Natural Elements—All You Gotta Do Is Tell Me What You’re Sippin’ On; It’s Electric, Baby; and A Hot, Wet Blanket [DEC.23]

A TPDEARR Article
Trans-Pacific Dynamic Equity Allocation Research Report

It’s getting hot out there. Full stop.

No longer can an oppositional voice carry weight in its argument; the planet is getting warmer, more volatile, with a higher incidence of “extreme” weather and climate events, and greatly increased temperature and survival stress for billions of humans worldwide. No nation can escape the effects of climate change. The climatic unfolding of 2023 has shown the global community what a 1.4^o Celsius increase in global mean temperature feels like. Long-time climate watchers will remember that the IPCC determined a 1.5^oC increase over pre-industrial times ought to be considered the tipping point for irreversible climatic change, unleashing a cascade of environmentally devastating effects that will ultimately result in a much less-habitable Earth ecosystem, particularly for humans. Though a single year of 1.4 does not equate to a sustained level exceeding 1.5, we, as a species, should be more than alarmed at how quickly we have reached this level, noting in particular that the ongoing El Nino atmospheric conditions will exacerbate global warming and climate change for at least the next year or two. Next year is not going to be cooler and more tolerable than this year.

What’s more to the point in considering our investment research motives is that ALL national economies are struggling to rein in their climate damaging industries, struggling to reduce fossil fuel consumption, struggling to increase renewable energy generating efforts in a markedly impactful way, and struggling to find consensus among political players as to how exactly to go about “fixing” the most significant causes of humanity’s contribution to climate change. No major, first-tier polluting nation is close to reaching net carbon neutrality; less developed economies are even further away from ecofriendly industry. In fact, global emissions from coal, oil and gas all rose this year, again, hitting record high levels, again. Scientists and world leaders who have met in Dubai for COP28¹ have released sobering data about how abysmally global players are actually performing; emissions from fossil fuels have never been higher. It is now all but “inevitable” that humanity will overshoot the +1.5^oC threshold target introduced in the 2015 Paris Agreement². Moving forward, the focus on clean energy technologies will continue to grow in significance. This theme has largely shaped the entire DEC.23 TPDEARR issue, and we will explore industry-integrated environmental aspects in this article, and in each of the Macroeconomics, Demographics and Geopolitics articles as well.

All You Gotta Do Is Tell Me What You’re Sippin’ On

(#Usher)

And by “sippin’ on,” we mean, of course, what’s the source of energy? Sure, you may have an electric car, but every time you plug that car into an electric grid that’s provided for by fossil-fuel-burning power plants, you, and your electric car, are still a part of the problem. Depending on where you live, charging your EV is just as emissions-spewing as running an AC unit; they’re both sippin’ on electricity made by fossil fuels. Looking back over the past 40 years, the average primary energy consumption across the world has risen in every single year except for two: 2009, following the Great Recession; and 2020—Covid³. Increasing electric demands ought to be treated as a given, and all that “power” must be generated (from resources), disseminated (across electrical grids), stored (in batteries, primarily) and consumed by end users (both consumer and enterprise.)

Heat stress from climate change will continue to plague humanity over the coming decade, spreading further from the equator and into new areas with no preexisting infrastructure for managing it, occurring more frequently, and lasting for longer durations. New, novel, passively operational innovations for cooling personal and community spaces are desperately needed, and not just for the countries rich enough to afford them. But it’s unwise planning to simply wait for a future invention to save oneself. So, instead, virtually all economies are deploying electrically-powered air conditioning technology to manage small-scale climate control. Unfortunately, this is a sub-par solution to the problem, as the vast majority of cooling units in existence still run on electricity generated from burning fossil fuels⁴. Nonetheless, the UN predicts the total amount of air conditioning deployed globally may triple by mid-century as billions of people in developing nations gain access to the technology (along with the associated infrastructure) for the first time, while first-tier economies also continue to deploy and innovate upon the ideas as well. These electric infrastructure installation and technology dissemination factors play in heavily to our focus on [DEC.23 Squad Asset #1] and [DEC.23 Squad Asset #2], as well as the other Squad assets in multiple ways.

