In this piece I will argue that ‘net-zero by 2050’ represents a forcing into a shorter time frame, of a transition that would occur naturally over a longer time frame. This introduces a moral dimension to our technical problem. It is the imposition of a social / environmental goal, with consequences for all. Towards the end I will introduce a twist that implies that NOT forcing the transition is actually the more morally-suspect choice. As a note, I consider the terms morality and ethics as interchangeable, and I am not implying any distinction by using one rather than the other1. Both are aimed at distinguishing between ‘good and bad’ or ‘right and wrong’.
Economies are complex adaptive systems and they are always in transition. We can call this a ‘natural’ transition. All transitions create ‘winners and losers’ – some businesses grow and hire new workers, while other businesses die and jobs are lost. If we assume that the market’s invisible hand is the most efficient allocator of capital, then it follows that natural transitions yield the lowest financial cost transition. By the same assumption, natural transitions are also the most orderly form of transition.
Human history has witnessed a number of major energy transitions. Initially we relied on mechanical power derived from wind (history rhymes!) and water, but transitioned to mechanical power from steam (coal). We then transitioned from mechanical power to electrical power (still steam, from burning hydrocarbons). These major energy transitions typically took a century or more to complete. Our current energy transition from fossil electricity to clean electricity started a number of decades ago. Left to its own devices, the transition would continue to run at its own pace, until complete.
The question then becomes “does the Paris agreement attempt to force the transition to happen more quickly than its natural rate?”. In other words, would the transition naturally complete itself by 2050 and within the carbon budget that is consistent with no more than 1.5C of warming?
I will assume ‘net-zero by 2050’ represents a forcing of, say, 80 years’ transition into 30. That means we need to understand the characteristics of a forced transition. By definition, a forcing means some form of non-market intervention is required to achieve what the market cannot. In turn, this implies:
- Greater dispersion between and/or greater numbers of winners and of losers
- Greater likelihood of structural unemployment (forced transitions destroy existing jobs faster than the natural rate of job creation eg UK under Thatcher)
- Some combination of higher aggregate cost, greater disorder and/or higher volatility of prices.
Consequently, a forcing implies that some (social/environmental) goal is deemed more important than a sub-optimal financial / economic outcome (which could include social pain).
In this light, what do concerns over a ‘just transition’ mean?
- Either (1) the necessity of the forcing is not universally agreed,
- and/or (2) the judgement that the cost/pain of the transition outweighs the benefits,
- and/or (3) the benefits of achieving the goal will be inequitably* spread,
- and/or (4) the costs/pain will be inequitably* spread.
(* notions of inequity necessarily involve moral / ethical judgements)
For a natural transition, arguments #1 and #2 fall away. There is no pre-determined goal, and no forcing towards it. We may, however, want to invoke arguments #3 and #4 if we believe a better distribution of outcomes was desirable and feasible. We conclude that even natural transitions can throw up moral problems.
For a forced transition all four concerns are likely to be in play:
- #1 – different groups will disagree over the necessity of forcing. Proponents believe science provides sufficient evidence that holding temperature rise to 1.5C is the ‘correct’ goal. Opponents will generally back the market and a natural transition.
- #2 is problematic. If we were fully cognisant of the likely pain when accepting the necessity of forcing then we can reject #2. However, it is possible that the degree of likely pain was not fully understood when committing to net-zero / agreeing to the forcing (raising the prospect of reneging on commitments)
- #3 and #4 show that a just transition is also a moral problem. From above, a forced transition amplifies disorder and dispersion, and increases the likelihood of structural pain. A just transition is actually a call for redistributing gains and losses in the knowledge of forthcoming cost and pain.
Given the logic of our thought experiment, a forcing entails a net cost (relative to unforced) and therefore a just transition is more accurately seen as a redistribution of cost.
What should the investment industry make of this? Clearly, if we hold transition-losers we should expect a hit to our returns. However, if we hold transition-winners we have a potential just transition problem (we own the gains, which could be redistributed).
Fiduciary duty probably makes the idea of voluntary redistribution untouchable for investment, however redistribution could be ‘done to us’ by our investee companies (they decide to treat better their employees, suppliers etc so our residual profits are lower), or by governments (higher taxes, whether windfall or general). This raises an important question: are notions of a just transition important to us as citizens, but out-of-bounds for us as investment professionals? The professionals I speak with, genuinely want to see a just transition but the mechanism for achieving it is not year clear.
This brings me to the twist in our tale.
So far we have compared a forced transition with a natural transition. The imposition of a social or environmental goal within a forced transition has been portrayed as ‘morally loaded’ relative to the more ‘morally neutral’ natural transition. I will now introduce a critical threshold (carbon budget) beyond which, by definition, bad outcomes start to accumulate. Please note, I am using ‘outcomes’ as a very broad term – much broader than financial cost alone.
Can we have any confidence that the natural transition will complete itself within the remaining carbon budget? I don’t think we can have any such confidence. A natural transition uses the profit motive to drive an efficient allocation of capital, and the carbon budget is not part of the profit calculation. It would be a secondary objective (a constraining / forcing one at that).
But can’t we make the carbon budget part of the profit calculation by introducing a carbon (emissions) price? We could. But then we would need to debate whether (1) we had introduced a forcing mechanism by the back door, and (2) if it would help.
But why would it not help – surely making emissions expensive would lead to less of them?
If the goal is to reduce carbon emissions then, agreed, a carbon price should help. But there is no guarantee a carbon price would keep us within the carbon budget, because we should not expect a price to eliminate emissions. An official price makes an activity legal. And so, if I can make a profit after paying for my emissions, then I am incentivised to emit as much as possible. A strictly enforced budget requires a quota not a price (ideally, a quota and a price).
OK, get that. But doesn’t that then mean the ‘morally loaded’ forced transition minimises the future accumulation of bad outcomes? Which means that a natural transition that doesn’t respect a critical threshold is actually ‘morally loaded’ relative to the more neutral forced transition?
Exactly. That is why climate change really is the biggest market failure of all time.
We can conclude, then, that as well as being a technical problem, net-zero is also a moral problem. First, in terms of accepting the necessity of the forcing, and second in working out what responsibility we carry for actively assisting the system (that pays our returns) to transition to its new state.
1 See, for example, What’s the Difference Between Morality and Ethics? on Britannica.com (https://www.britannica.com/story/whats-the-difference-between-morality-and-ethics)
By Tim Hodgson, Co-Head of the Thinking Ahead Institute