French Ameri-Can Climate Talks In San Francisco 2015

The French Ameri-Can Climate Talks (FACTS) roadshow came to San Francisco last night. I attended at the Exploratorium to hear from luminaries, as I usually do when intellectual heavyweights are around. The French government promotes the FACTS series as a precursor to the UN COP 21 / CMP 11 conference in Paris this December. I will render my impressions of the speakers' insights with my own genius thrown in to make it worthwhile.

The UN Environment Program (UNEP) quantifies the gap between annual goals for carbon reduction and actual carbon generation. The UN 2030 Agenda for Sustainable Development supersedes the UN Millennium Development Goals (MDGs) because development without sustainability still exacerbates climate change. NOAA data shows the world's surface temperatures rising. Complaining about methodologies does not change the data. UNEP quantifies each country's climate change as Intended Nationally Determined Contributions (INDCs). The implied take-away is that some nations, presumably the heavy polluters like China, will have disproportionately larger INDCs. UNEP's Green Economy Initiative redefines prosperity to include human and ecological factors. The initiative would be more marketable to the finance sector if it used the language of ESG criteria and triple-bottom line outcomes that investment managers now widely accept.

President Nixon's Project Independence was an early attempt to put the US energy sector on a sustainable path. It failed because it focused more on supply changes than demand management. One of the FACTS speakers noted that decarbonizing the US economy now works because demand-side energy efficiency is ten times more effective in reducing carbon output than the expansion of renewable energy supply. Energy used per unit of GDP and carbon generated per unit of energy can still decline while GDP continues to grow. The central lesson of sustainability is that the developing world need not trade away future prosperity to save the planet.

Regulating energy markets and human behavior ideally generates Nash equilibriums, but some actors will always resist these equilibriums by seeking self-maximizing outcomes. The paradox is that individuals' optimizations do not optimize an entire system. The global regulatory regime that COP 21 / CMP 11 embodies should move many national economies toward Nash equilibriums. The US EPA Clean Power Plan recognizes that decarbonization is the only politically possible solution the developed world can offer the developing world.

I like the Lazard investment banker's joke that energy companies should put their receivables into special purpose vehicles (SPVs) and sell them as unit trusts to investors. The good thing about carbon trading is that energy companies won't have to use SPVs to monetize their gains from efficient demand or renewable supply. Investment banks can have their fun packaging solar and wind assets into yield cos at a high scale while microfinance enables smaller off-grid solutions at a low scale. Lazard does great work publishing annual summaries of the levelized cost of energy (LCOE) for each major renewable energy technology. The DOE NREL's LCOE calculator is agnostic towards any one technology. I say utilities should use NREL's calculator first to determine what commitment their capital budget and credit quality will allow, then use something like Lazard's numbers to determine which tech is most affordable.

Two hot French babes chatted me up at the reception afterwards. I kept them entertained by demonstrating my amazing intellect and they were suitably impressed. A whole bunch of hot French babes attended this lecture. There must be something in the water over there in France that makes women so much hotter than the ones growing up in other regions. The FACTS talk got me interested in hearing more about financing the UN's sustainable goals even if there are no babes on hand to admire my interpretations.

Bion Environmental Technologies Churns Much Effluent

Bion Environmental Technologies has spent several decades developing a technology to treat the waste runoff from commercial livestock operations.  Water treatment solutions should never mistake the nation's head count of cattle or pigs as a target market.  Those are more properly supply chain inputs.  I had to say that up front to clear the air before the analyst community dives in to big piles of manure.

The most important thing about this company is its lack of profitability.  It has existed since 1987, which is plenty of time to develop a viable product and find a market in agribusiness.  Bion has not made a profit in at least three years, with only a trickle of revenue.  If these folks had something, they would have had it by now.  Retained earnings were into negative nine figures by 2014.  That's how much capital has been sunk into this concept over time.

I have no idea why the company is paying its executives while they fail to produce financial results.  It is really embarrassing to listen to people spew horse manure about a technology that claims to clean up cow manure.  There is nothing new about bacterial mitigation of effluent.  Call me when something is financially viable.  Oh, yeah, the stock has traded under a buck since late July.  I don't think I need to waste any more electrons here.

