Monday, May 19, 2014

EXTRA! Climate Economics Confound U of C Profs!

Not everyone at the University of Chicago is an economic genius.

At least that's my conclusion after listening to four professors on a panel about divestment related to climate change tonight. One of the panelists was an economist, two were physical scientists, and one was a political scientist. They seemed united in their determination to tell the assembled crowd of polite (mostly) students that divestment of fossil fuel stocks didn't make sense.

What was striking to me was that, despite the U of C's reputation as a center of economic research and thinking and teaching, all four of the panelists appeared singularly uninterested in the central economic problem of the climate crisis: how will the supply and demand of goods and services change as a result of society's understanding of the climate crisis? and how will the market react to signals about such changes?

Crescat scientia; vita excolatur.
Let knowledge grow from more to more;
and so be human life enriched
Notably, when asked about the possibility of a carbon bubble -- i.e. overvaluation of stocks dependent on fossil fuel consumption -- they all pooh-poohed the possibility.  "It's not as if the market isn't already aware!" Unfortunately, this is tantamount to saying there is no such thing as a bubble -- an assertion that is demonstrably untrue.  By definition, a bubble is a mistake by the market that occurs when, in fact, the market hasn't already taken all the necessary factors into account.

Within minutes they were agreeing that, while it may not be possible for atmospheric warming to be held below 2 degrees, known world fossil fuel reserves couldn't all be commercialized (burned) without resulting in temperature changes of 10 times that -- a result that would be catastrophic. So . . . what, the market's already "taken into account" all of this? The market already reflects the equilibrium point where it's all going to end up? Where, pray tell, might that be?

No, far from being the case that the investment arm of the University of Chicago has nothing to bring to the table in all this, I submit that the University is in a position to assert an investment thesis that maximizes its advantage in light of projected future developments, and that by articulating its thesis, it can bring the market better into line with reality -- and, not incidentally, enjoy a near-term windfall as market values are adjusted.

(Contrary to the view hazarded by the economist on the panel, it is not the case that the U of C's action is somehow "less" valuable if it is the 3rd or 13th or 30th university to do so.  Diminishing returns is not the issue here. The issue is whose investment thesis is articulated in a way that moves the market.)

The specifics of that investment thesis are fairly self-evident -- they go beyond short positions in fossil fuels and long positions renewables to include favoring public transit in favor of personal transportation, passive buildings, and low-energy food production.

My advice to the student activists at the University of Chicago: persist.  Someday your alma mater will thank you.

Related posts

Oil companies are valued by the market based on their reserves. The problem with this approach is that the total reserves claimed by the oil companies is FIVE TIMES what can possibly be burned without driving up the temperature of the atmosphere up by a catastrophic amount and, as McKibben puts it, "breaking the planet." How can the value of oil companies be a function of reserves that can never be used?

(See The REALLY Big Short: The Jig is Up with Oil Companies)

"Although we know the end from the very beginning," says Walker, "the story is no less compelling to watch." A man, gloriously alone (except for his own reflection) on an ice-covered lake; the soothing pastel colors of the distant sky; and what seems surely to be a circle he is digging around himself with a pick-axe. A perfect parable for our headlong rush toward climate crisis?

(See How Do You Say "Suicide Narcissus" in Chinese?)

I have begun writing about how the fate of the Earth is intertwined with the ability of BOTH China AND the U.S. to reverse their addiction to carbon. I think this linkage is so critical that it deserves its own word: "chinaEARTHusa".

(See China + USA = Planetocide)

Other related links

I remember a day several years ago when David Swenson came to Chicago to give a talk. People swarmed to hear him, because they thought this director of the Yale endowment was in a class by himself when it came to smart investing. Now I see he is directing his managers to take a hard look at whether Yale's investments were adequately accounting for the risk related to climate change, and "avoid companies that do not take sensible 'steps to reduce greenhouse gas emissions.'". (September 7, 2014, "Yale Fund Takes Aim at Climate Change" by Geraldine Fabrikant in The New York Times) Another sign to me that the jig is up . . . .

 November 1, 2014 - "The Missing Campus Climate Debate" by Evan J. Mandery in The New York Times: "[W]hat better forum than the university could there be for distinguishing among competing moral claims? Knowing students and professors, these debates would be prolonged, but it’s easy enough to structure the questions that would be asked and how they’d be answered regarding fossil fuels . . . . "