Is the coal and oil boom on already?

• Germany’s Energiewende is now a cautionary tale
• Why BP will change its name to “Back to Petroleum”
• Net zero will be arrested for trying to break Goodhart’s Law

You can’t virtue signal without electricity. At least not on the scale that activists and politicians feel the need to broadcast. And so, it seems that even the German government is having second thoughts about abandoning coal anytime soon. “As long as it is not clear that energy will be available and affordable, we should end the dreams of phasing out coal power in 2030,” the German finance minister recently said.

Dreams? Oh my…

So, where will the available and affordable energy to replace coal come from? Over to you, renewables… it’s time to stand and deliver or be blamed for coal and oil’s continued revival, with both being used at a record pace in 2023 while wind projects topple.

It’s not just the Germans who now perceive their Energiewende as more of a cautionary tale than something to emulate. In Canada, the Virtue-Signaller-in-Chief Justin Trudeau has suspended his tax on oil used for home heating just months after it came into effect. Of course, it’ll come back into effect in three years. But, as with all things net zero, once reality sets in, it may not after all…

This bit of the Bloomberg article covering the shift in Canada made me giggle:

Trudeau’s government began implementing the carbon price in 2016 to give people incentives to reduce fossil fuels. He insisted on Thursday the three-year suspension would help his government reach its climate goals, because it would help people afford the move to heat-pump technology.

This is straight out of Orwell, isn’t it? A suspension and delay of a climate change-driven policy actually improves Canada’s ability to cut emissions…

Why didn’t Canada just cancel net zero in order to reach it then?

The executive vice president of the Canadian Climate Institute dug into the real problem of this shift in government policy, alongside many others:

[The suspension] sends the signal to emitters — and investors — that policy can be weakened in the future, diluting the carbon price’s effectiveness in driving the long-term, low-carbon investments required to reduce emissions.

Would you invest in Canada if your fossil fuel or emissions-driven business could have the rug pulled out from under it by shifts in government policies?

Only if you knew how those policies would have to shift – the premise of our new report on the fate of net zero.

Or if you were seeking to make a quick getaway before the scheme collapses, in which case the technology you’re selling needn’t work either…

That analysis seems to typify a great deal of what’s been going on in the name of net zero. The dodgy carbon offsets, the ill-fated and increasingly abandoned investments in renewables by oil and gas companies, the wind turbines that need fixing and the vast government infrastructure projects that get bogged down – in some cases literally.

If Germany continues to lead the world’s energy transition from green energy right back to fossil fuels, this implies a return to fossil fuels is coming in other countries too. Perhaps BP will change its name to “Back to Petroleum”.

In the UK, this has begun too. The government is busy rolling out all sorts of fossil fuel projects that could extend for decades. Not only that, but the government will mandate the licensing of further projects in the future.

The prime minister says he wants to reduce the UK’s reliance on hostile foreign regimes… which implies we’ll still be using a lot of fossil fuels after all. It’s just a question of where they’re produced.

Which is, by the way, one of the inherent flaws of net zero. It all depends on how and where emissions are counted. Should they be attributed to those who produce the fuel, those who burn it or those who buy the end product that is manufactured by the use of the fuel?

Should we tax the Saudis for their oil, the Chinese for their factories or the Americans for what they buy from China?

One of the laws of economics is called Goodhart’s Law which states that, “When a measure becomes a target, it ceases to be a good measure.” The point is that policy targets create misaligned incentives. And so, the correct answer to the question above is that it’s a trick question – you’re going to create unintended consequences however you do it.

So far, the world has been focused on measuring net zero based on where the emissions actually take place. Which makes obvious sense… until you apply Goodhart’s Law.

Measuring emissions in this way encourages countries that have committed to reducing emissions to shift their emitting activities overseas. Manufacturing the things we buy, for example, can take place in China instead of in the UK. This reduces our emissions… as we measure them… but probably increases them overall.

China is far away, its factories use a lot of high-emission energy and manufacturing processes, and ships pollute a lot on the way to the UK. Only a politician would measure the shift of manufacturing from the UK to China as an emissions reduction.

So far, so well understood by many people who are paying attention to the vagaries of net zero. But ask yourself: what happens if the rules change? What if we begin to measure emissions based on where a product was consumed rather than where it was produced?

Or what if we begin to assign emissions based on who provides the energy – Australia’s vast coal and gas exports rather than Chinese power stations, for example?

Suddenly, all the incentives change radically. But they are just as misaligned.

The Chinese are pushing for such a rule change because they manufacture the goods we produce, causing vast emissions. But those emissions are really produced in our name, as the end consumer of the products the Chinese make.

Only the Chinese might want to be careful what they wish for because taxing emissions based on consumption would make it a lot more economical to manufacture in the UK rather than shipping things from China… and this would spike energy demand in the UK unexpectedly.

You can see how such vast government programmes quickly go awry. But either way, it seems fossil fuels are taking the inside lane away from many of the ways you can profit from all of this mayhem.

Of course, it’ll be tough to beat 2022 when coal stocks left the rest of the market for dead. Back in May, I explained, “Why fossil fuels are the best way to play net zero”:

So, what’s the counterintuitive impact of net zero going to be? To increase emissions, of course!

That’s what Germany’s Energiewende has resulted in, after all. It made Germany reliant on Russian gas, which the Russians then exploited, resulting in a return to coal for Germany’s energy system. Not to mention wood heating by desperate Germans…

The result was a decrease in energy use of 4.7% in 2022, but an increase in emissions from the energy system! Quite an achievement.

But that’s nothing compared to the returns on coal stocks that year. They accounted for the top four performers on the Australian stock market, for example.

Why did Germany return to coal so rapidly? Because it was able to get coal power up and running extremely quickly to replace missing gas.

Now I’d like to apply that logic to net zero more broadly and over a longer time horizon.

If, over the next few years, renewables fall badly short, power storage fails to come online fast enough, the grid isn’t ready, there aren’t enough EVs and we face meeting emissions goals only by shutting down the economy, then I suspect there will be another change of heart, as in Germany in 2022.

The change may already be upon us.

Until next time,

Nick Hubble
Editor, Fortune & Freedom