Jupiter Merlin Weekly: A ‘revolution by coercion’?
Jupiter Merlin Weekly: A ‘revolution by coercion’?
This Jupiter Merlin Weekly discusses how different countries are grappling with the path to net zero and what the political and economic costs of the journey might be.
Investment Manager & ESG Investment Director, Independent Funds/Merlin
Investment Manager, Jupiter Independent Funds/Merlin
“A revolution by coercion” – that was how Lord Haig, William Hague, former Tory leader and Foreign Secretary described the path to carbon net-zero. How right he was.
There is a worrying and deeply lazy consensus about climate change. That is most certainly not to deny that the climate is changing (it has been dynamic since the Earth’s creation and will continue to be so long as Earth exists) and that human activity is also having a demonstrable effect. What is worrying is that to challenge the orthodoxy, its assumptions, and the extrapolations made by climatologists which determine future policy, is almost taboo. There is little or no balance to the argument; if one subject defines the “you’re either with us or against us” dog-in-the-manger approach, it is climate change. Cost is a secondary issue in the minds of many; for some, climate change policy must be delivered whatever the cost. Healthy constructive debate tends to produce better law; little or no debate does not always lead to bad law or outcomes but it has a strong history of doing so.
If all efforts are being directed at controlling emissions, extraordinarily little thought is being given to how society and the economy might adapt to take advantage of climate change (on the grounds that such thinking presumes a lack of commitment to halting climate change in the first place). It is almost as though benefiting from climate change is a Bad Thing.
There is a worrying and deeply lazy consensus about climate change. That is most certainly not to deny that the climate is changing (it has been dynamic since the Earth’s creation and will continue to be so long as Earth exists) and that human activity is also having a demonstrable effect. What is worrying is that to challenge the orthodoxy, its assumptions, and the extrapolations made by climatologists which determine future policy, is almost taboo. There is little or no balance to the argument; if one subject defines the “you’re either with us or against us” dog-in-the-manger approach, it is climate change. Cost is a secondary issue in the minds of many; for some, climate change policy must be delivered whatever the cost. Healthy constructive debate tends to produce better law; little or no debate does not always lead to bad law or outcomes but it has a strong history of doing so.
If all efforts are being directed at controlling emissions, extraordinarily little thought is being given to how society and the economy might adapt to take advantage of climate change (on the grounds that such thinking presumes a lack of commitment to halting climate change in the first place). It is almost as though benefiting from climate change is a Bad Thing.
The Paris Climate Accord: a brief reminder
As of February 2023, all the world’s governments except those of Libya, Iran and The Yemen were signatories to the Paris Climate Accord as set out at COP21 in 2015. Paris commits jointly to cutting greenhouse emissions (currently comprising CO2 at 74.4%; methane 17.3%; nitrous oxide 6.2%; hydrofluorocarbons 2.1%). It limits the future global temperature rise to no more than 1.5% above pre-industrial levels by the end of the century. The United Nations Intergovernmental Panel for Climate Change predicted in 2015 that to be able to stay within that 1.5degree limit, global greenhouse emissions in turn had to peak no later than 2025 and then decline by 43% by 2030. All signatories are legally bound to deliver national carbon net-zero emissions by 2050, with China refusing to comply until 2060.
In 2022, the International Energy Association estimated that the total mass of CO2 emitted globally was 36.8Gt (giga tonnes; 1Gt = 1 billion tonnes). The upward slope of the emissions graph has been remarkably constant since 1950 over which period the compound growth rate in emissions has been 2.6%. Despite all the political hot air emitted in the nearly eight years since the COP21 agreement, and the turn of 2025 now being only 14 months away, global CO2 emissions are neither currently showing signs of peaking to order nor likely to drop by the required 43% in the remainder of the decade.
The aim is to transform an immensely complex global society and economy from one powered for three centuries by hydrocarbons and fossil fuels into one within three decades powered largely by alternative fuels. If the legally binding hard-stop in 2050 was ever an achievable aim, a precondition of doing so is the political need to carry electorates with you. There has been an arrogant assumption that because the science allegedly proves the point, there is nothing to argue with and therefore the revolution will happen. If Covid proves nothing else, it is that it raises significant suspicions that first, the science and more particularly its forecasting models might be wrong and second, when science and politics are conflated and confused, the credibility of both is undermined.
