California’s Altruistic Carbon Policy
Wildfire season began abruptly in California last week. Bankrupt utility PG&E’s planned widespread power outages are a response to last year’s fires, which were blamed on high winds and faulty transmission lines. Having friends in affected areas, as many of us do, certainly brings home the tragedy and fear that comes when you might lose your home. Claims for fire-related deaths and property destruction last season overwhelmed PG&E’s financial resources. Apportioning blame is complicated – what seems certain is that Californians will endure higher electricity prices – both to make up for underinvestment in transmission infrastructure as well as to achieve the state’s 2050 goal of lowering Greenhouse Gas (GHG) emissions to just 20% of their 1990 level.
Californian electricity prices average 16.6 cents per Kilowatt/Hour (KwH), substantially above the U.S. average of 10.5 cents, but still lower than New England (see An Expensive, Greenish Energy Strategy). The EU average is 23.4 cents, so there’s probably plenty of room for prices to rise. Energy in America is cheap. Stores on busy streets keep their doors open in summer, blasting cool air on to passers-by in hopes of luring them in. Energy prices are not a political issue. They may never be this cheap again.
Like the U.S., California’s GHG emissions peaked over ten years ago. But while President Trump withdrew America from the Paris Accord, California has adopted laws intended to reduce GHG emissions even below targets the Obama administration considered as part of its “Mid-Century Strategy”
Lowering emissions enjoys widespread support in California. They even have a cap-and-trade program, the subject of a recent lawsuit from the White House because it includes Quebec, possibly violating the Federal government’s exclusive responsibility for foreign policy
What’s interesting is to consider the political support for California’s laws mandating GHG reductions. Although it’s often noted that California’s GDP is bigger than all but seven countries, even that state’s planned 80% reduction in GHGs won’t save the planet. The heavy lifting is about to begin. The Transportation sector is 41% of California’s GHG emissions. Electric vehicle adoption will need to grow substantially. Demands on the state’s beleaguered electricity transmission infrastructure will correspondingly increase, although GHG emissions from the power sector are also expected to fall.
In 2017 Californians generated 424 Million tons of GHGs, pretty much the 1990 level. By 2030, state law mandates that annual emissions must be 40% lower, reduced by 170 Million tons of CO2 equivalent. The world generates 35 Gigatons, so the Golden State’s contribution will be to keep the world’s total 0.5% or so less than it otherwise would be.
California’s emissions policies are laudable. But global success unfortunately won’t come solely from this effort. Their hope is that they’ll set an example that other states and countries will adopt.
So it’s worth looking at China, where GHG emissions are expected to increase by over 2 Gigatons during the same period. The heroic efforts of Californians to slash their emissions over a decade will be offset by just nine months of growth in China.
This is the Climate Change Conundrum. The rich world says it wants lower emissions. California is a leader in this respect, although no country is on track to meet its Paris Agreement pledges. Meanwhile, developing countries like China and India plan sharply more energy consumption, so as to raise living standards. By accepting higher power prices, Californians are accommodating rising living standards in China by lowering their own. Moreover, poorer countries are far more exposed to rising sea levels and other consequences of climate change than richer states, which possess the resources to protect themselves. California is sitting on the high, dry moral ground.
The Paris Agreement isn’t working. Global emissions are rising. It’s the tragedy of the commons on a global scale. Californians will eventually realize that their substantial efforts are being hijacked as GHG emission capacity by others, rather than inspiring similarly noble, selfless acts. China, the world’s biggest emitter, is ranked “highly insufficient” by Climate Action Tracker for its efforts, as emissions continue to grow rapidly. The U.S., which emits half that of China, is ranked even lower, at “critically insufficient”, because of its withdrawal from the Paris Agreement despite lowering emissions more than any other country. Shifting energy intensive industries from America’s relatively clean energy mix to China’s is going in the wrong direction.
The current approach needs to be rethought. Perhaps what’s required is a set of agreed objectives that are attainable, even if those objectives fall short of what the UN’s IPCC report recommends. Extremists such as the precocious Greta Thunberg with her global scolding at the UN (“How dare you?”) and Extinction Rebellion are irritating or simply wacky. Movie stars who speak on climate change before hopping back onboard their private jet easily betray their hypocritical, virtue signaling goals. They make a few headlines, but the extreme solutions they advocate aren’t supported and aren’t being implemented. They are counter-productive.
There’s probably not much popular support in America for green policies to support higher living standards in Asia. What remains clear is that solutions should include substitution of one relatively clean fossil fuel (natural gas) for the dirtiest one (coal), since fossil fuels are what work. California relies on natural gas for 46% of its in-state power generation. Natural gas pipeline companies will be needed more than ever.
Important Disclosures
The information provided is for informational purposes only and investors should determine for themselves whether a particular service, security or product is suitable for their investment needs. The information contained herein is not complete, may not be current, is subject to change, and is subject to, and qualified in its entirety by, the more complete disclosures, risk factors and other terms that are contained in the disclosure, prospectus, and offering. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy, completeness or timeliness of this information. Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments. Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.
References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase. Indexes and benchmarks may not directly correlate or only partially relate to portfolios managed by SL Advisors as they have different underlying investments and may use different strategies or have different objectives than portfolios managed by SL Advisors (e.g. The Alerian index is a group MLP securities in the oil and gas industries. Portfolios may not include the same investments that are included in the Alerian Index. The S & P Index does not directly relate to investment strategies managed by SL Advisers.)
This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involves a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of SL Advisors LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made. r
Certain hyperlinks or referenced websites on the Site, if any, are for your convenience and forward you to third parties’ websites, which generally are recognized by their top level domain name. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with SL Advisors LLC with respect to any linked site or its sponsor, unless expressly stated by SL Advisors LLC. Any such information, products or sites have not necessarily been reviewed by SL Advisors LLC and are provided or maintained by third parties over whom SL Advisors LLC exercise no control. SL Advisors LLC expressly disclaim any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites.
All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.
Past performance of the American Energy Independence Index is not indicative of future returns.
Leave a Reply
Want to join the discussion?Feel free to contribute!