In April 2022 the U.S. Office of Management and Budget published a report estimating that climate change could cost the country $2 trillion per year by 2100. In the same month, the U.N. issued a report warning that global greenhouse emissions must level off no later than 2025 to cap the increase in global temperature to 1.5* C, a level that many scientists consider critical to minimizing the effects of climate change. Since many countries are still increasing greenhouse emissions, that threshold will likely be breached.
At the same time, due to supply shortfalls, oil and natural gas prices in the U.S. have spiked, increasing costs to U.S. households and businesses. In 2022 alone, the added cost of gas at the pump, home electricity, home heating, and prices of products and services dependent on fossil fuels could well exceed $1 trillion. Based at least partly on the expectation that demand will shift to renewables, fossil fuel companies are not investing in new production capacity, so prices are not likely to return to historically low levels.
The Federal Government recognizes the importance of reducing greenhouse gas emissions and therefore, the need for a new energy policy. Based on public statements made by the Administration, the government appears to have a multi-pronged strategy with a focus on a few areas: 1. Accelerating the adoption of electric vehicles, 2. Reducing industrial emissions, 3. Shifting electric power generation from natural gas to solar and wind, 4. Transitioning home heating solutions from natural gas to electricity or hydrogen-based. These changes will be highly disruptive to households, businesses, government, and the military in the U.S., causing major increases in costs and changes in operating procedures until the transition is complete.
Climate change may also affect everyday aspects of life on planet earth. Coastal regions at sea level will be underwater. Some areas of the world may be uninhabitable for people and animal species due to higher temperatures and more violent weather patterns. Ironically, higher temperatures will increase demand for air conditioning, creating more demand for natural gas. Response to climate change may also shift the balance of political power in the world. Nations that continue using fossil fuels will have an advantage in manufacturing and militarily. As problems go, climate change is non-trivial, but most people (like me) have paid little attention to it until recently.
Greenhouse Effect 101
Global temperature data show unambiguously that the temperature of the planet has been rising since about the 1940s. Since scientists have identified this trend, the $64,000 question has been: what’s causing the higher temperatures? Historically, looking back millions of years at the climate record found in the ice, soil, and fossils scientists know that temperatures on earth have cyclically fluctuated resulting in periods of abnormal cold and hot. However, in evaluating the current heat wave, scientists point to evidence that the temperature increase since the 1940s is not a natural weather cycle but has been caused by human activities.
As NASA explains on their website:
Ice cores drawn from Greenland, Antarctica, and tropical mountain glaciers show that Earth’s climate responds to changes in greenhouse gas levels. Ancient evidence can also be found in tree rings, ocean sediments, coral reefs, and layers of sedimentary rocks. This ancient, or paleoclimate, evidence reveals that current warming is occurring roughly 10 times faster than the average rate of warming after an ice age. Carbon dioxide from human activities is increasing about 250 times faster than it did from natural sources after the last Ice Age.
The planet’s average surface temperature has risen about 2 degrees Fahrenheit (1 degree Celsius) since the late 19th century, a change driven largely by increased carbon dioxide emissions into the atmosphere and other human activities. Most of the warming occurred in the past 40 years, with the seven most recent years being the warmest. The years 2016 and 2020 are tied for the warmest year on record.
As explained on the CalTech website:
…several lines of evidence show that current global warming cannot be explained by changes in energy from the Sun:
- Since 1750, the average amount of energy from the Sun either remained constant or increased slightly.
- If a more active Sun caused the warming, scientists would expect warmer temperatures in all layers of the atmosphere. Instead, they have observed a cooling in the upper atmosphere and a warming at the surface and lower parts of the atmosphere. That’s because greenhouse gases are slowing heat loss from the lower atmosphere.
- Climate models that include solar irradiance changes can’t reproduce the observed temperature trend over the past century or more without including a rise in greenhouse gases.
We Don’t Want None of that Greenhouse Gas
Certain gases in the atmosphere absorb energy, slowing or preventing the loss of heat to space. Those gases are known as “greenhouse gases.” They act like a blanket, making the earth warmer than it would otherwise be. This process is natural and necessary to support life. However, the recent buildup of greenhouse gases in the atmosphere from human activities has changed the earth’s climate and resulted in dangerous effects on human health and welfare, and ecosystems.
