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Banker Protests Keystone XL

Editor’s Note: John Fullerton worked at JP Morgan for over 20 years in senior level positions including as the former head of global derivatives. When he left in 2001, the Wall Street fixed income markets were a different place. In those days according to John, there was a deeper sense of honor and personal responsibility that was lost in the build-up to the financial crisis and the questionable ethics that remain in the mortgage securities and lending markets today. In the years since leaving Wall Street, John has become an outspoken champion of climate change initiatives and financial industry reform. When I spoke with him at Good-b a little over a year ago on the dangers of the Keystone XL Pipeline, he did not seem alarmed by the potential ecological devastation of the project. Since then, he has become more concerned than ever about the damage to our planet by fossil fuels and joined 50,000 other environmentalists in a major protest in Washington, D.C. The following article appeared both on his Capital Institute blog and in the Huffington Post.

Why I Marched Against the XL Pipeline

My daughter and I joined an estimated 50,000 demonstrators in Washington D.C. marching against the XL Pipeline that would connect the Canadian Tar Sands to American refineries. After a half century on this planet, I took to the streets. Here’s why.

The “business as usual” arguments in favor of building the pipeline as articulated by the liberal and often thoughtful Joe Nocera in the New York Times — “Like it or not, fossil fuels are going to remain the world’s dominant energy source for the foreseeable future” — virtually guarantee ecological and economic disaster in our lifetimes. There is no denying it: on our present course, climate change will be irreversible, unleashing unimaginable suffering and destruction for all of human and non-human life now on this earth and for future generations. We need to name the truth. Through its so-called balanced coverage and opinions relating to what must be understood as the unparalleled moral issue that defines our age, the mainstream media is complicit in the slow-motion catastrophe playing out in front of us in real-time.

Nocera calls the tactic — it’s just a tactic in a comprehensive offensive — to choke off a route to market for expanded Tar Sands oil mining from a rich northern economy “bone-headed” when he should be contemplating how we are going to leave in the ground the already developed fossil fuel resources in politically unstable regions like the Middle East, whose entire and unstable social systems are dependent upon oil revenues. The Potsdam Institute revealed all the arithmetic on carbon quotas needed to limit climate warming to 2 degrees Celsius back in 2009. Our “Big Choice” is to develop a new energy system based on renewables and to leave in the ground the vast majority of the fossil fuel reserves we have already discovered but not yet burned, or, to usher in climate (and economic) catastrophe. Expanding that fossil fuel resource base with dirty Tar Sands oil is sheer lunacy, a “bad investment,” to quote Tom Steyer, billionaire hedge fund manager turned climate activist.

Together with the 50,000 who descended on the White House, and the millions and probably billions of global citizens who agree, I am not prepared to simply accept that inevitability without a fight. It’s a shame President Obama felt it would be a better use of his President’s Day weekend to fly Air Force One from Chicago to Florida — nice carbon load there — and play golf with his friendly patrons, and with Tiger Woods of all people, than to look out his window and absorb our message firsthand.

Looking upon the White House, such a symbol of power, I felt hopelessly powerless and powerful at the same time with my 50,000 brethren on a crisp, windy winter day. I also felt angry at all “the people who run the world” who for whatever reasons can’t seem to bring themselves to address the cold hard truth, even as the evidence unfolds in front of their eyes. Is the best we can do to start talking about building floodgates, rather than look head on into the systemic fallacy of our conventional thinking that somehow presumes exponential growth of carbon emissions dumped into a finite atmosphere is acceptable and inevitable?

Let me help Joe and others trapped in our present globalized free market efficiency ideology: When certain critical assumptions about a system are factually flawed — like the notion that exponential growth on a finite planet somehow does not violate the laws of thermodynamics — observations of events increasingly conflict with our ideological expectations until it no longer remains possible to ignore them.Introducing finite boundaries into conventional (flawed) equilibrium economics will generate what systems scientists call phase transitions. We learned how this works in the recent financial crisis-induced global recession. The future stops behaving like the past. Ask a Greek about it. With no changes to business as usual, we are in the process of the largest self-inflicted and catastrophic phase transition of life as we know it in the history of humanity.

Yet the news coverage in the liberally slanted New York Times on the day after the XL Pipeline demonstration appeared not on the front page, but on the business page, describing the difficult choice facing President Obama in which two special interests — environmentalists and free trade with Canada — are in conflict. The environment is not a “special interest” Mr. President (and the New York Times). The environment is us. We and our beloved economy are embedded in the “environment,” indivisible in accordance with the laws (not theories) of physics.

Nothing will be easy about this challenge, economically or politically. We lack an accurate roadmap to find our way. Our current intellectual maps of economics and finance, governance and law, and the working of our political system, are all grounded in the limitations of Enlightenment thinking, which preceded quantum theory in physics and modern biology. The latter reveal, in fact, that everything is connected to everything. On matters of great strategic importance like climate change, there is only our common interest.

Business as usual will deliver a virtually identical fossil fuel footprint in the decades ahead. According to the US Energy Information Administration, we currently get 82 percent of our energy from fossil fuels. Appallingly, by 2040, they predict that proportion will still be 78 percent. And the picture in China and India is of course dire in terms of expansion of carbon emissions.