In 2022, the International Energy Association estimated that the total mass of CO2 emitted globally was 36.8Gt (giga tonnes; 1Gt = 1 billion tonnes). The upward slope of the emissions graph has been remarkably constant since 1950 over which period the compound growth rate in emissions has been 2.6%. Despite all the political hot air emitted in the nearly eight years since the COP21 agreement, and the turn of 2025 now being only 14 months away, global CO2 emissions are neither currently showing signs of peaking to order nor likely to drop by the required 43% in the remainder of the decade.
The aim is to transform an immensely complex global society and economy from one powered for three centuries by hydrocarbons and fossil fuels into one within three decades powered largely by alternative fuels. If the legally binding hard-stop in 2050 was ever an achievable aim, a precondition of doing so is the political need to carry electorates with you. There has been an arrogant assumption that because the science allegedly proves the point, there is nothing to argue with and therefore the revolution will happen. If Covid proves nothing else, it is that it raises significant suspicions that first, the science and more particularly its forecasting models might be wrong and second, when science and politics are conflated and confused, the credibility of both is undermined.
The coerced and revolutionised don’t always read the script
Governments are expending significant political capital on climate change. Genuine leadership qualities are rare among politicians. It is no surprise therefore that the ‘there-is-only-one-path’ assumption is being tested with demonstrable consequences. As time marches inexorably on, we are now getting down to the brass tacks of how carbon net-zero will or will not be achieved. The path is likely to be rocky. A few examples of recent encounters with political potholes.
Germany: politically combustible e-fuels
In March, the EU was forced to delay a critical vote banning the sale of combustion engine vehicles from 2035 (in the UK the moratorium applies from 2030). The German FDP (the centre-right Free Democrat Party, the smallest of the three members of Olav Scholtz’s ‘traffic light’ coalition) insisted on exemptions for cars powered by ‘green’ e-fuels (definition quoted from Reuters: “e-fuels, such as e-kerosene, e-methane, or e-methanol, are made by synthesizing captured CO2 emissions and hydrogen produced using renewable or CO2-free electricity; the fuels release CO2 into the atmosphere when used in an engine. But the idea is that those emissions are equal to the amount taken out of the atmosphere to produce the fuel – making it CO2-neutral overall”). With counterarguments from the coalition Greens as to why allowing e-fuels is policy backsliding, four months on there is still no resolution, thanks to the fragility of the government and Olav Scholtz’s own political weakness.
Causing some alarm, the far right AfD party is riding a wave of popular support nationally. According to Politico, as of mid-June it has become the second most popular party in Germany (one year ago it was fourth) behind the Christian Democrats and polling more strongly than any of the coalition parties. It has recently achieved its first ever local government seat. Specifically concerning climate change among a range of other predictable far-right manifesto subjects (immigration etc), in the district of Sonneberg in the eastern state of Thuringia, the AfD campaigned successfully on a platform of being against the ban on oil and gas-fired boilers in new homes.
Causing some alarm, the far right AfD party is riding a wave of popular support nationally. According to Politico, as of mid-June it has become the second most popular party in Germany (one year ago it was fourth) behind the Christian Democrats and polling more strongly than any of the coalition parties. It has recently achieved its first ever local government seat. Specifically concerning climate change among a range of other predictable far-right manifesto subjects (immigration etc), in the district of Sonneberg in the eastern state of Thuringia, the AfD campaigned successfully on a platform of being against the ban on oil and gas-fired boilers in new homes.
Holland: disaffected farmers strike back
In neighbouring Holland, Mark Rutte’s coalition government collapsed in July. An irreconcilable split among its members on the subject of immigration was the direct cause. However, in attempting to meet strict EU targets on limiting nitrogen emissions which for Holland meant a cut of 50% by 2030, Rutte’s government found itself at significant loggerheads with the powerful Dutch dairy farmer lobby. A home-developed policy of forced state purchases of farms for re-purposing, and for the remainder strict grazing density limits, led to farmers forming their own political party, the BoerBurgerBeweging (BBB). In little more than a year fuelled by, in the words of its leader “grievance caused by diktat”, the BBB has built a strong populist momentum. Ahead of the forthcoming general election, at 18% it currently leads the pack, its nearest rival trailing by four points in national polling. It will not form a government even if it remains the biggest recipient of votes (very seldom does a Dutch party win outright, the government is nearly always a coalition), however it is likely to be a vocal and highly influential group with direct political representation in the Hague, possibly even membership of a future coalition.
Sweden pragmatically changes tack
Not a populist backlash but a pragmatic review of the strategic possibilities for meeting net-zero, the Swedish government has abandoned fixed targets for renewable energy. It is now prioritising ‘a more technology neutral aspiration for “100% fossil-free” energy provision’. Essentially, it is the recognition that there is a limit to how much can be done with wind and solar and an acknowledgement that nuclear is an essential component of enduring, reliable electricity generation in an advanced society and with a growing economy.
