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27 February 2020

JP Morgan and climate change – 4 out of ten must try harder

The headlines this week talk about a report issued from JP Morgan on climate change, suggesting that business as usual will result in climate change creating a catastrophic situation that the world has never previously seen.

People were so shocked they just went with the headlines and did not read the report. On first reading the report looked like it had been written by the IPCC. It was, for the most part, a rerun of the arguments in favor of anthropomorphic global warming, designed for an audience which to date, has either ignored the subject or been skeptical – US investors.

But it peters out into a weak conclusion where it expects Business As Usual to win out, with governments powerless or unwilling to change course and while it recognizes that “nuclear has fallen out of favor, and geothermal and hydro are both constrained by geography, so the real issue is the ongoing development of wind, solar, bioenergy, concentrated solar power (CSP) and marine, which together accounted for 9.8% of electricity generation in 2018,” it fails to go any further.

Clearly nuclear has fallen out of favor because it is slow and really, really expensive to do safely and there is no other way to do it; hydro has been stalled by layer upon layer of required environmental permissions that in advanced nations takes an average of 10 or 12 years to get through; and somehow it has managed to lump bioenergy – which is basically building up a carbon debt that you promise to pay back at some future point and which fails to reduce CO2 – and marine (too expensive) and CSP (unscalable at value) with genuine solar and wind renewables.

The conclusion should have related to the incredible journey that both wind and solar have been on to lower costs and effectiveness, and so where was the warning to investors to stay out of “Business as Usual” investments in fossil fuels, because they would be bankrupted by renewables? No such conclusion was reached because on the key issue of costs, JP Morgan did precisely zero research.

It concluded after 22 pages that the issue is not the lack of potential opportunities for renewables, but the cost. “Coal remains the cheapest source of electricity and the stock of coal-fired power stations is relatively young. Around 60% of the stock is less than 20 years old, compared with a design lifespan of up to 50 years.”

None of that is right. Much coal stock is in its last 10 years, and relatively few are young. And it is NOT the cheapest form of electricity, solar is. How has JP Morgan managed to miss that? Consistently financial organizations which have limited experience funding renewables, underestimate the last 3 or 4 years cost reduction that has gone on in renewables, cite old out of date solar prices from 2010, and managed to forget that coal and gas systems are massively subsidized. Even the World Bank has pointed that out repeatedly in free documents – so how come these two eminent economists cannot look up LCOE numbers of currently awarded products which are published daily in the free press? It beggars belief.

It concludes that according to the IEA (another organization widely understood to underestimate renewables and current pricing of them) to meet the Paris 2⁰C objective on the global temperature, the lifespan of coal-fired power stations would need to be limited to 25 years (most are 35 not 50), which would require the immediate elimination of 34% of the global coal-fired production capacity.” Look up how much retired this year.

Well that is currently happening, and it’s happening simply because coal is so inefficient, not because people are nobly agreeing to close coal plants early. Coal plant owners are simply going bankrupt. Have these people been living under a rock for the past 20 years?

They conclude, “The cost would involve not only the premature scrapping of these coal-fired power stations but also the increased investment in renewables. The end result could be energy shortages and higher electricity prices for consumers. It isn’t going to happen.”

If you follow the daily Federal Energy Regulatory Commission wrangling in the papers, you will see that it has deliberately blocked renewables from undercutting fossil fuels on many major markets. The result will be an increase in energy prices, because FERC has forced renewables onto a minimum price – simply because renewables were driving down costs, which fossil fuels could not handle. So in its own back yard, government pressure is being brought to bear to PREVENT renewables from lowering prices.

What they say can’t happen is already happening, China is virtually ready to put a block on new coal, US coal is going broke, the EU countries have each declared end of life to coal at various dates from 2035 to 2050. South East Asia is perhaps something of a problem, as is Africa, which China is selling coal plants against its governmental policy. That too will soon stop.

JP Morgan should be saying that business-as-usual opens the earth to a greater likelihood of catastrophic outcomes and it does, but it offers zero investment advice because it simply runs out of IPCC reports to copy.

It’s such a shame because the reported started well.

JP Morgan economists David Mackie and Jessica Murray began examining the problem, that population growth, and GDP growth exert upward pressure on emissions. This is related to the energy intensity of GDP growth and how much of that is based on renewables.

It cites UN estimates on population growth from today’s 7.7 billion to 9.7 billion in 2050 and 10.9 billion in 2100 – caused by a combination of declining fertility and increasing longevity. So it starts its case saying that energy requirements will be going up not down.

It misses entirely the idea that environmental protections in the EU have driven down electricity costs consistently, and this is a permanent effect but for one thing, the rise of Electronic Vehicles and the shift from gas heating to electrical heating are anticipated, and that will lead to electricity growing a few percentage points, before beginning to fall once again. But then again most of the EU countries have a declining population except for net migration – despite both declining fertility and increased longevity. Explain that.

But being economists they are more married to the growth in GDP per capita which they say will rise of 2.1% per year in the period 2010-2100. There is no explanation of this, it is the global top domain rule of economists – GDP MUST rise, even if everyone has to die.

But we are witnessing a decline of the energy intensity for each new point of GDP that is added. Yes that has to increase, but as renewables produce more and more of the total electrical mix, that will happen.

