Reimagining logic

The International Monetary Fund this week sounded a tiny little alarm about the price tag of the energy transition. It was just business as usual, really, with the IMF warning that the cost of the transition could become difficult to stomach because of higher interest rates and a gloomy economic outlook that has totally nothing to do with the transition, of course.

But that wasn’t the interesting part. The interesting part was the IMF’s claim that governments pursuing the transition are focusing too much on spending “such as increasing public investment and subsidies for renewable energy.”

Transition governments were so preoccupied with pushing the transition forwards, the IMF argued, they could run into trouble unless they turned their attention to the question of income and how to get some. The Fund, of course, had the answer to that question and that answer was carbon pricing.

No, don’t say “Oh, not again”. This time it’s not about carbon offsets. It’s about governments taxing carbon dioxide emissions directly to fill the coffers that have been emptying rather fast with all that solar, wind, and hydrogen to be supported, not to mention heat pumps and EVs.

So, the idea is to make businesses and possibly households pay for the emissions they generate and use the money to, well, reduce these emissions further by replacing hydrocarbons with wind and solar for power generation, and ICE cars with EVs.

No, let me rephrase because I don’t think it sounds funny enough: the IMF’s idea is for governments to turn CO2 into a commodity, tax its use, and work towards making that commodity — that taxable commodity — increasingly scarce, effectively closing that tax revenue avenue or at least shrinking it considerably over time.

With tactics like these we’d need to redefine the word ‘logic’ before too long and I’m sure someone is already working on it. But that’s just one part of the Western transition equation. Because even without the help of the IMF, some governments in Europe are deploying tactics that are at best questionable and at worst the source of much amusement for evil people such as myself.

Take France, for instance, and its eager president, Emmanuel Macron. Macron’s government recently ordered supermarket chains to sell fuel at cost and cap the prices of a quarter of their product inventory.

The reason, of course, is that the French are unhappy with their food and fuel inflation and when the French are unhappy they don’t just sit and stew in it but take to the streets. So price caps were seen as the most effective way to prevent another mass protest.

It is here that I would like to refer you to a speech by the governor of the French national bank from April this year, in which Francois Villeroy de Galhau said that carbon pricing was “the only signal capable of aligning climate imperatives with economic agents’ decisions” and, even better, “the only way to make more green projects profitable.”

Now, in fairness, when President Macron unveiled his new plan for a just transition a week ago, he did not mention carbon taxes. Yeah, I’m sure we all wonder why but we don’t have to wonder for long. Per the IMF, carbon taxes are unpopular. Even so, however, if at some point in the future Macron’s and other European governments decide to take the IMF’s wise words to heart, carbon taxes will become a reality. And they will take the IMF’s wise words to heart. They need the money.

Indeed, carbon taxes must become a reality if the transition is to have a chance. As the IMF rightly said, though in a lot more words, you can’t just spend money, you’ve got to make some, too.

So, on the one hand, we’ll have governments subsidising everything transition-related and on the other we’ll have them taxing everything else for the carbon emissions everything else generates… including industries producing components for the transition. Food production, too, no doubt.

In other words, right now France — and other European countries — are using price caps on essential foods to keep them affordable but in a few short years they may well slap a carbon tax on these same essential foods making them, well, more expensive.

I’m sure they’ll blame supermarket owners for the higher prices when that happens, too. I hear that’s what’s been happening in Canada. Incidentally, Canadians would like to see their carbon tax lowered or killed altogether.

But the logic of carbon taxes and price controls is even more warped than that. Because proponents of carbon pricing are very vocal about using some of the new income (what’s left from wind and solar subsidies) to help the most vulnerable in the population — whom once upon a time we called poor people.

So, on the one hand, again, governments are going to tax businesses in order to collect some money, part of which they will hand out to the poorest households. On the other hand, they will effectively use the carbon tax to make everything more expensive for everyone, including the poorest among us. Rube Goldberg ain’t got nothing on our politicians.

They are not stopping at this, either. Not at all. Last Sunday, the European Union launched the first phase of what it affectionately calls the Carbon Border Adjustment Mechanism, or CBAM.

The mechanism, per Brussels, will even the playing field between European producers of iron, steel, aluminium, cement, fertilisers, electricity, and hydrogen, as well as products made from some of these materials, and non-European producers with lower emissions standards.

The reason the playing field needs evening is, of course, the emission permit system in the EU, which has affected the competitiveness of European producers in the sectors listed above. In other words, European cement, steel, fertilisers, etc. are more expensive because their producers have to pay for the emissions generated during production.

On the other hand, Chinese, Turkish, Russian and other producers of these goods and materials are not bound by such emission rules, which makes their products cheaper. Well, of course we can’t have that, so everyone selling to the EU will now have to track and report emissions and beginning in 2026 they will also have to pay for these emissions.

But that’s not all because the EU is the gift that keeps on giving.

We’ve all seen the reports about European businesses considering relocation because operating in the EU is getting increasingly challenging financially. Well, thanks to CBAM, relocation won’t help. You move out of the ETS, you get CBAM. There is no escape from reporting and paying for emissions. And that includes Scope 3 emissions because of course it would. No half-measures for the EU.

"CBAM is not about trade protection. It is about protecting the EU's climate ambition – and seeking to raise the level of climate ambition worldwide," Economy Commissioner Paolo Gentiloni told Reuters. Aww.

This protection of the EU’s “climate ambition” will not come cheap, not with all that tracking and reporting, and, from 2026, paying. This might become a bit of a problem down the road because it would result in an increase in the number of what the EU likes to call vulnerable households. These households will need government help as they do now, only more of it because of the higher number.

To sum up, then, the EU is putting a massive effort into making life more expensive for everyone, meaning it is spearheading the impoverishment of large parts of its population, which it would then need to support because poor people can become pretty dangerous pretty quickly. The money it would use to support these people will be coming from all the tools the EU would be using to make life more expensive. Honestly, it is magnificent.

Also, it’s absolutely worth it because in less than 30 years Europe can totally become hydrocarbon-free. It will only cost around 2 trillion euro. That’s according to a research institute in Germany, which just published a report containing the above conclusion.

Incidentally, the report was commissioned by Aquila Capital, which describes itself as “an investment and asset development company focused on generating and managing essential assets on behalf of its clients. By investing in clean energy and sustainable infrastructure, Aquila Group contributes to the global energy transition and strengthens the world’s infrastructure backbone,” but I’m sure this is totally irrelevant, hence the study being reported as actual news.

Aquila appears to be especially invested in onshore wind, given that, per the report “While most of the sum would be needed for onshore wind expansion, solar, hydrogen and geothermal resources would be additional pillars of a strategy that would enable Europe’s electricity needs to be powered exclusively from renewables by 2030.”

No doubt all this capacity will be built using responsibly sourced steel, cement and all the rest of it, with emissions duly tracked and recorded, and paid for. And it is totally going to cost 2 trillion euro, distributed over 26 years.

It will be a bargain, according to the authors, because it would come in at just 140 billion annually by 2030 and then 100 billion annually by 2040, which is petty cash compared to the 792 billion euro the EU coughed up last year alone to mitigate the impact of the energy crunch on people and businesses.

I really don’t know what we’re waiting for and why we only had 2.1 GW of new wind capacity installed in the first half of the year when we have an annual target of 11 GW. Not only that but the Germans are now reopening coal power plants. To save gas.

Outrageous as this is, I’m sure carbon taxes will spur us all into action soon enough. What I’m not so sure about is whether the nature of that action will be to the liking of those implementing the taxes.