Down the Rabbit Hole of Climate Change / ESG Investing & Disruption of Hydrocarbons.

Kaoboy Musings 19 – 1/22/2020

Down the Rabbit Hole of Climate Change

I debated long and hard about whether or not to write a piece on the topic of climate change because it has become such a political hot-button, but because the topic has become front-and-center in just about every forum from Davos to ESG talk on CNBC, I feel that a dedicated Musing is in order.

I have many friends on both sides of the aisle and have had many debates on this topic, but I’ve never really understood why a topic that should be grounded in hard science repeatedly gets hijacked by politicos on both sides of the aisle with religious zealotry.  The fact that this debate has polarized around two extremist camps, “climate alarmists” and “climate deniers,” highlights the current state of affairs.  I am neither.  I have always believed that to be a successful investor, one must have an open mind, have a healthy skepticism of consensus opinions, not be wed to any particular thesis, and to continuously learn.  Thus, I decided several months ago to really get educated on the topic of climate change.  The more I delved, however, the more that I found that there was so much misinformation on this topic, much of it touted with “100% certainty” or “97% consensus” to promulgate political and/or economic motives.  Furthermore, the pragmatist in me wonders how there can be so much emphasis on the “how” (e.g. solutions to mitigate CO2 emissions) without clear-cut agreement on the “why” (e.g. is CO2 really the right variable to solve for?).  After several months of reading numerous books/ papers/articles and engaging in debates/conversations with experts on both sides, I’m going to take a shot at summarizing the state of the debate and share some of my learnings – hopefully in as apolitical of a way as I can.  My goal in writing this Musing is not to press any agenda, political or otherwise; rather, I’m hoping to cut through the political noise and to provoke thought and to stimulate intelligent dialogue.

In the name of full disclosure, if you’ve been reading Kaoboy Musings, you know that I am also currently invested in the oil & gas industry based upon a bullish cyclical thesis, so my original interest in this topic was purely pragmatic – I wanted to better understand the secular disruptive threats to my thesis.  Philosophically, I do not believe that politics should enter the investing realm and find the trend toward “ESG” or “socially responsible” investing somewhat misleading and in some cases downright disingenuous (more on this later).  I believe that an investment thesis should ultimately stand on fundamental economic precepts.  Although it is true that I have an economic interest to see the hydrocarbon industry flourish, if I find that the risk/reward calculus of renewables dominates, I will pivot accordingly.

Finally, I will caveat this discussion by saying that I am not a scientist, but rather an inquisitive investor.  Although I’ve taken a healthy share of math/physics for my undergraduate engineering degree and economics/statistics for grad school and know enough about the scientific method and statistical analysis to be dangerous, I’ve spent almost all of my professional career in the world of investing, which is a far less exact “science.”  My modus operandi from an investing perspective, however, has always mixed the “scientific method” of formulating a hypothesis based upon collecting imperfect and incomplete information, and then borrowing the methods of an investigative journalist of canvassing a myriad of diverse and often opposing viewpoints from experts to test that hypothesis before committing capital.  Keeping an open mind and questioning the underlying incentives of who says what in this debate is also important.  I’ve tried to take the same approach here and am grateful to have made the acquaintances of several prominent experts in the field of climate change.  One expert in particular who has been an invaluable and non-partisan advisor in my quest for knowledge is Professor Robert Giegengack, former chair of the Department of Earth and Environmental Science at the University of Pennsylvania and is now emeritus faculty there; I have run many articles and papers by him, and he has given me permission to quote his thoughtful responses.

What People Agree On

Let’s get the low-hanging fruit out of the way first and list out some facts that virtually everyone is in agreement on:

1. The planet is currently in a warming trend.

2. Atmospheric CO2 concentrations have been rising.

3. Human civilization does indeed have an effect on the environment, in some cases deleterious and in other cases beneficial.

4. The Earth is 4.5 billion years old and has seen varying climate epochs throughout the ages.

5. Humans have fretted about climate change for hundreds of years – the current debate is not new.

6. We all want a cleaner, healthier planet.

I am sure that there may be some extremists that even take issue with some of these statements, but for the most part, I see agreement on these statements.

What Is Controversial

What surprised me most as I descended this rabbit hole is how there is still tremendous controversy behind seemingly “obvious” questions:

1. Global Warming (GW) is real, but is Anthropogenic (man-made) Global Warming (AGW) real, and if so, to what degree?

2. Should CO2 be our primary concern?

3. Whether we as a species can really do anything to influence the climate, and if so,

4. What should we do about it, and how much would it cost?

Some Historical Context

Humans have fretted about climate change for eons and have always believed in the ability to influence climate, ranging from archaic solutions of  prayer and human sacrifice to modern solutions of climate accords and CO2 emissions quotas.  The “modern” debate over AGW originated in the early 1800’s, with Joseph Fourier’s first attempt at modeling the “greenhouse effect.”  Since then, the climate debate has morphed many times, ranging from the 70’s fears of the next Ice Age to the current “existential crisis” of AGW.

