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The Economics of Climate Change

The Jevons Effect, the Khazzoom–Brookes Postulate and Recent IEA Assumptions – Is it time to Rewrite Economic Theory or Face Reality?   In...

Monday, May 31, 2021

Black Swans and the Sting in the Tail of Climate Change Initiatives: What is the Fallback?

The Black Swan

At all times, knowingly or unknowingly, we are exposed to a measure of risk.  The key variables are twofold, likelihood and impact. In general, we focus on mitigating risks that have a high likelihood of crystallizing and which have a very high negative impact, either commercially or in terms of people being harmed. Whilst all risks should be assessed, those with a low chance of occurring and have minimal impact, are generally not priority areas.

There is also a category of risk events which have a low likelihood of taking place but when there is an occurrence, the consequences may be catastrophic. These are the “Black Swan” events. The term “black swan” is Latin in origin, its oldest reference being found in the works of the Roman poet, Decimus Juvenalis’ who stated that "a good person is as rare as a black swan".

A rare stamp from Western Australia, issued circa 1854 depicting a Black Swan  

Former Options Trader, Nassim Nicholas Taleb developed on this ancient expression and in 2007 authored a book entitled, “The Black Swan: The Impact of the Highly Improbable”. In his book, Taleb proposes Black Swan Theory, which encompasses his thinking on the extreme impact of rare and unpredictable outlier events, that have major effect, and are then followed by the tendency of humans to retrospectively, inappropriately simplify or rationalize the incident.

Recent Black Swan Events

In the past two decades, Black Swan events have increased in frequency.

On the morning of Tuesday, 11th of September 2001, nineteen terrorists, in a series of coordinated attacks, hijacked four commercial aircraft in mid-flight over United States airspace and crashed these planes into various prominent American targets. These targets included both the towers of the World Trade Centre complex in New York and the U.S. Department of Defense facility at the Pentagon. A fourth jet, headed towards Washington, crashed in a field in Pennsylvania after its passengers thwarted the hijackers from getting to their eventual target (which has remained a mystery). These attacks resulted in nearly 3,000 fatalities. In addition, the financial markets of Wall Street were closed for three market days, until the 17th of September.

A First Day Cover issued by Israel, remembering the 9/11 attacks

The 9/11 attacks markedly changed security processes related to air travel. It also resulted in a U.S. backed, global war on terror. As part of this war on terror, the United States invaded Afghanistan in an effort to capture Osama bin Laden, who was believed to have master-minded the 9/11 attacks. The hunt for Bin Laden was relentless and he was eventually killed in a clandestine U.S. military operation in Pakistan in 2011. The motion picture, “Zero Dark Thirty”, directed by Kathryn Bigelow and written by Mark Boal, dramatizes the nearly decade-long international manhunt for Osama bin Laden, leader of the terrorist network, “Al-Qaeda”.

Three years later, on Boxing Day of 2004, a rupture along the geological fault of the Burma Plate and the Indian Plate caused the Indian Ocean earthquake and tsunami. Known to the scientific community as the Sumatra-Andaman earthquake, it had its epicenter off the west coast of northern Sumatra and measured a devastating 9.1 on the Richter scale.

The earthquake itself was the third largest ever recorded, releasing energy equivalent to approximately 1,500 times that of the Hiroshima atomic bomb. The earthquake generated a seismic oscillation of the Earth's surface of between 200 and 300 millimeters, equivalent to the effect of the tidal forces caused by the Sun and Moon. Incredibly, the seismic waves originating from the earthquake were felt across the planet, as far away as inland the United States, where vertical movements of 3 millimeters were recorded in the state of Oklahoma.

Stamps from Slovakia and Thailand remembering the 2004 Boxing Day Tsunami 

The earthquake caused a series of massive tsunami waves to form, growing to an intimidating 30 meters (100 feet) in height as they approached landfall. Many communities were severely affected as the tsunamis killed an estimated 227,900 people living along the coastlines of 14 countries in a matter of hours. It remains one of the deadliest natural disasters in recorded history.

