© Robert Ayres
|
I think we are on the threshold of a new era, with renewables being a central part of it due to several reasons. First of all, the climate change problem is actually much worse than the last IPCC report suggested a few years ago. What we see now is that the size of the glacial cover is decreasing, the ice in the Arctic Ocean is getting thinner rather rapidly; in Northern Siberia, Northern Alaska, and Northern Canada frozen tundra is melting as the air temperature warms up in the summer and does not get so cold in the winter. When the tundra melts the organic material in the soil begins to decay, emitting methane, which is 30 times more potent as a warming agent than carbon dioxide. Thus, increasing methane input to the atmosphere accelerates the "greenhouse" phenomenon that is already happening. The success of "fracking" has made renewables less competitive, in the short run. It is certainly true that gas from shale is better than coal. If it could be used only as a substitute for coal, it would help to some extent.
If the big oil companies are allowed to drill in the Arctic Ocean, they are going to make the climate problem still worse. The two-degree C. "cap" on global temperature rise that seemed feasible a few years ago now seems far too optimistic because nothing has been done to cap emissions. In addition to that, since the global temperature will continue to rise for decades, it will result in an increase in the sea-level. If (when) Greenland ice melts, the sea-level rises by around six metres. Can you imagine what a six meter higher sea level means to those, who live along the coasts? It means that some island countries literally will disappear while others will shrink to unsustainable nubs. It means that much of the most highly productive agricultural land in the world, which is in river deltas, is going to be flooded. Refugees from the lowlands will move to the towns and cities at higher altitudes, demanding assistance from governments with no surplus resources. Social stability will be adversely affected, mostly in the countries least able to cope.
A lot of scientists have understood this reality, but very few politicians are willing to take it seriously enough to change policy. Will they ever? There is a technological consequence. In order to survive the next century or so, the world needs to get away from its current "addiction" to fossil fuels. That means replacing the internal combustion engine, which powers all transport, agricultural and construction equipment, but that depends on liquid hydrocarbons from fossil fuels, like diesel oil and gasoline.
Insurance companies are especially vulnerable. They are going to find that they have no money to pay for the increasing storm, flood and other climate-related damage that is expected in the next few decades from ever greater natural disasters. Thus, insurance companies (and re-insurance companies) are already in trouble whether they know it or not. That means that the pension funds owning their stocks are also in trouble. Another problem is that the financial crisis is still here and most of the OECD countries have not recovered yet. Economic growth is still very slow in the U.S. Europe and Japan, because it depends on increasing use of energy. Central banks, especially the U.S. Federal Reserve, the ECB, the German government, and British government, have kept interest rates extremely low to encourage economic growth by encouraging investment. They would do better by cutting energy costs directly, if they could.
However, those very low rates of interest mean that the bond- holders, which are the long-term investors, are now getting very little return on their investments. I do not see much discussion of this problem in the financial pages, but I think the situation is ominous. The answer, I believe, must be similar to what investment banks did in the 1990s and 2000 period, namely, to create "securitized" long-term investment vehicles based on packages of investments in a variety of renewables, ranging from wind power to geothermal, PV, and tidal. True, home mortgages have a long history, while investment in renewables does not. Investing in one project, or one mortgage, is very different from investing in a fractional share of 1000 diverse projects. There is no need for the retail investor to have detailed information about each project; an investor in wind (for instance) can rely on the law of averages based on past experience, provided the underlying engineering analysis is sound. What has to happen in my opinion is that a large number of small projects have to be pooled together into large packages, such as the CDOs that were introduced for mortgage based bonds in the ‘90s.
One specific opportunity that I see, which nobody has exploited yet, is the opportunity to offer energy service contracts to residential housing. If it is an established business, the energy service companies do offer services to municipalities, factories, hospitals, and institutions that are pretty big, where there is a sense to do engineering survey, to calculate the possibilities for saving on energy costs. However, the energy service companies do not offer services to residential housing. The reason is that the amount of money involved is not enough to justify individual engineering surveys or individual contracts. Thus, what would change that situation would be creating a market for a very large number of these projects using average numbers for what can be saved at different locations, types of construction, income levels of the owners etc. Thus, the housing market would be used not to sell mortgages per se, but to sell energy services to make the houses much more energy efficient, which in fact can be done at a profit. That could then be the basis for long term investments, which could provide enough income to keep the insurance industry in business.
You share an idea, that "the financial system can create energy-backed securities", which may present a new way for inventors, innovators, and developers to raise funds. However, as opposed to the housing market, the renewables are not nearly as old and established. Thus, there might be tough challenges to convince financial institutions and rating agencies that they are a reliable investment that can provide good, long-term returns without high default rates. In your view, what could be the other challenges and how could they be overcome?
I agree that it will be a tough sell. One main challenge is, of course, opposition by economic sectors that will be hurt, starting with the energy sector, because the whole idea is to save energy. If householders save enough energy, the fossil-fuel suppliers will sell less. The electric power sector will be affected too, because it will be selling less power to households. But if the automobile industry becomes electrified, that would be beneficial for the electric power producers, but it would be bad for the current automobile companies. Thus, there are a lot of companies that will be hurt by the transition.
The second challenge is major regulatory barriers that would have to be changed, for example, the carbon-trading system that exists in Europe, which is clearly not working. The tax system does not now encourage investment in efficiency. There are a number of schemes that could change this. The simplest idea would be to tax energy inefficiency at the corporate level, per se. The government could establish a moving efficiency target for each of the large energy-consuming sectors, with under-performers paying proportionally higher tax rates. This would be hard to implement, but worthy of consideration. There are other approaches In my opinion, we need to treat investments in different areas quite differently. Pollution taxes on so-called "greenhouse gases (GHGs) are another possibility. Capital gains are still another area of potential. Capital gains on profits from buying and selling stocks of established firms in the market should be higher than they are, whereas capital gains on energy-startups might be eliminated altogether.
Much more needs to be done in this area.