Where to invest

Where to invest

$50 billion is the current projected cost to replace the Australian submarine fleet.

$60 billion is roughly 5% of Australia’s GDP

$96 billion is what 9.3 million Australian households spend on the modern equivalent of bread and water, somewhere near 15% of their weekly budget. This is a pretty standard proportional spend in mature economies. Somewhere between 7 and 15% of household budgets go to food. The French at the higher end, the British the lower.

Big numbers then.

$226 billion is an order of magnitude larger. It represents the size of the labelled green bond market in 2016.

$895 billion is the size of the climate-aligned blond universe. This amount includes investments that are designed to support climate adaptation or have an impact on emissions but are not quite up for a green label.

$1,000 billion is the projected size of the climate aligned bond market in 2020, just three years hence, investments that are needed to help all countries meet their Paris climate commitments for emission reduction.

$90,000 billion is the current size of the global bond market.

The interesting question is where to put all this money.

It makes sense to put a hefty chunk of it into actions that improve environmental performance or, alternatively, new submarines.

Empathy

Empathy

Suppose you are a die hard Manchester United fan. You have been in this manic state since you first kicked a ball around the living room in your diapers. It’s baffling why Manchester United is the club that captured your undying soccer loyalty given there are numerous top grade clubs within spitting distance of your childhood home, however, you cannot question it for the feeling resides somewhere deep and unexplainable.

Along with this love of the Red Devils comes a dislike, some might even say hatred, for the club that plays at a ground just 6 km distant and wears sky blue. Your ire rises higher at any mention of jokers from other towns, Liverpool especially.

Now this rivalry with the opposition is no doubt part of the deep and unexplainable. It has something to do with the limbic requirement to compete and win.

Along with this genetic programming, nurture has imbibed you with the essence of local culture, defined your broader allegiance, and provided you with an accent. Who can even understand what those scousers are saying?

I’m sure you are with me so far, at least in principle.

You may not be a soccer tragic or reside in north-west England, but I guarantee there is something you are passionate about to your core. A tumult in your soul that has no apparent explanation.

Importantly, such passion is never truly extinguished. Sure it wanes, but come finals day or a beer around the barbecue, and the old passion reignites like a bushfire in a breeze.

Like it or not, admit it or not, tribal affiliation makes you feel good.

This is because the tribe has two highly desirable traits. First the tribe covets your loyalty, cares for it and protects it to your benefit. This becomes a delicious positive loop. The more you feel wanted the stronger the tribe and the stronger the tribe the more loyalty you relinquish.

The second highly desirable trait is that there are always other tribes.

So just as your loyalty is rewarded with warm feelings of belonging and place, so the tribe tests its mettle and your allegiance with rivalries.

And herein lies the ancient human condition as recognisable 3 million years ago as it is at Old Trafford on a Saturday. We love a good stoush.

In our modern, supposedly enlightened times, it is no longer necessary to attack Liverpool FC supporters, leave them for dead, capture their womenfolk, steal their pigs and eat all the yams in their grain store. It is sufficient to chant abuse from the stand and laugh when their striker scuffs his shot wide. But rivalry is crucial to the tribe. It feeds the loyalty process and without it the warm feelings are much harder to maintain.

Crucially this necessity for rivalry builds more than aggressive contempt. It is not admissible to speak these other thoughts because they are easily misinterpreted, but at some level you have respect for those scouser scum. They are, after all, tribalists like you. They are misguided in their choice of allegiance, deranged even, and yet without another tribe of near equal size and passion what would be the benefit in winning any encounters. Crushing minnows ultimately depletes loyalty.

Thankfully there they are on the terraces, giving back as good as they get, and always rendering that god awful song about walking. Curiously they are wearing the same clothes as you. They are as overweight and unfit as you, and, hey, isn’t that Bob from accounting?

In short, you empathise with the opposition support because you need them and because you recognise their image in the mirror.

The same thing applies to all other tribal rivalries that humans have invented. In the violent conflicts any empathy has wilted or died invoking a chicken and egg explanation. But in many others the empathy is still there and may even be the reason there is restraint.

One of these intense rivalries is over the environment.

Not the grab for land, water and oil that is at the core of many, perhaps all, wars but the rivalry that exists even in stable nations with well defined and uncontested territories.

On one side there are various tribes with members willing to hug trees or stare down bulldozers to protect the lesser spotted owlet even as the greater spotted owlet numbers increase to previously unknown heights.

In opposition are tribes with members in hi-vis vests or business suits who have never even seen an owlet.

This rivalry is ostensibly about the consequences of resource use. More strictly, who should get the benefit from exploiting natural resources or wear the opportunity costs of parsimony.

