Reaping The Whirlwind: Economics And Climate Change

|
Includes: BP, CBI, CX, FLR, FSLR, GE, HCMLY, JEC, TSLA
by: Kevin Wilson

Summary

The well-meaning planners of the IPCC have failed to convince Americans of the need for action on climate change; this is due to the failure of the Kyoto Protocol.

If we first stipulate that climate change is real, anthropogenically driven, and poses risks to civilization, we still need to plan for both mitigation and adaptation.

The Paris Accords pose almost hopeless goals for mitigation; the carbon budget remaining to stop warming at 2 degrees C will be used up well before 2039 (the target date).

Costs of mitigation are probably underestimated, but even if not, adequate mitigation will not occur in time to deal with 3-4 feet of sea level rise by 2100.

Adaptation involving building sea walls and tidal barriers will be more important in the next few years; therefore buy JEC, FLR, CBI, CX, and HCMLY; also FSLR, GE, TSLA.

Antarctic Ice Shelf Breakup (Source: slate.com)

"What goes around comes around," as the saying goes. "As you sow, so shall you reap" may be the original version of this sentiment. These phrases may have direct application in the ongoing drama of the climate change culture wars. On the one hand, the scientific community has reached a fair amount of consensus that global warming is real and a threat over the long term. However, on the other hand, the way this story has been "sold," and the failure of highly touted mitigation efforts by international governmental bodies, have together made the general public in the US cynical and unresponsive to the cries of the warming alarmists. Thus, there is an important economic aspect to the climate controversy that may need more thought and evaluation applied to it than has so far been the case.

Now let me stipulate a few things so readers don't waste their time or mine in over-reacting to the politically incorrect statements just made. First, I have enough scientific background on the subject of climate to have an informed opinion on climate change risks and global warming mitigation efforts. This is by virtue of having done a PhD in a relevant science (geology), and having done paleoclimate research as part of a team using a global climate model (GCM) at the National Center for Atmospheric Research (OTC:NCAR) in Boulder, Colorado under a research project funded by the National Science Foundation in 1990-92, which was later published by the Geological Society of America as the lead article in an edited scientific monograph.

Amongst my mentors, co-authors and team members back then were several well-known climate scientists. I have also done extensive graduate level coursework on oceanography, climatology, geochemistry, and earth system science. None of this makes me an expert on current research, and I do not claim any sort of superior knowledge in this area of science (far from it), but I have a good understanding of the issues and the data, and of how natural systems work on a planetary scale.

I want to stipulate that I absolutely believe that the apparent scientific consensus on global warming is essentially correct: The earth's surface temperatures are on a long-term warming trend, and this trend is primarily driven by human activity. I also want to stipulate that something must be done to mitigate the main effects of global warming, i.e., sea level rise and changes in precipitation patterns. The damage to civilization, especially in coastal areas, will eventually be very serious.

Impact of a 1.0 Meter Sea Level Rise:

Source: globalwarmingss.blogspot.com

Supposedly in the interests of "saving the planet" (which by the way is a completely unscientific and anti-historical sentiment, as the planet as a system doesn't need saving -- only people do), the international community has spawned entire industries (a "climate science-industrial complex" if you will) dedicated to delineating the problems and selling solutions. However, mixed in with the many legitimate measures are a number of exaggerated, ephemeral, or even false measures or ideas being presented to gullible governments and greedy investors. If you need an example, look no further than the US corn-based ethanol boondoggle, which has provided small benefits to the carbon budget of the atmosphere, but has also raised emissions of formaldehyde and ozone, and has resulted in the squandering of enormous water resources, according to data from the USGS. This general rush, or opportunistic grab for money does not in any way argue against the need for doing something about climate change, as the threat remains very serious in my opinion. But it does harm the quest for the political will to solve the problems associated with rapid climate change.

