Financial markets are betting against the future of the planet. This won’t end well

Imagine you’re a stock market investor or an analyst whose job it is to advise those investors. How do you put a value on the shares of a publicly listed oil company? You can estimate the value of the skills of the company’s engineers, managers and other employees.

There’s the brand, reputation and the culture of the company to factor in too. There’s also the worth of its equipment and various physical investments to consider.

Yet the bulk of the value of any oil company inevitably derives from its reserves of the black stuff (along with gas and coal) in the ground; assets that are expected to be extracted and sold over time.

But what if you knew that the company would never be able to get these assets out of the ground? What if they were destined to be “stranded”? What would happen to the value of the oil company then? 

Some analysts – including the Bank of England – are urging financial markets to start thinking much more seriously about the possibility of tens of trillions of dollars of “stranded assets” in the energy sector and the profound implications for share prices.

Because if governments around the world deliver on their promises to decarbonise their economies and limit the rise in global temperatures this century to 2 per cent above pre-industrial levels, then those assets really can’t see the light of day. Either they will be forbidden from being sold, or there will be no demand for them because we will have new clean means of energy production.

But the lure of short-term profit has a way of obscuring this kind of logic with impenetrable smog. A 1991 public information film produced by the global oil giant Shell has come to light. The video warns explicitly about the extreme weather, floods, famines and climate refugees that are a likely consequence of global warming. The film also noted that the science of climate change was “endorsed by a uniquely broad consensus of scientists”.

Yet none of this stopped Shell, over the following two decades, lobbying against concerted government action to curb carbon emissions and investing heavily in further fossil fuel extraction. “Shell told the public the truth about climate change in 1991 and they clearly never got round to telling their own board of directors,” notes Tom Burke of the environmental think tank E3G.

The lesson of Shell’s film is that it’s naïve to imagine oil companies will take unilateral action that will negatively impact their share price. But what about investors? Might they wise up, force a correction in asset prices and drive a change in corporate behaviour? That increasingly seems naïve too. At the moment the financial markets are assuming the energy industry’s fossil fuel assets will be extracted and burned, not stranded.

The United Nations Paris Agreement on climate change, signed in December 2015, was hailed by the environmental campaigner Al Gore as the moment when “the community of nations finally made the decision to act”. But there has been no fundamental readjustment of energy stock prices since then.

Indeed, the imminent flotation of a tranche of Aramco, the Saudi state oil giant, is widely expected to create the most valuable company on the planet.

The state of politics in the most intensive per capita user of fossil fuels among the large advanced economies – the US – is hardly propitious either. 

It is true that a proposal for a simple domestic carbon tax has recently been presented to the White House by a group of senior Republican statesmen, including James Baker, George Shultz and Henry Paulson. 

And Donald Trump’s Secretary of State Rex Tillerson, a former boss of Exxon Mobil, has in the past advocated such a tax, which economists agree would provide an immensely powerful incentive for firms to reduce emissions.

But other elements of the Trump White House and the Republican Party are preparing to roll back the moves taken by President Obama to reduce US carbon emissions through a regulatory clampdown on energy firms. 

Scott Pruitt, the new head of the Environmental Protection Agency appointed by Trump, is a climate change sceptic who sued the EPA more than a dozen times when he was Oklahoma attorney general. Trump himself has dismissed climate change as a hoax, designed by the Chinese to disadvantage American industry.

Against this background, the markets are betting against substantive government action, whether in America or anywhere else in the world, to curb climate change. And they are also betting, indirectly, against the habitable future of the planet.

#climatechange #strandedassets

Sorry Jeanette Winterson but in lobbying against a business rates hike you’re asking the poor to sub

Are you rich and influential? Are you interested in lobbying ministers to water down or even abandon a tax change that will make you worse off? Then the first thing you need to do is find a human shield.

Whenever a long overdue overhaul of council tax is floated it is never long before a penurious little old lady rattling around in a giant house in the Home Counties pops up in the media as a compelling reason not to change anything. And now the business rates regime is being updated we have small independent retailers in well-off areas thrust in our faces.

One retailer in particular has featured prominently in this lobbying campaign. The novelist Jeanette Winterson has written that her luxury grocer-cum-deli, Verde & Company in east London, which started life during the Napoleonic Wars selling “oranges the size of cannonballs”, will have to close because of the revaluation of rates due in April.

Who could be in favour of poverty-stricken old ladies paying more council tax? What kind of monster wants to drive small shopkeepers like Winterson to the wall? But don’t be fooled. These are human shields, emotive propaganda case studies whose function is to sway public opinion, intimidate ministers afraid of losing votes, and, ultimately, protect the well-off from paying their fair share of tax.

The big losers from a revaluation of council tax would be the richest households in the country. And the main beneficiaries of the watering down of the business rates revaluation, which now seems to be in train after ministers have shown signs of losing their nerve, will be large firms and landlords in prosperous parts of the country.

Firms in well-off areas facing higher business rates, even large firms, do deserve our sympathy to some extent. It was cowardly for the Conservative ministers George Osborne and Eric Pickles to delay this revaluation, which had been due to fall in 2015, just before the election.

The last revaluation was in 2010. Seven years is far too long to wait between revaluations and relative rents have changed significantly in that time meaning startlingly large shifts in some firms’ ratable values.

Businesses of all sizes are entitled to better guidance than this over their future tax bills.

While it’s true as some have pointed out that over time the cost of business rate increases is borne by landlords rather than firms as rents adjust, it bears repeating: over time. And heaven knows this is a financial problem many firms do not need while they are also struggling with a sharp spike in imports due to the plunge in the pound in the wake of the Brexit vote.

