Geoff Summerhayes is an Executive Board Member of APRA. Over the weekend he gave a speech in Singapore to an international conference of financial regulators outlining a case for an increase in APRA scope and powers to regulate the Australian financial sector in relation to climate change. Some notable comments were as follows:
“Liability risk refers to the potential for companies, boards and individual directors to be held legally accountable for their actions – or lack of them – with regards to addressing climate risk.”
“APRA is embedding the assessment of climate risk into our ongoing supervisory activities. We intend to probe the entities we regulate on their risk identification, measurement and mitigation strategies. We expect to see continuous improvement in how entities are preparing for the transition to the low-carbon economy.”
“This is not something we are mandating, and nor do we intend to introduce a specific climate-related prudential standard at this time [my emphasis]. However, I have previously noted that the global regulatory community is steadily moving in this direction, which is yet another reason why prescient business leaders should be taking steps now to get ahead of the curve.”
That the stability of our financial system is in hands of Geoff Sumerhayes, who despite having zero expertise whatsoever in climate science is nonetheless convinced that climate catastrophe is a certainty, and hence we need to regulate our companies to “transition to a low carbon economy” is truly frightening.
To flag that company directors should be liable for future weather is as absurd as it is impractical. Australia as a nation cannot influence climate action or change the weather. What can individual companies hope to achieve?
More to the point, it is completely disingenuous. It is a draconian measure to enforce political ideology that has nothing to do with prudential standards designed to foster “a stable, efficient and competitive financial system” as per APRA’s mandate.
You kind of have to hope it is disingenuous because the alternative is to accept that the regulator entrusted with ensuring financial system stability is so bad that it deliberately disregards from its elevated thinking any notion of rational, objective and empirical considerations of risk, reward, cost and benefit, which of necessity would include assessments about the levels of scientific, technological, economic and political uncertainties that are endemic in climate change.
This is the inescapable conclusion reading Summerhayes speech, who despite being expert in insurance matters, ironically doesn’t believe in weighing up the probability that his inexpert view of climate alarmism might be wrong and the rest of the world might not be moving in quite the same direction or speed that he assumes they are.
For a regulator that preaches prudence for a living, Sumerhayes unquestioning acceptance of climate hyperbole, activist falsehoods, regurgitation of unsubstantiated platitudes, and resort to false equivalence, to advance a straw man argument demanding climate regulation of the finance sector is concerning to say the least.
Summerhayes accepts without question the science is settled, the need to limit warming to less than 2 degrees Celsius, the potential it could go as high as 4 degrees Celsius, more extreme weather events are happening now and will get worse in future, the global transition to the low-carbon economy is underway and accelerating, the technology to transition to a low carbon future exists, and the future cost of climate catastrophe is greater than the current cost of mitigation.
Yet every one of these claims is highly contested, uncertain or arguably false. The science is not settled but the subject of on-going research and debate. The best evidence shows that the climate is not particularly sensitive to CO2 and that a doubling of CO2 will hence most likely lead to a 1 degree Celsius rise in the global temperature anomaly, not the 2-4 degree rise predicted off climate models that Summerhayes claims. These models have failed the test of prediction, a necessary pre-condition of science. They are too sensitive to CO2 and run too hot.
Extreme weather events are neither more extreme nor more frequent despite CO2 in the atmosphere increasing by roughly 30% and temperatures being almost 1 degree Celcius warmer than pre-industrial levels. This is a well established fact shown in the instrumental record and it is precisely because there is nothing to see in the instrumental record (i.e. nothing distinguishable from natural variability) not even the IPCC attribute a climate signal to present day weather events as Summerhayes does. He is plain wrong.
The transition to a low carbon global economy is stalling not accelerating contrary to Summerhayes claims. Developing countries have steadfastly refused international calls to cut emissions for over 20 years and the Paris Agreement enables developing countries to continue increasing their emissions over the life of the Agreement.
The larger developing countries (e.g. China, India, Brazil, Indonesia, Mexico, Vietnam) being exempt from cutting emissions account for almost 40% of total emissions and represent the bulk of the projected rise in emissions. The developing world as a whole constitutes almost two thirds of global emissions and is similarly exempt.
Contrary to Summerhayes assertion that we are seeing an acceleration to a low carbon global economy, emissions rose by 2% in 2018 which according to the BP Statistical Review of World Energy report was the fastest growth in 7 years, in spite of the Paris “commitments”.