But this was not the last Black Swan event of the decade. Between mid 2007 and early 2009, a downturn in the U.S. housing market catalyzed an economic crisis that spanned a world connected through intricate, web-like linkages of the global financial system. Multiple banks across several continents incurred large losses and without substantial government support, would have suffered bankruptcy. Experts blamed excessive risk taking in a favourable macroeconomic climate as being the root cause of this crisis. Others identified over-exuberance in credit risk assessment by lenders coupled with poor oversight by the regulators as the main drivers. This Global Financial Crisis may not have claimed many lives but it certainly crushed millions of livelihoods.

This second decade of this century has not been spared from a Black Swan event. As I write this post, the world is facing another war on terror. This time millions of lives have been lost and many livelihoods are under threat. The Economist (May 15th to 21st, 2021 publication) estimates, using a proprietary model, that “Covid-19 global pandemic has led to between 7 million and 13 million excess deaths worldwide.”

It almost seems that the black swans are not as rare as once thought!


Operation Pocket Money

In May 1972, during the Vietnam War, an aerial mining campaign was conducted by the U.S. Navy over North Vietnamese waters. The initiative was called, “Operation Pocket Money”. Operation Pocket Money was the first use of mines, dropped from aircraft, and was implemented to halt or slow down the transportation of sea borne supplies into North Vietnam, specifically from Russia, North Korea and China. It was estimated that nearly eighty-five percent of North Vietnam's import tonnage came through the port of Haiphong, so this city became the target of the naval mining initiative.

Stamps from Vietnam commemorating the Vietnam War 

Naval mining had been frequently previously considered but always rejected for fear of the risk of provoking intervention by the Soviet Union or the People’s Republic of China. However, on 9th May 1972, on the orders of President Nixon, U.S. Naval and Marine Corps bombers started deploying two types of mines, one type being 1,000-pound (450 kg) Mk-52 magnetic mines, which were  to be dropped in Haiphong's inner channel, and the other category being 500-pound (230 kg) Mk-36 acoustic mines, to be dropped in the outer portion of the channel.

By the end of that year U.S. bombers had dropped more than eight thousand mines in North Vietnamese coastal waters, and about three thousand more, in inland waterways. For several months the U.S. Strategy seemed to be working according to plan. Many vessels were immobilized in the Haiphong habour area and the port had to be closed. Habour depth also decreased by about 0.6 meters (2 feet) because the mines prevented routine dredging.

All was going according to U.S. military strategy but then, along came a cosmic originating Black Swan ….

On 4 August 1972, dozens of the mines spontaneously detonated, for no apparent reason. Up and down the Vietnamese coast, in the first few weeks of that August, this mysterious phenomenon repeated itself, until, according to one estimate, 4,000 destructor mines had detonated, as if ghost ships had been trawling the waters and sweeping them for danger.

At the time the U.S. Navy had no answer for these phenomena. After months of study, it was noticed that all the mines that had self-detonated were installed with a similar type of magnetic based trigger; i.e. sensors that would measure the amplitude, polarity, or gradient of magnetic fields, waiting for a steel-hulled ship to pass above, tweaking the field and triggering the bomb. This was the “smoking gun’’ and soon, an event that took place 93 million miles away, was identified as the cause.

Naval investigators concluded that this unexpected event was caused by magnetic radiation emanating from a geomagnetic storm, triggered by a coronal mass ejection from the Sun. When the solar flares distorted the magnetic field of the Earth, the mines reacted and detonated.

This was later confirmed by scientific research in 2018, nearly forty-six years later.

A stamp from Hungary depicting solar flares

The Carrington Event

Johann Zahn designed the first camera in 1685 but first photographs were actually captured by Joseph Nicephore Niepce in the year 1814. Practical photography was only invented by Louis Daquerre in 1829.  So, on the morning of September 1, 1859, whilst British amateur astronomer Richard Carrington was in the private observatory attached to his country home outside London, he was without camera technology and instead sketched his astronomical observations, a common practice of scientists and astronomers of the day.

Joseph Niepce and Louis Daquerre, the developers of practical photography, featured on this stamp issued by France.

With his brass telescope trained in the direction of the Sun and his hands recording the view of a cluster of enormous dark spots that freckled the Sun’s surface that he saw through his eyepiece, Carrington spotted “two patches of intensely bright and white light” erupting from the sunspots.

The fireballs vanished within five minutes.

