Bankers Should Mind Their Own Business, not the Climate

John H. Cochrane writes at the Hoover Institution Central Banks and Climate: A Case of Mission Creep.  Excerpts in italics with my bolds.

The following is adapted from John H. Cochrane’s remarks at the European Central Bank’s Conference on Monetary Policy: Bridging Science and Practice. His full presentation about the challenges facing central banks is here.

Central banks are rushing headlong into climate policy. This is a mistake. It will destroy central banks’ independence, their ability to fulfill their main missions to control inflation and stem financial crises, and people’s faith in their impartiality and technical competence. And it won’t help the climate.

In making this argument, I do not claim that climate change is fake or unimportant. None of the following comments reflect any argument with scientific fact. (I favor a uniform carbon tax in return for essentially no regulation, but this essay is not about carbon policy.)

The question is whether the European Central Bank (ECB), other central banks, or international institutions such as the International Monetary Fund, the Bank for International Settlements, and the Organization for Economic Co-operation and Development should appoint themselves to take on climate policy—or other important social, environmental, or political causes—without a clear mandate to do so from politically accountable leaders.

The Western world faces a crisis of trust in our institutions, a crisis fed by a not-inaccurate perception that the elites who run such institutions don’t know what they are doing, are politicized, and are going beyond the authority granted by accountable representatives.

Trust and independence must be earned by evident competence and institutional restraint. Yet central banks, not obviously competent to target inflation with interest rates; floundering to stop financial crisis by means other than wanton bailouts; and still not addressing obvious risks lying ahead; now want to be trusted to determine and implement their own climate change policy? (And next, likely, taking on inequality and social justice?)

We don’t want the agency that delivers drinking water to make a list of socially and environmentally favored businesses and start turning off the water to disfavored companies. Nor should central banks. They should provide liquidity, period.

But a popular movement wants all institutions of society to jump into the social and political goals of the moment, regardless of boring legalities. Those constraints, of course, are essential for a functioning democratic society, for functioning independent technocratic institutions, and incidentally for making durable progress on those same important social and political goals.

It’s Not About Risk

The European Central Bank and other institutions are not just embarking on climate policy in general. They are embarking on the enforcement of one particular set of climate policies—policies to force banks and private companies to defund fossil fuel industries, even while alternatives are not available at scale, and to provide subsidized funding to an ill-defined set of “green” projects.

Let me quote from ECB executive board member Isabel Schnabel’s recent speech. I don’t mean to pick on her, but she expresses the climate agenda very well, and her speech bears the ECB imprimatur. She recommends that

“[f]irst, as prudential supervisor, we have an obligation to protect the safety and soundness of the banking sector. This includes making sure that banks properly assess the risks from carbon-intensive exposures. . .”

Let me point out the unclothed emperor: climate change does not pose any financial risk at the one-, five-, or even ten-year horizon at which one can conceivably assess the risk to bank assets. Repeating the contrary in speeches does not make it so.

Risk means variance, unforeseen events. We know exactly where the climate is going in the next five to ten years. Hurricanes and floods, though influenced by climate change, are well modeled for the next five to ten years. Advanced economies and financial systems are remarkably impervious to weather. Relative market demand for fossil vs. alternative energy is as easy or hard to forecast as anything else in the economy. Exxon bonds are factually safer, financially, than Tesla bonds, and easier to value.

The main risk to fossil fuel companies is that regulators will destroy them, as the ECB proposes to do, a risk regulators themselves control. And political risk is a standard part of bond valuation.

That banks are risky because of exposure to carbon-emitting companies; that carbon-emitting company debt is financially risky because of unexpected changes in climate, in ways that conventional risk measures do not capture; that banks need to be regulated away from that exposure because of risk to the financial system—all this is nonsense. (And even if it were not nonsense, regulating bank liabilities away from short term debt and towards more equity would be a more effective solution to the financial problem.)

Next, we contemplate a pervasive regime essentially of shame, boycott, divest, and sanction

“[to] link the eligibility of securities . . . as collateral in our refinancing operations to the disclosure regime of the issuing firms.”

We know where “disclosure” leads. Now all companies that issue debt will be pressured to cut off disparaged investments and make whatever “green” investments the ECB is blessing.

Last, the ECB is urged to print money directly to fund green projects:

“We should also consider reassessing the benchmark allocation of our private asset purchase programs. In the presence of market failures . . . the market by itself is not achieving efficient outcomes.”

Now you may say, “Climate is a crisis. Central banks must pitch in and help the cause. They should just tell banks to stop lending to the evil fossil fuel companies, and print money and hand it out to worthy green projects.”

But central banks are not allowed to do this, and for very good reasons.

A central bank in a democracy is not an all-purpose do-good agency, with authority to subsidize what it decides to be worthy, defund what it dislikes, and force banks and companies to do the same. A central bank, whose leaders do not regularly face voters, lives by an iron contract: freedom and independence so long as it stays within its limited and mandated powers.

The ECB in particular lives by a particularly delineated and limited mandate. For very good reasons, the ECB was not set up to decide which industries or regions need subsidizing and which should be scaled back, to direct bank investment across Europe, to set the price of bonds, or to print money to subsidize direct lending. These are intensely political acts. In a democracy, only elected representatives can take or commission such intensely political activities. If I take out the words “green,” the EU member states, and EU voters, would properly react with shock and outrage at this proposal. If the ECB bought different countries’ bonds at different prices and in different quantities to reward those making greater progress on “green” policy implementation, there would likely be an outcry.

That’s why this movement goes through the convolutions of pretending that defunding fossil fuels and subsidizing green projects—however desirable—has something to do with systemic risk, which it patently does not.

That’s why one must pretend to diagnose “market failures” to justify buying bonds at too high prices. By what objective measure are green bonds “mispriced” and markets “failing”? Why only green bonds? The ECB does not scan all asset markets for “mispriced” securities to buy and sell after determining the “right” prices.

Who Gets the Green Light?

At face value, “carbon emitting” does not mean just fossil fuel companies but cement manufacturers, aluminum producers, construction, agriculture, transport, and everything else. Will the carbon risk and defunding project really extend that far, in any sort of honest quantitative way? Or is “carbon emitting” just code for hounding the politically unpopular fossil fuel companies?

In the disclosure and bond buying project, who will decide what is a green project? Already, cost-benefit analysis—euros spent per ton of carbon, per degrees of temperature reduced, per euros of GDP increased—is lacking. By what process will the ECB avoid past follies such as switchgrass biofuel, corn ethanol, and high-speed trains to nowhere? How will it allow politically unpopular projects such as nuclear power, carbon capture, natural gas via fracking, residential zoning reform, and geoengineering ventures—which all, undeniably, scientifically, lower carbon and global temperatures—as well as adaptation projects that undeniably, scientifically, lower the impact on GDP? Well, clearly it won’t.

The ECB is embarking on one specific kind of green policy, popular at the cocktail parties at Davos, but having little to do with cost-benefit analysis or science of climate policy.

