End of oil II

After penning the End of Oil, I was bothered by my switch of camp. In some sense I had become a new kind of neo-Malthus but yet I resist the analogy. I think the struggle we have today with carbon emissions is different from the issue of resource conservation like in the case of land or other commodities. And the reason has to do with the market system and price signals.

In the past when we are thinking about resource constraints such as agricultural land, we know there is a price on the resource. With subsidies they get over-utilised but overall, because the market system rewards greater productivity of those resources, all the micro-decisions in the economy will encourage discovery of more of the resources or greater efficiencies in utilisation. The economics is working against Malthusian ideas.

Nevertheless, with the carbon emission challenge of today, most emissions still remain unpriced. They rightfully require a negative price but tax systems and enforcement aside, governments around the world are reluctant to even design regulations to create proper carbon pricing. Without this pricing, economics will keep working against the climate change problem, and we can only rely on goodwill or sustainability marketing as motivation which will never be enough.

End of oil

Many years ago when I first thought about the study of Economics, there was the prevailing concern about oil reserves running out and the world running out of fuel. It was 2005 and the economist even had an issue where the cover page was showing the reflective colorful swirls of oil. The economists would argue that the world will never run out of oil because towards the last drop of oil left, the price of oil would be so high no one would want it. And perhaps many other alternative technologies which were not commercially viable would have become so before oil runs out.

Those were days when we technically already know about greenhouse effect and the global warming potential of carbon dioxide. And I was particularly fascinated with the recurring debates between the Malthusians (and neo-Malthusians) and the others weigh on the hope of technology (and possibly economics).

It is funny how more than 17 years later, I’m in a career to try and reduce (and eventually end) the dominance of oil. Not to promote an alternative technology, not to rail against the political power of oil but to create a future that we all want to step into. Because climate change is an existential danger for us all and the planet as we know it. And because I believe our current economic system can be superceded by one that works for the future and not the tradition notions of wealth and fortune.

Dig and ship

Australia is extremely resource rich and has low population density. The demand for its resources will come from elsewhere. And the reason is probably that those are industries already established elsewhere and needs those raw materials from Australia because they already squandered those they have nearer to them.

So for decades, minerals, and other resources have been dug up and then shipped to those other production locations. Global supply chains are formed this way. There is a mix of proximity to key resources or demand, as well as some path dependency and government competition to promote and attract investments inward. It is not formed by mere economic calculations at every moment.

That is to say that in the energy transition, Australia has the chance to attract actual industries needing their raw materials to situate in Australia. This will also mean pushing up the population of the country and potentially straining what is conceived as the carrying limits of the land. So it is a trade off to consider. But either way, the world could be better from this logistics chain optimisation at regional level.

Subsidies and fundamentals

Huge amounts of subsidies goes into fuel and energy. The companies are not necessarily being the ones subsidised to produce the fuel but rather, domestic markets of net exporters tend to be protected somewhat from international energy prices through subsidies. The notion is to help maintain internal price stability and hence cope with cost of living.

Australia is one of the few markets who are net exporters of natural gas for example and yet do not really “shield” its domestic market from international price impacts. The result is that the recent price spike in natural gas had Australians screaming in pain and for perhaps the first times in decades, businesses and households are seriously considering disconnecting from the grid and electrifying.

But there can be a middle ground. Subsidies can exist for these energy exporters to protect their domestic users given that these exporters stand to gain when the energy price increase. How can they share these windfall with their own economy and the users in local market? The government can subsidise users but make the subsidy transparent. This way, households are not paying the full prices and they are also given information about how much the government is helping to make them affordable. At the same time, it becomes more politically acceptable to pull back on such subsidies for those heavy users who are higher on income brackets and can afford it.

For far too long, we shield the markets from the proper price signals and artificially create false sense of affordability by subsidies, we reduce the resilience of our economies and contribute further to wastage and carbon emissions. Making subsidies transparent is a great first step, towards removing this political gridlock around domestic energy tariffs.

Resource-rich

There is always this age-old question of what you’d do if you’re rich. And then you might give an answer of an outcome that is already within your reach so then wanting to be rich is more about the identity that one would like to associate with.

What if you were resource rich? Like having lots of friends, or lots of land, or lots of cars, or collectible figurines? Do you think of those resource or things in terms of money? What if they don’t easily convert to money like friends or time? Does it matter?

How do you steward the resource that you are rich in? Does it matter if you can monetise it? Or whether its benefit is depleted by some actions you undertake? How do you think about it? What does it mean to “cash out” on your resources?

We all have a common resource and that is our atmosphere’s carrying capacity for carbon dioxide before climate goes completely amok and make our planet inhabitable. Sacrificing it could give us some money and maybe some comfort to certain extent. How would we steward it?

Cost reflective

Are our energy prices cost-reflective? In many countries where low energy tariffs are results of subsidy, there is not cost reflection. Government continues to mask the subsidy by controlling prices. It is not clear if this is good but besides the fact that market signal is not properly expressed, it is also not a very equitable way of spending taxpayers money.

