Breaking Free From Hydrocarbons Lock-In

Fiduciary-financed, science-guided, CFA-designed, government-regulated, enterprise-executed hospicing of hydrocarbons, accountable for care, prudence and diligence under the circumstances then prevailing through the innovation of fiduciary activism as conversation with workers speaking through their Union representatives with the Voice of Common Sense, as a Proxy for Common Sense

Climate Week 2024 is just wrapping up in New York, with climate activists issuing various calls for action on climate inaction, such as this from The Climate Group:

It's Time to deliver on climate finance and power sustainable growth [through] the mobilization of financing to adapt and adopt a future-proofed transition plan

https://www.theclimategroup.org/climate-week-nyc-2024-livestream-registration

Associating finance and power is good.

Calling for the mobilization of financing is good.

But what happened to "transitioning away from fossil fuels in a just, orderly and equitable manner", per COP28?

Where is the inquiry in search of insight into finance with the power to finance this orderly and equitable transitioning away?

Yesterday, a court in England sentenced the two young climate activists affiliated with the Just Stop Oil climate action campaign who spilled soup on a famous painting by Vincent Van Gogh displayed at the National Gallery in London for public appreciation, as part of our shared cultural commons, in protest against climate inaction, to a two year custodial sentence, sparking outrage within the activism community.

This punishment does not seem to fit that crime (The Mikado by Gilbert and Sullivan).

Nonetheless, there is a futility to this crime that stands as a proxy for the vast amounts of well-intentioned energy being wasted by the climate activism community on strategies for climate action that always dead-end in no action.

This lived experience of climate action leading to no action merits, I think, some thoughtful inquiry into the root causes of this causal connection between action and inaction.

The Climate Group's call, at Climate Week for "mobilizing financing" gives us a clue.

“Just Stop Oil” is a catchy slogan that fits nicely onto a protest poster, but it is not a call to action that leads us beyond inaction, because it is, in essence, a call on politicians to take action. But politicians do not control the money pegged to forever at planetary scale that humanity needs to mobilize for “transitioning away from fossil fuels in a just, orderly and equitable manner”, as COP28 tells us we need.

Our problem with carbon is really a problem with hydrocarbons, as COP28 inadvertently admitted when trying to respond to cries of "Foul!" from the so-called Global South.

If we expand our framing of the circumstances now prevailing, beyond the common conventional framing of "carbon emissions are driving climate change", we can see that Nature needs the energy that we are extracting from hydrocarbons, to fire the technologies that form the safe house in which we live, to keep the habitats on earth inhabitable by us.

If we want to keep our safe house safe, we need to stop extracting energy from hydrocarbons to light, heat and power that house.

Which means we have to find some other way to power our safety, more safely.

We need to be rapidly redesigning and reconstructing our global energy supply ecosystem to be purpose-rebuilt for energy sufficiency complete with habitat longevity and social equity on a planetary scale in the 21st Century and beyond...

That is going to require a vast mobilization of individual insight and initiative.

That is going to require mobilizing vast quantities of money pegged to forever, on a planetary scale.

That is, indeed, a daunting task.

Then there is the sociological phenomenon recently pointed to by Rowan Conway in her paper, co-authored with Anju Massey-Brooker, on Mission-oriented innovation for sustainable polymers in liquid formulation https://royalsocietypublishing.org/doi/pdf/10.1098/rsta.2023.0272,

In this brilliant work, identify as problematic a social phenomenon called carbon lock-in.

The history of synthetic polymers is deeply tied to fossil fuels. Bio-based polymers have existed for centuries, but petrochemical feedstocks are the default in manufacturing systems owing to over a century of investment in infrastructure, production processes and supply chains. The resulting efficiencies effectively tether production to fossil feedstocks. While it is technically feasible to substitute fossil-derived ingredients with alternative feedstocks, the 100-year head start that petrochemicals have had makes the viability of this transition very challenging for industry.”

