Saturday, March 13, 2021

The Madness Of Green Bonds

A bond is supposed to generate income. Greenies seem never to have thought of that

As we all know the Sage of Ely [Richard Murphy] has been insisting upon the mass issuance of green bonds for many years now. As is less understood the man hasn’t understood the subject under discussion in the slightest. But here’s his own explanation of the idea in a nutshell:

* There is an alternative, of course. Colin Hines and I outlined it in December 2019. Caroline Lucas welcomed it. This was the plan.

The answer is easy.

Fist, commit to a Green New Deal.

Second, change ISA and pension rules to only allow green bonds in the former and to require them as a condition of tax relief in the latter.

Make these bonds fund a Green New Deal – no iffing and butting, but the radical transformation our society needs.

What is the Green New Deal? Well, it’s that radical transformation that society requires. More detail is that it’s building windmills, insulating buildings, triple glazing them, sticking battery powereruppers on the streets and so on.*

There being two rather grand economic problems with the suggestion. The first is the Underpants Gnomes problem

1) Collect underpants.

2) ??

3) Profit!

There’s an entire step left out of the calculation. How does triple glazing a house make money that then gets paid as interest to the bond holders? What is the income stream from the action?

Now, we can think of various ways of doing this. Those who have the triple glazed put in have to pay for it having been done. Or an addition to rent. Or, like certain solar cells schemes, they’re an asset that get traded separately from the underlying house – not that that has worked out all that well.

But d’ye see? We need to identify what is the income stream that pays the interest. Even, if we’re lucky, what is the income stream that pays off the capital value of the bonds at some point. On the grounds that people might like to get their money back. We can say that it’s government borrowing so it’s future tax revenues that pay them. OK, that has its own interests and problems but at least we will have done that identification. Murphy and Hines simply haven’t done that at all.

Who pays what money to pay off the bonds?

This being the bit that hasn’t been done.

One reason, I suspect, that they haven’t done this is that once that identification is made then there’s no need for Green Bonds to pay for the transformation. Because once we’ve set up a manner of people making a profit by funding the transformation then people will line up to make a profit by funding the transformation. This has actually happened with the provision of rental housing. Now that the law’s all nicely sorted out and all that – tenancy agreements, evictions for non-payment etc, no government determination of rents and all that – the institutions are lining up to build long term rental housing in large estates.

Sort out the revenue stream to be had from doing the work and the work will get done. Arguing about where you’re going to get the capital from in order to fund the work without sorting the revenue doesn’t work. They’re still in underpants territory.

The second problem is risk. This comes in two forms.

The first is that in order to save for your pension you do need to be taking some risk. Because a 1 or 2% – pre-inflation – return on your savings doesn’t cut it. Think about this for a moment. The aim it sot use the income from 40 years of work to fund 20 years of retirement (roughly enough). This is lifetime income smoothing.

The next bit isn’t exact but it’s a useful illustration. Say that these bonds pay inflation and inflation only – 2% bonds in a 2% inflation world would do that. So, to pay for that 20 year retirement at an income equal to the working years (that’s the bit that’s not right but useful) we have to save one quarter of our annual income. We have to have a savings rate of 25% that is. As opposed to the pre-covid what was it, 7%?

The way out of this is to gain a higher return from those investments. 5%, 7% (around what a decent equities portfolio might provide). This means that we have to save less in any one year in order to gain that equality of income in retirement.

Risk is a necessary part of pensions savings simply because without the returns to risk the numbers don’t work.

The other side of risk is also important. All these projects – triple glazing, windmills – who is taking the risk of their completion? Think on what the insistence is – savings must be only into bonds. Are bondholders to take the risk of non-completion? Of cost overruns?

That’s an interesting – in the Yes Minister sense of “brave” – idea. Bondholders on 2% must carry construction and completion risk?

Doesn’t anyone recall how PFI was set up? There was some actual capital, real equity, which was at risk. Then the building phase was further funded by quite expensive debt. 5% and up in fact. Once the project was completed, turned on and handed over then that expensive debt was refinanced at 2 and 3%. Because that’s the right price for debt on operating a completed project and the wrong price for the construction and completion risk.

So, the Hines and Murphy plan to finance the reconstruction of society through pensions savings. It betrays no knowledge of construction nor pensions and thereby will entirely cock up both.

