Headwinds and Tailwinds

Mid-flight musings on COP21, pattern-seeking, courage and optimism… in that order.

Hyperbole does not sit easily with me. Far too many rely far too heavily on its rhetorical power to win arguments rather than to seek essential truths. So it is with frustration that I read the hyperbole that has been spackled onto the post-COP21 world.

Supporters herald the accord as the watershed moment for which so many have waited (largely in vain) for so long; the mystical Kumbaya moment when the world’s leaders finally commit to actually doing something about man’s impact on the natural world. Let’s light the fire and pass around the bag of marshmallows.

Critics condemn it as nothing more than political theatre, pointing to the reality that the agreement – such as it is – is essentially aspirational. The rubber will hit the road when it comes time to drill in some teeth. In the same year that the Doha round collapsed under the weight of conflicting self-interest, it seems an impossibility that, for example, the Developed world will willingly embrace what will amount to a form of wealth transfer in order to mitigate the consequences of a changing climate in the Developing world. Can you remind me exactly where Bangladesh is?

What seems to have been missed by the world’s media is that both are wrong. It is neither the pivot point for the world economic relationship to the environment that supporters wish it to be, nor is it the toothless vote-getting machine that critics accuse it of being.

Here is the truth: what was once an implacable, steady headwind against any concerted international effort to mitigate, limit or adapt to climate change, has (almost miraculously and against almost all expectation) morphed overnight into a tailwind.

Yes, the framework remains unclear. And yes, there are no teeth in the accord. And yes, there is not yet a clear “solution” emerging from Paris. And yes, the hard work related to shaping binding commitments is yet to be tackled. But all of that will be solved in the course of time. Directionally, COP21 provided the world with a goal. Politically, the world’s leaders signed on. The rest is a matter of hard work, not machinations.

As I’ve been writing for some time, the transition towards a post-hydrocarbon world is well and truly upon us. Just as humans moved from wood to whale oil, and from whale oil to coal, and from coal to oil, we are moving relentlessly from oil to renewable energy. This transition is inevitable and firmly in place. It will take longer than many wish. It will happen more quickly than others can evolve. Great fortunes will be made and lost. Old jobs will be lost, but will be lost less quickly than new jobs are created.

(As an aside, why do we celebrate disruption that eviscerates entire businesses in technology, but decry disruption that eviscerates energy? A subject for another blog, perhaps…)

During a guest lecture at the American University in Paris Business School in 2013, I was asked to outline my thoughts on the relationship between the oil industry and the renewable energy industry. What I said at the time still reflects my sense of the relationship today:

“A future economic historian will write a three-volume series titled “The History of the Carbon Era”.

The first will cover the period from Colonel Drake and Spindletop to the first Oil Embargo; let’s call that volume “The Golden Age of Oil.” Much of that book will be lifted from Daniel Yergin’s exhaustive book “The Prize”, the author will suffer accusations of plagiarism, and a minor scandal will erupt that will sweep the talk show circuit for a week or two. But I digress.

The second will bridge from the early 1970’s to 9/11; let’s call that volume “The Rise of Geopolitics and the Psychology of Scarcity”. Much will be made of Hubbard’s Peak, the various Gulf Wars, the rise of sectarian warfare in the Middle East and the rebirth of the American oil and gas industry. This volume will restore the author’s credibility, and he will go on to make a fortune on the lecture circuit.

The first chapter of the third volume begins with the second Gulf War, and ends with COP21. Main Street begins to become aware of the viability of alternative forms of energy. The price of oil is in free-fall. The so-called Islamic State strikes fear into any rational person. The Saudis contemplate floating shares of Aramco, the world’s most valuable company. The faint outlines of a post-carbon world begin to emerge.

And the rest of the book, all 26 chapters, will deal with the inexorable rise of alternative and renewable energy at the nexus of commerce, transportation, construction and manufacturing.”

Personally, I think that was a pretty damn good on-the-spot summary.

More recently, I spoke at SRI in the Rockies, the nation’s oldest and largest gathering of SRI/ESG investment professionals. During the Q&A, I was asked my thoughts on market signals relative to climate change. The question was posed as a challenge to an earlier comment I had made reflecting the above perspective and was couched in a profound skepticism that anything different would grow from COP21.

My statement at the time, and I am even more convinced of it today, was; that a carbon pricing mechanism will emerge; that the hardening science around what we know about climate change will be the forcing factor for such a mechanism; that I have no idea what this mechanism will eventually look like; and that it will likely include some sort of carbon tax, will be based on some sort of tradable commodity, will evolve into some sort of cap-and-trade market, and could very well eventually incorporate some sort of fixed, global, limit of produced carbon.

If I’m right, there will be no end of political theater in the coming years. Indignant tirades. Dithering and hand-wringing. Anxious appeals. Thundering celebrations. A tale told of sound and fury… signifying just about everything.

But, in the end, what will emerge will be some sort of workable framework to do our best to mitigate and adapt to the reality of a changing climate. It will not be easy. But when has anything of both import and value been easy?

(And, who knows… perhaps there is a small team of scientists squirreled away in a lab somewhere who are, even as I type, on the verge of discovering a way to extract carbon from the atmosphere in a cost-effective, scalable way – the ultimate impact investment! If so, then feel free to ignore this entire post.)

Your congenitally optimistic scribe,