Perhaps the best-known and most controversial chart in the climate change debate is the “Hockey Stick” chart put forth in 1998 by Michael Mann of Penn State, which shows a clear spike in temperatures in the last 100 years as compared to a relatively flat period over the last 1000 years.  This chart (Figure 1) was made famous in Al Gore’s 2006 book and documentary An Inconvenient Truth.

How do scientists reconstruct temperatures from ancient times?   They identify “proxy variables” in things like ice cores and tree rings and then use these proxies to reconstruct the paleoclimate record.  The problem with statistical methods, of course, is that when there is human discretion involved in how to manipulate and interpret data, very misleading results may arise.  As economist Ron Coase is famous for saying, “If you torture the data long enough, it will confess.”

Figure 1: The Mann “Hockey Stick”

In 2009, Mann was embroiled in what became known as “Climategate” – this article (https://wryheat.wordpress.com/2017/12/12/climategate-comes-back-to-bite-the-university-of-arizona/) by Jonathan DuHamel (another scientist with whom I’ve had much dialogue) does a good job of summarizing what happened.  Here’s the key quote:

There are problems with the Hockey Stick according to Canadian researchers Steve McIntyre and Ross McKitrick. “The first mistake made by Mann et al. and copied by the UN in 2001 lay in the choice of proxy data. The UN’s 1996 report had recommended against reliance upon bristlecone pines as proxies for reconstructing temperature because 20th-century carbon-dioxide fertilization accelerated annual growth and caused a false appearance of exceptional recent warming. Notwithstanding the warning against reliance upon bristlecones in UN 1996, Mann et al. had relied chiefly upon a series of bristlecone-pine datasets for their reconstruction of medieval temperatures. Worse, their statistical model had given the bristlecone-pine data sets 390 times more prominence than the other datasets they had used.

Furthermore, the statistical algorithms in Mann et al. were shown to be flawed. McIntyre ran the Mann’s algorithm 10,000 times, having replaced all palaeoclimatological data with randomly-generated, electronic “red noise.” They found that, even with this entirely random data, altogether unconnected with the temperature record, the model nearly always constructed a “hockey stick” curve similar to that in the UN’s 2001 report.” 

I am in the middle of a book entitled The Hockey Stick Illusion by A.W. Montford, which delves into his methodology in great detail.  In short, Mann not only used cherry-picked proxies (like tree rings from specific pines in very specific locations), he also used an algorithm that effectively over-weighted near-term trends and under-weighted history, which effectively erased the so-called Medieval Warm Period (MWP) – a 300-year period during which temperatures were significantly warmer than they are now. See Figure 2 below, also taken from Jonathan’s article:

Figure 2: Mann’s “Hockey Stick” Compared With Other Temperature Reconstructions

I bounced this “Climategate” article off Professor Giegengack, and here is his response:

I saw the Mann, Bradley, Hughes curve when it was published, and I was immediately struck by the absence of the well-documented Medieval Warm Phase and the Little Ice Age.  The graph was on the cover of the 2001 IPCC summary, but absent from subsequent IPCC reports.  Mann has become embroiled in a series of lawsuits, based in part on reaction to the hockey stick, and in part on the emails hacked from the Climate Research Unit.  Mann has declined to share his raw data with several critical statisticians, and then announced that data had been lost. Bradley and Hughes have not leapt to the defense of their co-author.

To be fair, I have since seen many rebuttals to this rebuttal that have come to Mann’s defense (one of them is here: http://berkeleyearth.org/summary-of-findings/).  In my opinion, the fundamental problem with all of these analyses is that they rely upon arbitrarily incomplete data sets. The earth is 4.5 billion years old — with Coase’s “data torturing” quote in mind, I keep wondering why people continue to arbitrarily pick incomplete data sets to present their AGW conclusions.

The Big (Phanerozoic) Picture

In my many correspondences with Professor Giegengack, I learned the importance of considering the big picture -- necessary for the topic of climate change which is, at its heart, a geologic process requiring a geologic time scale.  Figure 3 is a chart of atmospheric CO2 concentration over the last 450 million years – a period referred to as “Phanerozoic time.”  Figure 4 is a regression of atmospheric CO2 concentration against temperature proxies over this period.

There are some interesting conclusions to be drawn and questions raised:

1. CO2 concentrations have been much higher than they are now (currently around 420 ppm, or 0.04% of the atmosphere).

2. CO2 concentration correlation to historical temperature proxies is zero to negative throughout the eons.  If this is the case, what else could be causing the current GW?

3. The Earth teemed with life during these periods of much higher CO2 concentration, but did these spikes in CO2 corroborate with mass extinctions?

4. To put things in perspective, homo sapiens have been around only 200,000 years.  The Agricultural Revolution began around 12,000 years ago, and the Industrial Revolution began about 170 years ago.  Most of the “Hockey Stick” analyses arbitrarily focus on a negligible period on the geologic time scale.