The consequences of resource use are real enough, far more so than the winning or not of 3 points towards the title race and a few months worth of bragging rights. Any human exploitation of natural resources alters the flows of energy and nutrients through the environment either directly – log a forest and habitat is changed or last altogether – or indirectly – burn coral and the climate changes.

Green tribes hate this outcome.

Brown tribes hate this outcome too mainly because it fuels green tribes out to stop them. Usually those with a development focus feel so strongly about the need for resource use to fuel the economic engine that they don’t even notice the consequences for future resource use let alone any undesirable externalities.

The trouble is that the green tribes have to get their hemp and their biofuels from somewhere in the environment. Every human leaves a footprint in the sand.

Equally the brown tribe members know that even though ‘a tree converted to dollars invested in the stock market’ is a well trodden road to wealth, on this road there are potholes, oncoming traffic and, heaven forbid, fuel shortages. Heavy boots do some real damage.

The kernel of empathy exists in these contradictions.

It comes through admitting that even the off grid, eco-home, tiny house still has a footprint and that with over 15 billion human feet on the planet, the tiny house option cannot be for everyone. It also comes from the notion held among some resource users that maintaining a resource for the long haul can be a better economic outcome given the resource is still there to be used.

Many also know that the environment always offers renewable solutions.

Then we have the option of incentivising resource use actions that limit the undesirable outcomes using the language of the economic tribe to change behaviour. We pay resource users to be careful. A weird compromise position that partly neutralises the conflict.

Here, then, is the thought.

When you next find yourself in a tribal situation, and this will probably be sooner than you think, look for the empathy. Try to find that connection with the rival that you know makes them just like you.

Should this situation have something to do with the environment and the empathy feel just can’t be seen, look harder, for empathy is there hiding behind the entrenched positions.

Energy prices

Energy prices

In the mid-1990’s energy prices in Australia were some of the lowest in the OECD.

I distinctly remember the politicians of the day boasting about how good this was for industry and business and I have to say I bought the argument. Utilities that people have to have should be affordable. The marketing men can persuade me that a Mercedes is so much better than a Hyundai and well worth the price tag because it is a discretionary spend on my part, but water, power and waste removal I must have or we are back in the dark ages.

Twenty years later, the current government has announced a new energy policy that they claim will save the average family $100 a year on their energy bill. This new policy is supposedly a response to the problem that domestic energy prices have risen by 67% in the last decade, and with supply shortages forecast regularly, the medium term economics suggest this annual rate of increase will persist. Energy costs in Australia are now at the top end of the OECD ranks.

Oops.

Australia is also going to struggle to meet emission reduction targets it promised in Paris in part because this cost pressure from energy has become an excuse not to focus on renewables and to continue with power generation with a heavy emission profile.

Oops again.

Lots of rant and rave opportunities here, classic Muppetville. The one I want to unpack is that cost saving, $100 a year for the average family.

Median annual income in Australia is around $81,000 and has been increasing steadily at around 3.5% more than doubling since 1990’s when energy was cheap.

An income of roughly $220 per day is right up there with the highest in the world. Savings on the energy bill proposed by the government is 27c per day, not even the price of a coffee and cookie in a month.

The average household energy bill, on the other hand, is around $4.20 per day and currently increasing at close to 7% or roughly 29c per day.

Phew, that’s a relief. The government policy is going to save the average household most of the money they would have to spend to on the price rises. Superb.

Should average annual income continue to rise at 3.5% the 29c cost saving on energy is further compensated by an additional $7.70 per day in extra income.

This explains why economic growth is so important to governments. Despite inevitable difficulty around the margins, on average it puts money in voters pockets.

It also makes that first ‘oops’ identified earlier a huge blunder.

Energy is literally the engine of economies so to let its costs spiral and allow the security of supply to lapse is stupid however you spin it.

Dams

Dams

A decision is made to dam a modest sized river In the foothills near a big coastal city. The city is growing and water security is regularly a hot political topic as the area is prone to drought.

Construction on the dam wall begins in 1948 and on its completion the wall creates a lake with the capacity to hold a little over 2,000 Gigalitres of accessible water.

When the dam was completed the city was home to 1.8 million people. Today there are over 5 million inhabitants and the lake remains the primary source of freshwater for these people and their economic activities.

Downstream of the dam the floodplain has become an important area of agricultural and peri-urban development. The dam protects against flooding and the planners have allowed people to live in previously inundated areas. The dam not only holds a large proportion of the water supply to the city it also protects built and commercial assets from flooding.

When the engineers say that the dam wall could be raised by 14m, what do you think the planners will do?

Naturally, they will allow greater access to land on the floodplain, most likely by releasing some areas for residential development. It is a growing city after all.

In the planning meeting some wag says that it will all be alright because the climate is changing “It will be drier anyway, so no worries”.