Within hours, the impact of these massive solar fireballs was felt on Earth.  Telegraph communications systems around the world began to fail and there were reports of sparks showering radially from telegraph poles like exploding fireworks coupled with flames being spit out from telegraph machines, delivering electrical shocks to operators and setting papers ablaze.

In America, the telegraph system – the internet of the Victorian era – was rendered inoperable on the night of August 28 as the first of two successive solar storms struck. All over the planet, colourful auroras illuminated the twilight and night-time skies, glowing so brightly that birds began their morning chirp. Many thought the end of the world was nigh whilst newspapers from the U.S.  to Australia featured glowing descriptions of brilliant auroras that had turned night into day.

The Aurora Borealis, sometimes called the "Northern Lights" are featured on these stamps from the United States.  In the southern hemisphere, they are called the Aurora Australis. They are the result of disturbances in the magnetosphere of Earth caused by the Solar Wind.

The true cause of this black swan event: a massive solar flare with the energy of 10 billion atomic bombs. The flare spewed electrified gas and subatomic particles toward Earth and the resulting geomagnetic storm—dubbed the “Carrington Event”— is the largest on record to have struck the planet. In fact, ice core samples have determined that the Carrington Event was twice as big as any other solar storm in the last 500 years.

An Inconvenient Truth

When file producer, Laurie David witnessed a slide show by former United States Vice President, Al Gore, at a townhall presentation about global warming, she was so inspired by his quest to educate the world with his climate change message that she met with fellow producer, Lawrence Bender, and director, Philip Davis Guggenheim, with the idea to adapt Gore’s presentation into a silver-screen documentary. The resultant film, “An Inconvenient Truth”, premiered in May of 2006. Since the film's release, it has been credited for alerting the public to an evolving "planetary emergency", increasing public awareness of global warming and re-energizing the climate change movement. Apart from winning two Academy Awards for Best Documentary Feature and Best Original Song, this firm probably also resulted in the 2007 Nobel Peace Prize being shared in two equal parts, between the Intergovernmental Panel on Climate Change (IPCC) and Albert Arnold (Al) Gore Jr. "for their efforts to build up and disseminate greater knowledge about man-made climate change, and to lay the foundations for the measures that are needed to counteract such change."

Nobel Laureate, U.S. Vice President Albert Gore, featured on these stamps from Guinea-Bissau, a country in West Africa.

Whilst the genesis of thinking related to how humans are causing detrimental changes in the climate of the planet goes back several decades, it has only been since December 2015, after global alignment was achieved at the 21st Conference of the Parties (COP 21) in Paris, that verbal rhetoric on addressing the climate change emergency has noticeably transformed into  action. 

A First Day Cover, from 1981, issued by the United Nations, carrying the signature of Secretary-General, Kurt Waldheim. It calls for the use of renewable sources of energy to prepare for the time when traditional sources become scarce.

It is also probably accurate to state that only few conversations with members of government or the investment community are likely to take place these days without reference to initiatives in the ESG (environment – social – governance) space. 

Climate Change Movement

The momentum of the climate change movement has been building. Action towards achieving a cleaner planet has transitioned from a pace akin to participation in a controlled Sunday morning public demonstration in Trafalgar Square to full involvement in a riotous stampede by the “Extinction Rebellion” pressure group. Additional effort is also being channeled by the younger generations through social media to get the climate change message heard. An increased level of importance being placed on health-related matters, brought about by the Covid-19 pandemic, is a further driver fueling greater awareness on the subject of climate change.  The global financial system is also playing a role by demonstrating a palpable preference to invest in, or fund companies, that provide solutions for a cleaner planet.

The global objective is simple to comprehend whilst the intent is noble – let us save our planet, together.

A Financial Frenzy

Over the past two years, the world has seen much investment in the green agenda. More has been committed for the coming decade. In Europe, the European Green Deal is expected to cost around €1 trillion in public and private investment over the next decade with the main aim of achieving carbon neutrality by the year of 2050. Several countries, including the United States, are also heavily investing into achieving such an objective. Most studies indicate that this goal must be achieved to ensure that we do not cause the planet to warm up to a tipping point, that when crossed, will result in catastrophic long-term consequences. Droughts that will impact food production and availability of water, rising sea water levels that will flood areas and displace coastal populations, and more frequent and destructive wildfires which will reduce animal and plant species, are just some of the consequences. China has not been left behind in the quest and has also embraced the climate change agenda, setting 2060 as its target to reach carbon neutrality.