The carbon cycle is the process by which carbon continually moves from the atmosphere to the earth and then back to the atmosphere. On the earth, carbon is stored in rocks, sediments, the ocean, and living organisms. Carbon is released back into the atmosphere when plants and animals die, as well as when fires burn, volcanoes erupt, and fossil fuels (such as coal, natural gas, and oil) are combusted. The carbon cycle ensures there is a balanced concentration of carbon in the different reservoirs on the planet. But a change in the amount of carbon in one reservoir affects all the others. Today, people are disturbing the carbon cycle by burning fossil fuels, which release large amounts of carbon dioxide into the atmosphere, and by deforestation, which reduces absorption of carbon from the atmosphere.
Atmospheric methane comes from both manmade and natural sources. The main sources of methane emissions from human activity are agriculture (especially cattle and rice paddies) and fossil fuels (extraction, transport, and use). Fossil methane is emitted from coal mines, fracking, gas leaks and venting of oil wells.
Most nitrous oxide comes from agriculture, including microbes in fertilized soils and animal manure. It is a potent greenhouse gas with about 300 times the heat-trapping power of carbon dioxide. Nitrous oxide also depletes the ozone layer (and is used by dentists as laughing gas).
Fluorocarbons come from coolants, foaming agents, fire extinguishers, solvents, pesticides, and aerosol propellants. Fluorocarbons (FC) destroy the ozone layer of the atmosphere by increasing the amount of water vapor that gets into the ozone layer. It is the water vapor in the ozone layer that depletes ozone.
The earth is a very complex system. Forecasting weather years in advance is fraught with pitfalls mainly because scientists don’t quite understand everything that’s going on. The very sophisticated computer models used to forecast the effects of climate change have not been very accurate. However, a few important feedback mechanisms are known and are fairly-well understood.
One is the effect of vegetation. Remember from Biology class that the photosynthesis process uses CO2 and water to produce oxygen and sugar. More vegetation will therefore reduce the amount of CO2 in the atmosphere. The densest area of carbon-consuming vegetation on the planet is the Amazon rain forest in South America. Unfortunately, the vegetation in parts of the rainforest is being razed so the land can be used for farming or grazing.
Another feedback mechanism is the effect of warming oceans. Unlike vegetation, which has a negative feedback effect, warming oceans have a positive feedback effect. They add to global warming. This includes the effect of the melting polar ice caps. Melting ice caps cause the ocean levels to rise but also will cause the global temperature to increase. The ice at the poles has a cooling effect on global temperatures.
All else being equal, warmer air can hold more water vapor and that is the basis for another positive feedback effect. Scientists tell us that water vapor is the most important greenhouse gas. Higher temperatures lead to more moisture content, and more moisture content leads to more heat retention. Also, a negative side effect of more warm moisture in the air is more violent tropical storms and more precipitation. This is especially a problem in the southeast and eastern seaboard U.S. The southwest U.S. is less affected because of the colder Pacific Ocean and the dry winds coming off the ocean. The gulf coast has exactly the opposite situation. And, unfortunately for the southwest, as the oceans warm, scientists predict that the southwest will also become more humid.
Population migration also affects climate change. As millions of humans migrate from less-developed to more advanced areas of the world to escape the heat or for other reasons, their carbon footprints will increase, further accelerating global warming.
If we were to poll the general public, a fairly large percentage would probably say they doubt the whole climate change narrative. That’s probably because the message has become politicized. After all, the main spokespeople have been Al Gore, AOC and Greta Thunberg, not exactly the team you’d pick for a convincing PR campaign. Videos of a Swedish high school student scolding the U.N. are a real turnoff to most people. Same with a wide-eyed former bartender warning that the world will end in 12 years. Then to top things off, President Trump decided to snub the Paris Climate Talks. That did not help. Putting all of that aside, what do the serious scientists have to say?
