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Op-Ed:
Decarbonization – it’s the demand side, stupid
[The Center Square] Rupert Darwall |
RealClearWire
By any standard, the
London meeting of finance ministers of the Group of Seven leading
Western economies a week before the G7 leaders’ summit was historic. By
committing to transformative structural change to meet net-zero
greenhouse gas targets and other environmental objectives, G7 finance
ministers turned themselves into adjuncts of their environment
ministries. Considerations of climate change and biodiversity loss are
to be embedded into economic decision-making, they pledged. Some form of
carbon tax is heading America’s way, after Treasury Secretary Janet
Yellen signed a communiqué that commits to “the optimal use of the range
of policy levers to price carbon.” |
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 That’s for the future. More immediately, the London meeting
agreed to make climate reporting by companies mandatory across the G7. Britain’s
Chancellor of the Exchequer Rishi Sunak professed himself thrilled. “This is
such an important step in getting markets to play their part in tackling
environmental issues and paves the way for us all to achieve our net-zero
goals,” he tweeted. The ostensible justification – which no doubt Gary Gensler,
President Joe Biden’s pick to chair the Securities and Exchange Commission, is
already prepping – is to help investors better appraise climate risk.
Gensler’s first task should be to coach the White House on presenting a stronger
case than the president did at the Earth Day virtual leaders’ climate summit.
“If Wall Street is pumping billions of dollars into business that could be
turned upside down when the next storm comes – and we know there will be more
storms – Wall Street needs to make clear the risk it’s taking on,” the president
said, without providing any evidence to substantiate such claims.
Financial markets produce acres of data. In August 2017, energy stocks were hit
as Hurricane Harvey slammed into the Texas Gulf coast. Refinery production of
crude oil and petroleum products plunged 44% in September. The following month,
production bounced back to 92.7% of its July level and in November exceeded it.
Turned upside down? Hot on Harvey’s heels came Irma, the costliest storm of the
last decade. The stock market actually rose the day after Irma made landfall in
Florida; energy stocks had already rebounded, and insurers rallied. “The
long-run effect of these disasters unfortunately is it actually lifts economic
activity because you have to rebuild all the things that have been damaged by
the storms,” New York Fed president William Dudley told CNBC.
Hurricanes have devastating consequences for those unfortunate
enough to be in their path. Unlike the American economy of nearly a century ago,
when bad harvests and the dustbowl deepened the depression, today’s
industrialized economy is highly resilient against these physical elements, as
are financial markets. Perversely, though, politicians most concerned about
climate change also want to make the electrical grid more exposed to bad weather
by subsidizing and mandating vulnerable wind and solar farms. It makes no sense.
Does that make for increased climate risk – or increased climate-policy risk?
Chair Gensler might wish to explain the answer to senators when he next
testifies.
In fact, the G7 finance ministers exposed the speciousness of the justification
for mandating climate disclosure to protect investors by revealing the real
reason for it. The communiqué speaks of greening the financial system to
“reinforce government policy to meet our net-zero commitments.” Climate
disclosures would aid corporate reporting “on net-zero alignment.” The G7
decarbonization strategy is clear: supply-side constriction by imposing an
ever-tightening blockade enforced by shareholders and the capital markets,
overseen by regulators such as the SEC, to squeeze carbon-emitting activities
until they’re put out of business.
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In his epochal book “Capitalism, Socialism and
Democracy,” Joseph Schumpeter described publicly traded corporations
as capitalism’s vulnerable fortresses. This is truer now than when
Schumpeter was writing in the 1940s, with huge, politically
controlled state and municipal pension funds. The Big Three index
funds of Vanguard, BlackRock, and State Street now hold 43% of the
fund industry’s U.S. equity assets, which own individual stocks and
vote their proxies not out of choice or conviction but because
they’re in the index. Across the Atlantic, the EU is formalizing
state direction of private investment with the 2020 EU taxonomy for
sustainable activities regulation designed to help meet the bloc’s
decarbonization objectives.
For these reasons – and despite the collateral
shareholder-value destruction – the carbon blockade of publicly
traded corporations is likely to succeed in its proximate aim. But
decarbonizing them is not the same as decarbonizing the economy. The
reason is obvious: Partial blockades don’t work. If Exxon or Chevron
or Shell don’t supply gasoline, other firms less beholden to
American and European institutional investors or to the Dutch courts
will. Private companies and state-owned oil companies of OPEC and
Russia will gain what Western oil majors are forced to cede.
The point is emphasized by Jason Bordoff, a senior climate expert on
President Obama’s National Security Council, in a comprehensive
critique for “Foreign Affairs.” Emissions go down only if oil use
declines, Bordoff notes. “Unless both supply and demand change in
tandem, merely curbing the oil majors’ output will either shift
production to less accountable producers or have potentially severe
consequences on economic and national security interests.” Bordoff
also casts doubt on the effectiveness of a Western-led financial
blockade of the oil and gas sector. “To the extent capital from
Western banks dries up, Chinese banks have also demonstrated they
can fill the gap.”
Throttling the supply of oil and gas via the capital markets is not
sufficient to eliminate carbon dioxide emissions. Neither is it
necessary – and it’s no substitute for government policies directly
aimed at suppressing demand, with combinations of vertiginously high
taxes and subsidies for inefficient hydrocarbon substitutes. This
takes policy deep into “if it isn’t hurting, it isn’t working”
territory in terms of lost jobs and squeezed living standards. In
Europe, where virtually all political parties subscribe to net-zero
climate policies, this might be politically survivable, but in the
U.S., it’s more likely to be a one-way ticket to electoral oblivion.
The politics point in the direction of targeting Western oil
companies and the requirements of effective decarbonization in order
to constrain demand. It’s how the finance ministers of the seven
largest, for now, capitalist economies decided to take a leaf out of
the anti-capitalist progressive playbook of the People vs. Polluting
Corporations. And that, in essence, is what the G7 finance ministers
did.
Rupert Darwall is a senior fellow of the RealClear
Foundation and author of Capitalism, Socialism and ESG.
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