Wednesday, December 10, 2008

Conservatives, climate change and investing

I didn’t mean to start a debate by the religious fanatics of climate change. And I will not do so here. But I will state my position and I do want to talk about the investing implications of climate change.

My position on the political and practical debate (and on the science on which I have limited expertise)

Conservatives have had a funny set of positions on climate change. First they argued that it didn’t exist. That seems to have fallen by the wayside. There is little factual doubt that the world is warmer than it was say 50 years ago. In Australia – where the climate is doing quite strange things – popular opinion says the strange things (sustained drought) are caused by greenhouse effects. I have my doubts about that…

Then conservatives argued that the observed warming was not caused by human driven changes in the CO2 in the environment. That is possible – but I am happy to accept that it is highly likely that humans have caused it. I am far less convinced by the human cause step than the existence step – but I still think that the bet on climate change is having human causes is pretty strong.

It is not clear what conservatives are going to argue next. Starting by arguing with the preponderance of scientific opinion doesn’t bode well…

I was always more impressed by Charlie Munger’s view – which was intellectually honest – and did not start by denying the science. His view – which I believe arguable – is that climate change is real, is caused by humans but that it is essentially unstoppable at any reasonable cost (you simply can’t administer any plausible program to reduce greenhouse gas emissions). He then argues that the cost of the world being marginally warmer are not too high.

I really have no idea at that point. I do not know how big the cost of the world being a few degrees warmer will be and I have no idea whether a system to ameliorate climate change is even practically possible. I have some idea how you would design quotas and taxes to try ameliorate greenhouse emissions and I personally think it worth trying, however I am very unsure as to whether it would be successful.

More generally I think the conservatives without strong relevant scientific skills and who start by denying the preponderance of scientific opinion do themselves disfavour. If they lose the scientific debate they look stupid – and just as importantly – they deny the fundamental intellectual strength of conservatism.

The appeal of conservatism as an ideology is that it is based on a practical observation about the world – decentralised market systems work pretty well on the whole and governments stuff up lots of things. That observation – loosely stated – is grounded in fact. Nobody is responsible for the distribution of bread in New York or Sydney – but it works very well. Someone was responsible for the distribution of bread in Stalingrad and it worked dreadfully. The appeal of conservatism in this regard is that the core part of the ideology is based on observable fact.

I do not understand why conservatives want to latch onto very minority scientific positions (which are probably wrong) on climate change or onto positions which are completely scientifically untenable on evolution (six days, recent origin).

Conservatives have a perfectly defensible ideology – why give up the intellectual high ground for obscurantism? It is not my ideology – but when the facts suggest that I am wrong I am very happy to retreat. If you are not happy to retreat then you count yourself out of serious discussion.

But this is a practical investing blog

I think we can assume (on the strong balance of probability) that CO2 emissions cause global warming. I am not sure we can assume that something effective will be done about it – or even that it is possible within a modern global economy do to anything effective about it. But there is a good probability that governments will try.

How they try is going to dramatically change the investment horizon – and it might do so in strange ways. For instance in Europe greenhouse gas quotas were given to large carbon emitters – and for a while the way to make money was to buy the company with the worst emissions problem. Why? Because the quotas were worth more than the industrial base they had to shut.

I do not want to provoke a debate about whether the human caused greenhouse effect is real – I think that is pretty likely – but this blog is entirely unlikely to contribute in any meaningful way to the debate. I am not a relevantly trained scientist and nor are most my readers.

What I do want to provoke is a debate about how the governmental reaction to greenhouse will change the investment horizon. I may not like it – but if the incentives are for me to buy the ugliest most polluting industry because it is a beneficiary of government action then I will do it. I will not let ideology get in the way of investing. That would be even more stupid than believing in six day creationism – because the belief in creationism is largely personally harmless – but letting ideology get in the way of investment decisions is personally costly.

So this is a plea: let us discuss what really matters to my clients and my readers – which is how do we make some filthy lucre from all of this – rather than argue about science about which we can make little contribution.