Multiple studies published in peer-reviewed scientific journals show that 97 percent or more of actively publishing climate scientists agree: Climate-warming trends over the past century are extremely likely due to human activities. (Caltech)
But the warming we’ve seen over the past few decades is too rapid to be linked to changes in Earth’s orbit and too large to be caused by solar activity.(Caltech)
Carbon dioxide from human activity is increasing more than 250 times faster than it did from natural sources after the last Ice Age. (Caltech)
In its Fifth Assessment Report, the Intergovernmental Panel on Climate Change (IPCC), a group of 1,300 independent scientific experts from countries all over the world under the auspices of the United Nations, concluded there’s a more than 95 percent probability that human activities over the past 50 years have warmed our planet.
But, wait a second. The cost of discontinuing use of fossil fuels will be many trillions of dollars and will affect every household in the U.S. If the science is so clear, why do only 97% of scientists agree and why do experts assign only a 95% probability that human activities are to blame?
Let’s examine the arguments made by the climate skeptics. They say:
- The changes in measured temperatures are part of the natural cycle. These skeptics are admitting that there is climate change, but not that it is caused on human activity. In response, climate scientists have gone to great lengths to develop methods that show how climate change rises above the natural signal (the so-called “fingerprinting” of climate change). Moreover, some of the more important natural cycles should be causing global cooling rather than warming at present.
- Climate change and CO2 are good. Skeptics who take this line of argument are acknowledging that climate change is happening and that humans may be causing it. But, they extoll the virtues of climate change and are skeptical of potential negative impacts. For example, they claim that agriculture will benefit from higher temperatures, increased rainfall, expansion into northern latitudes, and the fertilization effect of CO2. Climate scientists, ecologists, and agronomists have shown that negative impacts far outweigh positive effects of climate change on agriculture. In fact, the weight of evidence suggests that negative impacts will swamp positive impacts in all sectors.
- The scale of climate change is not sufficiently large to take action beyond sensible least-cost measures. This line of reasoning accepts that climate change is likely, that it is human-induced, and that most impacts are negative. Nonetheless, these skeptics do not believe that climate change will be as bad as mainstream science thinks it will be. A time goes by, however, observed climate changes are greater, and observed impacts are worse than originally projected by climate scientists. Although most experts agree that it is prudent to use least-cost measures when possible, they also agree that combating climate change cannot be cheap because the scope is so large.
- The economic impact of making substantial cuts in greenhouse gas emissions on the scale suggested by the Intergovernmental Panel on Climate Change (IPCC) and other groups is too large. This final line of reasoning by skeptics accepts the conclusions of climate scientists, but says that society cannot afford to make the cuts needed to stave off the worst impacts of climate change. Numerous analyses, however, show that the ultimate cost of inaction or limited action to society will be far greater than the cost of robust responses to climate change and delaying action now necessitates more aggressive action in the future, which is likely to be more expensive.
In summary, the 97% of scientists who are climate change believers seem to provide credible counterarguments to those made by the 3% who are deniers. However, recognizing that some scientists with Ph.D. degrees in climate science could analyze the data and come to a completely different conclusion should still be troubling. The problem is the complexity of the problem and the difficulty in forecasting its effects.
Skeptics say D.C. Braintrust Has Lights On, But Nobody Home
Some people are not “climate deniers” but would more accurately be called skeptics. Perhaps they are critical about how the transition from fossil fuels to green energy is being managed, (i.e., so far, not so good). The government apparently believes that limiting the supply of fossil fuels from U.S. sources and thereby causing higher prices will accelerate the adoption of renewable forms of energy. That may be true, but it’s a very clumsy and destructive way to promote the switch that will cost consumers and businesses multiple trillions of dollars in additional costs during the transition, enriching only the fossil fuel suppliers. So consumers and businesses are paying huge premiums for fuel while the federal government is passing multi-trillion dollar federal spending bills to promote green energy and in the process, triggering massive inflation. The same result could be accomplished in other less destructive ways. For example, why not keep fossil fuel prices low, apply an additional fuel tax and use the tax revenue to fund the transition? That would not be inflationary, would not wipe out savings and pension plans, or cause the stock market to crash. One gets the impression the government is not very smart or perhaps is corrupt and therefore anything they say should not be trusted.