This was mostly related to growth in energy consumption that was met by natural gas and coal. Coal production and consumption increased by their fastest rates in five years mostly off the back of high demand in China and India.
The Paris Agreement which Summerhayes believes constitutes “aggressive mitigation action” has been widely condemned by climate scientists and activists for failing to result in targets consistent with the stated goal of limiting global warming to 2 degrees Celsius (much less the more ambitious 1.5 degree subsequent target) that he believes is necessary to stave off catastrophe.
The Copenhagen Consensus Centre estimates the Paris commitments will reduce global temperature by less than 0.2 degrees Celsius which is the equivalent of doing nothing. Even that assumes that all countries will honour their commitments which is wishful thinking at best.
Renewable energy, which is implied by Summerhayes as being the “low carbon economy” future, remains plagued by problems of intermittency and correspondingly low capacity factors, and hence cannot guarantee supply on demand, much less at peak periods nor at an affordable price.
The issue of backup remains costly, complicated and vexed. However, like the economist that assumes a can opener, Summerhayes simply assumes these limitations don’t exist as he calls for mitigation as the more cost effective solution.
Consequently, Summerhayes sets up a straw man argument in much the same manner as Bill Shorten did during the election, reducing the climate change issue to a false choice of:
“controlled but aggressive change with a major short-term impact but lower long-term economic cost? Or uncontrolled change, limited short-term impact and much greater long-term economic damage?”
Which is to say he conveniently sidesteps the cost issue by deliberately avoiding any analysis, be it scientific, technological, economic or political, that might cast doubt on his underlying assumptions and disprove his conclusion that the cost of action is lower than the cost of inaction.
The dichotomy he sets up is patently false. Any prudent analysis (and I use this word deliberately as we are talking about a regulator) of the climate change issue results in fundamentally different scenarios leading to totally different rational choices that we as a nation and companies in particular should be aware of.
The first scenario, based on the weight of actual climate evidence to date, is that the climate system is not highly sensitive to CO2 and there is no pending climate catastrophe. Hence, anything we do to mitigate CO2 today constitutes a deadweight loss on the economy that will be adversely felt by Australians for generations to come.
This scenario assumes a rise of just 1 degree Celsius consistent with a doubling of CO2 with low sensitivity which nobody believes will be harmful to the planet. Given the fact that we are already about 80% there, without any signs of catastrophe, and over this period we have witnessed the greatest advancement in human welfare in history, the most logical conclusion is that a slightly warmer, CO2 enriched planet will be overall a net benefit. Summerhayes does not even entertain this possibility.
The second scenario, is that the climate system might be sensitive to CO2 in the manner the IPCC and hence Summerhayes suggest (albeit with a high degree of scientific uncertainty) but the fact remains that international agreement to meaningfully and transparently cut CO2 emissions has remained elusive for well over 20 years and there is no evidence that this is about to change.
The developing world – constituting roughly 60% of global emissions and responsible for most of the growth in global emissions, and comprising as it does, some of the most powerful nations in the international system – simply refuses to acquiesce to Western pressure to reduce their emissions and there is nothing the developed world can do about it. If Summerhayes’ view of climate science proves correct then climate catastrophe is inevitable.
The real choice is therefore not about the cost of mitigation versus the cost of climate catastrophe, it is about the futility and waste of mitigation versus the potentially necessary cost of future adaptation, against the backdrop that climate change predictions have thus far largely failed and may not be as damaging as APRA make out, and international agreement does not exist. Under either scenario the prudent course of action is a wait and see approach.
Summerhayes speech is accordingly an indictment of APRA that is willing to abandon financial prudence at the altar of climate change ideology. He jumps to solution mode without any serious analysis or understanding of the problem he is seeking to solve. He pushes a business case for climate regulation without having done any of the due diligence one would expect of a prudent and compliant regulated company.
He bemoans a lack of data and information that he claims would underpin more informed discussion and analysis of the cost of climate change, which in turn would better inform shareholders and customers of investment risks, but his entire starting point is that he already knows which way the science and cost arguments will play out and hence any information contrary to mitigation would presumably be APRA non-compliant.
He jumps between mitigation action taken by government and action taken by companies as though the two are interchangeable. They are not. In fact, a single company can be exposed to multiple climate policies depending on its areas of operations and the location of its customers, including the non-climate policies of the developing world.
