The Weekend Wonk: Alex Steffen on Trump, Putin, and the Carbon Bubble

Alex Steffen in Medium:

If you’re an American, you’re likely misinformed about the most dire crisis in our world.

American journalists, pundits and media executives have largely convinced themselves that climate change is not a serious political issue, because they think the polls tell them that. A majority of American voters regularly tell pollsters they don’t think climate change is a critically important election issue, so therefore the media decides it must not be an important political issue at all.

Unfortunately, that conventional wisdom blinds us to both to the actual bedrock reality of this era, and to — as I see it — the defining aim of the in-coming Trump administration: delaying climate action.

Trump has surrounded himself with more oil industry and oil industry connected people than any president in history (even George W. Bush). You can’t understand what’s going on with Trump unless you understand the oil industry… and you can’t understand the oil industry without understanding climate change.

Understanding Climate Change

In case you’re just joining us here on Earth, we’re making the planet hotter. The science is incontrovertible that by burning fossil fuels, we’re changing the planet’s climate. Because the consequences worsen dramatically as we emit more climate pollution and the planet gets hotter, every nation on Earth agreed last year in Paris to hold that temperature rise to two degrees Celsius (2ºC).

This means we must limit the total amount of CO2 and other greenhouse pollution we put into the sky: we have to meet a “carbon budget.” To meet that budget, we have to radically cut greenhouse gas emissions — burning way less oil, coal and gas — in the next two decades, and set the global economy on a steep path to zero emissions.

Again, the American media has failed to convey the magnitude of the costs of unchecked global warming. Those costs are profound already, today, as the Arctic heatwave, Syrian civil war, bleaching of the Great Barrier Reef, worsening storms, droughts, wildfires and freak weather events all show. Those costs will only grow, and they will grow more dire, more quickly as the planet heats.

At the same time, the innovations we need to create zero-carbon prosperity are already here. From plummeting costs for solar, wind, electric vehicles and green buildings to better approaches to urban planning, agriculture and forestry, we already have the tools we need to start building a much more prosperous world, producing hosts of new companies and millions of jobs. Indeed, a giant building boom is what successful climate action looks like.

Because we have no real choice but to act — and, in fact, climate action will make most people not only safer, but better off — big changes are coming, far sooner than most Americans understand.

But some people totally understand: the ones who stand to lose money from these changes.

The Carbon Bubble

The need to keep within our global carbon budget means we must leave most of the coal, oil and gas on the planet unburnt.

But also, we’ve already set in motion extremely serious climate change. Even if we act decisively now, we will be wrestling with the impacts of that pollution for centuries. So one half of our task is to become zero-carbon societies, but the other is to ruggedize in the face of worsening problems, in many cases by abandoning places that cannot be saved and practices that cannot be continued.

Here’s the blunt reality: the pressure to cut emissions and respond to a changing climate are going to alter what we do and don’t see as valuable. Climate action will trigger an enormous shift in the way we value things.

If we can’t burn oil, it’s not worth very much. If we can’t defend coastal real estate from rising seas (or even insure it, for that matter), it’s not worth very much. If the industrial process a company owns exposes them to future climate litigation, it’s not worth very much. The value of those assets is going to plummet, inevitably… and likely, soon.

Currently, though, these assets are valued very highly. Oil is seen as hugely valuable, coastal real estate is seen as hugely valuable, industrial patents are seen as hugely valuable.

When there’s a large difference between how markets think assets should be valued and what they are (or will) actually be worth, we call it a “bubble.”

Experts now call the differences between valuations and worth in fossil fuel corporations, climate-harmful industries and vulnerable physical assets the “Carbon Bubble.” It is still growing.

And here’s the thing about bubbles: they always pop.

People whose job it is to measure risk in financial markets are extremely concerned about the magnitude of the Carbon Bubble and the damage it will do as it bursts. Because when it bursts, trillions of dollars of imaginary assets will simply vanish in a very short time.

Mark Carney, the Governor of the Bank of England and chair of the Financial Stability Board — the global institution designed to try to prevent market panics and crashes — gave a bombshell talk at Lloyds last year, saying he thought letting the Carbon Bubble continue to grow exposed global markets to a risk on the level of the 2007 subprime crisis.

In other words, one of the most knowledgeable financial authorities on the planet has come to think that the difference between what the high-carbon part of the economy is priced at and what it’s worth is so enormous that letting it grow and then suddenly pop could crash financial markets worldwide.