UK: war on urban cars…
In the UK, a detectable undercurrent of dissatisfaction is evident, particularly in but not confined to London, in respect of the introduction of car-free zones without consultation by councils, the expansion of congestion charge areas and urban Ultra Low Emission Zones and the perceived political war against motorists. It is sure to be a pivotal topic in the London Mayoral election in May 2024
…and other consumer costs pending. A political minefield
A recent survey by the National Grid points to the significant upgrade and expansion of the electricity network that is necessary across the entire UK. The underlying problems are two-fold: 1) the significant distances from the principal sources of renewable energy generation (e.g. off-shore wind power off the periphery of the northern Scottish coast and The Wash) to where it is largely consumed (the populous south-east and the industrial north-west of England); 2) the new capacity is required to meet the expected demand for electricity over the next ten years as the shift particularly towards electric vehicles accelerates. As well as an extensive web of high-capacity cabling and the forest of very tall pylons carrying them industrialising the landscape including National Parks, the result is also predicted to be a very complex “locational pricing” structure, one with significant regional transmission pricing disparity expected to be reflected in widely differing tariffs on consumer bills depending on where you live.
As if not enough, as the government pushes forward on new off-shore wind capacity, a troika of three renewable energy associations (RenewableUK, Energy UK and Scottish Renewables) has written to the Energy Security and Net Zero secretary, Grant Shapps, saying that the current auction regime for new offshore capacity licences fails to recognise the increased cost of installation and maintenance; such auctions go to the lowest bidder whereas the energy associations are saying that such a system is uneconomic in the “race to the bottom on strike prices”. Essentially, they are demanding a new round of subsidies to fund unreliable energy generation. This would inevitably end up as a surcharge on consumers’ bills, as the existing green levy already is.
In the domestic housing sector plans are still being drafted for all dwellings to be compliant with EPC Level C by either side of the end of the decade (including the mandatory installation or retro-fitting of roof and cavity insulation, double-glazing and heat pumps for water and warmth) and its significant potential costs per household. We analysed this in some detail in our weekly column on 31 March 2023: the best estimate at current prices is an average cost of £18k per household to be compliant, roughly £95bn in total; that is the same sum as the OBR estimates the 2023/4 cost of servicing the government debt bill.
For whichever party forms the next UK government following the election in 17 months’ time, its entire five-year term in office is likely to be dominated and may be defined by its competence in implementing climate change policy. With coherent plans barely formed particularly for the delivery of infrastructure literally to keep society’s wheels turning and with the electorate not yet having been confronted with the true costs that they themselves are going to have to bear directly (as well as indirectly through government expenditure which ultimately must be recouped), the challenge is formidable.
As if not enough, as the government pushes forward on new off-shore wind capacity, a troika of three renewable energy associations (RenewableUK, Energy UK and Scottish Renewables) has written to the Energy Security and Net Zero secretary, Grant Shapps, saying that the current auction regime for new offshore capacity licences fails to recognise the increased cost of installation and maintenance; such auctions go to the lowest bidder whereas the energy associations are saying that such a system is uneconomic in the “race to the bottom on strike prices”. Essentially, they are demanding a new round of subsidies to fund unreliable energy generation. This would inevitably end up as a surcharge on consumers’ bills, as the existing green levy already is.
In the domestic housing sector plans are still being drafted for all dwellings to be compliant with EPC Level C by either side of the end of the decade (including the mandatory installation or retro-fitting of roof and cavity insulation, double-glazing and heat pumps for water and warmth) and its significant potential costs per household. We analysed this in some detail in our weekly column on 31 March 2023: the best estimate at current prices is an average cost of £18k per household to be compliant, roughly £95bn in total; that is the same sum as the OBR estimates the 2023/4 cost of servicing the government debt bill.
For whichever party forms the next UK government following the election in 17 months’ time, its entire five-year term in office is likely to be dominated and may be defined by its competence in implementing climate change policy. With coherent plans barely formed particularly for the delivery of infrastructure literally to keep society’s wheels turning and with the electorate not yet having been confronted with the true costs that they themselves are going to have to bear directly (as well as indirectly through government expenditure which ultimately must be recouped), the challenge is formidable.
Biden’s Inflation Reduction Act; a work of political genius?
