Net Zero’s Questionable Pathway
July 10, 2023 7:34 AM
The week of July 3, 2023: Net zero questions, antitrust, the Fed, regulation, and much, much more.
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There was a time when the IEA (International Energy Agency) could be taken seriously. Established as part of the OECD response to the 1973 Arab oil embargo, it was, among things, a provider of great amounts of useful data on the oil and gas sector (and, in many respects, it still is). However, international organizations are what they are and mission creep is what it is, and the IEA has embraced climate millenarianism.
In May 2021, the agency produced a “flagship report” (its description) on “Net Zero by 2050.” The report was, claimed the IEA, a “roadmap for the global energy sector.” The road it describes may well be one to ruin, although that’s not, unsurprisingly, how the IEA described it:
This special report is the world’s first comprehensive study of how to transition to a net zero energy system by 2050 while ensuring stable and affordable energy supplies, providing universal energy access, and enabling robust economic growth. It sets out a cost-effective and economically productive pathway, resulting in a clean, dynamic and resilient energy economy dominated by renewables like solar and wind instead of fossil fuels. The report also examines key uncertainties, such as the roles of bioenergy, carbon capture and behavioural changes in reaching net zero.
“Behavioral changes,” eh? Nothing sinister sounding about that.
Let’s take a look:
Behavioural changes, particularly in advanced economies – such as replacing car trips with walking, cycling or public transport, or foregoing a long-haul flight – provide around 4% of the cumulative emissions reductions in our pathway.
As usual, the war against cars makes an appearance as does its higher altitude equivalent, the war against flying, something I have written about here.
To be fair, the IEA doesn’t hide where it’s coming from: “Reaching net-zero emissions globally by 2050 is a critical and formidable goal.” In reality, the target is not “critical,” far from it, and it is not so much “formidable” as lunatic.
Idler and trespasser that I am, I went through IEA’s “summary for policy-makers.”
Among some highlights:
Fossil fuel subsidy phase-outs, carbon pricing and other market reforms can ensure appropriate price signals.
“Appropriate price signals,” or, to put it another way, greenflation.
Policies should limit or provide disincentives for the use of certain fuels and technologies, such as unabated coal-fired power stations, gas boilers and conventional internal combustion engine vehicles.
It was, of course, no surprise to see the call for disincentivizing the use of conventional cars. A wide take-up of electric vehicles (EVs, which should amount to 60 percent of global new car sales by 2030) are meant to be rolling down the IEA’s pathway. Let’s just hope that their drivers find the chargers they need, and that the weather is not too cold. Let’s also hope that workers for conventional carmakers don’t mind too much about losing their jobs to the Chinese, and that the Western EV manufacturers do not mind being dependent (at least for a while) on China for their supply chains.
Gas boilers?
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The prospect of a ban on new gas boilers in Germany created a political crisis in Germany (the approved replacements — heat pumps — are much more expensive), and the proposed new ban has been (somewhat) watered down. Other EU countries will follow suit with bans (the EU would like a bloc-wide ban by 2029), which will probably cause more political trouble elsewhere. One of the striking characteristics of the IEA’s plan is how little its authors have thought through the political consequences of what it is they are proposing (to be fair, perhaps that may have been beyond their remit), other than implicitly noting that there will be some: “A transition of the scale and speed described by the net zero pathway cannot be achieved without sustained support and participation from citizens.” And what if that support proves to be far from “sustained?”
The reality is that as net zero starts to bite, voters are likely to start biting back. As I noted in a recent Capital Letter, this is already happening in Germany and the Netherlands. If I had to guess, the effects of the net zero agenda being pushed by Britain’s center-left Conservative government is one reason why it will be humiliated at the polls next year (even though the opposition Labour party are even more extreme in this area).
IEA:
Reaching net zero by 2050 requires further rapid deployment of available technologies as well as widespread use of technologies that are not on the market yet.
I’ll just leave that there. Central planning is what it is.