A carbon tax to begin to “internalize the externality” of carbon pollution and shift the marginal economics of renewables is the natural place to start. But we must also move rapidly toward hard global emission limits. We need a much expanded government-funded innovative research program, displacing military spending that continues to prepare for yesterday’s national security threats. This is the reality we simply must confront. American leadership is essential, President Obama. The time is now.

Despite the amazing organizing energy and success bringing 50,000 peaceful demonstrators to Washington in what is being described as the largest environmental protest in the history of America, we have miles to go and mountains to climb. Much more pressure will be needed to combat the overwhelming short-term economic interests in play.

Imagine the shift in moral consciousness it took to bring “one million men” to march on Washington? Without Twitter.


Climate Change & the New Enlightenment

Editor’s Note: The Anthropocene means “The recent age of man.” The Economist recently ran a cover story on how our modern age affects climate change and the necessary shift demanded of human beings in our relationship to nature.

Freedom in the Anthropocene

by John Fullerton
Much needs to change in the Anthropocene, including our willingness to have constraints placed on our precious right to individual freedom.  This is particularly challenging for Americans whose country was founded on an Enlightenment-inspired understanding of freedom, uninformed by the advances of modern science that have taken place in the past century.

We accept the premise that shouting “fire!” to incite panic in a movie theatre is an unacceptable exercise of freedom of speech since it poses a clear threat to other patrons.  Yet somehow when Mayor Bloomberg proposes a ban on supersized sugar drinks to help combat the obesity and diabetes epidemic (40% of Americans are thought to be either diabetic or pre-diabetic), he is caricatured as “Nanny Bloomberg” to great effect by the soda industry, playing to our very American sense of our right to freedom from government interference in our private lives.  Never mind that we all pay for the health care crisis caused to a significant degree by the diabetes epidemic.  And never mind that sugar has clear health dangers and the same addictive qualities of certain drugs that we demand be regulated.

Interference in our so-called “freedom” will become the new normal in “the Anthropocene”—the new geological era named by Nobel-Prize-winning chemist Paul Crutzen ushered in by the industrial revolution and following the relatively stable 10,000 year Holocene. In the Anthropocene human influence on the planet will determine what is sure to be  a more volatile, unstable, and uncertain future. The interdependence of all life on earth will become increasingly obvious and the ramifications of our human impacts will become undeniable, with profound moral implications that will alter our notion of individual freedom.

The juxtaposition of two articles in last week’s Economist magazine is illustrative of our failure to grasp the new ethical limits to freedom. The first, “Plenty More Fish in the Sea,” described progress being made in replenishing fishing stocks. It appeared only four pages apart from a story about dirty tar-sands oil production in Canada,  entitled “The Great Pipeline Battle.”

The first article celebrates the findings of the National Oceanic and Atmospheric Administration (NOAA) report on the great progress made in replenishing federally monitored fisheries—79 percent are now considered healthy.  Emphasizing the “importance of scientific quotas,” The Economist attributes this success, both ecological and economic (NOAA estimates commercial and recreational fishing generates $183 billion a year and over 1.5 million jobs), to “America learning a simple truth – that scientists, not fishermen or politicians, should decide how many fish can be caught.”

The Economist goes on to report that State-managed fisheries have further to go, and in its dysfunctional wisdom, the House of Representatives passed legislation forbidding NOAA from developing an innovative market mechanism to apportion fishing quotas, know as catch shares.  The two ignorant congressmen behind the ban claim the catch shares are designed “to destroy every aspect of American freedom under the guise of conservation,” the implication being that our forefathers didn’t risk their lives crossing the Atlantic in search of freedom only to be told they need to abide by some government-concocted catch share program!

The Economist rightly focused on the importance of adhering to scientifically determined quotas to manage finite fisheries, yet only four pages later when discussing energy, it misses the opportunity to make the connection between what science dictates and what should be legislated in an article on the tar-sands debate.  “The Great Pipeline Battle” details the multiple permutations pipeline companies and the Canadian government are exploring in order to ensure that Canada’s expanding tar-sands oil production gets to market.  The article quotes Scotiabank analyst Matthew Akman as saying, “While there are legitimate environmental worries, replacing gas exports (America is now awash in gas) with tar-sands oil is vital for economic growth” in Canada.

The “legitimate environmental worries” that Akman references include the fact that tar-sands oil contains three to four times as much carbon and other greenhouse gases as conventional oil according to the Pembina Institute, an environmental think tank in Calgary (industry estimates are lower).  They also include massive water usage and water table pollution problems, and the destruction of large swaths of Alberta’s Boreal forest—which contains 35% of Canada’s wetlands, thousands of plant and animal species, stores carbon, regulates climate, and filters water when functioning as a healthy ecosystem.

These “environmental worries” center on the scale of the tar-sands resource – “twice the amount of carbon dioxide emitted by global oil use in our entire history,” according to Jim Hansen, Director of the NASA Goddard Institute for Space Studies and widely regarded as one of the leading climate scientists in the world.

In a May 9 Op-Ed in the New York Times, which explains why he went to jail protesting the XL Pipeline, Hansen wrote, “If Canada proceeds, and we do nothing, it will be game over for the climate.”

