🔋The Real Climate Catastrophe Pt. 2

The current ESG narrative at large is a widespread malinvestment which will cause inflationary and harmful downstream consequences.

May 04, 2022

This is the second of a three-part series where I argue the bigger climate catastrophe is the reaction to the problem, not the problem itself. This week connects the economic framework from last week to what I believe is malinvestment into climate change under the guise of ESG parameters. If you press the heart button above or below I would greatly appreciate it!

Part 1

Part 2

Part 3

President Nixon sits with economic policy advisors at Camp David including Chairman of the Board of Governors of the Federal Reserve System Arthur Burns. — 1971 — President Nixon sits with economic policy advisors at Camp David to discuss plan to end dollar convertibility to gold. Federal Reserve History

In part 1, I lay the framework for the “Bretton Woods II” economic system that we’ve been living under since 1971. I argue that this framework incentivizes short-term thinking, is a pernicious tax/depletion of the people furthest from the central bank for the benefit of those in power, and finally causes malinvestment with deleterious long-term ramifications. The decision to confiscate Russia’s FX reserves last month marked a change only few realize the severity of. According to Zoltan Pozsar, (former advisor to the treasury, IMF, involved in the federal reserve of New York, and currently at Credit Suisse) that decision marked the start of “Bretton Woods III,” which moves away from the system of “inside money” (aka treasuries that can be confiscated) to “outside money” like gold and commodities. This will likely take years to fully flesh out, but not before central banks stumble their way into this reality and we deal with the consequences of the monetary policy we have been under for the last 40 years. The bill always comes due…

In daily life there is a constant tug-of-war between present and future. Will you spend money on something you want now or save/invest it to have something else better in the future? Do you eat all the food you can in the present, or ration it throughout the month? Typically, successful people are able to forgo present satisfaction for a meaningful future with even better rewards. This is only the case when a stable society emerges and people have a reasonable estimation of their lives in 1, 5, 10, and 50 years. What I mean that people can actually plan on being alive, and not worry about food, water, safety (physical and monetary). There are billions of people who don’t have that luxury and have completely different priorities as discussed in my piece Wealth of Nations. The majority of people around the world are not developing spaceships or privileged enough to be worried about emissions.

The climate change issue is a prime example where people with stability and freedom can see that we should pay more attention to the climate for the sake of our future. Many in such luxury realize that it would be a bad idea to damage the future world for the sake of present satisfaction, and this is a good thing. It is a good thing for our kids and even the futures of those who decide to live it up in the present with little regard for the future, unbeknownst to them.

There is a drawback however — you can’t prioritize a future goal at the expense of the present as you need to be able to make it there for that goal to matter. If some goal is deemed to be virtuous and worth working towards, actionable steps should be taken and perhaps sacrifices made in order to achieve it. If that sacrifice is at the expense of human lives, there becomes conflict. People need to have a say in what goes on otherwise there is coercion and force. In The Road to Serfdom, Hayek speaks of how a choice is not moral if it was forced upon you. Even the climate goal, as virtuous as it is in principle, is not a moral goal if it is forced upon the world against their will or in such a way to cause suffering.

Climate change has been deemed an immediate catastrophe by many. By labeling it a crisis, it gives policymakers/leaders the ability to do whatever steps it deems required solve the issue. This trickles down to incentivize new investment to be ESG related and manipulated free market behavior. I’m sure there are good faith actors, and many are just acting in their own interests, but ESG at large has become a virtue signal contest even denying certain projects with substantive potential to reduce emissions that don’t follow the popular narrative. This narrative is wind, solar, and batteries. All three are amazing technologies with fantastic use cases, and I think batteries have shaped the world we live in today; however we have become overzealous.

With the easy money propping up many sectors and unimaginable debt that the US has accumulated, it has become more difficult to separate truly productive investments from those which seem like productive investments. People turn to more speculative behavior as well as investors and politicians looking to secure their funding/special interests in the short term for their latest project or next election cycle. These decisions have been influenced by the destruction of the money supply which incentives short term thinking. Since the climate is in a proclaimed crisis it falls victim to this process. Many investors and projects can only get funded if they meet ESG requirements which closes off other opportunities to investors. This has narrowed capital allocation in an already inflationary environment. Even ignoring the fact we have let China gain dominance over the materials required to go through with the proposed ESG narrative, thus an exponential increase in domestic infrastructure would be needed to properly secure the materials needed, it is still inflationary (1trillion already spent on infrastructure in 2021, trillions more was proposed with build back better, more funding allowed through defense production act). US climate policy is on a course to be a significant portion of US GDP each year. The graphic suggests that this is “surprisingly inexpensive,” however it matches the cost of social security or Medicare/Medicaid (already expensive and overpriced policies) just to reach 80% of the goal. It also states that depending on measurements, they may have underestimated the numbers. Furthermore, US spending to GDP is already high and this is additive policy which only works to increase that ratio. So contrary to the charts innuendo, these are quite expensive and inflationary policies.

To be clear I think we should re-shore mining and production of what vital resources we can. A quick side example of the inflationary nucleus of the ESG narrative is destroying pipelines just to transport the oil/gas that needs to come regardless on trains which is much less efficient and burns more fossil fuels in the process. Furthermore, in the past we have transitioned to higher energy dense sources over time. These drove down the cost of energy and yielded excess energy that could be used in new productive ways. The wind/solar/batteries ESG picture as it sits required a tremendous amount of capital expenditure (both government and private) to create less energy dense power. They also require large geographical footprints in terms of mining and actual deployment. If historical trends serve as any guide, less energy dense energy sources would likely be more expensive, unless the inputs were in extreme excess and energy cost was sufficiently low which we know is not the case.

I believe we are witnessing the peak or ensuing peak of capital misallocation that will be in for a rude awakening as “Bretton Woods III” progresses. Unlimited imaginary dollars will eventually give way to money backed by hard assets or commodities. Soon, projects that are expensive and produce less value will not be feasible. Only through the jaded illusion of productivity through easy monetary policy and a life of privilege has the ESG investing movement been gifted life. The government will not be able to fund their current version of the energy transition without more spending and money printing. The dollar is only as secure as the US military is strong so the government will never “default” because it can always print more money and add to the debt. The point I want to make very clear is that there are real world consequences, and the bill always comes due. What do I mean? We will suck the value out of the people through monetary inflation to fund lower energy dense sources. This scenario will cause purchasing power to decrease as inflation worsens and cause energy costs to rise as there is less energy produced for the same input.

Malinvestments of great proportion are often called bubbles. Examples include the housing bubble in 2008 or dot-com bubble in 2000. Today there are a lot of obvious bubbly behavior like some of the crypto market or certain companies. ESG is another bubble of sorts, where the privileged west may tamper with the fabric of that privilege at its own peril. This time the consequences will directly impact the primary input to life — energy.