Thursday 7 November 2019

Contrarianism; ESG investing; coal; and climate change

It is widely acknowledged in the investment world that one need think and act in a contrarian manner in order to achieve outsized returns and differentiated results. However, despite many claims to contrarianism and 'going against the crowd', its actual practice is vanishingly rare, and the core ingredients that drive effective contrarianism are also often misunderstood. It is not simply a matter of having a disagreeable personality, and disagreeing for the sake of it, or buying a stock simply because it has gone down. Much of what passes for contrarianism these days is actually what I describe as 'faux contrarianism' - buying expensive stocks that have recently become slightly less expensive, but where the fundamental view on the company remains very much in accordance with recent mainstream opinion (and often fails to comprehend new, emergent negative developments which have driven the recent share price decline, but are not yet apparent to all).

Market sentiment is like water to fish. Its the medium investors are currently swimming in, without recognising its existence. It's the collection of assumptions and beliefs about reality and the outlook that form the prism through which people assess the prospects of companies and value them. Genuine contrarianism is not about valuing companies while looking at them through the same prism as other investors (in these situations, if you reach a different opinion you've probably missed something), but rather stepping further back to recognise what type of water investors are currently swimming in, and assessing the validity of those widely-held contextual assumptions, which are often mistaken as 'truth'.

In my opinion, the essence of genuine and effective contrarianism lies in a deeply-rooted belief/understanding that the world is not black and white, but instead shades of grey, and is filled with infinite nuance and complexity, and as a result, future outcomes will routinely surprise mainstream popular opinion informed by overly-simplistic generalisations and thinking in absolutes. Human beings are generally time staved, and also incline lazy. It's an evolved trait to not waste energy and work any harder than one needs to (which is why it can sometimes feel challenging to get oneself to the gym). We therefore vastly prefer simplifying heuristics that distill the world down into binary assessments of good and bad and right and wrong, that facilitate easy decision making. The problem is that although these heuristics result in easier decisions, they often result in poorer decisions as well.

We see the use of simplified heuristics in a lot of popular fiction. In traditional action hero movies, the heroes are ridiculously good in every way, and the villains are ridiculously evil. This dichotomy is also reflected in many traditional religions, which draw a clear and bright line between good and evil. We like these simple and clear dichotomies - it makes things clear cut and the world seemingly easily intelligible. However, reality is often not like that - it is often complex, grey, counter-intuitive, and contradictory.

The (excellent) recent movie Joker was an example of a movie which bucked the general trend, and delved into this complexity, bringing nuance to something which most would consider as clear as day - that the Joker is pure evil. The movie humanised evil, by tracing an origin story of a protagonist subject to various traumas that make his subsequent evil deeds far more relateable, and showed that the origins of evil lie in the mental vulnerabilities that are present in all of us, to varying degrees. Subject to enough trauma and psychological hardship, most people will eventually snap, and find solace and personal validation in the infliction of harm on others. The desire for revenge is a hardwired human trait (and is a manifestation of our usually-constructive instinct towards reciprocity); an 'eye for an eye, tooth for a tooth' after all is a dictum inscribed in the Old Testament - it's an ethos that has been with humanity for a long time. Subject to enough suffering, any human will eventually feel a desire to take 'revenge on the world'. This is how you end up with high school shootings.

This humanisation of evil lies at the heart of the movie's controversy, as it throws into disarray a lot of the simplifying heuristics people use to draw a simple and easy distinction between good and evil, and common reductionist views of their underlying causal factors (to a large extent it's not a matter of 'good people' and 'bad people', but different circumstances and life experiences). It also manifests repeatedly in political conflicts. One side might consider the other to be violent rebels or terrorists, while the other side sees themselves as valiant freedom fighters throwing off the yoke of oppression and injustice. Both sides consider themselves to be good, and the 'other' to be evil.

We see the same sort of simplistic, binary thinking manifesting in the investment world all the time, and it is generally characterised by the excessive use of generalisations and absolutes. Examples include 'bricks and mortar retail is dead'; 'EVs are displacing ICEs'; 'ride hailing will put an end to private vehicle ownership'; 'Millennials don't buy stuff anymore, they buy experiences'; 'coal is dead'; 'Europe's banks are all insolvent'; 'banks are all black boxes and are hence uninvestable'; 'Greece is bankrupt'; 'China is nothing more than a giant leveraged bubble that will explode'; 'Russia is bad'; 'Africa is the hopeless continent'; 'Trump is stupid and everything he says is by definition wrong'; 'free trade is always best in all circumstances'; 'you're either for immigration or against immigration'; 'China is evil'; 'shopping mall REITs are all going broke', or 'malls in tier 1 cities will be immune from online threats; malls in tier 2 cities will go bankrupt', etc. What all of these types of claims have in common is that they are all absolute, black and white assertions, and are hence easy beliefs to not only hold and act upon, but also communicate/sell (which results in the memes spreading far and wide and self-replicating into consensus opinion - the water in which investors swim). But they are also all generalisations that lack any sort of nuance, or leave any room for complexity or uncertainty.

