The Capital Letter

Climate and Central Banks: Regulators Doing What They Shouldn’t

European Central Bank President Christine Lagarde addresses an event to launch the private finance agenda of the 2020 United Nations Climate Change Conference in London, England, February 27, 2020. (Tolga Akmen/Pool via Reuters)

I felt spoiled for choice when it came to a topic with which to preface this week’s Capital Letter. Dogecoin went quite a long way toward the moon, the U.N.’s secretary-general has pushed for a “solidarity” or wealth tax, and digging further into the details of the administration’s planned new corporate-tax regime produced yet more nasty surprises.

That said, I think that it’s worth continuing to watch how the regulatory state continues to push ahead with its climate agenda in a way that bypasses the normal democratic process — and is still not subject to enough scrutiny.

The Financial Times:

Over the past decade, financial regulators have used stress tests to measure banks’ exposure to anything from losses on derivatives to fat-finger trades and cyber crime. Now, they have a more complex target in sight: assessing banks’ vulnerability to the effects of climate change.

This year, the Bank of England and the European Central Bank are running first-of-a-kind thematic stress tests of their banks’ exposure to everything from freak weather events to the decline of industries such as heavy manufacturing and traditional energy. In the US, the Fed has said it is in the very early stages of considering climate scenarios to assess the longer-term risk of climate change to the broader financial system.

It is worth noting how these stress tests are not only concerned with the effect that climate change may or may not be generating (such as those “freak weather events”) but also with the harm to certain industries caused by policies designed to slow climate change, harm that central banks may make worse with their own contribution to a concerted effort (supported by activists, “socially responsible” investors and all the rest) to increase the cost of capital for climate sinners.

The Financial Times (my emphasis added):

In late 2019, the BoE said the goal of this year’s climate exercise would be to achieve a better understanding of the financial risks that banks face from climate change, how their business models could be affected and what they are doing to mitigate those risks. “The BES [biennial exploratory scenario test] will focus on sizing risks rather than testing firms’ capital adequacy or setting capital requirements,” the BoE said.

According to Patrick Amis, director-general at the ECB with responsibility for supervising large institutions, the tests are to assess banks’ “resilience in certain scenarios and indeed to make them think about this, and make them start taking measures to adapt”.

Though preliminary results point to a “major source of systemic risk”, the ECB’s final report, due in July, is unlikely to hit institutions as hard as the ECB’s more familiar stress tests. Those can result in banks having to raise billions of euros in extra capital.

“In some cases, I imagine we will end up with qualitative requirements and possibly quantitative requirements if needed, but certainly not across the board,” Amis says.

And what were those preliminary results?

From a Financial Times report in March:

The European Central Bank has identified “a major source of systemic risk” in the preliminary results of its economic stress test to gauge the impact of climate change on 4m companies and 2,000 banks over 30 years.

Luis de Guindos, vice-president of the ECB, summarised the findings in a blog post on Thursday, saying: “In the absence of further climate policies, the costs to companies arising from extreme weather events rise substantially, and greatly increase their probability of default.”

Thirty years! One can only be amazed by the powers of prediction that the ECB, which so miserably failed to anticipate the euro-zone crisis, has now developed.

And (again, emphasis added):

His warning came shortly after another senior executive said the ECB was prepared to raise the amount of capital required at any banks considered to have particularly high levels of climate risks in their balance sheets as early as this year.

Read on and we find that:

The ECB used data provided by Four Twenty Seven, an affiliate of Moody’s, and research house Urgentem, to model three potential scenarios: an orderly transition to a greener economy, a disorderly transition with limited physical risks from climate change and a “hothouse” world with few green policies leading to extreme physical risks.

On its website, Four Twenty Seven explains how it “blends economic modeling with climate science to help you reduce risks, identify new opportunities, and build resilience in the face of climate change.” As for Urgentem (the name is a bit of a giveaway), well:

Our mission is to empower the financial sector to play a leadership role in the transition to a sustainable low carbon economy by providing climate risk data, analytical tools, investment services and products that are science aligned, transparent and collaborative.

Further to this, it is to act as an advocate for responsible investment and to promote a sustainable model for society.

The scientific consensus that we must cut carbon emissions in half by the end of this decade (approximately 7.6% each year) amounts to nothing less than a transformation of the economy, requiring urgent focus and sustained action in every sphere: commerce, politics, and civil society.