5. The implication here, of course, is that the current bout of GW might not be anthropogenic; if that is the case, many of the proposed solutions predicated upon curbing CO2 emissions (many of which come at great economic/human cost) as the answer to halting AGW might be based on a fundamentally flawed thesis.  If CO2 is the wrong variable to solve for, what is the “right” variable to solve for?

Figure 3: Atmospheric CO2 Concentration over Phanerozoic Time

Figure 4: Regression of Atmospheric CO2 Against Temperature Proxy

Questions Abound

This next section attempts to answer some of these questions, and I will present it in a Q&A format.

Question 1: If anthropogenic CO2 is not the cause of GW, what else could be causing the current GW?

From my readings, there are many, many variables that affect the climate, with no one variable claiming any disproportionate effect.  Correlation does not mean causality, as much as the “Hockey Stick” analyses would like to conclude, and what makes those claims even more suspect in my opinion is the use of arbitrarily limited data sets that just happen to coincide with the beginning of the Industrial Revolution.

Professor William Happer of Princeton, in his testimony to the U.S. Senate Environmental and Public Works Committee in 2009, stated:

The existence of climate variability in the past has long been an embarrassment to those who claim that all climate change is due to man and that man can control it. When I was a schoolboy, my textbooks on earth science showed a prominent “medieval warm period” at the time the Vikings settled Greenland, followed by a vicious “little ice age” that drove them out. So I was very surprised when I first saw the celebrated “hockey stick curve,” in the Third Assessment Report of the IPCC. I could hardly believe my eyes. Both the little ice age and the Medieval Warm Period were gone, and the newly revised temperature of the world since the year 1000 had suddenly become absolutely flat until the last hundred years when it shot up like the blade on a hockey stick. This was far from an obscure detail, and the hockey stick was trumpeted around the world as evidence that the end was near. We now know that the hockey stick has nothing to do with reality but was the result of incorrect handling of proxy temperature records and incorrect statistical analysis. There really was a little ice age and there really was a medieval warm period that was as warm or warmer than today.

Many of us are aware that we are living in an ice age, where we have hundred-thousand-year intervals of big continental glaciers that cover much of the land area of the northern hemisphere, interspersed with relative short interglacial intervals like the one we are living in now. By looking at ice cores from the Greenland and Antarctic ice sheets, one can estimate past temperatures and atmospheric concentrations of CO2. Al Gore likes to display graphs of temperature and CO2 concentrations over the past million years or so, showing that when CO2 rises, the temperature also rises. Doesn’t this prove that the temperature is driven by CO2? Absolutely not! If you look carefully at these records, you find that first the temperature goes up, and then the CO2 concentration of the atmosphere goes up. There is a delay between a temperature increase and a CO2 increase of about 800 years. This casts serious doubt on CO2 as a climate driver because of the fundamental concept of causality. A cause must precede its effect.

The full testimony can be found here: http://carbon-sense.com/wp-content/uploads/2009/09/happer-testimony.pdf

I also came across a paper entitled “Climate Change In Perspective” by geologist Jonathan DuHamel who runs a blog called Wryheat (https://wryheat.wordpress.com/about-2/).  In it, Jonathan describes many of the same issues raised about the disappearance of the Medieval Warm Period, the lack of long-term correlation between CO2 and temperature, but he also presents other explanatory variables for the Earth’s climate change including the 3 Milankovitch cycles of the sun, which are long-lived cycles spanning 23,000 to 100,000 years.

Here is Jonathan DuHamel’s “Climate Change In Perspective” paper:

https://wryheat.files.wordpress.com/2018/01/climate-change-in-perspective-2018.pdf

I shared the paper with Professor Giegengack and got this response:

I agree with most of which DuHamel says in the article you sent me. He knows a lot more than I do about some of the atmospheric processes he describes.  I have some thoughts about his statements about sea level and the history of CO2 in the Phanerozoic atmosphere.

As I will lay out, my study of a longer time perspective has convinced me 1) that there are many good, fully defensible reasons to stop using fossil hydrocarbons as “fuel”, and 2) that our pre-occupation with AGW has kept us from addressing many environmental problems that are more immediate and more threatening to human welfare than AGW, and can be addressed with resources and technology now at our disposal.  We are barking up the wrong tree!!!

We can’t “stop climate change”, or “reverse global warming.”  Nothing we are doing, or even contemplating doing, will have a measurable effect on the atmospheric concentration of CO2 for many years, probably centuries.  Climate will continue to change.  If we run out of extractable hydrocarbons, or if we choose to stop burning hydrocarbons, we will have the opportunity to wait centuries to see if reduced CO2 emissions will have a measurable effect on global climate.  Meanwhile, we will have learned, again, to adapt to changing environmental conditions.

