The SEC’s rule is an obstacle to human flourishing.
The SEC’s rule is an obstacle to human flourishing.
U nsurprisingly, the Securities and Exchange Commission’s (SEC) recent decision to finalize its onerous and unprecedented climate rule is attracting significant legal pushback as state attorneys general, industry groups, and my own company (among others) challenge the Commission’s authority to implement the rule. While the litigation will raise important technical and legal issues with the rule, the biggest threat it poses is to the betterment of human lives.
While testifying before the U.S. House of Representatives’ Financial Services Committee last week, I emphasized that the SEC’s rule will make it more expensive and riskier to produce oil and natural gas in the U.S., and consequently will lower energy production. And for what? The jury is still out on whether the rule — which hinges on greenhouse gas “guesstimates” pertaining to emissions amounts — will actually offer more clarity to investors, as required by the SEC’s mandate.
Unsurprisingly, the most aggressive and vocal proponents of the rule are not investors, but environmental NGOs who believe it will benefit the climate, although the Sierra Club and the National Resources Defense Council are currently suing the SEC to argue that it does not go far enough.
Climate change is a real and global challenge that we can and should address. But presenting it as the most urgent threat to humanity today crowds out action on urgent issues like malnutrition, access to clean water, air pollution, endemic diseases, and human rights, among many others.
Will the SEC be adopting rules on all these issues as well? I hope not. Being seen to “do something” is never a suitable replacement for thoughtful action.
As Commissioner Hester Pierce noted in her dissent to the rule, implementation of the rule indicates, “that climate issues deserve special treatment and disproportionate space in Commission disclosures.” In short, the SEC’s myopic focus on climate risk is wholly misplaced.
Investors are concerned about and consider a large range of risks, including climate change, but are currently able to use their discretion to determine which risks are most material to the interests of the companies they are invested in. Climate should not be an exception, especially considering the implications for energy prices and human development.
In many ways, the SEC’s outsized focus on climate suggests we are overdue for a much larger and more fundamental conversation about tradeoffs, a conversation that should be held in legislatures, not regulators’ offices. As a society, we have to honestly assess and measure climate risks against the massive reductions in safety, longevity, and human flourishing that would accompany reduced access to hydrocarbon energy, given the lack of reliable and cost-efficient replacements.
As I highlighted in my testimony, the stakes are high, because energy from hydrocarbons continues to be the essential ingredient to the modern economy. Even though some believe that solar, wind, and batteries can rapidly transform our whole energy system and address the climate crisis, the reality is that they have not, will not, and cannot replace most of the energy services and raw materials provided by hydrocarbons, at least not for the foreseeable future.
Today, renewables are deployed almost exclusively in the electricity sector, which in total accounts for only 20 percent of all primary energy consumption. Manufacturing is the largest user of energy globally, mostly in the form of process heat that cannot effectively be supplied via electricity. Hydrocarbon use in aviation, global shipping, long-haul trucking, and mobile mining equipment has, for either technological or practical reasons, no viable replacement in sight.
Critical materials from hydrocarbons provide nitrogen fertilizer that is responsible for fully half of global food production. In addition, hydrocarbons enable the production of plastics and petrochemicals that are essential to the modern economy. They are also essential to the production of asphalt, paints, lubricants, cosmetics, 60 percent of global clothing fiber, and thousands of other products.
Without hydrocarbons, we would have no way to produce the vast quantities of steel and cement that undergird our built world, at least, for now, on the scale we need. Even wind turbines, solar panels, and batteries are made of hydrocarbon materials and require huge amounts of process-heat energy from hydrocarbons for their fabrication.
The dramatic increase in energy available to humanity brought out by the use of hydrocarbons has transformed the human condition over the last two centuries. Human life expectancy globally has risen from around 30 to over 70 years in that time. The dire-poverty rate — the percentage of people living on less than $2 per day in today’s money — has plummeted from nearly 90 percent of humanity 200 years ago to less than 10 percent today.
Yet even more energy is needed if we care about improving the quality of life for billions of people around the world. Roughly only 1 billion people today enjoy the full benefits of an energy-rich lifestyle. These lucky 1 billion consume an average of 13 barrels of oil per year per capita, while the other 7 billion people average only three barrels per capita of annual oil consumption.
To raise the standard of living of the 7 billion to even half that of the 1 billion with less energy access would require more than doubling today’s oil production, which suggests that the commodity will still see strong demand for many years to come. Yet the SEC’s rule is partially built upon the premise that demand for oil is peaking and that investors need more information to plan for that transition risk.
If it stands, the SEC’s rule will not only impose severe compliance costs on companies but encourage investors to divest from a critical sector, which could have a remarkably negative impact on human lives. An action this significant is clearly beyond the scope of an independent agency and deserves a full debate in Congress and amongst the public.