As a contrarian, one should be instinctively skeptical of overly generalized claims such as these, because the world is almost never as simple and clear cut as these statements proclaim. Even if they are right in direction, they are seldom right to such an extreme degree, or with such a high degree of certitude about future outcomes (EVs might in fact eventually displace ICEs, but as I have discussed in past blog entries, people are likely too confident this is inevitable). From an investment perspective, you should always be alert to such mainstream views, because they very often signal where attractive investment opportunities may reside - on the other side of these narratives, where popular beliefs have been overly discounted; nuance ignored; and other potential outcomes discarded.

In order to be a contrarian, having a core belief in the fallibility of simplified generalisations, and an instinctive aversion to binary, reductionist thinking, is half the battle won, because it will cause you to be willing to seek out and listen to contrary arguments; test the veracity of widely-accepted claims against new evidence/data that emerges; and generally keep an open mind. Conversely, if you believe the world is simple and black and white, you'll find this virtually impossible, because you'll believe yourself to already be in possession of all the answers.

Often, active open-mindedness is all that is needed to develop a far more nuanced, balanced view than the general consensus, and it is from this place that contrarian views naturally spring (often what is contrarian is actually having a more balanced view, far removed from the extremes/absolutes harboured by the mainstream). The reason people do not behave this way is not temperamental per se, but because they think the truth is obvious and further scrutiny of their existing views is therefore unnecessary. This is the fundamental cause of confirmation bias. But as Mark Twain put it, it often ain't what you don't know that gets you into trouble; it's what you know for sure that ain't so.

Enter ESG, and the ethics of coal mining

The latest in the long and continuous string of fallacious black and white thinking to envelop the investment world has been the emergent wave of so-called ESG investing (environmental, social & governance).* The flaw is not in the principle or idea of ESG investing (after all, what is usually good for employees, customers, and broader society, is generally good for business in the long term as well), but instead the manner of its typical execution, which precedes on the assumption that the world is simple and clear cut, rather than complex and contradictory, and that businesses/industries can therefore be easily put into ethical and unethical categories.

Armed with this belief, the ESG crowd has proceeded to categorizes stocks and industries as either 'good' or 'bad' in an extraordinarily blunt way entirely lacking in nuance. 'Coal is bad'; 'fracking is bad'; 'solar panels and wind farms are good'; etc, are obvious examples. The 'coal is bad' view is perhaps the most widely held, black and white position in the ESG community; it is the archetypal climate villain. No ESG investor would be caught dead owning a coal stock.

But is it really that simple? Is the world really that black and white? Let's deconstruct the issue in a more nuanced fashion. My views here will be regarded as 'contrarian', and yet in truth they simply reflect the acknowledgement of easily-ascertainable facts drawn from a variety of disciplines, that are accessible to anyone willing to look and think a little more broadly and deeply. It is an example of how contrarianism is borne of little more than simply keeping an open mind and being willing to listen to and integrating multiple perspectives.

The first problem is that the ESG community does not differentiate between coking coal and thermal coal. Iron ore and coking coal are the two essential ingredients in blast-oxygen furnace steel production, and a source of reductive carbon is essential to the chemical process. Without coking coal, you don't have steel, and without steel, you don't have modern industrial civilisation.

Steel is the unsung hero of the modern world. Steel is essential to everything from transportation infrastructure (shipping & ports, railways, cars and trucks, aeroplanes; tunnels and bridges); industrial machinery that powers the world's manufacturing economy; agriculture and food production (tractors and farm implements; and food processing infrastructure); high rise buildings (structural steel-reinforced concrete); mining (excavators, crushers & grinders, pipes); electricity (power transmission, power plants), and everyday home appliances. Without steel, the modern world would not exist, and we would be transported back to the pre-industrial era (I highly recommend Vaclav Smil's book Still the Iron Age: Iron and Steel in the Modern World for a fuller analysis).

So explain to me how investing in coking coal is unethical? If no one invested in coking coal, there would be no new steel production, and the resultant collapse in global economic activity would impoverish billions. While the developed world would somewhat muddle through for a while (as they have large installed bases of steel and can recycle existing steel via electric arc furnaces), it would deprive poorer economies with limited installed bases of steel of the opportunity for economic development, causing poverty and reduced quality of life by the billions.

Properly understood and framed in this way, it could reasonably be argued that it is far more unethical to deprive this life-giving industry of appropriate funding until a scalable, cost effective alternative is developed. By all means, invest in upstarts trying to come up a new way to make steel. But not investing in the current steel supply chain until that technological inflection point is reached is not only not ethical, but doesn't contribute at all to solving the problem. It might sound good. But it's a simplistic, black and white assessment borne of ignorance (and a desire for pious PR optics).

What about thermal coal? While there are technologically viable alternatives to coal-fired power generation (natural gas gen, and nuclear), at the present time approximately 40% of the world's electricity is generated by thermal coal-fired generation. If coal mining ceased today, the world's electricity consumption would drop by perhaps 30-35% (some of the slack would be picked up by underutilised gen), which would wreak absolute havoc. It is no exaggeration to say millions of people would die and it would be a man-made humanitarian tragedy unprecedented in modern times.