And just to make sure the discussion is focussed I am going to break this blog’s policy on censorship of comments. I will censor any comment on the science of greenhouse unless it has an investing implication. I will however let through any comment with investing implications generally or discussions on the practicality of things governments might (try to) do to ameliorate greenhouse gas emissions.

John Hempton


Anonymous said...

I live in California and see global warming more as a move in geography. While Australia might become uninhabitable, North America climatically just moves south. Hence for counteracting global warming all heat sensitive industries have to move north. And there is plenty of space up there!

The question remains, how quickly will global warming happen? Can I expect by the expected end of my life (say 50 years from now) the Bay Area becoming L.A. and Eureka becoming the new Bay Area? Except for planting palm trees in Eureka and developing ocean front condos, moving agriculture north and building even more water storage and transport facilities across the state - is there anything else that needs to be done? I am wondering, because people _do_ live south of here. Mexico is full of them. They are moving north though. So maybe develop Oregon and push?

IMHO the investment horizon is fairly long. I think you agree to a degree, as you are proposing to take a short cut and front run/ trade government decisions. But isn't that something that is independent of the global warming idea? (Where is the "investment"?)

Unknown said...

Interesting points! I think you are pretty much spot on with your analysis of the probablities around climate change. I also like your rational approach to analyzing the current situation and how to deal with it.

However, on two points I strongly disagree:

[…]it is possible within a modern global economy do to anything effective about it[…].

Just imagine, for a moment, that unless we do something about the CO2 emissions, millions of people will die. Homes will be flooded, children will be orphaned, people will starve. If that really is what we are facing, how can we not do everything in our powers to prevent that from happening?

Is this it? Is this where we give up? Is this what the human race can achieve; putting ourselves into a terrible mess, unable to solve problems we created ourselves?

I will not let ideology get in the way of investing

Given my understanding of the situation we are facing I need to realize others may see it differently. If the consequences of our actions are - literally - a question of life and death, it is not a question of ideology but, of moral. I feel there is a difference.

cannboys said...

Government's could potentially kill two birds with one stone by weighting those highly prized carbon credits to drive investment into truly renewable, zero CO2 footprint energy sources like solar. I doubt they will of course, especially given the current direction of policy.

Anonymous said...

In general, long energy.

I did an exercise the other day using wikipedia and its energy usage numbers from 2004 for the US.

If you were to take just 10% of gasoline demand, and convert it to electricity demand, as would be the case with a plug in car, you would need on the order of 30 nukes.

Nukes are the "environmentally friendly" solution to this problem.

Someone please correct me if I am wrong here.

Anonymous said...

i got one. short australia. besides the other reasons, crippling whatever industry you managed to put together, for a mirage, is a surefire fiasco. do they think it will have the slightest impact if they go alone? do they expect anyone to follow in the next say, 3 years? dumb moves were meant to be exploited.

I-Engineer said...

> I do not understand why conservatives want to latch onto very minority scientific positions

Having a science and engineering background, I have wondered about that too. But the difference between scientists and politicians is that scientists use their own thinking to understand reality, whereas politicians use other peoples thinking to change reality. Or, to put it another way: Scientists seek the Truth, but politicians seek Results.

> [Climate Change] is essentially unstoppable at any reasonable cost

I think this statement is both true and false, depending on how you discount future cash flows. From what I understand about the topic, the first fact is that a reduction in CO2 emissions only reduces the rate of increase of atmospheric CO2 concentrations, and we would need a 80-90% reduction in emissions (=energy) to actually decrease the level of CO2. So despite any efforts, the Earth would still warm up.

The second fact is that any change in the CO2 level (up or down) takes quite a lot of time (some argue about 40-50 years) to actually produce a significant change in actual temperature levels.

So the cost of these changes is incurred today, but the benefit occurs in what Keynes referred to as the long run.

Putting these points together, I do not expect any political action that has a significant effect on CO2 emissions or the related industries. But it would be foolish to position oneself against a change in general psychology, which I do expect, perhaps not right now, but 2-5 years from now.

