The IPCC Report: What Matters and Why.

The Biden administration is spending an unprecedented amount to combat climate change and, at the exact same time, not really doing anything to reverse our current disastrous trajectory. What does this mean for your portfolio?

The big story this week was the publication of a monumental report by the UN IPCC. Coming in at over 1400 pages, the UN's Intergovernmental Panel on Climate Change made for grim reading.

Helpfully, there has been A LOT of coverage (see here and here) so we won't reproduce it all but the general takeaway is that the world is running out of time to be able to stop the most horrific climate scenarios. Among other devastating conclusions: A 1.5 degree Celsius increase in temperature above pre-industrial levels is now nearly guaranteed by 2040, even with deep and rapid cuts in emissions.

Now, this isn't necessarily new: Warning after warning has been issued to the point where it can be hard not to have your eyes glaze over as you read yet another dire and dramatic set of climate predictions.

However, what is typically less discussed but was carefully detailed by the IPCC is that the countermeasures we are either already attempting or even considering to halt the warming planet are, to put it bluntly, irrelevant.

In other words, all of these headlines are just marginal improvements or, if we are being less kind, self interested climate theater.

The disappointments are many:

  • The June G7 meeting in Cornwall back couldn't collectively agree to phase out coal.

  • The US and the EU are somehow still unable to agree on carbon tariffs.

  • President Joe Biden's efforts to include climate change in his infrastructure bill have been whittled away to barely nothing.

  • Finally and most incredibly, this week the Biden administration pushed OPEC+ to drill for more oil thereby lowering energy costs for consumers but, of course, also incentivizing more oil to be burned.

At some point, regardless of how you feel about the importance, severity or likelihood of climate change, this near total failure of policy planning just underlines the futility of this entire drama.

Listening to yet another speech (or reading a 1400 page report!) that goes on about the "existential threat" facing our planet and our species is not a great use of time when we are conscientiously NOT addressing the problem properly.

So, what? Why care then?

Two conclusions for the discerning Pebble reader to hopefully give you a more useful framework to think about climate change and how it will impact your investing:

  1. There is something in economics called the "Jevons paradox." This paradox argues that greater technological efficiency for a resource does not necessarily curb its usage. Often, in fact, it encourages it. So, a better, more efficient engine can perversely incentivize fuel consumption. A lot of what we are doing to combat climate change risks falling prey to this classic problem and you should always ask yourself if a proposed policy will fall into this trap.

  2. The simple way to stop burning carbon is simple and has been obvious for decades: tax it. A carbon tax - putting a price on every ton of carbon - would very quickly incentivize our society NOT to consume fossil fuels and thereby lower emissions.

And when you look at our many, many climate policies, past and present there are two general takeaways:

  • They are not a carbon tax.

  • We are generally somehow subsidizing something more environmentally friendly rather than fundamentally addressing the carbon emission problem. This could be more electric vehicles, this could be rooftop solar panels, this could be making it easier to get permits for wind turbines but nearly all of them are really just tinkering at the edges of the problem rather than tackling it head on.

Now, these could be very good improvements to have and want! We are by no means anti-EVs or anti-solar. We are also not making a political argument. This isn't the fault of bogeyman Republicans or oafish Democrats. This is a collective failure of political will and vision.

But its not clear that subsidizing green industries with tax credits or regulatory breaks makes a lot of financial sense when they are in reality - per the IPCC's exhaustive report - NOT helping to actually combat the problem we (and they) claim is "existential."

There are two problems with this approach:

  1. These subsidies and policies and the speeches are actually distracting us - and taking up valuable time - from actually making the necessary very tough choices.

  2. Furthermore, in many ways these policies are creating a new industry and interest group very keen for the status quo to continue - albeit with slight alterations for their own interests. Electric vehicle makers want to sell you vehicles, not have you drive less or take public transport.

This puts you, the principled and prudent investor, in a tough spot.

For one thing, it means that regardless of your personal preferences or values you really only want to buy into the decarbonizing story if we are seriously tackling the issue. So, short of a serious and global carbon tax, stay wary.

Second, if you plan on buying a fund or a company that you think will gain from new or increased subsidies be careful to make sure a) that the subsidies are changing meaningfully and b) that the purported improvements are real and not purely the result of hype or wishful thinking.

Mistakes on either front can be very costly:

Exhibit A: The heavily polluting US S&P energy sector is up 33%+ this year to the S&P 500's 20%+.

Exhibit B: A lot of fine folks invested in clean energy ETFs after Joe Biden won the presidency.

Those investors were misled by the theater.

Those ETFs have had a brutal year and with good reason: we are simply not investing nearly enough to actually make the seismic changes that the we (and the climate) likely need and the industry - and the wider market - are brutally reflecting that fundamental truth.

The below chart could save you (or us) 1400 pages of reading the next time.


Have questions? Care to find out more? Feel free to reach out at or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.


    What Is Direct Indexing In 2021


    US Equities - A Rising Tide Lifts All Boats?