Again, by all means, invest in companies developing or scaling cost-effective alternatives. The way to ethically invest in climate is the way Bill Gates is doing - invest risk capital in upstart technology companies trying to develop better solutions. You'll probably lose most of your money, but you'll at least have a shot and making a meaningful positive difference. But avoiding investing in companies providing essential, life-giving services in the meantime, merely because we don't like some of the side-effects, when no scalable, viable alternatives are yet in place and able to pick up the slack, is not ethical and it's not solving the problem. Carried to its logical conclusion, it would tank the global economy as the availability of affordable energy disappeared, and such a backdrop is unlikely to represent a supportive funding environment for speculative new-energy technology companies.

Furthermore, as anyone who has studied historical energy transitions knows, they can happen only very slowly in the best of cases, because the size of the world's energy needs and energy infrastructure is simply so massive. Think of it like this: imagine you were to level the US - destroying all houses, buildings and infrastructure - bridges, railways, etc, but keeping the current human capital stock intact. How long would it take you to rebuild the entire USA? You have a relatively finite supply of qualified engineers, architects, and construction workers, as well as annual run-rate capacity for raw materials production, which is currently designed for incremental annual additions to the accumulated build. It would probably take 50 years to rebuild what currently exists - maybe more.** You simply couldn't do it any faster than that. You wouldn't have the raw materials inputs, or sufficient qualified human capital. The state of the world's current energy infrastructure is roughly analogous (long dated existing contractual arrangements also further complicate the task - you may have built a coal power plant with 30 year project financing debt, and sold long term power purchase agreements to local utilities; none of this can be easily undone in the short term).

This is why talk of reducing carbon emissions to zero by 2030 via 'green new deals' is completely unrealistic, as is migrating the world completely off coal within this time frame (2040-50 is more realistic for the latter). For the former, even if scalable, affordable technological solutions were to exist - which they currently do not - you simply couldn't do it. The scale of the undertaking is too large. There is not enough nickel, lithium and cobalt to produce enough batteries for a start. So sure, work on/invest in alternatives, but in the meantime, the world absolutely needs a continuing supply of thermal coal to keep the world's electric grids humming, and provide cost effective, reliable, and affordable energy to billions of people, while also helping to finance R&D into new technologies. Suggesting we ban thermal coal mining any time in the foreseeable future is therefore an absurdity.

Furthermore, overlooked is the fact that some of the largest contributors to reducing pollutants and carbon emissions over the past few decades has actually been the steel and coal power industries! This is because the industries have invested heavily in new technology and efficiency improvements, which have yielded tangible gains. Modern HELE (high efficiency, low emission) coal-fired thermal generators, for instance, with installed scrubbers and electrostatic precipitators, now emit almost no particulates, sulphur, or nitrous oxides. Virtually the only thing coming out of the coal stacks of these plants is Co2 and water vapour (steam) - a remarkable accomplishment. Furthermore, their heat efficiency has risen from some 30-35% to closer to 45%+, which means they now generate significantly more useful electricity relative to the amount of carbon released/coal burned, which means their Co2 efficiency has also significantly risen. These appear to have been highly ethical, win-win investments.

These efforts and successes have been meaningfully under-appreciated, and it is arguable that the industry needs more not less investment to continue to drive further innovations to reduce coal gen's environmental impact. What the ESG crowd should be doing is investing selectively in coal and coal-gen companies that are investing in such innovations and are committed to improving efficiency. But this would require nuanced thinking. It is much easier to simply say 'coal is bad' and avoid it.

This is also before mentioning the important but fundamental reality that coal feedstocks, at about US$2.50/MMBTU, is the cheapest, most reliable source of base-load power that exists (outside of the US, where for the time being, a glut of natural gas has rendered CCGT natural gas gen competitive with coal), and coal is also relatively easy to transport (not requiring complex and expensive pipeline and LNG infrastructure), such that its increased use in the developing world could promote a significant reduction in poverty by the billions (and indeed already has). Only a privileged, high income developed market do-gooder could believe that slowing global carbon emissions by a fairly negligible amount ought to be a greater priority than alleviating hunger, disease and poverty by the hundreds of millions in place like Africa, where nearly a billion people still live without electricity (the electrification ratio is only 42% in Africa). It's easy to be in favour of a policy when you're personally immune from the consequences.

Instead, the ESG and environmental crowd is opposing coal and promoting solar energy in Africa - one of the most expensive and unreliable sources of energy, for the world's poorest people. By refusing to invest in new coal mines, they will also contribute at the margin to increasing the cost of coal and hence raising the cost of coal-fired electricity in these nations, which will make electricity less affordable for some of the world's poorest people. By all means, promote substitution of coal-fired gen in the developed world, but to oppose the use of coal in the developing world ravaged by poverty is - to put it mildly - not particularly ethical (particularly because the prosperity ESG investors currently enjoy was built on the back of cheap and plentiful energy in decades past).

As can be seen, even something as seemingly obvious as 'coal is bad' is not so straight forward. The world is a complex place. Contradictions and two-sides of the debate almost always co-exist, because the world is mostly one of trade-offs, not absolutes.

Climate change - black and white?

All of the above stands even if one takes for granted the fact that carbon dioxide emissions and global warming are serious long term issues, but even this supposedly black and white issue appears far less clear cut when one delves into the details. I've spent a lot of time researching this issue of late, and believe the current state of the popular climate narrative is a fascinating case study in how even the most seemingly obvious examples of a black and white, open and shut cases, are often in fact far more complex when you get into the weeds. Permit me a fairly lengthy digression here, but I think the implications and lessons are important enough to warrant extensive comment.