Now, who was it who said that politicians should be held responsible for the damage their policies do? Ah, yes, wasn’t it the Sage of Ely?


Shock at British government coal mine intervention

An MP has told Guido how he and his colleagues were given no forewarning by Robert Jenrick before he announced his department was going to intervene in the Cumbria coal mine project and order a fresh public inquiry. The intervention is seen by red wall MPs as the government bowing to niche, interest group public pressure, with Workington MP Mark Jenkinson last night telling the Tory MP WhatsApp group the Secretary of State has “bowed to climate terrorists”. Whatever happened to not negotiating with terrorists…

The cancellation of the project could see a loss of £165 million of private investment into the area; and adding to the political embarrassment of the intervention, Boris’s own PPS Trudy Harrison was set to be the coal mine’s constituency MP. It now appears Harrison doesn’t intend to quit as the PM’s PPS…

Away from the immediate reaction, Mark Jenkinson now tells Guido the inquiry may provide one upside insofar as the debate will now be taken away from the fraught, partisan one seen so far. The now-scuppered timing of the massive project may pull the rug from underneath the project given its private investment funding. Jenkinson also told Guido of his “shock” hearing the announcement, as he got no prior warning about the intervention, and given the process is now quasi-judicial it’ll be very difficult for him and his colleagues to now level questions at Jenrick. Not least “does the government think it’s more environmental to import coal from China rather than mining it here?”

The government needs to decide if Britain is going to be a high-value manufacturing nation or not, the pandemic showed the dangers of having little or no manufacturing capability in strategic areas. De-carbonising the economy will kill energy intensive industries dead to the benefit of China and Asia. This is pretty disastrous for the government’s promised leveling up agenda, with Jenkinson’s inbox overwhelmingly pro-mine, as well as his Facebook. At the moment he doesn’t believe this is just the government laying the groundwork to eventually u-turn and cancel the project, though Guido smells a rat…


Biden Virtue Signaling on Keystone XL Pipeline Can Actually Harm Environment

On the campaign trail, then-presidential candidate Joe Biden promised to kill the Keystone XL pipeline, which would transport 830,000 barrels of crude oil each day from Alberta, Canada, to Nebraska, a pledge met with elation from environmental activists across the globe.

So no one was surprised when, on his first day in office, Biden followed through by revoking the pipeline permit through executive order, again prompting applause from the green crowd.

But even a cursory examination of the issue reveals Biden’s actions to be mere virtue signaling, which will not stop the oil from flowing into the United States, and could prove even more environmentally dangerous than the Keystone XL pipeline itself.

The story of the pipeline is a long one. After Congress declined to pass climate change legislation near the end of President Barack Obama’s first term, the environmental lobby went looking somewhere else for victories. It zeroed in on the proposed Keystone XL pipeline, designed to stretch about 1,800 miles and carry tar sands crude, itself a favorite bogeyman of environmentalists.

Following lengthy public handwringing over the proposal, the Obama administration eventually buckled before the activists and blocked the permit.

After President Donald Trump reversed that decision and greenlighted the project, Biden made his promise to undo it. And he certainly could not let Tom Steyer—billionaire environmentalist, fervent Keystone XL opponent, and fellow Democratic presidential aspirant—outflank him from the left on the issue.

The problem for Biden is that blocking the pipeline achieves nothing more tangible than demonstrating his moral correctness to the green crowd, while very possibly causing greater harm to the environment.

About 70% of petroleum products in the United States are already transported by pipelines, with truck and train shipping combining for a mere 7%. One would then naturally expect that most accidents occur with pipelines, but one would be wrong.

Though responsible for a tiny fraction of petroleum product transportation, road and rail methods are where a majority of mishaps occur.

From 2005 to 2009, roadway transmission averaged 19.95 incidents per billion ton-miles each year, while railway accidents occurred at the rate of 2.08 accidents per year. In contrast, liquid pipelines produced only 0.58 incidents annually.

The environmentalist specter of the pipeline as a leaking, polluting menace just does not hold up to the barest scrutiny.

It would be a different argument if Biden’s actions were going to actually halt the flow of oil from Alberta into the United States, but that clearly is not going to happen. Canada depends on the economic benefits of the oil sands, as its negative reaction to Biden’s decision demonstrated, so into tanker trucks and railway cars the crude will go.

