Only capitalism will save the planet

Even the oil majors admit there is a climate crisis – anthropogenic global warming (due to made-made greenhouse gasses) is now undeniable. Getting to net zero will not be easy – but the Chinese are now on board, ahead of the Americans. This goal will require the development and deployment of new technologies. But countries which use the market to manage this historic transition will fare better than those which espouse green socialism – and they will do less damage to the environment.

Activists versus markets

While the global coronavirus pandemic has diverted attention away from the fraught issue of climate change and what to do about it, the environmental activism of groups such as Extinction Rebellion (XR) has continued to simmer. In fact, this year XR has blended with the Black Lives Matter (BLM) movement such that explicitly anti-capitalist environmental protest and anti-patriarchal, anti-colonial wokery have become intimately entwined. The underlying message is: If you want to save the planet you have to change the system. In practice, all protest movements have many threads – just look at the two-year campaign of the gilets jaunes in France – but the unifying thread is always resentment.

The irony is that both aspects of this counterculture are out-of-date. Rapid advances in technology, facilitated by the free market, have transformed the climate conversation. Whatever Mr Trump’s rhetoric on the issue (and he may well be in the departure lounge by the time you read this), the big energy companies, backed by a raft of environmentally conscious investors, are already transitioning towards renewable and zero-fossil fuel energy precisely because it is now economically viable to do so. And in that process, they are making money. Win-win.

Outright climate change denial was always a marginal school of thought. Thinking people – of which the business and investment community – understand well that manmade carbon emissions increase the concentration of CO₂ in the atmosphere and thus precipitate a greenhouse effect by which the Earth’s atmosphere and seas warm up. That said, there is a respectable scientific debate about how quickly that process is taking place and how quickly it will cause irreversible results such as desertification. And it is perfectly legitimate to question the climate models which climate scientists construct to estimate these outcomes, since many have questionable inputs and methodologies. Claims that we have ten years left to save the planet can and should be challenged, though that should not be an argument for further delay in taking action. 

The global policy framework has been constructed by the ongoing work of the Intergovernmental Panel on Climate Change (IPCC), an agency of the United Nations (UN). This body laid down two years ago that our target should be to limit the rise in ambient temperature to no more than 1.5 Celsius above pre-industrial levels. That said, there are many climate rebels who believe that this level will itself be disastrous to human and animal life; and still others who claim that even this target is entirely unrealistic given the direction of travel.

Ms Thunberg and her disciples would have us shut down the carbon-based economy forthwith. That would cause unparalleled economic disruption, mass unemployment, poverty, adverse health outcomes and – let us be honest – starvation. No mainstream politician is going to get behind that.

Zion Lights is a writer who has been an environmental campaigner all her adult life. She doesn’t drive, fly or eat meat. In April 2018 she joined XR because she thought it was evidence-based. She soon found that many of its claims were indefensible. She wrote recently:

That is the single biggest problem with most environmental groups: they don’t offer realistic solutions to the very real climate change threat. What they offer, if you follow their arguments to their logical conclusion, is eco-austerity: that we should all use less energy, stop going on holiday, live in colder homes, and so on^[i].

In the latest papal encyclical published on 04 October (the feast day of St. Francis of Assisi), Fratelli Tutti (Brothers All), Papa Francisco wrote that the Covid-19 pandemic had proven that the “magical theories” of market capitalism have failed and that the world needs a new type of politics that promotes dialogue and solidarity. (Perhaps the unjustified restrictionism pursued by First Minister Drakeford in Wales?)

In fact, much as I respect Catholic social teaching (having been brought up with it), the best chance we have to solve the immense challenge of climate change and other environmental problems (such as plastic waste in the oceans) is to harness market forces. In this way, the profit motives of finance and technology will re-engineer the global economy completely.

Big money already decided that the fossil fuel economy is doomed and that renewable energy is the future long before Dame Emma Thompson swept in from LA (business class, of course) to gesticulate on Oxford Street, in those languorous pre-Covid days. The billionaire Davos Boys have been preaching climate orthodoxy for years. And the Great Transition is already well underway.