Finite limits in the Anthropocene, the new geological era where the destiny of the planet, our home, is literally in our hands, come in many forms. Renewable resources such as fisheries require “scientific quotas” to limit how much can be taken per year without triggering collapse as the Economist nicely reports.  Waste sink limits, such as the greenhouse gas limit of the atmosphere necessary to avoid out-of-control warming, also require the constraints of “scientific quotas.”

To paraphrase the Economist, which somehow missed connecting the dots across just four pages in the same edition, we must remember a simple truth: scientists, not oilmen, bank analysts, or politicians, should decide how much carbon we can release into the atmosphere.  The determinations of science have been made.  They are detailed in the periodic reports issued by the Nobel-Prize-winning Intergovernmental Panel on Climate Change (IPCC).

Scientific consensus has been reached—on the connection between the ingestion of refined sugar and diabetes and obesity, on the sustainable catch rate in a fishery, on the carbon absorption capacity of the atmosphere. That consensus calls for the strict imposition of scientifically determined quotas, not some foggy notion of  “pricing in externalities” as economists prescribe.  Price is a vital polity tool, but not a panacea.  What is the price of  the risk of a 50-foot rise in sea level to our grandchildren, and what discount rate do economists  propose we use to estimate the price we should pay to mitigate that risk today?

Yes, I’m afraid freedom in the Anthopocene is not going to look much like the freedom our forefather’s fought to defend.  Get used to it.

Reprinted from The Capital Institute

John Fullerton is the President of The Capital Institute and a former managing director at JP Morgan.


To Keystone or Not To Keystone

The Keystone XL Pipeline continues to inspire passionate debate. Will it advance climate change and further damage our fragile planet? Or will it be a “harmless” environmental hazard that does more good than bad? Capital Institute President and former head of Gl0bal Capital Markets at JP Morgan, John Fullerton weighs in on the debate.

Ending the Debate on Keystone

by John Fullerton

In his February 10th essay, New York Times columnist Joe Nocera asked a simple question: “Can a person support the Keystone XL oil pipeline and still believe that global warming poses a serious threat?”

Joe answers “yes,” with the logic that this one pipeline alone will not bring about a global warming apocalypse, which is ultimately caused by “deeply ingrained human habits.” He was on the defensive as a result of his prior column “Poisoned Politics of Keystone XL,” in which he defends Canada’s decision to court China as an alternative market for its Tar Sands oil in the face of Obama’s refusal to approve the XL Pipeline under political duress. “At least one country in North America understands where its national interests lie. Too bad it’s not us.”

Joe is a balanced and thoughtful observer of business and Wall Street, but I disagree with him on XL.

If one believes as I do that global warming poses a “serious threat,” i.e., a threat of potentially and even likely catastrophic consequences, then the XL pipeline provides a useful and timely “line in the sand” that can be used to call the question, and alter the course of the global economy before it is too late.

Let’s review the two issues that are the focus of Joe’s second column. The first is whether Tar Sands oil is all that bad, and whether it alone will doom the planet as leading climate science authority Jim Hanson suggests. I don’t know whether tar sands oil emits only 6 percent more greenhouse gases than other oil as the IHS Cera study Joe sights suggests or 17-20 percent more as I heard from environmental leader Bill McKibben. The point is the absolute volume of carbon in this massive reserve, the equivalent of 150 parts per million in the atmosphere, when added to existing “proved” reserves, will undoubtedly doom life as we know it on the planet if it’s all produced and burned.

Marginal differences in quality and efficiency do not alter the hard boundaries of absolute scale limits. When faced with absolute limits, it only makes sense to prioritize high quality (low carbon) fuels, focus on efficiency, and find alternatives fast.  Efficiency of energy source or use will never solve the scale limit issue.  That’s the big deal.

The stunning truth points to a far more difficult challenge that the politicians, economists, and columnists are failing to see.  Unless we solve the technical challenge of carbon sequestration, a feat that appears to be fading from the imagination of even the technology optimists, then even before the expansion of Tar Sands production, the world already has proven reserves in the process of coming out of the ground in the decades ahead that exceed our carbon budget by a factor of 5 times.

In other words, as I have described in “The Big Choice,” we can choose to burn the fossil fuels we already have and likely cause irreparable damage to the planet by blowing through the 2 degree Celsius warming limit that climate scientists tell us is the tipping point, or we can choose to abandon 80 percent of the global fossil fuels already discovered and find alternative means to power our restructured and less energy-intensive economy. I call this our “big choice” because at current market value, that 80 percent of what would become “stranded assets” is worth about $20 Trillion.  No wonder the fossil fuel interests will stop at nothing to promote denial.

So where to start?  I can think of no better place for America to lead than in our own backyard on a project whose scale matters. Tar Sands. There’s no easy way down folks, so we simply need to decide whether to engage in the serious decisions in front of us. Greece failed to do so with their unsustainable fiscal path. We see the results. Our energy/carbon path represents a “bio-capacity deficit” that makes the the consequences of the present financial crisis cascading across Europe appear modest in comparison.

Joe’s second issue relates to trade. One argument against the XL Pipeline is that the oil would cross America on its way to Gulf Coast refineries, and then head to Europe, doing nothing for our “national security” interest of sourcing oil from friendly allies as pipeline supporters claim. Here, Joe rightly points out that the trade flows of this oil will probably not deviate much from existing patterns.  But this is missing the point.