Anonymous said...

Hi John, love your blog, I've been reading for a month or so now. I hear you about not letting ideology get in the way of investing. I'll never forget my fundamentalist christian parents staring glumly at their portfolio statements and realising they held alcohol and tobacco companies, and realising that they were highly profitable, and deciding not to protest to their financial advisers. If they could suck it up and ignore their rabidly anti-sin principles, we all can.

But a couple things. How do you measure whether it is profitable for you to invest in planet-destroying companies. Is your profit only in dollars? Because the cost of destroying the planet is also a cost to you. I seem to remember that you have kids - why leave them money that will be worthless if they live in a world of water wars, food wars and violent climate refugees? It probably won't happen in our lifetime, but it certainly will in theirs.

One other thing I wanted to take you up on - I'm not climate science knowledgeable either, but I have been following the debate and the knowledgeable climate scientists and economists say that it would actually take a heartbreakingly small investment of the major economies GDP to fix the climate issue. The problem is political will, not lack of money or technology. And by taking up the attitude you have on investing in climate destroying companies for short term financial gain, you are eroding the little political will there is to make the change.

It's a conundrum.

Cheers, a reader.

Potato said...

Ok, to start with the original post, I think one option to look at is the tar sands. There has been some noise that the incoming US administration might not be favourable towards the oil that comes from the tar sands. I personally think it's unlikely that anything can feasibly be done about it, but it's a decent thought experiment. So imagine that the source of oil suddenly matters to the US, and they stop importing from Alberta. However, US total oil demand won't necessarily change overnight, which could drive up the price of more conventional sources. So one investment idea might be to short the oil sands producers and go long the conventional ones, though I'm very inexperienced at this sort of thing even hypothetically.

IF: could be interesting; if that sort of migration happens quickly then you could face another housing boom in northern areas...

Marius touched on a point I was wondering about: I heard a lot of numbers thrown about last year or so about the potential cost to curbing carbon emissions, and I tended to hear things like "it'll be hundreds of billions of dollars, it'll never fly" -- and indeed, that was an "unreasonable" sum last year. But this year we've easily flushed that much global wealth down the toilet for a much less worthy cause... what's a few trillion more?

Anon #4: Not nearly that much: there is excess electrical generation capacity at the moment at night; provided electric cars charged at night a substantial portion of the US/Canadian fleet could be converted to electric with no extra power plants built (there is also included in that a small efficiency boost -- well to wheels in an electric is better than a gasser). Of course, then you'd need a massive amount of batteries to come on the market (with most likely a lithium- or nickel-based chemistry). I've tried briefly looking into that on my own as an amateur investor, and unfortunately couldn't find a "pure play": Sanyo and Panasonic make the hybrid batteries for Honda and Toyota, but they also do a whole lot more and I found trying to put a value on all that was beyond me.

I-Engineer: good points. Our political leaders are generally too old/not long-lived enough to care about solving problems that won't surface until long after they're dead. Of course, if we just want to freeze the CO2 concentration where it is, and we assume that whatever sink (the ocean?) is absorbing most of humankind's CO2 emissions now will continue to absorb, then we "only" need to reduce our emissions by 20-30%.

Anonymous said...

"Anon #4: Not nearly that much: there is excess electrical generation capacity at the moment at night; provided electric cars charged at night a substantial portion of the US/Canadian fleet could be converted to electric with no extra power plants built..."

That does not make sense to me. If there is excess generation capacity, that does not mean there is excess electricity. How do you convert capacity to electricity? Burn something. There is nothing, besides nukes, that produce electricity without burning something.

I would call this the myth of night time electricity, and have no idea where it comes from. As all observers of markets over time realize, those times of excess balance out with demand redistribution. The 'excess capacity' at night is more accurately called lower demand. They are not one in the same. Higher demand at night would mean more being burned at night.

