Blain’s Morning Porridge – October 28th 2021: COP26 – We Could All Be Winners
“Clean energy isn’t just good for the planet, but will make us all richer!”
This morning: It’s easy to be cynical about next week’s COP26 Gabfest, but we could all be winners if global leaders successfully optimise for a cleaner decarbonised environment and a global growth economy based on new clean technologies, but we need time for the transition from fossil fuels. If we fail to do so, the alternatives are bleak.
From Sunday the Good, the Bad, the Ugly and Politicians meet in Glasgow for the 26th United Nations “Conference of Parties” on Climate Change. It might just be the most important gab-fest of global leaders in the whole of human history – so I am told. So far, the biggest winners are Scottish Railway workers. They were threatening strike action through the conference, and they’ve just accepted a 2.5% bribe pay-rise to return to work.
Ultimately.. we might all be winners…
I should stop being cynical about the COP26 conference. I guess I just have a problem with virtue-signalling politicians and unelected commentors telling us how to live our lives and telling me I can’t eat steak. These same folk will be furiously negotiating compromises on how much longer they can keep building coal-fired power stations. I don’t mind that – as long as the coal is part of a short-term transition strategy.
As a trader and investor, I’ve weighed up the evidence and concluded the climate science predicting global warming is more likely than not to be correct. I’d much rather the scientists are wrong, but common sense and the risk profile dictates we should go with a hedging strategy; a “perfect preparation prevents piss-poor performance” approach to mitigating climate change. (I take the same approach to my passion for offshore sailing – prepare for every eventuality, no matter how remote. Assume stuff is going to break. (Generally, a good rule of life is buying an expensive piece of kit to fix a specific breakage means that breakage will never occur. If you don’t buy it – the thing will break.))
I accept climate change is among the most important issues facing humanity today. Unless we are prepared for it, then increasing concentrations of greenhouse gases in the atmosphere caused by industrial processes will trigger higher temperatures, catastrophic weather events (such as we’ve seen this summer), sea levels to rise with unquantifiable economic damage.
These are just the Micro-issues.
Climate change could tip an increasingly unstable global society into Macro-chaos. Very small weather changes can trigger drought. The wars of the future are far more likely to be about water security than the passions of kings. Water security could trigger mass migration – and all the consequences that could follow in terms of nationalism, protectionism, global conflict and even genocide.
In short, even small rises in global temperatures could be… nasty in the extreme.
Avoiding chronic instability as the result of climate change is what the COP26 meeting is about. All of us win if we avoid the events described above. Global leaders will update us on how they’ve cut Co2 emissions since COP20 5-years ago in Paris, and “commit” to “binding” net-zero targets for the future. Like all gabfests it will be about compromise. At the end some grand statement (agreed months ago by conference Sherpas), will emerge. The Climate protestors will keep protesting saying the conference failed to do enough.
The reality is everything is a compromise.
We need to find a way to deal with the climate threat without cratering global society. What we need to solve for is an optimisation:
How to reverse rising emissions while maintaining global growth, raising billions of people out of poverty and providing them with higher living standards, and doing so in a better, cleaner more stable environment.
That spells massive market opportunity!
Perfect preparation for climate change should spur massive innovation! Its already happening. It should mean multiple new energy technologies – each potentially with the revolutionary potential of the internal combustion engine. It should mean whole new industries to capture, sequester and store carbon and improve the environment. It should mean finding new ways to prepare for a carbon neutral future, and spur whole new industries, even things like manufacturing and mining in space. The possibilities are endless – but they can’t be done overnight.
Economic transformation will not be easy.
The basics of climate change mitigation are about energy transition – how to switch from fossil fuels to other energy sources.
77% of emissions causing global warming come from transport and power derived from fossil fuels. If we can cut the economy’s reliance on coal, oil and gas by transiting to renewable power sources, then we might get the 80% reduction in CO2 emissions required by 2030 to reach global net zero by 2050, thus limiting global temperature rises to a “manageable” 1.5 degrees.
The only way we could achieve these targets overnight would mean the total collapse of the global economy and that we all starve or freeze. That would not be a good compromise.
The International Energy Authority says renewables now account for 28% of global energy production, up 2% in a single year! We’ve embraced them because the costs of wind and solar power, and battery storage, have dramatically fallen. Wind costs are down 50% in a decade! Solar power in 2030 is expected to be 1/20th of the price 10-years ago.
Renewables work but have issues; weather means wind and solar are intermittent, the carbon costs of construction are huge, it takes years to achieve carbon neutrality (solar panels take 4 years, and 3 years for an electric vehicle’s battery), there are questions about maintenance and replacement, and supply chain and recycling chokepoints are appearing in commodities like lithium. Any renewable energy future is going to require a massive increase in minerals, rare-earths and metals mining – raising new social and environmental costs.
The market has embraced the simple renewables. Under the banner of ESG (Environment, Social and Governance), most investment managers now claim to be green and won’t fund anything fossil fuel related. They foresee greatly improved returns from renewables – creating a virtuous circle where renewable stocks go higher as fossil fuels tank. The result is companies with a high ESG rating trade at up to a 25% premium to the poorer ones, and can raise finance some 10% cheaper.
But… what we’ve seen so far has been the easy yards of the long-term decarbonisation shift. EVs are not rocket science.
Windmills are millennia old-tech. Solar panels are great when it’s not raining. They were all established technologies – and relatively simple to upscale and innovate for the modern age. We embraced Wind, Solar and Lithium batteries because they were proven, cheap and promised swift payback – and there is nothing the market likes as much as short-term returns.
The fashion for ESG assumes renewables are a complete solution – that wind and solar can be ramped up from 28% to 100% – which is dangerous nonsense.
Over the past decade it’s become increasingly difficult to finance fossil fuel exploration or production. The result is a new energy crisis – the UK and Europe ignored the reality we will need Gas for decades to provide power during the transition to clean energy, but having neglected how to source or store it. The result is the deepening crisis for European Energy Security and an increasingly dangerous dependency on Russia for supplies.
The next and very necessary stage of de-carbonisation is likely to prove more difficult and more expensive. Wind and Solar were easy but unreliable. Tidal energy is an example of short-termism failure. Tides are ultra-reliable, but extracting energy comes at a higher cost because the sea is an unfriendly environment for any piece of high-tech kit dunked in it. Tidal power remains in the slow lane, even though industry experts have shown costs would quickly tumble on widespread adoption to make them cheaper and more reliable than wind.
It takes years and billions to build a nuclear power station, or to develop smaller and more nimble nuclear alternatives. There are battery solutions which will be less dependent on dirty, socially questionable elements like lithium, but they are still a few years from commercial roll out. They require long-term investment – which is difficult due to the market’s short-termism.
A second issue is the reality of changing the global economy from high growth to carbon neutral growth, something no politician will talk about it if it looks like a poorer future. Which developing nations are willing to tell their populations future growth is limited while the developed west looks relatively richer? The problem of free riding will not go away – at the individual or national level – which is why the no-show of China’s President Xi at the conference is generating distrust.
Politics is a game with a short frame focused on the next election – however much they say about future generations. Short-term solutions are favoured to garner immediate results. Sound bites allowing politicians to bask in glory on their well intentioned but short-term plans will flavour the conference.
The hard work is making it happen over the long-term.
Out of time, and back to the day job…
Strategist – Shard Capital