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Geopolitics and Climate Change: Economic Implications

With the UN Climate Change Conference drawn to a close in Scotland, the question still remains as to what should be done versus what will be done. The text below will look at the holistic view of the comprehensive implications of the issues of climate change and how they impact the world. 

There is a major push by certain sectors to “fix” climate change. There are two aspects: (1) the manifestations of climate change and how to mitigate those negatives and (2) the root cause of climate change. Dealing with the manifestations is an imperative or people will die. Dealing with the root cause, although important given that people may die in the future from climate-related events, is less important right now since each country’s self-interests have led to actions that fall short of their commitmentsif these commitments have even the slightest negative impact on their respective economies, they revert to their self-serving rhetoric.

In the United States, the push is to shift to a net-zero on CO2 by accelerating wind and solar generation.  However, wind and solar are not, nor can they function as baseload capacity (24-hour 7-day a week demand). In the industrialized world, baseload capacity is critical to provide a reasonable level of reliable economic activity.  Whether we like it or not the only reasonable answer is nuclear power, that with the strides made with small modular reactors has become realistic. 

Historically, France has had most of its generating capacity provided by nuclear which had risen to more than 80%. On the flip side, Germany moved towards natural gas-fired capacity even though it had a robust nuclear program in place. The outcome was France was electricity independent while Germany, receiving over 40% of its natural gas from Russia was anything but independent. Russia has never been shy about using fuel supplies as a lever to exercise its political will. Recently Russia made it clear that if Europe and the UK do not support Gazprom’s building of the NordStream 2 gas pipeline, it will begin diverting gas supplies elsewhere. If Russia succeeds they will have a stranglehold over the region that will be difficult to break. Prices in the region have soared for electricity and the upcoming winter heating season is causing a panic that pricing may force many to go cold.

In the U.S. we had achieved energy independence and became a net exporter which helped the world balance supply and demand. The current anti-fossil fuels initiatives are worsening supply while at the same time demand is growing. China will purchase every dekatherm of gas it has access to. Although the tipping point for climate change is around 2035-2040, China’s only concession was that they will stop funding/building coal plants outside China. Within China, they may consider carbon reductions after 2050. China and Russia’s economies will grow while the U.S. stagnates. The break-up of the Soviet Union in 1991 made the U.S. the only superpower yet now we have two giants (China and Russia) positioning themselves to eclipse the U.S. And both have the muscle and political will to do just that. I have been told by a number of Chinese officials that China will never take action that will stifle its economic growth.

Saudi Arabia has been a good friend to the U.S. and is a major factor in Mideast stability. The U.S. is currently deemphasizing oil and gas which will reduce supply and enhance pricing. It will over the long term bring other currently marginal suppliers to the market, most notably Iran and Russia. But this will also continue to drive energy prices up further in the U.S. for both transportation fuels and power generation which will lead to higher inflation and a detrimental impact on the U.S. economy.

There are ways in which individuals and groups can think about how to resolve near-term societal issues. In a course that I teach for Columbia’s Insurance Management Master’s program, The Role of Finance in Insurance, there are two major assignments that deal with issues facing the world. Students are tasked with looking at a societal problem and studying the subject with a view to developing an insurance-based solution.  Many of the students have focused on climate changecarbon capture and sequestration, technology wraps, hail storm damage cover, etc. As a result, they have achieved the overarching objective which is to develop a product that they can take back to their respective employers with a view to vetting the product and actually marketing those products for the benefit of the world. Such contributions will eventually make a positive impact on the immediate and over the long-term future consequences of climate change.