Climate Change: Tipping Points

For the past few years, environmentalists have voiced concern that we’ve passed a tipping point of climate change. Even if we achieve drastic reductions in emissions, they fear, the current levels of carbon dioxide in the atmosphere may inexorably increase its temperature by more than two degrees. And meteorologists warn us that such warming may create catastrophic damage to our global weather patterns.

But before you lose all hope for our planet, you may wish to consider a different tipping point. Namely, public awareness of the problem — and demand for solutions — may have passed the point where polluters can safely continue their behavior.

Consider, for instance, the Financial Stability Board. It’s the global consortium of central regulators and banking institutions that was formed during the global economic crisis of 2009 to establish universal financial standards. It launched the Task Force on Climate-Related Financial Disclosures eighteen months ago to address environmental concerns.

Last week, the Task Force issued its final report. It recommended that publicly traded corporations issue more detailed disclosures about their governance practices, business strategies, risk management processes, and metrics and targets involving climate change.

Let’s think about that for a moment. The banking institutions that finance our global economy are establishing a universal expectation that corporations must integrate climate change considerations into all core business activities.

Although the Task Force announcement didn’t receive a fraction of the attention that was generated by the United States’ decision to withdraw from the Paris Accord, this new expectation may explain why many leaders are now optimistic that America will still meet the Agreement’s emission reduction targets.

So if you’re feeling depressed about the possibility that the environmental impact of climate change is irreversible, please keep in mind that our society’s awareness of the problem — and our determination to address it — may be irreversible as well.

In other words, one tipping point is confronting a countervailing one. And because so many individuals around the world are racing to manage both elements, it’s possible to hope that our planet has a fighting chance of survival.

Delete The Environment

Is it possible that we’re still debating the existence of climate change? Two months ago, President Trump’s Secretary of the Environmental Protection Agency (EPA) declared that:

“… measuring with precision human activity on the climate is something very challenging to do and there’s tremendous disagreement about the degree of impact, so no, I would not agree that it’s a primary contributor to the global warming that we see.”

Secretary Scott Pruitt continued:

“We need to continue the debate and continue the review and the analysis.”

But review and analysis require data. And last week, the EPA removed significant amounts of public data and scientific information from its own web site.

Why would Secretary Pruitt remove data from public view if he believes that we need to “continue the review and the analysis” of the information? According to an EPA spokesperson, the removal was needed to “eliminate confusion by removing outdated language.” And yet the spokesperson didn’t explain why the language of the data was “outdated.”

So why should we feel concern? Given that climate changes over time, scientists must analyze data that has been collected over many years in order to evaluate the effects of various environmental factors. Thus, it is difficult to understand how a set of data can itself become “outdated.”

To be sure, this is not to say that Secretary Pruitt is wrong. In fact, it is never wrong to question established scientific findings, or to call for more review and analysis.

But such activities are simply impossible to perform when information that resides in the public realm is removed from public access. So when our government “of the people, by the people, for the people” compiles data and publishes it on a public web site, perhaps we’d be better served if it simply leaves it there.

Science: Fact vs. Inference

A set of scientific facts rockets across the internet. One highly respected news organization appears to cite it as a warning about global warming. But another appears to cite it to raise doubts about such warnings.

How can that be possible? It’s tempting to assume that one of these organizations must be engaged in the practice of “fake news.” A single set of facts cannot simultaneously support a pair of perfectly contradictory inferences, can it?

In reality, it can. And given that the phenomenon of global warming impacts the future of our planet, it might be helpful to take a moment to understand the difference between scientific fact and scientific inference.

The facts in question involve a gigantic crack in a region of the Antarctic ice shelf known as Larsen C. Environmental scientists have long warned that global warming would cause the collapse and melting of the shelf, generating massive increases in sea levels. Just yesterday, the New York Times reported that:

A rapidly advancing crack in Antarctica’s fourth-largest ice shelf has scientists concerned that it is getting close to a full break. The rift has accelerated this year in an area already vulnerable to warming temperatures. Since December, the crack has grown by the length of about five football fields each day.

