The week of August 5, 2024: Coal’s persistence, (“brutal”) capitalism, trade, antitrust, and much, much more.
The week of August 5, 2024: Coal’s persistence, (“brutal”) capitalism, trade, antitrust, and much, much more.
Wicked, grubby old King Coal, they said, was on his last legs.
Weeks before the signing of the Paris Climate Accord at the end of 2015, Carbon Tracker (“aligning capital market actions with climate reality”) estimated that if the world was to meet the climate target set out in the agreement, then, according to the International Energy Agency’s “450” scenario, “the production from … existing coal mines is sufficient to meet the volume of coal required … It is the end of the road for expansion of the coal sector.”
Previewing the ESG mania to come, Carbon Tracker advised institutional investors to “derisk [their] portfolio by identifying companies which are aligned with a 2℃ demand scenario or engage with those that are in the danger zone.”
But if anyone was in a danger zone, it was people who had retained investment managers who took such obviously unrealistic thinking seriously.
In 2017, Felipe Calderón, a former President of Mexico and Honorary Chair of the Global Commission on the Economy and Climate, wrote in the Financial Times that China’s coal consumption “likely peaked in 2014” and that India had announced it wouldn’t build new capacity beyond what’s currently under construction until at least 2027.
Let’s just say that that hasn’t quite worked out as he predicted.
Bloomberg (December 17, 2021):
The world likely will generate more electricity from the dirtiest source this year than ever before, indicating just how far the energy transition still needs to run in the fight against climate change.
Coal-fueled generation is set to jump 9% from last year, according to an International Energy Agency report released Friday. That U-turn from the declines of the previous two years threatens the world’s trajectory to reach net-zero emissions by 2050, the organization said.
The Financial Times (December 28, 2022):
The world’s largest coal mining companies tripled their profits in 2022 to reach a total of more than $97bn, defying expectations for an industry that was thought to be in terminal decline. As global demand for the fuel rose to record levels, total earnings from coal operations at the world’s 20 largest coal miners reached $97.7bn during the most recent 12-month period for which financial information is available, compared with $28.2bn during the same period a year earlier, according to Financial Times research and data from S&P Capital IQ.
Many countries that once pledged to quit coal have turned back to it as a reliable source of heat and power as energy security concerns became a top priority following Russia’s invasion of Ukraine.
A month before, another report in the Financial Times had indicated that large investors had a far greater exposure to coal than they were “meant” to. This upset a researcher at University College, Dublin:
“These managers are making actively dirty bets across their entire portfolios and putting more money in coal than the benchmark [Vanguard]…They are financing the wrong thing, in very large proportions.”
Or maybe they were just trying to make their clients money, which is, after all, what they are paid to do.
And a report in the Financial Times from February 14, 2023 indicated that various hedge funds were doing just that, much to the irritation of Greenpeace UK’s climate finance adviser:
“Coal’s day has long passed…These dinosaur financiers need to invest in 21st century tech, not bet on prolonging the coal age.”
That’s not the way that the investment business works. Investment managers are paid to generate a good return. Whether it’s based on 19th or 21st century technology is neither here nor there. They are not paid to “prolong the coal age,” nor are they paid to end it. Such issues are, quite literally, none of their business. Their sole task (indeed, their obligation, unless specified otherwise) is to make money for their clients. Their investment horizon can be five minutes, or it can be ten years. Contrary to what the preachers of long-term, “sustainable” (to use that junk adjective) investment like to claim, there’s no intrinsic merit in long-term investment — or demerit either. All that should matter, except in funds with specific mandates to the contrary, is return.
So how did one of those “dinosaurs,” a hedge fund called Makuria do?
Buoyed by bets on coal stocks, Makuria gained 43.5 per cent last year while the S&P 500 fell 19 per cent. The fund owns positions in Glencore, Whitehaven Coal and Teck Resources, a producer of copper, zinc and metallurgical coal.
Oh.
Speaking of 21st century technology, here’s a Bloomberg headline from January 25, 2024: “AI Needs So Much Power That Old Coal Plants Are Sticking Around.”
Oh.
Environmentalism is too often a playground for purists, fundamentalists in wealthier countries who insist that the threat posed by the climate rules out any trade-offs, a luxury apocalypticism not shared elsewhere.
China approved more than 50 gigawatts of new coal power in the first half of 2023…with the world’s top carbon polluter focused on energy security rather than cutting fossil fuel consumption.