And he’s far from alone. Scores of experts warn that the Carbon Bubble is one of the biggest threats to the global economy. The way to increase the resilience of global markets, they say, is to act on climate, but to do so with bold-yet-predictable pacing. If we do that — they say — we will still see the Carbon Bubble deflate, but markets should be able to adjust, and panic can be avoided. Climate action will stave off financial disaster as well ecological catastrophe.

This is a win-win for everyone, except those heavily invested in those Carbon Bubble assets now. For these investors, the Carbon Bubble is a goodthing: the longer it lasts, the more they reap the benefit of high valuations and large dividends. For them, the larger the Carbon Bubble swells, the more money they make.

The Perception War

There is no long game in high-carbon industries. Their owners know this. They don’t need a long game, though: their investment horizons are years (or even months), not decades. Investors don’t even need successful companies, actually — as we’ve seen time and time again with hostile takeovers, pump-and-dumps, stock buybacks and other financial looting tactics. All they need is the perception of the inevitability of future profit, today. That’s what keeps valuations high.

Here’s something critical it took me a long time (and the patience of a few smart friends) to understand: the Carbon Bubble will pop not when high-carbon practices become impossible, but when their profits cease to be seen as reliable.

As it becomes clear that these assets will not produce profit in the future, their valuations will drop — even if the businesses that own them continue to function for years. The value of oil companies will collapse long before the last barrel of oil is burned; the value of beachfront hotels will collapse long before rising tides flood their lobbies.

Put another way: The pop comes when people understand that growth in these industries is over and that, in fact, these industries are now going to contract. That’s when investors start pulling out and looking for safer bets. As investors begin to flee these companies, others realize more devaluation is on the way, so they want to get out before the drop: a trickle of divestment becomes a flood and the price collapses. What triggers the drop is investors ceasing to believe the company has a strong future.

Because that risk already exists, the pop is way closer than most people understand.

A crisis in investor confidence is the biggest threat to fossil fuel companies — not environmentalists, regulations, clean energy competitors or climate agreements.

The Carbon Lobby and the Trump Gang

For high-carbon industries to continue to be attractive investments, then, they must spin a tale of future growth. They must make potential investors believe that even if there is a Carbon Bubble, it is decades away from popping — that their high profits today will continue for the foreseeable future, so their stock is worth buying.

How would you maintain this confidence?

• You’d dispute climate science — making scientists’ predictions seem less certain in the public mind— and work to gut the capacity of scientists to continue their work (by, for instance, defunding NASA’s Earth Sciences program).
• You’d attack global climate agreements, making them look unstable and weak, and thus unlikely to impact your businesses.
• You’d attack low-carbon competitors politically, attempting to portray the evidence that they can replace high-carbon industries as fraudulent (or at least overly idealistic).
• You’d use every leverage point to slow low-carbon industrial progress — for example, by continuing massive subsidies to oil and gas companies, while attacking programs to develop new energy sources.
• You’d support putting a price on carbon, since this makes you look moderate and engaged, but you’d make sure that the definition of a “reasonable” price on carbon was so low and took so long to implement that it was no real threat to your business, and at worst would replace the dirtiest fossil fuels with others (switching for example from coal to gas).
• You would ally with extremists and other sources of anti-democratic power, in order to be able to fight democratic efforts to cut emissions through the application of threats, instability and violence.
• Most of all, you’d invest as heavily as possible in new infrastructure and supply. For oil and gas companies, this means new exploration and new pipelines. Why would you do this, if you know you may have to abandon these assets before they’ve paid off? Two reasons: First, it sends a signal of confidence to markets that you expect to continue to grow in the future. Second, it’s politically harder to force companies to abandon expensive investments than it is to prevent those systems from being built in the first place — the mere existence of a pipeline becomes an argument for continuing to use it. This, too, bolsters investor confidence. (Note that whether these assets are eventually abandoned or not is of little concern to current investors looking to delay devaluations).

Here’s the kicker: If you were going to put in place a presidential administration that was dedicated to taking these actions, it would look exactly like what we have now: a cabinet and chief advisors in which nearly every member is a climate denialist with ties to the Carbon Lobby.