Finally, Freeman Dyson is a highly respected Princeton physicist who is politically a Democrat, yet he is one of the most prominent AGW skeptics. Dyson believes that it is hubristic to think that we can predict climate change or that we can meaningfully alter it.  He also calls into question the entire presupposition that more CO2 is bad for the earth.  I perk up when retired academics with impeccable pedigrees like Dyson and Giegengack speak up, because that they have no other “dog in the hunt” other than to pursue “academic purity”  -- sadly this claim cannot be made for many of the scientists/researchers on either side of the climate change debate.

This interview with Freeman Dyson is worth a watch: 

Question 2: Did past spikes in CO2 cause the mass extinctions? Isn’t only recent history relevant since what’s good for “green slime” isn’t necessarily good for humans?

This is how Professor Giegengack answered this question:

A lot of things happened at and around the end-Paleozoic mass extinction event.  It has proven frustrating to separate out cause and effect. An atmospheric CO2 spike is more likely to have been an effect of a mass die-off than its cause.  The PETM (Paleocene-Eocene Thermal Event) of ~55 million years ago shows both a brief (~200,000-year) CO2 spike and an equally brief temperature excursion.  There is no agreement as to what “caused” the PETM, but lots of people are trying to use the PETM as a means to get on the AGW bandwagon. One hypothesis for the PETM is collapse of a continental shelf that would have released gaseous CH4 from the mass of methane hydrate that is accumulating within the shallow sedimentary column off many of the world’s coasts.  A sudden landslide would have lowered confining pressure, and released billions of tons of methane from the methane-hydrate molecular structure. CH4 is a “potent” greenhouse gas, but a short-lived chemical species.  That CH4 spike would have been quickly oxidized to CO2, also a greenhouse gas, and the feedback effect might have kept Earth warm for the requisite 200,000 yrs. Atmospheric levels of both CH4 and CO2 would have returned to pre-landslide values at the end of those 200,000 years.

Under much higher CO2 concentrations than 180-400 ppm, plants and animals very much like what we have now thrived.  Green slime was much earlier; we have no reliable reconstructions of atmospheric chemistry for “green-slime time.”

Again, most studies supporting AGW I have seen arbitrarily use time periods that correlate with human existence and in some cases choose to only show the last 200 years – this would equate to focusing on the just last couple seconds of a 470-day period if each day was equivalent to 1 million years!  In fact, I have yet to see one pro-AGW study that takes Phanerozoic time scales into account.

Question 3: If CO2 increases have little effect on temperatures and may even lag temperature increases, could rising CO2 concentration itself be dangerous?

Giegengack:

Analyses of stomatal density for the period during which fossils of land plants are available (the last ~470,000,000 years) show that atmospheric concentration of CO2 has been as high as 7,000 ppm (Ordovician-Silurian) and fell as low as 180-400 ppm only in the last few million years.  The error bars are large, but probably a “good” average value for atmospheric CO2 over the last 470,000,000 years would be 2500-3000 ppm.  As I (may have) pointed out in an earlier note, commercial greenhouse operators in USA and Europe routinely maintain a level of ~1500 ppm in their growing spaces to enhance photosynthetic productivity. It seems that higher levels of CO2 confer no additional benefit.

Some people have chosen to describe CO2 as a pollutant, and refer to “carbon pollution.” The implication, by some, is that levels of atmospheric CO2 higher than the pre-industrial value may be injurious to human health, because higher levels of CO2 have not prevailed through the period of rise of human civilization (the last ~10,000 years). But the atmospheric concentration of CO2 through the 8 glacial/interglacial cycles now documented from the Antarctic ice cores, 170-280 ppm, is probably the lowest that CO2 concentrations have fallen in Phanerozoic history (the last 540,000,000 years). Some students of the carbon cycle (e.g. Will Happer) have suggested that the world is on the verge of a “CO2 crisis,” as atmospheric levels of CO2 fall low enough to compromise photosynthesis.

At what concentration is CO2 an atmospheric “pollutant”?  400 ppm is only 0.04% of the atmosphere. Oxygen remains at 21%. Water vapor can rise as high as 4%.  By any measure, CO2 is in the atmosphere as a “trace” component, but nonetheless an essential component.  It is disingenuous, and deliberately misleading, to refer to CO2 as a “pollutant.”

Nobody knows more about the chemistry of breathing mixtures than the US Navy, who operate nuclear submarines that can remain submerged for months at a time.  A healthy breathing mixture is maintained in submarines by scrubbing CO2 out of the interior atmosphere, and adding O2 as needed. The US Navy Submarine Guidebook that I last saw instructs submarine commanders to surface and vent the interior atmosphere if the CO2 concentration reaches 7,000 ppm, or 17 times the current atmospheric concentration of 400 ppm. (The US Navy has measured “some cognitive impairment” at ambient levels of CO2 above 7,000 ppm)

At ~60,000 ppm, CO2 in the atmosphere becomes lethal, because metabolic CO2 cannot be transferred across lung epithelial cells to be exhaled when the concentration in the inhaled air becomes that high.  60,000 ppm is 150 times the current concentration of CO2 in the atmosphere. If words have meaning, CO is not a “pollutant.”