So, what exactly is the plan to achieve the 2050 / 2060 target? Currently, it appears that the primary agenda is to curtail fossil fuel production. The fossil fuel industry is being decimated in the financial markets, challenged in the board room and persecuted in the court room. In fact, it has been a historic week for Big Oil commencing 24th May 2021, when:

  • A Dutch court ruled that Royal Dutch Shell had to make a 45 % reduction in its greenhouse gas emissions by 2030; and
  • Engine No. 1 won votes for two of its candidates to be inducted onto the Board of ExxonMobil, both individuals being proponents of the climate change agenda.

Is this the right strategy? 

I am not sure. 

It is likely that Royal Dutch Shell will reduce its emissions by cautiously sanctioning future projects that result in emissions. At the same time, it may divest its interest in its existing, highest emitting assets. A divestment does not reduce global emissions, it just shifts the metrics to a third party. Reducing the implementation of new projects causes another problem - where will the cashflow come from to fund the large decommissioning and abandonment liabilities (of existing facilities) that sit on Shell's Balance Sheet for existing projects.? 

How to Avoid a Climate Disaster?

Bill Gates, in his book, “How to Avoid a Climate Disaster” outlines a blueprint for the transition to a "Nett Zero" world.  He articulates the obstacles that will impede the achievement of results and calls for more global cooperation, innovation and a review and rewrite of national policies. He also proposes what each of us can do, in our own small way, to reduce our personal carbon footprint. Innovation is critical as many of the most pertinent questions are yet to be answered. 

Entrepreneur, Innovator and Philanthropist, Bill Gates. Now bringing his influence to bear on the Climate Change agenda.

An Inconvenient Super Truth

There is one area that must be addressed quickly, but remains without real solution neither in Gates’ text nor in any other credible document.  

The bp Statistical Review of World Energy 2020 estimates that the world consumed circa 584 exajoules of energy in 2019. Of this amount, eighty-four percent, came from fossil fuels (coal, oil and gas). By 2050, only about half of this eighty-four percent can be replaced with alternative, cleaner sources of energy.

So here are some of the questions which immediately arise:

  • Vast sums of capital are being withdrawn from investment in the current energy mix and players are being incentivized to invest in the new energy ventures for tomorrow. In these circumstances, who is going to ensure a stable and secure energy supply for today?
  • With only a modicum of investment going into fossil fuels, supply will become scare and prices will increase as a certain level of demand will prevail. What happens to those countries which are not ideally located for solar or wind as renewables and are not gifted with hydro as a form of  energy generation ? Oil and gas will likely be expensive in the future as there was no investment in fossil fuels today for a balanced and secure tomorrow? Who will provide these countries with the hydrogen or nuclear based technologies that will be sorely required for their survival?
  • Historical statistics demonstrate that the longevity and quality of human life has improved since energy supply became reliable, affordable and available. What happens when the population of the planet increases to 9.5 billion in 2050 (from 7.5 billion today) with less primary energy available? Innovations to improve energy efficiency (less energy required to do the same activity) will help, but it will not close the gap.

I believe that the great risk on the horizon is that as we transition to a green world at an accelerated pace, we are going to stress the supply infrastructure of current sources of primary energy to the extent that crude oil and gas prices will increase and the green bubble will drive a black gold boom, for a while at least. To close the shortfall in energy supply for the long term, caused by a lack of investment made today, the only choice available will be the nuclear option, literally, and potentially, hydrogen, which still remains in its infancy. 

Is this the preferred route?

A series of stamps from the Ukraine, remembering the horrors of the Chernobyl
nuclear accident that occurred on 26 April, 1986

The Great Reset II

There could be even more risks. The new technologies, supporting the future global economy and its infrastructure are all highly dependent on integrated circuits, fiber optic networks and data centers.  Ownership of our assets are no longer recorded on paper. They are stored as bits, on a blockchain based ledger residing at digital addresses on a virtual sever, in an energy-sapping datacenter, which is backed-up  by another redundant (also energy-sapping) system, located at another site, a system collectively known as the “cloud”.