Trump wants ExxonMobil CEO Rex Tillerson to be his Secretary of State. You might remember that Exxon has been a main driver of climate denialism, as well as being one the largest polluters in history. Tillerson also has close ties with Vladimir Putin.

Not long ago, Tillerson was quoted as saying “The world is going to have to continue using fossil fuels, whether they like it or not.” Think that one over. This is the man who would be America’s face to the world.

Trump has also put forward a host of other appointees who are overt climate denialists and generally also have financial ties to industries threatened by the Carbon Bubble. These include Rick Perry, Trump’s choice for Secretary of Energy and a close ally of Big Oil; Scott Pruitt (EPA Administrator — a virulent climate denialist); Nikki Haley (U.N. Ambassador, also known for suppressing climate science as Governor); Steve Bannon (Chief Strategist, and just generally gross); Ryan Zinke (Secretary of Interior — who strongly supports more oil and gas exploration on public lands): Jeff Sessions (Attorney General and climate regulation opponent); Elaine Chao (Secretary of Transportation, who will be tasked with getting a huge fossil fuel infrastructure plan through Congress, working with her husband, Mitch McConnell); James Mattis (Secretary of Defense, who is not a denialist but does have oil industry ties); Michael Flynn (National Security Advisor — and former oil industry lobbyist); Larry Kudlow (Council of Economic Advisors — a climate denialist and frequent defender of the Koch brothers); Wilbur Ross (Commerce Secretary — holds “hundreds of millions of dollars” in oil and gas investments); even Betsy DeVos (Education Secretary) is sister to Blackwater founder Erik Prince, who is investing heavily in African oil and gas fields, “places where he thinks his expertise in providing logistics and security can give him a competitive edge.”

This is a cabinet custom-built to protect carbon industry investors… especially, perhaps, one.

No One Cares More about the Carbon Bubble than Putin

Trump’s ties to Russian espionage suddenly make more sense in this light.

If you were going to ask why a country like Russia would risk a war to interfere with American politics, look at what the Russian economy is.

Russia is a petrostate. It’s the number one gas exporter and number two oil exporter in the world, but it’s economy is otherwise stagnant and out-of-date. Those oil and gas assets are controlled by a small number of oligarchs gathered around Putin, the former head of the KGB. Those oligarchs may be the one group of investors who stands to lose the most from the popping of the Carbon Bubble.

Russia’s major national asset is their potential to develop Arctic oil fields opened up by climate change — which won’t happen if investors pull out of oil. If it’s obvious that this oil is unburnable, there’s no point in building all those oil-drilling platforms and pipelines. But if the perception is that the Carbon Bubble won’t pop for decades, then getting one’s hands on millions of barrels of Arctic oil will pump valuations way up. By one estimate, these oil fields could be worth at least $500 billion.

I don’t have any special insight into what Russia did or didn’t do, but if you’re looking for a reason why they would want to disrupt our election, there’s 500 billion of them.

Now, add in all the other Bubble-expanding projects and ploys, pipelines and hotels, and you begin to see the magnitude of the scam here. The difference between the Carbon Bubble deflating rapidly now and popping spectacularly in a decade or more could mean literally trillions more dollars in profits for the kind of people now helicoptering into Washington.

But that same delay would also bring on climate catastrophe, damage our democracy and bring financial ruin for the investors who are left holding those assets when the bubble pops. If history is any guide, those investors will be pensions and mutual funds and small timers — in other words, regular people.

It is not hyperbole to say that swelling the Carbon Bubble is not only not in the interests of the United States, it increases threats to our economy and national security, puts Americans at risk, undermines our prosperity and weakens our nation. It’s hard to call defending high carbon interests anything but unpatriotic.

People who are looking to understand what the Trump gang is up to would do well to consider his gang’s actions through the lens of the Carbon Bubble. Understand that the amounts of money at stake are vast, nearly inconceivable to most of us, and highly concentrated in the hands of the people in Trump’s cabinet and their close friends and business allies.

Journalists are unused to thinking about climate change as being an economic and financial issue — much less the core political issue of our day — so for a lot of us this whole problem is invisible, despite the credibility of everyone pointing it out. It sounds like a conspiracy theory, frankly, because we are so cognitively unprepared to see the Bubble in front of us. That we are so blind to these risks is a tragedy.

We need to focus: The most serious political fight on the planet — the need to end use of coal, oil and gas — is at the center of America’s current political crisis.