On Sunday, Swiss voters narrowly rejected increased taxes on users of fossil fuels. The measure was promoted by the government as necessary to ensure Switzerland can meet its commitment under the Paris climate accord. Following the government’s defeat, plans to meet Switzerland’s 2030 emissions goals have been derailed.
8.5 million Swiss people emit around 0.1% of global CO2, roughly 1/300th of China, so they’re scarcely much of a problem. Switzerland already generates two thirds of its electricity from hydropwer, so although the infrastructure of modern renewables is mercifully not ubiquitous in the picturesque Alpine valleys, the Swiss can claim to be doing their bit.
But the vote does reveal the shallow support climate policies have once they come with a price tag. The energy transition should cost money because renewables are far less efficient than conventional energy. Otherwise the landscape would already be carpeted with solar panels and windmills. And there’s a good case that rich countries should be willing to spend more for cleaner energy, as a sensible risk mitigant acknowledging the possibility of future climate damage. But environmental extremists have failed to make a persuasive case. Joe Biden talks about green jobs and disingenuously glosses over costs. If it’s urgent it should be worth paying for.
The energy transition is fundamentally bad news whose enormous cost true believers in a threatened climate should loudly embrace. But the message that this generation should accept lower living standards to save tomorrow’s isn’t a reliable pathway to electoral success. Greta Thunberg hissing “How dare you” was theatre at the UN, but so far hasn’t reached too many bumper stickers for political office. Politicians are loathe to deliver bad news.
On the same day Swiss voters rejected paying to help lower emissions, managers of California’s power grid pleaded for households to conserve energy during a forecast heatwave so as to avoid power cuts to their parsimoniously supplied population. ERCOT, which runs the Texas power grid, did the same. It’s no coincidence that two states heavily reliant on renewables can’t provide enough electricity.
The Golden State has some of the most expensive power in America as well as its least reliable. Few would want to emulate their model, which is hurtling towards intermittent sun and wind while abandoning everything else that works, including nuclear. With Californians selflessly enduring expensive electricity tenuously delivered, this relieves others of the need to emulate them — including China and India, whose growing emissions are partly accommodated by California’s altruism.
Perhaps Swiss voters don’t want to live like Californians.
Meanwhile energy demand keeps rising, driving prices higher and exacerbated by environmental extremists who press for less investment in new oil and gas production. Energy investors are grateful (see Profiting From The Efforts Of Climate Extremists).
On another topic, this week’s two-day FOMC meeting has drawn increased interest. The Fed’s aggressively accomodative monetary policy, which includes buying over half the government’s debt issuance since Covid began, is widely criticized. Economists expect the FOMC to indicate an eventual winding down of QE. Paul Tudor Jones said he thought a failure to do so would drive investors into inflation sensitive assets such as commodities, gold and bitcoin. But he added that tapering would also hurt bonds, which sounds like a bearish stance on fixed income in either scenario.
We agree. The eurodollar December 2021 — December 2022 spread (“Dec red Dec”) at under 20 reflects around a 75% chance of a 1Q23 tightening. That isn’t far from consensus, which means it doesn’t provide any premium for the possibility markets conclude the Fed has overdone the debt monetization. Taking the opposite side of this trade is like selling under-priced put options on the Fed’s reputation for accurate forecasting. The Dec red Dec spread should be wider.
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