In sum, where is the analysis for this program? I challenge the ECB to calculate how many degrees this bond buying plan would lower global temperatures, and how much it would raise GDP by the year 2100, in any transparent, verifiable, and credible way. Never mind the costs for now: where are the benefits?

And how would the ECB resist political pressure to subsidize all sorts of boondoggles? If the central bank does not have and disclose neutral technical competence at making this sort of calculation, the project will be perceived as simply made-up numbers to advance a political cause. All of the central bank’s activities will then be tainted by association.

This will end badly. Not because these policies are wrong, but because they are intensely political, and they make a mockery of the central bank’s limited mandates.

If this continues, the next ECB presidential appointment will be all about climate policy: who gets the subsidized green lending, who is defunded, what the next set of causes is to be, and not interest rates and financial stability. Board appointments will become champions for each country’s desired subsidies. Countries and industries that lose out will object. This is exactly the sort of institutional aggrandizement that prompted Brexit.

If the ECB crosses this second Rubicon—buying sovereign and corporate debt was the first—be ready for more. The IMF is already pushing redistribution. The US Federal Reserve, though it has so far stayed away from climate policy, is rushing into “inclusive” employment and racial justice. There are many problems in the world. Once you start trying to shape climate policy, and so obviously break all the rules to do it, how can you resist the clamor to defund, disclose, and subsidize the rest? How will you resist demands to take up regional development, prop up dying industries, subsidize politicians’ pet projects, and all the other sins that the ECB is explicitly enjoined from committing?

A central bank that so blatantly breaks its mandates must lose its independence, its authority, and people’s trust in its objectivity and technical competence to fight inflation and deflation, regulate banks, and stop financial crises.

A Narrow Role, and Essential

Working for a central bank is a bit boring. One may feel a longing to do something that feels more important, that helps the world in its big causes. One may feel longing for the approval of the Davos smart set. Why does Greta Thunberg get all the attention? But a central bank is not the Gates Foundation, which can spend its money any way it likes. This is taxpayers’ money, and regulations use force to transfer wealth between very unwilling people. A central bank is a government agency, and central bankers are public servants, just like the people who run the DMV.

Central banks must be competent, trusted, narrow, independent, and boring. A good strategy review will refocus central banks on their core narrow mission and let the other institutions of society address big political causes. Boring as that may be.

See also:  Financiers Failed Us: Focused on Fake Crisis

 

 

Oil Demand No End in Sight

Your next car? NURPHOTO VIA GETTY IMAGES

Michael Lynch writes at Forbes  Peak Oil Demand! Again?  Excerpts in italics with my bolds.

Amid stubbornly low prices and lackluster demand we’re now seeing, on cue, a new round of predictions that oil demand has already or is about to peak (including even scenarios published by BP). These cannot be dismissed out of hand — as the peak oil supply arguments could, inasmuch as they were either based on bad math or represented assumptions that the industry couldn’t continue overcoming its age-old problems like depletion. (See my book The Peak Oil Scare if you want the full treatment.)

Now, the news is highlighting various predictions that the pandemic will accelerate the point at which global oil demand peaks, which is certainly much more sexy than business as usual. When groups like Greenpeace or the Sierra Club predict or advocate for peak oil demand, it doesn’t make much news: dog bites man. But, as the newspeople say, when man bites dog it is news. Thus, when oil company execs seem to believe peak oil demand is near, you get headlines like, “BP Says the Era of Oil Demand-Growth is Over,” The Guardian newspaper proclaiming that “Even the Oil Giants Can Now Foresee the End of the Oil Age,” and Reuters in July: “End game for oil? OPEC prepares for an age of dwindling demand.”

Anyone who is familiar with the oil industry knows that a peak in oil production has been predicted many times throughout the decades, never to come true (or deter future predictions of same). But few realize that the end of the industry has been repeatedly predicted as well, including both the demise of an old-fashioned business model, but also replacement of petroleum by newer, better technologies or fuels.

Until the 1970s, few saw an end to the oil business. The automobile boom created a seemingly insatiable demand for oil, one which has only slowed when prices rose and/or economic growth stalled, neither of which has ever proved permanent.

Yet there have been three particular apocalyptic threads put forward for the oil industry: the industry would spiral into decline, demand would peak, and/or a new fuel or technology would displace petroleum.

The oil industry’s business model was challenged as far back as 1977, when Mobil XOM +1.3% CEO Rawleigh Warner tried to diversify out of the oil business for fear that those who didn’t would “go the way of the buggy-whip makers.” Similarly, Mike Bowlin, ARCO’s CEO, declared in 1999 “We’ve embarked on the beginning of the last days of oil.” Enron’s Jeff Skilling (whatever happened to him?) said he “had little use for anything that smacked of a traditional energy company — calling companies like Exxon Mobil ‘dinosaurs’”

Vanishing demand has been another common motif for prognosticators, especially when high prices caused demand to slump. Exxon CEO Rex Tillerson (whatever happened to him?) thought in 2009, when gasoline prices were $4/gallon, that gasoline demand had peaked in 2007. (The figure below shows how that worked out.)

Gasoline demand peaks then recovers U.S. Gasoline Demand (tb/d) THE AUTHOR FROM EIA DATA.

Sheikh Yamani, the former Saudi Oil Minister, warned in 2000 that in thirty years there would be “no buyers” for oil, because fuel cell technology would be commercial by the end of that decade. (From 2000, oil demand increased by 20 mb/d before the pandemic.) The fabled Economist magazine agreed with Yamani in 2003, “Finally, advances in technology are beginning to offer a way for economies, especially those of the developed world, to diversify their supplies of energy and reduce their demand for petroleum…Hydrogen fuel cells and other ways of storing and distributing energy are no longer a distant dream but a foreseeable reality.”

They might have been echoing William Ford, CEO of Ford Motor Company F +0.6%, who said in 2000, “Fuel cells could be the predominant automotive power source in 25 years.” Twenty years later, they are insignificant.

Amory Lovins, whose has probably received more awards than Tom Hanks, has long argued that extremely efficient (and expensive) cars would reduce gasoline demand substantially, including in his (and co-authors) Winning the Oil Endgame, which argued that a combination of efficiency and celluslosic ethanol could replace our imports from the Persian Gulf (then about 2.5 mb/d). (They’ve been replaced, but by shale oil, and demand was unchanged since their prediction.)

He was hardly alone, with Richard Lugar and James Woolsey in a 1999 Foreign Affairs article calling cellulosic ethanol “The New Petroleum.” Perhaps they relied on a 1996 Atlantic article by Charles Curtis and Joseph Room (“Mideast Oil Forever”) which argued that cellulosic ethanol should see its cost fall to about $1/gallon (adjusted for inflation). (In 2017, the National Renewable Energy Laboratory put the cost at $5/gallon.)

One of my persistent themes has been that too much writing is not based on rigorous analysis but superficial ideas, a few anecdotes and footnotes, supposedly supporting Herculean changes.