The oil market is now a global market. Global supply and demand is what sets world prices, plus or minus a transportation charge, subject to temporary logistical constraints. So whether tar sands oil goes to the US or China, the price we all pay over time will not vary by a significant degree.

However, the future will likely look quite different than the past.  This is the vital message of running into limits on an unsustainable path.  We will choose to take one of two paths, either actively or passively:

Business as usual: Global energy demand will continue to grow. We will fail to materially curb our burning of fossil fuels. We will set in motion irreversible climate change that will impact the lives of our children for sure and likely ourselves (most would suggest this is already the case). Oil will become scarce and the global “free market” will function no longer. Having access to Canadian oil will be seen as a US asset, ensuring us vital supply either by negotiation or by annexation.  But it will be clear to all that the world is on a frightening path, and our “non-negotiable” SUV lifestyle will be the furthest thing from our minds.

Smart path: We will understand, as our military and security establishment now does (another essay on that here), that our unsustainable economic system poses the greatest threat to our national (and global) security. We will start making hard decisions in line with a vision of a sustainable future, one important decision at a time. Deciding not to expand Tar Sands production when the challenge is how to decide which existing resources to strand in the ground, and how to share the consequent financial and social burdens, will be one of the easier of these decisions.

So my question back to Joe Nocera is, what do you mean by “a serious threat”?

What’s Wrong With the Debt Debate

Soros Fund’s Robert Johnson with John Fullerton
by Capital Institute President John Fullerton

 This former banker, and now sustainability investor and humble blogger, will not offer grand predictions for 2012.  Forecasting in a world of rising uncertainty suggests a lack of understanding about uncertainty.  Instead, inspired by my holiday reading, Debt: The First 5000 Years, by anthropologist David Graeber, I will take up the debate about the debt, and offer an uncomfortable third view: jubilee (in some form) is inevitable.

The debt debate as it rages on can be summarized as the “Krugman view” versus the “austerity view” (the latter having too many advocates both at home and in Europe to associate it with a person).  The less popular Krugman view rests on a belief in Keynesian economics (“Keynes was Right”) that governments must increase deficit spending during slumps, and then tighten the spigot during booms, providing an automatic stabilizer to the economy.  Failing to do so in times like the present turns recessions into depressions.  This view rejects the analogy of government finances to household finances, since governments can, and do, print money.  Krugman points to long-term interest rates in the United States and Japan being at historic lows as vindication that the market says he’s right—markets understand deficits don’t matter in the short run (at least when a country issues debt in its own currency).

The “austerity view” holds that, like households and firms, there is a relationship between cash flow (tax receipts in the case of governments) and debt capacity, and that the “bond market vigilantes” will pounce without warning when “they” determine the relationship is heading in an unsustainable direction—raising the cost of borrowing, thereby accelerating the downward spiral.  In a word, Greece (a country trapped inside the Euro with only bad choices).
My personal opinion is that both views are wrong for two reasons, one common to each.
The Krugman view is probably right in the near term, that without increased and more intelligent stimulus, depression is a serious risk and perhaps inevitable.  But he is wrong to be too confident that current bond market behavior invites more deficit spending without simultaneous and credible long-term structural reform.  In my judgment, the two must go together, and it is the distinct privilege of governments with their own currencies to have such an option.  Individual currencies may have seemed inefficient, but they allow resiliency.
The austerity view is wrong in its headstrong rush to austerity now, unless the consequences of depression—crushing unemployment and the associated physical and social ills that go with it as well as lost competitiveness in the global economy—are deemed necessary medicine to escape worse outcomes from the debt trap.  But one consequence is also an explosion of the debt to GDP ratio that is such a focus as the denominator (GDP) drops, so it is a self-defeating approach even without consideration for the human affects of depression.
More importantly, however, both views are wrong in that they are predicated on the assumption that salvation lies in a return to exponential economic growth.  Such an assumption may have made sense in Keynes’ day when the economy and human population was a fraction of its current scale, but it lies in direct conflict with our scientific understanding (fact, not theory) of the “safe operating space” for the global economy on a finite planet.  
It is this simple but profoundly flawed assumption we will look back on from a future, uncomfortable perch, just as today we look with incredulity at the similarly flawed assumption that housing prices can grow exponentially ahead of incomes.  The analogous “income” from the biosphere upon which our economic system (and much more) depends is referred to as “ecosystem services”, and they are in factual decline according to peer reviewed science. 
The day of reckoning is coming, possibly in 2012 (there’s my forecast) and the implications for the debt are chilling.
If the assumption about new physical constraints on economic growth due to natural resource constraints (energy, water, quality soil in particular), and overflowing waste sinks (carbon in the atmosphere, phosphorus in rivers) is correct, then the arithmetic on our excessive debt levels leads to only one conclusion:  jubilee.
When companies get over-leveraged, they are forced to restructure their balance sheets.  When it comes to countries and people, there is no practical alternative to writing off unserviceable debts.  This jubilee will not be driven by ethical necessity alone, but by physics and arithmetic. 
Technological optimists will shoot down this “limits to growth” assumption on arguments of material efficiency and the inventive human spirit.  There is a chance they are right.  But those who argue that economic growth will naturally be decoupled from aggregate material throughput in a world of growing populations and rising living standards have yet to find facts that support their argument.  Such an outcome is at best uncertain.
For different reasons, the jubilee conclusion has a long historical precedent with complex and poorly understood moral and religious underpinnings (as are well documented in Graeber’s book).   2012 may be the year we begin to contemplate the inevitable: history repeating itself.
Happy New Year.
Reprinted with permission from Capital Institute.org
John Fullerton is a former JP Morgan managing director of global markets with a special focus on FI swaps and  derivatives. He is currently the president of the Capital Institute, and Impact Eco$nomic Investor and a leading thought leader on financial reform.