Full disclosure:  No position in Bion Environmental Technologies (ticker BNET) at this time.

The Haiku of Finance for 05/08/15

Climate engineer
Fund small project as test bed
Find out if it works

Climate Engineering For Profit

Climate engineering is an emerging solution in search of a problem.  Our planet's periodic temperature changes may not be radical enough to warrant spewing dust or water vapor into the upper atmosphere.  That won't stop some motivated groups from trying.

The science behind climate engineering's effectiveness is even more contentious than the science behind climate change theories.  Even the IPCC is skeptical of climate engineering.  How much climate engineering is needed to normalize the planet?  How much will it cost?  Who will pay for it?  Modeling atmospheric modifications in laboratories is not enough to determine policy impacts.  Other policy options, such as carbon taxes and carbon trading regimes, are already in place.

Planet hackers who worry about introducing a profit motive into climate engineering need to get real.  Nothing big happens without an economic incentive driving behavior.  Carbon trading has already introduced private investment into climate modification.  Private investors could fund small-scale climate engineering in fertile regions to enhance crop yields.  Some iron fertilization projects have shown limited results; this is the natural result of allowing private investors to experiment with novel ideas.

Someone is going to make a buck from climate-related phenomena.  The easiest way to moderate climate change is to plant trees.  People have been doing that since the first Arbor Day, for crying out loud.  Demand for saplings means timber REITs have fat years ahead.  More exotic approaches that require adventures into the upper atmosphere may eventually benefit specialized aviation services, if any governments with deep pockets are willing to fund such programs.  It is perfectly okay to make a fortune by saving the planet.

Climate on the Brain is Powering Innovation to Create Climate Wealth

Three recent Commonwealth Club events on how our brains understand climate change, how to promote sustainable innovation in the energy sector, and how to create wealth from climate change prompted me to think about how they all tie together.  Notice how I strung the titles of those talks together to make the title of my own blog article.  Good artists borrow, and great artists steal, so yeah I'm taking a page out of old William Shakespeare's playbook.

George Marshall's Don't Even Think About It is heir to a long tradition in psychology that describes how the human brain has difficulty comprehending abstractions.  Emotion-based arguments usually overcome cognitive barriers in the majority of humans.  Appeals to authority also help.  This is why faith-based organizations like Alliance of Religions and Conservation and Catholic Climate Covenant will play a key role in winning conservatives over for the climate change argument.  Bernays' techniques matter in selling climate change to low-information, high-emotion masses with large cognitive deficiencies.  A "master narratives" study of how tribes communicate in the climate change debate would reveal much.  The human evolutionary bias to underappreciate risks for abstract things like climate change probably has much in common with behavioral finance's understanding of poor investor behavior.

Climate change is like any innovative concept, where early adopters form a beachhead that proves a viable market exists.  Social psychology and persuasive technology can produce enough compelling stories to reach the late adopter market in climate change.  The Citizens Climate Lobby should be an excellent channel for storytelling targeting late adopters.  Human interest stories matter more than narratives using facts or fear.  Talented national politicians have dropped names of average schmucks into their major speeches during the Internet Age.  Average people can see themselves in those average stories.

Once the narrative frames consumers for adoption, industry must have a minimum viable product ready for purchase.  Industry's problem is that it has offered few tangible moneymaking products addressing climate change.  Utilities invest in carbon capture because raw carbon is a viable feedstock in automobile tires, advanced fuels, and construction materials.  Scaling problems have hindered the promise of carbon capture.  Commercializing carbon ideas from government laboratories would be more successful if the tech developers follow the NSF I-Corps model.

Government research is more effective in powering energy innovation than government loans, as we all saw with the Solyndra debacle.  Some in government and the energy sector learned nothing from that failure.  BrightSource Energy got a $1.6B DOE loan guarantee for a solar thermal project that lowers the cost of capital for NRG Energy and Google.  What a sweet deal.  NRG also benefits from this $1.2B DOE loan guarantee for a solar PV project.  These loan guarantees are a central-planning approach to funding energy innovation.  The capital markets now have a better way to fund energy with the "yield co" publicly traded structures.