If financial markets are to play a leadership role in the transition to a low carbon economy, then data and analytical tools that can be trusted are indispensable.

That’s where we come in.

I have commented before on the flourishing ecosystem that feeds — and feeds off — “socially responsible” investing (SRI) and, by extension, climate campaigning. It is not much of a stretch to think that both Four Twenty Seven and Urgentem are a part of it.

So, what’s going on at the Fed?

Back to the Financial Times:

The Federal Reserve is less developed in its approach than the regulators in Europe or Asia, where climate-related exercises are also being carried out. Despite this, analysts at Fitch, the credit rating agency, say US regulators are “poised to catch up to global peers” now that the Biden administration has identified made climate change a top priority.

In January, the Fed created a supervision climate committee to look at the risks of climate change to individual banks. Last month, governor Lael Brainard said her officials would also create a financial stability climate committee to look at how the financial system as a whole could be affected by climate change.

There is, however, still an institutional reluctance within the Fed to push this too far. As Fed chairman Powell explained in March, “It’s been a long-held policy of the Fed that we don’t tell banks what legal businesses they can lend to or order them to lend to.” But in order to understand how climate policy-making works, it is important to understand the extent to which it is a coordinated effort:

The Financial Times:

“We are still some distance from disincentivising actual financial decisions,” says Fitch analyst Mark Narron about the US efforts . . .

Christopher Wolfe, a colleague of Narron, says “investors increasingly have been pushing banks” for enhanced disclosure around climate risks. Fitch also includes environmental, social and corporate governance (ESG) factors in its ratings metrics.

“Large US banks are already taking this very seriously,” says Wolfe, speaking weeks after Jane Fraser, the new chief executive of Citigroup, added her bank to the list of global lenders that promise that green financing initiatives will fully offset the environmental effect of their lending to companies that add to greenhouse-gas emissions.

And, as always, keep an eye on the part that lawfare will have to play.

This, for instance:

ClientEarth is taking landmark legal action to stop ‘quantitative easing’ from European central banks flowing to fossil fuel companies and polluting firms.

We’ve launched a lawsuit against the Belgian National Bank for failing to fulfil environmental protection and human rights requirements when purchasing corporate assets, many of which are from companies that are fuelling the climate crisis.

These purchases are made through the Corporate Sector Purchase Programme – a programme developed by the European Central Bank that directs capital to some of Europe’s most polluting sectors.

It was established in 2016 to improve financing conditions for Eurozone businesses, and is implemented by the central banks of Belgium, Germany, France, Spain, Italy and Finland.

But fossil fuel companies are in fact among the biggest benefactors, with more than half of the $266 billion of assets held under the programme issued by high emitting firms.

We believe this programme to be invalid due to its environmental and human rights costs . . .

Meanwhile, John Cochrane, who has already taken an, ahem, critical look at the abuse of the notion of “risk” by central banks in this context, returns to the fray with an open letter on his blog, the Grumpy Economist, to Janet Yellen. The context is some recent remarks the treasury secretary made to the Financial Stability Oversight Council, the highest-level body responsible for overseeing financial regulation in the U.S.

Cochrane quotes Yellen as follows:

We must also look ahead, at emerging risks. [To the financial system, the FSOC’s purview.] Climate change is obviously the big one.

It is an existential threat to our environment, and it poses a tremendous risk to our country’s financial stability. We know that storms will hit us with more frequency, and more intensity. We know warming temperatures might disrupt food and water supplies, leading to unrest around the world. Our financial system must be prepared for the market and credit risks of these climate-related events. But it must also be prepared for the best-possible case scenario: that we begin a rapid transition to a net-zero carbon economy, which also creates potential challenges for financial institutions and markets. On all these fronts, the Council has an important role to play, helping to coordinate regulators’ collective efforts to improve the measurement and management of climate-related risks in the financial system.

To Cochrane, who regards climate as an important cause, this is “nonsense” (he is not wrong):

“Climate change is obviously the big one.” The biggest risk? To the financial system? More than sovereign debt crisis, another run, another pandemic, war, revolution, pestilence, crop failure, another Great Depression, civil unrest, cyberattack … I could go on. You have a much better imagination than that. So does your staff.