And along comes a Carrington type event … a coronal mass ejection … the lead black swan in that wedge coming at us from the Sun. In a matter of eight hours, chaos would prevail. An energy system based on nuclear technology, solar cells and wind turbines would be shut down for years. The banking system could come to an abrupt halt and all those digital records of asset ownership could be corrupted.

A sequel to the Great Reset, being currently being enthusiastically discussed, could indeed become a reality.

And here is the thing:

In early May 2021, millions of tons of super-heated gas, originating from a coronal mass ejection on the surface of the Sun hurtled 150 million kilometers toward Earth. On the space-weather scale, it was not a particularly powerful event but when it collided with the Earth's magnetic field it triggered the strongest geomagnetic storm seen for many years.

There was not much disruption to our electrical and communications infrastructure, but it served as a reminder that the Sun has woken from a period of hibernation.

A series of stamps issued by the United States: photographs taken through various filters, shows solar flares being ejected from the Sun

The fact is that our Sun began a new 11-year cycle last year and as it reaches its peak in 2025 the possibility of powerful space weather patterns creating havoc for humans grows, threatening chaos in a world that has become ever more reliant on technology since the last big storms hit 17 years ago.

To quote Caitlin Durkovich (a special assistant to President Joe Biden and Senior Director of Resilience and Response in the National Security Council), "It is still remarkable to me the number of people, companies, who think space weather is Hollywood fiction.”

What would be the impact of a Carrington Event category of magnetic storm today? According to a 2008 report from the National Academy of Sciences, it could cause “extensive social and economic disruptions” due to its impact on power grids, satellite communications and GPS systems. The potential price tag?

Between US$1 trillion and US$2 trillion.

A lot of capital is being invested in the climate change agenda. Solving the energy supply conundrum is the keystone to solving the climate change jigsaw puzzle. Given the degree of digital technology being utilized as part of the renewable energy infrastructure, it would be best that we deploy a solution that considers climate on a cosmic scale or nature itself could unleash a black swan from 150 million kilometers away. And as we take this monumental leap into the future, it may be best to remember that the transition is going to have to be a careful balance between evolution and revolution or it will not be climate change that causes us hardship, but instead, an inability to provide energy to a growing population, particularly if space weather patterns deliver a sting in the tail of our greening agenda. It is likely that in the future, the nuclear option may well take center-stage in the energy delivery chain because there were no fallback contingencies in the plan to reduce fossil fuel use. That might end up  being a good outcome but if there is ever to be a repeat of a Carrington Event in a nuclear world, then it would not be a global black swan event that would be of concern, but instead, an extended, crippling, global blackout, would be the headline of the day.

To close off this post, here are some thoughts of the musician, Gordon Sumner (aka: Sting), expressed in a song, "We Work The Black Seam".

Master Musician and songwriter, Sting, featured on this stamp from he island of Malta



This place has changed for good
Your economic theory said it would
It's hard for us to understand
We can't give up our jobs the way we should
Our blood has stained the coal
We tunneled deep inside the nation's soul
We matter more than pounds and pence
Your economic theory makes no sense

One day in a nuclear age
They may understand our rage
They build machines that they can't control
And bury the waste in a great big hole
Power was to become cheap and clean
Grimy faces were never seen
Deadly for twelve thousand years is carbon fourteen
We work the black seam together
We work the black seam together

The seam lies underground
Three million years of pressure packed it down
We walk through ancient forest lands
And light a thousand cities with our hands
Your dark satanic mills
Have made redundant all our mining skills
You can't exchange a six inch band
For all the poisoned streams in Cumberland
Your economic theory makes no sense

One day in a nuclear age
They may understand our rage
They build machines that they can't control
And bury the waste in a great big hole
Power was to become cheap and clean
Grimy faces were never seen
Deadly for twelve thousand years is carbon fourteen
We work the black seam together
We work the black seam together

Should the children weep
The turning world will sing their souls to sleep
When you have sunk without a trace
The universe will suck me into place

One day in a nuclear age
They may understand our rage
They build machines that they can't control
And bury the waste in a great big hole
Power was to become cheap and clean
Grimy faces were never seen
But deadly for twelve thousand years is carbon fourteen
We work the black seam together
We work the black seam together


Songwriter: Gordon Sumner

© Sony/ATV Music Publishing LLC


All stamps and First Day Covers in this post are from my personal collection.