On second thoughts, I won’t, because it touches on an important issue. One of the arguments against the current direction of climate policy is how front-loaded it is, something that favors technologies (from wind to solar to EVs) that are not yet ready for prime time. A good portion of the money now being spent on inadequate technologies would be better allocated to fund research designed to improve, supplement, or replace them.
And much more of it should be spent on adaptation and resilience, such as on stronger defenses against whatever the climate may bring. Some of this spending on, say, better ocean defenses for low-lying coastal cities, or on burying more power cables underground in densely populated areas, would in many cases pay for itself before too long. Then there’s the matter of allocating resources away from unreliable solar, and even more so, wind, and toward nuclear power.
Finally, as history shows, the wealthier the world becomes, the better it will be able to cope with the effects of the climate. The more that net zero slows economic growth, the lesser will be the future improvement in our ability to do so.
But back to the IEA:
There is no need for investment in new fossil fuel supply in our net zero pathway.
As Rupert Darwall, writing for Real Clear Energy, points out, this gave a helping hand to some of those who would muddle climate activism with finance:
Climate Action 100+, a group of 700 investors with over $68 trillion in assets under management, hailed the report as a “watershed moment” and highlighted the call from the “relatively conservative IEA” for an immediate end to new investment in fossil fuel extraction. Similarly, As You Sow, a not-for-profit climate activist investor, described the IEA NZE report as groundbreaking. For the 2023 proxy season, As You Sow filed shareholder resolutions at five of the largest U.S. banks, pressing them to align their financing activities with achieving net zero by 2050. Those resolutions all failed, but last year, a resolution filed at the ExxonMobil annual meeting by Ceres, another activist investor and a founding partner of Climate Action 100+, cited the IEA net zero report and requested the company’s board to produce an audited report on the impact of applying the IEA’s net zero assumptions on the company’s financial statements. The resolution received the support of 51.0% of voting shareholders.
But how reliable were those IEA numbers?
Darwall:
[T]he RealClear Foundation asked the Energy Policy Research Foundation, Inc. (EPRINC) to conduct a forensic analysis of the IEA’s major reports on net zero and assess the likely economic impact of a cessation of investment in new oil and gas fields. EPRINC’s analysis conclusively demonstrates that the IEA’s assumptions are unrealistic, internally inconsistent, and often support the case for increased hydrocarbon fuel production. In reality, the IEA’s net zero roadmap is a green mirage that will dramatically increase energy costs, devastate Western economies, and increase human suffering.
The questions raised by EPRINC’s analysis (unless rebutted) ought to have implications for investment managers who see themselves as “socially responsible” (Darwall discusses his views on that in his article) as well as on banks that have been reluctant to finance the oil and gas sector. But the implications for the financial world go beyond that. Some central bankers claim that the financial risk created by climate change justifies their meddling in the lending policies of the banks they supervise. In reality, such financial risks are, as the economist John Cochrane and others have argued, very small, not least because of the relatively short-term nature of most bank lending.
On the other hand, if the IEA’s pathway is any sort of indication of the approach that policy-makers will take to the race to net zero, and if the effects of that sort of approach are as grim as EPRINC suggests, then they will damage the economy more quickly and more severely than climate change any time soon (or, perhaps, ever). If banking regulators are concerned by financial risk, they would do better to look at the risk posed by net zero policies. The same could be said for those securities regulators who want to press companies to disclose the climate risks they allegedly face. They should be asking for net zero risk disclosure instead, starting perhaps with the Western auto companies threatened with disaster by the switch to EVs.
Darwall:
The fundamental assumption underlying the IEA’s net zero roadmap is that the superiority of alternatives to hydrocarbons—principally wind and solar (nuclear barely gets a look in)—will cause demand for coal, oil, and natural gas to wither away.
But this needs to take place in the right order.
Darwall:
The IEA warned in its World Energy Outlook 2022 [that] “If supply were to transition faster than demand, with a drop in fossil fuel investment preceding a surge in clean technologies, this would lead to much higher prices—possibly for a prolonged period”
As Darwall notes, that’s “an accurate description of the world we’re now living in.”