Climate change “is an existential threat . . . poses a tremendous risk to our country’s financial stability.” You don’t really believe this oft-repeated trope do you?

We do not, in fact “know” that storms will hit more frequently and more intensely. But even if they do, when was the last time a storm had more than a tiny effect on GDP, and threatened financial stability, a contagious run on the nation’s debt-laden financial institutions? Weather has never, in all history, caused a financial panic.

We do not, in fact “know” that slowly warming temperatures will “disrupt” food and water supplies. But even if they do, it is utterly absurd to imagine that you or your bank regulators can measure or control a causal chain from bank regulation to carbon emissions to warming temperature to food and water disruption to unrest around the world to financial stability (whew) which, let us remember, is the FSOC’s only task. Do you really think that the most important way to prevent, say, a war in Syria in 2075 is for California to build a high speed train? This is beyond absurd. And even then, what does “unrest” abroad over food have to do with a coordinated US bank failure? Famines have come and gone, and Goldman Sachs remains unscathed . . .

You did not have to do it. You could have said, “The FSOC should study implementation of the Administration’s executive orders on climate.” You could even have said “The FSOC will continue to research the possibility of climate related risks to the financial system, ” knowing full well what any honest quantitative research will find. You did not have to assert things that are so blatantly preposterous.

Well, we live in preposterous times.

The Capital Record

We recently launched a new series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.

In the 13th episode  David Bahnsen talked to  Senator Pat Toomey, a deficit hawk and free marketeer still fighting the good fight in the U.S. Senate. The senator and David Bahnsen go round and round about the national debt.

And the Capital Matters week that was . . .

We began the week with our latest instalment of Supply & Demand. This time, Casey Mulligan warned that removing the profit motive from health care would be . . . unwise:

Yet the COVID pandemic has confirmed that “innovation” is not just a fancy bourgeois-apology word. President Trump’s economic team was the first to highlight the role of medical innovation in alleviating fatal diseases of the past. Although a global pandemic was merely a hypothetical at the time (2018 and 2019), we specifically analyzed vaccine innovation during pandemics and how the private sector would be essential in delivering relief to the public. President Trump issued a 2019 executive order emphasizing the private sector’s role in vaccine innovation, which would prove to be “the most effective defense.”

Now the United States is exiting a historic pandemic by vaccinating its population with products produced by Pfizer, Moderna, and Johnson & Johnson. Each is a for-profit company. Their cumulative profits from the vaccines, while impressive from a company perspective, may never reach the $34 billion value that the U.S. obtains from reaching the end of the pandemic just one day earlier. While the value of ending a pandemic months earlier reaches into the trillions of dollars, throngs of critics of capitalism will complain that companies are getting a dozen or two billion.

The European Union lags six weeks behind the U.S. and even more behind the U.K. and Israel, who also administer vaccines from for-profit companies. The E.U.’s slow pace is due to several factors, one of which was the time they wasted in maneuvers to try to prevent the vaccine companies from earning too much profit.

Although no European country fully eliminates private organizations from health care and health insurance the way Medicare for All would, many have taken steps in that direction and sparked jealousy among those on the left here at home . . .

Meanwhile, Fred Lucas provided another example of government at work:

A recently released watchdog report underscores how the Environmental Protection Agency may be ignoring core responsibilities, even as it pursues ever-expanding regulatory schemes that go well beyond its ambit.

The inspector-general report determined the EPA has failed to adequately monitor about half of the country’s nonoperational hazardous-waste storage sites, known as Treatment, Storage, and Disposal Facilities (TSDFs). Regular monitoring is still required after these sites are closed, under the Resource Conservation and Recovery Act (RCRA) . . .

Jerry Bowyer reported on polling showing that corporations should keep out of politics:

According to the poll, 59 percent of Americans think companies taking political positions “adds to divisiveness.” Over half of self-identified Democrats agreed. Another related poll released by Mr. Rasmussen a day earlier found that 66 percent of Americans thought corporations should not be taking political positions. Again, that includes over half of Democrats.

In other words, no broad electoral coalition is asking for businesses to be fronts for activism. Not Republicans, not Democrats, not independents. If that conclusion wasn’t obvious enough already, there’s data to support it. Corporations are doing themselves no favors when they take stances on controversial, complicated, political issues.

And yet, woke capital forges on . . .

