By Rupert Darwell
Rupert Darwall
By any standard, the London meeting of finance ministers of the Group of Seven leading Western economies a week before the G7 leaders’ summit was historic. By committing to transformative structural change to meet net-zero greenhouse gas targets and other environmental objectives, G7 finance ministers turned themselves into adjuncts of their environment ministries. Considerations of climate change and biodiversity loss are to be embedded into economic decision-making, they pledged. Some form of carbon tax is heading America’s way, after Treasury secretary Janet Yellen signed a communiqué that commits to “the optimal use of the range of policy levers to price carbon.”
That’s for the future. More immediately, the London meeting agreed to make climate reporting by companies mandatory across the G7. Britain’s Chancellor of the Exchequer Rishi Sunak professed himself thrilled. “This is such an important step in getting markets to play their part in tackling environmental issues and paves the way for us all to achieve our net-zero goals,” he tweeted. The ostensible justification—which no doubt Gary Gensler, President Biden’s pick to chair the Securities and Exchange Commission, is already prepping—is to help investors better appraise climate risk.
Gensler’s first task should be to coach the White House on presenting a stronger case than the president did at the Earth Day virtual leaders’ climate summit. “If Wall Street is pumping billions of dollars into business that could be turned upside down when the next storm comes—and we know there will be more storms—Wall Street needs to make clear the risk it’s taking on,” the president said, without providing any evidence to substantiate such claims.
Financial markets produce acres of data. In August 2017, energy stocks were hit as Hurricane Harvey slammed into the Texas Gulf coast. Refinery production of crude oil and petroleum products plunged 44 percent in September. The following month, production bounced back to 92.7 percent of its July level and in November exceeded it. Turned upside down? Hot on Harvey’s heels came Irma, the costliest storm of the last decade. The stock market actually rose the day after Irma made landfall in Florida; energy stocks had already rebounded, and insurers rallied. “The long-run effect of these disasters unfortunately is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storms,” New York Fed president William Dudley told CNBC.
Hurricanes have devastating consequences for those unfortunate enough to be in their path. Unlike the American economy of nearly a century ago, when bad harvests and the dustbowl deepened the depression, today’s industrialized economy is highly resilient against these physical elements, as are financial markets. Perversely, though, politicians most concerned about climate change also want to make the electrical grid more exposed to bad weather by subsidizing and mandating vulnerable wind and solar farms. It makes no sense. Does that make for increased climate risk—or increased climate-policy risk? Chair Gensler might wish to explain the answer to senators when he next testifies.
In fact, the G7 finance ministers exposed the speciousness of the justification for mandating climate disclosure to protect investors by revealing the real reason for it. The communiqué speaks of greening the financial system to “reinforce government policy to meet our net-zero commitments.” Climate disclosures would aid corporate reporting “on net-zero alignment.” The G7 decarbonization strategy is clear: supply-side constriction by imposing an ever-tightening blockade enforced by shareholders and the capital markets, overseen by regulators such as the SEC, to squeeze carbon-emitting activities until they’re put out of business.
In his epochal book “Capitalism, Socialism and Democracy,” Joseph Schumpeter described publicly traded corporations as capitalism’s vulnerable fortresses. This is truer now than when Schumpeter was writing in the 1940s, with huge, politically controlled state and municipal pension funds. The Big Three index funds of Vanguard, BlackRock, and State Street now hold 43 percent of the fund industry’s U.S. equity assets, which own individual stocks and vote their proxies not out of choice or conviction but because they’re in the index. Across the Atlantic, the EU is formalizing state direction of private investment with the 2020 EU taxonomy for sustainable activities regulation designed to help meet the bloc’s decarbonization objectives.
For these reasons—and despite the collateral shareholder-value destruction—the carbon blockade of publicly traded corporations is likely to succeed in its proximate aim. But decarbonizing them is not the same as decarbonizing the economy. The reason is obvious: Partial blockades don’t work. If Exxon or Chevron or Shell don’t supply gasoline, other firms less beholden to American and European institutional investors or to the Dutch courts will. Private companies and state-owned oil companies of OPEC and Russia will gain what Western oil majors are forced to cede.
The point is emphasized by Jason Bordoff, a senior climate expert on President Obama’s National Security Council, in a comprehensive critique for “Foreign Affairs.” Emissions go down only if oil use declines, Bordoff notes. “Unless both supply and demand change in tandem, merely curbing the oil majors’ output will either shift production to less accountable producers or have potentially severe consequences on economic and national security interests.” Bordoff also casts doubt on the effectiveness of a Western-led financial blockade of the oil and gas sector. “To the extent capital from Western banks dries up, Chinese banks have also demonstrated they can fill the gap.”
Throttling the supply of oil and gas via the capital markets is not sufficient to eliminate carbon dioxide emissions. Neither is it necessary—and it’s no substitute for government policies directly aimed at suppressing demand, with combinations of vertiginously high taxes and subsidies for inefficient hydrocarbon substitutes. This takes policy deep into “if it isn’t hurting, it isn’t working” territory in terms of lost jobs and squeezed living standards. In Europe, where virtually all political parties subscribe to net-zero climate policies, this might be politically survivable, but in the United States, it’s more likely to be a one-way ticket to electoral oblivion.
The politics point in the direction of targeting Western oil companies and the requirements of effective decarbonization in order to constrain demand. It’s how the finance ministers of the seven largest, for now, capitalist economies decided to take a leaf out of the anti-capitalist progressive playbook of the People vs. Polluting Corporations. And that, in essence, is what the G7 finance ministers did.
Rupert Darwall is a senior fellow of the RealClear Foundation and author of Capitalism, Socialism, and ESG.