Like most people, before I took the time to do much research on climate change, including seeking out and listening to contrary arguments, I took climate change orthodoxy at face value. After all, Co2 is a greenhouse gas and we've been emitting a lot of it; the climate seems to be warming a bit; and the scientific community appears (at face value) to be fairly unanimous in saying that this is happening, and is a problem/potential problem. It seemed pretty simple and obvious - what was there to dispute, really? And surely if there was any uncertainty, we should adopt the 'precautionary principle'. Usually a open-minded contrarian, in this case I didn't think any further work was particularly necessary.

However, like most, I hadn't taken the time to really properly understand the issues or listen to both sides of the debate, relying instead on popular caricatures/straw-manning of the arguments of the so-called 'denier' camp. Even I succumb to mistaking the water we are swimming in as reality from time to time. What prompted my willingness to look was an increasing realisation of the toxic incentives associated with activist movements - something I blogged about here. There is a sort of domino effect when you reach these sorts of realisations - they prompts you to ask, what else have I bought into uncritically, and how am I really sure this is true? And the more research I did, the more surprised I became as to what I found. Indeed, I've come to believe that the current climate change orthodoxy could well be one of the most profound correlation vs causation errors in modern history.

One tendency I have noticed is that experts in their field are often deeply contrarian or skeptical about their own field, and see all the problems, biases, and institutionalised folly that occur in their own industry, but are they bafflingly quick to assume the orthodox views in other domains outside their areas of expertise are assuredly accurate. It's like reading a story in the paper - when it's something you personally know a lot about, you're often appalled by the inaccuracy of the reporting, but when it's something you know little about, you assume that it's 100% accurate.

Steve Keen and Jeremy Grantham are two prime examples. Both are hyper-contrarians in their own areas of expertise, but have championed climate change orthodoxy with almost religious zeal, without applying even a modicum of the critical thinking they are famous for in their own disciplines. I find the juxtaposition almost comical. But the truth is, the financial industry has no monopoly on folly and irrationality. Indeed, the more I learn about other fields, from healthcare and psychiatry, to academia and the toxic dynamics of institutionalised activism, the more I realise that the tendency to folly and irrationality is a human universal, and if anything, the financial industry is far better than average.

The origin of the current climate change orthodoxy lies in arctic ice core records, which over a 400k year history, showed a clear correlation between historical temperatures and atmospheric Co2 levels. Coupled with the fact that Co2 is known to be a greenhouse gas (as it is capable of absorbing reflected long-wave infrared radiation), it seemed more than reasonable to infer that fluctuations in Co2 levels were likely driving these temperature changes. It seemed to be a sound hypothesis, and this hypothesis was popularised by Al Gore's An inconvenient truth. And as popular opinion goes, so goes politicians, government funding, and the PR departments of corporations and institutions.

The problem is that as any good scientist should know, correlation does not mean causation, and you don't take a hypothesis at face value. You need to scrutinize it, and test it. Indeed, in order for a claim to be scientific, it needs to be falsifiable (one should always be able to answer the question, what piece of evidence would cause you to change your view?; if you can't answer that, your view is not scientific but ideological), and also capable of making accurate predictions.

What is remarkable is that over the past 30 years, we have emitted far more carbon dioxide than predicted (due primarily to rapid growth in China and other parts of the developing world), and yet temperature change has undershot even the low end of projected increases in mainstream climate models (the leaked 'climategate' emails also revealed consternation amongst the alarmist fraternity about the fact that the climate wasn't warming as much as it should be, and revealed coordinated efforts to obfuscate that fact). Sea level rises have also been far less than was predicted, and despite claims that more extreme weather and famine would befall the earth, catastrophe experience and reinsurance prices have significantly declined over the past 15-20 years, and real food prices are also at record lows. This new data, and prior failures of prediction, suggests that at the very least, alternative perspective should be considered, but the problem is that existing orthodoxy can become so ossified into existing institutional arrangements that, in combination with bad incentives and the 'institutional imperative', responding adaptively to new evidence can prove nigh on impossible.

So what's the potential correlation vs. causation error I reference? A closer look at the historical arctic core data reveals that Co2 levels actually lagged temperature increase by approximately 800 years - an important fact obscured by Al Gore's deceptively simple rhetoric. The explanation lies in the fact that approximately 98% of earth's carbon dioxide is dissolved in the oceans, and only a small percentage resides in the atmosphere. As sea temperatures rises, the oceanic solubility of Co2 declines, which results in oceans venting Co2 into the atmosphere at the ocean's surface. Meanwhile, when temperatures decline, solubility increases, resulting in greater Co2 absorption. It takes approximately 1,000 years for the oceans to fully circulate (bringing water from the very depths of the deepest oceans to the surface, where atmospheric Co2 exchange can happen), which broadly corresponds to the 800 year time lag between changes in temperature and the resultant change in atmospheric Co2 levels. This dynamic suggests it is more than plausible that it could have been temperature driving Co2 levels, rather than the other way around.