Huge international efforts have been made over the last 30 years to rein in the anthropogenic causes of global warming or climate change, which is of course quite laudable based on the evidence of warming and the potential damage it might do, but it has had very little actual effect so far. The Kyoto treaty cost (from 2008) an average of $180 billion per year globally according to author Bjorn Lomborg, and even if adhered to by all signers (which it was not), it could only have achieved a grand total reduction in global CO2 levels of only about 1%, and reduced global surface temperatures by only about 0.3 degrees F. Carbon dioxide emissions soared by over 40% following the adoption of the Kyoto Protocol, according to author Robert Hensen. This is an appallingly poor result by any measure, but especially on the basis of a reasonable cost/benefit analysis.

It is pretty clear now, that however necessary the science of the time made a Kyoto treaty of some type seem, the politics involved made Kyoto a complete failure in terms of actual climate mitigation or impact. However, it did achieve the political goal of getting the world started on the problem. There was effectively no useful cost/benefit analysis done in preparation for the Kyoto meetings in my opinion, nor really very much more (that is believable) in all the time since. The recent climate accords reached in the Paris meetings (COP21) call for a target increase of no more than 1.5 degrees C above pre-industrial levels if possible, with a backup goal of 2.0 degrees C if the first goal is not met in time. How much time we have for getting emissions cut enough to matter is the crux of the problem.

What I object to then is not the growing alarm at the fact of global warming. I am myself mildly alarmed. Instead, I have five somewhat smaller bones to pick with the so-called international consensus: 1) in general the rate of sea level change, even as now understood, is not as catastrophic as has been claimed over the last few decades, and many dire predictions have been proven premature; this has had an undesirable "boy who cried wolf" effect; 2) the earth has been through much worse episodes in geologic history with respect to temperatures, carbon dioxide, and sea levels, so we do not need to fear for the planet itself, and certainly not in the next few years; rather, it is human civilization that will have to (and can) adapt; 3) there is abundant evidence that civilization has already adapted to steady (but somewhat slower pace than that now expected) sea level rise and changing precipitation patterns for literally millennia; 4) the global climate models now in use do not have sufficient accuracy to "predict" even the current climate in detail, and therefore should not be accepted uncritically, or solely relied upon for making policy decisions based on dire model predictions of what's coming; and 5) the failure by the scientific, economic and political communities to undertake realistic and rigorous cost/benefit analyses as guides to international mitigation efforts is causing a tremendous waste of economic and political capital which is starting to have a serious impact on business.

With respect to the first objection raised above, I present the popular imaginary scenario pictured below, the idea for which dates back quite a few years. Many, many global warming alarmists have claimed that the sea was going to flood our cities by 2000, or 2015, or whatever. This does not mean the water isn't going to actually flood our cities, because it absolutely will at some point; rather it means that there is a "Chicken Little" attitude amongst some observers that has done them no credit (because they were wrong) and has weakened the political argument for taking action. I won't mention any names, but certain Nobel Laureates come to mind.

Apocalypse Now? - Or Maybe Soon?

Source: berkrey.com.au

With respect to the second objection raised above, I would point out that in earth history there is good evidence that CO2 levels have at different times been as much as 15 times higher than at present, and for long periods of time more than 3 times as high as the present elevated level, as shown by the chart below. This is based on a series of geochemical models for the carbon budget of the planet. The earth and its creatures survived all of that in pretty good shape, or we wouldn't be here. Earth as a complex system has made it through some pretty big changes over time, and it will make it through anthropogenic global warming as well. There is evidence that there have been multiple periods without ice at the poles, and sea levels have as a result been much higher at times (e.g., some 1200 ft. higher in the Ordovician Period, about 445 million years ago).

Source: theresilientearth.com

Phanerozoic Temperature Changes:

Source: skepticalscience.com

Source: vraaghetnoach.nl

With respect to the third objection raised above, it is a long established fact that the sea level has been rising at a rate of about 6 mm/yr. for the last 20,000 years, or 2 feet per century. This is why so many ancient civilizations are being explored now by marine archaeologists; indeed, many have had at least some buildings and monuments preserved because they are now underwater.