Continuing, the authors tell us

However, in innovation systems, Grubb et al. [24] have pointed to the embedded inertia in systems of production and consumption that effectively prevent a rapid response to the defossilization challenge. This is commonly attributed to a path-dependent process known as carbon lock-in [19], whereby the conditions that are embedded in incumbent fossil-based industrial systems of production, have locked in the efficiency gains of over a century of industrial development and compounded economic returns to scale. This lock-in acts as a powerful inhibitor of innovation and threatens the competitiveness of low-carbon alternatives [19], as Seto et al. [19] note, because ‘innovation is cumulative, multi-faceted and self-reinforcing in its direction’ this path dependency constitutes a perennial head start for the fossil-fuel chemical architecture, making defossilization at industrial scale a complex and expensive task. emphasis added

This history-aware situation assessment applies to energy perhaps even more so than polymers.

The work of “transitioning away from fossil fuels in a just, orderly and equitable manner” cannot begin until we acknowledge the “path-dependent process known as [hydro]carbon lock-in…, whereby the conditions that are embedded in incumbent fossil-based industrial systems of [energy] production, have locked in the efficiency gains of over a century of industrial development and compounded economic returns to scale. This lock-in acts as a powerful inhibitor of innovation and threatens the competitiveness of [non-hydro]carbon alternatives … because ‘innovation is cumulative, multi-faceted and self-reinforcing in its direction’ this path dependency constitutes a perennial head start for the fossil-fuel chemical energy architecture, making defossilization at industrial scale a complex and expensive task.”

So far, this brilliant work is inspiring!

But then the authors take a wrong-turning down a pathway proven by decades of experience to lead to a dead-end.

They default to the inherited thinking that the Government and Industry are the social structures for social choosing through which society can, should and must control what the authors call "the Common Box" where the redesign and reconstruction of technology enterprise and exchange networks for energy supply on a planetary scale can take place.

This default thinking about Government and Industry is itself a kind of social choosing lock-in that is preventing us from dealing effectively with hydrocarbons lock-in on energy supply, globally.

How are we going to compel our politicians, politics, government, the force of law and the lawful use of force to break free from hydrocarbon lock-in?

We need to “build a roadmap to shift the production, use and disposal practices of incumbent [energy extraction from hydrocarbons] towards a sustainable path—a challenge that was must be seen as too large for any single firm government to address alone.”

And our experience with nation-states collaborating at planetary scale against a force as powerful as carbon lock-in presents compelling evidence that this is not a way for humanity to build the roadmap we need.

Corporations and the Capital Markets, the “Private Sector”, navigate through incumbent technology lock-in through Creative Destruction: innovative new technologies push their way through the lock-in by delivering an overwhelmingly more popular price-for-performance choice at the point of purchase by individuals acting in our role as consumers.

This is problematic for climate action, because the price-for-performance at the point of purchase calculus does not encompass future consequences on habitat longevity (or social equity), and new energy technologies do not deliver an overwhelming better price-for-performance profile without taking into consideration the consequences of competing choices on habitat longevity and social equity.

The logic of the markets, both commercial and capital, is not capable of discriminating between inherited and innovative new energy supply choices based on future consequences for habitat longevity and social equity.

That logic is blind to those consequences.

If society wants to make energy choices based primarily on habitat longevity and social equity and to do so on a planetary scale, we need a different social decision making logic through which to make those choices.

That's the bad news.

The good news is that the logic that we need can be found in the Mid-Century Modern social innovation of the social trust for provisioning the public good of Workforce Pensions.

Tens of trillions in society’s shared savings are now aggregated, collectively, worldwide, into these social trusts, giving them the power of vast size, programmatic purpose and forever time to use the technologies of spreadsheet math, desktop publishing and digital communication to negotiate with enterprise of any size, in any business, anywhere on the planet.

Right now, our common sense is telling us that it makes sense for the fiduciary stewards of these social trusts to abdicate their fiduciary responsibilities over the investment of the money we entrust to their care, prudence and diligence for income as well as safety to assure income security in a dignified retirement, and turn control over to capital markets professionals seeking the highest possible returns by extracting purely pecuniary risk-adjusted profits from gain on sale to other market participants, timing and riding the booms and busts in market clearing prices for shares traded in the share price trading markets, over the Exchanges, or through Funds.