Renewable profitability

The good news is (don’t tell XR) that the United Kingdom has managed to reduce its carbon emissions by over 40 percent since 1990 by all but phasing out coal and investing massively in renewable power generation. As I write this on a blustery day in late October, according to the GB National Grid Status website, coal powered generation is contributing precisely zero to UK power generation. The UK has the world’s largest offshore wind power market with capacity still increasing rapidly. Earlier this year the UK government effectively dropped the ban on onshore wind turbine arrays in the drive to reach net zero carbon emissions by 2050.

As the shift from carbon-heavy sources to carbon-free electricity generation has accelerated so economies of scale have kicked in and new technologies have come online. Recent data from Bloomberg New Energy Finance shows that the latest generation of solar and wind power plants can produce electricity cheaper than the most modern coal plants even without subsidy for two thirds of the global population. The price of solar panels has dropped by almost 90 percent over the past decade. By mid-decade, solar and wind power will outcompete all existing coal plants on price – at which point a swath of coal plants will be deemed uneconomic and closed.

The economics of energy storage – battery technology – are also improving. On 22 September Tesla (NASDAQ:TSLA) unveiled its new battery known as the 4680^[ii]. This fuel cell reportedly offers six times the power of Tesla’s previous cells, and five times the energy capacity. The company confirmed that the new cell measures 46 millimetres by 80 millimetres – hence the name. The iconic automaker says that these new fuel cells will be able to increase the range of a vehicle by 16 percent – that could be up to about 500 miles for its latest models. That kind of range makes medium-distance travel without recharging (say, London to Edinburgh in a UK context) quite feasible.

Red China goes green

China currently has new coal plants under construction which will have a capacity of another 94 Gigawatts of electricity per annum. China already emits more CO₂ than all of Europe and America combined. But China now has a target of going carbon neutral by 2060, and by so aspiring has upped the moral ante with Mr Trump’s America. Now, some analysts predict that China may abandon its programme of building coal-fired power stations as much on economic grounds as on environmental ones.

China might yet gain a strategic advantage from global warming. Last month the UK First Sea Lord, Admiral Tony Radakin (the military head of the Royal Navy), warned that the melting of ice in the Arctic would create new maritime trade routes across the top of the world – the Arctic Ocean – which would halve the transit time between East Asia and Western Europe. China already has, according to the Pentagon, the world’s largest navy with 350 warships and submarines. That opens the prospect of Chinese naval vessels being able to penetrate the North Atlantic rapidly, and possibly threatening the European and American undersea cable network.

Hydrogen in three colours

The downside with the current generation of electric vehicles is that they require batteries which use expensive rare earth minerals of which lithium, and which are costly and messy to recycle at the end of their economic life. The extraction of these rare earth minerals in countries such as the Democratic Republic of Congo (DRC) is itself a cause of environmental degradation and carbon emissions. That is why there is renewed focus of attention on hydrogen.

Hydrogen comes in three colours. Gray hydrogen is made using fossil fuels like oil and coal, which emit CO₂ into the air as they combust. The blue variety is made in the same way, but carbon capture prevents CO₂ being released, enabling the captured carbon to be safely stored deep underground or utilised in industry. BP (LON:BP.) is working on that. As its name suggests, green hydrogen is the cleanest variety, producing zero carbon emissions. It is produced by electrolysis powered by renewable energy i.e. offshore wind.

The holy grail in energy now is to extract hydrogen cheaply and cleanly from water by electrolysis (i.e. separating the hydrogen and carbon atoms). Hitherto the energy required to perform the electrolysis has been unequal to the energy value of the hydrogen thus produced. That could be about to change.

Bill Brown, founder of NET Power has claimed that his firm’s techniques can produce clean hydrogen at 0.57 cents a kilo. This is a developmental technology based on the Allam Cycle which has been around in theory for some time. 

Hydrogen can power vehicles, trains, ships and even aeroplanes. When hydrogen is ignited the only by-product is water. Hydrogen could also be used to facilitate the manufacture of steel, cement, glass, chemicals and fertilisers. Goldman Sachs reckons that, if the efficiency of hydrogen electrolysis could be sufficiently improved, then about 45 percent of all global carbon emissions could be eliminated.

