Before listening to Al Gore speak at Columbia's World Leader's Forum on Monday, I scribbled down the following question in my notebook:
"Is the paradigm of short-sighted markets equipped to handle the long-term energy issues related to global warming?"
Long before the post-speech question and answer session, Gore addressed my question, buttressing his points with vivid details about the absurd nature of present-day markets.
Gore's general thesis was this:
(1) Capitalism, which he defined as an incentive-driven open-market economic system, is the best economic structure we have. It fuels innovation, creativity, and technological advancement.
(2) However, capitalism is broken. The aspiring capitalist aspires towards incentives that are fundamentally distorted because they are biased towards short term goals. In other words, the time horizons of are far too short. He offered up a number of examples of this:
- Money managers and CEOs operate in a world of quarterly reports. CEOs of major companies were asked the following question: Would you invest in something that would increase your profits over the next fiscal year, but cause you to fall short of your quarterly earning target? Eighty percent responded no, preferring to achieve quarterly earnings goals instead of making the prudent long-term investment.
- Regulators recently tried to change the way stock markets operate by forcing each offer to buy or sell a stock to remain open for one entire second. Traders went into an uproar, and the reforms were never instituted.
In a world where things are evaluated on the time-scales of milliseconds in the case of stocks, or months in the case of corporations, there is no room for long-term value assessments.
What's the value of putting 90 million tons of carbon into our shared atmosphere each day? If you think about the next few years, carbon assets (oil companies, car companies, aviation, etc...) are incredibly valuable. However, that value ignores the future environmental destruction, political instability, and general economic calamity that unchecked carbon emissions will generally cause.
Gore termed such investments sub-prime carbon assets, drawing an intentional parallel with the now infamous sub-prime mortgages. In the same way that sub-prime mortgages were valuable as long as the housing bubble remained intact, sub-prime carbon assets are valuable as long as the global climate bubble, our tenuous atmosphere, remains intact. Once that bubble fails, releasing 100's of millions of climate refugees, catastrophic storms, devastating droughts, it will seem infantile how we now indiscriminately dump greenhouse gases into an open atmospheric sewer.
Any savvy investor realizes that this is true, but markets are structured in such a way that does nothing to incentivize long-term investments. Market forces, the most powerful vehicle of change in the world, can address the climate crisis, but only if they can look tens of years into the future - a far cry from the second-by-second existence of the modern trader.