His warning of a Kodak moment is a false equivalence. Kodak failed to keep up with pace of technological change and was replaced by a superior and lower cost product. Whereas the major problem in transitioning to a low carbon economy is that we do not have the technology to be able to do it and the renewable energy approach represents an inferior product at higher cost.
That is why international action on climate change has gone nowhere for over 20 years and why developing countries balk at the idea of constraining their economic development through the use of inferior renewable energy.
China and India are not stupid nations. They are not investing massive sums in energy infrastructure and deliberately choosing the most uneconomic and risky form of supply. They are investing heavily in fossil fuels to meet their growing energy needs because they know it represents the better investment. It is scalable, cheaper, reliable and can be dispatched 24/7 on demand. Japan has said the same thing in relation to its recently built 4,000 MW plant in Kobe.
If renewable energy was the better technology and better investment China and India would not be building coal-fired plants in the hundreds. But they are. Unconstrained by Western climate propaganda China and India are just getting on with the job of building the energy infrastructure they need. Do we really believe that China and India are so stupid that they are deliberately forgoing the cheapest form of energy (i.e. wind and solar) and are ignoring the climate investment risks (i.e. stranded assets) that APRA says we should prioritise? A good way to think about this is to consider whether Australia is prepared to deny the supply of coal in future because of climate concerns and potential liability.
The fact is renewable energy cannot compete against coal and gas and that is what developing world investment patterns prove. Without subsidies and government intervention most renewable energy companies in the developed world would be non-viable enterprises. Yet this is the sort of highly speculative (i.e. government policy-rent seeking dependent) uneconomic investment APRA presumably believes we should prioritise .
This goes to the argument that Bjorn Lomborg has made and why in his view the economic case is opposite to that of Summerhayes. The Copenhagen Consensus Center, using the IPCC’s own data and assumptions (being generous) has stated that a back-ended technology solution wins on cost-benefit terms by a wide margin because the current technology has no hope of replacing fossil fuels.
The Copenhagen Consensus Center dismisses Summerhayes’ commitment to the Paris Agreement as a waste of money, highlighting a global annual cost of $1 trillion USD to achieve abatement of just 1% of what is required to meet the IPCC’s stated goal of limiting global warming to 2 degree Celsius. In other words, nothing.
Summerhayes speech draws heavily (i.e. substantially lifted) from the Taskforce on Climate-Related Financial Disclosure. This somewhat obscure taskforce is seemingly dedicated to market manipulation dressed up as risk mitigation and investor transparency. It has little to do with genuine policy debate and a genuine assessment about climate related risks, including technology and political risks.
If it did it would have sections in its final report dedicated to the biggest climate investment risks: that alarmist climate predictions will amount to nought; that the developing world will not decarbonise but continue to increase its carbon footprint; and hence ad hoc, unilateral government policy oblivious to these risks will impose futile deadweight costs on its companies and its economy. It doesn’t.
Instead it starts with a Green-Left definition of climate risk and proposes through regulation to manipulate company decision-making and market value through a combination of peer pressure, Green shareholder activism, adverse public relations and ultimately climate legal action (hence Summerhayes comment at the top of this post).
This is a prescription to turbo-boost the type of Green law-fare that has bogged the Adani project down for 8 plus years and invites activist judges to rule against new coal mines citing our international commitments to reduce emissions. It also encourages our banks to turn their backs on resource projects that generate jobs, exports, and royalties that fund our schools, hospitals, roads, the mendicant states of South Australia and Tasmania, and sadly our government debt.
Worse still, this stupidity will only further encourage China to step in and fill the investment void, funding coal plant projects throughout the developing world (as it does now) as part of its Belt and Road initiative designed to expand its geo-political and geo-economic power, as we commit to economic self-harm.
Summerhayes call for greater information and transparency by regulation is dangerous. On the surface it seemingly has nothing to do with providing greater information leading to a more balanced assessment of climate change risk to investment, but is instead a call for greater APRA powers that will effectively weaponise the regulator to aggressively pursue Green-Left climate ideology.
In doing so it is just one more step in the long march through the institutions that seeks to by-pass democracy, getting around the inconvenience of voters and government by exploiting its statutory independence with calls to globalist moral authority.
Far from saving us from a Kodak moment Summerhayes recipe for more Green-Left climate regulation will expose shareholders and taxpayers to Solyndra bankruptcies on an unprecedented scale, undermining the integrity and stability of the finance sector, and by extension the economy APRA is mandated to protect.