Climate Change not an important issue for the Institute of Directors

Graham Leach, the previous Chief Economist at the Institute of Directors, wrote in the Director magazine of February 2014: ”10 years from now man-made global warming will have been exposed as a myth.” When James Sproule, his successor, visited Leeds last month I asked whether he endorsed that view. His response and my comments are below. I spoke to him again  this morning and he told me that climate change was not an important issue for the IoD.

In response to my question James Sproule said that there was disagreement within the IPCC (Intergovernmental Panel on Climate Change) between scientists and economists. The economist view is that it is reckless to plan for what might happen in 100 years’ time when so much has radically changed in the last 100 years and so much more will change in the next.

Here's what I think.
First of all, Graham Leach was not commenting on the planning cycle, when he said “man-made global warming will have been exposed as a myth.” He was rubbishing the science, which he is surely not qualified to do. His remark is reckless in that it could lead the uninformed to believe that there is nothing to worry about and nothing need be done. The report from the IPCC last month shows that it is 95% scientifically certain that we are on the threshold of a problem which will have serious consequences far sooner than 100 years hence. 

Secondly, not all economists suggest that we should sit on our hands and wait and see what happens. Lord Stern published his report in 2006 where he stated that a relatively small investment of global GDP could mitigate the worst effects of climate change if action were taken promptly. Since then he has written that things are worse than he then thought, and since not much action has been taken the cost of mitigation is now very much greater.

Third, CDP, the Carbon Disclosure Project, is an organisation backed by more than 750 global institutional investors who have assets worth $US92trn under management. Each year they request information on greenhouse gas emissions, energy use and the risks and opportunities from climate change from thousands of the world’s largest companies. If they take the trouble to do this they surely believe there is an issue and that the information will enable them to take action - else why collect it?

In my view the future is sustainability. Sustainable business is essentially efficient business, and there is nothing new in examining each stage of the production process to see what improvements or cost savings can be made. Carrying out this analysis from a sustainable viewpoint could mean assessing the availability of key materials and redesigning products to make less use or no use of them. It could mean embracing new technologies such as 3D printing, where there is minimal waste and large parts of the supply chain can become redundant, so transforming some industries. The circular economy will become increasingly important as producers redesign not just to make less use of materials but to produce items that can be disassembled, remanufactured and re-used, thus saving the costs of new materials and the cost of waste disposal. Sustainable business is good business. Developing renewable energy is sustainable from the energy security point of view. Nobody controls our wind and no one can cut off our sunshine. We don’t get much gas from Russia, but we do get 20% of it from Qatar by sea. As the North Sea declines we’re a net importer of oil. A generation ago we were self-sufficient in energy. We can be again. (Without fracking.)

We have challenges. Climate Change is just one of them, but we need a clear understanding, a clear direction and a positive lead on the whole sustainable future. The “greenest government ever” has failed to develop coherent policies. I would like to think the IoD could inject some informed realism into the debate. 

If you can spare 9.33 minutes, have a look at this video http://youtu.be/zORv8wwiadQ 

Energy and the Bubble Economy

On 20th May the Yorkshire Chapter of CASSE, Centre for the Advancement of the Steady-State Economy, presented this event at Leeds University Business School. I expected one session but there were two separate presentations.

Energy

Tiago Domingos of the University of Lisbon took the first module: “Can energy use and economic growth be decoupled?” Green growth is possible by reducing the energy/GDP ratio, and to do that we need to decarbonise the energy system. This proved to be a technical talk; knowledge of thermodynamics a distinct advantage. Apparently energy cannot be destroyed and in any energy transfer there are always losses. This is demonstrated by our present electricity generation process, where around 60% of primary energy is wasted in generation and transmission and only 20% of what’s left (Final Energy) is Useful Energy. The rest is dissipated as heat in the appliance. He claimed that an output of 0.02kWh needs an input of 25kWh, which seems to be overstating the case a bit, but even a loss of 90% is bad enough. We pay for final energy - and all the primary energy that goes into it - and waste most of it in inefficient appliances.

We now moved on to the thermodynamics bit and started talking about exergy. I hadn’t heard of it before, but this is what Wikipedia says:   

“In thermodynamics, the exergy of a system is the maximum useful work possible during a process that brings the system into equilibrium with a heat reservoir.[1] When the surroundings are the reservoir, exergy is the potential of a system to cause a change as it achieves equilibrium with its environment. Exergy is the energy that is available to be used. After the system and surroundings reach equilibrium, the exergy is zero.”

The professor then went on to propose that we should study exergy rather than energy, and gave examples of sources of exergy: electricity, coal, gas, biomass, oil, food. (Note that electricity is a source of exergy, but of course not of energy.) He stated that the important ratio is not energy/GDP but Useful Energy/GDP. There followed an analysis of energy statistics for Portugal since 1850 when the economy was agricultural, through industrialisation from 1920 and onwards. The Final Energy/GDP ratio dropped sharply and plateau’d from 1960. Useful Work/GDP was at the same level as 1850, although primary energy consumption went up.