On that topic, Vivek Ramaswamy:

Democracy is indeed under siege in states such as Georgia and Texas, but these states’ new voting laws aren’t the biggest assailants. Rather, it’s stakeholder capitalism — the new dogma demanding that companies no longer simply make products, but also craft our society’s moral norms.

Stakeholder capitalism is now in full bloom in the Peach State and beyond. Over 100 companies spoke out against Georgia’s new voting rules. This past weekend, dozens of CEOs gathered on Zoom to plot what Big Businesses should do next about voting laws under way in Texas and other states. A formal joint statement is expected soon from companies ranging from PayPal to PepsiCo to T. Rowe Price Group.

“The legislation is unacceptable. It is a step backwards and does not promote the principles we have stood for in Georgia,” declared James Quincey, CEO of Coca-Cola. “Our focus is now on supporting federal legislation that protects voting access and addresses voter suppression across the country.” Delta CEO Ed Bastian added: “The final bill is unacceptable and does not match Delta’s values.” But why should Americans care about whether an election statute matches the values of a private airline company or a soft-drink manufacturer? Mr. Bastian didn’t say. Apparently he holds such truths to be self-evident . . .

And Dan McLaughlin:

As the Washington Post reported:

“More than 100 chief executives and corporate leaders gathered online Saturday to discuss taking new action to combat the controversial state voting bills being considered across the country, including the one recently signed into law in Georgia. Executives from major airlines, retailers and manufacturers — plus at least one NFL owner — talked about potential ways to show they opposed the legislation, including by halting donations to politicians who support the bills and even delaying investments in states that pass the restrictive measures, according to four people who were on the call. . . . Leaders from dozens of companies such as Delta, American, United, Starbucks, Target, LinkedIn, Levi Strauss and Boston Consulting Group, along with Atlanta Falcons owner Arthur Blank, were included on the Zoom call.”

Undoubtedly, to the extent that some of their businesses compete with each other, the corporate executives on Saturday’s call would argue that they are seeking no advantage for their companies, and it is more likely than not — even in the perennially unpredictable forest of antitrust rules — that this argument would successfully immunize them from legal liability under federal antitrust law (state laws can be another story). But they would be doing so by openly admitting that they are wielding the resources of major corporations for no economic benefit to the shareholders, to whom they owe a fiduciary duty as stewards of corporate assets . . .

Infrastructure made its inevitable appearance.

Iain Murray:

Given the bipartisan agreement that genuine infrastructure needs attention (even recognizing that the nation’s infrastructure isn’t in as bad shape as it is painted), the president probably could move a bill with broad cross-party support. The decision to attach sundry unrelated items — such as federal funding of schools, job-training initiatives, and unionization of home health-care and child-care workers — to what most voters consider a must-pass bill suggests that Biden doesn’t think he can get those passed any other way.

Then there’s the cost. President Biden boastfully claimed that the bill would create 19 million jobs “that pay well.” That could possibly represent value for money at $118,000 a job. However, Transportation Secretary Pete Buttigieg had to contradict his boss, recognizing that this figure included over 16 million jobs that would be created anyway. As Reason’s Eric Boehm calculated, that puts the dollar figure per job created at over $800,000. It’s not quite the $2 million per job created by Los Angeles after the Obama stimulus act, but it’s getting there, and on a much bigger scale.

Part of the reason is that the bill doesn’t help make the building of real infrastructure projects quicker or more affordable. In fact, it doubles down on policies such as project labor agreements and “Buy American” requirements, while failing to do anything about the plague of permits. Perhaps the president’s old boss could remind him how those affected his stimulus bill’s supposedly shovel-ready projects . . .

Robert VerBruggen:

Earlier this year, when Democrats wanted to spend yet another $2 trillion on “COVID relief,” much of which wasn’t even COVID relief, some moderate Republicans made a roughly $600 billion counteroffer. I called the proposal “halfway sane”: more than we really needed to spend, but far better than what Biden had proposed. As you may recall, the Democrats went ahead and passed their own plan without Republican help, using the “reconciliation” process to avoid a filibuster.

Well, now the Democrats want to spend about $2 trillion on “infrastructure,” much of which isn’t even infrastructure. And once again moderate Republicans are prepping a smaller counteroffer, likely in the range of $600–800 billion. It’s “more targeted in scope and funded by unspecified user fees,” as Politico puts it.