But what about wind? But what about solar?
Darwall:
“Ever-cheaper renewable energy technologies,” the IEA claims, “give electricity the edge in the race to zero.” Yet the IEA’s own numbers demonstrate the inferiority of its post–fossil fuel energy future as it will require enormous increases in capital, labor, and land to produce less energy.
By 2030, the IEA’s net zero pathway uses an additional $16.5 trillion of capital. More investment should make labor more efficient. Not with clean energy. Renewables require nearly 38.5% more labor, global energy employment rising by nearly 25 million. Yet this new energy system produces 7% less energy, implying a calamitous 33.0% fall in energy output per employee. If that’s not bad enough, solar and wind require an area equivalent to the combined size of California and Texas and bioenergy for electricity production an area the size of France and Mexico combined.
There is no theory in growth economics that says that more inputs of land, labor and capital for less output is a formula for sustained economic growth. Quite the opposite. The IEA’s net zero pathway reverses a process that has been under way since the dawn of the Industrial Revolution of society obtaining more outputs for fewer inputs, making the world unambiguously poorer and having the worst impact on billions of people in the world’s poorest nations. And this is before considering renewable energy’s own negative environmental impacts. This leaves decarbonization as the sole potential benefit from deploying wind and solar. If there is an economic case for net zero, neither the Intergovernmental Panel on Climate Change nor the governments that adopted net zero targets have yet to conduct a proper cost-benefit analysis to prove it.
Oh.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and National Review Institute trustee, David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 127th episode, David walks through our nation’s glorious founding documents and gives listeners crucial takeaways as to how America’s first principles connect to economics. The free and virtuous society requires some key commitments, and they were put into a document in 1776.
No Free Lunch
Earlier this year, David Bahnsen launched a new six-part digital video series, No Free Lunch, online at National Review. In it, we bring the debate over free markets back to “first things” — emphatically arguing that only by beginning our study of economics with the human person can we obtain a properly ordered vision for a market economy.
The series began with a discussion with Fr. Robert Sirico of the Acton Institute. Later guests include Larry Kudlow, Dennis Prager, Dr. Hunter Baker, Ryan Anderson, Pastor Doug Wilson, and Senator Ted Cruz.
Yes, the six-part series now has seven parts.
Enjoy.
Capital Writing
As part of a project for Capital Matters, called Capital Writing, Dominic Pino is interviewing authors of economics books for the National Review Institute’s YouTube channel. This time, he talked to talked to Mark Calabria about his book, Shelter from the Storm: How a Covid Mortgage Meltdown was Averted. Calabria served as the director of the Federal Housing Finance Agency from 2019 to 2021 and before that was chief economist to Vice President Mike Pence. He is currently a senior adviser at the Cato Institute. Here you will find an edited transcript of a few key parts of their conversation, as well as the full video of their interview.
The Capital Matters week that was . . .
Antitrust
In the race to develop this revolutionary technology, the government has proved to be a hindrance. The FTC penalized the front-runner instead of encouraging free-market competition and innovation, thereby delaying the development of Galleri and improvements to cancer diagnosis. Since there is no evidence of anticompetitive harm, the commission could only substantiate its concerns with guesses about the hypothetical future market.
Taxation
Taxation policies that sound good on social-justice grounds rarely work out well. For raising revenue, the best taxes are designed with broad bases and low rates. This tax has one of the narrowest bases possible (property sales over $5 million) and a relatively high rate for the type of activity it is taxing (4–5.5 percent on real-estate transactions). Naturally, people with the means to do so — and people with property worth over $5 million in Los Angeles have the means to do so — avoid the tax, and the government doesn’t get the revenue it wanted.