(See Tom Nichols The Death of Expertise.) Peak oil demand is the flavor of the month and people are rushing to publish predictions, prescriptions, guidelines, and fantastical views of a fantastical future. But petroleum remains by far the fuel of choice in transportation and the pandemic seems unlikely to change that. Sexy should be left for HBO and not energy analysis.

There are many reasons the demand for fossil fuels is strong and growing.  

Footnote:  Shareholder activism against Big Oil is based on a cascade of unlikely suppositions including declining demand and stranded assets.  See: Behind the Alarmist Scene

 

 

ESG Investing Fails Both Activists and Pensioners

Robert Armstrong wrote at the Financial Times The Dubious Appeal Of ESG Investing Is For Dupes Only.  Excerpts in italics with my bolds.

Environmental, social and governance investing is ascendant. Its mirror image, stakeholder capitalism, is now the standard mantra on boards and in executive suites. This is not cause for celebration.

Both rest on weak conceptual foundations and should be viewed suspiciously by investors who seek adequate returns, and by citizens who want real rather than cosmetic change.

The business and financial establishments endorse the new consensus. BlackRock, the world’s largest asset manager, released an open letter warning companies that it would “be increasingly disposed” to vote against boards moving too slowly on sustainability. The World Economic Forum in Davos says that companies exist to create value not just for shareholders but “employees, customers, suppliers, local communities and society”. A letter from the Business Roundtable, signed by prominent chief executives, promised to “commit to deliver value to all” stakeholders.

Investors have responded. In the first half of 2020, net inflows into ESG funds hit $21bn, according to Morningstar, almost matching last year’s record total.

But behind ESG and stakeholderism lies a dangerous idea: that shareholders’ economic interests and the social good always harmonise over the long run.

It is true that when companies subordinate everything to maximisation of shareholder value, it backfires. When IBM, a company that long prioritised technological excellence, shifted its focus in 2012 to a target of hitting $20 in earnings per share a few years later, it was the beginning of the end for both IBM’s industry leadership and its rising share price. General Electric has never recovered from its decision to chase “easy” profits by turning into a finance company in the 1990s. The list goes on.  So ESG supporters are right that companies cannot always maximise long-term profit by aiming to do so.

They have to shoot instead to deliver excellent products, which creates profit as a side effect.

In many cases, excellence creates good stakeholder outcomes too, from investment in employees to lower carbon emissions. But this does not mean shareholder returns and the social good can always align. And there is one important way in which the two must come apart.

Part of the justification for ESG investing is that divesting from certain industries (fossil fuels or tobacco, say) creates economic pressure for change, in the way that boycotting a company’s products might. Divestment increases a company’s cost of capital: when fewer investors line up to buy its shares or bonds, it must sell them for less. This makes it more expensive for it to invest in socially destructive projects.

The necessary corollary? ESG-friendly companies’ cost of capital goes down, as dollars are channelled their way instead. Their shares and bonds become more expensive, meaning lower returns. If ESG investors’ returns are not lower, their choices have not affected corporate incentives.

Given that this is so, many ESG advocates take a different tack. They argue that the point is not to change corporate incentives but to invest in companies that will thrive financially precisely because they take ESG seriously.

There may be a distant and ideal future when this will be achieved. But even the best corporate leaders cannot look out to the end of days. They make choices about what they can foresee with a degree of confidence. At that range, it is obvious that shareholders’ and stakeholders’ interests can conflict. If they did not, there would be far fewer lay-offs announced and far fewer oil wells drilled. If stakeholder capitalism means anything, it is that corporate leaders must sometimes make choices that benefit stakeholders at the cost of shareholders.

The financial mandarins’ manifestos ignore such trade-offs, and say nothing about how they might be managed. They merely repeat that, in BlackRock’s phrase, social purpose “is the engine of long-term profitability”.

If corporate leaders are silent it is because they know how they will choose when such conflicts arise. They are paid in stock, and if monetary incentives are not enough, there are legal ones. Most US companies are incorporated in states where the law requires them to put shareholders first. Promises of virtue do not change this. As Aneesh Raghunandan and Shivaram Rajgopal of Columbia Business School point out, corporate signatories to the Business Roundtable letter have worse ESG records than industry peers.

Is the answer, then, a top-to-bottom change in executive pay packages, and indeed corporate law? No. Rewriting the internal rules of corporate capitalism would put at risk a system that has served us well in its remit: to create wealth. At the same time, do we want more of the power and responsibility for solving our most pressing problems, from inequality to climate change, to be pressed into the hands of corporations, which will still be run and owned by the richest among us? No again.

Shareholder capitalism is an excellent way to manage our corporate economy and we should stick with it.

We also have a very good, if presently neglected, set of tools to ensure that everyone shares in the fruits of economic progress. They are democratic action and the rule of law, which allow us to, for example, set minimum wages, tax carbon emissions and change campaign finance laws. Let’s use the right tools for the right purposes.

Anti-fossil fuel activists storm the bastion of Exxon Mobil, here seen without their shareholder disguises.

Stop Pension Funds Gambling on Energy Fads

Haley Zaremba writes at oilprice Will Trump’s Proposed ESG Regulation Help Big Oil? Excerpts in italics with my bolds.

The ESG Push to Gamble Pension Funds on Climate Concerns

Instead of joining the financial revolution geared toward environmental, social, and governance (ESG) that many experts believe is coming down the pike (with or without the cooperation of the United States) the Trump administration has actively fought against this likely inevitability. A new proposed regulation from the United States Department of Labor would explicitly bar the department from taking ESG into consideration in decision making concerning U.S. employer-provided pension funds. Ostensibly, this move is because the government doesn’t believe that the nation’s pension fund managers are doing a good job, but many critics see this as a blatant attempt to redirect investment dollars towards fossil fuels, which are increasingly falling out of favor with investors.

[Note: The author’s bias shows, favoring subsidized wind and solar enterprises over oil and gas companies that provide reliable energy powering modern civilization, reliable returns and tax revenues.]

This week Bloomberg Green reported that in this new proposed ruling, “the language reaffirms the standard interpretation of fiduciary guidelines that only financial risks and returns can be considered in the management of U.S. employer-provided pension funds; ‘non-pecuniary goals,’ for example relating to political or public policy, should not guide pension investments.” As Bloomberg Green points out in the report, “The timing is ironic, coming as the fossil fuel industry begins to confront existential questions about its near-term future. It would almost be amusing if it wasn’t for the fear, uncertainty, and doubt the proposal leaves in its wake.”

For Balance, Consider How Risky are Wind and Solar Investments

Paul Driessen writes at CFACT Reporting renewable energy risks.  Excerpts in italics with my bolds.

The whole thrust of the ESG campaign is to burden oil, gas and coal companies with additional reporting and scrutiny regarding hypothetical global warming impacts and to downgrade their worth in investors’ eyes.  Driessen correctly points to the risk of renewable energy projects collapsing when public support and tax dollars are withdrawn, as is already happening in some European countries.

If efficient energy companies must disclose climate-related financial risks, so should renewables.