This too is halfway sane. Our infrastructure is not in as bad of shape as some like to say, and most of our actual problems can be addressed at the local and state rather than federal level. But cutting the size of the package by two-thirds would be a victory, as would funding infrastructure with user fees rather than tax hikes on businesses. The people who actually benefit from these projects should be the ones to pay for them . . .

And another i-word, inflation, made its regular appearance too.

Ramesh Ponnuru:

For the last eleven years or so, I’ve been writing that monetary policy is too tight. During this period, it has sometimes been a little too tight, sometimes a lot. I’ve been skeptical of claims of impending inflationary doom, and my skepticism continues to this day.

So I’m on board with the starting point of Bruce Bartlett’s New Republic article: that worries about inflation are exaggerated. I don’t agree, however, with where he takes this idea. He thinks inflation hawks are self-interested capitalists and their conservative lackeys, all of them deathly afraid that wage-earners will see raises. A looser policy would have better served both capital and labor over the last decade, in my view, and it’s been mistaken ideas that have kept it from being adopted. Those ideas are not merely stalking horses for narrow economic interests. Bartlett explains that he has revised his view of Karl Marx’s thoughts on political economy upward. I don’t think the shift has improved the quality of his analysis . . .

Steve Hanke was not so sanguine:

On Tuesday, the Bureau of Labor Statistics released the Consumer Price Index (CPI) for the month of March. Prices increased by 0.6 percent since February, the largest monthly increase since August 2012. On a year-over-year basis, the CPI increase was 2.6 percent. Given that the CPI for March 2020 was abnormally depressed because of the COVID-19 pandemic, most observers anticipated that the year-over-year increase would be elevated, but not as elevated as it actually turned out to be. I, for one, was not surprised.

The dramatic growth in the U.S. money supply, when broadly measured, that began in March 2020 will do what increases in the money supply always do. Money growth will lead in the first instance (1–9 months) to asset-price inflation. Then, a second stage will set in. Over a 6–18-month period after a monetary injection occurs, economic activity will pick up. Ultimately, the prices of goods and services will increase. That usually takes between 12 and 24 months after the original monetary injection. Given this sequence, it’s as clear as the nose on your face that we’re going to see more — perhaps much more — inflation entering the system in the coming months . . .

And nor was Jerry Bowyer:

Inflation data updates (like shark TV programming) come in weekly spurts. Last Friday (April 9), we received the updated data for the Producer Prices Index, which tracks inflation for the cost of inputs for businesses. Then this past Tuesday, April 13, we got the star of the show, the Consumer Price Index data. Monetary policy is looking like a Great White and dollar purchasing power like an unlucky baby seal . . .

Travis Nix took aim at the proposed new corporate-tax regime:

Joe Biden’s recently proposed “infrastructure plan” is a $2-trillion-dollar liberal wish list designed to transform America. The lion’s share of the bill has nothing to do with infrastructure at all, but its most damaging provision is the business-tax increases that will destroy American jobs and slow the economic recovery the U.S. desperately needs following the COVID-19 pandemic.

There are a lot of bad changes in the ironically named “American Jobs Plan.” But two stand out as particularly damaging to the U.S. economy. The plan would increase the corporate-tax rate to 28 percent, which would be the highest in the world, and it would increase the global minimum tax on American companies’ foreign earnings. Together, these changes would tank America’s ability to compete with other nations, increase the probability of companies’ shifting jobs overseas, and destroy incentives for businesses to make the job-growing and wage-growing investments that strengthen the economy.

Increasing corporate taxes by 7 percentage points would kneecap the United States’ ability to compete with its biggest rivals. Including state taxes, America would have a 32.34 percent statutory corporate-tax rate. This would be the highest in the Organization for Economic Cooperation and Development (OECD). The U.S. corporate-tax rate would be greater even than Communist China’s. Under this plan, companies would undoubtedly choose to invest overseas instead of being burdened with Biden’s sky-high taxes, and American workers would lose.

And Robert VerBruggen didn’t like the thought of returning more SALT to the tax menu:

“Taxed twice on the same income”: This is an argument sometimes brought out in favor of the state and local tax deduction, or SALT. But it doesn’t really hold water.

