Merlin Weekly Macro: Good COP, or bad COP?

November. It must be another COP. The twenty ninth, in fact, since the world’s countries first convened in Berlin in 1995 to confront the implications of climate change.

‘Gifts from God’ (applause)

This week the circus came to town in Baku, Azerbaijan. Deep in the Caucasus, it is a state founded on oil. As the Azerbaijani president said in his opening address (and to surprising but notable applause), its oil and gas reserves are ‘gifts from God’. The UN estimates that there will have been 66,778 registered participants, to which add an army of the world’s media, a plethora of lobby groups representing a multitude of conflicting interests, troops of globe-trotting protesters, other hangers-on, plus the Taliban. That figure could easily double. Greta Thunberg decided to make her point from next door in Georgia. Given Baku is not the easiest place on earth to access, one wonders what the total carbon footprint of this jamboree is when they have almost all travelled by air, been fed and watered, wined and dined for a week, and put up in glitzy, well-illuminated and airconditioned hotels. Then multiply that by twenty-nine.

Forgive the cynical tone but there is a serious point here. COP exists in a revolving one-dimensional bubble that is in perpetual motion. It rejects challenge that fails to agree with its science; it rants through the offices of the UN general secretariat; it pontificates and delivers decrees in letters of stone; it demands accountability and insists on progress. It is an unarguable, immutable, patrician and paternalistic force to which its signatories have bound themselves and their successors. Until the plebs, who pick up the bill, decide that enough is enough.

COP meets MAGA and populism

Looming over COP29 are two dark greenhouse-toxic clouds. First, President Elect Donald Trump, whose stated intent is to rescind America’s participation in the Paris Climate Accord (again). Compounding the horrors and heresy, he’s ‘gonna drill, baby, drill’ and open America’s oil taps. Second, eyes will, or should, be focused on Germany where Olav Scholz’s deeply unpopular Traffic Light Coalition has finally imploded: alongside the economy (and the national humiliation of VW, a company in deep trouble thanks to its failure to develop competitive electric vehicles, itself a function of climate change policy), the budget and immigration, a powerful force behind the rise of the right wing AfD party in particular is the populist backlash against draconian climate change policies originating in Brussels and interpreted and implemented severely at the national level. As if the US election wasn’t already, the forthcoming German one is a political canary in the climate coal mine.

Those same climate change policies were a significant factor behind the collapse of Mark Rutte’s Dutch coalition government a year ago. The final straw that broke the camel’s back in The Hague was fundamental disagreements about migration, however the underlying political landscape had changed months earlier in a huge surge in popular support for farmers whose livelihoods were under threat of collapse. The reason? Those same diktats from Brussels about greenhouse gas (GHG) emissions being implemented cack-handedly by the Dutch government and with a loss of livelihood imposed on a farming community heavily focused on dairy production and fully invested in methane-emitting cows.

On the other hand, civil unrest in Valencia in the aftermath of the recent cataclysmic deluge in Spain, as well as the anguish of Americans on the south-eastern US seaboard after the devastating hurricanes points to the political pressure the other way to tackle climate change.

How to dodge a bullet? Easy. Don’t turn up to the gunfight

The central theme of this week’s convention is funding. Specifically the proposed transfer of billions, perhaps trillions of dollars of financial aid from the developed to the emerging economies, partly to help them meet their own obligations towards a net-zero carbon society and partly as reparation for the damage already done. A common refrain among emerging economies to those in the West (and the UK is specifically fingered as the progenitor of the Industrial Revolution) is ‘you started it; it’s your fault; you pay for it’. It is fascinating to note, therefore, that of the G7 government leaders, only two were present. With a variety of excuses, no Biden (he’s history); no Scholz (about to be history); no Macron (in hot water locally over his interference in Azerbaijani/Armenian relations); no Von der Leyen (‘in transition’); while all the excuses may have validity, nevertheless the leaders concerned will all face the accusation that the easiest way of not having to talk about reparations is by not turning up. Other notable absentees are the leaders of three of the world’s biggest polluters: China, India and Indonesia.

‘Not Fit for purpose’. Critical thinking: time for change

Climate change is happening; to deny it is obtuse. However, the root cause of the manmade part (climate was changing way before the dawn of humanity and will continue to do so long after we’re gone) is too many people. Constraining population growth let alone reducing the global population is impossible to tackle. But guided by the scientists about trying to minimise the risks of climate change, the political communities are making a hash of taking their electorates with them. So often they resort to free use of the stick and very little offer of the carrot. If the electorate were a donkey, would permanently burdening it with blame and responsibility and beating it with cost and inconvenience be the best way of convincing it that there is a safer path to a brighter, more prosperous future ahead?

It is interesting (and almost inevitable) that a group of senior scientists and UN officials has arrived at the conclusion that COPs in their current format are too unwieldy, too reliant on consensus and therefore ‘not fit for purpose’. Theirs is no acknowledgement of that democratic deficit we have discussed above: quite the opposite, they are demanding greater direct control over climate policy and accountability from national governments.