Domingos quoted the economist, Nicholas Kaldor, who said that in the long term the wages/interest, interest/capital, capital/GDP and Useful Work/GDP ratios were constant in most economies. There are also thermodynamic limits to the efficiencies of transforming primary to final energy and final to useful energy. The whole thing seems to lead me to the conclusion that there is very little scope for decoupling energy from economic growth. What hope for growth? Having said that, surely it all comes down to efficiencies. And while electricity generation from coal, gas, nuclear and even biomass can have losses of as much as 70%, the losses in generation from renewables are less than 1%.

I found this on the internet: http://www.theguardian.com/news/datablog/2012/jul/06/energy-green-politics#zoomed-picture 

The Bubble Economy

Our second speaker was Robert Ayres (from INSEAD in France) who will shortly publish "The Bubble Economy: Is There a Sustainable Way Forward?”. 

This was a very different presentation, and referred to Tulip Mania, the South Sea Bubble, the Trust Bust, the Dot-com Crash and the Sub-prime Disaster, among many others which litter history. Apparently there is a plausible story and investors start to pile in. Rumour builds on rumour, possibly helped along, until every man in the street sees a golden opportunity and mortgages his house to buy in. Canny investors get out at the top, confidence evaporates, prices crash and small investors lose their houses. Ayres predicts another bubble, this time involving fracking. Presumably that will happen in the US. After this week’s report from the UK Geological Survey few people in this country will surely invest!

Since 2008 we have seen pressures in the economy from climate change and the end of cheap oil, leading to inequalities and a slow recovery. In 2008 the banking system was under such extreme stress that governments had no choice but to rescue it. Household net worth collapsed and the middle classes have still not yet recovered. Oil price rises are inevitable because the rate of new discovery of oil is not keeping up with production. Saudi Arabia continues to be a major global oil producer, but its recoverable reserves remain, and have remained constant since 1988. (This is apparently justified by improving extraction techniques.) The oil price affects the global economy, but Ayres claims that it is only recently that the IMF has included the price of energy in its models. We need to decarbonise our energy and this is becoming more achievable as the average cost of onshore wind has been falling annually by 14%. The price of solar PV is falling faster; not yet to grid parity, but arguably coal generation benefits from hidden subsidies in that it does not pay the true cost of pollution. The costs of renewables and hydrocarbons are reaching a crossover point as new technologies, experience and economies of scale drive down renewable costs. Could we create a renewables bubble? Ayres told us that there are substantial reserves held by US corporates in overseas banks and doing nothing. Let’s not have a bubble, but let’s have some solid investment.

The future growth paradigm will be based on energy efficiency, not demand.

Questions

Questions came thick and fast and this a summary of what I picked up. 

Why will energy costs rise? asked a former Shell executive. Because Saudi is running out and the projected reserves in the US have been overstated and we are using it faster than we’re finding new reserves. Well, when he was at Shell they tried predicting the oil price and got it totally wrong….

Can we really substitute electricity for oil? Yes, but it is difficult and time-consuming which is why the price of oil matters…Is 30% the maximum share of energy that the UK can source from renewables? I would have thought that was pessimistic, myself.

If the future is efficiency, what about user behaviour? The rebound effect means consumers can spend the same and use more. Prices must be controlled by governments to prevent this. A green levy could keep expenditure at constant levels and raise a fund for green research and investment.

Will lower-quality reserves demand more energy? Energy in for energy out is a problem with fracking...Timescales for decarbonising the economy are a concern. There are big opportunities for improving efficiency - notably transport and home heating (cars are still very inefficient) - but if we are serious about our 2050 targets we have a serious problem. Current policies - and politicians - do not recognise the extent of the challenge.

Education is lacking in high places.

And my conclusion? As always, spread the word. Make people aware that business as usual is not an option. Make them aware that big business has generally taken all this on board, but small business and the consumer need to follow on. It’s not about a lower standard of living, it’s about doing things differently and more efficiently. It’s about not sacrificing the long term for the sake of the short term. 

Please tell any politicians you meet.

Business Success in a Changing Climate

Yesterday I went to EcoFair14, an exhibition and conference with six parallel presentation streams. It was great to meet friends and make new contacts; to see established products and find out what has been developing over the last year.