Source: hu.wikipedia.org

Egyptian Statue Off Alexandria:

Source: dailymail.co.uk

With respect to the fourth objection listed above, GCMs have paradoxically really struggled historically to describe or model the present climate. In fact, out of the 90 models shown in the graph below, 95% were predicting temperatures that are systematically too high relative to actual measurements. This is a problem dating back thirty years, and it has never been fully resolved. Notice that the bias is almost uniformly high; the alternative is unthinkable given the way that scientific funding works. Note also that the trend is still very clearly upwards. So what this means is that the trend is accurately modeled, but when we try to decide how to deal with mitigation of the damage, we should remember that the models have significant uncertainty and may have embedded errors.

Click to enlarge

Source: contrepoints.org

Finally, with respect to my fifth objection, the economics of global warming and mitigation have been studied by a number of research teams, but the error bars on the expected damage from warming are very large, as shown in the differences between the graphs below. The economic models treating the estimated costs of mitigation or adaptation are genuine attempts at cost/benefit analysis, but as shown in the long discussion on mitigation to follow, they make heroic assumptions that will not generally turn out to be accurate.

Differences Between Mitigation and Adaptation:

Source: wrsc.org

Source: nuclear-news.net

Some authors (e.g., Keith Williams, 2016, Seeking Alpha) have studied and reported recent estimates (using the Intergovernmental Panel on Climate Change [IPCC] 2011 carbon budgets) that there is a 50% chance of hitting the 2 degrees C maximum warming goal (or ceiling) over the next 24 years, i.e., by 2039. This assumes that the total cumulative carbon budget for the entire industrial age since 1860 does not exceed 3,000 billion tons of carbon dioxide by the year 2039 (www.carbonbrief.org), and we have already emitted 2,007 billion tons. We are presently emitting about 40.3 billion tons per year under a business-as-usual scenario -- hence the 24.6 year time span. Note that this assumes a trend increase in global GDP per capita, i.e., 1.4% per year (and carbon emissions) over time, and a trend decrease in energy intensity of GDP (-0.8% per year) over time. This means that periods of rapid global economic growth or slower energy efficiency growth will make it harder to reach the goal, and periods of slower GDP growth (recession) or faster energy efficiency growth will make it easier to reach the goal.

2009 Carbon Budget Probabilities:

Source: reneweconomy.com.au

What would it take to raise the chances of success higher, say to 66%? According to the data, the budget would have to be cut by another 100 billion tons, or 2.5 years' worth of emissions. This would roll the target year back to 2037, or cut the carbon emissions by 2039 to 2,900 billion tons, but note that the error bars on this in the IPCC's 2014 report are quite large. If you then compare IPCC data for world population growth estimates and GDP per capita growth estimates, this goal seems rather optimistic. Modeling by the IPCC suggests that a carbon emissions reduction of at least 40% must occur by 2050 if we are to hit the goal, in spite of continued GDP growth. This translates as a cumulative cut of 300 billion tons of carbon dioxide output, or the replacement of 800 trillion cumulative kWh of coal-fired equivalent power with alternative energy sources. I have pointed out elsewhere that I think creative destruction will eventually displace fossil fuels with solar, wind, and other alternatives, but I still don't think it will happen in time to solve the problem of a 3-4 foot sea level rise.

Click to enlarge

Source: gci.org.uk

For comparison, the USGS reports ( Circular 1407) that US total energy consumption was about 30 trillion kWh per year in 2007. On the other side of the argument, China apparently cut its coal consumption significantly in both 2014 and 2015, and is closing 4,300 old coal mines. But researchers at the Institute for New Economic Thinking (INET) at Oxford have just shown that the capital stock for the IPCC goal will be reached in 2017. In other words the global stock of energy infrastructure from which future emissions have a 50% chance of staying within the cap of 2 degrees C will have already been built by 2017. Thus 100% of all new-build energy infrastructure after 2017 would have to be wind, solar, etc., for it to remain reasonably possible that we successfully reach the goal. This sounds really unlikely to me, although we are at a ratio of about 67% alternatives in all global new-build infrastructure already.