Now of course, there are also feedbacks, because Co2 is absolutely a greenhouse gas. Consequently, rising atmospheric Co2 levels caused by an initial warming (generally caused by long-cycle variations in the earth's orbit, which is the driver of ice-ages - see here for an excellent explanation) can amplify and prolong the level of prior warming in a positive feedback loop. However, the initial correlation data, coupled with knowledge that Co2 is a greenhouse gas, says nothing about the magnitude of this positive feedback. It could be large, or it could be small. And this is the absolutely critical issue. Is the feedback effect large or small? It's not a matter of whether Co2 has a greenhouse effect. Of course it does. It's a matter of whether the warming effect of trace 0.04% atmospheric carbon going to 0.05% is large or small.

Here we once again see how the penchant for binary, simplistic thinking has hijacked the debate. The theory goes, you either think Co2 is a greenhouse gas or you don't. If it's a greenhouse gas, then obviously global warming is happening due to rising Co2 levels. In order to deny climate change, you need to deny that Co2 levels are rising due to human activity and that Co2 is a greenhouse gas, and yet we know with a high level of confidence that both of these things are true. Consequently, anyone that doubts the warming narrative is either stupid or engaging in motivated obfuscation. However, note how absolute and binary this view is, and that it pays no heed at all to the relevant issue: the magnitude of the warming effect. And will the impact accelerate or attenuate as Co2 levels rise?

The wonderful truth is that the evidence that has emerged over the past 30 years or so since the carbon hypothesis initially gained traction seems to suggest that the warming effect of Co2 has been radically overestimated, and that climate sensitivity is relatively low. During the 400k year ice core period, fluctuations in atmospheric Co2 of about 100ppm correlated with huge temperature swings of 5-10 degrees Celsius (10c near the poles, but likely closer to 5c near the equator) - see here. If the climate was that sensitive to carbon dioxide levels, we would do well to panic. However, we have seen Co2 levels rise by 100ppm over the past 100 years or so, and yet temperatures have only increased by about 0.5-1.0c during this period. Furthermore, as noted, carbon emissions have accelerated over the past 30 years as China et al have industrialised, and yet the level of warming has shown no signs of meaningful acceleration (it has risen a bit this decade, but stagnated completely during the 2000s). This provides meaningful evidence that it was primarily temperature driving the change in Co2 during the ice-core period, with a small level of positive feedback, rather than the other way around.

There are also people that believe the level of claimed 0.5-1.0c temperature increases has also been overestimated, because in many cases it fails to adequately adjust for the 'urban heat island' effect, which can affect thermometer readings. Urban areas tend to be hotter than rural areas, as concrete, steel and asphalt absorbs more heat than natural environs. Consequently, as cities/regions/countries increasingly urbanise, local temperatures will rise for reasons completely unrelated to global climate trends. Tropospheric temperature measures suggest less warming has happened than terrestrial measurements suggest, and there is also evidence that institutions such as NASA have re-written the global temperature record, revising down historical temperature readings, which has had the effect of increasing the amount of apparent subsequent warming. They have done this because confirmation bias is a powerful thing, and when the historical record didn't confirm with their belief system (less warming than expected), they decided that the historical temperature readings must have been flawed/biased in a certain way and made various 'adjustments' to correct those 'errors' (see here).

Furthermore, a very very important but little known dynamic of the greenhouse effect of Co2 is that the warming effect of a linear increase in Co2 declines exponentially (logarithmically). If you double Co2 and get (say) 2c of warming, you then need to double Co2 again to get another 2c of warming, and so forth. This is why the IPCC's conclusions are cast in terms of a 'a doubling in Co2 will drive a 1.5-4.5c increase in temperature' - note they use the relative standard of doubling instead of talking about the absolute impact per unit of Co2. That is because the impact diminishes as the Co2 stock rises. This is massively important, because atmospheric Co2 levels are rising in a relatively linear fashion, and will continue to slow down over time as the global population peaks around 2050; the developing world steadily completes its S-curve industrialisation over time; and our energy use becomes more efficient (as it has in the developed world), which is a trend that owes itself to capitalist cost efficiency incentives as much as it does to government environmental policy.

The reason for this exponential decline in warming is that a 'saturation effect' is at work. Trapping infrared radiation is somewhat akin to blocking incoming light with a curtain. As the curtain gets more and more opaque, you eventually get to the point where not much light is coming into the room, so if you keep doubling the thickness of the curtain, at some point the level of incremental light being blocked starts to become relatively negligible. It has been estimated that as much as 87% of the potential warming effect of atmospheric Co2 has already been realised (see here; also see here for a decent explanation of the science of infrared absorption). It is also worth bearing in mind that life would not have been able to evolve on earth over billions of years if the climate was radically unstable, so there is already prima facie evidence for relatively low climate sensitivity, and the diminishing return effect of Co2 warming is likely one contributing factor as to why. Without it, runaway and irreversible cooling and warming could happen, making life on earth impossible.