As we have seen, the capital markets cannot finance an orderly transition. Those markets are created by design to finance Growth through Creative Destruction. Replacement is not Growth. Destruction is not orderly. The capital markets will continue to finance the historical trend-line of hydrocarbons lock-in, until that trend line fails, catastrophically. And it is that very catastrophe that climate activism is working to avoid.

There is an alternative, an Untaken Safer Alternative, for income security in a dignified retirement for workers, directly, and for us all, consequently.? The fiduciary stewards of Workforce Pension Funds can and should (even must, according to the law) retain control over the investment of money entrusted to their care, prudence and diligence, exercising their power to negotiate to negotiate with enterprise, directly, for equity paybacks to an actuarial/fiduciary cost of money, plus opportunistic upside, from enterprise cash flows that are prioritized by contract for suitability to the times, longevity over time and fairness all the time.

The problem with energy extraction from hydrocarbons is that it is no longer suitable in our times, because science has learned that Nature needs that energy to be conserved inside those hydrocarbons in order to sustain habitats on earth that we humans can inhabit. We need to make a more suitable choice of energy supply technologies that will not impair Nature’s ability to sustain the habitats on earth in which we live.

The problem with longevity is that we cannot “Just Stop Oil”, or the lights will go out, our stoves will grow cold, and the machinery of our prosperity will grind to a halt. Our safe house will not longer be safe. Instead, we need to replace, before we can retire, energy extraction from hydrocarbons.? So, we need a new global enterprise that can manage that process of synchronized and coordinated replacement and retirement, as quickly as possible, but as long as it takes.

The problem for fairness is the wrenching dislocations of the inherited social and economic order of personal wealth and consequent social standing that will be attendant on the necessary but fundamental redesign and reconstruction of our global energy supply ecosystem. We will need to manage these dislocations, on a planetary scale, so that they do not undermine social cohesion and breach the peace that we are working to shore up.

Rowan Conway and her co-author points us to the solution, again in the context of carbon-based chemicals:

PLFs are present in six key industries: agrochemicals, household and personal care, paints and coatings, water treatment, adhesives and sealants and lubricants (see figure 1). Despite their importance to society and the global economy, there has been very little coordinated effort to highlight the sustainability problems surrounding them.

This is the paradigm for all prudent stewardship of change in the economy: an inventory of the needs that people have in our everyday lives, the technologies available to meet those needs, and the learning required or desired or possible to inform innovations that will make more fit-for-purpose, more right-for-the-times choices available to people, for living our own best lives “under the circumstances then prevailing” (ERISA).

Governments are constrained in their ability to take such inventories and support such innovations by the competing interests of diverse constituencies and the vagaries of electoral politics, election cycles and jurisdictional boundaries.

Corporations and the Capital Markets are reactive, not proactive; extractive, not interactive.

Social Trusts for Workplace Pensions (and also for Civil Society Endowments) have the character and the aims required to exercise this stewardship, prudently.

The Institute for Energy Economics and Financial Analysis (IEEFA) just issued a new report arguing that:

Asset owners need investment products that prioritise decarbonisation over short-term returns

https://ieefa.org/articles/asset-owners-need-investment-products-prioritise-decarbonisation-over-short-term-returns

By "Asset Owners" the IEEFA means the fiduciary stewards of social trusts for provisioning Workforce Pensions and Civil Society Endowments as customers of the capital markets.

One Key Take-away concludes:

Asset owner efforts to ease systemic risks such as climate change are held back by outdated product offerings that disproportionately prioritise short-term returns.

The referenced "outdated product offerings" are the many and diverse Asset Classes in which Asset Managers profess professional expertise, all of which are thematic variations on the same investment thesis of buying securities at one price to extract a profit as gain on sale at a another, hoped-for better, price.

But the problem of inaction on climate, and other challenges humanity is facing in these times, is not with the different investment themes expressed by diverse asset classes.

The problem is with the investment thesis of profit extraction through gain on sale.

The solution is the new investment thesis of equity paybacks from prioritized cash flows.

Think Private Equity upgraded from ownership for extraction to stewardship of interactions.