Replacing coal, gas and nuclear electricity, internal combustion vehicles, gas for home heating, and coal and gas for factories – and using batteries as backup power for seven windless, sunless days – would require some 8.5 billion megawatts. Generating that much electricity would require some 75 billion solar panels … or 4.2 million 1.8-MW onshore wind turbines … or 320,000 10-MW offshore wind turbines … or a combination of those technologies … some 3.5 billion 100-kWh batteries … hundreds of new transmission lines – and mining and manufacturing on scales far beyond anything the world has ever seen.

That is not clean, green, renewable energy. It is ecologically destructive and completely unsustainable – financially, ecologically and politically. That means any company, community, bank, investor or pension fund venturing into “renewable energy” technologies would be taking enormous risks.

Once citizens, voters and investors begin to grasp:

  • (a) the quicksand foundations under alarmist climate models and forecasts;
  • (b) the fact that African, Asian and even some European countries will only increase their fossil fuel use for decades to come;
  • (c) the hundreds of millions of acres of US scenic and wildlife habitat lands that would be covered by turbines, panels, batteries, biofuel crops and forests clear cut to fuel “climate-friendly” biofuel power plants; and
  • (d) the bird, bat and other animal species that would disappear under this onslaught – they will rebel. Renewable energy markets will implode.

Growing outrage over child labor, near-slave labor, and minimal to nonexistent worker health and safety, pollution control and environmental reclamation regulations in foreign countries where materials are mined and “renewable” energy technologies manufactured will intensify the backlash and collapse. As the shift to GND energy systems brings increasing reliance on Chinese mining and manufacturing, sends electricity rates skyrocketing, kills millions of American jobs and causes US living standards to plummet, any remaining support for wind, solar and other “renewable” technologies will evaporate.

Pension funds and publicly owned companies should therefore be compelled to disclose the risks to their operations, supply chains, “renewable energy portfolio” mandates, subsidies, feed-in tariffs, profits, employees, valuation and very existence from embarking on or investing in renewable energy technologies or facilities. They should be compelled to fully analyze and report on every aspect of these risks.

The White House, Treasury Department, Securities and Exchange Commission, Federal Reserve, Committee on Financial Stability, Pension Benefit Guaranty Corporation and other relevant agencies should immediately require that publicly owned companies, corporate retirement plans and public pension funds evaluate and disclose at least the following fundamental aspects of “renewable” operations:

* How many wind turbines, solar panels, batteries, biofuel plants and miles of transmission lines will be required under various GND plans? Where? Whose scenic and wildlife areas will be impacted?

* How will rural and coastal communities react to being made energy colonies for major cities?

* How much concrete, steel, aluminum, copper, cobalt, lithium, rare earth elements and other material will be needed for every project and cumulatively – and where exactly will they come from?

* How many tons of overburden and ore will be removed and processed for every ton of metals and minerals required? How many injuries and deaths will occur in the mines, processing plants and factories?

* What per-project and cumulative fossil fuel use, CO2 and pollution emissions, land use impacts, water demands, family and community dislocations, and other impacts will result?

* What wages will be paid? How much child labor will be involved? What labor, workplace safety, pollution control and other laws, regulations, standards and practices will apply in each country?

* What human cancer and other disease incidents and deaths are likely? How many wildlife habitats will be destroyed? How many birds, bats and other wildlife displaced, killed or driven to extinction?

* For ethanol and biodiesel, how much acreage, water, fertilizer, pesticide and fossil fuel will be required? For power plant biofuel, how many acres of forest will be cut, and how long they will take to regrow?

* What “responsible sourcing” laws apply for all these materials, and how much will they raise costs?

* How will home, business, hospital, defense, factory, grid and other systems be protected against hacking and power disruptions caused by agents of overseas wind, solar and other manufacturers?

* What costs and materials are required to convert existing home and commercial heating systems to all-electricity, upgrade electrical grids and systems for rapid electric vehicle charging, and address the intermittent, unpredictable, weather-dependent realities of Green New Deal energy sources?

* What price increases per kWh per annum will families, businesses, offices, farms, factories, hospitals, schools and other consumers face, as state and national electrical systems are converted to GND sources?

* How many power interruptions will occur every year, how will they hurt families, factories and other users – and what will be the cumulative economic and productivity damage from those power outages?

* To what extent will policies, laws, regulations, court decisions, and citizen opposition, protests, legal actions and sabotage delay or block wind, solar, biofuel, battery, mining and transmission projects?

* How many solar panels, wind turbine blades, batteries and other components (numbers, tons and cubic feet) will have to be disposed of every year? How much landfill space and incineration will be required?

* How accurately are climate model predictions of temperatures, sea levels, tornadoes, hurricanes, floods, droughts and extreme weather events that are being used to justify renewable energy programs?

These issues (and many others) underscore the extremely high risks associated with Green New Deal energy programs – and why it is essential for lenders, investment companies, pension funds, manufacturers, utility companies and other industries to analyze, disclose and report renewable energy risks, with significant penalties for failing to do so or falsifying any pertinent information.

See Also Cutting Through the Fog of Renewable Power Costs

“Woke” Capitalists High on ESG

Rupert Darwall writes at The Hill BlackRock’s choice: Investment fiduciary or political activist? Excerpts in italics with my bolds.

Something more disruptive and longer lasting than COVID-19 is at work in BlackRock’s New York offices — and its implications may well extend beyond one financial firm and its shareholders.

Astonishingly, BlackRock now threatens to vote against directors who don’t incorporate its views on environmental and social issues, the “E” and the “S” in ESG social-investing criteria. (The “G” stands for “governance.”) BlackRock says it will take a “harsh view” of companies that fail to provide it with the hard data it demands, even though Fink himself tells corporate CEOs that such reporting requires “significant time, analysis and effort.” And it proposes to make good on its threat by aligning its proxy vote with single-issue activist campaigners when it judges a company is not effectively dealing with an issue it deems “material” or might not be dealing with ESG issues “appropriately.”

Unsurprisingly, BlackRock camouflages this shift with language about its fiduciary duty to its customers — American savers and investors. “BlackRock’s primary concern is the best long-term economic interest of shareholders,” its investment stewardship guidelines state. “We do not see it as our role to make social, ethical, or political judgments on behalf of clients.”

It’s hard keeping up the pretense, though — and sometimes the mask slips. The goal cannot be transparency for transparency’s sake, Fink says: “Disclosure should be a means to achieving a more sustainable and inclusive capitalism.” Companies must commit to serving all their stakeholders and embrace purpose, as distinct from profit. This goal is nothing if not controversial. It also is inherently political.

In their critique of the Business Roundtable’s recent adoption of such stakeholder capitalism, former Secretary of State George Shultz and his coauthors suggest that the demotion of profit and shareholder accountability should be seen as a response to a resurgence of a socialist impulse in American politics; it will result in decisions that sacrifice shareholder value and is a formula for endless legal wrangling and litigation. In a March 2020 working paper, “The Illusory Promise of Stakeholder Governance,” Harvard Law School’s Lucian Bebchuk and Roberto Tallarita conclude that the stakeholderism advocated by the Business Roundtable and BlackRock should be viewed “largely as a PR move.”  Yet, what may have started out as a sham, pain-free PR exercise to signal E&S virtue has morphed into something of a monster, with real-world consequences for BlackRock, the companies it invests in, its customers and for society in general.

