The economist Rens van Tilburg has commented on the liabilities on the financial market of amongst others the so called carbon bubble. We have written here about carbon credit for a while, basically explaining the same phenomenon but from a clearer perspective.
In the video above he compares the current mismatch between natural resources and the predictions in the financial sector to the ‘mispricing’ during the internet and mortgage bubbles. He considers stocks and mortgages part of the real economy, which we don’t. There’s nothing real about financial debt except the CO2 that was burned spending the (carbon) credit. Stocks are also just a type of currency, a means of exchange of right to divident and influence, not something real. We will ignore these typical economic misconceptions here.
The main message is that future profits of oil companies will come under pressure due to their inability to actually ‘harvest’ the fossil fuels. Mean while they are investing heavily in new exploration. That investment will not be financeable as people smell the demise of the sector. Also all manufacturers that either produce heavily fossil fuel dependent products or consume a lot of fossil fuels will see investors prefer companies that do not have such vulnerabilities.
The rise in CO2, plastic in our oceans and displaced/depleted resources are what remains of consumed carboncredit (debt)
His statement is that this change may be foreshadowed more severely and faster than we expect, or in short he suggest that the financial sector makes the choice we have been advocating for a long time, namely direct investments into high EROI (Energy Return on Energy Invested), sustainable or renewable energy enterprises.
What Rens can not do is talk about this situation clearly, because we all know that money is not a real issue in fossil fuel exploration and exploitation. How else can prices be so low while the energy it cost to get a barrel out of the ground has increased steadily? To get fossil fuels you need only fossil fuels. How can oil companies be in jeopardy if they still clearly call the shots. Without gasoline and diesel society grinds to a halt, no matter how much money the financial sector has to spend. Fossil fuels are the primary currency of our economy, and money derives its value from it.
Most jobs deplete resources that can not be recovered
The price of anything in a fossil fuel economy is not like the price of things 100 years ago. Then you could be a shoemaker, make shoes, sell them and get potatos from a farmer, who made potatos. Today you can be a car salesman, sell cars and earn money, but as you do so you use fossil fuels, used in making the cars, heating your showroom and lighting it that can never be recovered. Then you spend that money on potatos with a farmer who has put ten times the calories in terms of fossil fuels than he sells you in terms of potatos in them, so he too is using fossil fuels (gas for fertilizer, diesel to run his equipment) which can never be recovered. You and the farmer are both operating at a net loss in terms of total resources, while the shoemaker and farmer that lived in a society run on solar and wind (before coal and the industrial revolution) did not.
The fossil cost of all work today is basically our fossil consumption if you substract recreation. We are now trying to migrate to renewables (at least a large portion of us), but we fail to realise how fossil fuels consuption and resource depletion has become the standard in all our operations. This is not of any bad intention, just a result of miguidedly believing economic theory.
The financial sector will not exist post fossil fuels
Rens claims that investors and financial sector companies have to be aware of the risk to their bottom line, as trust in the longevity of some assets, companies and products implodes. This is great. But there are two flaws with this thinking. The financial sector deals with a lot of different aspects of financing and banking, some of which will not work post fossil fuel. This is of no concern to Rens, who as a typical economist has a short horizon. For example as we explained earlier, loans and debt will work differently or not at all.
To explain if you now want to build a school, you can borrow credit based on future income from running the school. Then you can use that credit to build the school, meaning you have to buy resources that will be brought together by workers and turned into a school. That process is now highly dependent on fossil fuels, for trucking, cement, and all the things the workers buy with their salaries. This is possible because fossil fuels are stored energy, and we have more than we need (or we can redirect it).
Suppose we have our needs covered with renewables, so solar, wind, batteries to cover low wind and sun periods, then can we loan out 30 million for a new school? Not really. Where will the energy come from to make the cement, to transport it to poor it, where will the energy come from for the workers, if they where jobless, how can there be any activity if all renewable energy is already used. You’d have to build a solar/wind farm first and you’d have to save energy and store it. Banks would be real banks again, not just offices where you get your carboncredit.
This is why we talk about carboncredit, because money is carboncredit today and banks know that they have to radically change and may not have a role in the future in providing credit at all. It is much more likely that a cement company has it’s own renewable energy source to make cement, and then cement is cheap for those that need it. And a trucking company makes its own NH3 truck fuel with a couple of wind turbines, and all trucking is more or less free. After all it’s for a school for the community, or one close by, because multinationals operating across the globe will make no sense in a post carboncredit economy. A real world example of this is Tata Steel who is switching (after decades of subsidized coal use keeping a lot of people happy) to electrolysis on solar. The price to the consumer of steel processing wil no longer depend on the price of cockes, and will be much lower, but a lot of ‘economic activity’ and cashflow for banks associated with coal logistics will disappear.
Invisible wall
Meanwhile the same carboncredit can pull the wool over our eyes in terms of real economic risks. Why? Because fossil fuel is priced in carboncredit, so Euro, Dollar. Because these currencies can be inhaled and exhaled by banks at their whim we never know anything about the availability of the underlying asset, fossil fuels. Prices don’t only depend on the availability of the product, but also on the availability of the currency they are bought in.
Banks will want to preserve cashflow and keep it as stabile as possible. As we have seen lower fossil availability is paired with liquidity contraction. And if the last gas tanker is arriving in Rotterdam to supply the greenhouses with CO2 they will still not tell anyone. What would the use be? There would be immediat rationing, no free economy, to protect the population the government would confiscate all reserves and work on a super fast fossil exit plan. That is why the economy is blind to resource depletion : It would reduce profits if people constantly knew the time we can survive living like this is finite. They are keeping the wall as invisible as possible.
Rens points the wall out in a convoluted way. His exit plan (divest into more sustainable activities) is not going to fly with the fossil sector, because they don’t like working with zero control, no profits, they will be servants of the sustainable agenda. They will call it communism (as they always did any suggestion that would put a break on thier blind expansion of fossil fuel use). Rens is right but his warning is not enough. The fossil sector will have to hand over power to some more democratic organization, and the financial sector will also have to obey strick rules set by this new autority, as fossil fuel use is cut and a lot of fossil fuel intensive activites will simply be banned. No flying to italy for 100 Euro to have a cappucino next to the Trevi fountains. What makes you so entitled to do that while your own town may be in chaos because of fuel shortages and climate change? Do something usefull! Of course the italians are much better off, even though we consider them poorer. They never needed that carboncredit!
Take home message
The carboncredit, or fossil/financial sector is in trouble. Hopefully because you use your democratic power to tell them to stop wasting resources and hand over control (or be swayed by new rules) that directs those resources to secure our lives, instead of making them harder. For a few decades survival will be the name of the game, but soon this will be over and we will have more renewable energy than we have fossil fuel today. We will find that solving energy needs with renewables is a low maintenance, low cashflow, zero credit activity. We will find that banks are places where there is a store of some realrealeconomic asset, like natural gas or elecrtricity or wood or some other commodity. The economy wil become real and the rules will adapt, and economistmay find that finally there is some method to their metier. Resource utility optimization is a complex field, less bullshitting to make people accept the rate of fossil fuel production, more thinking about ways to use that super abundance (2500 times our current fossil ration) of solar energy to turn our planet into paradise (finally).