Europe’s net zero carbon cracking starts sooner than expected
Late last year, I predicted that 2022 would be the year politicians step off the climate policy cliff. I gave too much time. It happened in January.
Or rather, January was the month when the political class decided to pull away from the cliff. Now we are waiting to see if they can.
The European Commission, the bureaucratic wing of the European Union in Brussels, decided on New Year’s Eve to classify natural gas and nuclear as potential sources of green energy in a “taxonomy” designed to guide public spending and private investments. He stuck to the decision despite loud protests from environmentalists. It is an acknowledgment that stalling investment in proven and reliable technologies in the midst of a unique energy price crisis is creating a political nightmare.
Meanwhile, Britain’s Prime Minister Boris Johnson’s net zero fixation has become the biggest threat to his political future, a far graver danger than any lockdown-defying birthday party. Last week, UK households found their electricity and natural gas bills could rise by 54% in April as a regulatory price cap adjusts to market realities. Commercial space energy costs are a separate crisis, as rapidly escalating electricity and natural gas prices squeeze small businesses and large manufacturers alike.
Real politics finally erupts in response. A group of lawmakers from Mr Johnson’s Conservative Party have formed a caucus to voice skepticism over Mr Johnson’s net-zero ambitions, while Chancellor of the Exchequer Rishi Sunak professes enthusiasm for more offshore drilling from the North. The left-leaning newspaper The Guardian quoted climate change alarmist Michael Mann for call this effort a “culture war”. This is how we now describe any effort to repoliticize the questions of economic and social arbitration that an axis of technocrats, activists and the media had tried to assume.
The political world is belatedly waking up to a statement by the eminent French economist Jean Pisani-Ferry
offered last year. To paraphrase: because carbon-based energy is cheap and reliable and carbon-free alternatives remain elusive, current consumption will need to be phased out to fund aggressive investments in the development of carbon-free technologies.
This now takes two forms. Skyrocketing energy prices are the mechanism by which carbon-based consumption (whether of energy or of any product that requires carbon to be manufactured or distributed – which is most products) can be removed while diverting resources to research and development in green technologies. Second, someone needs to incentivize financial investment to shift toward green goals, even if investors would otherwise have concluded that the strategy does not maximize returns. Retirees or anyone else whose consumption is based on investment income may need to receive less income and therefore consume less in order to subsidize the allocation of capital for green purposes.
No wonder politicians run away. Watch a kerfuffle, still in the UK, over the taxation of ‘windfall profits’ of oil and gas majors such as BP and Shell,
which recently announced windfall earnings. The companies are accused of ripping off consumers, but the real plan, as announced to their shareholders, is to invest carbon profits in an expanding portfolio of green projects.
This is only possible by diverting resources from consumers via higher prices. Whoops. Any form of consumption tax, whether a levy or regulation of price increases, is highly regressive. The UK Labor Party’s calls for a windfall tax to redistribute those reinvested profits to consumers, in violation of the interest of net-zero policies, mark an admission that climate mitigation is an impending political shipwreck. Maybe one day the left will understand what it is saying here.
Can the train be stopped? Politicians will try and should be reminded of the importance of long-term thinking. Boosting energy supply requires persuading investors that politicians support long-term investment. Net zero comes with a 2050 deadline, but that needs to be dropped now so investors are ready to fund capital-intensive projects with a lifespan long enough to be useful.
The danger is that investors will be unwilling to do so when politicians come belatedly to beg. Recent years have seen a concerted effort by climate activists and various enthusiastic enablers in the financial world to co-opt private capital in pursuit of green goals. Hence the rise of so-called ESG investing – the E stands for “environmental”. Politicians, in their dumbest moments, have been happy to help, such as in efforts to embed these principles into financial regulation.
The political class will be sorry because this change makes it harder for politicians to appease angry voters. The EU taxonomy is meant to reverse the ESG push by encouraging investors to treat natural gas and nuclear as green. Investors intoxicated by their own signals of virtue might not be encouraging. “Investors may now need to consider going further than the taxonomy requires in order to align with net zero,” said Stephanie Pfeifer of the Institutional Investors Group for Climate Change, a group of investors. coordination for pension funds and other asset managers, said recently.
The politicians’ challenge is to wrest well-functioning energy and financial markets from a financial, activist and media class that seems unwavering in the face of the anti-consumerism and income redistribution miseries their agenda inflicts. Culture war, indeed.
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