This raises the question of the demarcation between the rightful domains of democratic politics and business.

BlackRock’s contention that its stewardship engagement is not about making political judgments on behalf of its clients falls apart when it comes to climate, reflecting its capitulation to shareholder activists. At a minimum, BlackRock is imposing its political judgment on companies about climate regulation that future presidents and future Congresses might or might not enact. Given the tortured political and judicial history of attempted climate legislation and regulation in the U.S., this is an unusually difficult call to make.

In fact, BlackRock goes much further. In January, BlackRock joined Climate Action 100+ (the clue’s in the name) to press companies to “take necessary action on climate change,” a formulation that dispenses with any pretense that BlackRock is doing anything but acting as a political activist with a $3 trillion equity portfolio.

Thus, BlackRock and its shareholder activists are using corporate governance statutes to usurp regulatory functions that properly belong to government. Whatever BlackRock’s motives in allowing itself to be strong-armed by shareholder activists – expediency, political benefit or poor judgment – the outcome is that BlackRock is subordinating its core responsibility as an investor fiduciary to political activism.

This incurs a double democratic deficit: The first is not formally soliciting its clients’ permission to use their money to advance BlackRock’s new political agenda; the second is bypassing the democratic process of electing officials to political positions to pass laws and appoint regulators. Whatever one’s views on climate change and ESG in general, the means used by shareholder activists and BlackRock’s capitulation to them amount to an abuse of corporate governance structures put in place to protect shareholders and not intended to be a channel for political campaigning by other means.

Addendum from the Financial Times

Excluding oil from the definition of fossil fuels is everything but straightforward,’ says MEP Paul Tang © Essam Al-Sudani/Reuters

Investors blast EU’s omission of oil from ESG disclosures

Under draft proposals for the EU’s sustainable disclosure regime, the European authorities responsible for banking, insurance and securities markets define fossil fuels as only applying to “solid” energy sources such as coal and lignite.

This means asset managers and other financial groups would have to follow tougher disclosure requirements for holdings in coal producers than for oil and gas company exposure.

The huge rise in popularity of ESG investing over the past decade has prompted regulators to take measures to confront the risk of greenwashing.

The latest EU proposals represent a significant watering down of its ambitious sustainable disclosure rules, which aim to give end investors clear information on the environmental, social and governance risks of their funds.

But critics also argue they risk undermining the EU’s commitment to becoming a world leader in sustainable finance, a key priority for the bloc as it seeks to tie the coronavirus recovery to creating a greener economy.

See also Financiers Failed Us: Focused on Fake Crisis

 

Financiers Failed Us: Focused on Fake Crisis

Terence Corcoran writes at Financial Post Why all the macroprudes failed on COVID-19. Excerpts in italics with my bolds

Global policy-makers shoved pandemic risk aside and spread climate alarm instead

One of the noble houses of global macroprudentialism, the International Monetary Fund, declared Tuesday that “The Great Lockdown” will plunge the global economy into the “worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago.” Along with the rest of the world’s economic overseers and protectors of financial stability, the IMF seems to have been unprepared for — and overwhelmed by — the arrival of COVID-19.

That the IMF was blindsided is clear in the opening words of Tuesday’s World Economic Outlook. “The world has changed dramatically in the three months since our last World Economic Outlook update on the global economy. A pandemic scenario had been raised as a possibility in previous economic policy discussions, but none of us had a meaningful sense of what it would look like on the ground and what it would mean for the economy.”

That’s some statement: “None of us” had a sense of what such a pandemic might impose on the world economy.

It’s not clear who is included in the collective “us,” but it seems fair to assume the IMF is referring to the host of other members of the global fraternity of institutions that have assumed the role of guardians of the stability of the global financial system.

Among the institutions that should have been preparing for and assessing the risks of a global viral pandemic, in addition to the IMF, are the Financial Stability Board, the Bank for International Settlements, the G20 assembly of finance ministers, the World Bank and the European Central Bank.

In the wake of the 2008 financial crisis, which “none of us” had anticipated, these global entities and national authorities adopted “macroprudential policy” to prevent the next global financial meltdown and, if possible, prepare plans to deal with a new blow to global financial stability.

Wikipedia has an excellent and authoritative review of the origins of macroprudentialism, describing it as an “approach to financial regulation that aims to mitigate risk to the financial system as a whole.” In the aftermath of the 2008 financial crisis, policy-makers and economic researchers backed the need to reorient the global regulatory framework “towards a macroprudential perspective.”

As the world sinks into lockdown and decline, one wonders why the whole macroprudential policy preparations, underway since the 2008 financial crisis and formally installed in 2016, so obviously failed to prepare for the financial stability shakeup brought on by the COVID-19 pandemic?

There are two explanations. One is that the whole financial stability-macroprudential effort is an international bureaucratic collection of agencies dedicated to the pursuit of meaningless bureaucratic interventions.

The second explanation is that the macroprudential apparatus, from the IMF through to the FSB and down, was hijacked by activists pushing climate change as the dominant systemic risk of our time.

In 2017, Mark Carney, then Bank of England governor and head of the FSB, reviewed the successes of macroprudential policy and highlighted new risks. The FSB, said Carney, is assessing “emerging vulnerabilities affecting the global financial system … within a macroprudential perspective.” Among the risks identified, he said, were “risks from FinTech, climate‐related financial risks and misconduct in financial institutions.”

Carney has been something of a poster boy for climate change. In a 2015 speech at Lloyd’s of London — titled “Breaking the tragedy of the horizon — climate change and financial stability,” Carney warned the insurance industry to prepare for big climate risks — including defaults, lawsuits, stranded assets and increased liabilities related to a changing climate.

The insurance execs picked up the macroprudential warnings. The replacement of pandemic risks with climate change as a threat to the global financial and economic system was highlighted this week by Roger Pielke Jr. at the University of Colorado. In 2008, the No. 1 risk cited by insurance executives was a pandemic, described as “a new highly infectious and fatal disease spreads through the human population.” In 2019, the top risk was identified as “global temperature change.” Pandemic was not even one of the top-10 insurance risks.

Over the past several years, but especially through 2019, the major efforts of the macroprudes has been to spread alarm about the financial stability risks allegedly building around climate change. Never mind pandemics and other more mundane but genuine financial risks, such a soaring government debt buildup and U.S. political schemes to dismantle Big Tech. Instead, banks and other financial institutions have been pressed to get out of fossil fuels and shift into ethical investing, sustainable financing, green financing, social financing, impact investing, ESG investment, responsible investing.

At the turn of the 2020 New Year, Carney appeared on BBC television calling for “action on financing” from banks against fossil investments. One day later, the Communist government in China informed the World Health Organization of pneumonia cases in Wuhan City, Hubei province, with unknown cause. Carney’s get-out-of oil call caused alarm within Canada’s fossil fuel industry. At the time, oil was trading at US$55 a barrel.