Large projects do not suffer from lack of funding with Google, Warren Buffett, and George Soros throwing money around.  Smaller projects still need a push from entrepreneurs seeking wealth.  Too much conflicting information on the risks and rewards of sustainable business models poses a problem for entrepreneurs.  Advocates of social entrepreneurship ignore the higher costs of capital and higher risks inherent in many community-based business models that will never scale up to address large markets.  NREL published several guides to community solar as good foundation references, available by searching DOE's OSTI archives.

Cleantech entrepreneurs need many baseline references because too many self-serving pontificators on both sides of the climate change debate have muddied the water.  I have heard "experts" claim at the Commonwealth Club that China and India value US carbon capture technology because they are still building coal plants.  I have also heard the Club's invited experts claim that China's prospects of "Peal Coal" and India's poor quality coal mean they will need expensive coal imports.  These positions are reconcilable if developing countries' energy plans balance increased generation capacity with increased resource exploration.  Give engineers and economists in those countries the credit they deserve.

The key to wisdom is understanding where each side in a debate gets their basic data.  Utilities constantly iterate their supply adjustments to meet demand, using real-time data and decades of modeling experience.  If coal and gas power plants cannot spin up turbines individually in sufficient time to smooth out "duck curve" evening demand in the US, then it makes sense for utilities to invest in transmission lines across time zones.  A true national grid would not allow gaps between the eastern and western parts of the US to limit supply flexibility.  Closing the gap is a matter of time, and in the meantime utilities buy energy futures contracts to hedge their demand forecasts.  Utilities also have a strong interest in grid storage, smart grids, and predictive analytics that together make smoothing the duck curve more efficient.  Anyone who shorts utility stocks in the face of the sector's incoming tidal wave of innovation has been reading too much gloom and doom literature.

I have argued before that hedging civilization's bets on climate change is much like Pascal's Wager.  The worst outcome of preparation is a more efficient use of limited natural resources, even if climate change proves to be groundless.  The best outcome is the preservation of the only known biosphere in this corner of the galaxy.  I trust our elites to get the programming correct so Spaceship Earth stays on the right course.

Financial Sarcasm Roundup for 06/02/14

Read my words and discover the contempt I have for humanity.  Stupid losers are everywhere.  They deserve nothing but my sarcasm.

Pimco's Total Return Fund is watching investor withdrawals whittle away its flagship product.  The trickles will turn to a deluge as investors realize the air is leaking out of the bond market bubble.  Chair Yellen can keep the plates spinning a while longer if the Fed has to restart QE purchases.  Everyone in the fixed income universe forgot about mean reversion while the fixed income party was going full steam.

The Administration's emission rules are going to put the coal sector in a world of hurt.  Climate change advocates have a religious fervor for reengineering our society, with or without a scientific basis.  The only thing dumber than blind faith in weak science is forcing others to pay for those beliefs.  Renewable energy stocks may get a small push from new rules on power plant emissions.  I doubt the Administration's push to convince other polluting countries in the developed world will bear fruit.  US coal companies will just export to China and India if the coal can't be burned domestically, and those nations will have no incentive to cooperate with US climate goals if they would otherwise lose access to our coal.  Way to go, Washington.

Ecuador is swapping gold for liquid assets, presumably some instruments denominated in US dollars.  Goldman Sachs took them to the cleaners and all the Ecuadoreans can do is lie about the deal.  It's obviously an asset swap but Ecuador's finance ministry and central bank both refer to it as an investment.  They must think the global financial community is as stupid as their own citizenry.  This swap only works for them if the US dollar retains its value for three years, a highly doubtful prospect if the US experiences hyperinflation.  A dollar devaluation means they'll only get back a fraction of the gold they're swapping out.  Goldman and other banks now have a case study they can use to liberate hard assets from other dollar-dependent countries before the party ends.  I'll remember that the next time I'm stocking up on stuff.

Humans run around like chickens with their heads cut off.  I exist to collect up the headless chickens and cook them for supper.  The brainless losers who don't read my blog might as well be headless.