But three weeks ago, National Public Radio reported that:

“A lot of things are going on deep inside the ice,” says Adrian Luckman, a glaciologist (who is) leading a project to track changes in the ice shelf. “This is probably not directly attributable to any warming in the region, although of course the warming won’t have helped … it’s probably just simply a natural event that’s just been waiting around to happen.”

Let’s think about the discrepancy in these news reports. At first glance, the Times appears to attribute the crack to global warming, and NPR appears to disagree with that attribution. But are the two organizations fully at odds with each other?

Not really. In reality, the authors are largely in agreement on the facts. Neither one concludes that the crack was directly caused by global warming. And neither one asserts that global warming had no impact whatsoever on the crack.

Furthermore, both authors concur that the region is warming. The Times reporter states that the area is “already vulnerable to warming temperatures.” And the NPR reporter quotes a glaciologist who agrees that “of course the warming won’t have helped.”

In other words, according to both authors, the Antarctic region is heating up and the Larsen C region is cracking. Neither concludes that the heat directly caused the cracking. They agree that other factors likely contributed to the situation. And yet they also believe that warming temperatures can’t possibly be beneficial for the stability of this gigantic chunk of ice.

Are the authors inclined to draw different inferences from the twin facts of warming temperatures and cracking ice? Sure. The Times author appears to be much more inclined to interpret the set of facts as supportive of concerns about global warming.

And yet, do they disagree on the underlying set of facts itself? Not at all.

It’s certainly reasonable to feel a bit distressed when reporters at two highly respected news organizations draw radically different inferences from a common set of facts. It’s only natural to hope that a pair of rational individuals could follow a common trail and arrive at the same destination.

But at least it’s comforting that these two reporters only differ on their inferences while agreeing on their facts. As long as we keep this scientific distinction in mind, we’ll be able to maintain our faith in science itself.

Climate Change: Humanity and Nature, Collaborating

If you’re worried about climate change and its devastating effects on the natural balance of the environment, you’re certainly not alone. For many years, meteorologists and other scientists have warned that the increase of carbon dioxide in the earth’s atmosphere would lead to extreme droughts, hurricanes, and other extreme weather patterns.

As the forests in the drought-stricken western United States have continued to burn, and as filthy piles of snow — leftovers from the most extreme winter in Boston’s history — have continued to melt well into the summer, these predictions have proceeded to drive concerns about the climate. But hope about the future, from both human and natural causes, has begun to emanate from California and the Pacific region.

For instance, in response to Governor Jerry Brown’s unprecedented set of mandatory water rationing orders, the citizens of the Golden State have immediately achieved incredible reductions in water usage. Urban water districts, for instance, reduced their water consumption by 27.3% in June, well above the Governor’s 25% order.

And California is also receiving help from Mother Nature. Apparently, an extremely powerful El Nino effect is expected to manifest in the Pacific Ocean this winter. Such effects typically lead to extremely rainy weather on the west coast of the United States, and to relatively mild and dry weather in Boston and other northeastern cities.

Less human water use and extreme rain events are exactly what California needs to deal with the cumulative effects of its devastating five year drought. And mild and dry winter weather is precisely what Boston needs to recover from its Arctic-like winter of 2014-15.

Of course, this is most certainly not the time to grow complacent about climate change. Most scientists are deeply worried about its long term impact on our natural environment.

Nevertheless, this may well be the time to feel a little better about our ability to manage the impact of climate change. For at the moment, in California and the Pacific region, it does appear that humanity and nature are collaborating to moderate the recent extremes in our climate.

MetLife and Deutsche Bank: Playing Hide And Seek

Undoubtedly, you’ve heard of the Metropolitan Life Insurance Company, i.e. MetLife. According to the Fortune 500 rankings, they’re the largest life insurance company in the United States. And certainly, you’ve heard of Deutsche Bank AG as well. According to Banker’s Almanac, they’re the second largest bank in the world.