On Tuesday, thanks in part to the pandemic Carney and the macroprudes failed to plan for, West Texas crude continued to languish at just above US$20.

By promoting the risks of far-off climate change and ignoring the real financial and economic risks of a pandemic, the macroprudes got what they wanted by helping to usher in a global economic crisis they claimed to be attempting to prevent.

 

Extinction Rebels Work on Wall Street

Raising alarms about the climate extincting humans is not only fun, but profitable. Just ask J.P. Morgan who recently put out a treatise pumping up the alarm.  Tyler Durden writes at Zero Hedge “The Human Race Could Go Extinct”: JPMorgan Fearmongers Climate Change Impact In Leaked Report. Excerpts in italics with my bolds.

A new explosive report from JP Morgan was leaked out this week titled “Risky business: the climate and the macroeconomy” warns climate change poses a significant macroeconomic risk to the world economy and could result in a “catastrophic” event.

“The response to climate change should be motivated not only by central estimates of outcomes but also by the likelihood of extreme events (from the tails of the probability distribution). We cannot rule out catastrophic outcomes where human life as we know it is threatened,” the report advised its top clients.

JPM’s David Mackie and Jessica Murray, the authors of the report, said: “climate change would not only impact GDP and welfare directly but would also have indirect effects via morbidity, mortality, famine, water stress, conflict, and migration.”

They said the impact of climate had been underestimated by governments, adding:

“Something will have to change at some point if the human race is going to survive.”

The reason for this elaborate scheme is that after the 2008 financial crisis, where financial elites were bailed out and the middle class was left to rot, convincing the average person that money printing is needed once more would be a difficult task.

So again, financial elites created a fake climate change crisis to offer a policy prescription of money printing to protect their asset bubbles, but simultaneously, make everyone believe that it’s to transform the global economy into a much greener trajectory to save the planet.

“If no steps are taken to change the path of emissions, the global temperature will rise, rainfall pat-terns will change creating both droughts and floods, wildfires will become more frequent and more intense, sea levels will rise, heat-related morbidity and mortality will increase, oceans will become more acidic, and storms and cyclones will become more frequent and more intense.  And as these changes occur, life will become more difficult for humans and other species on the planet.”
–J.P.Morgan

And if you care to read JPM’s leaked report, here it is:

 

Corrupting Climate and Weather

An article at The Spectator raises the question Do alarmists know the difference between weather and climate?  The author Charles Moore may also be a man for all seasons like Sir Thomas More.  Excerpts in italics with my bolds and images.

A lot of clever people are putting the ‘green’ into ‘greenbacks’

Until recently, those expressing skepticism about climate change catastrophe have been hauled over the coals (or the renewables equivalent) for not understanding the difference between ‘climate’ and ‘weather’. The lack of global warming at the beginning of the 21st century was not to be taken, chided the warmists, as evidence that climate change was not happening. Weather was the passing phenomenon of each day: climate was the real, deep thing.

Now, however, the alarmists themselves have elided the two concepts, using the Australian bush fires as their cue. As Sir David Attenborough puts it: ‘The moment of crisis has come’. They could be right, of course, but how could they really know? In this sense, President Trump is surely justified in warning, at Davos, against the ‘Prophets of Doom’. Prophecy is a different skill from an exact understanding of the here and now.

Mr Trump might usefully have talked about the Profits of Doom too. If the movement can persuade western society that the climate emergency is upon us, there are enormous sums to be made by people who claim to be able to remedy it. Hence the patter now coming out of companies such as Blackrock, BP or Microsoft, fanned by Mammon’s public intellectuals, such as Mark Carney. A lot of clever people are putting the ‘green’ into ‘greenbacks’. A lot of less clever investors are going to get their fingers burnt.

See Also Stoking Big Climate Business

Footnote:  Case in Point:  Green Fraudsters Plead Guilty

Jeff Carpoff, 49, of Martinez, pleaded guilty today to conspiracy to commit wire fraud and money laundering. His wife, Paulette Carpoff, 46, pleaded guilty today to conspiracy to commit an offense against the United States and money laundering. According to court documents, between 2011 and 2018, DC Solar manufactured mobile solar generator units (MSG), solar generators that were mounted on trailers that were promoted as able to provide emergency power to cellphone towers and lighting at sporting events. A significant incentive for investors were generous federal tax credits due to the solar nature of the MSGs.

The conspirators pulled off their scheme by selling solar generators that did not exist to investors, making it appear that solar generators existed in locations that they did not, creating false financial statements, and obtaining false lease contracts, among other efforts to conceal the fraud. In reality, at least half of the approximately 17,000 solar generators claimed to have been manufactured by DC Solar did not exist.

“By all outer appearances this was a legitimate and successful company,” said Kareem Carter, Special Agent in Charge IRS Criminal Investigation. “But in reality it was all just smoke and mirrors — a Ponzi scheme touting tax benefits to the tune of over $900 million. IRS CI is committed to investigating those who take advantage and impact the financial well-being of others for their own personal gain.”

“The Federal Deposit Insurance Corporation, Office of Inspector General (FDIC-OIG) is pleased to join our law enforcement colleagues in announcing these guilty pleas,” stated Special Agent in Charge Wade Walters for the FDIC OIG San Francisco Regional Office. “The defendants conspired with others to create a fraudulent business venture that duped unsuspecting entities, including banks, to invest approximately $1 billion, which the two later used to support a lavish lifestyle.

Source:  https://wattsupwiththat.com/2020/01/27/dc-solar-owners-plead-guilty-to-largest-ponzi-scheme-in-eastern-california-history/

Warmists Make Bad Investors

Terence Corcoran explains at the Financial Post: The world needs more of what Exxon is selling (and will for decades). Excerpts in italics with my bolds.

World demand for Exxon’s products, fossil fuels, is expected to increase and remain steady over the coming decade

It’s the kind of story that lights up headlines: one of Britain’s biggest fund managers started selling shares in Exxon Mobil Corp. because the global oil giant wasn’t doing enough to address climate change.

The investment fund manager, Legal & General Investment Management (LGIM), oversees $1.3 trillion, making it the 11th largest money manager in the world. Legal and General (as it is called) is also one of scores of investment management firms, activists and hand-wringing organizations that are part of the burgeoning global sustainable and environmental social finance and governance effort to promote collaborative engagement and foster responsible investment and divestment. The goal is to enhance disclosure target-setting within corporations so that they can become leaders and builders of business models that will help the planet achieve a prosperous and sustainable future and overcome the climate emergency/crisis/disaster now faced by humanity if fossil fuels are not reduced to near-zero in the not-too-distant future.

As part of this movement, LGIM is a member of an organization called Climate Action 100+: Global Investors Driving Business Decisions, a collection of meddling institutional investors around the world, mostly government-run pension plans — although Quebec’s state pension fund, the Caisse de dépôt et placement du Québec, is the only obvious Canadian member of Climate Action 100+.