It’s not problematic for different taxes, funding different services, to use the same denominator. County and municipal governments often tax the same property, for instance, and local and state governments often impose sales taxes on the same transactions. In these cases, requiring one tax to be deducted before the other was calculated would just be silly, because legislators would simply increase the second tax’s rate enough to offset the loss, leaving everything back where it started.

With SALT, though, there’s no simple solution like that — federal tax rates apply across the entire nation, while state and local taxes vary from place to place. A federal deduction subsidizes places with high taxes by collecting less federal revenue from those places, while any overall rate increase will hit the whole country. Blue-state lawmakers like Nadler like SALT, and want to get rid of the cap on it, because they want that subsidy, not because it’s fair tax policy . . .

Steve Hanke released his 2020 (economic) misery index:

The human condition lies on a vast spectrum between “miserable” and “happy.” In the economic sphere, misery tends to flow from high inflation, steep borrowing costs, and unemployment. The surefire way to mitigate that misery is through economic growth. All else being equal, happiness tends to blossom when growth is strong, inflation and interest rates are low, and jobs are plentiful.

Many countries measure and report these economic metrics regularly. Comparing them, nation by nation, can tell us a lot about where in the world people are sad or happy. Is the United States, for example, more or less miserable than other countries? Hanke’s Annual Misery Index (HAMI) gives us the answers.

The first misery index was constructed by economist Arthur Okun in the 1960s to provide President Lyndon Johnson with an easily digestible snapshot of the economy. That original misery index was a simple sum of a nation’s annual inflation rate and its unemployment rate. The index has been modified several times, first by Robert Barro of Harvard, and then by me . . .

The most miserable? Read the whole thing to discover for yourself. (Clue: It begins with a V.)

Jon Hartley remembered the economist Robert Mundell, who died earlier this month:

Mundell won the Nobel for his brilliant work spanning monetary policy and trade, largely published in the late 1950s and early 1960s, going back to his early days as a student at MIT and an economist at the IMF. He built one of the most influential open-economy models of the 20th century: the Mundell-Fleming model, which showed that economies could not simultaneously have fixed exchange rates, monetary autonomy, and free capital flows, also known as the “Mundell-Fleming trilemma.” He also wrote many excellent related theoretical papers on trade, including on the mobility of factors of production.

On the policy side, Mundell also greatly influenced the early supply-side movement. He was a professor at the University of Chicago from 1965 to ’72, overlapping with Art Laffer, who taught at the University of Chicago from 1967 to ’76. Mundell’s influence on the Reagan era and its embrace of supply-side economics cannot be understated.

However, his most famous and perhaps lasting influence came in the realm of monetary policy, as an advocate of fixed exchange rates in what he viewed were optimum currency areas. This advocacy of fixed exchange rates drew a sharp contrast with fellow UChicago economist Milton Friedman’s support for floating exchange rates . . .

Benjamin Zycher discussed the dangers of Biden’s energy policy:

It is not difficult to hypothesize that the OPEC+ producers have concluded that prospective competition from U.S. oil producers will prove less important than was the case during the Trump administration, due far more to political constraints on expanded U.S. production than any inherent reluctance to produce on the part of U.S. oil companies. In other words, the clear animosity of the current governing majority toward fossil energy, which was made very clear early in the campaign (and, of course, has been reflected in deeds as well as words since President Biden took office), is likely to have led OPEC+ to conclude that they can grab market share with less fear of a sharp price decline from increased in U.S. production.

After all, the Saudi argument that “the glory days of U.S. shale . . . are never coming back” would make little sense otherwise. There is no reason to believe that U.S. producers systematically have weaker foresight with respect to the evolution of market conditions than anyone else. Moreover, because the production and consumption of fossil fuel reserves are “substitutable” over time (they can take place during the current time period or during a future one), the market price today is the competitive expectation of the future price, on the basis of all available information.

Accordingly, U.S. producers can form expectations and make plans just as rationally as any others. They know that prices can be volatile, that they can be depressed by unexpected events (e.g., COVID), that OPEC+ can increase output unexpectedly. Those realities were just as true before the pandemic as after. All producers must make judgments about the long-term “steady state” price and the efficiency of investments at that price.