So here’s a question for you: according to the federal government of the United States, which one of these organizations is an insurance company? And which one is a bank?

A rational person might respond “the insurance company is an insurance company and the bank is a bank.” But in the world of federal banking regulations, a rational answer is often a wrong answer. So please guess again!

MetLife: From Insurer to Bank and Back

The Metropolitan Life Insurance Company was founded in 1863 as the National Union Life and Limb Insurance Company, an issuer of policies to military personnel fighting the American Civil War. For almost 150 years, it has been perceived as a quintessential American insurer; in fact, it even utilizes the Peanuts beagle Snoopy as its corporate logo.

But in the year 2000, MetLife purchased a small bank called Grand Bank N.A. of Kingston, New Jersey. Although it renamed the entity MetLife Bank and has been operating it since that time, the division has never grown to become a significant component of its operating activities. And recently, on December 27,  2011, it decided to sell the division’s entire depository business to GE Capital.

Considering the relatively inconsequential size of MetLife’s banking operations, why does the Federal Reserve Bank of the United States list MetLife, Inc. as the sixth largest bank in the nation? It’s because MetLife utilized its tiny bank to reorganize itself as a diversified bank holding company. That helped the firm boost its profits during the bubble economy era prior to the 2008 market crash, but is now proving a hindrance in the new era of Dodd Frank regulations and Federal Reserve stress tests, one of which MetLife recently failed.

So MetLife is now shedding its banking persona, selling off its MetLife Bank operations in a piecemeal fashion. Last year, when it decided to sell its deposits to GE Capital, it declared that “a diversified bank holding company structure was no longer appropriate” for it.

Deutsche Bank: From American Bank to American Subsidiary

Deutsche Bank AG has been operating as a global banking company since its founding in 1870. In 1999, one year before MetLife purchased Grand Bank N.A., Deutsche Bank created a corporate entity called Taunus Corporation (named after a mountain range in Germany) to serve as a bank holding company for its American assets.

Until late last month, there was never any question that Taunus represented a major American banking operation. That’s why the Federal Reserve Bank still lists Taunus as the eighth largest bank in the United States.

So what happened last month? Like MetLife, Deutsche Bank decided that its American operations should try to avoid the necessity of compliance with the new regulations that are being imposed by federal regulators. So it decided to transform itself from: (a) an American bank that is owned by a German bank, to (b) a German bank’s American subsidiary. At first glance, that distinction might appear to be a relatively arcane one, but under American law it will permit Deutsche Bank’s Taunus Corporation to side-step the new regulatory requirements.

Now You See Me, Now You Don’t

As if playing a game of hide and seek, MetLife and Deutsche Bank have each decided to disappear from the watchful gaze of federal oversight. MetLife plans to accomplish this feat by selling off a minor operation that enabled them (while it was beneficial to do so) to classify their entire firm as a bank. And Deutsche Bank plans to achieve the same goal without selling any of their American operations at all.

Are there any other organizations that have slid in and out of the regulatory classification of a banking institution? You bet! Major American corporations such as Harley-Davidson, Caterpillar, and McDonald’s relied on their corporate treasury operations to borrow billions of dollars from the Federal Reserve Bank at the height of the financial crisis. And pension plan entities of all sizes, ranging from the California State Teachers Retirement System to the City of Bristol (Connecticut) General City Retirement Fund, did so too.

Clearly, the conveniences of the reclassification process have permitted many banking organizations (like Deutsche Bank’s Taunus division) to avoid the disadvantages of being regulated as a bank. And clearly, they’ve also permitted many non-banking organizations (like McDonald’s) to enjoy the advantages of such a classification.

So when can a bank call itself a bank? And a non-bank a non-bank? Apparently, in the United States, the answer to these questions is a simple one: whenever the bank (or non-bank) decides it is beneficial to do so.