Buzz from COP28 is revitalizing the urgency of development and progress in climate management technologies perhaps even more so than it is inspiring nations to reduce their use of fossil fuels. In a way, many governing entities seem to feel and behave as if “their hands are tied” in a way that prevents them from shutting down fossil-fuel-burning power plants. They can’t simply shut off and deny electricity to their citizens who have been building a life upon its use, so old power plants cannot be decommissioned without alternative sources of power available, which typically take years and USD $billions to install. Switching over is a time-consuming process for all parties. Even so, smaller, effective strides can still be made in the meantime, such as with the expansion of solar panel installations, which can be implemented at a wide variety of scales, and which effectively feed surplus power back into the electrical grid for widespread use without the need for major industrial upgrades, at least to an extent. Every additional solar cell plugged into the grid incrementally adjusts the ratios of the “power mix”, which is essentially a breakdown of the proportions of each different source of energy in an economy. Fossil fuels dominate the playing field. Renewables make up less than 10% of energy generation in the more-advanced nations of Korea⁵ and Japan. In China, solar accounts for ~1% of the power mix; there is ample room (and motivation) for the solar and renewables industries to expand across Asia. Influence from this logic also underpins our further analysis of [DEC.23 Squad Asset #3] and [DEC.23 Squad Asset #4].

Probing deeper into how (time-consuming) green infrastructure upgrades are actually transpiring, we find that the PRC has just experienced a record-high level of new renewable energy installations⁶, primarily through wind and solar. With this new infrastructure now in place, the PRC could even find itself in a period of “structural decline” of its fossil fuel use and emissions as soon as next year. This is a big deal; the PRC is the largest single emitter of greenhouse gases, blowing into the atmosphere roughly 31% of the global total⁷. Successful reduction of emissions and shifting of the power mix to a heavier use of renewables will have a reiterative impact, further promoting use and expansion of the relevant technologies.

Major advances in significant economies always percolate outwards and have positive spinoffs in nearby and regional areas. Distribution of technological advances that have proven successful in the PRC out into the Southeast Asian region around southern China will be particularly impactful as many of these nations are experiencing rapid increases in their primary energy consumption and will benefit greatly from implementing large scale eco-friendly installations. According to the US Energy Information Administration (IEA), the Philippines, Malaysia and Vietnam have all seen their primary energy consumption rise by >5% over the past year, and Indonesia has seen a jaw-dropping ~26% increase over the last year. This all serves to reinforce the notion that electrical integration is imperative in modern societal development, with developing nations seeing the largest rates of growth. Indonesia, in particular, will see marked increases in its annual energy consumption over the next few years as new sources of power are fully utilized, and its population of over 275 million people tap into new (electrically-powered) technological luxuries to help them navigate a hotter and more volatile world on their national and economic ascent.

Generally speaking, the higher up on the wealth ladder an economy gets, the more energy it utilizes per capita⁸. We know exactly what you’re sippin’ on: electricity. And what is electricity itself sippin’ on? Hopefully, more of the sun in the days to come.

It’s Electric, Baby

Let’s take another moment to reiterate to ourselves the often-hidden significance of electrical power for human life on Earth. Earth’s natural resources cannot naturally provide enough nutrition for 8 billion people, plus all the domestic animals we enslave for our own consumption. Bluntly, synthetic fertilizer is arguably the single most significant factor in growing enough calories and nutrients for humankind to consume. We, collectively, cannot currently grow and manage the production of enough food otherwise. Industrial agriculture, as currently practiced in the modern world, depends upon tools and inputs that are manufactured by humans at industrial scale, a feat made possible only by electrical power.

Let’s go down the rabbit hole: the fat within that packaged product you’re eating is, according to the numbers⁹, probably palm oil, which makes up more than half of the global edible oil market. Palm plantations are 10-20 times more productive than soybean, sunflower or rapeseed¹⁰, so use of the commodity is not going to change, and in many ways it ought not change considering its relative agricultural advantages. Nonetheless, you better believe that those palm plantations (mostly around Southeast Asia) you’re benefitting from were put in place with all of the following characteristics:

they were installed on land that was cleared by fossil-fuel-guzzling heavy machinery (frequently destroying dense, old rainforest in the process);
they were grown and maintained with fertilizer, pesticides, herbicides and fungicides (=inputs) that were industrially-produced with electricity-consuming equipment;
products from the plantations were milled, processed, refined and packaged with industrial-grade equipment powered by electricity;
the electricity that was provided to the factories to enact all the different stages of product development was delivered to industrial participants at much higher levels than for a typical household, sometimes with regular voltage over 100 times higher¹¹;
the countries that provide the bulk of palm oil to the global market are Indonesia and Malaysia, and they both generate upwards of 90% of their annual electrical needs via fossil-fuel-burning power plants¹²;
the transportation of palm oil products to end users via truck, plane, rail, and commercial seafaring vessels has yet to be decarbonized, adding further emissions to an already gravely environmentally-damaging process.