The Big Ecological Choice

by Capital Institute President John Fullerton

A $20 trillion “externality” appears to present civilization with its BIG CHOICE: economic destruction or ecological destruction, both with chilling global security implications.  Here’s why, along with a practical and more hopeful alternative to “Sophie’s Choice.”

Carbon Tracker has released an illuminating report, “Unburnable Carbon – Are the world’s financial markets carrying a carbon bubble?”[i]

The report nicely describes the potential “stranded asset risk” to resource company investors, and calls for a regulatory response on disclosure.  What the report does not make explicit is the BIG CHOICE:  Barring a miracle technology advance in the next decade (keep working brilliant scientists and entrepreneurs), if we want to avoid civilization-transforming and global  security threatening climate change, we must absorb a global security threatening $20 trillion write off (that’s 40 percent of global GDP) into our already stressed global economy.  Even if gradually spread over a decade or more, with partial offsetting value creation in sustainable energy industries, this is an unprecedented challenge.

First the essential facts as per the report:

  • The Potsdam Institute calculates that in order to reduce the risk of exceeding 2 degrees Celsius warming to a 20 percent chance (not all that comforting), the global carbon budget for 2000 – 2050 cannot exceed 886 GtC02.  Minus emissions in the first decade of the century, this leaves a budget of 565 GtC02 over the next 40 years.
  • Total “proved” fossil fuel reserves listed on public company balance sheets and State reported reserves is estimated at 2795 GtC02, nearly 5 times the remaining budget, implying 80 percent of these reserves should be left in the ground.
  • Seventy four percent of these reserves are State owned (Russia, China, Saudi, Venezuela, Iran, Iraq, etc.) or owned by private companies, 26 percent are owned by the 200 largest public energy companies.

According to James Leaton at Carbon Tracker, the market value of the top 100 public oil and gas companies and the top 100 public coal companies listed in the report exceeds $7 trillion, approximately 12% of the global public equity market.  Making a simple assumption[ii] that State-owned companies and reserves have an equivalent market value per unit of carbon would suggest the global market value of proved fossil fuel reserves equals $27 trillion.

A real cap on carbon emissions designed to limit warming to two degrees implies sovereign states and public corporations will need to strand 80 percent of their $27 trillion of proved reserves.  Rounding down, this implies a potential $20 trillion write off[iii].

The risk of systemic collapse of an already fragile, interconnected global economy is high if we incur a write off of this magnitude.  Fossil fuel intensive economies and investors would be severely damaged, no doubt triggering a deep and prolonged recession while the losses were absorbed.  Some, like Saudi Arabia where energy represents 75% of government revenues, and Venezuela (50% of government revenues) would face economic devastation leading to widespread social unrest.

Not surprisingly, the markets are ignoring this risk today as the Carbon Tracker report makes clear.  Why would they do otherwise when, as Bill McKibben pointed out, the US House of Representatives recently defeated a resolution stating simply that “climate change is occurring, is caused largely by human activities, and poses significant risks for public health and welfare”?  Why listen to the broad scientific consensus when we can invent a more accommodating (and remarkably partisan) physics?  No surprise that this week, American Electric Power announced that it is shelving plans for its $668-million, full-scale carbon capture plant at Mountaineer in West Virginia, the nation’s most prominent effort to capture carbon dioxide from a coal-burning power plant in the United States, “until economic and policy conditions create a viable path forward.”

Rising fossil fuel stock prices coupled with no game-changing promise of carbon sequestration technologies (the present reality) implies the markets assume we blow past the 2 degree warming limit into catastrophic climate change.

Is there an alternative to the BIG CHOICE between ecological destruction and economic destruction?  I think the answer is “yes,” but not with the simple happy talk of “CSR” and “growing the green economy.”  A viable plan will entail real costs, unprecedented commitment, and shared sacrifice.

Costs: The seminal “Stern Review”[iv] on the economics of climate change suggests that for a range of manageable costs centered around a 1% reduction of GDP growth, greenhouse gasses can be stabilized at 500 to 550 ppm by 2050.  While this modeling exercise is highly complex, it contains at least two fundamental flaws.  First, it presumes 500 ppm is consistent with the 2 degree goal, when the scientific consensus, propelled by increasingly disturbing new evidence of climate change, is calling for a limit of only 350 ppm, what Bill McKibben calls “the most important number in the world.”[v] And second, it appears to ignore the $20 trillion stranded asset write down and associated economic spillovers by assuming carbon sequestration capabilities will allow us to continue burning fossil fuels largely unabated.