It is accepted scientific consensus that this logarithmic decline in the warming effect is how Co2 infrared absorption works. It is testable and measurable, and is in the IPCC reports (albeit it is buried in the interior). Even if one cares to disagree with all my other points, it is very hard to disagree on this point, as this is absolutely mainstream, accepted science known with a high degree of certitude. Importantly, most people's intuitions/beliefs are that if you increase carbon levels linearly, you'll have a linear to exponential increase in temperature, and yet the opposite is in fact true - you will get an exponentially diminishing level of warming over time. This alone means that the magnitude of the risks we are facing is perhaps an order of magnitude less than what many people intuitively think it is.

So here we have a major gap between mainstream perception and the underlying reality, that is easily ascertainable from information in the public domain, and yet very view people are aware of it. Why? Because they haven't been looking for it, or felt the need to seek contrary opinions. In markets, you don't need inside information - there is plenty of useful outside information out there for the taking if you're prepared to look for it, and it is not hard to find if you do. With respect to climate, every single argument I have made above is not my own novel work or insight, but instead derives from a wide array of highly credentialed scientists with 30-40 years of experience in their area of expertise, who have publicised their arguments. They may be in the minority (particularly in their willingness to speak publicly on the issue, and risk the associated reputational and career consequences), but that does not mean they are wrong. We know from markets that the consensus is often wrong.

William Happer, for instance, is a Princeton physicist who has built carbon dioxide lasers. His Wikipedia profile includes the following excerpt: "Happer is credited with a key insight in 1982 that made adaptive optics possible: there is a layer of sodium in the mesosphere, at around 90 to 100 km of elevation, which could be lit by a laser beam to make an artificial guide star. His idea was tested successfully by DARPA but classified for possible military applications". I'm willing to bet he knows a lot more about the science and dynamics of carbon dioxide that Greta and her ilk. He has pointed out for years to anyone prepared to listen how the warming effect of carbon declines logarithmically, as have many other scientists, and as previously noted, it is included (begrudgingly) in the IPCC reports. But no one listens because people believe they already know all the answers (see here for an excellent interview with Happer).

Furthermore, it gets even worse (or better, depending on your perspective). There is actually a growing amount of evidence that rising Co2 levels and mild planetary warming are actually having a net beneficial effect on the world and the environment. Satellite evidence confirms that global greening is happening (see here for an excellent presentation by Matt Ridley on this point). Co2 is plant food, and is an absolutely essential ingredient in photosynthesis. Commercial greenhouses pump in Co2 to artificially raise levels to 1,000-1,500ppm, which is more optimal for plant growth (vs. atmospheric levels of 400ppm). Anyone can conduct this experiment to prove it. Plants evolved in (and are hence adapted to) an environment with significantly higher carbon levels than currently prevail, and as carbon levels have started to rise, carbon-starved plants have been flourishing. Agricultural productivity has risen and real food prices are at record lows. A more carbon-rich atmosphere also promotes improved drought resistance amongst crops, improving food security.

The Cambrian explosion also occurred when carbon was at 7,000ppm - something that perhaps ought not be a surprise, considering that all life on earth is carbon based. Even today, life appears to flourish most vigorously in warm, energy-rich environments (e.g. tropical rainforests; tropical coral reefs are also the most vibrant).

It is merely asserted by the green movement that pre-industrial levels of Co2 were at optimal levels, but no evidence for that is provided. Meanwhile, there is meaningful evidence that we are currently living in something of a carbon drought, and higher carbon levels could well be a net positive for the world. Even Elon Musk has said that he believes the world could do with a little more carbon. Indeed, at 150ppm, plants start to die. We were getting dangerously close to that level a few centuries ago, with carbon levels troughing at as little as 200ppm in recent cycles, because over eons, carbon has been slowly sequestered and trapped in the form of hydrocarbons and other marine deposits/sediments. In what is the most supreme of supreme ironies, had humans not intervened to release this sequestered carbon by burning fossil fuels, all life on earth would have eventually ceased (with some predicting that it could have occurred as little as 5m years from now - on an evolutionary timescale, human beings' industrialisation arrived just in the nick of time).

While these latter points are grounded in very basic first-principles scientific realities, and are easily testable, the implications are almost impossible for the green movement to accept, because environmentalists have been conditioned by past experience to perpetually cast human beings in opposition to the health of the environment. That is understandable, because a lot of human economic growth in the past has come associated with industrial activity that has in fact polluted streams, groundwater, and the the air over time. It seems almost inconceivable that we could be so lucky as to enjoy a 'win win', where burning fossil fuels to release Co2 would be both good for human economies, and good for the environment (note that Co2 needs to be differentiated from genuine pollutants such as particulates, sulphur, nitrous oxides, etc, which are damaging and ought to be - and increasingly have been - sequestered; Co2 - analogous to oxygen for humans - is frequently mislabelled a 'pollutant'). But the evidence appears to suggest that could well be the case!

In a rational world, that reality would be greeted with unmitigated joy. However, in the real world, amongst the professional environmental activist community, it is greeted with fear and trepidation. The reason is simple - these people's livelihoods and reputations depend on their being a climate emergency to agitate against. Specialist 'climate scientists' livelihoods also depend on large government grants to fund climate change research as well. If concern about climate change goes away, so do billion-dollar government research grants, and hence their large and reliable incomes.