This also provides fuel for other conspiracy theories. Aren’t the studies being done by climate scientists all funded by the federal government? University professors working on climate change grants have a perverse incentive to conclude that things are worse than they are. The bigger the threat, the greater the likelihood of follow-on grants. Likewise, government officials responsible for departments covering climate change have the same kind of incentive. Bigger problems lead to bigger budgets, more staffing, and possible promotions.
Skepticism may stem from doubt that science can accurately predict the results of rising temperatures. Perhaps the “climate industry” is manufacturing a crisis to encourage people and governments to change behavior or make investments faster. Or, maybe spokespeople are pitching climate change because they will benefit in some way. After all, Al Gore reportedly made over $100 million from his “An Inconvenient Truth” movie. Maybe relatives of D.C. politicians are heavily invested in alternative energy stocks.
Until the situation is managed better, the skepticism will likely continue.
Forecasting the Effects of Higher Global Temperatures or… Turn on the AC Please
The forecasts for climate change are categorized by average temperature increases of 1.5*C, 2.0*C, 2.5*C and 3.0*C. The accompanying figure shows that forecasts have been made for three scenarios – worst case, intermediate and best case – representing how well governments are able to reduce the upward temperature trajectory. Reading from the chart, we see that in the worst case scenario the average temperature is expected to rise by 1.5*C by 2027 and in the best case scenario not until 2032. Some scientists believe a temperature increase of 1.5*C will put low-lying island nations under water.
What do scientists have to say about how life will change in different areas around the planet? It’s not good:
Direct Effect of Higher Temperatures
In the next decade, heat waves in some parts of the world will make life unbearable. Tropical regions, the Middle East, India, Pakistan, Latin America, the southern regions of the U.S., and the eastern seaboard will all become less desirable locations because of the extreme heat.
This will reduce property values in these areas, cause a migration of people from these areas to cooler regions, and ironically, cause a spike in energy demand for air conditioning. If the trend continues, many regions of the world will be so hot as to be unlivable by the end of the decade.
Floods, Droughts, and Rising Ocean Levels
In some areas, the higher temperatures will cause the atmosphere to retain more water and then release the water causing cataclysmic floods. This will be the trend in the northeastern U.S. and the central parts of the continent.
Climate models forecast that northern California, Oregon, and Washington state will see less rainfall in the next decade. According to the models, over the next 30 years, the droughts will spread to southern California and Arizona, regions that have already experienced periodic droughts. What will happen to the Colorado River and the availability of water for consumption and irrigation? With this kind of uncertainty, one may want to think twice before investing in southern California real estate.
Cities like New Orleans and Miami that are at or close to sea level will be underwater by the end of the century. The U.S. will spend billions on flood walls and levies which will ultimately prove to be a waste of money. Island nations will be the first to be submerged, some even before the end of the decade.
California has already experienced massive wildfires but things will only get worse as temperatures rise. Over the next decade, more frequent fires will be experienced in Texas, Canada and parts of Mexico.
Farmers like predictable weather. Either too much rain or too little is not good. Abnormal temperatures can also ruin a crop. Scientists predict that global warming will cause a third of the world’s food supply to be at risk. Famines and food shortages around the world will cause mass migrations, exacerbating the climate change problem.
The forecast sounds apocalyptic, but scientists warn that forecasting the effects of rapidly rising temperatures is not an exact science. There are many unknowns. For example, the effects may be non-linear. We may see change up to a point and then a leveling off. Or, change may take a upward hockey stick direction. No one knows for sure because such rapid temperature increases have never happened.
The Abatement Cost Curve
In 2009, McKinsey & Co., the strategy consulting firm, developed estimates of how much greenhouse gas emissions could be reduced by taking various steps globally and how much each step would cost in terms of Euros. The result is an abatement cost curve shown here.
On the vertical axis is Euros per billion tons of CO2 equivalents. (A Euro is roughly equivalent to a US dollar.)