I can only speculate on what portion of the $20 trillion stranded cost potential will need to be incurred.  It will depend on the success of carbon sequestration technologies (unknowable), and their cost (also unknowable).  But it will not be cheap.  Prudence suggests we should plan to incur at least half of these costs, still a profound multi-decade economic challenge.  We must also determine what combination of caps, taxes, and regulation will best manage the difficult carbon-limiting prioritization decisions among coal, various qualities of oil, and gas, and among the resource bases of sovereign states (with armies) and multinational corporations that we decide to burn, all having profound financial, political, social, and security implications.

Unprecedented commitment: At the core, our challenge and our greatest chance to mitigate the most horrendous consequences of the BIG CHOICE boils down to a capital allocation decision.  We must of course invest aggressively in the “green economy” of clean technologies including carbon sequestration, energy efficiency, and alternative energy.  Indeed this process has begun as documented by Ethical Market’s Green Transition Scoreboard[vi], which now documents over $2 trillion of private sector investments in, and commitments to, the “Green Transition.”  We must accelerate low technology paths such as avoided deforestation and grassland restoration[vii] to sequester carbon.  But we must also remove subsidies and divest from the destructive fossil-fuel- based energy, transportation, and industrial agriculture systems, and from the destabilizing and counterproductive speculation of the Wall Street financial system.   Only if we marshal unprecedented private and public resources to the great energy system transition can we hope to manage the BIG CHOICE.

Shared sacrifice: It’s time for true leadership around shared sacrifice.  This must start with the richest half billion people, less than 10% of the human race, whose consumption and investment decisions will determine the fate of civilization.  It’s time we awaken to the burden we bear.  Seeking justice, our children will ask – What did you do, once you knew?

[ii] This assumption is somewhat flawed because the market capitalization of a resource company should and usually does exceed the present value of its “proved reserves” because as a going concern, it is expected to create incremental value beyond its current reserves.  However, my assumption remains conservative because it also ignores all “unproved” reserves whose values are only partially reflected in company valuations, and ignores reserves held by all private companies and public companies not in the top 100 lists.  World recoverable reserves certainly exceed by a wide margin, some argue by multiples, the current quantity of “proved reserves” on the books, meaning the total potential for stranded reserves is far greater than indicated here.

[iii] Yes this analysis ignores the potential of carbon sequestration technologies, but they are probably at least a decade away and uncertain.  It also probably overstates the sovereign value of reserves, given the widely held belief that some governments overstate their reserves for political reasons.  But it also ignores the value of many refining assets, power plants, shipping, rail, and pipeline infrastructure that will be devalued if we decide to leave fossil fuels in the ground in order to limit carbon pollution.  It ignores the value of all private and smaller energy companies.  It ignores the value to dependent governments of all associated production and consumption tax receipts associated with fossil fuels which have tremendous economic value.  And, it only achieves an 80 percent confidence that we don’t exceed the 2 degrees warming target. Overall, we believe the $20 trillion estimate of aggregate economic exposure is reasonable.

John Fullerton is the Founder and President of the Capital Institute and former Managing Director at JPMorgan overseeing global capital markets, derivatives and swaps.

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Impact Investing: Eco$Models that Work


“As an ‘impact investor’ in Grasslands, one of the true, unanticipated delights has been the amazing quality of the people the project has attracted. By connecting one’s investments with, and in the process building life experiences and careers for, real people doing real wealth creating work connected to the land, an investor experiences a profoundly different meaning in the word “value” than experienced when picking a good hedge fund to invest in. This is what we mean by the “purpose of capital” at Capital Institute.“

John Fullerton, President of Capital Institute details the impact CI’s capital investment is having on Montana and South Dakota eco-ventures.


From Capital Institute:

Meet the Grasslands Ranchers, our second installment of the Grasslands Story, a project of the Capital Lab’s Field Guide to Investing in a Resilient Economy, illuminates the talents and eloquence of our growing family of Grasslands ranchers. Here they talk about what inspires them and what they struggle within their daily lives, their insights into holistic management, and their understanding of how their work is contributing to the healing of the land and the rural communities in which they live.   The Grasslands photographs that illustrate this update were taken by Capital Institute Fellow David Nicola on a recent visit to the South Dakota and Montana ranches. 

Reflections on Investing in Grasslands from Capital Institute Founder John Fullerton

As an “impact investor,” one of the true and unanticipated delights that has come with our association with the Savory Institute and our management team led by experienced Holistic Management practitioner Jim Howell has been the amazing quality of the people the project has attracted.  A “cowboy ethic” is still alive and well in America, and no doubt throughout the world. It is a combination of the salt of the earth values of integrity, fairness, and hard work, combined with an enlightened ecological awareness and commitment to care for the land and the wildlife.  Some prefer the term “pastoralists,” the vast grasslands equivalent of the permaculture farmer.  

As you will see from the comments below, Grasslands is building a team of truly great people making it happen every day on the ground.  Some quite young, some less young.  Like we see with the new breed of organic farmers, there is great hope in the enthusiasm of the next generation to be smarter than us old folks.  Such hope is made a reality by our young team working on Grasslands ranches this summer.  I imagine this can be true in finance as well some day, when finance rediscovers its proper purpose in the economy.  This is likely to come with the next generation as well, rather than from mass epiphanies in the old guard.  