Most attempts at cost/benefit analysis submitted to international committees like the IPCC over the last 30 years have been transparently politically motivated, are universally in favor of drastic measures, and have always reached the conclusion that vast expenditures, even to the point of stifling global growth by 1-3% of GDP for decades, are the only way to go. The most recent IPCC (2014) estimate of the global cost of mitigation is about 1.3% of global GDP, or $1.012 trillion per year in 1990 dollars, or about five times what Kyoto cost. The justification for this seems to be that, if we are actually facing total catastrophe, with the imminent flooding of every major coastal city on the planet, then we must do everything possible to prevent it, of course. So the thinking goes: "Maybe this is what's required."

But then the standard of evidence needed, the scientific hurdle for making this call, ought to be very high, on both sides of the question. By that I mean, the standard of proof for the dire nature of the threat to civilization should be very high, and the standard of proof that proposed solutions will actually work also ought to be very high. The relatively dire nature of the threat has been emphasized again recently by two of my former co-authors (David Pollard and Rob DeConto, 2016, Nature V. 531: 10-38), who have demonstrated an alarming potential rate for West Antarctic glacial melting that could raise global sea levels by 3-4 feet by 2100. Obviously, if you accept this estimate, and I do, this would suggest that something must be done soon. However, the scientific and technological evidence in general does not support the actual proposed courses of action at the most recent international meetings in Paris (COP21). This is not because these actions wouldn't eventually work; rather, it's because they can't possibly work in time, as discussed above. Indeed, just like Kyoto, most nations will not honor the Paris agreement, and it is once again an agreement full of wishful thinking.

Source: skepticalscience.org

Thus in my opinion, although the global warming data are ever more compelling, few rational answers have been offered up; instead, only radical measures unlikely to be honored by the participants are on offer, and these will be depressingly ineffectual on a practical basis in the long run. If the goal is to actually stop sea-level rise before it wrecks our cities, and the method used will involve curtailment of emissions as the main tool, then the task is just about impossible. This narrow and self-defeating approach is not what science requires, or engineering limits us to, or economics can tolerate, but rather it is what politicians seem to want.

I think the solution is to combine our continuing efforts at mitigation with a strong effort at adaptation. This means building tidal barriers and sea walls like the ones constructed on the Thames River in the UK, or on the Bay offshore from Venice, Italy, or along the North Sea coast of the Netherlands. Efforts are already being made in New York and a few other major cities to limit the damage that occurs when big storms combine with higher sea levels to flood urban areas. This could be done in increments as sea level rises, so the costs would be spread out over decades. Well-known author Bjorn Lomborg ( Cool It, 2007, Alfred A. Knopf (Random House), New York, 253p) has estimated that the costs of adaptation would run a total of around 1% of global GDP, which is cheaper than mitigation costs, and far more likely to work in time. Of course this would imply a massive effort of engineering and construction around the world, but that can be planned for and accomplished. Eventually mitigation would take over in importance and reduce carbon emissions to safer levels.

Assuming that we will be forced into emphasizing adaptation far more than the IPCC has projected is exactly what I think will happen when the wishful thinking of the Paris Accords fails to deliver timely results. I am not the only one apparently, as BP PLC (NYSE:BP) has made the same call recently, according to Keith Williams. For trades then, I would favor large engineering firms like Jacobs Engineering Group (NYSE:JEC), Fluor Corp. (NYSE:FLR), and Chicago Bridge and Iron Co. (NYSE:CBI), as well as cement producers like Cemex S.A.B. de C.V. (NYSE:CX) and LafargeHolcim Ltd. (OTCPK:HCMLY). All firms involved in mitigation and alternative energy will also prosper, including some solar firms like First Solar Inc. (NASDAQ:FSLR), some wind power firms like General Electric Co. (NYSE:GE), and some battery firms like Tesla Motors Inc. (NASDAQ:TSLA).

Disclosure: I am/we are long BP, FSLR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks or other securities mentioned or recommended.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.