The point is, no matter what product or good is being discussed, even a “simple” natural or agricultural commodity, the international supply chain that makes provision possible, at the root, runs on fossil fuels and electricity, which itself is currently mostly generated by fossil fuels. Electrically-powered civilization is non-negotiable for tapping into the resources of the natural world. And as more national economies raise their level of development, they require the effective provision of electricity to more people, so all the trappings of modern society can be implemented. There is no current alternative (hehe, current, get it?…nm). Thus, again, [DEC.23 Squad Asset #2].

A Hot Wet Blanket

Finally, we would like to focus on the painful reality of adjustments to our habitable biome and how they transpire over time. Even if humanity were to completely cease burning fossil fuels and releasing harmful, warming emissions into the atmosphere, we have already “baked in” significant changes to Earth’s climatic future. A study in the journal Nature found that we are already looking at ~2.3^oC of global temperature increase that has been incorporated into the atmosphere via historical emissions¹³, and that’s if we shape up and stop our polluting behavior, which we are not doing. That study was published 2 years ago, and since then we have been making things even worse! Like we said, the reality is painful. And we’re just talking temperature, here. We’re not even touching upon how climate change dynamics are increasing the frequency and severity of natural disasters like fires, snowstorms, drought, floods and pandemics, as well as the most significant natural cataclysm of all—ecosystem collapse. Next year will be roughly hotter than this; as will the year after that be hotter than next year. No national or developing economies are prepared to use less aggregate electrical energy to manage climate control in populated areas. Air conditioning will not be less-utilized by the global populous over the intermediate term, nor will the installation of new and additional electric utility provisions to unlock technological climate-challenge-meeting innovations be lessened.

Congratulations on your new smart phone. Every time you charge it, you leech and consume electrical energy that was likely provided to the grid from fossil-fuel-burning power stations. If you live in the modern world, you should assume that you are part of the problem. Guide your investments properly and leverage the growth of your capital as an investor to make more climate-conscious decisions, such as moving your domestic life to a more eco-conscious city with cleaner energy generation, or backing political contenders who are conservation/preservation-oriented, and who aren’t willing to back down from contentious environmental issues.

What’s an example of a contentious environmental issue? Hmmm… let’s connect two dots and see what happens:
As global temperatures rise, so will the sea level of the world’s coastlines. It’s true that the warming effects are not uniform, and vary widely across latitudes and locations. Nonetheless, the aggregate impact has, as one of its results, the melting of icecaps, notably polar¹⁴ and glacial¹⁵¹⁶. (Though humanity doesn’t utilize the freshwater locked in those icecaps directly, it does contribute to rivers, streams and freshwater lakes, which we obviously require for civilizations to subsist. Humans are already stressing into oblivion the meager 0.5% of the world’s total water supply that’s fresh, potable and accessible enough for our use¹⁷.) Melting icecaps ultimately deposit into the world’s oceans and exacerbate sea level rise. Everyone will feel the effects of sea level rise; even those living much further inland from coastal urban areas will have to contend with repopulation and migration pressures, unstable demand and volatility in resource availability, among countless other undesirable stressors. Personally, the author of this post currently lives atop land that will be underwater by the end of the century, if not at least on every high tide, then all day, every day¹⁸. And the odds are, the situation is similar for you¹⁹.

Are coastal cities, and their governments and leaders, equipped for this? Are they preparing and planning for a wetter and warmer future? Are they figuring out how to retreat to higher ground? Or move buildings? Or repopulate elsewhere? Who is going to take in the people of Tuvalu, Kiribati, the Marshall Islands and the Maldives, tiny island nations that are vanishing beneath the waves²⁰? Are city leaders and architects determining how to raise up currently existing structures? Or transportation networks? Is it even safe to keep building and occupying sub-level spaces at all? Are coastal “defenses” being implemented to mitigate higher tides, waves and storm surges? Is modern urban life evolving for a more environmentally volatile urban existence? Broadly, there aren’t any positive or good answers to these questions yet. The embeddedness of current infrastructure and ideas, along with political entrenchment and basic fear of the unknown make progress on this, the most dire of fronts, slow. Continuing adaptation to the new more-volatile normal will be even more painful than it’s been so far.

Don’t like that that’s the way environmental things operate now? Nobody cares. Hot. Wet. Blanket.