Energy Leadership: An Unwanted Honor

China is responding in an unexpected manner to a milestone it has just reached on its path to economic dominance. Although it has gladly accepted such mantles of leadership as the world’s largest automobile market and the globe’s greatest export manufacturer, it doesn’t appear to be eager to accept the title that would logically accompany such accolades: the world’s energy leader.

There are, of course, two types of energy leaders: nations that produce energy and nations that consume energy. Regarding production, although China is no match for Saudi Arabia, it is justifiably proud of its investments in renewable energy projects. Many pundits have criticized the American Congress, in fact, for failing to pass energy legislation at the very time that China is becoming a global leader in alternative fuels.

However, China appears to be far less proud of its prodigious energy consumption. When the International Energy Agency (IEA) recently announced that China had finally surpassed the United States as the world’s greatest energy consumer, China refuted the designation and backed away from the leadership position.

A Dubious Honor

To be sure, the mantle of leadership for energy consumption is a far more dubious honor than the title for leadership in production. That’s because our desire for economic efficiency leads us to endeavor to minimize our energy use, not maximize it. Energy, after all, is a fiscally costly (and often environmentally dirty) resource; the less of it one must use for manufacturing products and heating living spaces, the better.

And yet any economic superpower will inevitably find itself consuming more energy than its weaker competitors. The United States, for instance, had been the world’s energy consumption leader since it earned that title approximately a century ago. That was approximately the time that America surpassed Britain as the world’s largest economy as well.

But when the IEA announced that its data analysis had placed China in the top consumption position, China forcefully disagreed. In fact, they reminded the IEA of an issue that the Agency and other data analysts have been struggling with for years: namely, that China’s self-compiled economic data reports may be less accurate than those submitted to the IEA by more developed nations.

Delicate Global Diplomacy

Why is China so reticent to accept the position of the world’s largest energy consumer, especially when most analysts expect the nation to surpass the United States more dramatically within the next few years any way? The answer to this question may seem more obvious to a practitioner of international diplomacy than to an analyst of macro-economic policy.

Apparently, the burden of the world’s largest energy consumer requires more of its recipient than a simple acknowledgment of its economic clout. Because most of the globe’s energy consumption still involves the burning of carbon based fuels like oil and coal, the largest energy consumer must inevitably accept the title of world’s largest contributor to global warming as well. Most of the customers of China’s export powerhouses happen to live in wealthy developed nations that are concerned about global warming issues; this places China in a delicate diplomatic position as the leading energy consumer.

There are other reasons why the Chinese may be reluctant to accept this distinction. Now that the International Monetary Fund has reaffirmed that the yuan remains undervalued, China may be concerned that it rivals may attempt to draw links of causality between its currency valuation levels, its manufacturing competitiveness, its energy consumption, and its contribution to global warming. Such concerns are particularly worrisome at at time when China’s economic growth is slowing and its once-soaring investment markets are declining in value.

Looking Ahead

Where will these trends lead us during the next three to five years? It appears inevitable that, barring any unforeseen economic catastrophes, China will take the undisputed lead in energy consumption and will then begin to pull away from the United States. Its overall economic growth rate is simply too much larger than America’s growth potential to anticipate any other outcome.

Nevertheless, because the Chinese population is so much larger than the American population, China’s energy consumption per capita (i.e. per person) will likely remain far below America’s for the next three to five years. And its Gross Domestic Product per capita will likely remain below America’s as well. When measured by the living standards of average citizens, China remains ensconced in the position of an emerging economy, still significantly different than the mature economies of America, Japan, and Western Europe.

With its economic growth slowing, though, it remains to be seen whether China’s economy will hit the same type of wall that ended the rapid economic growth of Japan two decades ago. Although it has astounded the world with its meteoric rise to economic superpower, there is no guarantee that continued growth will manage to carry China into the ranks of the wealthiest nations.