My first session was Business Success in a Changing Climate by John Chubb of yourclimate.org  Rather than business success, he was talking about business resilience which of course is equally important. He started with the statistic that 80% of organisations without emergency continuity plans never fully recover from a disaster. And he reminded us that there had been severe weather incidents every year since 2000 in the UK. We've seen freezes, floods, water shortages and heatwaves. In that time the Great Yorkshire Show had to be abandoned and there was the East Coast surge; ice and snow closed roads, schools and businesses and some agricultural crops were wiped out. What is certain is that extreme weather events will be more frequent in the future and a move to a low carbon economy won’t change it. We can expect warmer, wetter winters; hotter, drier summers and it’s far cheaper to prepare than to react. (Didn’t Lord Stern say something like that back in 2006?)

John gave us case studies: the chemicals firm that moved its IT to the first floor and its electrics to the roof, bolted down its bulk tanks to stop them floating away and built a bund to keep all but the worst of the water out. He told us about the plant hire company that was unable to hire out pumps in a flood because its own premises were under water. A firm that survived - but only just.

Resources

John gave us all his excellent guide to Weathering the Storm. If you contact him via yourclimate.org maybe he’ll send you one. He pointed us to the Association of British Insurers, which publishes advice on flood prevention and also looks at the future from an insurance point of view https://www.abi.org.uk/Insurance-and-savings/Topics-and-issues/Join-the-debate/Identifying-the-challenges-of-a-changing-world If you want to know if you’re in a flood risk area the Environment Agency has the answer: https://www.gov.uk/prepare-for-a-flood . Sometimes we get a heatwave which can be dangerous for the elderly and very young and can cause problems at work. More advice from the NHS: http://www.nhs.uk/Livewell/Summerhealth/Pages/Heatwave.aspx and from the Health and Safety Executive: http://www.hse.gov.uk/temperature/  You can assess your business resilience at businessresiliencehealthcheck.co.uk from Business in the Community. There are Local Resilience Forums, where businesses can get together to assess risks and work together to meet them. This is the one on the Humber: heps.gov.uk 

John’s final points were that customers increasingly need to know that their suppliers are secure. (See my Green Supply Chain workshop!) The impacts of extreme weather are neither equal nor fair.

A great start to the event. More about other presentations to follow.

Climate Change, life and death

Professor John Broome, of the University of Oxford and author of “Climate Matters”, delivered the Royal Institute of Philosophy lecture at York University this week.

His is a philosophical approach to climate change. How is that relevant? The United Nations Framework on Climate Change sets out to avoid “dangerous anthropogenic interference with the climate system.” To achieve this it needs to:

1. Identify the level of emission concentration in the atmosphere low enough to prevent dangerous interference
2. Define acceptable global annual emissions
3. Allocate these annual emissions fairly  among nations

Moral philosophers are involved in stage 3, but stages 1 and 2 are decided by scientists, economists and politicians. Professor Broome disagrees with this because value judgements are involved at all three stages and he doesn’t believe that scientists, economists and politicians are much good at making such judgements. He is concerned that the UN Framework on Climate Change suggests that decisions on what constitutes dangerous climate change are value judgements and should be “determined through socio-political processes.” He doesn’t think the result of this process can be readily supported. The IPCC has set a target of a maximum emission of 1 trillion tonnes because that gives a better than 2/3 chance of keeping global warming below 2°C. Why 2/3? Why 2°C?

Professor Broome believes that decisions should be made on expected values, not on likelihood. For example, the likelihood of the average house burning down is very small but the consequences are likely to be very serious. Because of the value of the catastrophe, it makes sense to buy a fire extinguisher.

How can we evaluate the harms and benefits of climate change? People are already dying as the result of climate change. The effects of weather are significant, leading in turn to poverty, malnutrition and disease. The fact that people die as a result of climate change is negative in itself, but as a consequence of their deaths there are fewer descendants and future generations are smaller, even to the extent that human extinction becomes an increasing possibility. The effect of climate change on the population - and vice versa - is largely ignored by governments. Some argue that changes in population levels are ethically neutral: Broome challenges this, but admits that we have no consensus on how to take these changes into account. The population elephant remains in the room.

Questions at the end of the session drew the comment that being nice is not good enough. We need to promote green virtues, but there are not enough virtuous people, so the only answer is government coercion. 

One questioner suggested that burning all the fossil fuel reserves in the world would not have serious consequences. He couldn’t quote supporting figures. Professor Broome disagreed but could not provide opposing figures and neither could I. However, it’s all here: 

http://eye.carbontracker.org/analysis-reports/view?analysisReportId=15552

Economic Outlook - ideas taken from a presentation by James Sproule of the IoD

Overview

The Institute of Directors represents senior executives of businesses of all sizes in all sectors throughout the UK. James Sproule was recently appointed Chief Economist and Director of Policy at the Institute. The week he came to Leeds to share his thoughts on the economy with Institute members. Here is what I learnt.

