Who Is on First?

We spend a great deal of time thinking about secondary effects. Policy makers are concerned with primary effects, while we frequently make money by focusing on the knock-on implications of their decisions. For example, in California, government officials have implemented a low carbon fuel standard, which has replaced 3.0 billion gallons of diesel fuel since implementation with renewable diesel. It’s good for California, but likely not for the planet. State officials didn’t take into account that growing soybeans, which are necessary to make renewable diesel, is greenhouse gas intensive, with 2.7 tons of CO2 emitted for every 1 ton of commodity produced. Furthermore, given that the soybeans are likely to be crushed in the Midwest, the soybean oil needs to be taken by fossil fuel powered unit trains to California to be refined. The use of renewable diesel adds to higher food prices as crops are taken out of the food stream. Whether you believe rapid decarbonization is just and necessary, it is inflationary.

Many of the same dynamics are playing out in shipping. Recently, I saw headlines regarding the IEA’s call to eliminate all investment in fossil fuels today if we want to be at net carbon zero by 2050. The IEA is a body of unelected bureaucrats from fourth or fifth rate academic institutions at best. In other words, they are the same individuals who in the US might qualify to join the US Post Office if they could pass a civil service exam. We could cut emissions from shipping by 60% today – no fancy engines, no technologies to be invented and little capital destruction – by mandating slow steaming. There is no discussion of this alternative. I see the cost of new vessels rising dramatically to incorporate various fuel types. If you own recent vintage modern vessels, rapid decarbonization is a tail wind to your ships’ values. As an investor, I still feel very lucky.

We also experienced many moments of irony during the month. We attended a conference via Zoom where considerable time was spent discussing environmentally friendly propulsion systems for ships used to carry coal. We heard much hand wringing about rising lumber prices impacting the affordability of new housing. On May 21, the US Department of Commerce moved to double the tariff on softwood lumber imports from Canada. Last Thursday, we read an excellent note on the sustainability of agrifood commodities. Chocolate (Cocoa) is highly carbon intensive, with 12 tons of CO2 released into the atmosphere for every one ton of Cocoa produced. Palm oil is worse, with 13 tons of C02 released into the atmosphere for one ton produced. Will those substituting plant-based alternatives for red meat give up Chocolate, French Fries prepared in vegetable oil, and Impossible Burgers, all of which are terrible for the environment? We will be intrigued to see the reaction of voters to the zero net carbon philosophy when the secondary effects and the required sacrifices, at least when it comes to food, become visible.