Most steel mills in the US have changed over to night time work because of this. They still do the bending and finishing during the day, but the hard core melting is all done at night. EAF furnaces, nearly all still left here, use massive amounts of electricity to melt the steel.

Hydro/wind being the exceptions. Hydro is maxed out at all times, its essentially free, once it is built. Wind is still expensive, and requires ever larger infrastructure investments over larger areas. Neither scales well.

Nukes do not scale well either. But, in a choice between any of the above they are the clear winner, especially from an environmental standpoint.

Until there is a very real effort to build a lot (over 200) the demand for electricity will be directly related to burning things. Buy things that you can burn.

To put it simply, without nukes, you are moving buring from one place to another.

Your argument on efficiency is dead wrong. Transmission efficiency is on the order of 70%. Then you get into charger efficiency, usuall less than 80%. That brings us down to 100 going in at the plant, and 56 going into your car. In this instance, it is clearly better to burn whateverit is at the point of use.

Don't know the numbers on the efficiency of turning stored electrical energy into mechanical energy on that level, but it is not 100%. Thermodynamics is a bitch.

Potato said...

I'm afraid this is getting off-topic, but first off, my point was that with excess capacity at night, the investing opportunity for more power plants isn't really there, at least not to the degree you were suggesting. To some extent, yes, it would involve more burning at night.

Your numbers are way off: transmission efficiency is over 90% for electrical -- easy to just check on your bill for the transmission correction factor if your utility includes such (and roughly the same for gasoline distribution efficiency). ~80% at the charger, and another ~80% at the motor -- compared to ~20% for burning gas to move wheels in tiny inefficient engines distributed in each car.

Anonymous said...

The problem with investing on this is that the results come too slowly; the results on individual investments are overshadowed by other politics. Even more, imagine standing on a square in 1950 deciding what companies to buy - you may or may not guess that computers will be a big future hit (and even if you did guessing the right companies would be hard) - but you're more likely to believe that nuclear - well whatever really - is the way of the future. In stead, we invest the policies on climate change. My money would be on fusion and on wind - not on mills, but on high-altitude kites - but I have no idea where to put my money to get any return on that. I will, however, have an idea to make money going short on solar energy these days; the 40% year-on-year increase over the last several has put too many players into the game, especially on wafer production. Obamas victory and the talk of a "green New Deal" from several countries means they haven't been hammered nearly as much as they deserve in the current crisis.

Anonymous said...

I am reminded of a comment I wrote on the efficiency of anything.

The best over the top example I could come up with it the efficiency of my ass in this chair. In order for my ass to be working at 100% efficiency, I would have to have 100% of my ass in contact with the seat. Depending on how you define the ass in general, It could be as low as 50% and as high as 80%. You would need a very flabby, flat ass, and a very good ass grove in a well worn chair to even get near 100% efficiency.

Keep looking at your energy bills to get your numbers.

I repeat this again, the efficiency of transmission in the united states is on the order of 70%. It does vary, depending on the location of the plant and the equipment used in the various converstions. It has and always will cost electricity to move electricity. Supercooled super-conductors in a lab get over 90%. Power lines run over hundreds of miles do not even come close. The biggest factor is usually the ambient temperature.

Anonymous said...

If we think of eco-system stress in general, it boils down to:
* healthcare
* clean water
* food production and productivity

Claen water technology and water saving is key. If earth warms, water levels rise bringing hugh problems to water distribution networks in many costal area cities. If water aulity suffers too much, we will get massive outbreak of different diseases. As a side note, many western states have an elderly population so any really serious outbreak could transform the age distribution which changes overall consumer patterns. (don't laugh).

We still need to fight malaria and cholera.

Small scale argiculture machines should be a good investment too. People need to eat, so there are custommers and small modern machines can bring reasonable return on investment for farmers. Therefore the makers of these things should make money. Another interesting aspect is that today we have environmentally unsound argiculture in many places. Growing rice in Australia which don't have the water recources necessary for it in the long run. That means, there are opportunity for change in argiculture methods and hence invention in equipment.

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.