But nine years before, the Honorary Chair of the Global Commission on the Economy and Climate had claimed that China’s coal consumption had “likely peaked in 2014.” Either he was remarkably naive or he was telling a form of “noble lie” to reinforce the West’s will to decarbonize, a deception that would become par from the course from the likes of “honorary chairs” of climate commissions, committees or “alliances.”
China has good scientists. If Beijing thought that climate change represented an existential threat, it would not be making the trade-offs it does. Its enormous investments in green technology primarily reflect two objectives. The first is to boost self-sufficiency, a long-term preoccupation of the ruling regime. The second is to use its domestic market as a proving ground for the development of green industries, manufacturing products — from solar panels to wind turbines — that will yield healthy export revenues and geopolitical clout.
China never had a strong hand to play in the global energy market, but now, with its position in renewables reinforced by a mercantilist pricing model that has destroyed much of the West’s capacity in this area, it has. Better still for Beijing, the West’s reckless “race” to net zero is trashing its own energy advantage, and looks likely to damage its economic growth, acts of self-harm facilitated by enticingly cheap Chinese renewable technology. To repeat an observation I made in an earlier post, Lenin (reportedly) said that “the Capitalists will sell us the rope with which we will hang them.” The Chinese regime is subtler and more cost-conscious. It is selling the West the rope with which it will hang itself. Many in the West regard climate change as an existential threat. To Beijing it is a business and strategic opportunity.
As mentioned above, the IEA had a base scenario in 2015 in which meeting the Paris climate targets meant no new coal capacity. Nevertheless, capacity continued to be added. Undeterred, the agency is now arguing that most coal consumption should be phased out by 2040. That’s highly unlikely. DNV, a quality assurance and risk management company, has forecast that China’s coal consumption will only have fallen by a third by that year. That’s only one estimate, but it seems more realistic than expectations of hitting zero, or close to it, by 2040. In 2023 global coal capacity increased by 2 percent. Two-thirds of that increase came from China, which started construction, Bloomberg reported, on twenty times more new coal capacity than the rest of the world combined.
China is not the only major Asian country that will still be sticking with coal in 2040. As a poorer country, India prioritizes economic growth and development over climate concerns, a rational choice made more so by one indisputable equation. The richer a country becomes, the better it will be able to cope with whatever the climate may send its way. Indian electricity consumption has grown rapidly as its economy has expanded, but production has not kept pace. India went through energy crises in 2021 and 2023. Bloomberg’s Rajesh Kumar Singh wrote earlier this year that this “raised expectations that the country would accelerate the shift to green energy.” Bien pensant expectations maybe, but India, focused on affordability and reliability, went in the opposite direction:
Officials pushed for more mining, abandoned plans to retire old power plants, raised targets to add coal-fired electricity and successfully lobbied international forums to adopt resolutions that wouldn’t hinder fossil fuel use.
India was going to play to its strength, coal.
Indonesia, another large Asian country eyeing a more prosperous future, has also put growth before greenery. A good portion of that will rest on Indonesia’s nickel reserves, the world’s largest, Nickel is a key element in the most effective — wait for it — electric vehicle (EV) batteries. Wanting to move up the value chain, Jakarta banned the export of raw nickel, which now must be processed domestically. New smelters are busily smelting away. And the source of the electricity used to smelt the nickel for the batteries for “clean” cars? You can surely guess by now: Around 62 percent of the electricity generated in Indonesia comes from coal-fired power stations. Coal demand in Indonesia has reportedly doubled in the last five years.
So this (via CNBC in January) should be no surprise:
Global coal usage in 2023 hit a record high…on the back of strong demand in emerging and developing countries such as India and China, IEA said in a recent report.
There are no signs of a slowdown, with the IEA saying coal consumption in India and Southeast Asia is projected to “grow significantly.”
Bloomberg’s Javier Blas, writing in 2024:
[D]espite all the solar panels, all the windmills, the electric vehicles and the government incentives to go green, the world has never used as much coal as it’s burning this year…
Under current trends, appetite for anthracite, lignite and all the other flavors will be higher in 2050 than it was in 2000. Read that again and let it sink in: Since the world started to get serious about global warming, coal demand has done nothing but increase, up 75% since 1997 (Kyoto Protocol), and by nearly 15% since 2015 (Paris Agreement).
