The Politics of Climate Change: Pragmatism, Virtue Signalling and Opportunism

Blain’s Morning Porridge – 8th December 2022: The Politics of Climate Change: Pragmatism, Virtue Signalling and Opportunism

“Plant a tree today and harvest a forest tomorrow.”

This Morning: West Cumbria Mining has upset the Green Lobby, but it’s a triumph of pragmatism over virtue signalling. We should be more concerned at the implications of US Fund Vanguard pulling out of an asset management alliance focused on slashing emissions. However, the reality is the Global Economy is poised for growth driven by climate change mitigation and renewable energy!  

Pragmatism is more important than virtue signalling.

I consider myself Green, but this morning I’ll likely be pilloried by the environment lobby. Even before I joined the first course on Environmental Economics at Heriot-Watt University back in the early 1980s, I was very aware of the damaging impact of growth (starting with Acid Rain and Forest die-back), the criticality of the emerging green lobby at the centre of the economic debate, and the early threat of climate change. I realised back then that environmental quality and growth is something of a complex compromise – to make it optimal is the hard part.

Last night the Government finally gave permission for the first new Coal Mine in the UK for 35 years to open, re-creating 500 well-paid jobs in an employment blackspot in Northwest Cumbria. I completely support the decision. It seems counterintuitive, but it’s a difficult and important milestone for the UK towards transition to a wholly renewable energy economy.

Also yesterday, US Investment Group Vanguard took the ‘remarkable” decision to pull out of the Net Zero Asset Managers Initiative (NZAMI). It looks like the largest manager of index tracker funds has embarked on political opportunism, deciding to play to a massive right-wing sentiment shift away from the perceived “wokery” of anti-fossil fuel ESG investment towards a more pro-oil market. Its broadly split GOP/Dem in terms of US politics – where Vanguard is signalling it owns the right.

Vanguard ticked a lot of boxes when it said: “We have decided to withdraw from NZAM so that we can provide the clarity our investors desire about the role of index funds… And about how we think about material risks, including climate-related risks—and to make clear that Vanguard speaks independently on matters of importance to our investors.” Climate change deniers and other dinosaurs will love it.

You can’t make an omelette without cracking eggs, and you can’t build a green economy without making steel. West Cumbria Coal will produce metallurgical coal used across Europe in the production of high-grade steels – which will be a critical part of the energy transition economy. And the only way to do that is with metallurgical coal.

To transition from fossil fuels to renewables, steel is critical. It’s a key component of wind farms, solar arrays, nuclear reactors, tidal energy turbines, tokomak containment, and everything else. You can use electric arcs to refine scrap into low grade steels, but new carbonless hydrogen-based steel tech is decades away from commerciality, and could prove vastly inefficient.

Today, you simply cannot make steel without Coal. Predictably, the Green Lobby is crying foul.

The UK currently imports Met Coal from the other side of the globe or Russia, and much of our steel from China. By doing so, the UK offshores the carbon emissions associated with steel wherever we source or produce it. Yet, the Greens say it’s an “indefensible” decision to mine coal here – although apparently its fine if its mined elsewhere.

Why? Is it better we put our faith in global supply chains and China to build and supply the materials required for our climate change transition? That sounds as daft as placing our reliance on Russia to supply Europe’s gas!

Any historian will tell you coal and steel are strategic resources. It would be indefensible for the UK not to have its own strategically secure access to Metallurgical coal. So, a hat-tip to Michael Gove – finally a conservative minister does the right thing and makes a difficult but correct decision. As I’ve written so many times; it takes over 400 tonnes of coal to construct an offshore Wind turbine.

The noise over the mine will continue. The former COP Minister argues it’s destroying his COP26 legacy and the UK’s transition leadership. The Greens will say it’s destroying the planet. And the former coal mining town of Whitehaven will rejoice in new jobs and a future for the town.

Following the Ukraine energy shock, coal has been a top performing asset this year. Around the planet smart portfolio managers will be ruing the chance they never got to finance the deal – they didn’t even bother looking at it, aware that ESG-compliant investment committees would immediately pander to Green sentiment and reject it.

Many Green campaigners, and a disappointing number of politicians, seem to believe there is a magic button that will miraculously transform our energy supply from oil and gas, to wind and solar overnight, and that our national grid and energy infrastructure can handle such a change. Not a chance.

The reality that energy transition, thus far, has been imperfect and largely unplanned. The transition to Green Renewable Energy is a number one priority for all sensible nations, but its currently in a bit of a mess – mired in bureaucracy, wokery, and too-difficult-to-solve thinking. Aside from some limited government subsidies to steer aspects of transition, it’s largely been left to the financial markets to run transition in terms of what they will and won’t fund.

That’s led to some serious distortions – and resulted in an over-focus on Wind and Solar. That’s because markets prefer to fund easy, simple, cheap technology like Wind and Solar. These are intermittent, and create problems for energy infrastructure. But they allow the fund management industry to demonstrate and highlight their Green credentials. In some ways its an acceptable form of greenwashing. These same investors are less willing to finance complex, risky, expensive but better and more reliable energy sources like geothermal and tidal energy.

That said, I am very enthusiastic about the prospects for the green economy. The mood is changing. Governments are involved – on the back of the green movement.

There is going to be a massive new burst of technological innovation to address climate change and mitigation, including areas like carbon absorption and sequestration, green infrastructure, renewable energy, waste and recycling. My bet is it will prove deeper and more real than the last 10-years of Big and Disruptive Tech – and its going to be supported by increasing government support and subsidy.

The environment will increasingly be at the core of the new economy, creating the jobs and environmental improvement we need to maintain growth and all the societal benefits that’s brought. To achieve carbon neutrality there are a host of other options, not just renewable energy, including planting new trees, sequestering carbon from waste energy treatments, soil improvement to absorb more carbon, and many others. The potential is huge in terms of the climate change mitigation industries that are going to emerge!

How will it happen? Saxo Bank’s excellent Outrageous Predictions 2023 includes a gang of Tech billionaires getting together to putting billions of their own money into the largest research and development effort since the Manhattan project to solve climate change. That’s an interesting approach – and I am sure it would pay dividends, but would Musk, Gates, Zuckerberg (oops, he is bust) et al really all work together in an aligned way?

But happen it will… This is going to be one of the biggest investment themes of the next 10 years!

No 5 things – writing from a bar in London!

Out of time, and back to the day job!

Bill Blain

Strategist – Shard Capital