The Big and Fatally Flawed Business of Climate Change

Smoke billows from a fire in an area of the Amazon rainforest near Porto Velho, Rondonia State, Brazil, on Sept. 10, 2019. Bruno Kelly/Reuters

Commentary

The world has been ending for decades.

In 1989, a senior official from the United Nations Environment Program warned that “entire nations could be wiped off the face of the Earth by rising sea levels if the global warming trend is not reversed by the year 2000.”

For good measure, a study from the program added that shifting climate patterns would bring back 1930s dust bowl conditions to Canadian and U.S. wheatlands.

So much for that.

In 2006, in his movie “An Inconvenient Truth,” Al Gore stated unequivocally that we only had 10 more years before we reached the point of no return.

It would seem that we’ve been barreling down a path of climate-driven self-destruction forever.

One solution that’s been put forward has been the idea of carbon offsets or carbon taxes. According to the World Bank, 40 countries and 20 cities around the world use some form of carbon taxes or carbon emissions trading to curb greenhouse gas production.

Here in the United States, it’s an idea that’s been debated and discussed to death, but never actually implemented.

Here’s why.

The Inconvenient Reality of the Energy Industry

At the Climate Action Summit of 2019—the global climate change party the U.N. has been hosting since 1995, otherwise known as COP25—77 countries and over 100 cities committed to achieving a net-zero emissions policy by 2050. Billions of dollars were pledged by global governments to various green initiatives. It was a huge success.

For the record, net-zero emissions doesn’t mean absolute zero. It means that if you own a business that emits CO2, you would need to offset that production by removing an equal amount of greenhouse gases and “storing it permanently in soil, plants, or materials.”

Fast forward to COP26 last year (where, in the ultimate irony, attendees’ rented Teslas were charged by diesel generators), the results were a little different.

CNBC reported that “the U.N. climate summit ended with calls on governments to return next year with tougher pledges to slash greenhouse gas emissions.” And, “Climate scientists, legal experts and politicians argued the final deal out of Glasgow resulted in incremental progress inadequate to address the climate crisis.”

Apparently, enthusiasm waned ...

Now, I don’t want to be totally dismissive of these efforts. Certainly, a cleaner planet is a noble goal. And I want to believe this massive global effort is being made in good faith. But it’s not hard to understand why countries around the world would be looking to hedge their climate bets.

Energy isn’t an elastic commodity. You can start buying chicken if arbitrary beef taxes make steak too expensive. But you can’t just build a wind farm to replace the coal plant that got too expensive to run.

Social Engineering the Energy Market

Energy runs the world. It heats and cools our homes. It fuels our cars. It basically powers our lives. And here’s another inconvenient truth: Fossil fuels are the very heart of the world’s energy consumption.

Trying to force a change through economic disincentives (i.e., taxes) is a recipe for disaster.

First off, the concept in and of itself is flawed. It’s a “self-eliminating” tax. Its taxes are designed to force businesses into more sustainable forms of energy, but as businesses move in that direction, tax revenues decrease. And that’s never acceptable to governments.

Then there’s the effect on the end user. Taxes that are designed to modify behavior are typically pretty punitive (the U.N. has recommended a tax of $135 to $5,500 per metric ton). That’s because their goal is to drive the taxpayer to a less desirable option, such as having to spend $10 million to retrofit a factory for solar or wind. These costs end up getting passed on to the end user, making these taxes regressive long after they’re gone (assuming they’re even that successful).

The concept of carbon taxes is a form of social engineering—it’s designed to elicit a response that wouldn’t happen otherwise.

Such a levy raises the cost of doing business, which makes it a regressive tax, and doesn’t optimize innovation which only comes via ... wait for it ... profit.

Yeah, money makes the world go around, and free markets where profit can be made will drive innovation.

These malformed efforts are largely driven by governments and think tanks.

The problem with that is governments and think tanks are largely funded by free public money. It’s not like they have to produce a valuable result to get paid, such as all businesses do. And for all their staff members’ Ph.D.s, they don’t understand the actual disincentives that taxes create.

So while the world struggles to save itself with green energy, here’s a clue: Oil is back above $80 per barrel, and I believe it’s aiming for $100. That means integrated oil producers such as Exxon and BP—as well as independent explorers such as EOG Resources—should all perform well.