveable environment.
Exhibit 2: Includes 20 most populous countries and a sampling of key energy producers and consumers Source: The World Bank
Developing nations have long argued that developed nations should pay a higher portion of the costs of a clean energy transition (Exhibit 2). Developed nations have pointed to growing emissions from large developing countries (Exhibit 3) to argue for inaction. The Paris accord side-stepped this circular debate by letting each country independently commit to reductions.
Exhibit 3: Only the top two emitters have double digit share – China and the U.S. Adding India makes nearly half of world total. Source: The World Bank
“Then why do you say you hate science?” asked Ms. Aruba-Tate.
“Global warming!” chanted the second graders.
“Global warming?” asked Ms. Aruba-Tate.
“Didn’t you listen, Ms. Aruba-Tate?” Bean said. “The whole world is going to turn into a desert.”
“The polar bears are going to die out,” said Ivy.
“And the frogs,” said Emma.
“And newts,” said Eric. “Squishy things are in trouble.”
“All the animals are in trouble,” said Drew.
“And it’s all our fault!” said Bean. That was the worst part.
Mr. Aruba-Tate was quiet for a moment. She looked like she was thinking hard. Then she said, “Boys and girls, I’m hearing that you are very worried about global warming. I’m feeling sorry that you’re worried, but I’m also feeling glad that you care so much about the earth. People who care so much as you do are the people who will fund solutions to the problem.”
The second graders looked at each other. Solutions? There were solutions?
“Right now, scientists all over the world are trying to find ways to stop global warming. Science is the solution, not the problem. That’s why I’m sad when I hear you say you hate science.”
“They should work harder,” said Drew.
– Ivy + Bean: What’s the Big Idea, Annie Barrows
“[M]any policy experts and economists prefer another course of action to reduce greenhouse gas emissions… a revenue-neutral carbon tax. I know that’s hard for a politician to say. So we’ve given them a new name – refundable greenhouse gas emissions fee.” – Rex Tillerson, CEO of ExxonMobil, October 2009
The Climate Leadership Council proposes each nation tax CO2 when emitting resources enter the economy – at mines, refineries and ports – and all proceeds returned to its citizens. At the proposed starting rate of $40 per ton, an average U.S. family is to receive dividends of $2,000 annually. Despite consumers paying more for all goods and services, the lower 70% of earners would have a net cash benefit. At $49/t CO2 the lowest-earning decile would see their after-tax income increase by 8.9%, while that of the top decile would decrease by 1.0%. This would be the key to getting support from Trump voters sceptical of traditional top-down emissions regulations. Individual choices would move the economy towards lower-carbon goods and services.
Initially, the per-capita dividend would be ~$1.35 per day. While this seems low, a strong pricing signal of a commitment to continually raise this level sends a powerful message to both businesses and consumers. Each ton of CO2 is treated equally, without the need for government arbitration. The CPP failed to acknowledge the largest source of carbon-free electricity – nuclear power (Exhibit 4). Subsidies to renewables have had destabilizing effects on electricity grids. Such glaring inconsistencies have been partially responsible for Republican opposition to climate action, even while its base supporters in America’s farming communities struggle with increasingly extreme weather.
Exhibit 4: Lifecycle greenhouse gas emissions of energy sources (median estimate) of electricity generation Source: IPCC 2014, Annex III Table A.III.2
“Only nuclear power can lift all humans out of poverty without cooking the planet, or keeping cities like Delhi and Beijing caked in deadly particulate matter. Coal and fossil fuels can lift people out of poverty, but at the cost of hammering the environment. Solar and wind barely made up half of nuclear’s seven percent decline as a share of global electricity [since the mid-’90s]. It will make up even less over the next 10 years.”
– Michael Shellenberger, Environmental Progress
In the religion of climate environmentalism, ‘Big Oil’ is hated for its role enabling humanity’s new ‘Original Sin.’ We want to consume a high-energy diet, but those who extract the resources to power this appetite are treated like the biblical serpent. For instance, Obama administration wanted to keep “the boot on the neck of British Petroleum” during the Gulf of Mexico oil spill in an unconstructive and confrontational attitude. The arguments on pipelines Keystone XL and Dakota Access have become acrimonious, leaving scientific evidence behind. If the negative externalities of pollution are priced in, ideological debates on regulation may give way to bipartisan progress.
Exhibit 5: U.S. light truck monthly sales as a percentage of all vehicle sales; 2001 to February 2017 Source: U.S. Bureau of Economic Analysis (BEA), ARC Energy Research Institute
Price signals are the best way to entice behavioral change. As seen in Exhibit 5, Americans have been purchasing ever more gas-guzzling SUVs and pick-up trucks since oil prices crashed. In 2013, a new buyer had similar odds of buying a big car with 20 mpg vs. a small car with 30 mpg. Three years later almost two-thirds now choose a pickup truck or SUV. Data from Canada and China confirm that this trend is not limited to the U.S. At the same time, record percentages of Americans are concerned about global warming, believe it is occurring, consider it a serious threat and believe it is caused by human activity. In a recent poll, 67% Americans supported a carbon tax where proceeds are directly returned to them.
British Columbia successfully implemented a revenue-neutral carbon tax in 2008. Since then, BC’s economic growth has surpassed that of other Canadian provinces, along with superior gains in fuel efficiency. Progress has stalled possibly due to concerns of ‘free riding’ by BC’s trading partners. Having a cost advantage, they would benefit without contributing to emission reductions. Therefore, a border adjustment tax is essential to a successful solution. Imported goods from a jurisdiction with no – or lower – carbon taxes would be punished, encouraging it compete by implementing a matching program.
A market-based tax-and-dividend program ticks the Trump boxes of promoting high-paying American jobs, is pro-business, includes a border tax and limits government. With Republican control of all parts of the federal government, such a change is possible. Environmental activists in Washington State let the first U.S. state-wide carbon tax-and-dividend initiative be defeated in November as they sought to direct the revenue towards renewable energy, mass transit and other green infrastructure projects. Progressives would be well-advised to support as option where all parties can claim a victory, leading to its long-term success.
“You children have new ideas all the time, which means you’re already good scientists. Each one of you could come up with an idea to fight global warming.”
“But we’re kids,” said Vanessa.
“You’re kid scientists.” Said Ms. Aruba-Tate firmly. “What we need for this problem is new ideas. And you kids are great at that.”
“Year,” whispered Bean. She was great at new ideas. She had them all the time.
“So — I think we have our theme for the Emerson School Science Fair, don’t you?” asked Ms. Aruba-Tate. “Ideas that fight global warming.”
Oh, this is going to be great, thought Bean. If she stopped global warming, she’d be the most famous person in the world. “Do you win anything if your idea is the best?” she called out.
Ms. Aruba-Tate smiled. “You sure do. You win a special certificate of Scientific Achievement from the Principal!”
Sheesh. Bean had been hoping for money. But she would fight global warming anyway.
– Ivy + Bean: What’s the Big Idea, Annie Barrows
Editing by Pablo Ruiz
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