One can see their point that holding a conference in an oil and gas-rich, unapologetically hydrocarbon-supporting state is unhelpful to the cause. But their zeal for a carbon net-zero climate in the way they demand it is as intellectually dishonest as Napoleon’s sheep acting the useful idiots bleating “four legs good, two legs baaad!” in Animal Farm every time anyone raised any dissent against The Leader. The path to carbon net-zero is not and cannot be binary: the transition from the carbon-based fuels that have powered and developed our modern society for three centuries, to alternative sources of energy in less than three decades is not a switch that can be instantaneously flicked. Technological development and investment in infrastructure to keep the lights on, to keep us powered up and moving with no compromise to our way of life takes time. In the meantime, the nature of the hydrocarbon fuel beast is that as existing wells run dry it does require new investment in replacement capacity to keep society functioning until the transition is complete, stable and sustainable.

More broadly, we have discussed on many occasions the new competitive tensions (opportunities and threats, winners and losers) which are presented by this momentous technical revolution. What the scientists, with all the best of intentions, lose sight of is the different application of that word, ‘revolution’. You have to carry electorates, your people, with you otherwise you get a different revolution from the one you had in mind.

Time, surely, for a different route to the same destination.

UK energy policy: a child’s game devised at the Mad Hatter’s Tea Party

One who did turn up in Baku was the UK’s new prime minister. Keir Starmer was clearly determined to put his own climate change marker down on the global stage. He has declared that the UK will cut its emissions to 81% below the 1990 level, to be achieved by 2035 (it specifically excludes the aviation and shipping industries). The government’s existing target, or Nationally Determined Contribution, is a 68% reduction by 2030; in context UK GHGs had already reduced by 53% from 1990 levels at the end of 2023. “There is a race on to show global leadership on addressing climate change and I want us to win that race”, said Starmer. Should you consider this commendable fortitude or political virtue signalling depends on your point of view. Whether it is wise and in the national economic interest is another matter. Global competitors such as China, India and the US (possibly Germany too, depending on the outcome of the election and the influence of the AfD’s policies shaping those of the next government) might simply say, go ahead, be my guest.

Starmer wants the UK to lead the world in renewable energy. Energy Secretary Ed Milliband has an explicit target of zero (not just net-zero) carbon electricity generation by 2030. They talk of ‘low-price energy’ and ‘energy security’. Both are the right aims. The problem is that neither will be achieved as a result of Labour’s energy policy. Today, among the leading industrialised countries in Europe, we have the second highest wholesale electricity cost: the European Commission quarterly report on electricity markets illustrates average national wholesale prices for the first half of 2024 (€/Mega Watt Hour): Italy 95; UK 77; Germany 67; Sweden and Spain 33; France 31.

Almost exactly a year ago the government auction for new offshore windfarm licences attracted zero bids; the August 2024 auction received 16. Why the sudden interest where none before? Because the government had been forced to put up another £1.5bn of public subsidy to backstop the contracts-for-difference electricity pricing mechanism to make the projects commercially viable and investors’ risk worthwhile. This week, the CEO of Scottish Power was on the radio talking enthusiastically of the need to ‘electrify the hell out of the UK’ as his new offshore turbine field off the Suffolk coast crossed the last of 10 years’ worth of hurdles before construction starts. He talked about the jobs that will be created at the Siemens turbine blade plant in Hull. He talked about investment. What he did not mention was the cost, both to the public purse through British government subsidies and that Siemens receives substantial German government support to maintain the financial viability of making the turbine hardware.  

As for security, consider the last couple of weeks and two quite separate events. First, as a matter of self-defence, the Swedish government has abandoned the prospect of any further wind farm developments in the Baltic on the grounds that they can be easily destroyed by the Russians; they are vulnerable to attack and very difficult to protect. Second, the weather. We have had a prolonged high barometric pressure system over the UK and the North Sea, with persistent gloom (only 100 minutes of direct sunlight were recorded in the first ten days of the month) and barely a breath of wind. The National Grid website shows that the average UK source for electricity generation between 4-10 November was 57% from fossil fuels, 12% from renewables and 24% from other sources with the balance imported. On Tuesday 5th November, the most still and gloomy day of all, 68% of our electricity was produced from gas, 0.8% from solar, 4.9% from wind and 1.4% by hydro generation; nuclear was 16% and 8.9% was biomass (mainly Drax’s big wood burner at Goole plus waste incineration). By 2030, Ed Milliband and chums in the Energy department want all that gas and biomass gone. Into the bargain, for safety and regulatory reasons, four fifths of the current nuclear fleet will have been switched off from 2028, to be decommissioned. It does not matter how much ‘renewable’ solar and wind capacity is installed: if the sun doesn’t shine and the wind doesn’t blow and there is nothing else to back them up, the power goes off. Period. That is not a sensible way to win the race.  

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