If the average atmospheric CO2 concentration over the last 470 mm years was 2500-3000 with a high of 7000, and the “recent lows” of 170-180 ppm were the lowest in Phanerozoic history during which life flourished, this begs the question: why is the current 420 ppm an “existential crisis”? My market analogy would be this: imagine a stock that averaged $25-$30 (after hitting a high of $70) over 470 days crashing down to $1.70 in the last 12 hours (each “day” in my analogy is equivalent to 1 mm years, so each hour = 41,000 years), where it bounced around between $1.70 and $3 for a couple hours.  In the last 40 minutes (~25,000 years ago to now), the stock popped up to $4.20 – does this rally portend a return to anywhere close to the long-term average?  Not so sure about that.  Curiouser and curiouser.

Question 4: I’ve read about some regenerative agricultural initiatives (https://terraton.indigoag.com/about)  that claim to be “the answer” to AGW by sequestering CO2 in the soil. Thoughts?

Giegengack:

Most students of the C cycle would agree that the amount of C now resident in extractable fossil fuels that would be transferred to the atmosphere if all those hydrocarbons are combusted is more than the world’s soils can hold, regardless of whatever process might be used to sequester that C in the soils.  It’s a good idea, but if anthropogenic CO2 is the primary cause of contemporary climate change, soil sequestration of C will not “save” us.  Sure, our agricultural technology, which evolved without much concern for long-term sustainability, is inefficient and destructive.  We know how to “reform” that industry in ways that will allow photosynthesis to take excess CO2 from the atmosphere and store it in soil, standing vegetation, etc. etc. We are beginning to do that, on a modest scale.

Photosynthesis is slow and inefficient (~1-2%), but it works. It will take photosynthesis a long time to store away the “excess” CO2 that human industry has dumped into the atmosphere. One way or another, the allocation of C among Earth-surface reservoirs will probably return to what we have described as a “pre-industrial” concentration, but not in a time frame consistent with what is now almost universally described as an “existential threat.” However, the pre-industrial concentration (280 ppm) is very low compared to the history of CO2 concentration in the atmosphere, and is approaching the level at which photosynthesis  may struggle to transfer essential CO2 to plant tissues. At the very least, at concentrations below 280 ppm, increase of stomatal density in land plants will make those plants more vulnerable to drought stress. [Commercial greenhouses now routinely maintain a CO2 level of ~1500 ppm in the growing space]

There are lots of very compelling reasons to reform global agriculture. That reform will be far too slow to reverse what is now widely described as a dire emergency. I see no evidence to support the assertion that the temperature change since ~1825 AD must be attributed to anthropogenic CO2.  It would be a stunning coincidence if the myriad processes that we know have controlled Earth’s climate for a very long time suddenly all ceased to operate ~200 years ago just to accommodate our need to attribute climate change to  anthropogenic emissions.  Yes, we must reform modern industrial agriculture. To invoke climate change in that argument is a counter-productive distraction.  What happens when we do all those good things and climate does not respond as we predict it will?

To me, this last paragraph is key.  It seems premature to tackle the “how” when it is not clear that the “why” we are solving for is the right “why.”

Question 5: If CO2 is indeed the wrong variable to solve for, what is the “right” variable to solve for? What can/should be done?

Giegengack:

My “geoengineering” solution:  Plant vast areas of the Earth’s surface with eucalyptus trees, known to be the most efficient plant to fix carbon as woody tissue via photosynthesis.  Allow those trees to reach “maturity,” the size/distribution at which they lose C as fast as they fix it, or about 50 years.  Cut down those trees, float them down rivers to the ocean, tie them up in giant rafts, inoculate those rafts with oyster spawn (to allow CaCO3 shells to grow attached to the rafts), pile the rafts high with industrial organic waste, and tow those rafts (slowly, to save energy) to locations over major subduction zones (e.g. Puerto Rico, Aleutian, Mindanao, Marianas, etc. trenches), and let the rafts grow waterlogged and sink, to be recycled through the Earth’s mantle and eventually to return to the Earth’s surface as volcanic CO2 30-150 million years in the future.  To “recycle” via this mechanism the 7.5 billion tonnes of C/yr now delivered to the atmosphere as CO2 via anthropogenic processes would require that we dedicate to eucalyptus cultivation an area the size of Australia (we would cut down, and re-plant, 1/50 of that area each year).  Tall order.

Increased/decreased desertification; melting/growing ice caps have been features of Earth history as long as irregularities in orbital trajectories of planets in the Inner Solar System have driven cyclic climate change on Earth.  We might “stop” those cycles, or at most reduce their amplitude, by altering the orbit of Mars so that it would always remain at 90° to the position of Jupiter.  Or else, we might reduce the amplitude of cyclic climate variation by moving the Antarctic continent off the South Pole.  This would allow equatorial warmth to be transferred to the pole via ocean circulation, and would eliminate “permanent” snow/ice from the South Pole. Thus, the reflectivity of Earth would be reduced, and open water in the southern ocean would absorb more solar radiation. [Of course, global sea level would rise ~90 m when the Antarctic ice sheet melted.  Oh, well, we can’t have everything….]

