Net Zero’s Questionable Pathway

 The week of July 3, 2023: Net zero questions

There was a time when the IEA (International Energy Agency) could be taken seriously. Established as part of the OECD response to the 1973 Arab oil embargo, it was, among things, a provider of great amounts of useful data on the oil and gas sector (and, in many respects, it still is). However, international organizations are what they are and mission creep is what it is, and the IEA has embraced climate millenarianism.  

In May 2021, the agency produced a “flagship report” (its description) on “Net Zero by 2050.” The report was, claimed the IEA, a “roadmap for the global energy sector.” The road it describes may well be one to ruin, although that’s not, unsurprisingly, how the IEA described it:

This special report is the world’s first comprehensive study of how to transition to a net zero energy system by 2050 while ensuring stable and affordable energy supplies, providing universal energy access, and enabling robust economic growth. It sets out a cost-effective and economically productive pathway, resulting in a clean, dynamic and resilient energy economy dominated by renewables like solar and wind instead of fossil fuels. The report also examines key uncertainties, such as the roles of bioenergy, carbon capture and behavioural changes in reaching net zero.

“Behavioral changes,” eh?  Nothing sinister sounding about that.

Let’s take a look:

Behavioural changes, particularly in advanced economies – such as replacing car trips with walking, cycling or public transport, or foregoing a long-haul flight – provide around 4% of the cumulative emissions reductions in our pathway.

As usual, the war against cars makes an appearance as does its higher altitude equivalent, the war against flying, something I have written about here. 

To be fair, the IEA doesn’t hide where it’s coming from: “Reaching net-zero emissions globally by 2050 is a critical and formidable goal.” In reality, the target is not “critical,” far from it, and it is not so much “formidable” as lunatic. 

Idler and trespasser that I am, I went through IEA’s “summary for policy-makers.”

Among some highlights: 

Fossil fuel subsidy phase-outs, carbon pricing and other market reforms can ensure appropriate price signals.

“Appropriate price signals,” or, to put it another way, greenflation. 

Policies should limit or provide disincentives for the use of certain fuels and technologies, such as unabated coal-fired power stations, gas boilers and conventional internal combustion engine vehicles.

It was, of course, no surprise to see the call for disincentivizing the use of conventional cars. A wide take-up of electric vehicles (EVs, which should amount to 60 percent of global new car sales by 2030) are meant to be rolling down the IEA’s pathway. Let’s just hope that their drivers find the chargers they need, and that the weather is not too cold. Let’s also hope that workers for conventional carmakers don’t mind too much about losing their jobs to the Chinese, and that the Western EV manufacturers do not mind being dependent (at least for a while) on China for their supply chains. 

Gas boilers?

The prospect of a ban on new gas boilers in Germany created a political crisis in Germany (the approved replacements — heat pumps — are much more expensive), and the proposed new ban has been (somewhat) watered down. Other EU countries will follow suit with bans (the EU would like a bloc-wide ban by 2029), which will probably cause more political trouble elsewhere. One of the striking characteristics of the IEA’s plan is how little its authors have thought through the political consequences of what it is they are proposing (to be fair, perhaps that may have been beyond their remit), other than implicitly noting that there will be some: “A transition of the scale and speed described by the net zero pathway cannot be achieved without sustained support and participation from citizens.” And what if that support proves to be far from “sustained?”

The reality is that as net zero starts to bite, voters are likely to start biting back. As I noted in a recent Capital Letter, this is already happening in Germany and the Netherlands. If I had to guess, the effects of the net zero agenda being pushed by Britain’s center-left Conservative government is one reason why it will be humiliated at the polls next year (even though the opposition Labour party are even more extreme in this area). 

IEA: 

Reaching net zero by 2050 requires further rapid deployment of available technologies as well as widespread use of technologies that are not on the market yet.

I’ll just leave that there. Central planning is what it is. 

On second thoughts, I won’t, because it touches on an important issue. One of the arguments against the current direction of climate policy is how front-loaded it is, something that favors technologies (from wind to solar to EVs) that are not yet ready for prime time. A good portion of the money now being spent on inadequate technologies would be better allocated to fund research designed to improve, supplement, or replace them.

And much more of it should be spent on adaptation and resilience, such as on stronger defenses against whatever the climate may bring. Some of this spending on, say, better ocean defenses for low-lying coastal cities, or on burying more power cables underground in densely populated areas, would in many cases pay for itself before too long. Then there’s the matter of allocating resources away from unreliable solar, and even more so, wind, and toward nuclear power. 

Finally, as history shows, the wealthier the world becomes, the better it will be able to cope with the effects of the climate. The more that net zero slows economic growth, the lesser will be the future improvement in our ability to do so. 

But back to the IEA:

There is no need for investment in new fossil fuel supply in our net zero pathway.

As Rupert Darwall, writing for Real Clear Energy, points out, this gave a helping hand to some of those who would muddle climate activism with finance:

Climate Action 100+, a group of 700 investors with over $68 trillion in assets under management, hailed the report as a “watershed moment” and highlighted the call from the “relatively conservative IEA” for an immediate end to new investment in fossil fuel extraction. Similarly, As You Sow, a not-for-profit climate activist investor, described the IEA NZE report as groundbreaking. For the 2023 proxy season, As You Sow filed shareholder resolutions at five of the largest U.S. banks, pressing them to align their financing activities with achieving net zero by 2050. Those resolutions all failed, but last year, a resolution filed at the ExxonMobil annual meeting by Ceres, another activist investor and a founding partner of Climate Action 100+, cited the IEA net zero report and requested the company’s board to produce an audited report on the impact of applying the IEA’s net zero assumptions on the company’s financial statements. The resolution received the support of 51.0% of voting shareholders.

But how reliable were those IEA numbers? 

Darwall:

[T]he RealClear Foundation asked the Energy Policy Research Foundation, Inc. (EPRINC) to conduct a forensic analysis of the IEA’s major reports on net zero and assess the likely economic impact of a cessation of investment in new oil and gas fields. EPRINC’s analysis conclusively demonstrates that the IEA’s assumptions are unrealistic, internally inconsistent, and often support the case for increased hydrocarbon fuel production. In reality, the IEA’s net zero roadmap is a green mirage that will dramatically increase energy costs, devastate Western economies, and increase human suffering. 

The questions raised by EPRINC’s analysis (unless rebutted) ought to have implications for investment managers who see themselves as “socially responsible” (Darwall discusses his views on that in his article) as well as on banks that have been reluctant to finance the oil and gas sector. But the implications for the financial world go beyond that. Some central bankers claim that the financial risk created by climate change justifies their meddling in the lending policies of the banks they supervise. In reality, such financial risks are, as the economist John Cochrane and others have argued, very small, not least because of the relatively short-term nature of most bank lending. 

On the other hand, if the IEA’s pathway is any sort of indication of the approach that policy-makers will take to the race to net zero, and if the effects of that sort of approach are as grim as EPRINC suggests, then they will damage the economy more quickly and more severely than climate change any time soon (or, perhaps, ever). If banking regulators are concerned by financial risk, they would do better to look at the risk posed by net zero policies. The same could be said for those securities regulators who want to press companies to disclose the climate risks they allegedly face. They should be asking for net zero risk disclosure instead, starting perhaps with the Western auto companies threatened with disaster by the switch to EVs. 

Darwall:

The fundamental assumption underlying the IEA’s net zero roadmap is that the superiority of alternatives to hydrocarbons—principally wind and solar (nuclear barely gets a look in)—will cause demand for coal, oil, and natural gas to wither away.

But this needs to take place in the right order. 

Darwall:

The IEA warned in its World Energy Outlook 2022 [that] “If supply were to transition faster than demand, with a drop in fossil fuel investment preceding a surge in clean technologies, this would lead to much higher prices—possibly for a prolonged period”

As Darwall notes, that’s “an accurate description of the world we’re now living in.”

But what about wind? But what about solar? 

Darwall:

“Ever-cheaper renewable energy technologies,” the IEA claims, “give electricity the edge in the race to zero.” Yet the IEA’s own numbers demonstrate the inferiority of its post–fossil fuel energy future as it will require enormous increases in capital, labor, and land to produce less energy.

By 2030, the IEA’s net zero pathway uses an additional $16.5 trillion of capital. More investment should make labor more efficient. Not with clean energy. Renewables require nearly 38.5% more labor, global energy employment rising by nearly 25 million. Yet this new energy system produces 7% less energy, implying a calamitous 33.0% fall in energy output per employee. If that’s not bad enough, solar and wind require an area equivalent to the combined size of California and Texas and bioenergy for electricity production an area the size of France and Mexico combined.

There is no theory in growth economics that says that more inputs of land, labor and capital for less output is a formula for sustained economic growth. Quite the opposite. The IEA’s net zero pathway reverses a process that has been under way since the dawn of the Industrial Revolution of society obtaining more outputs for fewer inputs, making the world unambiguously poorer and having the worst impact on billions of people in the world’s poorest nations. And this is before considering renewable energy’s own negative environmental impacts. This leaves decarbonization as the sole potential benefit from deploying wind and solar. If there is an economic case for net zero, neither the Intergovernmental Panel on Climate Change nor the governments that adopted net zero targets have yet to conduct a proper cost-benefit analysis to prove it.

Oh. 

Capital Letter: Net Zero's Questionable Pathway | National Review