Blas notes that the days when rising demand in Asia was offset by declining demand in Europe and the U.S. are over. Much of the switch away from coal in the latter markets has now taken place. To be sure, some coal is used in parts of the West (in the U.S. it still accounts for 16 percent of power generation, more, Blas relates, than wind and solar combined). But Asia now accounts for 82 percent of global coal usage. China, often portrayed as some kind of jolly green giant, cleaning up its own act and selling much of the equipment with which other countries can clean up theirs, accounts for 56 percent.
Oh yes:
Ironically, coal is now getting a boost from the energy transition itself. As the world moves to electrify everything — for example, putting more electric vehicles on the roads — demand for power is rising briskly. Renewable sources are meeting the bulk of that increase, but coal is still required mostly because it’s dependable: It doesn’t rely on weather conditions like hydropower, wind and solar do. There are alternatives to provide a baseload flow of power, but these are typically also disliked by green activists: gas-fired power stations and nuclear reactors.
To repeat my earlier point, fundamentalists don’t do trade-offs, and to underline it, check out this storyby Tim McDonnell in Semafor. In it, he explains how Western concerns about funding coal-powered energy are, incredibly (but not), holding back much-needed repairs to Ukrainian energy infrastructure:
Russia’s attacks on energy infrastructure are forcing Ukraine to run its energy transition in reverse, dumping cash into the rebuilding of massive coal projects that would never fly in Europe or the US…[E]ven as Western capitals send weapons and aircraft to Kyiv in order to defeat an invading army, they could be hampering its efforts to rebuild critical infrastructure battered by those same forces.
In some respects, Europe’s energy transition has proved a boon to Ukraine; the decommissioning of coal plants in Germany, Poland, and elsewhere has created a stockpile of parts that Ukrainian energy officials are now scouring. But that stockpile covers only about 20% of DTEK’s repair needs, Executive Director Dmytro Sakharuk told me. As a result, cash is needed, and even though experts agree that repairing existing coal plants is the simplest and cheapest way to restore Ukraine’s energy security before this coming winter, funds are constrained by the climate policies of Western donors and financial institutions that don’t want to underwrite increased use of coal, Viktoriya Gryb, a Ukrainian lawmaker, said….
Ukraine is facing an extreme version of a dilemma familiar to many developing countries, who find that their donors’ climate concerns sometimes take precedence over the near-term requirements of energy access.
As an example of the myopia, recklessness, and sheer destructiveness of the race to net zero, this takes some beating.
Blas criticizes the green activists, enraptured by a vision of China as the poster child of green innovation, who overlook the fact that so many of the factories that produce those solar panels, EVs, and all the rest, are using coal-fired power to do it.
To Blas this is shameful. Indeed, the explanations, I suspect, are not pretty. It’s easier for activists to throw their weight about in Western democracies than in authoritarian states. What’s more, a good number of those activists see Western capitalism and the Western lifestyle as the motors that create much of the demand being met by Asia’s greenhouse gas belching factories. By attacking capitalism and consumerism they are thus taking aim at the real cause of the climate menace. And there’s often something else. Out of a mix of ideological and quasi-religious motives, many are repelled by our economies and lifestyles. We, the sinners, must do penance if a coming climate apocalypse is to be averted.
Blas argues that so long as coal consumption keeps rising, it is better to talk of an energy addition than an energy transition. Renewable energy is merely topping up the power generated from fossil fuels. He is unimpressed by earlier exaggerated expectations of the shift away from coal. At the COP 26 climate jamboree hosted in 2021 by the absurd Boris Johnson (my description not Blas’s), policymakers boasted of “consigning coal to history.” This was, Blas writes, “utter nonsense,” and maintains that the talk of “imaginary progress” was counterproductive, because (I think) it helps China get that free pass.
Maybe. But was there really anything that would have persuaded China, India, and Indonesia to do any differently? On the other hand, acceptance that coal production would remain stronger for longer might have led to a more sensible allocation of capital than that driven by the reckless race for net zero, not least by forcing a more realistic assessment of whether the 2050 emissions target was ever achievable (spoiler: absent a new wonder technology or economic collapse, it wasn’t, and isn’t). That might have led, for example, to more money being spent more quickly on nuclear power, and on adaptation, rather than on installing or mandating technologies such as EVs and wind turbines that were not yet ready for primetime.
There is something else to consider. The notion that coal was entering its final act fit neatly with the investment approach called for by ESG hustlers, advocates, and devotees at the beginning of this decade. If coal was finished, then exiting (or severely underweighting) this environmentally unfriendly industry was easy to justify on pecuniary grounds. The investor who did so would, in the marketing spiel popular at that time, be doing well by doing good. There would be no conflict between investment managers’ fiduciary obligation to deliver return to their clients and doing their bit to save the planet as well, the latter something that had nothing to do with the job they were meant to be doing.
