It’s only been a few years since governments worldwide snuck in net zero legislation past us under the cover of a pandemic. And when I mean snuck in, consider that the UK’s House of Commons never even voted on the law! In Australia, former Treasurer Peter Costello points out no thought was given to how the target would be achieved until after it was voted into law:
‘I was in that school that always used to say, “Let’s figure out how we could do something before we announce we’re going to do it”. These days you just announce you’re going to do it and you’ve got not idea.’
Ever since the targets were imposed, net-zero plans have been in for a rough time. You see, governments didn’t figure out how net zero would be achieved. They just made a law saying that it would. Peter Costello explains:
‘For example, in this country, we now know we are going to have to rebuild the new transmission system.’
The absence of a credible plan is something governments worldwide have in common for a simple reason. You can’t come up with one. Net zero simply isn’t plausible. And that’s true for a long list of reasons, including the amount of resources needed, the cost, the reliability, and the time frames committed to.
And yet, it is the law…
If only we had dealt with poverty, homelessness, illness, and HIV in this way!
Heck, why didn’t governments just legislate against COVID instead of imposing lockdowns?
Instead of laying out how net zero would be achieved, governments simply declared the commitment and then left it to a long list of experts to do the maths and figure it out.
Unfortunately, they came to an awkward conclusion: net zero simply isn’t plausible.
Lately, though, something has changed in the public sphere too. Net-zero scepticism has gone mainstream in the media, popping the previously impervious bubble of climate change campaigners, who nobody was allowed to question in any way.
Former Snowy Hydro boss Paul Broad described the government’s 80% renewables target by 2030 as ‘bulls—’ on the radio:
‘The notion that we can have 80 per cent renewables by 2030 is bullshit.
‘Eraring CANNOT close…If the lights don’t go out I’ll be awfully surprised.’
The radio show he said it on went into detail about just how renewable energy projects have been struggling, to put it mildly.
Over in the UK, the government funded university group FIRES has warned the UK is facing the loss of 75% of its energy supply by 2050 because it can’t build the renewables system fast enough to replace the fossil fuel system, which must be shut off to meet emissions commitments.
Previous FIRES descriptions of the UK Government’s net-zero plans included ‘magic beans fertilised by unicorn’s blood’.
The most crucial flaw in net zero is a very simple one: there simply aren’t enough resources to build the energy system that net zero requires, and not even at a significantly lower level of energy use if we crunch our standard of living to save the planet.
We don’t have the copper, lithium, or other resources needed to build a vast energy grid, a vast number of renewable energy plants, a vast amount of carbon capture plants, a vast amount of electric cars, and a vast amount of energy efficient homes.
It simply can’t happen.
So, at this point, it seems clear that the attempt to reach net zero is doomed. We face a choice. Either we crush our living standards back to some lower level of energy demand, which seems unlikely in an age of electrification, or we go back to using fossil fuels.
The outrage against net zero in the media suggests Australians have made their choice: they want to keep the lights on.
What does this mean for financial markets? Perhaps the energy transition is in for a much earlier reversal than expected.
You see, the obvious investment angle of net zero, given its absurd resource intensity, is to invest in the resources needed to try and build a net-zero world. Copper, which I covered here, being the obvious example.
The campaign against mining, which is incredibly energy- and emissions-intensive, not to mention bad for the environment, has constrained the supply of resources. Including, ironically, the supply of those resources which are needed to build a net zero world.
Those mining companies that own permitted reserves of those resources, and mines that produce them with existing permits, face an optimal scenario. A demand so great nobody could possibly hope to satiate it, and a restricted supply.
Unless, of course, new supply is unleashed as climate change campaigners agree to sacrifice the environment in their cause to save it. But even then, it takes a decade to get a mine up and running.
The price spike that a genuine attempt to reach net zero would cause would richly reward the firms with a foothold and their shareholders.
Another angle is to focus on the refining of resources. But the Chinese Communist Party has already bottlenecked that opportunity. China completely dominates refining of the resources needed for net zero, as we looked into here.
But if net zero is doomed, does the investment opportunity in renewables resources still apply? Or did it peter out in 2022?
It comes down to when governments decide to abandon the doomed strategy. At what point do they admit that their targets aren’t plausible, let alone likely to be achieved?
Because whenever they do, they’ll also need to admit that vastly more coal, oil, and gas is going to be needed than previously expected. And that suggests a boom in their prices too. Which means investors need to own those stocks.
The best part that, for investors anyway, is that fossil fuel development has been severely curtailed too. So, if we get falling supply due to climate change concerns, combined with a surprise surge in demand, as renewables fail to deliver, that suggests a boom for fossil fuel producing companies.
And they’re not hard to find given the climate change campaigners love to highlight them for you…
But which should it be in your portfolio? Copper and lithium, or fossil fuels?
The answer lies in the timing as governments reverse their energy transition, or at least delay it.
Estimates from the experts I’ve been interviewing on the topic suggest the delay will have to be decades, if not indefinitely. Technology would have to change rather dramatically to combat net zero’s resource shortages, after all.
But it doesn’t matter how long net zero is rescheduled for. The point is that, at some point in the future, the optimal energy investment mix will transition from net zero’s commodities to fossil fuel producing companies.
What’s an investor to do?
The correct answer, if you ask me, is both. By holding both fossil fuel and metals mining companies, you benefit from both trends.
The biggest risk to this strategy would be a complete abandonment of net zero and renewables, which seems very unlikely, or heightened targeting of fossil fuel companies in the short term.
Right now, as net-zero scepticism grows rapidly and energy security is prioritised, the risk of fossil fuel companies being targeted is falling. That makes this an optimal time to invest in both fossil fuels and resources stocks.
The public’s awareness and opposition to net zero has reduced the risks of such an investment strategy by suggesting the return to fossil fuels will arrive sooner than expected. But it hasn’t undermined the renewable energy resource shortage.
Thanks to supply constraints on both, they could both boom.
Until next time,
Editor, The Daily Reckoning Australia Weekend