Electric cars

Some estimates suggest that electric battery-powered cars could compete on price with conventional cars powered by internal combustion engines (ICEs) as soon as 2024. That is one reason why Tesla shares have rocketed this year. But even if you are not a true believer in Tesla, consider that established automotive giants such as Volkswagen and Daimler-Benz are fully committed to the phase-out of ICEs. In Germany, sales of electric and hybrid cars overtook diesel cars for the first time last month.

I’ll have a lot more to say about the outlook for electric cars soon.

From coal to wind

Dalmellington in Ayrshire, Scotland, was once known as a coal-mining town. But in future it is likely to be known as the location of a 50-turbine wind farm. The new 240 Megawatt facility will be built and run by Vattenfall (owned by the Kingdom of Sweden). But the array will be owned by the infrastructure fund, Greencoat UK Wind PLC(LON:UKW), which has acquired the project for £320 million.

Greencoat has emerged as a growing renewables fund which is now included in the FTSE-250 index and which has a market capitalisation of around £2.5 billion – that’s more than the better-known UK energy company Centrica PLC (LON:CAN), the owner of British Gas. The fund has acquired 36 wind power sites which collectively produce enough electricity to power about one million homes – that’s about five percent of all wind power generated in the UK. Some of those arrays were acquired from Scottish & Southern Energy (LON:SSE). Wind power now accounts for about 20 percent of Britain’s total electricity consumption.

Greencoat’s strategy is to encourage energy giants to green up their portfolios by taking all the development risk. It then buys the asset from the generator and pockets the cash flow arising. Greencoat UK Wind is run by Greencoat Capital, a specialist investor in renewable energy which has £5 billion of assets under management across both wind and solar energy. Greencoat raised £375 million from investors in May 2019.

A report last year by the research firm, Hardman & Co. found that returns for listed renewable energy funds over five years approached 10 percent. Such funds often carry a share price premium over their net asset value. At a moment when the share prices of the oil majors are under pressure and when BP and Shell have slashed their dividends, Greencoat’s 4.8 percent dividend yield is pleasing.

Nuclear

The latest thinking is that carbon-free energy capacity could be ramped up quickly by means of a cluster of British designed and manufactured small modular reactors (SMRs) which have a footprint smaller than two football pitches. A consortium of Rolls Royce (LON:RR), WS Atkins (LON:ATK), Laing O’Rourke (LON:JLG) and the National Nuclear Laboratory is in the vanguard of this technology. Rolls-Royce has experience and expertise in building nuclear reactors to power Britain’s fleet of nuclear submarines, so this is not new technology. Reportedly, the UK government is considering the injection of up to £2 billion of state funds to invigorate the concept – assuming it is permitted to do so by the EU (if there is an agreement).

The idea is that by 2050 more than 12 of these SMRs will be operational in the UK, each with a capacity of about 440 Megawatts – so about one seventh of the conventional nuclear plant currently under construction at Hinkley Point, Somerset. Hinkley Point C is a project led by France’s EDF (EPA:EDF), the costs of which have spiralled up to an estimated £22.5 billion. Cost considerations have caused Toshiba (TYO:6502) and Hitachi (TYO:6501) to pull out of projects to build nuclear plants in Wales and Cumbria. In contrast, SMRs might have a price tag of around £2 billion each.

SMRs are easier to switch on and off than conventional large-scale reactors; thus, they can be held on standby for when wind and solar power wanes. Thereafter, the remaining gas turbine plants that are currently used for that purpose can be phased out. But it does not follow that the new roll-out of SMRs would entail the closure of Britain’s conventional large-scale nuclear reactors which, as I write, are supplying 17.2 percent of total power to the national grid.

A US consortium, NuScale, is also looking at SMRs with a capacity of 60 Megawatts. 

The fate of the oil majors

I wrote in the February 2020 edition of the MI magazine that the oil majors are here to stay. I meant by that that there would still be continued demand for oil, if much attenuated, after the transition to a net-zero carbon economy, not least because of the need for oil in petroleum derivatives (of which plastic). I did not foresee even then that the economic case for renewables would advance quite as rapidly as it has done this year; nor was it then apparent how the coronavirus pandemic would reduce the global demand for oil, at least in the short-term.

