Common Cents & Energy

Since Halloween, the 2021 United Nations Climate Change Conference, also known as COP26, has been going on in Glasgow, Scotland. An estimated 25,000 delegates from roughly 200 countries, including many heads of state, have attended in part or in whole. Its goal, as always, is to come to an internationally agreed upon solution to slow the pace of climate change.

Are you hopeful?

The problem with coming to a common agreement, particularly one with teeth is simple: China is, by far, the world’s largest fossil carbon dioxide emitter, roughly double the US, and the Chinese don’t always like to play by the rules. Shoot, nobody wants to play by someone else’s rules, only their own. Besides, Beijing could (and has) countered this fact with something along the lines of: “we consume the most in aggregate, yes, because we have so many more people than the United States. However, per person, the Americans consume much more than we do. That is a much graver problem.”

Regardless of the veracity of that last paragraph, my cynicism about COP26 is pretty simple: first, countries tend to act in their own self-interest. Second, what are the penalties if countries don’t comply, and who will enforce them? Third, will the Chinese really go along with the solution? Fourth, will the US? Fifth, will India? The list goes on and on.

I am not here to say something screwy isn’t going on with our climate. My camellias and azaleas now bloom at least twice a year, and a small lemon tree we bought in April is still bearing fruit, limes, here in the middle of November. Further, I have gotten rid of my wool sweaters, save two, because I no longer have great need of them.

As for melting ice caps, polar bears, and sinking island countries in the Indian Ocean, I am not a climatologist and I don’t have a sophisticated view other than to say: there are an estimated 7.75 billion human beings that need to clothed, fed, shod, and housed. That is more than double the number from 50 years ago, and there is no way this hasn’t had an impact on the environment.

Unfortunately, there isn’t a good, inarguable, fail proof solution to reduce humankind’s impact on the environment other than to reduce the number of humans.

So, does the United States really want to get into an international agreement which could unnecessarily fetter itself when there is/are no concrete assurances the remainder of the world will do the same? Would it make us somehow more virtuous if we did so? That, my friends, is a topic for another discussion, and not one for this newsletter.

But should we do something? And what can we do if we should? Something with least possible pain, preferably?

Let me start answering those questions with a basic fact: all other things being equal, the more something costs, the less people will demand of it. That is very basic economics. As of 2017, average ‘gas excise tax rates (per gallon)’ for OECD countries were an eye-watering $2.24. The high was $3.36/gallon in The Netherlands, and the low was $0.00 for our friends in Mexico. In the United States, the average, including state, local and Federal taxes, was roughly $0.56/gallon. Therefore, on average, US gas taxes are about 25% the OECD average.

As for electricity, according to globalpetrolprices.com, the price per kWh of electricity in March 2021 for the average household in the United States was $0.15. It was $0.245/kWh for the remainder of the G7, excluding the US. If these estimates are indeed correct, and I have no reason to believe they aren’t, the average American household pays about 60% what the remainder of the “developed world” pays for 1 kWh of electricity.

Make no bones about it: energy is cheap in the United States. As a result, we consume a lot of it. Although per capita energy consumption has improved tremendously over the last several decades, it has, we still have a lot of people who are consuming a lot of liquefied “dead dinosaurs.”

If you are still with me, you can probably guess where I am going next. If the goal is to reduce greenhouse gas emissions, we need to reduce our consumption of greenhouse gas emitting energy sources. If reducing the number of people isn’t on the table as an option, what is the next most efficient way of going about it, understanding that transportation and electricity account for about 54% of US total emissions? Hint: think your Econ 101 class.

That’s right, make gasoline and electricity more expensive. How to do that? Well, if market forces won’t behave, tax it at a higher rate. The United States is already well below the remainder of the developed world in this regard.

Don’t get me wrong, I don’t like paying taxes. No one does. However, I would like to have the choice whether or not to do so, if you catch my drift. I don’t really need to keep the AC at the chilly levels I like during the summer, or at the toasty temperatures my wife prefers throughout the remainder of the year. We could also alter our driving habits to be more efficient with our usage there.

You get the picture: I get to decide how much tax I pay if the tax is based on the amount I consume. The more I consume, the more I should pay, right? However, again, what happens to demand when prices go up? That is right, demand goes down. When the demand for fossil fuels goes down, our emissions also go down, both per capita and in absolute, more than likely.

Of course, the kneejerk reaction is: this would hurt the least among us the most. My initial response is: “doesn’t everything?” My next response is a little less cavalier: “the government could increase the tax rate as the volume demanded increases.” The end result would be the extreme consumers would end up paying the majority of the tax increase.

This type of approach makes much more sense to me than spending literally trillions of dollars on dubious technologies and politically popular social initiatives…much. Let the markets determine how much energy they will consume, but, of course, the government can also give the markets a nudge. After all, people respond to financial incentives far better than they do to diktat, and I am talking about as far as Birmingham, AL, is to Glasgow, Scotland.

However, hmm, I suppose there is a reason why I was not one of the chosen 25,000 to descend upon the banks of the River Clyde over the last fortnight. It might have to do with understanding economics better than the average bear. That, and I don’t have a private jet like our Presidential Envoy for Climate, John Kerry.

Take care, thank you for your continued support, and please be sure to listen to our Trading Perspectives podcast.

John Norris
Chief Economist


As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.