You may have noticed that outside the Brexit bubble things are moving on the whole Climate Change/Green New Deal agenda. Lizzie Warren looks likely to face off with old Donald and I have no doubt that green politics will be at the center of the general election next year.
On many levels, I’m slightly despondent about this. We desperately need to take the culture wars out of the climate change debate but Trump sees political advantage in using climate change as a weapon in his war against the liberal swamp/establishment and the Democrats are happy to oblige by tacking on a whole bunch of incredibly daft social justice freebies.
On this theme at the weekend, the usually excellent Jonathan Ford of the Financial Times reviewed two of the more extreme Green economics texts about to hit our bookshelves – the first by Naomi Klein (On Fire), the second by left wing economist Ann Pettifor (the Case for the Green New Deal). Both essentially use the cudgel of climate change to advance their own radical left-wing agendas, positions although I would suggest that Pettifor’s is a tad more restrained.
Ford ends up concluding the review with the following comment “demanding drastic even impossible change – as Klein and Pettifor do – may just be a way to ensure that something is done”.
Given that Klein, in particular, is arguing for policies that aren’t that dissimilar from Khmer Rouge like Maoism (return to basics, end modernism) I think this last statement is nothing short of breathtaking. No, these are exactly the sort of extreme belief systems that will forever destroy the chance to combat climate change (emergency/crisis).
What we desperately need now is for climate change to be taken firmly away from the radical socialists and anti-capitalist greens and put in the hands of people who can fix the problem. That means building popular alliances which include conservatives and people who genuinely (though mistakenly) don’t believe in the risks of climate change.
The very LAST thing we need now is for this to be turned into another front in the culture wars. Klein and Pettifor are just plain wrong.
In particular, we need to stop one cynical line of attack dead in its tracks. Many on the Left are openly suspicious about why Wall Street and the City are showing an interest in preventative measures. They think they are about to profiteer from the proposed Green New Deal ideas.
And by Christ they are right, thank god.
We need capitalists to get behind the changes needed. Governments will not be able to do this all by themselves and we need someone to be thinking about where the buck will be made. At this point, the fundamentalists chunter on about “there is no way that a technical fix is going to solve this” – at which point we should all start laughing out loud. How the hell do you think we’re going to get all that carbon OUT of the atmosphere without a technical fix? There are only technical fixes left because there is zero chance that in the next 20 years we are somehow going to
- Stop capitalism
- Stop the hydro carbon economy
- Stop people’s consumption of excessive levels of energy
We could, of course, eliminate more than 50% of the human population, and achieve a non-technical fix but I think that might be considered a drastic solution. We need technical fixes and someone has to come up with the ideas and then pay for it.
So, sticking with the technical fix agenda, we saw two fabulous reports in the last few weeks that attempted to get a grip on what’s necessary to decarbonize the global economy. The big meaty one was froma cross disciplinary research team at Morgan Stanley, who’ve been doing some excellent work in this area. Big global investment bank looking for a quick buck – hiss!! Except that this tome of a report – called Decarbonisation: The Race to Net Zero – is an excellent primer on what is needed and the challenges needed.
The first infographic superbly sums up the various strands of the report.
Here are some of my highlights from the report: first on the need for oodles more renewable energy. Which will necessitate even more oodles of storage capacity?
“ The penetration of renewable power generation needed to stay within a 2 degree Celsius scenario will require $14 trillion of investment by 2050, on our estimates. We assume incremental renewable capacity (ex Hydro) of ~3,500 GW by 2030 (vs 2017) and ~11,000GW by 2050, with capital expenditure ranging from $0.9m to $3.3m per MW”
And the total tab? $50 trillion of capital investment by 2050. “This equates to an investment of roughly $1.6 trillion annually for the next 20 years. To contextualise this, Bloomberg’s New Energy Finance estimates that global clean energy investment totalled only $332 billion in 2018”.
Yikes, that’s huge but we also need to remember that this could be – hiss, hiss – profitable. Really very profitable. According to Morgan Stanley, “ we see the potential for $3-10 trillion of incremental EBIT assuming a 5-15% post-tax ROCE on the $50 trillion of invested capital”.
But for this all to work there’s one essential requirement – a carbon tax. They quote approvingly the estimate by Nicholas Stern that we probably need something like “$40-$80/t by 2020” to reach the goals of the Paris agreement 17, “which suggests that the majority of carbon pricing projects globally are currently too low”.
Given the current wave of global protests about unfair tax hikes and the cost of living, I’m not so sure that a carbon tax is going to work. I wish it would but my suspicion is that the vast majority of consumers are not willing to pay. The Left’s counteroffer is to throw in lots of free goodies to make them agree but I don’t think this will wash.
Sticking with practical suggestions for change stockbroking firm Killik and Co also brought out their own much slimmer treatise on the subject called “Chasing Net Zero, the energy transition”.
This echoed many of the themes in the Morgan Stanley report and sensibly focused on how to invest in this space – hiss, boo! Evil capitalists!!
I think their chosen ideas are all quite sensible and I list them below.
The one really interesting concept is “Energy as a service”. According to Killik this consists of the following:
“While much of the progress made in decarbonising the global economy has been the result of investment and policy change by central governments, we are beginning to see the baton being taken on by local governments, corporates and entities such as universities who are adopting emissions targets….The Science Based Targets initiative (SBTi) is a partnership that is seeking to drive ambitious corporate climate action. It evaluates private sector plans to reduce carbon emissions in line with the goals laid out in the Paris Agreement. Companies sign up in writing and then have 24 months to submit their plans. To date 672 companies have committed to action on climate change, 276 of which have approved science-based targets, including blue-chips names such as Inditex, Philips, Nestle, Kering and Nike.”
I’d highlight three investment ideas from the Killik report:
Orsted is a renewable energy company focused on the development, construction and operation of offshore wind farms in Europe, the US and Asia. It is the global leader in offshore wind, which in our opinion is the most attractive of the renewable generation technologies. Offshore wind is technically and operationally more complex than onshore wind and solar, and therefore has higher barriers to entry. Global installed capacity is expected to grow at a 15% CAGR to 2030, and it continues to enjoy subsidy support in most countries, including the UK. Orsted has a market leading position, and an outstanding track record of winning projects, delivering them on time and within budget, and of selling developed assets at attractive prices.
Energy-as-a-service – Engie is one of the world’s largest integrated utility companies, with businesses across the value chain, including in networks, power generation, energy services and energy supply. It is the global leader in the provision of complex, integrated, energy-as-a-service customer solutions. We believe that the company is uniquely positioned in the attractive energy-as-a-service space. It has the number one position globally in district cooling; the number two position in district heating; a dedicated software company that designs and deploys digital solutions for the group and its clients; extensive experience in the development of renewable generation assets; and, a long track record in operating energy networks.
Fund recommendation – Schroder ISF Global Energy Transition Fund: The fund aims to provide capital growth by investing in the equity securities of companies worldwide that the manager believes are associated with the global transition towards lower-carbon sources of energy. The strategy is managed by the dedicated Commodities investment team at Schroders and will target emerging technologies and strategic industries integral to the global shift to cleaner energy. The fund will seek opportunities across a range of areas, including renewable power generation, energy storage and related materials; equipment; and distribution. The strategy has an aim of being 100% fossil fuel free, leading to a highly focused investable universe providing pure exposure to the energy transition theme.