A financial expert argues: Global warming is real

Jeremy Grantham is an expert on investing – stocks, bond, commodity markets. The asset management fund GMO, where he’s Chairman of the Board (the ‘G’ stands for Grantham), was responsible for $107 billion at the end 2009. He has a reputation for predicting market bubbles, valuing history, and giving advice that’s worth listening to.

So when Grantham tells investors the equivalent of “you better believe climate change is for real,” this gives me hope. If greed got us into this mess, maybe greed can get us out of it. Ultimately it’s the American way, right?

Unfortunately for investors, Grantham thinks it’s too soon to profit from attempts to stave off global warming.

Global warming will be the most important investment issue for the foreseeable future. But how to make money around this issue in the next few years is not yet clear to me. In a fast-moving ﬁeld rife with treacherous politics, there will be many failures. Marketing a “climate” fund would be much easier than outperforming with it.

Is it worth taking a chance on a potentially infinite loss?

I recommend reading an essay by Grantham called: “Everything You Need to Know about Global Warming in 5 Minutes.” (Scroll down to essay #4.) Here are some excerpts – rather extensive since it was all so good (emphasis added):

4) … [T]he forecasts [on global warming] still range very widely, from a harmless negligible rise [in temperature] to a potentially disastrous +6 degrees Fahrenheit or higher within this century. The main danger of the CO2 [carbon dioxide] interaction with water vapor is the high probability that it will cause a great increase in severe precipitation episodes.

5) Skeptics argue that this wide range of uncertainty lowers the need to act: “Why spend money when you’re not certain?” But since the penalties rise hyperbolically at the tail, a wider range implies a greater risk (and a greater expected value of the costs). This is logically and mathematically rigorous and yet is still argued.

This is the first time I’ve seen anyone ask and answer the question: What would be the financial downside if we act to prevent further climate change and the threat turns out to be false?

6) Pascal asks the question: What is the expected value of a very small chance of an inﬁnite loss? And, he answers, “Inﬁnite.” In this example, what is the cost of lowering CO2 output and having the long-term effect of increasing CO2 turn out to be nominal? The cost appears to be equal to foregoing, once in your life, six months’ to one year’s global growth – 2% to 4%, or less. The beneﬁts, even with no warming, include: energy independence from the Middle East; more jobs, since wind and solar power and increased efﬁciency are more labor-intensive than another coal-ﬁred power plant; less pollution of streams and air; and an early leadership role for the U.S. in industries that will inevitably become important. Conversely, what are the costs of not acting on prevention when the results turn out to be serious: costs that may dwarf those for prevention; and probable political destabilization from droughts, famine, mass migrations, and even war. And, to Pascal’s real point, what might be the cost at the very extreme end of the distribution: deﬁnitely life changing, possibly life threatening.

What would Isaac Newton do?

I was glad to see Grantham acknowledge this aspect of the tragedy:

7) The biggest cost of all from global warming is likely to be the accumulated loss of biodiversity. This features nowhere in economic cost-beneﬁt analysis because, not surprisingly, it is hard to put a price on that which is priceless.

He goes on:

8) A special word on the right-leaning think tanks: As libertarians, they abhor the need for government spending or even governmental leadership, which in their opinion is best left to private enterprise. In general, this may be an excellent idea. But global warming is a classic tragedy of the commons – seeking your own individual advantage, for once, does not lead to the common good, and the problem desperately needs government leadership and regulation. Sensing this, these think tanks have allowed their drive for desirable policy to trump science. Not a good idea

Here’s the history part:

9) … [C]limate warming involves hard science. The two most prestigious bastions of hard science are the National Academy in the U.S. and the Royal Society in the U.K., to which Isaac Newton and the rest of that huge 18th century cohort of brilliant scientists belonged. The presidents of both societies wrote a note recently, emphasizing the seriousness of the climate problem and that it was man-made. … Both societies have also made full reports on behalf of their membership stating the same. Do we believe the whole elite of science is in a conspiracy? At some point in the development of a scientiﬁc truth, contrarians risk becoming ﬂat earthers.

What to do about denialists?

This next part is especially good:

10) Conspiracy theorists claim to believe that global warming is a carefully constructed hoax driven by scientists desperate for … what? Being needled by nonscientiﬁc newspaper reports, by blogs, and by right-wing politicians and think tanks? Most hard scientists hate themselves or their colleagues for being in the news. Being a climate scientist spokesman has already become a hindrance to an academic career, including tenure. I have a much simpler but plausible “conspiracy theory”: that fossil energy companies, driven by the need to protect hundreds of billions of dollars of proﬁts, encourage obfuscation of the inconvenient scientiﬁc results.

It’s true that academics look down on colleagues who popularize their work, rather than limit their communication to the academic community. But scientists are fighting back. Check out this hard-hitting letter (PDF), published in Science, where 255 scientists compare climate skeptics to Joseph McCarthy.