Equally, company managements who were good “stewards” — a word that, like “stakeholder,” should warn shareholders or investment clients that (supposedly) high-minded robbery is on the way — of their enterprise, could get out of their coal business with a clean conscience or, at least, a good argument. They were working to defend their shareholders’ net worth while dumping what risked becoming — to use scare words popular at the time — a “stranded asset,” a mine, say, into which a firm had put a lot of capital, but which risked becoming unsellable and could already be hitting the company’s market valuation.
To be charitable, we should assume those investment managers and corporate executives believed what they were being told about the death of coal. For if they did not, but still cut their exposure to the sector, there is every chance that they were using their clients’ or their shareholders’ money as an instrument of climate policy, something that would have been a clear breach of their fiduciary obligations. And that would never do.
Another narrative running through the ESG push of a few years ago was that it was something that investors wanted. There were always good reasons to doubt that then and they have been growing since. In a post from early 2022, I cited polling showing that institutional investors did not pay much attention to ESG when deciding which shares to buy, sell, or hold. That was the year in which, as discussed above, various investors were found to have greater exposure to coal than climateworld deemed appropriate. In 2021, disaffected investors forced Emmanuel Faber, one of the more irritating — tough field — advocates of stakeholder capitalism (ESG’s equally repellent symbiont) out of his job as CEO of the food group Danone. Even the Financial Times, ESG’s Pravda, had to admit, that “it turns out that investors, like CEOs, care about environmental, social and governance issues, but not when it affects their bottom line.”
“It turns out.”
Apart perhaps from a brief bubbly moment of enthusiasm in 2020 or so, most of them never felt otherwise, with the exception of institutional investors (investors, remember, who manage other people’s money) who had a vested economic (higher fees) or ideological (many public pension funds) interest in promoting ESG.
A recent decision by Glencore, a prominent commodity trading and mining company, concerning, yes, coal, has shown how far the willingness to push back publicly against ESG has gone. The company abandoned previously announced plans to divest its highly profitable — yet another narrative fail — coal unit following a change of mind by its shareholders (previously they had backed a spin-off).
The investor-led U-turn highlights the conundrum facing fossil fuel companies and the shareholders that own them. From coal to oil, producers have come under pressure to cut their emissions — but that would mean missing out on the bumper profits they’re still pumping out.
For many investors, Glencore offers a unique proposition: a miner that produces metals like copper that are needed to decarbonize the global economy, while also generating huge coal profits. The company has spent the last month consulting shareholders, and the majority of those that expressed a clear opinion were in favor of keeping the coal unit to help fund growth in metals and support shareholder returns.
Somehow I doubt there was much of a “conundrum,” but Bloomberg, a media business too often in thrall (with some exceptions) to the climate fundamentalism of both its founder and the parent company’s chairman, Mark Carney) is going to Bloomberg.
Spinning off the coal business would have meant that Glencore would have continued its mining operations in minerals such as copper, nickel, and cobalt, all of which, incidentally, have important roles to play in the creation of a decarbonized economy, but (in the words of the Bloomberg report) “without the financial cushion provided by coal.”
The reaction of the CEO to the shareholders’ decision was telling. He commented that the ESG pendulum had swung back in the last nine to twelve months but didn’t leave it at that. “Common sense,” he said, “had prevailed.”
ESG, common sense: Choose one.
ESG, fiduciary duty: Choose one.
Stakeholder capitalism, common sense: Choose one
Stakeholder capitalism, fiduciary duty: Choose one
The Forgotten Book
Capital Matters has a (more or less) fortnightly feature, The Forgotten Book, which is written by National Review Institute fellow, the writer and historian, Amity Shlaes. We live in an age of short attention spans, and one of Amity’s objectives is to introduce readers to books or other primary sources that warrant a second look.
In her Capital Matters column, Amity dedicates herself to sharing with Capital Matters readers older, forgotten books, along with new books that aren’t getting the attention they perhaps warrant.
Her latest column can be found here. In it she discusses Richard F. Hirsh’s Powering America’s Farms: The Overlooked Origins of Rural Electrification, a book which tells appropriately enough for this series of columns, a piece of forgotten history with some (overlooked) implications for today’s America.