So, for example, looking at the left most bar we see the abatement cost to save one ton of C02 by switching from incandescent to LED lights is about 100 Euros per ton of CO2. On the horizontal axis we see the amount of CO2 emissions that each action would save in terms of billion of tons of CO2 equivalents. You can see that the bar for switching to LED lights is very narrow indicating that the emissions reduction is only slight. Also note that the widest bars are related to switching to nuclear energy (which most countries probably will not do), adopting wind energy, and reforestation.
What’s not clear is how deep the McKinsey analysis goes. For example, when they measure the emissions reduction from switching from internal combustion to electric vehicles, do they consider greenhouse emissions related to mining required inputs (e.g., minerals for car batteries). When the report was originally developed in 2007, this information was probably unknowable. In fact, as if to correct this error, in 2021 McKinsey published another report which estimates the abatement cost for switching to electric vehicles considering the full supply chain effects.
McKinsey concluded from their 2009 analysis that the cost to control greenhouse gas emissions globally would be about 800 billion euros upfront and an annual recurring cost of 200-350 billion euros by 2030, which is only about 1% of global GDP. Although this number sounds quite doable, as already pointed out, the McKinsey analysis is flawed.
Unfortunately, the 2009 McKinsey analysis has been widely used by the U.N. and at the 2015 Paris Climate Accords. A Google search yields no evidence that the curve has been updated since 2009. Other consulting firms have jumped on the government funding bandwagon and produced their own estimates of the cost of emissions abatement. For example, Deloitte estimates that inaction could cost the U.S. economy $14.5 Trillion over the next 50 years. Surprising that anyone could be so precise (the .5) when estimating over 50 years.
One thing we do know is that this subject has become politicized. For any consulting report, the most acceptable conclusion politically is that global warming must be mitigated as soon as possible, the cost of doing so is well within reach and the cost of doing nothing is unacceptable.
Decision Analysis for the World – I’ll Take Door #1, Monty
As things stand, some countries like the U.S. are moving aggressively to reduce greenhouse gases and other countries are largely ignoring the threat of global warming or moving so slowly their efforts will have little effect. Reports on China are mixed. On the one hand, they are pushing the transition to electric vehicles but on the other, the country is still using coal as its primary power source.
For purposes of our analysis let us assume that an individual global dictator could make a decision about climate change abatement for the entire world. To make the analysis easier, let’s assume that the decision is binary – (Door #1) accept the hypothesis that global warming is an existential threat and take an aggressive path to reduce emissions, or (Door #2) accept the skeptics’ position and take only least cost measures.
Assume that the cost of taking Door #1 over the next 15 years is $50 trillion worldwide. This includes the full supply chain costs and not just the costs to governments but also the costs to households and businesses. This is a huge number. By way of comparison, for the first nine months of 2022, the market capitalization of the U.S. stock market has declined by almost $10 trillion. Our estimate is much higher than McKinsey’s which does not include the full supply chain costs nor the full cost to households and businesses.
We estimate that the cost of taking Door #2 is $2-4 trillion.
If the world takes Door #1 but their hypothesis is incorrect (i.e., global warming does not continue as predicted), the cost is $50 trillion. In other words, the cost of being wrong is $50 trillion, a huge number. If the world takes Door #2 and is incorrect (i.e., global warming continues unabated) the cost to humanity is incalculable, probably many times more than $50 trillion. In either case, the cost of making the wrong decision is huge, almost unthinkable.
If the decision were a simple binary choice, the world dictator would probably pick the less risky path. Unfortunately, the situation is not that simple. In a more realistic scenario, the decision is not binary and is not made by a single decision maker. Each country will decide on a policy path and some countries like the U.S. and E.U. members will make every effort to reduce emissions while other countries will make only minimal efforts. Unfortunately, this real-world, non-binary scenario may result in the worst possible outcome (worse than either Door #1 or Door #2) for the U.S. and perhaps the world overall. In this scenario, the U.S. spends many trillions of dollars on climate abatement but its efforts are still not enough to halt the upward trajectory in global temperatures, ocean levels, and the intensity of tropical storms. It’s a double whammy. We spend huge amounts of money on abatement but suffer almost as much as if we had spent nothing.