This next point is both historical and a good assessment of what we’re up against when it comes to climate skeptics:

11) Why are we arguing the issue? Challenging vested interests as powerful as the oil and coal lobbies was never going to be easy. Scientists are not naturally aggressive defenders of arguments. In short, they are conservatives by training: never, ever risk overstating your ideas. The skeptics are far, far more determined and expert propagandists to boot. They are also well-funded. That smoking caused cancer was obfuscated deliberately and effectively for 20 years at a cost of hundreds of thousands of extra deaths. We know that for certain now, yet those who caused this fatal delay have never been held accountable. The proﬁts of the oil and coal industry make tobacco’s resources look like a rounding error. In one notable case, the obfuscators of global warming actually use one MIT professor who also defended tobacco! The obfuscators’ simple and direct motivation – making money in the near term, which anyone can relate to – combined with their resources and, as it turns out, propaganda talents, have meant that we are arguing the science long after it has been nailed down. I, for one, admire them for their P.R. skills, while wondering, as always: “Have they no grandchildren?”

Grantham concludes:

13) Almost everyone wants to hear good news. They want to believe that dangerous global warming is a hoax. They, therefore, desperately want to believe the skeptics. This is a problem for all of us.

This mess we’re in

Climate change is such a difficult issue. Money talks. How do you win an argument against enormous financial interests that benefit from resisting change?

Grantham is undoubtedly quite wealthy himself. He talks to people who have large financial holdings, and they listen to him. I found his essay very encouraging.

Update 7/23/10:
Democrats Call Off Climate Bill Effort (New York Times)

Bowing to political reality, Senator Harry Reid, the Nevada Democrat and majority leader, said the Senate would not take up legislation intended to reduce carbon emissions blamed as a cause of climate change, but would instead pursue a more limited measure focused on responding to the oil spill in the Gulf of Mexico and tightening energy efficiency standards.

Update 7/23/10:
With a Whimper (New York Times editorial unsigned)

The Republicans — surprise — had been fiercely obstructionist. But the Democratic leaders let them get away with it, as did the White House. It has been weeks since President Obama spoke out about the need for a serious climate bill to address the very real danger of global warming and to lessen this country’s dependence on imported oil.

Update 7/25/10:
We’re Gonna Be Sorry (New York Times editorial, Thomas Friedman)

The best thing about improvements in health care is that all the climate-change deniers are now going to live long enough to see how wrong they were.

Alas, so are the rest of us. …

[T]he truth is, the public, confused and stressed by the last two years, never got mobilized to press for this legislation. We will regret it.

Update 7/26/10:
Four Ways to Kill a Climate Bill (New York Times editorial Lee Wasserman)

If President Obama and Congress had announced that no financial reform legislation would pass unless Goldman Sachs agreed to the bill, we would conclude our leaders had been standing in the Washington sun too long. Yet when it came to addressing climate change, that is precisely the course the president and Congress took. Lacking support from those most responsible for the problem, they have given up on passing a major climate bill this year. …

Citizens wouldn’t support an approach they couldn’t understand to solve a problem our leaders refused to acknowledge. Even the earth’s flagging ability to support life as we know it couldn’t stir a public outcry. The loudest voices insisted that leaders in Washington do nothing.

They obliged.

Update 7/26/10:
Who Cooked the Planet? (New York Times editorial Paul Krugman)

You’ve probably heard about the accusations leveled against climate researchers — allegations of fabricated data, the supposedly damning e-mail messages of “Climategate,” and so on. What you may not have heard, because it has received much less publicity, is that every one of these supposed scandals was eventually unmasked as a fraud concocted by opponents of climate action, then bought into by many in the news media. You don’t believe such things can happen? Think Shirley Sherrod. …

If you want to understand opposition to climate action, follow the money. The economy as a whole wouldn’t be significantly hurt if we put a price on carbon, but certain industries — above all, the coal and oil industries — would. And those industries have mounted a huge disinformation campaign to protect their bottom lines. …

Greed, aided by cowardice, has triumphed. And the whole world will pay the price.

Update 7/27/10:
Among House Democrats in Rust Belt, a sense of abandonment over energy bill (The Washington Post)

[L]ofty talk about the securing the future of the planet is not likely to win over many voters who have lost their jobs. … “All the average voter wants to know is, ‘When my refrigerator is on, are my rates going to be lower or higher?’ “

Update 8/3/10:
Warming Is Real. Now What? (New York Times)

“In their least guarded moments,” Mr. Pooley writes [in The Climate War, “the climate campaigners would tell you what they had always known in their bones: their work was necessary but not sufficient. Climate action was going to happen sooner or later, but they couldn’t make it happen. It might be inevitable — the true believers still believed it was — but it would only become real when enough people demanded it and shouted down the lobbyists and the professional deniers and demanded it again. Alexis de Tocqueville long ago said that in the United States, events ‘can move from the impossible to the inevitable without ever stopping at the probable.’ Was that still true? How bad did things need to get before the moment came? Would the prospect of a clean-energy economy, and the jobs it would bring, mobilize enough people to make a difference? Or would some sort of monstrous, galvanic weather event — epic heat and drought, Katrina on steroids — be needed to shake America fully awake?”

Resources:

Image source: fubiz

Jeremy Grantham, Grantham Summer Essays, GMO Quarterly Letter, Junly 2010