An extract:
[E]ven if Hoffman secures his objective — prevailing over Senator Bernie Sanders and labor unions, who promptly sought to block his drive for a Khan ouster — his new industry won’t win the right to grow, or fail, as it sees fit. No matter what price the industry pays for comity. Companies like Hoffman’s are just good enough that the government can’t resist attempting to break them, over and over.
That at least is the evidence from a recent book on the industry that once boasted more potential than LinkedIn, Microsoft, or even AI today: utilities…
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, makes use of another medium to deliver Capital Matters’ defense of free markets. Financier and National Review Institute trustee, David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 182nd episode, David is joined by Dr. Paul Mueller of AIER, fresh off the publication of his insightful and comprehensive unpacking of the ESG phenomena. Join them for a deep discussion of the E, the S, and the G, which is more than most ESG proponents have ever done.
The Capital Matters week that was . . .
Ukraine
Russia’s invasion of Ukraine puts at risk trillions of dollars’ worth of its natural resources, including fossil fuels, minerals, crops, infrastructure, and human capital. If successful, this blatant resource grab would rank as the largest heist in human history…
Antitrust
The court has not yet announced any remedies and is unlikely to until Google has exhausted its appeals. The court will be unable to take the EU remedy of requiring a “choice screen” on devices, as the makers of the devices are not a party to the lawsuit in question. It may be that the court bans Google from bidding for the position of default search engine, which would surely benefit Microsoft the most while hurting the device manufacturers, which would receive less revenue from the process and might therefore have to increase prices. It is hard to see consumer welfare benefiting.
However, the whole question could be moot…
Supply Chains
At its most basic, the supply-chain crisis of 2020–2021 isn’t difficult to understand. Factories and their suppliers ran short of workers due to illness and pandemic-related lockdowns while consumers, leery of venturing outside and flush with stimulus dollars, shifted their purchases toward buying stuff instead of services. Trips to the gym and Disneyworld were out while binging Disney+ (and other streaming services) on the new TV — perhaps while working out on new home-exercise equipment — was in…
ESG
One of the reasons that ESG will prove so difficult to relegate to its proper position as an investment niche for those investors who have specifically requested that their money (not other people’s) be invested that way is the amount of money ESG makes for the rent-seekers who graze in its ecosystem…
(“Brutal”) Capitalism
The New York Times seems to have a problem when it comes to covering leftist regimes. In the 1930s, the New York Times’ Moscow reporter Walter Duranty wrote glowing stories about Stalin’s regime while it inflicted terror and famine on the Soviet Union. Last month, in reporting on the situation in Venezuela, the paper placed the blame for the nation’s woes not on the government’s collectivist policies but rather on “brutal capitalism.”
Trade
A new poll from the Cato Institute asks Americans about their views on globalization and trade. As one might expect given Cato’s libertarian views, the think tank is highlighting that the survey finds that about two-thirds of Americans think international trade is good for the U.S. economy and want more of it…
If you listen to the “New Right” (or the progressive Left), you’d think that trade is one of the most important issues facing the nation. Those of us who still believe that voluntary transactions typically make both parties better off — whether between individuals and businesses in the same nation, or in different nations — are scolded for our stubborn refusal to “learn the lessons of the Trump era.”
Well.
States that have embraced tax cuts, worker freedom, and free trade have gained manufacturing jobs, foreign direct investment, and highly skilled workers from around the world. Negotiating trade deals at the federal level complements those efforts by opening markets and creating certainty…
Net Zero
Britain’s new Labour government is turning out to be oriented far further to the left than some wishful thinkers once believed. A key part of its agenda will be picking up the pace even faster than their feckless Tory predecessors in the “race” to net zero, a lunatic exercise in central planning (but I repeat myself) incompatible with the maintenance of much of a modern free-market economy…
California
Chevron, one of the largest U.S. energy companies, announced on August 2 that it would be moving its headquarters from California to Texas. For a company that was once named Standard Oil of California, the move is significant, and emblematic of California’s hostility to the energy industry…
Crime and Data
There are two measures of crime. The FBI’s NIBRS counts the number of crimes reported to police each year, but the Bureau of Justice Statistics uses its National Crime Victimization Survey (NCVS) to ask about 240,000 people each year whether they have been victims of crime. Since 2020, these two measures have been highly negatively correlated. The FBI has been finding fewer instances of crime, but people are simultaneously answering in greater numbers that they have been victims.
To sign up for The Capital Letter, please follow this link.