You will seldom hear us offering plaudits to Joe Biden. But his own climate change policy enshrined in statute through the Inflation Reduction Act (IRA: whether it proves exactly the opposite is beside the point) is proving a formidable piece of legislation.
First, in reversing Donald Trump’s stance of refusing to endorse the Paris Accord, Biden has very rapidly shifted the US government stance from being not only averse to acknowledging climate change, to willingly being a Paris signatory and now actively embracing climate change policy at full speed.
Second, doing it another way but effectively stealing the emperor’s clothes (Trump raised the protectionist drawbridge using tariffs), Biden’s fiscal incentives to business and consumers to ‘go green’ with significant tax breaks for embracing low or zero carbon technology so long as it is US manufactured and sourced is competitive genius. Pragmatically, foreign manufacturers, such as the German car industry, for whom the US is a significant export market, were faced with the immediate prospect of exclusion; the solution is obvious: build plants in the US. As a result, America is seeing a wave of foreign inward investment with all its positive knock-on effects for employment etc. Many will argue that it is anti-competitive, it actively alters the dynamics of international trade, the opportunity cost of that investment in the US is that other countries including domestic locations where the investment might have been made lose out. That is merely to tilt at windmills.
Third, Biden has created a political trap for the Republicans in the 2024 Presidential election. He has used differential tax incentives to target that investment, the biggest breaks going to the most economically deprived areas, typically the in the old bust-up rustbelt regions in the north-east. They are Trump heartland. Inclined to be climate sceptics if not outright deniers, are the Trumpian disaffected blue-collar cohort really going to vote against policy which demonstrably regenerates their back yard, offers hope of new prosperity and job security? Surely a case of cutting off your nose to spite your face? Of course there are many other factors at work too which affect election results but this has the potential to be significant. We will know soon enough.
First, in reversing Donald Trump’s stance of refusing to endorse the Paris Accord, Biden has very rapidly shifted the US government stance from being not only averse to acknowledging climate change, to willingly being a Paris signatory and now actively embracing climate change policy at full speed.
Second, doing it another way but effectively stealing the emperor’s clothes (Trump raised the protectionist drawbridge using tariffs), Biden’s fiscal incentives to business and consumers to ‘go green’ with significant tax breaks for embracing low or zero carbon technology so long as it is US manufactured and sourced is competitive genius. Pragmatically, foreign manufacturers, such as the German car industry, for whom the US is a significant export market, were faced with the immediate prospect of exclusion; the solution is obvious: build plants in the US. As a result, America is seeing a wave of foreign inward investment with all its positive knock-on effects for employment etc. Many will argue that it is anti-competitive, it actively alters the dynamics of international trade, the opportunity cost of that investment in the US is that other countries including domestic locations where the investment might have been made lose out. That is merely to tilt at windmills.
Third, Biden has created a political trap for the Republicans in the 2024 Presidential election. He has used differential tax incentives to target that investment, the biggest breaks going to the most economically deprived areas, typically the in the old bust-up rustbelt regions in the north-east. They are Trump heartland. Inclined to be climate sceptics if not outright deniers, are the Trumpian disaffected blue-collar cohort really going to vote against policy which demonstrably regenerates their back yard, offers hope of new prosperity and job security? Surely a case of cutting off your nose to spite your face? Of course there are many other factors at work too which affect election results but this has the potential to be significant. We will know soon enough.
The investment backdrop
We have discussed on many occasions that the path to carbon net-zero is likely to be inflationary. In particular, the policy compression period over the next 10-15 years in which the competition for advantage, natural resources, capital and resources will be intense. Biden’s IRA is already demonstrating the effect policy may have on global investment patterns.
But as we have demonstrated here, the political risks are important. Among a host of other critical issues, not least those created by geopolitical players such as China and Russia, climate change policy has the potential to create political instability. In this ‘revolution by coercion’, populism can easily foment where electorates feel increasingly disenfranchised by an arrogant or distant and disconnected political class. Political instability or ‘shock’ electoral outcomes are quickly reflected in currencies and bond yields as the barometers of investment risk. All to be weighed up in the mix, but certainly not ignored.
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
But as we have demonstrated here, the political risks are important. Among a host of other critical issues, not least those created by geopolitical players such as China and Russia, climate change policy has the potential to create political instability. In this ‘revolution by coercion’, populism can easily foment where electorates feel increasingly disenfranchised by an arrogant or distant and disconnected political class. Political instability or ‘shock’ electoral outcomes are quickly reflected in currencies and bond yields as the barometers of investment risk. All to be weighed up in the mix, but certainly not ignored.
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
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