Biden has forced the oil out of the safer pipeline and onto the more hazardous roads and railways. But even if the oil meant for the pipeline was blocked completely, the impact on the global climate would be almost nonexistent, clocking in at a meager four ten-thousandths of a degree (Celsius) in temperature change over the next 79 years.

With the attention this particular pipeline has received, it would be easy to be deceived into thinking that it was some monumental project never before undertaken in North America. This is hardly the case.

There are nearly 200,000 miles of existing liquid petroleum pipelines in this country today, crisscrossing the nation so densely that a graphic representation looks like an interstate highway map of the United States. Knocking down 1,200 additional miles is hardly the great triumph Biden is beating his chest about.

In fact, the language that Biden used in his executive order may offer the most proof that the entire gesture is nothing but political posturing. He wrote, “Approval of the proposed pipeline would undermine U.S. climate leadership by undercutting the credibility and influence of the United States in urging other countries to take ambitious climate action.”

This revealed that a prime motivator in revoking the permit was to give the appearance that America is doing something, regardless of the actual impact.

The 11,000 American workers who would have been employed through the Keystone XL pipeline are unlikely to offer Biden pats on the back for his preening for his environmental audience. About a thousand people were immediately laid off when the permit was pulled, 10,000 more jobs will now never exist, and $3.4 billion will never be added to the gross domestic product.

To top it all off, the Biden administration and the media insult these hardworking Americans by dismissing these lost jobs as only “temporary” positions.

This ignores the reality that construction jobs are temporary by nature, yet are key to supporting widespread employment, particularly when the country is attempting to emerge from an economic downturn.

Further, many of the people who simply shrug off these job losses are the very same folks who trumpeted construction jobs supported by the Obama stimulus package. “Temporary” was not a word they used to describe the employment numbers back then.

Biden’s “climate czar,” the noted private plane-flying John Kerry, waved away any concerns about workers and their families suffering from the cancellation of their jobs in a press conference in late January. He displayed the cavalier attitude prevalent among environmental activists by advising that displaced workers could “make solar panels” instead.

Apparently, “make solar panels” is the new “learn to code” in the condescending parlance of elites talking down to the laboring masses facing unemployment.

Assessing whether Biden accomplished anything by stopping the Keystone XL pipeline depends on which question is asked.

Did he earn the praise of environmental activists and repay them for their support in the 2020 election? Most definitely.

Did he do anything to benefit the United States, either environmentally or economically? Almost assuredly not.


Biden sued by 12 states over climate executive order: 'Enormous expansion of federal regulatory power'

A coalition of 12 states is suing President Biden's administration over a climate executive order that they claim has the potential to have a serious economic impact across the country through the expansion of federal regulatory power.

The suit, which is being led by Missouri Attorney General Eric Schmitt, was filed on Monday. State attorneys general from Arkansas, Arizona, Indiana, Kansas, Montana, Nebraska, Ohio, Oklahoma, South Carolina, Tennessee and Utah also joined the action.

It alleges that Biden’s Executive Order 13990, titled “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis,” does not have the authority to issue binding numbers for the “social cost” of greenhouse gases to be used in federal regulations.

The breakdown of the social costs shows $269 billion for carbon dioxide, $990 billion for methane, and $8.24 trillion for nitrous oxide – totaling approximately $9.5 trillion, according to the lawsuit, which cited interim values determined by an interagency working group that was created by Biden’s order.

Schmitt said that those potential regulations will stifle manufacturing and harm agriculture in Missouri, where state figures show that hundreds of thousands of people work in those industries.

“Under President Biden’s executive order, which he didn’t have the authority to enact, these hard-working Missourians who have lived and worked this land for generations, could be left in the dust,” Schmitt said in a written press release.

But the suit claims that the impact from the $9.5 trillion “social cost” of greenhouse gases will stretch farther than just Missouri.

“In practice, this enormous figure will be used to justify an equally enormous expansion of federal regulatory power that will intrude into every aspect of Americans’ lives— from their cars, to their refrigerators and homes, to their grocery and electric bills,” the suit states.

The lawsuit argues that Biden’s order does not have the authority to set values for the social costs of carbon, methane, and nitrous oxide that will be used by regulatory agencies.

“It will be used to inflict untold billions or trillions of dollars of damage to the U.S. economy for decades to come,” the suit states.

In claiming that Biden’s order cannot set these values, the suit claims that the action violates the separation of powers, “the most fundamental bulwark of liberty.”




No comments: