During this horrible time in world events, I have had little urge to write public material. With the COP 28 wrapping up, I want to share some thoughts about the “public staging” of this event. I will argue that activists seek to shift medium term expectations as they try to create a type of self-fulfilling prophesy that the world is decarbonizing. If COP 28 reveals a unified Global Policy shift to low carbon technologies, then today’s investors will be more likely to choose the “green path” with respect to their investments.
Suppose that you have billions of dollars to invest today in an asset that will payoff for the next 60 years. Suppose that you are choosing between investing in a natural gas power plant, a nuclear power plant or a renewable power fueled by solar panels on a large lot of land.
You face risk here. Each of these three choices creates power that you can sell to those who demand electricity but they differ with respect to their environmental impacts. The natural gas plant creates carbon dioxide and local air pollution. The nuclear power plant creates nuclear waste. The solar panels feature a life-cycle ecological impact and require more land and their value partially depends on increased access to cheap batteries to store power during times when power is generated but aggregate demand is low.
Forward Guidance is a term from the U.S Federal Reserve. Read this for background. In this case, the U.S Federal Reserve leadership tries to anchor expectations about inflation targets. If the Fed can commit to following a certain rule, then its credibility guides investment decisions and asset holdings.
In a similar sense, Global Greens are trying to convey a type of “Forward Guidance” in the fossil fuel markets. If the world thinks that carbon taxes will be high in 2050, then this affects coal investments today. A type of Hotelling’s Law plays out as the expectation of low coal prices in 2050 leads coal producers to mine it today and and sell it today rather than keeping such capital in the ground when it will be “worthless” in 2050.
The field of “Political Business Cycles” explores how expected shifts in public policy (i.e If Trump defeats Biden in 2024) affects private sector investor decisions. Such “stop and go” carbon policies create an option value for investors to delay making irreversible decisions until they have a greater certainty about what decarbonization path the global economy is actually taking.
If renewable power becomes cheap enough and reliable enough that policy doesn’t matter, then this column’s theme doesn’t matter.
Richard McCain highlighted how policy changes to Net Metering have impacted the markets- https://energyathaas.wordpress.com/2023/12/04/do-high-interest-rates-threaten-the-green-transition/#comment-90720