In the UK the tax take is about 35% of GDP. It is a feature of developed economies that proportion remains very stable over time. The figure is lower in the US and much higher in Denmark (48%), but varies by little more than one percentage point up or down over time.

Financial Crisis

The financial crisis was not just down to the banks, although they lent more than they should. Consumers borrowed too much, businesses borrowed too much and governments borrowed too much and let the money supply got out of control. An inflation-led crash can be resolved relatively quickly. A debt-based crash, like the one we have just had, takes longer because the money has to be paid back. UK consumers are already well on the way to paying down debt to 2008 levels. Business has benefited from a weaker pound and has chosen to take greater margins rather than seek greater market share through price cutting. Greater margins have allowed business to pay down debt.

The Budget

The Institute’s members represent a significant proportion of the UK’s GDP and it is able to represent their views at the highest level of government. In advance of the budget, members indicated that they wanted business rate reform, a higher income tax threshold, a higher starting point for the 40p tax rate, pension reform and a review of airline passenger duty. Several of these suggestions were reflected in the budget and pension reforms went much further than expected.

HS2

The Institute has made it clear that it does not consider that HS2 will be a solution to the North/South divide - a view endorsed by “Failure to Transform: High-Speed Rail and the Regeneration Myth,” a report issued this week by the Institute of Economic Affairs. Apparently this view was not popular in Whitehall and the IoD was called to account but protested that as independent organisation it had every right to reflect its members’ views. The government is running regional roadshows to promote its case.

Threats to the Economy

The euro zone continues to have problems. In southern Europe the banks are unable to lend to prime the pump for recovery. This is partly because their safe asset ratio has been raised from 2% to 12%. More importantly, many depositors in the south have transferred their savings to banks in the north. The logic is that if any of the southern countries drop out of the euro then the new local currency is likely to devalue by as much as 30% or even 50%. Savings tucked away in euro in the north are safe, but not available to fund investment in the south.

Inflation is a likely future threat to the UK economy. Although there has been a rise in the money supply, inflation remains low because the velocity of circulation remains low. Governments always promise to keep inflation under control, but historically governments have always used inflation to reduce government debt, so who’s to say this government won’t be tempted?

Wealth Distribution

The Gini coefficient is a measure of wealth distribution where 1 means that all the wealth of a nation is in the hands of one person and 0 means that it is equally shared. Currently Saudi Arabia is rated at 0.6 and Russia at 0.2. In 1979 the UK was rated at 0.24, in 1980 at 3.4 and is currently at 0.4, slightly above the rest of Europe. In 1979 the average salary was £4,000 and the majority of earnings levels were clustered in a very small range. The reasons for this were lack of incentive with an 83% top tax rate, an industrial structure with very large employers and trades-union-led national pay bargaining. By 2013 average earnings were £25,000 and the range was very much wider. There was merit-based pay, no national pay bargaining and a more diffuse economy with small businesses and start-ups. It would be impossible to narrow earnings differentials by moving back to the 1979 situation.

One percent of the UK population are super-rich. This group is not affected by the same drivers that influence the rest of the economy; their position is the result of globalisation and opportunities where winner takes all. It would be possible to drive out the super-rich through taxation, but it is not clear whether that would be desirable. Taxation would put their wealth into the public purse and boost GDP in the short term. At the same time it would remove these funds from investments in the long term. Is the government the best spender of money? Should the US tax Bill Gates to the extent that he can no longer afford to fund the eradication of malaria in Africa?

Challenges for the Next Government

There is still work to be done on the deficit. Cuts will continue and their full effect has yet to be felt. Only a government with a substantial majority will be able to keep its nerve on this. Growth is good at the moment, trending at 2.5%. However, we are approaching a demographic inflection where the working population is shrinking. Unless we can improve productivity this could pull growth below 1%, which will feel like recession to many people.

Questions from the floor

What would be the effect if the living wage became the minimum wage? Wage rises have outpaced productivity. If wages rise even further it will make businesses less competitive. The benefit system overcomes this to an extent, but there is no doubt that the tax credit and benefits systems need reform.

Can we look forward to a stable GBP/USD exchange rate? Nobody can predict exchange rates. Continuing uncertainty in the euro zone may reduce the value of the euro against the dollar. The influence of the euro zone might cause the pound to weaken.

If HS2 is not the answer, what, if anything will correct the north/south divide? Logically, as overheads and wage rates rise it makes sense for organisations to move their back offices out into regional centres. The pressures are there, but for the moment they seem to be resisted. Within 20 years it is likely that more wealth will flow from the south-east to other parts of the country, but there will never be equality. In an aside, there is every possibility of a housing crash if interest rates rise. Traditionally borrowers mortgaged for three times annual income but in this time of unusually low interest rates they are borrowing four times or more. If interest rates go back to more normal levels many borrowers will be over-stretched, and not just in the south-east.