Exxon was one of five companies LGIM said it had placed on the divestment list as it steps up pressure on companies to address climate change: ExxonMobil Corporation, Hormel Foods, Korean Electric Power Corporation, Kroger and Metlife. “These names,” said LGIM, “are in addition to China Construction Bank, Rosneft Oil, Japan Post Holdings, Subaru, Loblaw and Sysco Corporation, all of whom remain engaged but who have yet to take the substantive actions to warrant re-instatement.”

Meryam OImi, head of Sustainability and Responsible Investment Strategy at LGIM, said the investment firm “will continue to push companies to build business models fit for a prosperous, sustainable future.” LGIM’s name-and-shame strategy was enthusiastically endorsed last week in Forbes magazine for maintaining “a sophisticated approach to climate change.”

One has to wonder, however, about the wisdom of divesting Exxon Mobil, one of the world’s most successful fossil-fuel producers, at a time when world energy forecasters project continuing expansion of fossil fuel demand well into …

Whoa. Hold on a second. Let me go back a few paragraphs. Loblaw? Is that our Canadian Loblaw, national champion virtue-signalling food industry giant, master of green product marketing, installer of solar panels on supermarket roofs, and most recently recipient of government funding to help upgrade the company’s refrigeration units to make them more green?

By gosh, it is our Loblaw. In a release, LGIM said “Loblaw, the Canadian grocery chain,” will continue as an “exclusion candidate.” According to Angeli Behham, a corporate governance manger who leads LGIM’s “pledge engagements with the food sector,” Canada’s leading food company “has made improvements in its governance, appointing a Lead Independent Director to ensure a counter-balancing voice to the Chair/CEO role. But we believe there are still a number of necessary steps for companies of such scale, and look forward to continuing engagement and support for substantive changes in the future.” Only then, it seems, will Loblaw be removed from the “divested” list and “reinstated.”

A colleague here at FP Comment, Peter Foster, sent an email to a public affairs person at Loblaw’s head office in Toronto about LGIM’s listing of Loblaw as a climate laggard. “Did they tell you where you are falling short? Are you taking steps to regain their approval? Does this mean they don’t invest in you at all, or just in one of their funds?” There has been no reply as of deadline.

Meanwhile, back to Exxon Mobil, from which LGIM has commenced divesting. Presumably the objective is to use slow trickle-down divestiture as a form of blackmail: change your ways, Exxon, or we will take away our investment, publicly announce our intent and drive your share price down.

This may be terrific green headline-grabbing investment politics, but in the stock market world the plan seems a little naive. According to the latest forecasts — from the International Energy Agency, BP’s Energy Outlook, and McKinsey — world demand for Exxon’s products, fossil fuels, is expected to increase and remain steady over the coming decades.

Natural gas demand, for example, surged last year, and McKinsey reports that gas demand will continue to increase from about 3,500 billion cubic feet (bcf) today to a peak of about 4,200 bcf in 2035 before declining slightly back to today’s level by 2050. Over the next 30 years, oil will also gain from 100 million barrels a day (MMBD) a year today to 108 MMBD a year in 2033 before falling back down to 100 MMBD by 2050.

That means that Exxon and other fossil-fuel companies are forecast to produce a total of 3,000 MMBD of oil over the next 30 years and 120,000 billion cubic feet of gas.

By most investment standards, this is no time to be divesting fossil-fuel stocks. If LGIM and other dumb fund management clucks agitating for sustainable investment and divestment want no part of it, then let them have their political fun. Sell, baby, sell. As they do their bit to keep the fossil-fuel stocks low, they are creating buying opportunities for smarter investors. In future, it seems, the world will need more Exxon.

Comment:  How is it that so-called professional wealth managers can be so crippled with wish dreams and political correctness?  Do they think that everyone with disposable income lives in their progressive, post-modern bubble?  I hope they lose their shirts.  (Except for Quebec pension fund who need to send me a check every month.)

Carbon Tax Dubious Economics

How could 3508 economists be wrong? Let us count the ways.

Michael Davis writes at Regulation Magazine The signatories of the recent “Economists’ Statement on Carbon Dividends” must address some important issues. Excerpts in italics with my bolds.

Economists are disagreeable people. And it’s good that they are. Most important economic questions are complex, multi-dimensional puzzles with no obvious, simple answers. But debate and disagreement advance our understanding of the world, and so good economists debate and disagree.

If you heard that thousands of the very best economists actually did agree on something, you’d probably think that it was something glaringly obvious—maybe they issued a joint statement condemning the designated hitter rule or calling for a total ban on Super Bowl halftime shows. But those aren’t the subject of the recent “Economists’ Statement on Carbon Dividends,” signed by 3,508 economists and released by the Climate Leadership Council. The statement supports the creation of a Pigouvian tax on U.S. carbon emissions on the grounds that “global climate change is a serious problem calling for immediate national action,” and that “a carbon tax offers the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary.”

This agreement is remarkable! The environment and the economy are both complex systems. Intelligent people can agree on a few things involving them—of course, manmade global warming is real—but there is vast uncertainty about how the complex climate system interacts with the complex economic system to shape the human condition in the distant future. More importantly, core questions about climate change engage fundamental moral values about intergenerational equity. How to deal with climate change is the very epitome of a “wicked problem.”

[Note: Intelligent people also note that in the world (as opposed to models) manmade global warming has yet to be detected separately from natural global warming. I understand the author is not questioning the science or the impacts (later on), but is raising serious issues about the policy proposal.]

This is a serious proposal advanced by serious people to deal with a serious problem. But it is also a radical proposal. According to a joint study by Columbia University’s Center on Global Energy Policy and the Urban Institute–Brookings Institution Tax Policy Center, in the first year the tax would amount to about $2,000 for a family of four. No matter what is done with the tax revenues, this proposal would have far-reaching economic consequences.

And so, before we get too far along, we need a proper argument over this proposal’s merits. Here, then, are five important questions about the plan. Let’s hope these questions lead to some disagreeable, but fruitful, discussions.

QUESTION 1: What if these economists are right about the principle but wrong about the tax rate?

The principle behind the carbon tax makes perfect economic sense. The market price of any good reflects at least some of the costs of making that good. The price of a gallon of gas, for example, needs to be high enough to compensate all those who worked to get the gas into your car. But some goods—and gasoline is one of them—impose costs on others that are not reflected in the price. Economists call these costs “negative externalities.” If burning a gallon of gas causes damage to coastal property, drivers are not paying the full price of their consumption and that distorts their consumption choices. That’s unfair and inefficient.

The obvious solution is to levy a Pigouvian tax equal to the harm caused, forcing consumers to shoulder the externality cost of their consumption and, perhaps, change their consumption pattern. But we have very little idea of the magnitude of the actual harm from a ton of CO2 emissions and so we don’t really know how high this carbon tax should be. Estimates of the “Social Cost of Carbon” published by the U.S. Environmental Protection Agency indicate that a ton of CO2-equivalent released in 2020 could cause harm of as little as $5 or as much as $123. (This roughly translates to a range of between 4¢ and $1 of damage from the burning of a gallon of gas.) The $40-per-ton tax suggested by the Statement signatories is a kind of average of several disparate estimates. As such, it is almost certainly the wrong number.