The professor may well have been facetious in advancing these implausible solutions, but maybe that was his point – that maybe there really is nothing we can feasibly do to influence the climate (at least at reasonable cost) by manipulating just one variable that is far from being established as the clear-cut “right” variable to solve for.

Question 6: What about all the extreme weather events we’re reading about almost daily in the media? Isn’t that due to climate change?

I recently saw a fascinating presentation on climate change, entitled “Climate Change: Does The Data Support The Mania?” given by Chris Wright, a successful energy entrepreneur who is also an engineer and self-professed “climate geek.”  Although this was not the exact venue I was at, the presentation is nearly identical: 

Chris, like me, is a fan of using complete data sets and has given me permission to share this slide (Figure 5) from his deck, which shows that the data around “unprecedented” weather disasters doesn’t really support the media hype.

Figure 5: Extreme Weather Events Not Corroborated by Data

As a resident of California, I’m no stranger to wildfire risk.  In fact, I was evacuated for a week during the Woolsey fire of 2018, and many of my friends were evacuated during the fires of 2019.   While it’s tempting to cast blame on “climate change” as the culprit for “unprecedented” wildfires (as the media and politicians love to do), the actual fire data dating all the way back to 1926 (as collected by the National Interagency Fire Center, NIFC) points in the opposite direction: https://www.nifc.gov/fireInfo/fireInfo_stats_totalFires.html.

Somewhere along the line (specifically around the time of the Agricultural Revolution 12,000 years ago), we humans stopped adapting to climate change and running away from disasters.  Perhaps that is why it is so easy for the media to wax hyperbolic about “extreme weather” when it really hasn’t been extreme at all.  Channeling my inner Star Wars geek, imagine that we lived on a planet like Coruscant which is one gigantic planet-wide metropolis; even a once-in-a-century natural disaster would be heralded as “unprecedented” and “extreme” simply because there would be no place to hide!  Maybe we should be spending more money on adapting to climate change versus trying to change it.

Summary Points

We’ve covered a lot of ground here, so I’m going to try to summarize my learnings in the following bullets:

• This has become a politically divisive topic.  Both sides of the debate have come out with countless rebuttals of the other side, and it is admittedly difficult to cut through the political noise.  I have learned that no matter what “proof” someone comes up with, there always seems to be someone with a rebuttal “debunking” or “discrediting” someone else.  My North Star in my quest to cut through the obfuscation rests upon 3 factors:

  • Reliance upon complete data sets whenever possible

  • Questioning studies that pick arbitrary starting points for analysis

  • Examining underlying incentives and motivations and paying particular attention to authorities with “no dog in the hunt”

• GW is real, and the planet is currently in a warming trend — but the Earth has been in cooling and warming cycles countless times before and will continue to do so regardless of what humans do.

• Be wary of studies that conflate correlation with causality – especially over arbitrarily short time periods.  The modern AGW movement originated with the so-called Mann “Hockey Stick” which was produced using questionable/controversial techniques.  That Mann presided over his own “peer review” for the IPCC Third Assessment severely calls into question the credibility of that body in my opinion.  I’m very wary of sources that have financial/career incentives that are direct beneficiaries of policies supported by their findings.

• Despite all the defenses of the Mann “Hockey Stick,” I have yet to see a study that incorporates “Phanerozoic time” (the last 500 mm years) that still asserts that today’s temperatures/CO2 concentrations are “unprecedented.”

• Based on everything I have read, I believe CO2 is one of potentially thousands of variables that play a part in determining the Earth’s temperature, but it does not appear to be a statistically significant variable in and of itself (Figure 4), so the “Anthropogenic” in “AGW” seems suspect.

• Many people conflate CO2 with air pollution, but that is just factually incorrect.  Where I suspect people get confused is that while it is true that the particulate emissions resulting from burning hydrocarbons can be “dirty,” the CO2 emissions themselves don’t appear to be the culprit many in the media or political realms claim.  Despite the fact that hydrocarbons have become much cleaner over the last century and have at the same time brought cheap energy abundance to billions, modern politics has latched onto CO2 as the bogeyman responsible for everything from floods and fires to malaria and drought.

• To quote Professor Giegengack: CO2 at  “400 ppm is only 0.04% of the atmosphere. Oxygen remains at 21%. Water vapor can rise as high as 4%.  By any measure, CO2 is in the atmosphere as a trace component, but nonetheless an essential component.  It is disingenuous, and deliberately misleading, to refer to CO2 as a pollutant.”

• The Earth has been much warmer and has had much higher CO2 concentrations (Figure 3) long before the Industrial Revolution – yet life flourished. As Dyson and Giegengack both point out, it’s not clear whether more CO2 is bad or good for life. There’s a lot of evidence for the latter (see next bullet).

