Stop the Run-away Train that Climate Change Is..... How ’bout a bowl of Restructured Capital Soup ?

Stop the Run-away Train that Climate Change Is..... How ’bout a bowl of Restructured Capital Soup ?

Ganga Prasad G, Rao

Energy, Environmental and Mineral Economist

gprasadrao.blogspot.com

gprao64.blogspot.com

gprasadrao@hotmail.com

Disclaimer: The author makes no claim about reliability of the proposed design, or the assuredness of indicated outcomes.

Introduction

What, you ask, could be the analogical parallel between inflation and GHG emissions? Inflation, as a bottom line-enhancing business strategy, is often claimed to have been fiscally or monetarily resolved and put away politically. But it’d have, by then, done its damage in raising the prices of various goods - essential or otherwise, oftentimes irreversibly. In the same vein, one might claim to have abated economy-wide emissions, particularly on a GDP Energy-intensity basis, but the increments in ambient CO2 concentrations that occur before emissions are contained and despite reductions in energy intensity, are irreversible and virtually permanent. Such is the dilemma that faces Climate policymakers as they grapple with the curve balls thrown at them by Nominal paradigm. On the one hand, the global warming externality has exacerbated across decades, for reasons as varied as the population expansion and the per-capita nominal economic paradigm, cost-reducing innovations (and the associated rebound effect from competition-induced price reductions) and the wealth effects of a technological society; on the other hand, policymakers are confronted, in a society that leans on the Nominal paradigm to satisfy the various constituencies within, by the risks associated with violent climate change and sea level rises, and the very real trade-offs they face between pursuing economic growth and environmental sustainability, between focusing on basic human rights & needs and environmental justice, between blue-collar jobs losses and white-collar conveniences, and between the necessities of the current generation and the rights of unborn generations of the future. The need for anticipatory and efficient strategies that solve, rather than merely delay the exacerbating externality, and which facilitate a market-based resolution of intractable trade-offs, has never been felt more keenly.

Motivation

Equity markets, where stocks of corporate firms are traded, are a critical component of the Nominal paradigm. By their nature, stocks represent the discounted stream of future earnings. It is for this reason that investors price them not merely for their current Earnings per Share, EPS, but also for the expected growth in EPS across years. The availability of low-priced debt¹and the emphasis on EPS growth, in turn, fuels an environmentally imprudent contest to expand capacity, reserves, production, sales, revenues and profits. In turn, Investors rush to (debt-leveraged) stocks expected to outperform for reasons better growth prospects, enhancing returns in the stock and inducing a further expansion of capacity that further exacerbates Nominal externalities. This cycle of satisfying perpetual investor expectations engenders an unholy race for upstream reserves and competition for downstream market share in the Resources sector that verily reduces the Commons and the environment for all constituencies of the global society. The irreversible build-up of the GHG externality over time and space from Nominal pursuits, turns incrementally costlier upon the Real sections of the socio-economy that, much like a run-away train, accelerates toward an environmental disaster and an economic breakdown. It is in this context that one seeks a global financial strategy to contain ambient CO2 concentrations short of the environmental tipping point by curtailing emissions from fuel consumption in the transport sector². This manuscript broaches a re-constitution of capital structure of firms in the Fossil fuel constituency, and builds a ‘Whole Finance’ strategy around it in the hope of obtaining an unconventional, yet effective solution to a seemingly insurmountable and irreversible, environmental disaster in the making.

The Proposal

A reconstitution of capital structure is an oft-proposed resolution to control competition-induced environmental externalities from firms operating in the environmentally-injurious Resources sector. Firms operate to fulfill the objectives of the Capital of which they are constituted within the framework of Government regulations, Public capital markets, and indeed, Consumer preferences. Since most firms are constituted of Nominal-ZSPV Capital, their operation within a Nominal paradigm implies intense competition to expand markets and profits. Bond-capital, which guides firms to seek profits within the constraint of a sustainable environment and low returns expectations, avoids triggering large-scale environmental unsustainabilities and nominal exacerbations. Thus, and should the entire Fossil Fuel Resource sector be re-constituted of Bond Capital – whether Cause Capital, or otherwise, member firms would not face the pressures of the equity market to compete in the ever-expanding, nominal paradigm. Freed from competing on Volume-basis, they’d return the Sector to a path of environmental sustainability. In the context of Resource/Fossil fuel sector, the 370ppm Cause Bond³offers a mechanism to enforce foresighted environmental sustainability edicts upon Resources-aligned firms within a competitive Nominal paradigm, and which operates in the opposite of a Social Sustainability Bond. This blog explores a variant⁴that co-opts the 370 ppm Cause Bond, here re-christened ‘Environmental Sustainability Cause Bond, ESCB, in the role of an environmental regulator upon the Resource/Fossil-fuel sector.

The crux of the proposal......

(requires you download the docx file (the pdf is corrupted): Bond-based Capital Restructuring


A Long Perspective

Not many, perhaps not even Rockefeller, would have imagined the fossil-fuel industry would dominate the Nominal economy to such extent that it’d imperil the very environmental fabric that holds all Life together. Fossil fuel consumption, despite all the outcry about Climate change, actually set a record high in 2015. And a growth-oriented nominal global economy forebodes a further exacerbation of the already perilous state of the environment that has tripped the ominous 410ppm CO2 ambient concentration. A continued expansion around a per-capita nominal economy, accompanied by laissez faire policies and ineffective Carbon trading schemes, could only further exacerbate the tenuous imbalance that characterizes the global Carbon and Heat balances today, and push the Earth closer to an irretrievable Climate disaster that disproportionately burdens the Poor worldwide, and particularly so in Developing nations.

This proposal anticipates the incentives that pervade the Nominal paradigm, the political imperative to fully exploit the national resource base for the benefits of its people, the appeasement of Capital-market interests by populist regimes that must compensate the masses post elections, the mis-pricing of environmentally-injurious transportation products, and the global free-rider externality that engenders from distributed consumption of fossil fuels across politically-partitioned jurisdictions. It takes issue with, indeed finds fault with the participation of fossil fuel equity in a globally-competed nominal capital markets, and offers a credible alternative Capital scheme. The proposed restructuring of Capital, leveraged with Cause Bonds and Gold Collateral, offers a market-conformable switch from Equities to a special class of Bond-constituted Capital that attenuates nominal incentives, protects Fossil fuel investors from meltdowns in equity markets, retains firm incentives to compete for dividends, and above all, emphasizes environmental sustainability in the current and future periods. The proposal, in inducing conformance with a virtuous Sustainability pyramid, obtains the ‘co-benefit’ of a reduction in drilling acreage (and reserve accretion). It also generates the revenues necessary to operate a VMT Cap and Trade system that shrinks fossil fuel consumption to what is environmentally sustainable in the long-run. The overarching presence of an Environmental Sustainability Cause Bond ensures the Fossil Fuel sector may lean upon a range of solutions and strategies that the Bond adopts in its search for environmental and market sustainability. The proposal is, both a timely exit option for existing, increasingly risk-averse investors in the fossil-fuel industry, and an opportunity for the long-run sustainability-oriented interests to environmentally-reorient and bag a dividend-yielding sector. In an age of expanding populations, environment-using Open Cycle technical change, and populist regimes that must deliver on employment and self-sufficiency, a Sustainability-Bond-based restructuring of externality-intensive sectors of the Nominal economy, such as the Fossil Fuel industry, is expressly indicated, and indeed recommended.

......