Annual Top Ten List: 2023

Here is my Top 10 list for 2023.? As always, this is a subjective list and in 2023 it was influenced by my work on Environmental, Social, and Governance issues with a focus on Latin America.? I hope that this is an enjoyable read and offers a "glass-half-full" perspective on both our shared personal and professional journeys.

10. AI-geing:? As the global population ages many people will exit the workforce, weakening an important source of economic growth.? Japan is a prime example of a greying economy.? According to this blog, only by adding women to the workforce has it staved off the effects of a dwindling labor force.? On a smaller scale, the state of Vermont is suffering as a significant share of its population is retired or nearing retirement (NYTimes).? In fact, the ageing of societies is a global phenomenon as seen in this time-lapse graphic.

In the absence of more enlightened immigration policies, the only way to defy the gravitational pull of ageing populations is by boosting labor productivity.? That is why the GenAI revolution is so important.? A colleague, Cliff Justice (here), offers insights on the pace of adoption by calling the next phase of GenAI a new Industrial Revolution.? He compares it to Edison's light bulb (read Chat GPT) as the first mass "use case" for electricity (read neural network processing).? The light bulb led to investment in electrification and productivity enhancing technologies from the washing machines to refrigerators to electronics and computers. GenAI will have a similar, if accelerated, time path.?

The next milestone on this path is when AI passes the Turing test which is predicted by Ray Kurzweil to happen in 2029.? That is when an observer sees humans and computers as indistinguishable. Then we will be well on our way to a world where your bank teller, medical records assistant, accountant, and possibly air traffic controller are machines that rely on limited human guidance.?? Kurzweil describes his 1999 prediction on the Turing Test (here).

9. Green Industrial Policy:? COP28's acclaimed reference to a "transition from fossil fuels" and aspiration to triple renewable energy are signs that we are now firmly committed to adopting Green Industrial Policies (GIPs).?? These policies range from carbon taxes, credits, incentives, and R&D capital.? Interestingly, the US and Europe offer contrasting approaches on how to design GIPs.

The EU’s adoption of a Carbon Border Adjustment Mechanism (CBAM) takes a "tax carbon content of imports"?approach (now being adopted by the UK). While the US has taken a "subsidize green production" approach with the Inflation Reduction Act (IRA).? Both options offer a devil's choice. The EU's, while fiscally more conservative, worsens exporters competitiveness.? Not to mention, that it hurts emerging economies that have high carbon content in their exports -- African exports may fall by 4% according to this report.? On the other hand, US subsidies lead to distortions in the allocation of capital (e.g., news that Tesla will move battery production from Germany to the US), are hard to eliminate, and have undesirable fiscal impacts.? (The political economy of both approaches is reviewed by Clausing and Wolfram, 2023).?

All these factors make formulating a GIP challenging in the best of times.?? Today, most countries have already failed to meet their commitments under the Paris Agreement, according this UNFCC report,?Secretary-General's press release, and Climate Tracker, among others.? This makes finding effective GIPs critical.? Since governments are cash-constrained and overindebted there will be a greater reliance on private sector investment, especially in developing countries (See IMF's Global Financial Report).? A silver lining may be that these contrasting approaches offer real world tests to gauge which policies work and cause the least collateral damage.? The sooner we learn and scale the best policies, the better.

8.? What color is your hydrogen? If climate action is a gateway to industrial policy, then hydrogen fuel is a main target for dirigiste GIPs (Green Industrial Policies).? The prospects of a green energy future rest largely on energy storage as a compliment to intermittent renewables like wind and solar.? Therefore, hydrogen fuel cells are key.? To unravel when hydrogen is green, however, we cannot be color blind to how it is produced. A crib sheet of the color codes from black (coal based hydrogen production) to green (renewable) can be found here.

The transition will require getting the price right.? My colleagues in KPMG Africa produced a report that identifies the parity pricing of hydrogen with existing power sources in South Africa.? Since green hydrogen is between 4 -6x as expensive as black hydrogen, there are enormous hurdles to its widespread adoption – in spite of the region’s huge solar and hydro capacity.? Early-stage producers require subsidies and incentives that are inverse to the amount of carbon intensity in their hydrogen production.? Also? blended finance like the Development Bank of South Africa's SA-H2 Fund are essential to finance early stage production and help get the price right for mass adoption.