• To put “400 ppm” into perspective, again requoting Giegengack, “atmospheric concentration of CO2 has been as high as 7,000 ppm (Ordovician-Silurian) and fell as low as 180-400 ppm only in the last few million years…probably a “good” average value for atmospheric CO2 over the last 470,000,000 years would be 2500-3000 ppm.  [The] atmospheric concentration of CO2 through the 8 glacial/interglacial cycles now documented from the Antarctic ice cores, 170-280 ppm, is probably the lowest that CO2 concentrations have fallen in Phanerozoic history (the last 540,000,000 years). Some students of the carbon cycle (e.g. Professor Will Happer of Princeton) have suggested that the world is on the verge of a “CO2 crisis,” as atmospheric levels of CO2 fall low enough to compromise photosynthesis.”  You heard right – some reputable scientists think our level of CO2 might be too low.

• Despite all of these factors, there are extremists who just choose to focus on the 50% increase from 280 ppm to 420 ppm (while ignoring the 2500-3000 ppm average and 7000 ppm high) and claim that unless we take action now to get back to 300 ppm or below, the Earth’s very existence will be threatened.  Again, putting things into perspective, this is saying that if we don’t get a trace element down by 0.01% (the difference between 400 ppm and 300 ppm) we will face extinction.  The paleontological record says otherwise.

• Not only does the statistical correlation appear weak, the direction of causality appears backward.  CO2 concentration increases appear to follow and not precede temperature increases to the tune of an 800-1000 year lag.  Both DuHamel and Happer papers cited earlier say this, and Professor Giegengack corroborates this as well.

• The DuHamel paper also does an excellent job of explaining the logarithmic effect (diminishing returns) of increasing CO2 concentrations on temperatures -- even if we are causing anthropogenic GW through CO2 emissions, it would have smaller and smaller effects at higher and higher concentrations.

• Yes, there are negative externalities to hydrocarbon use, but there are also negative externalities to solar and wind, because these are intermittent sources of energy that require battery storage.  Current battery technologies require lithium and cobalt, the mining and disposal of which requires hydrocarbon energy as an input, is harmful to the environment in its own way, and is done in politically unstable countries (Bolivia and Congo) with questionable labor practices.  Furthermore, unless EV’s get their electricity from all-solar electric plants with no hydrocarbon-burning baseload, the CO2 emissions just move from the freeway to the power plants.  Think about that when you see a Tesla license plate boasting “Zero Emissions.”  There is no legitimate discussion without weighing all factors, and this article sums up some of the externalities I talked about: https://www.weforum.org/agenda/2019/03/the-dirty-secret-of-electric-vehicles/

• Nuclear is the only energy source currently that can supplant hydrocarbons from an energy density/non-intermittency standpoint but environmentalists hate nuclear even more than coal – likely because the externalities are much more violent and obvious (e.g. a meltdown like Chernobyl or Fukushima).

• Despite the “shale miracle” that brought cheap oil to the world, the world is still energy starved, with 2-3 billion people who still lack basic cheap electricity which can really only be delivered via hydrocarbons. There is also no legitimate discussion about “climate change solutions” unless you consider the effects of removing hydrocarbons from an energy-starved world.  The developing world would most assuredly feel a disproportionate effect from such policies. 

• In terms of solutions, I believe that money is far better spent on how to adapt to inevitable climate change instead and making hydrocarbons cleaner instead of quixotically attempting to curb CO2 emissions, which again seems like the wrong variable to solve for.  Prior to the Agricultural Revolution of 12,000 years ago, humans adapted to inhospitable environments simply by moving. That all changed when we set down our agrarian roots and decided to populate ever-denser urban centers.  So even though the data do not support “unprecedented” storms or fires, they feel a lot worse because we no longer flee inhospitable environments like we used to, i.e. we stopped adapting to the environment and started blaming climate change for our problems.  Instead of forcing mitigation of a chimerical variable like CO2 by curbing hydrocarbon use (which would bring untold misery to billions) it may be more productive to pour funds into adaptation, e.g. how better to weather fires, droughts, floods as well as how best to harvest hydrocarbons more efficiently with less particulate pollution (again, CO2 is not a pollutant).

ESG Investing & Disruption of Hydrocarbons

• There has been a lot of attention in the press recently regarding ESG investing.  Blackrock’s big announcement has been all over the news (https://apple.news/A51l0EY9yTq6Qf9kfGl8Ecg).  Climate change has become the centerpiece at Davos.  I think this is both a significant and potentially treacherous development.  As I alluded to at the outset, I believe politics should never drive investing, but when they do markets/sectors run the risk of getting distorted and divorced from economic reality.  That said, there may be ESG investments that prove to be very sound – I believe fundamental economics will be the primary determinants of that soundness and not politics.  Investment theses need to be viable without government subsidies, and it is not clear that we are there yet (here is one example: https://www.bloomberg.com/amp/news/articles/2020-01-13/electric-car-stocks-jump-as-china-signals-lull-in-subsidy-cuts).