Subsidies on goods and services like energy and water often are regressive because the rich tend to use more of these resources. By keeping prices low, those who can afford to consume more takes a lion share of the subsidy. When fuel is subsidised, those who have more cars and can drive more miles will receive more “funding” than those who do not even drive. The ones who have large houses with lots of appliances consuming lots of electricity and water will get more of that subsidy through low prices than poorer households.

Making sure even the strategic and essential goods are cost reflective helps to ensure transparency of subsidies and also allocate subsidies to the right group of people, those who needs them.

Chicken and egg

There is the chicken that laid the egg, and the egg hatches into a chicken. Which one comes first? Which one do you need first to start a cycle? That’s the challenge for so many different areas of life, and the energy transition.

We need to find the loose bricks that allows us to tear down the existing systems which perpetuates carbon intensive systems.

We need to identify the first part of a value chain to support and push through to get the rest of the activities through. For example, what should the government subsidise to get the hydrogen industry going? Would it be to subsidise the production, or the use of hydrogen? We need to figure out where is the bottleneck to deal with in order to break the cycle.

That’s one of the areas we are hoping to target and deal with. And that’s why blunomy was created.

Feeling helpless

Things are happening to me. When we experience that, we lose sight of our agency. We were not consulted, we’re not in control, not any semblance of control. We don’t seem to have a choice. We feel helpless.

Recently, I was attending an investor conference that was focused on the topics around impact, sustainability and ESG (environmental, social, governance). There was a broad spectrum of attendees; some were well-versed in the topic tossing out various acronyms while others were confused, lost, frankly a little unhappy about how the investing industry is taken over by metrics beyond the financial ‘fundamentals’. Personally I think that capital can act differently from a while back and that we have the responsibility to ensure that it is no longer perpetuating the system as it is.

Of course, there would be naysayers who dismiss impact, sustainability and ESG as fluffy, intangibles which are running counter to the money-making that investing is all about. But even the naysayers, confronted with climate science would acknowledge there is a problem we are facing with climate change and all. Naysaying helps them soothe themselves because at least if there’s nothing much they can do, the eventually downfall of the earth is not on them. We choose to be helpless that way; even when we do have a choice.

The better road is towards action. When it comes to the climate challenge, a strong and useful key message is that it is not too late to make that impact and make the change.

Changing the story

Insurance seemed like betting against your death or misfortune and some people don’t want to bet on your personal downfall so they don’t want to buy insurance. For years, the industry have been trying to change the story and they settled on the idea of protection, financial protection against those misfortune.

In principle, that works theoretically but the issue is that a lot of what you pay for is sales and distribution. The structure of the industry is such because insurance works well only when the risks are being pooled. That means having lots of people paying the premiums in order to support payouts during adverse events. As a business though, it means that the firm is ultimately a sales and marketing organisation. Costs will have to weigh disproportionately on the distribution side of the business.

This is a shame because the society needs insurance. Yet it is a market failure; the market system allocates resources poorly in this market. It can be better designed through a mix of regulation and making it mandatory to have certain amount of cover. The government should not think the market will help reduce cost of insurance through competition because the basis of competition in this market isn’t so much pricing. It is more sales, marketing and tactics.

But isn’t it just like many other products? For luxury products, yes. Basically for things people don’t actually need, you can allow the whims and fancies to be shaped by the market. But when it comes to insurance, you want the market to deliver an outcome so you need to design the boundaries and structure to make it work.

The story of insurance should be that of mandates, regulation, and basic necessity and right of people. We come together to live in highly urbanised environment and it should be a no brainer for us to risk-pool and mutually insure. There’s no excuse for this market to be hijacked to support high-flying salespeople.

Externalities isn’t external

An externality is deemed as a cost or benefit caused by a producer that is not incurred (financially) by the producer. The view is that because the producer is not paying for the portion of costs, or receiving the portion of gains from that economic activity, it is under or over-produced.

Of course, there are further variations of consumption externalities where it is happening on the consumer side of things.

The manner economists perceive these effects are based on analysis in a single snapshot of time, considering only a very narrow dimension of financially accountable cost and benefits. The typical solution prescribed on paper is to provide a tax or subsidy to close the gap: or to internalise the externality.

What if an externality actually isn’t external to begin with? That through time and the interconnectedness of people, organisations, nature and environment, would bring the costs or benefits back to the producer? After all, won’t reputation or enployer branding matter? Would it matter if an all-knowing government discloses the truth about how much pollution a company is causing? If the government in the economic analysis can close the gap, then there isn’t actually a genuine externality because somehow, within the system, the level and details of the externality is known.

And how are compensatory funds to be used by the government? For example, should carbon tax revenues be used to innovate in further development of low-carbon technologies to make it easier for companies to emit less carbon? Or should they be directed towards mitigating the impact of climate change? Eg. Building levees to buffer sea level rises? Should the role and impact of the externality have any say in that?