These economists will, no doubt, point out that the current carbon tax of zero is also wrong. But that observation, alone, is not enough to justify the proposed tax because setting the rate in excess of the actual external harm would cause real economic damage.

The economic argument in favor of carbon taxes needs to be coupled with a clear understanding that cheap, abundant energy has been an essential part of recent human progress. Fossil fuels provide food, shelter, health care, education, the arts, and countless other goods. They are not some vile poison, and consuming fossil fuels is not a shameful sin. When something is taxed, less is consumed. If, as seems likely, we consume too much energy from carbon-based resources, a tax can help to moderate that consumption appropriately. But if the tax is too high, we will consume too little. If we consume too little, we will miss out on some of the benefits that come from fossil fuels.

Here’s another problem related to the practical question of the appropriate carbon tax rate: Many fossil fuels are already heavily taxed. For example, the average tax on motor fuels is now about 48¢ per gallon, the equivalent to a tax of $54 per ton of carbon. These taxes exist mostly to raise revenue for transportation infrastructure, not control some other externality. Should the proposed new carbon tax be in addition to those existing taxes?

QUESTION 2: Should the United States impose carbon taxes even if the rest of the world does not?

In 2019 the world will produce a bit more than 35 gigatons of CO2-equivalent emissions. The United States will contribute about 5 gigatons to that total. The U.S. Department of Energy forecasts that, in 2040, world emissions will increase to 43 gigatons while U.S. emissions will drop by a small amount. A 2018 report by the Center on Global Energy Policy at Columbia University forecasts that if we impose a tax of $50 per ton of carbon in 2020 and increase that tax by 2% per year, annual U.S. emissions will fall by 13%–29% by 2030. But by 2030, U.S. emissions will be less than 15% of the world total. Even under the best-case scenario, our carbon tax would reduce global emissions by less than 5% and climate change will continue.

If the rest of the world doesn’t join us, the U.S. carbon tax won’t matter. This leads to a related problem. If the United States levies a carbon tax, it becomes more expensive for U.S. firms to make and transport goods. That means a U.S. carbon tax will reward those countries that don’t do anything to reduce their emissions by giving those places a competitive advantage. Exploiting that advantage will likely be too much of a temptation for others—especially developing countries with desperately poor people—to ignore. It is even possible that by pushing energy-intensive production to places with no controls on carbon emissions, this policy will make global emissions worse.

QUESTION 3: Doesn’t the “border-adjustment tax” that has to be part of the plan present enormous practical and political problems?

This carbon tax should not just apply to U.S. emissions, but to foreign emissions resulting from goods imported into the United States. Assessing a border-adjustment tax on these goods would be difficult from both an economic and political perspective. For example, almost 5% of the world’s carbon emissions result from the production of cement. But different production technologies for cement and different modes of transportation result in vastly different emissions. Even though two different shipments of cement may be practically identical, they won’t have similar carbon footprints. How would U.S. authorities determine which bags of cement face what tax rates?

The political problems are also tough. First of all, to the rest of the world a border-adjustment tax would seem like a tariff. How would we impose this tax without violating treaty obligations and without inviting retaliation? Second, how would we keep the crony capitalists away from the treats? The temptation to game the system for competitive advantage would be enormous.

QUESTION 4: What about adaptation?

All but the most apocalyptic of the potential harms from global warming can be managed through some type of adaptation to the changing climate. Building practices, for example, can be changed to deal with the threat of rising sea levels. There is also the possibility of some sort of geo-engineering solution. Remember that atmospheric CO2 is an otherwise harmless substance and that the burning of fossil fuels is enormously valuable. This means that if it is less costly to adapt to the effects of a ton of CO2 emissions than it is to eliminate the carbon, we should adapt. But to the extent that the carbon tax actually works to reduce CO2 emissions, it creates disincentives to adapt.

The proponents of a tax might say that the estimates of the Social Cost of Carbon already balance adaptation costs. The problem with that argument, though, is that the most effective adaptation solutions probably haven’t been created. New technologies to deal with climate change—altering agriculture practices, geo-engineering solutions, and other initiatives we can’t currently imagine— may well prove extraordinarily effective and efficient. An effective carbon tax reduces the incentive to find those solutions that allow us to enjoy the benefits of fossil fuel use without much cost.

QUESTION 5: Isn’t economic growth much more important than lowering CO2?

Every four years, a distinguished group of analysts delivers to Congress the “National Climate Assessment.” The latest version came out last November and was full of sobering projections. Anyone who chooses to ignore the threat of global warming should read what it has to say. Among the direst warnings was a graphic showing that if the worst-case scenario played out, by 2100 the effects of global warming would reduce U.S. gross domestic product by about 15% from current projections. To put that number in perspective, during the 2008 recession GDP fell by about 1%. That was accompanied by huge increases in unemployment and economic dislocation. Between 1929 and 1933, the worst years of the Great Depression, GDP fell by about 34%. That led to tremendous misery and, arguably, a world war. Remember, too, that the potential decline of 15% of GDP in 2100 isn’t just a short-term event. As bad as the Great Depression was, the economy recovered. The scary scenario is that by failing to address global warming, we will cause future generations to suffer a huge permanent decline in GDP.

But there’s another thing to keep in mind: if the United States could boost annual GDP growth rates between now and 2100 by an additional 0.2 percentage points, by the year 2100 U.S. GDP would be more than 17% larger than is currently projected. Think about it this way: Suppose that you had to pick between two tax policies. The first would reduce U.S. carbon emissions and maybe prevent the potential loss of 15% of GDP by 2100. The second would increase annual growth rates by 0.2 percentage points, increasing GDP by 17% by 2100.

As you’re picking between the choices, keep in mind that even if the carbon policy controls U.S. emissions, it is uncertain whether the rest of the world will go along and climate change will stop. Remember, too, that there is huge uncertainty about the specifics of global warming. The carbon emissions policies target the worst-case scenario. The GDP growth policy, on the other hand, doesn’t depend on the rest of the world and the benefits are guaranteed by the simple mathematics of compound growth.

Don’t try to waive off this choice by saying you want to do it all. We all want many things, but what we can have is bounded by our scarce resources. This particular group of distinguished economists has—quite deservedly—an impressive stock of political capital and prestige. But political capital and prestige are two such scarce resources. Why target carbon taxes rather than growth-enhancing tax reform?

Climate lemmings sticking together.

CONCLUSION

Let’s end where we started, with a call for a conversation. These five questions aren’t intended as some snarky put-down of a silly economic proposal. No good economist—and certainly none of the 3,508 who signed the Statement—should feel disrespectfully challenged by these questions. There are intelligent responses to each of these questions. And at the end of the discussion, we should all have a better idea about whether the answers are good enough to go ahead with the tax.