• On the investment side, I’m constantly in search of reasons to invalidate my cyclical call on the oil & gas sector.  This whole debate has gotten me thinking much more about the possibility of secular disruption, but it’s not apparent to me whether a) the advent of renewables will be evolutionary or revolutionary (disruptive), and b) how best to play those themes.  Not only are there polar opposite schools of thought regarding the level and speed of disruption, economics of certain verticals like solar are still heavily distorted by China’s willingness to lose money in order to dominate that market.  I have not yet identified an obvious part of the supply chain that to me will benefit disproportionately in terms of ability to extract economic rents consistently.  Please let me know if you do!

• Tony Seba, an author and evangelist of “clean energy,” is a true believer of rapid disruption of the oil & gas and auto industries by renewables and EV’s: 

• Seba is a big believer in S-curve adoptions and believes that the energy and auto industries will be rapidly disrupted by the confluence of rapidly declining costs of EVs and autonomous driving.  If he is right, the oil & gas and internal combustion engine (ICE) industries may not exist in 5-10 years.  Humorous aside: the last time I heard so much “S-curve” talk was when George Gilder pronounced, circa 1999, that fiber optics stocks like JDS Uniphase (JDSU, also known as “Just Don’t Sell Us”) would rule the world forever because of similar S-curve predictions of the Internet adoption.  While the Internet did change the world, there was also a spectacular crash of “New Economy” stocks that were the disruptors.  I am not a Luddite – just a contrarian investor that is skeptical of the risk/reward of some of the disruptor business models.

• Mark P. Mills, a senior fellow at the Manhattan Institute and a faculty fellow at Northwestern University’s McCormick School of Engineering and Applied Science, wrote a paper entitled ‘The "New Energy Economy": An Exercise in Magical Thinking’ (https://www.manhattan-institute.org/green-energy-revolution-near-impossible) in which he argues very persuasively that “systems that produce energy and those that produce information” have profound differences based on physics that make any near or even medium-term disruption impossible, because “in the world of people, cars, planes, and factories, increases in consumption, speed, or carrying capacity cause hardware to expand, not shrink” as is the case with bits, which is why Moore’s Law works in that realm but not in the energy realm.

• In particular, Mills makes a point about hydrocarbons which I have mentioned in past Kaoboy Musings: that nature has already invented the perfect “battery” in terms of energy density, transportability, storability and now low-cost thanks to the shale revolution.  “In practical terms, this means that spending $1 million on utility-scale wind turbines, or solar panels will each, over 30 years of operation, produce about 50 million kilowatt-hours (kWh)—while an equivalent $1 million spent on a shale rig produces enough natural gas over 30 years to generate over 300 million kWh.”

• That said, I think renewables will benefit society, because as I stated many times, a large chunk of the world is energy starved. Any new energy sources are good energy sources.

• Meanwhile, I believe that the world will not even come close to weaning itself from hydrocarbons any time soon, whether you believe in AGW or not. I think that it will take a lot longer to supplant hydrocarbons as the world’s primary energy source.  Solar and wind are great except for intermittency, so the gating factor comes back to utility-scale battery storage, which in turn is constrained by lithium and cobalt mining and disposition (I already mentioned the externalities).  Quoting Mark Mills: “The annual output of Tesla’s Gigafactory, the world’s largest battery factory, could store three minutes’ worth of annual U.S. electricity demand. It would require 1,000 years of production to make enough batteries for two days’ worth of U.S. electricity demand. Meanwhile, 50–100 pounds of materials are mined, moved, and processed for every pound of battery produced.”

• Bottom-line: I think we are a long way from a fully solar-powered grid that can store enough power to avoid the need for a hydrocarbon-based baseline capacity.  And if we are a long way off, forget about the developing world where 2-3 billion people lack basic electricity from any source!

• As an aside, look no further for a poster-child riding the crest of ESG than TSLA, which trades at a stunning 128x 2020 estimated earnings.  I think part of the reason for TSLA’s bubblicious valuation is that there is no obvious pure-play winner anywhere else.  With TSLA stock hitting $580+/share and approaching $110 bn in market capitalization (vs. GM’s $50 bn) and shareholders making the case for $6000/share on CNBC (yes, that would be over $1 trillion inmarket cap!), the expectations built into TSLA’s valuation are downright reminiscent of the 1999 era.  Meanwhile, oil & gas stocks trade at a moribund 2-4x EBITDA, are inflecting to free cash flow, and collectively as an entire industry are still worth less than AAPL alone!  I’ve never seen a relative market distortion of this magnitude.  Maybe I’m the “Old Economy” toad that doesn’t realize the “New Economy” pot I’m sitting in is boiling until it’s too late, but a lot has to go right for TSLA and a lot has to go wrong for oil & gas over the next several years for this to persist. 

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