Indeed, I always find it amusing how people argue that anyone opposing climate change orthodoxy must be biased by funding from the fossil fuel industry (when in fact, all the major oil companies now embrace climate change orthodoxy, as they have already comprehensively lost the PR battle and they know it; and most of the skeptics not only enjoy no such funding, but also frequently suffer very real reputational and career consequences for stating their views publicly),*** while they ignore the biasing effect billions of dollars of government research grants might have on the objectivity of professional climate change research. Qualifying for grants is a highly politicized process, and they are handed out with the tacit expectation that the conclusions that come back are 'on point'. If you come back with inconvenient conclusions, you risk compromising future research grants. The outcome of much of this research is therefore decided even before it starts.

Should we therefore be surprised that a majority of professional 'climate scientists' agree with climate change orthodoxy? Bear in mind that until the multi-billion-dollar feeding trough of climate change funding emerged, there was no such thing as specialist climate scientists. There were geologists, meteorologists, physicists, ecologists, marine biologists, and chemists, etc, but no climate scientists. The latter are a bunch of self-selecting people that deliberately chose to enter the field to specifically make a career out of researching climate-change related issues, whose livelihoods and relevance depend on the flow of funding continuing. If you pay a bunch of smart people a lot of money to find evidence for X, you should not be surprised that they come back with evidence for X, irrespective of whether X is true or not. Relying on a numerical consensus when the financial incentives and resources are hugely imbalanced is like a rich plaintiff in a court case hiring 99 lawyers, while the defence has 1 pro bono lawyer, and then arguing that 99% of professional lawyers believe the case for the plaintiff to be correct. They are hired guns with a vested interest, not objective observers.

It's the same fundamental reason why Buffett always stated that if he were a conventional corporate CEO considering doing an M&A deal pitched by a Wall St bank, he would hire another firm to pitch him against doing the deal, and put both on a contingency fee (so the second bank gets paid if the deal doesn't happen). Buffett is well aware that if you align the incentives of a bunch of smart people towards a particular outcome, they will come back with very convincing arguments. Don't ask a barber if you need a haircut, he noted. Well, the state of climate science research is structurally very similar, and no one is getting paid to dispute the narrative. To the contrary, people are routinely fired or scorned for the mere expression of doubt. That means that any vocal opposition should be accorded at least 10x its normal weight on account of the personal costs of doing so. If people are speaking out even at great personal cost, they must really really passionately believe in what they are saying. (Buffett's discussion of the 'institutional imperative' is also very relevant to the how NGOs, universities, and government departments frame their climate commentary and research as well - who wants to risk publishing/saying anything against the narrative? That's not how institutions behave, as there is no upside to the risk-averse people populating these bodies; only potential downside).

Furthermore, the oft-quoted 97% consensus is also a misleading statistic, because 97% of climate scientists agree that 'climate change is happening and it is due to human causes'. Notice that this is a bait and switch, and completely irrelevant to the pertinent issue, which is the magnitude of the change, and whether it is dangerous or not (or indeed, potentially beneficial). I'm in the 97%. I think change is happening due to human activities. I just think a sound case can be made that it is not only mild, but quite likely net beneficial as well.

Concluding remarks

So why is contrarianism so rare? It is rare not only because it is intellectually hard (it requires constant, active open-mindedness), but also because of incentive problems, and the personal costs involved in invoking the ire of the tribe. The stock market is one of the few areas of the world where pure truth always wins in the end, and where being a contrarian can seriously pay off. However, most areas of life are political to at least some extent (and often to a considerable degree), and getting ahead therefore depends as much on social perceptions and personal relationships as it does on truth.

We are a co-operative, social species, and in tribal times, ejection from the tribe was a death sentence. Human beings are therefore acutely attuned to what is deemed socially acceptable, and few people are prepared to risk invoking the tribe's wrath by taking a contrary view. These inclinations are hardwired, and are one reason for the 'herding' that observably occurs in financial markets (many financial market participants also face political constraints, from bosses to clients and media PR risk, and truth only wins in the long term - in the short term the market is a voting machine). Look at what happened to Peter Ridd - he lost is career and reputation for standing up for what he thought was right. Even if he is right, which I suspect he probably is, there is no vindication. He doesn't get his job and career back. He invoked the ire of the tribe and was ostracised.

The same thing happened to James Damore at Google, which I blogged about here. I felt instantly sympathetic, seeing a kindred spirit - a contrarian, independent thinking prepared to reason from first principles and do battle with conventional thinking. He was unmercifully fired and pilloried in the media for expressing views in a measured way that are very likely correct. The much less noble and deserving-of-sympathy Martin Shkreli also discovered to his detriment the perils of invoking the tribe's antipathy. Individual rights only go so far, even in modern day society. If he was aware of the personal risks of doing so, he might not have acted in such a brazen, loathsome manner.

I feel extremely fortunate to work in a job where I get rewarded for discovering truth. As I work for myself, I also need not fear being fired for the expression of politically unpopular or controversial beliefs. I feel extremely lucky - as an instinctive contrarian, I could easily have found myself in Peter Ridd or James Damore's position, were I to have worked my way into an alternative profession - and found myself alienated, condemned, and ejected by the tribe for espousing unpopular views. It is partly for this reason that I feel a responsibility to share some of the politically unpopular insights I have, because if it's not people like me, then who can we rely on to do so?