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7. It’s the private sector … or is it?? If you have any faith that we can reach our 1.5C degree ambitions without injecting climate-cooling sulfates into the atmosphere, then you are implicitly betting on the private sector to come to the rescue.? At a minimum, this will require enlightened public policies (regulation), some form of carbon tax (price incentives), and improved materiality indices for private capital (measurement and tracking).? Another necessary ingredient is innovation, aka entrepreneurship.? Here are some of my favorite climate friendly and sustainability-enhancing consumer innovations.

• 3-D tire printing: Michelin is pioneering 3-D printed tires that are airless, and therefore, puncture proof.? (See Video) The saving in scrap rubber, efficiency of just-in-time printing, and biodegradable material makes it a product with mass-market potential.
• Plant-Based Meat:?? Impossible Burger and Beyond Meat are the best tasting according to this Consumer Reports analysis. And they have a smaller carbon footprint than traditional meats.? If prices fall to parity with beef and chicken, there will be a large consumer market, and then I will be able to shift some of my Tofu dinners for an ersatz burger or chicken nugget.
• LED lights:? I was surprised to learn that over 1/2 of all lightbulbs are already energy-efficient LEDs, here and by 2025 we will reach 3/4.?? LEDs use 75% less energy and last longer than traditional incandescent bulbs.?

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6. Natural Capital, Naturally:? In the past natural capital was a hidden asset. That is no longer true.?? Advocates like Pavan Sukhdev pioneered the early work with the UNEP's Green Economy Report? offering the insights that shifted our attention to the economic benefits of ecosystems and biodiversity.? Here he explains his journey from Deutsche Bank to biodiversity guru in a Ted talk.? By some current estimates, the world could lose US$2.7 trillion in ecosystem benefits by 2030.?

Further, there is an estimated US$700 billion per year financing gap in nature investments, which are mainly domestic public sector funds (citation).? Sovereign debt markets are only just beginning to adopt?instruments like sustainability-linked bonds with Chile and Uruguay issuing bonds totaling US$ 3.5 billion in 2022 that include climate-linked KPIs such as keeping native forests (Uruguay).

The other COP --?COP 15 on the Convention on Biodiversity --? set the stage for a global framework to protect and value biodiversity.? The Task Force on Nature Based Financial Disclosures (TNFD) is working on a global approach to improve nature accounting by corporations, investors, and financial institutions (disclosure KPMG is supporting TNFD).? While the Natural Capital? Project, co-founded by Gretchen Daily,?has developed off-the-shelf, open-source tools to measure natural capital.?

Now that I am working in Latin America and the Caribbean again, I have a renewed appreciation of the region's natural capital given that it houses the greatest amount of biodiversity on earth as seen in the chart below and website. The region will be a laboratory for nature-based solutions like Ecuador's Blue Bond (debt for nature swap), Habitat Banks, and Natural Asset Companies (NAC) listed on the NYSE.?

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5.? How Big Projects Fail:? The book entitled How Big Things Get Done by Bent Flyvbjerg offers cautionary tales for those who plan megaprojects.? Based on years of infrastructure advisory work, the author notes that projects over US$ 1 billion, mostly fail because their risks have "fat tailed" distributions and the passage of time exposes them to unexpected shocks that derail them.??

Examples include metros, underground tunnels, and governments’ quadrennial overinvest in Olympic stadiums?-- like the Big O in Montreal.? These suffer from being big, poorly planned, and absence of intermediate KPIs.? As a result, they are delivered overbudget and late -- and Olympic stadiums have little residual use (see picture of Greece’s volleyball stadium).? Flyvberg modifies Daniel Kahneman phrase to suggest that planners "Think slow, act fast."

In line with this thinking Bjorn Lomborg's book, Best Things First, argues for a simpler, more defined global agenda.? He calls out the 17 Sustainable Development Goals (SDGs) as overly ambitious (169 targets and 200+ indicators) compared to the 8 Millennium Development Goals (MDGs had 18 targets and 48 indicators).? He and his team of economists apply cost-benefit analysis to define 12 investment-worthy social projects that have outsized returns (like childhood education and maternal health -- both MDGs).? See the discussion of his approach with Ian Bremmer here.? (Note: Lomborg is a famous dissenter on climate change, not because he is a “climate denier”, rather he is a “climate discounter” who says its impacts are far from catastrophic. That view is refuted here, here, here, here).