Financial Sarcasm Roundup for 03/31/14

March is almost over and the "ides" passed without incident from either lions or lambs.  Calendar idioms aren't very useful in sarcasm.  Financial topics are a lot more useful.

The IPCC is raising the alarm about the climate change threat to the world economy.  I hope they put enough qualifications about probabilities in their report this time.  Critics need to read the footnotes carefully.  The bright side of climate change is that previously frozen tundra will make great farmland.  Just think of the lucrative eco-tourist opportunities that will be available when inland flooding turns previously inhabited floodplains into marshes.

US stock markets are rigged to favor HFT funds.  No kidding.  I've been saying that since like, what, 2008 or so right here on this blog.  Individual investors, traditional mutual funds, and even index funds are getting nickel-and-dimed to death by hedge funds that pay for special access to trade information.  Making new platforms to route around HFT won't matter for long.  HFTs will sign up for those platforms and start gaming them all over again.  The manipulation will persist until a market crash destroys hedge funds with margin calls and rising interest rates remove cheap leverage from those hedge funds that remain.

China wants to make life easier for foreign institutions in its QFII program.  The hidden agenda here is obvious.  China knows it can't bail out all of the shadow banking WMP instruments that are in danger of popping.  Making QFII participation more attractive allows foreign suckers to buy into these things before they collapse.  Let's see if foreign banks rush in fast enough to get sucked into a shadow bailout of the shadow banking system.

I'll be down in Silicon Valley this week seeking out technical wisdom.  Who knows what new innovations lurk there.  

Climate Change Demographics Should Place Income First

I usually like the Climate One series of talks at the Commonwealth Club but today's talk on "Green Latinos" fell short.  Climate change shouldn't be the concern of one ethnic group because it affects everyone.  Replace "Latinos" with any other interest group and the effects remain the same.  Honing the message matters, and some demographics may respond more enthusiastically to culturally-specific images.  The single most important demographic factor impacted by climate change is probably income level.

Take a look at the social justice messaging from groups like 350.org and the Greenlining Institute to see their strident attitudes.  Justice is a worthy goal but limiting the dialogue to race is far from Dr. Martin Luther King's message of inclusiveness.  A race-specific approach will turn off the broad middle where political coalitions win converts for action.  Contrast the radicals' approach with Fuel Freedom's common sense emphasis on the economics of free market choices that benefit everyone.

Low-income citizens live closer to pollutant sources than high-income people.  A constituency for environmental stewardship should thus exist among low-income people of all races.  That constituency should be more than just an activist base where politicians win votes.  It should be a target market for entrepreneurial solutions.  California's green transport fleet incentives are the right regulatory reform for high-traffic areas.  The unintended side effects will include pricing self-employed truckers out of port service and chassis fleet markets if they cannot afford upgrades to meet the state mandates.  This means high-polluting truckers will still find business servicing other areas, likely the same high-traffic intermodal sites near freeways and railyards where low-income people live.  This is where entrepreneurial innovation solves the rest of this problem.  Somewhere between Google X and the X-PRIZE's reward for energy and environmental innovation is a solution to pollution.

Politicians and policy analysts consider the California ARB's cap and trade revenues to be a windfall for funding all sorts of green projects.  That should raise red flags with anyone concerned about accountability.  I'd like the state to avoid the problems the US DOE experienced with its loans and grants to troubled green enterprises like Solyndra.  Cap and trade revenue can be a decent source of subsidies for low-income Californians who want upgrades to more efficient home appliances.  I'll trot out my favorite pet project for the poor once again - the public option bank - as a conduit for such subsidies.  Paying a subsidy to owner-operator truckers for engine upgrades should be contingent upon income ceilings and an account at a public bank.  Energy rebates to low-income households should run through a similar public bank channel.

Climate change is not an ethnic issue.  It's an income issue, especially for the parts of our population who can't afford to mitigate its effects.  Energy efficiency reduces utility bills and raises personal income, but the poor among us will need some help with the initial capital outlay for more efficient technologies.  The California PUC should ask me about my public option bank plan if it's serious about helping the poor escape from pollution.