This comment goes unchallenged despite the evidence for increased storm frequency and intensity in the region, and the obvious connection between this and major flood events.

Here is a hint with a biblical origin.

Don’t buy a house on a floodplain…. especially downstream of a dam.

Post revisited – Journeys

Post revisited – Journeys

Netflix has an excellent period drama called Victoria on the life of the iconic queen of England who ruled for 63 years and married off her progeny into most of the royal families of Europe. She died in 1901 aged 81. Throughout her life, she moved around in luxury carriages drawn by horses. Steam trains and iron-hulled ships occasionally took her and her entourage further afield but it was the stables that did most of the heavy lifting.

She was in her late sixties when the first motor car appeared in Germany but did not live to see the mass production of cars or the first powered flight (1903) but she did have a few photographs taken.

Skip just 100 years and there are websites that track air traffic so you can follow the travel of your own flight or that of a loved one across the vast reaches of land and sea to every far-flung destination on the planet. Browse one of these sites and the globe lights up with traces. There are a million people in the air at any one time.

Amused or not, Queen Victoria would not have believed it was possible.

Here is an Alloporus thought on air traffic from June 2011

In 2009 2.5 billion journeys were taken in aircraft.

Evened out across the global population, every third person on earth took a flight. In reality it is the wealthiest proportion of the 1 billion people in western economies who took most of the journeys.

The projection is that by 2014 there will be 3.3 billion journeys taken.

This represents a 32% increase in 5 years.

Mobility is an inevitable consequence of affluence. As more and more people have disposable income, many will want to use some of those funds to travel. As economies grow, more business is done and so travel to buy, sell and negotiate also increases.

In the mid 1960’s the first Boeing 737s carried 100 passengers up to 2775 km. This was quite a revolution at the time.

The latest Boeing 737-800s carry twice the number of people over 5,500 km and use 23% less fuel.

Suppose it were possible to replace all the aircraft flying in 2009 with the latest fuel efficient models. It would be possible to absorb almost all of the 5 year increase in passenger volume to 2014 through fuel efficiencies that these more efficient vehicles bring.

Future aircraft construction materials that are lighter and still strong enough will see even greater fuel efficiencies. Aircraft built in the next decade or two might only use a third of the fuel guzzled by the earliest models.

Replace all the 737-800s with aircraft of composite material designs and 13 years of growth in passenger numbers could be accommodated without increasing fuel use above that used in 2009.

But even if all these replacements were possible by the mid-2020s, less than a generation from now, fuel use in air travel would begin to increase over 2009 levels.

In half the time since those first Boeing 737 aircraft began flying all the fuel efficiencies would have been used up by the increased volume of traffic.

Clearly instant replacement with the best technology is impossible.

Some of those fuel hungry early models are still in the air on the more remote routes operated by obscure airlines. And it is these cheaper fare options that will be responsible for much of the growth in passenger numbers. The fuel efficiencies will arrive incrementally.

In the absence of some remarkable technology that can replace jet engines running on aviation fuel, greenhouse gas emissions from or air travel will grow along with the airline industry.

PS

There is talk of a jet-rocket vehicle that would travel in the stratosphere, have no emissions because it flies above the atmosphere on hydrogen fuel and could reduce the travel time from Sydney to London to a few hours. Commercial flights might happen by 2040.

By then there will be close to 10 billion journeys per year.

Turns out there were 3.1 billion journeys in 2014, a little down on projections, but not by much. Dreamliners notwithstanding, the fuel consumption numbers are still up there as is the prospect of Tesla rockets.

There is no obvious solution to the emissions issue. Aircraft are going to continue flying passengers and freight, we are now over 100,000 flights per day, and the fleet still runs on aviation fuel.

In China alone, the expectation is that over 800 million people will join the ‘middle class’ meaning that there are going to be plenty of bums to put on all the seats. A GFC 2.0 or nuclear confrontation might slow things down but in the short term, there will be journeys taken and plenty of them.

The scale of all this is very difficult to comprehend. Numbers like this only come up when we are buying a house. Volume is an issue but the kicker is the rate of change. Horse-drawn carriages to 100,000 flights a day in 100 years is staggeringly rapid, even for a planet that is no stranger to the odd dramatic shift in fortunes.

‘Journeys’ was a post about emissions to highlight how significant they were going to be in the near future. The real message is to think about the rate of inevitable change. Those aircraft are here for their productive lifetime. They will fly as long as they can be operated at a profit. The fleet is added to rather than replaced and more flights are taken. More this year than last and more than the year before that. This is change that is fast and locked in. There is no reason, bar catastrophe, to suggest otherwise.

I don’t think we really understand what this means.

Queen Victoria would not have believed a word of it and I am not sure that we do either.