What does this mean for the Net Zero Agenda.? As we learn from Flyvberg, while 76% of Olympic stadiums end up in the “upper tail” with a likely 200% average cost overrun, for renewables the results are more encouraging. Few projects are in the upper tail, wind (7%) and solar (2%), and for those that are the cost overruns are 97% and 50%, respectively.

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4. Behavioralists Gone Bad:? One of the truly interesting innovations in economics in the past decades has been the introduction of behavioral psychology into the toolkit of academics and policymakers.? Made famous by the concept of the "nudge" and adopted by the Blair and Obama?governments, it is explained here by the Nobel-award winning economist, Richard Thaler.?? A famous debate at the U. of Chicago pitted the "rationalists" vs the "behavioralists” with the likes of Robert Lucas (RIP), Eugene Fama (aka rationalists) vs. Thaler as described in this clip.

Ironically, the field has been upended by something central to its foundational premise --?the? "behavior" of some academics.? A small group which produced a slew of articles on dishonesty seems to have misbehaved.? In one study, the author's claims that we are susceptible to simple prompts like signing an honesty declaration which reduces cheating on insurance claims.? One Harvard academic who has written extensively on dishonesty has now been accused of tampering with data as reported by a collaborative working under the name Data Colada and in this extensive New Yorker piece.? This is known as p-hacking or, to the layperson, torturing the data to make the results look statistically significant.?

While the insurance claim article has been debunked, it seems that this type of dishonesty is not limited to economists or psychologists.? Even in the hard sciences there is evidence like the famous cold fusion fraud of the late 1980s or, more recently, the room-temperature superconductor claim.? As we live in an age of hyper transparency there is even a website to keep track of these transgressions.? See RetractionWatch.com which unfortunately has over 45,000 entries in its database.

3.? Globalization Unplugged:? The historical trend towards increased economic integration has seemed inexorable.? Early technologies like the steam engine and telecommunications shortened geographical distances and lowered the costs of commerce.? Now, however, there is reason to question whether the pace and direction of travel has changed.? (See Vaclav Smil's? "Understanding Globalization" chapter in How the World Really Works).

Comparing the narratives of a few books and articles found in my library suggests that there is a shift away from globalism. Consider these citations.

In 1989,?Francis Fukuyama's treatise The End of History? gave an optimistic coda to the Post WWII struggle between capitalism and communism, published on the eve of the Berlin wall's collapse.? While Tom Friedman's The World is Flat (2005) hyped the impact of technology in flattening economic distances and reshaping global supply chains. At the other end of the bookshelf are Anne Applebaum's Twilight of Democracy (reviewed here) and The Underground Empire.? The first, documents the internal threats to democracies as seen contemporaneously by a historian witnessing the rise of anti-democratic regimes that politicize the judiciary, control the press, and propagate narratives about external enemies or social decline. The second book outlines the weaponization of the internet (via control over fiber optic cables) and financial networks (via global payments clearing) in the post-9/11 era.? The authors are not conspiracy theorists, but clear-eyed academics who discuss their insights here at a CSIS conference and in the original article.?

?2. Climate Songs:? Now the climate agenda has a song written by Pattie Gonia (pun intended), Yo-Yo Ma and Quinn Christopherson, which features iconic images and a lilting and catchy tune.? From my own musical selection of "oldies" here are some that I feel are relevant to the current discussion.

• ?Nature's way:? Spirit
• Time:? the Chamber Brothers
• Get together: Youngbloods (why? because I like this song)

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1. Wordle Poem:? During the Pandemic, I found time to add new diversions to my daily routine since my commute was a short 25 steps from my breakfast table to the home office.? One of these diversions was the NY Times Wordle -- a puzzle of 6 lines in which you to try to guess a 5-letter word (see graph below).? After 2 years, I have developed a reliable mental algorithm that allows me to solve the puzzle 98% of the time. ?To make it more challenging, I have made it into a competition with my youngest daughter to see who can solve it in the fewest turns.?

I have even asked Chat GPT to create a Wordle Poem of 5-letter words in 6 lines, which I was surprised to learn it found very difficult.? When I asked for a poem about fruit it offered:? Lemon, Cherry (6 letters!), Melon, Plum, Grape, Apple.? Hmmm..? My attempt was:? Fruit, Eaten, Taste, Fresh, Sunny, Morns.?? I think we both should keep our day jobs.

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??All the best for the Holidays and New Year

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Martin

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