Nevertheless the complaints are overblown. Winterson says the rateable value of her shop will rise from £ 21,500 to over £54,000. This implies she’s paying around £10,000 in business rates. But looking at the detail of the transitional relief scheme put in place by the Government this suggests her business rates bill will increase by 12 per cent from April to some £11,200.

A £1,200 tax increase is certainly not nothing (and her rates would continue to rise sharply over the next few years) but it’s hardly the obscenely punitive reparations bills presented by the Allies to Germany in 1921 either.

Moreover, it’s vital to grasp that Winterson’s loss is the gain of other firms in less prosperous areas since this is a revenue neutral revaluation for the Government. The total business rates tax take will not rise.

Indeed because of the delay in the revaluation, although she doesn’t acknowledge it, Winterson has been already been gaining financially in recent years at their expense.

The trouble with the coverage of this subject is that we do not hear from those firms who stand to benefit from the reform – and who stand to lose if the revaluation is delayed further or watered down. Why do we not see media case studies of a medium-size insurance company in the West Midlands, whose bills are supposed to fall by some 16 per cent? What about a manufacturer in the North-east which is due a 9 per cent fall in its business rates? Why are they any less deserving of our compassion? Regrettably, this represents a journalistic failing.

Yes, it’s tough being a modestly-sized retailer. But it’s easier in more prosperous areas. Winterson’s shop benefits from close proximity to some of the wealthiest workers in the world in the City of London; and hordes of tourists. That means more well-heeled passing footfall and, if she stocks fine products and runs her business well, higher sales. That’s why her rent is higher; other firms would be willing to pay top dollar to rent her prime retail premises.

By lobbying against the revaluation she’s effectively demanding that she pay a lower rate of tax than an equivalent grocer in a less prosperous town. This is Robin Hood in reverse: the poor being robbed to pay for the rich.

But perhaps no firms should pay business rates. Some argue that the tax should be cut for everyone, or even scrapped entirely. Yet let’s follow this logic through. Business rates bring in around £29bn a year.

That’s around 4.5 per cent of the entire tax take. If you get rid of that what else should be cut to make up the shortfall? The NHS? Education? Foreign aid? It would be nice to be able to reduce taxes on firms, especially small retailers like Verde. Yet one only has to look around to see that there are also other demands on our scarce public resources: more funding for mental health services, more money for social care, more support for refugees. And on and on the list goes.

Apologies Jeanette, but cannonball-sized oranges are not the only fruit.

#businessrates #JeanetteWinterson

If we want an adequate health service we will need to pay more tax

Imagine a large barrel that we pull apart, reconstruct and expand (at considerable expense) every year. Imagine we need to store a certain amount of precious liquid in that barrel. Now imagine that the amount of liquid we need to store each year is rising faster than the volume of the renovated barrel. The result is overspill and flooding, which makes everyone unhappy. Here we have a description of the NHS crisis.

Politicians have “protected” public spending on health since 2010. That means public spending on health has been rising in line with economy-wide inflation (unlike most other government departments, which have had to bear significant real-terms cuts). We spend more than £145bn of taxpayers’ money on health, around 7.5 per cent of our GDP. That’s up from just 3 per cent in the 1950s. NHS spending as a share of overall public spending is approaching 20 per cent, double the proportion of 30 years ago.

And yet there are reports of record A& E waiting times, warnings of “permanent winter” in the provision of health services and new plans for cuts. According to a BBC analysis, NHS managers around England are proposing to scale back hospital services in nearly two-thirds of areas.

What is going on? Why are we spending so much but still seeing such pressures? The answer is that the demand for services is rising faster than the new capacity of the NHS.

The UK population is ageing and older people, on average, have greater healthcare demands than younger generations. The proportion of residents aged over 90 has almost tripled since the early 1980s. The ratio of pensioners to the working-age population is projected to rise from around 30 per cent today to 37 per cent by 2040. By the way, this dependency ratio will go even higher if the number of new EU immigrants (who overwhelmingly tend to be of working age) falls sharply due to Brexit.

On top of this, heathcare inflation has outstripped general inflation since the NHS was founded and is likely to continue to do so as new drugs and high-tech medical equipment come onto the market. In short, the volume of liquid is growing faster than the size of our barrel.

Now imagine there’s a house next door. The volumes of liquid the neighbours need to deal with are rising too. They too have fast ageing populations. But they have built barrels which are much larger than ours. Germany spends 9.4 per cent of its GDP on public healthcare, France 8.6 per cent.

There are various ways we in Britain can address the problem of overspill. We can try and reduce the amount of liquid we have to deal with. We can take try to encourage people to adopt healthier lifestyles so they require less healthcare when they reach old age. Yet that’s not going to help much in the immediate term.

We can try to make the barrel bigger through driving productivity increases in the health service, making existing resources stretch further. But that’s easier said than done. And productivity increases are often unpopular. Nothing unites a community more effectively than a threat to close a local hospital.

Finally, we can, collectively, pay more in taxes to fund bigger increases in the overall size of the barrel each year. In next month’s Budget, Chancellor Philip Hammond is likely to increase public resources available to fund elderly social care, helping to relieve some pressure on the NHS. There may even be more money pledged for the NHS directly. But no one expects the Chancellor to outline the kind of structural upward shift in the national tax take that would be necessary to get us out of this bind.

To some extent this is a failure of political leadership. Conservative ministers have trumpeted real-terms protection for the NHS budget, while presiding over a severe de facto squeeze on funding. But the blame goes wider. As a society we’re in denial about this necessary trade-off between meeting a rising demand for healthcare and keeping tax rates at their current levels. And until this changes, expect the NHS crisis to continue lapping around our ankles.

#NHS #taxation