What does the above analysis mean for the outlook for coal? Does it mean it is positive? Not necessarily - particularly for thermal coal, which in the long term the world can survive without (by substituting to natural gas). Over the past 50 years, the environmental lobby has destroyed the nuclear industry in most of the developed world, despite it being a highly promising technology which is the most affordable, scalable, and reliable source of carbon-free base-load electricity generation we have (and despite the occasional high-profile mishap, one of the safest as well). In the 1960s, it was believed that nuclear energy would by 2000 render electricity 'too cheap to meter' (a cautionary tale on the perils of techno-optimism and excessive extrapolation, as well as the capacity for bad ideas to be tenacious, and activist groups to drive society-wide own goals). If the environmental lobby can destroy the nuclear industry, it can certainly destroy the coal industry as well (likely by forcing a substitution to more expensive - excepting the US for the time being - but still easily affordable natural gas).

The outlook will hinge on what happens in the developing world. If the developing world is pressured into using natural gas/alternatives, thermal coal's long term future could be relatively weak. However, counterbalanced against this will be the long duration of energy transitions, as noted, coupled with likely underinvestment in new mine capacity, which could support prices. Despite the uncertainty, I nevertheless remain fairly optimistic about coal's outlook in developing markets, given that coal will likely remain meaningfully cheaper than natural gas, such that there will be a competitive cost advantage for economies that embrace coal, and historical precedent suggests that most emerging markets will favour affordability and economic development above all else. In addition, while China's coal-burn is unlikely to increase, it is unlikely to meaningfully decrease, as I believe China will not wish to increase its share of natural gas in the energy mix above 20%, as they have limited domestic reserves, and given the state of geopolitcal relations, are unlikely to want to rely on countries such as the US for imported LNG for their energy security.

The other thing that could occur - albeit that it is a low probability event - is economies like the EU completely destroy the competitiveness of their industrial sectors through escalating carbon prices (which have risen from $10/MT to $25/MT this year), resulting in another economic crisis, substantial unemployment, and significantly higher living costs, which eventually trigger a backlash at the polls. The Yellow Vest protests in France were a potential indication of what could be to come across the European continent if policymakers continue down their current misguided trajectory.

Overall, I am not very optimistic the current climate change narrative will reverse itself, however. Indeed, recent trends indicate that the level of hysteria continues to grow, rather than recede. It is possible that we are in the manic stages of a popular narrative bubble, which will imminently reverse, but it feels unlikely to me as there is so much government/institutional/financial momentum behind the movement, and government-backed movements don't mean revert. They keep trending in the same direction unless and until a major crisis/discontinuity event occurs. Bad ideas can be extremely tenacious (witness the long term damage done to the penetration of GMO seeds in the EU, for instance, by the environmental lobby, in flagrant disregard of the scientific evidence).

The current climate change hysteria is not only a fascinating example of how dysfunctional our institutions can become, and how widespread mass delusions can spread (even many famed 'contrarian' investment managers fully sign on to climate change orthodoxy) - particularly when issues become politicised, and where bad incentives are involved (as Munger said, he's been in the top 5% of his age cohort his entire life in understanding the power of incentives, and he has always underestimated them). When viewed in combination with recent ESG trends, it also highlights how the general belief in the world being black and white and simple comes with all kinds of attendant risks of poor judgement and misguided actions. ESG-based funds are now eschewing anything seen to be contributing to 'climate change', having consigned it to the evil bucket, even though the state of the science is still unsettled to say the least, and in spite of the very considerable positive contributions the industry makes to global economic and socioeconomic welfare, including global poverty alleviation. And the worst part about it is that it is doubtful they will ever change their minds.

On a final note, I wish to emphasise I could well be wrong in some or all of my analysis. These are complex issues. I always consider all of my opinions provisional, and open to change in the face of new or better evidence/arguments/insights. If someone is able to convince me I've made a mistake, I'll be more than willing to change my mind.


*A cynic might argue that the rapid rise of ESG is less a reflection of the financial world suddenly growing a social conscience, and more the industry's latest attempt to overcharge investors for poor performance, in the face of rising fee and flow pressures from passive vehicles (if you don't have any alpha to sell to investors, why not roll the dice and try ESG instead?)

**Incidentally, this is pretty much what China is currently in the process of doing. They are building an entire modern economy from a standing start in about 50 years. This is what accounts for their outsized and unprecedented use of construction materials like steel and cement, as well as (to some extent), their rapid accumulation of debt. In the long run, replacing this aggregate construction demand will be a challenge, but at US$10k GDP per capita, there is ample room for consumption and services to grow to fill the void, and as the bears obsess about the demand-side risks, they forget about the tremendous supply-side progress that continues to unfold (and still has a long way to go).

***For instance, lifelong ecologist and Great Barrier Reef researcher and enthusiast Peter Ridd was recently fired from James Cook University for disputing - with evidence - claims that the putative environmental destruction of the GBR was being misrepresented (by organisations that are recipients of substantial funding from the Australian government, who have a vested interest in exaggerating the GBR's plight), and arguing the reef was actually in good health. He recently won a lawsuit against the university for wrongful dismissal. The university, to its shame, is appealing the decision, at a great waste of public money. You can help fund Ridd's (considerable) legal costs on his GoFundMe campaign.