What the report completely fails to give a good account of, is what life will be like and if it is possible to continue society as average temperatures rise. It has percentile calculations that potentially see temperature increases of up to 7.8 degrees. But because these two are ONLY economists, the report does not point out that the world will have ended by then. At those kinds of average temperature increases the food and water security of around 4 billion people is destroyed causing widespread migration, disease and inevitable wars for resources, ending in almost certain thermonuclear war and the end of the planet. Anyway it puts those extremes down anyway, as if they were just another fact and assumes that workers may be a bit less productive – well yes, if they are dead, they would be.

JP Morgan simply sums it up by saying “It is possible to argue that the impact of ongoing emissions on the climate will be modest. It is also possible to argue that it will be catastrophic.” Which in a way just shows you the lack of certainty in the minds of the authors. Most of the ranges beyond 3.5 degrees that they talk about would be totally catastrophic and there at the very least would no longer be a JP Morgan or a global banking system. We always ask people to imagine what would happen if the global internet were turned off, that usually gets people’s attention.

Then the report gets into the really sensitive and contentious area of positive feedback systems, which will all proceed to make things worse if they are triggered. It lists potentially very fast feedbacks as including more water making bigger clouds that trap heat and the artic sea ice becoming less reflective and absorbing more heat, and the same for glaciers. It’s a short list, and there are many more, mostly the potential for the major CO2 sinks – forests and seas to become saturated.

Then we are on to rising sea levels and the melting of the Greenland ice sheet causing some 7 meters rise and likely within 500 years. But of course much of it will melt in this century, but just how much by 2050 or 2070 is not clear. Neither is the Antarctic, although there are daily items in the news about all of this ice melting faster than was previously forecast.

There is one negative feedback loop it has missed however. As 4 or 5 billion people die from lack of food, war, pestilence or thermonuclear war, we are almost certain to produce less CO2, won’t that be a relief.

It becomes clearer and clearer with events like Corona Virus that economic activity is what causes CO2 emissions to rise (China’s output dropped 25% since the outbreak), if we did not drive to work, use electricity at work, and make concrete and steel for manufacturing, CO2 levels would be far lower.

The report even bothers pointing out that in the Late Cretaceous, 90 million years ago, CO2 reached 1000 parts per million, the temperature average rose 6.5 degrees and the sea rose 170 meters. Still no mention of New York, London and Paris all being under water at that point, but you get the drift. This is a bad thing and we should stop it if we can.

And how would all that affect GDP growth as if that would still be important to anyone?

Most macro assessments focus on the impact of changes in temperature on crop yields, labor supply and labor productivity. We had trouble at this point taking the report seriously – but let’s bear with it.

The two economists bemoan the lack of forecasting around GDP in a warm future. There is a reason for this, most sensible people don’t need it pointed out to them.

Because if all the glaciers have melted, and seasonal snowfalls become rainfalls – just looking at the Himalayas, that would threaten the food and water security of about 2.5 billion people alone – the water flows to the seas in three days, instead of leeching out off ice sheets for 8 to 9 months, the result are floods, followed by an 8 month drought, followed by crop failure and mass deaths. We will not be looking at GDP by that point – trust an economist.

The report then refers to a recent econometric study which considers the impact of temperature and precipitation changes on labor productivity growth.

This study gets data from 1960-2014 across 174 countries. It looks at the impact on labor productivity of deviations in climate (temperature and precipitation) from their historical averages. Their analysis suggests that an increase in the global average surface temperature of around 3.5⁰C above pre-industrial levels – broadly a business-as-usual (BAU) environment in line with the IPCC RCP 8.5 scenario—would reduce global GDP per capita by 7.2% by 2100. Up to 3.5⁰C it may have a point, but beyond that things deteriorate fast.

They are pretty much saying a loss of 7.2% is livable with and conclude that in no estimate is the level of income in 2100 lower than it is today (GDP growth is so important to them).

But in the end the paper comes right when it says that a business as usual climate policy would likely push the earth to a place that we haven’t seen for many millions of years. Experience over recent decades is not a useful guide to that kind of future.

Moreover, economists have struggled to quantify the impact of other aspects of climate change beyond temperature and precipitation, such as extreme weather events, droughts, heatwaves, floods and sea level increases. Now they’re getting it and they produce this graph which has no numbers on it. They missed out thermonuclear war.

The headline findings of the report are the following: in the absence of policy action, climate change may result in the movement of 143 million people within their countries’ borders by 2050 and that Sub-Saharan Africa stands to be most affected. We are already having that kind of migration in the middle east in a war zone. They must have missed at least one zero from the end of their calculations.

They it speculates that in the 1840s’ the Irish Famine was responsible for a vast external migration of Irish people to North America and England, since a mostly rural Ireland offered no industrial alternative to sustain a  livelihood. That was about half of the county’s population.

Re-calculate that for half the population of India, Pakistan and Bangladesh – into places like China and you are getting the picture.

This is half a report, and it concludes that we should not panic but has no  investment advice. It needs another such report which suggests that all of its clients invest in renewables, and pull all of their money out of fossil fuels, but somehow these economists could not quite find that advice in their hearts, because the bank has spent the last 30 years telling them to place all their money on black – Oil and coal. We reached out to both Mackie and Murray – but did not get the courtesy of a reply.