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 Since Russia attacked Ukraine two months ago, Western
governments have been learning the hard way about the critical importance of
energy to their national security. Germany’s 20-year, trillion-dollar
“Energiewende” (Energy Transformation) has made its economy totally dependent on
supplies of Russian natural gas and paralyzed its response to Russian
aggression. French president Emmanuel Macron faces a tougher re-election fight
this month thanks to soaring energy prices and failure to replace the nation’s
aging fleet of nuclear power stations. The Biden administration is tapping
America’s Strategic Petroleum Reserve in an effort to tamp down energy costs as
inflation heads toward double digits.
As the West grapples with the energy implications of a hostile
Sino-Russian alliance, the steering group of the Net-Zero Asset Owner Alliance,
whose members manage over $10.4 trillion of assets, issued a statement urging
Western governments not to sacrifice climate goals for energy security.
“The world is still heading for an excess of fossil fuel-based energy use that
will vastly exceed the carbon budget needed to meet the 1.5° Celsius Paris
agreement goal. This trend must be halted,” the United Nations-backed alliance
said in its April 8 statement, arguing that “the national security argument for
accelerating the net-zero transition has strengthened considerably.”
What, one might ask, is the standing of asset managers to opine on national
security matters? They have no expertise in this domain. It turns out that their
understanding of the economics of energy policy is defective, too.
The Net-Zero Asset Owner Alliance claims that development of new oil and gas
reserves will lock in fossil fuel subsidies, exacerbating market distortions. In
fact, the International Energy Agency (IEA) in its 2021 net-zero report states
that under its net-zero pathway, tax revenues from oil and gas retail sales fall
by about 40% over the next 20 years. “Managing this decline will require
long-term fiscal planning and budget reforms,” the IEA warns. Similarly,
Britain’s Office of Budget Responsibility estimates that net zero policies will
result in the loss of tax receipts representing 1.6% of GDP. So much for the
fossil fuel subsidy myth. If fossil fuels were heavily subsidized, eliminating
them would mean fossil fuel subsidies disappear. Instead, it’s tax revenues that
would melt away to zero.
The net-zero investors cite figures for the decline in solar and wind energy
costs. These numbers are based on so-called levelized cost of energy (LCOE), a
metric that aims to measure a plant’s lifetime costs. Wind and solar power are
intermittent, but LCOE metrics exclude the costs of intermittency, which
increase the more wind and solar are put on the grid. Because wind and solar
output responds to weather and not to demand, the value of this output declines
the more installed wind and solar capacity is available. It was for these
reasons that MIT professor of economics Paul Joskow concluded in a foundational
2011 paper that using LCOE metrics to compare intermittent and dispatchable
generating technologies, such as coal and natural gas, is a “meaningless
exercise.”
Wind and solar investors don’t need to understand the economics of the grid to
make money – they are shielded from the intermittency costs their investments
inflict on the rest of the grid, which is one reason why their views on energy
policy can be taken with a pinch of salt. Their economic illiteracy does,
however, make it easy for them to subscribe to the green fairy tale of 100%
renewables. They’re not responsible for keeping the lights on – that depends on
traditional power plants staying fueled up and ready to spin, which is what
Germany can’t do without Russian gas. Adopt the net-zero alliance’s call for no
new fossil-fuel investment, and the cost of energy is bound to spiral. And if
the lights go out, politicians – not woke investors – get the blame.
Investors’ opinions on energy and national security would
matter less if they didn’t have political power. Bloomberg opinion writer Matt
Levine argues that asset managers of giant funds form a parallel system of
government that exercises overlapping legislative powers with those of
governments. These government-by-asset-managers, as Levine calls them, tell
companies to do things they think are good for society as a whole, “making big
collective decisions about how society should be run, not just business
decisions but also decisions about the environment and workers’ rights and
racial inequality and other controversial political topics.”
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Foremost among these areas is climate policy.
Although the Biden administration has set a net-zero goal, Congress
has not legislated it, and it lacks the force of law. The absence of
legislation passed by democratically accountable legislators,
however, presents no barrier to government-by-asset-managers
legislating climate policy for the companies in which they invest.
“Investors are making net zero commitments for themselves and
demanding that companies issue greenhouse gas reduction targets and
transition plans for meeting those targets,” says the Reverend
Kirsten Snow Spalding of the not-for-profit Ceres Investor Network
on Climate Risk and Sustainability.
Neither Spalding nor the Net-Zero Asset Owner Alliance make a case
that forcing net-zero targets on companies will boost investor
returns, demonstrating that this is not about investors’ traditional
concerns – making money – but about pursuing politics by other
means. In this, the Securities and Exchange Commission (SEC) is
working hand in glove with woke climate investors. Commenting on the
SEC’s newly proposed rule on climate-risk disclosure, Spalding says
that for investors who have committed zero emissions by 2050, “this
draft rule is absolutely critical.”
It’s no coincidence that SEC Chair Gary Gensler chose Ceres to make
his first appearance to talk about the SEC’s proposed rule. Of
course, Gensler didn’t justify it in the same terms as Spalding. To
have done so would have heightened the risk of the courts striking
down the rule in subsequent litigation. Instead, Gensler attempted
to justify the rule as bringing “some standardization to the
conversation” and putting material climate information – the SEC
issued guidance in 2010 on how companies should disclose such risks
– in one place, saving investors the bother of piecing together the
information from different sources. Gensler’s explanation, to put it
politely, is an implausible one for imposing on corporate America
what amounts to a parallel climate-reporting regime to the
established framework of financial reporting. Whatever Gensler might
say in public, the effect of the SEC rule – if implemented – would
be to empower investors to impose net-zero targets on companies, to
monitor progress in meeting them, and to hold company boards to
account for them.
Unlike elected politicians, woke climate investors
are not accountable for the effects of their climate policies: They
exercise power without responsibility. This arrangement weakens
America’s ability to respond to the geopolitical challenges of a
revanchist Russia and an expansionist China. “We are on a war
footing – an emergency,” Energy Secretary Jennifer Granholm declared
at the CERA energy conference in Houston last month. “We have to
responsibly increase short-term supply where we can right now to
stabilize the market and to minimize harm to American families.”
Addressing oil executives in the audience, Granholm told them: “I
hope your investors are saying these words to you as well: In this
moment of crisis, we need more supply ... right now, we need oil and
gas production to rise to meet current demand.”
As Granholm suggested, woke investors have been trying to do the
opposite. Despite the war in Ukraine, there has been no let-up in
investor pressure on oil and gas companies to scale down their
operations. Whatever criticisms might be made of the Biden
administration’s handling of the war in Ukraine, it is responsible
for taking the awesome decisions that war involves. Investors, by
contrast, have no responsibility for the nation’s security and
America’s ability to lead the West. By helping investors impose
their desired energy policies on American oil and gas companies, the
SEC is undermining the national security prerogatives of the Biden
administration and eroding America’s ability to meet the challenges
of a dangerous world. The SEC is playing in a domain that it has no
business being in.
Rupert Darwall is a senior fellow at
RealClearFoundation, researching issues from international climate
agreements to the integration of environmental, social, and
governance (ESG) goals in corporate governance. He has also written
extensively for publications on both sides of the Atlantic,
including The Spectator, Wall Street Journal, National Review, and
Daily Telegraph. |