The real question is whether U.S. policies will ratify the strong OPEC+ preference that competition from U.S. producers be suppressed artificially. Any such suppression would reduce U.S. national wealth and increase that of foreign producers. And for what? Were the Biden net-zero policy to be implemented immediately, the effect on global temperatures in 2100 would be 0.104 degrees C (using the Environmental Protection Agency climate model), an impact that would not be detectable given the natural variation in temperatures. (The entire Paris agreement if implemented immediately, would reduce global temperatures by 0.17 degrees C by 2100.) The reality is that the crusade against fossil fuels — the effort to make the U.S. poorer in favor of others — has nothing to do with environmental quality. It is wholly an ideological imperative, not a very convincing rationale for imposing losses upon Americans.

Wayne Winegarden queried the record of ESG funds:

This recent outperformance does not provide any information regarding how ESG funds will perform over the long term. In fact, the long-term performance does not match these short-term results. For example, a 2017 study in a top finance journal examined 2,000 funds engaging in social investing. Unlike past studies that bluntly classified funds as either socially responsible or conventional, the authors created a methodology to capture the varying degrees of social responsibility of these funds. Summarizing the results of this study, Kenneth Kim of EQIS Capital Management noted that the results conclusively showed that “when investing in SRI [socially responsible investing] or CSR [corporate social responsibility] funds, one should expect some underperformance.”

ESG funds also contain unidentified risks that often go undiscussed. In a study I performed, ESG funds allocated 37 percent of their portfolio toward their top 10 holdings on average, compared with 21 percent for a broad-based S&P 500 index fund. The higher exposure to the top ten holdings means that the returns of ESG funds are more dependent on the performance of relatively fewer stocks. This concentration significantly reduces the benefits that ought to flow from diversification.

For instance, broad-based ESG funds that shun fossil-fuel companies but have greater exposure to the FAANG stocks would have performed very well in 2020. In this case, shunning fossil-fuel investments improved financial returns. While excluding certain investments may have enhanced past results, these trends change. The caveat “past performance is not indicative of future results” is apropos . . .

And Richard Lindzen and William Happer pondered how much of a climate “emergency” there really is:

No scientist familiar with radiation transfer denies that more carbon dioxide is likely to cause some surface warming. But the warming would be small and benign. In fact, history shows that warmings of a few degrees Celsius — which extended growing seasons — have been good for humanity. The golden age of classical Roman civilization occurred during a warm period. Cooling periods, which were accompanied by barbarian invasions, famines, and plagues, have been bad. Barbara Tuchman characterizes such periods as “the calamitous 14th century” in her book, A Distant Mirror.

More carbon dioxide will certainly increase the productivity of agriculture and forestry. Over the past century, the earth has already become noticeably greener as a result of the modest increase of CO2, from about 0.03 percent to 0.04 percent of atmospheric molecules. More CO2 has made a significant contribution to the increased crop yields of the past 50 years, as well. The benefits to plants of more CO2 are documented in hundreds of scientific studies.

Water vapor, and the clouds that condense from it, warm the earth’s surface at least four times more than does carbon dioxide. Paleoclimate data show little correlation between CO2 and climate, suggesting that the effects of CO2 are, in fact, marginal. Doubling CO2 concentrations alone should increase the earth’s surface temperature by about 1 C. Climate crusaders use computer models that include clouds, convective heat transfer in the atmosphere and oceans, and other factors to claim that “positive feedbacks” increase the predicted warming to 4.5 C or more. Supposedly, the direct consequences of any change are amplified. This would violate Le Chatelier’s principle that says “when a settled system is disturbed, it will adjust to diminish the change that has been made to it.”

Crusaders like to claim that the climate violates Le Chatelier’s principle and has “tipping points.” Given the much higher and changing levels of carbon dioxide that prevailed over much of the earth’s history, it is unlikely that life would have survived if such tipping points existed . . .

Finally, we produced the Capital Note, our “daily” (well, Tuesday–Friday, anyway). Topics covered included: the history of Nuance’s Dragon brand, J&J vaccine halted, Jack Ma capitulates, W. Brian Arthur on “Economics in Nouns and Verbs, corporatism in action, trusting China on the environment, the rise of retail investors (continued), France moves toward a ban on short-haul flights, coffee and interstates, Coinbase’s crypto correlation, another tech IPO, consumer borrowing stalls, a look back at the Bitcoin white paper, the Chamber of Commerce’s hedge, pruned, Coinbase, crytoptimists, combining the essence of two old crises to make a new one, and inflation.


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