What Is Climate Change Anyway?

Karl T. Muth examines whether the mere belief in climate change - regardless of the science - is enough to move markets.

The climate change debate is fascinating to me because it involves groups of people who, within-group, tend to have relatively homogeneous beliefs. As someone who does not care very much what the temperature of the earth is in 100 years, I’m more interested in where to invest my money in the meantime. And, if your interests are similar to mine, your focus should be on the beliefs of groups, rather than which group is right.

There will almost certainly be fluctuations in the world’s climate over the next 100, 500, and 1,000 years. There always have been (in past periods of 100, 500, and 1,000 years). It would be remarkable, and perhaps alarming, if there were no fluctuation in the world’s climate during these periods of time. There will be winners and losers from these fluctuations – some people will enjoy unprecedented harvests, others will suffer famines and floods.

To me – and others interested in investing in climate change – these effects are difficult to predict. I’m not sure enough where retaining walls will fail or floods will persist to invest in real estate on that basis. I’m not sure enough to invest in which areas’ storms will become more violent or which areas’ shorelines will become more picturesque. But I’m sure that what people think will influence the desirability of things.

In this sense, the idea that the world will get warmer, that sea levels will rise, and so on is like the belief that tulips will be worth more next month than this month or the belief that a dot-com technology stock can only go up. It does not matter whether these things are true. It only matters how many people believe they are true on the day you sell. That’s why the prevalence and persistence of these beliefs matter.

Much of the investment in “clean energy” and similar technologies comes from not only this “groupthink inertia” but also from government programs, policies, and subsidies that add to this momentum. In other words, if someone said, “hey, just kidding, this climate change thing should be way lower on our list of priorities” tomorrow, it wouldn’t matter, because now both public-sector and private-sector investments are aligned with this investment philosophy.

People concerned about climate change are often quick to clarify that we do not know with precision what is happening with the climate or precisely where it will end up. Even the supposedly-highest-precision predictions tend to be models that output rather broad ranges of possible global temperature changes. However, the investment strategies of people investing in these concerns are more precise. From what I can tell, they tend to make the following assumptions.

First, that fossil fuel costs will either naturally (through market forces) or through cartel effects (e.g. OPEC) or through foreign policy changes (e.g. war) or through public sector action (e.g. taxes, punitive tariffing, etc.) become vastly more expensive than they are today (we know reserves are vast, discoveries are commonplace, and the actual supply of fossil fuels is centuries from true scarcity). Second, that effects on things like real estate values will be slow but effects on things like preferred sources for power generation (despite these projects requiring immense amounts of capital) will be relatively fast. Third, that consumer preferences will shift to favour products and services that have lower perceived environmental impact without penalties or incentives.

I don’t believe any of these three predictions is true. However, it does not matter if I – or any other lone investor – believes these predictions have merit. It matters, instead, how many other investors believe these predictions have merit. In other words, climate change itself, from an economic perspective, may be a self-fulfilling prophecy. Those who dismiss climate change as “merely a belief” miss the point entirely – like the belief tulips will be more valuable tomorrow, it need only be a belief to have enormous market effects.