The bad news is this latter scenario appears to be most likely and this raises some interesting questions. For example, is there any way to save the world from the worst scenario? Do I sound like Greta Thunberg? Would countries with limited coastlines like Russia and Germany fare better? Or, would areas farther from the equator be less affected? How would the balance of power in the world change? I’m not sure scientists know the answers to the first few questions (not even Greta) but we do have enough information to venture a wild guess about changes in the balance of power.
Implications for U.S. National Security and the Balance of World Power
To review, the U.S. appears to be moving aggressively to alternative renewable energy sources (wind and solar). Russia and China, our two main adversaries are moving more slowly. Russia is dependent on natural gas and oil as its largest sources of revenue and cheap energy supply. Given its economic situation, it will therefore be unlikely to move to solar or wind until absolutely necessary. China, although it will not reach peak greenhouse gas emissions until 2030, is investing heavily in renewable energy technology. China is trying to balance the move to renewables with the desire to continue on its fast economic growth trajectory. China’s move to green energy is motivated not so much by the desire to save humanity but more likely by the national security need to reduce energy dependence on suppliers in Russia, the Middle East, and the U.S. China is ever laser-focused on benefiting the homeland and generally very smart in the way they go about it.
Critics of the current U.S. energy strategy point out that it will result in a greater dependence on foreign supply of critical materials and components. As recently as 2020 the U.S. was in the enviable position of being energy independent based on its supply of fossil fuels. However, as the country moves from fossil fuels to green energy, it will become increasingly dependent on other countries, some of whom are adversaries, for critical supplies.
For example, today eight of the top ten solar panel manufacturers are located in China. Ten of the top fifteen wind turbine companies are also in China. The U.S. has a very small amount of lithium. China is a major source of this element required for EV batteries and possesses 60% of the processing capacity. Cobalt is another element required for EVs. The major sources of cobalt include the Democratic Republic of Congo (where China has established significant influence with the government), Cuba, and Russia.
Dependence on foreign countries for energy will give adversaries bargaining leverage not only in economic markets but also in world political negotiations.
The move to green energy also results in a much greater reliance on the electrical grid to power not only heating/cooling/lighting/appliances but also transportation. This will increase the potential cost of cyber or physical attacks on the grid. In addition, as the oil and gas industry shifts away from fossil fuels, the question arises as to how this will affect the military readiness to defend the country or mount a military campaign, especially when potential adversaries are not shifting away from fossil fuels. That’s not entirely clear.
The message to the country from the Federal Government is to move full speed ahead to green energy and electrification. However, as noted, this national strategy has some obvious pitfalls, especially with respect to the implications for national security.
The summer of 2022 was one of the hottest on record in New Jersey and along the eastern seaboard. That was the nudge I needed to learn more about climate change. I suspect higher temperatures, along with the accompanying changes in rainfall and water availability will cause regional changes in property values and migrations to northern states. From a personal investing standpoint, the question is ‘when’. Alaska may well be the next retirement haven.
Causes | Facts – Climate Change: Vital Signs of the Planet (nasa.gov)
Basics of Climate Change | US EPA
What Is the Evidence that Human-Caused Climate Change is Happening? | Caltech Science Exchange
Deloitte Report: Inaction on Climate Change Could Cost the US Economy $14.5 Trillion by 2070 – Press release | Deloitte US
A cost curve for greenhouse gas reduction | McKinsey
How much will it cost to mitigate climate change? – Our World in Data
Beating the abatement cost curve for growth | McKinsey
U.S. Natural Gas Prices (eia.gov)
US natural gas prices spike to 14-year high. Here’s why – CNN
Frequently Asked Questions (FAQs) – U.S. Energy Information Administration (EIA)
The Case For Pivoting Into Renewable Energy (forbes.com)
The Business Case for Renewables: Obstacles and Opportunities – The One Brief
On the Business Case for Renewables (and Why It’s so Strong) – Union of Concerned Scientists (ucsusa.org)
Climate change could cost U.S. $2 trillion a year by 2100: White House (cnbc.com)
China’s Energy Strategy to 2030
China’s Daring Energy Strategy
American Institute of Physicists Forecast
The Climate Disaster Is Here – The Guardian