I consider it a real privilege to know my Grasslands colleagues, and to have the opportunity to work with them and learn from them in the years to come.  And I don’t just mean learn about managing cattle!  This is the kind of “value” that does not show up in the quarterly statements of one’s investment portfolio.  By connecting one’s investments with, and in the process building life experiences and careers for, real people doing real wealth creating work connected to the land, an investor experiences a profoundly different meaning in the word “value” than experienced when simply picking a clever hedge fund to invest in.  This is what we mean by the “purpose of capital” at Capital Institute.   — John Fullerton, Director, Investor, Grasslands, LLC

 From www.CapitalistInstitute.org – Building a Resilient Economy


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Jobs: Can CEOs Lead?

by John Fullerton

Jobs. Depending on how you count, the challenge is 7 to 10 million net new jobs in the United States over the next 5 years or so from a current base of about 130 million.  A five to seven percent increase, the sooner the better.  Here’s how.

First, we need to break the challenge down into two pieces:  emergency triage, and long-term structural reform.  The case for emergency triage is clear; this recession is different, for the reasons we are all familiar with [1].

Even if there were the political will and leadership in government for a second larger stimulus, which there’s not, the government’s ability to do what it takes has been compromised by the Wall Street induced financial crisis.

We need a hero.  We need leadership from the only sector that has both the ability and the means to make a difference.  Big business.  To suggest I’m naïve about this proposal is to be naïve about the predicament we are in, prospects of a double-dip recession being merely the near-term cyclical threat.  This idea crystalized for me upon reading about AT&T’s pledge to repatriate 5000 call center jobs (about 2% of its workforce) as part of its opening bid in negotiating with the Justice Department over its proposed T-Mobile acquisition.

Instead of whining about confidence and regulatory uncertainty, big business, which is living in the relative luxury of big business, correcord profitability on the back of decades of labor productivity gains that are at the root of the problem, simply must lead.  Big business depends on recovery in the largest economy in the world.  It’s in its self-interest to be, dare I say, patriotic.  Bill O’Reilly can get the competitive juices flowing in what he will coin the “Corporate Patriots and Pin Heads” segment of his show.

Generalizations are unfair.  But exceptions notwithstanding, big business means mature industries where the game is primarily growth through acquisition and cost rationalization. In addition to many strong attributes, big business is good at exploiting its scale advantage by eliminating jobs or outsourcing them in the name of “productivity improvement.”  Time to think outside the box.  The last man standing does not mean the last man thrives.

The Fortune 500 employ about 18 million people according to my research.  They can if they chose productively increase employment 5% and create low-cost intern programs for unemployed high school and college graduates equivalent to another 5% – 1.8 million jobs and 1.8 million internships within a year, at no harm to profit margins while generating numerous long-term corporate benefits.  Here are just a few ideas for how to accomplish this:

  • Reverse at least temporarily the growing (and unsustainable) wealth gap to provide funding for the new jobs.  Why not a three-year compensation cut of 3% for all employees earning over $250,000, 5% over $500,000, 7% over $1,000,000, 25% over $5,000,000.  Offset with some deferred stock since shareholders will be long term winners too.  CEO’s should compete to be bolder and show us real leadership.  Remember, some of our sons and daughters have given their lives for our country.  Talk to their families about sacrifice.
  • Job share and shorter work weeks.  See Germany for example.
  • Solicit ideas from Wall Street’s “creative” wiz kids aimed at job creating without eroding profit margins, giving these talented but maligned professionals a shot at redemption.  Start with culture-shifting job creation programs in their own firms.
  • Or, tell Wall Street that it’s in their companies’ long-term interest to erode profit margins a bit now to be a “Corporate Patriots” leader.  Certainly Apple’s margins can absorb the impact of making something in the US – probably could even charge a premium for an “American Apple.”

Mid-sized businesses can probably achieve collectively the same as the Fortunate 500, but to be conservative let’s assume only half, another 1.8 million jobs and internships.

There’s your “stimulus program” that creates over 5 million jobs within a year.  Add some politically feasible stimulus initiatives such as an employment tax credit to grease the wheels and funds to prevent teacher cuts and you have real “animal spirits” catalyzed by the human spirit.

Government policy should concentrate on one task: stimulating the critical long-term structural reform that the new economy will require in order to meet the profound 21st century challenge of absolute resource limits.  For starters:

  • Reexamine the principles of our global trade philosophy to reflect the reality of absolute advantage that comes with the free mobility of capital in contrast with theoretical “comparative advantage” that requires assumptions that don’t exist in the real world.  What is good for General Electric may not be good for America.
  • Develop a strategy to build economic resiliency, which may come at the cost of our obsession with “efficiency.”  Systems can be too efficient and collapse (see finance). The decentralization of food and energy production to sustainable systems is job one.  Eliminating fossil fuel and agriculture subsidies is the place to start.  Big challenge worthy of political capital, vital payoff.
  • Focus on stimulating the private sector creation and expansion of small business where 65% of the jobs are and over 100% of net new job creation comes from.  Eliminate big business corporate welfare.  If there’s no screaming and no stock prices of certain companies going down, it’s not working.
  • Shift from promoting an “ownership society” aimed solely at housing to an “ownership society” aimed at business enterprise, thereby truly democratizing wealth[2] and creating a nation of business owners.  Capital Institute and Jeffrey Hollender, co-founder of Seventh Generation are intrigued with the potential of cooperative models such as the Evergreen Cooperatives experiment in Cleveland under the inspirational leadership of The Democracy Collaborative and the Cleveland Foundation.
  • Create the infrastructure bank as contemplated and consider other public-private banking models with shared risk and reward in response to the banking system’s failure to support its vital public purpose.  Prioritize low or negative carbon infrastructure such as low-cost financing for energy efficiency investments.
  • Phase out the income tax on incomes below $100,000 and replace it with a carbon tax that escalates predictably over the next 10 years, reaching the equivalent of $12 per gallon of gasoline to cover the estimated indirect costs of oil consumption such as our presence in the Middle East.   Add a surcharge for “luxury carbon” usage such as in corporate jets, yachts, and yes, NASCAR racing.
  • Tackle the long-term structural deficits following the guidelines of the Simpson Bowels framework as a start, making ample room for significant new investments in education through far more dramatic reductions in our military budget.[3]