Wisconsin needs tax relief. For years, lawmakers and thought leaders have collectively looked at tax relief as a “want” and not a “need.” Now, the conversation has changed. Why? Other states have enacted bold tax reforms, leaving Wisconsin behind. In short, our state is quickly becoming uncompetitive with our neighbors…
Electric Vehicles
Sooner or later and if enacted, the administration’s plans (for some discussion of them, please see this article by Diana Furchtgott-Roth) to “encourage” the introduction of electric vehicles (EVs) are going to have a very difficult encounter with reality. The result will be bad for drivers and for automakers, and the political consequences will, I suspect, be . . . interesting.
Inflation
There’s been a recent development in a lengthy campaign of political grandstanding, economic confusion, and utter stupidity: Canada’s federal government wants to look at tackling rising food prices through special taxation of grocery stores. In a recent report, the Parliament’s Standing Committee on Agriculture and Agri-Food “recommends that, if the Competition Bureau finds evidence in its upcoming market study that large grocery chains are generating excess profits on food items, the Government of Canada should consider introducing a windfall profits tax on large, price-setting corporations to disincentivize excess hikes in their profit margins for these items.”…
For much of this inflationary episode, people have been able to say, truthfully, that volatile food and energy prices are making inflation look worse. Since March, that is no longer true, and the gap between total PCE inflation and core PCE inflation is growing.
The Economy
President Biden is on a “Bidenomics” tour, trumpeting what he claims are his administration’s economic gains. His effort comes as no surprise. In the RealClearPolitics average of the polls, only about 38 percent of Americans approve of Biden’s job on the economy. To date, the Biden administration’s efforts to convince Americans otherwise have fallen way short of the mark. The problems lie not with Biden’s rhetoric but rather with his policies — and economic reality.
International
Although far from perfect, U.S. state- and local-government financial conditions are far better than those in China. Aside from heavy debt loads, Chinese public-sector entities have opaque financial-reporting practices that reduce investor confidence. By contrast, U.S. borrowers now have an opportunity to improve their world-leading transparency standards — an opportunity that they would be wise to take…
Transportation
Negotiations for a new labor contract between UPS and the Teamsters collapsed this morning, with each side blaming the other for walking away from the table.
The Teamsters had demanded that UPS make its “last, best, and final” contract offer by Friday. That means an offer that includes all concessions UPS is willing to make, to be evaluated by the union. This was an artificial deadline the Teamsters created days earlier. The current contract does not expire until July 31, so the sides still have over three weeks to negotiate…
Social Media
After a volatile but ultimately successful year with its investments in virtual-reality hardware and software, Meta is set to release its Twitter competitor, Threads, tomorrow. Can Threads present a meaningful alternative to Twitter, given the latter’s precarious finances and general tumult under Elon Musk’s ownership?
In anticipation of Meta’s release of Threads, I raised doubts about the app’s value proposition. While Twitter remains operational, I argued that “the threads on Threads are bound to be sparse and short.”
It would appear I was sorely mistaken…
Regulation
Economic growth suddenly disappeared last year, and the Federal Reserve is getting much of the blame. But new estimates point to another culprit: the revival of the regulatory state…
The Fed
Transparency only has value and meaning if the signals given by the Fed about the future have information content. If the Fed’s economic and policy forecasts foretell the future, then they do serve transparency and help citizens make better economic decisions. If the Fed is going to keep rates low for a long time, for example, then there is no rush to get a mortgage today. If it thinks rates are going up steeply, then you better hurry up and buy the house. But if the Fed’s outlook is highly inaccurate or biased, it could significantly harm consumers and investors who take its “transparency” seriously…
I’d like to add that the real-GDP forecast is especially worthless and should be discarded even if the forecasts are kept. First, the Fed’s mandate is stable prices and low unemployment, nothing about real GDP. The Fed controls nominal variables (the money supply, nominal interest rates), not real variables, and there are any number of things that affect real GDP that the Fed does not control at all (technology, labor productivity, regulation, etc.). The FOMC members’ guesses as to what will happen to real GDP are hardly better than anyone else’s.
Second, the way the forecasts are done encourages inaccuracy…