Another reason why the oil majors may not go extinct quite yet is that they have embraced carbon capture and storage (CCS). Indeed, they have become advocates of high carbon pricing, calculating that it will mobilise technology to accelerate CCS. Under US legislation enacted under the auspices of the US Department for Energy, operators can claim $50 for each tonne of CO₂ sequestered underground and $35 per tonne if pumped back into declining wells.

A number of large players, including Saudi Aramco (TADAWUL:2222), ExxonMobil (NYSE:XOM), BP (LON:BP.), Shell (LON:RDSA), Total (LON:TTA) and others, have jointly formed the Oil and Gas Climate Initiative(OGCI) to drive CCS projects. The OGCI is a consortium that aims to accelerate the industry response to climate change. OGCI member companies explicitly support the Paris Agreement and its goals.

Just as with wind power and solar, the costs of CCS are in free fall. ExxonMobil has teamed up with FuelCell Energy to extract CO₂ using carbonate fuel cells. Total, Shell and Equinor (NYSE:EQNR) are part of the Longship project in Norway which is planning to take CO₂ captured in Europe’s industrial heartlands and pipe it to storage caverns beneath the North Sea. It hopes to lock in eight million tonnes of CO₂ per year by the middle of this decade, for which they will charge around €60 per tonne. Memoranda have already been signed with ArcelorMittal and Heidelberg Cement.

Cement is responsible for an estimated eight percent of global carbon emissions. Under the auspices of the OGCI, a venture with LafargeHolcim, the materials giant, uses CO2 rather than water to cure concrete at much lower temperatures than in conventional manufacture, thereby breaking down the CO₂ molecules and turning carbon into a form of glue. This enables a 70 percent reduction in CO₂ emissions and an 80 percent reduction in water use.

In terms of their market capitalisations, ExxonMobil, BP and Shell combined are now worth less than Tesla alone. Exxon was once the world’s largest company by market cap. As I write it is worth just $136 billion against Tesla’s $390 billion.

The oil price is down from around $53 a barrel 12 months ago to around $37 today. That is partly a function of reduced global demand arising from the lockdowns across the world; but one should not assume that it will rebound even if the pandemic is behind us one year from now. That means that a lot of new exploration and drilling activity will be regarded as uneconomic – and a lot of known reserves will remain beneath the Earth for evermore. But if the oil majors can really crack the challenge of CCS and prospectively begin to reduce the volume of CO₂ in the atmosphere, they will succeed in reinventing themselves.

One consequence of reduced demand for oil will be that the oil-dependent economies of the Middle East – Saudi Arabia and friends – will be seriously disadvantaged unless they accelerate their transition to the post-carbon economy. The fall in demand for hydrocarbons will hit the Russian economy hard and could have a destabilising effect on the regime of Mr Putin. Liquefied natural gas, which is regarded as doubly obnoxious because the freezing and unfreezing processes emit CO₂, and then emits more CO₂ when burnt as gas, will soon become extinct. That will hugely impact states which export it in quantity such as Qatar.

The cost of shale gas has been falling in the United States, and will soon outcompete liquefied natural gas (LNG) on which Britain is still dependent as a source of back-up energy (i.e. when the sun isn’t shining and the wind isn’t blowing). Shale gas, however, is controversial, given widespread opposition to fracking which arguably can pollute the water table. In the presidential debate of 22 October Mr Biden seemed to suggest that if he were president his administration would outlaw fracking altogether.

Conclusion

Overall, the trauma of the coronavirus pandemic has accelerated the Great Transition from burning fossil fuels to using clean, renewable energy – even if it might not look like that right now. A few weeks ago, British Airways retired the last of its kerosene-guzzling Boeing 747s, replacing them with 777s which are at least 25 percent more fuel efficient per passenger kilometre flown. Joe Biden – assuming he is President-elect when you read this – will probably hold China to account on its ambitious promise to go carbon neutral by 2060. 

Build back better. And cleaner. You can go home now, XR people – and cultivate your gardens.

^[i] Why I left Extinction Rebellion to campaign for nuclear power, Daily Telegraph, 10 September 2020. Available at: https://www.telegraph.co.uk/women/politics/left-extinction-rebellion-campaign-nuclear-power/ {paywall}.

^[ii] See: https://electrek.co/2020/09/22/tesla-4680-battery-cell-bigger-power-energy/