America can still lead.  American business has a critical leadership role to play, now.  Show us what leadership looks like.  Character is what we do when no one is watching.

[3] See “Debt Limit Nonsense” including Bush-appointed Secretary of Defense Gates’ comment that the Navy’s battle fleet “is still larger than the next 13 navies combined—and 11 of those 13 navies are U.S. allies or partners.”

John Fullerton is the President of Capital Institute and former managing director of JPMorgan Global Capital Markets & Derivatives.  Blog reprinted here with permission from Capital Institute.

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S&P Downgrade: A Good Thing?

Former JPMorgan Managing Director John Fullerton compares the current S&P credit downgrade to the days when JPM lost its AAA shine. He recalls that while it hurt the psyche and bruised the egos of employees, in the end, it made them better. John through his 18-year career at JP Morgan, managed multiple capital markets and global derivatives businesses, and was Chief Investment Officer of JPM’s venture investment initiative, LabMorgan. John also represented  JPMorgan on the contentious Long Term Capital Oversight Committee in 1997-98.

Only One Notch S&P?

by John Fullerton- Capital Institute

I recall when JPMorgan lost its AAA rating.  Those of us working there a long time felt the gloom of losing our specialness.  The rating agencies were right — the truth hurt.  Egos were stung.  And they were late, as they almost always are.

No different with the downgrade of US Sovereign debt.  Any rational, objective observer must conclude “too little, too late.”   Apparently, neither Tim Geithner nor even Warren Buffett can remain objective in this situation. Nor was the senior management of JPMorgan when it was downgraded. Blame the messenger is a time tested strategy.

 S&P’s full press release on the downgrade is available here.  The headline reads:

United States of America Long-Term Rating Lowered To ‘AA+’ Due To Political Risks, Rising Debt Burden; Outlook Negative

The press release the rating agencies should have released on December 18, 2010, the day after Congress approved an extension of the Bush Tax cuts, reads as follows:

United States of America Long-Term Rating Lowered Two Notches to ‘AA’ Due to Political Risks, Weak Leadership, Rising Debt Burden, Virtually Unlimited Contingent Liabilities, and New Constraints on Long Term Growth; Outlook Negative

 December 18, 2010

  • We have lowered our long-term sovereign credit rating on the United States of America to ‘AA’ from ‘AAA’ and affirmed the ‘A-1+’ short-term  rating.
  • The downgrade reflects our opinion, reinforced by the President’s capitulation on extending the Bush Tax cuts even on the wealthiest 1% of taxpayers, that Congress and the Administration are still not taking seriously the long term fiscal imbalances resulting from well understood demographic changes facing the nation, compounded by the $1.3 trillion hole (and growing) created by the Bush tax cuts at the same time the nation committed an estimated $3 trillion (including long-term health benefits and interest burdens) to fight two wars, and by the impact of the financial-industry-induced balance sheet recession which has exploded annual deficits to unsustainable levels.
  • More broadly, the downgrade reflects our view that the effectiveness,  stability, and predictability of American policymaking and political  institutions have dangerously weakened. Indeed, we observe a nation without strong leadership and virtually ungovernable at a time when restoring economic vibrancy and long-term fiscal prudence is essential.
  • Furthermore, the recent financial crisis and the weak government response in addressing meaningful financial reform, and the ongoing success of financial industry interests in weakening what reform provisions were enacted, necessitates a fundamental rethinking of the contingent liability associated with the government’s debt rating.  Nothing has changed that will prevent the government from having to underwrite the liabilities of the still oversized, misguided, and irresponsible financial industry at a time when its ability to do so has been severely weakened.
  • The outlook on the long-term rating is negative. We might lower the long-term rating to ‘AA-‘ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new  fiscal pressures during the period result in a higher general government  debt trajectory than we currently assume in our base case. 
  • In fact, our base case of a stable 3% long-term growth rate already looks suspect, and our low case fails to anticipate any future crises despite an increasingly uncertain planning environment, significant risk of the euro-zone breaking apart with unpredictable implications for the US economy, and increasing likelihood that natural resource limits to growth, and negative feedback from overuse of waste sinks will increasingly crimp the long-term growth potential of the economy.
  • We note the irony of one of the rating agencies playing the role of the adult in the room here, given our recent failures with disasterous consequences that directly lead to this action today, and our conflicted business model which we have chosen not to touch.  But sovereign ratings are pretty easy compared to CDO squareds, and this call is a no brainer.  Trust us.  In fact, history will show we are late and timid on this one like we always are.