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Energy, pensions and banks: can we fix our broken markets for the long-term?

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Exposing the secrets of Britain’s energy giants and forcing them to put things right is suddenly in vogue, it seems.

Even Ofgem is at it. The regulator – described only recently as a “toothless tiger” by MPs – last week ordered the big six to hand back over £400m accumulated over the last six years as people switching suppliers left their old accounts in credit.

This follows the secretary of state’s threat to break up Centrica after evidence emerged of excess profiteering in its gas business, and Labour’s promise to tackle the secret self-supply of the big six and fix our broken energy market.

It’s not just energy either. Across other vital sectors of our economy, the political debate ahead of next year’s general election has moved from whether we need more transparency and competition to how best to achieve these goals.

In the pensions industry, the call for transparency is coming from the left and right alike. New requirements now mean funds must soon disclose details of all their hidden charges, and Labour has said it would cap these at 0.5%. The banking industry saw the introduction of seven-day switching last year, and all the main parties are promoting new challenger banks to disrupt the status quo.

But whilst greater transparency, competition and choice are to be welcomed, the current focus is on putting things right in the short-term. Yet the environmental and economic challenges that lie ahead demand markets capable of delivering for the long-term, too.

An obsession with the short-term

Political economist Will Hutton has argued that privatisation and an obsession with short-term share price performance has led to the undermining of research and development (R&D) and infrastructure investment across the energy sector. In trying to pin the blame on politicians, rather than addressing the structural problems at the heart of the energy market, Centrica merely typifies the ills of the industry as a whole.

We also know that the pursuit of short-term profit drove the reckless behaviour of banks and financial institutions in the run up to the 2007 financial crisis. The “I’ll be gone, you’ll be gone” mentality meant long-term risks were ignored.

And we now know that our pension funds are failing to account for the long-term risks associated with climate change. Whilst fund managers rewards are too often based on the last quarter’s performance, our savings continue to be funnelled into fossil fuel assets that are simply incompatible with a sustainable future.

Underpinning this chronic myopia is the failed structure of our modern markets – markets that have evolved to serve the interests of the few rather than the many. Decades of deregulation based on dogma; the advent of computer driven high-speed trading; increasingly dominant investment intermediaries whose interests are not aligned with our own – all have combined to disconnect us from our money, and create markets that cannot deliver the long-term outcomes that we need.

The risk of the current debate on transparency and competition is that it will fail to address this short-termism. In fact if all it does is make more short-term performance information freely available and encourage switching on this basis alone, it could conceivably make things worse.

What we need are markets capable of working in both the short and long-term. Transparency and choice must be accompanied by financial decision making that delivers the best returns over a genuinely long-term timeframe, and not just for the few at the top.

The emerging movement towards a more inclusive, sustainable and forward thinking capitalism offers some ideas as to how this might be achieved.

Fixing our markets for the long-term

One priority is reforming the capital markets to focus more on investment and less on speculation.

The high-levels of churn in today’s markets means shares are now often held for days or weeks rather than years. Returns come from second-guessing the market and running companies into the ground rather than supporting longer-term performance. For the public companies in question this makes it harder to build new infrastructure when all the costs come upfront and the profits only later.

Another is to ensure the financial intermediaries who manage our money actually act in our long-term interests. As things stand this often isn’t the case, even for pension funds who should be at the core of investing for our future. Linking the remuneration structures of individuals making investment decisions to long-term performance would help here.

And then there’s the opportunity to bypass intermediaries altogether. Technology may have been used to disconnect ordinary investors from their money in recent decades, but new forms of democratic finance such as crowdfunding now offer the chance to turn this on its head. By cutting out the middle man and directly reconnecting ordinary people to what their money is doing on their behalf, investment decisions will better reflect their values and longer-term interests.

Transparency and competition may be essential in fixing our broken markets, but they must be accompanied by a long-term perspective, too.

Bruce Davis is a founder and retail director of Abundance Generation, a fellow at the Finance Lab and a research fellow at Bauman Institute. This article originally appeared on the Abundance blog

Further reading:

Miliband promises ‘new culture of long-termism’ in banking sector

Transforming Finance: how can we fix our broken financial system?

McKinsey: a fifth of biggest banks may be sold or broken up

Functioning markets, functional democracy, sustainable economics and the rule of law

Can we have capitalism back now, please?

Bruce Davis is a founder and retail director of Abundance Generation, a fellow at the Finance Lab and a research fellow at Bauman Institute

Economy

Will Self-Driving Cars Be Better for the Environment?

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self-driving cars for green environment
Shutterstock Licensed Photo - By Zapp2Photo | https://www.shutterstock.com/g/zapp2photo

Technologists, engineers, lawmakers, and the general public have been excitedly debating about the merits of self-driving cars for the past several years, as companies like Waymo and Uber race to get the first fully autonomous vehicles on the market. Largely, the concerns have been about safety and ethics; is a self-driving car really capable of eliminating the human errors responsible for the majority of vehicular accidents? And if so, who’s responsible for programming life-or-death decisions, and who’s held liable in the event of an accident?

But while these questions continue being debated, protecting people on an individual level, it’s worth posing a different question: how will self-driving cars impact the environment?

The Big Picture

The Department of Energy attempted to answer this question in clear terms, using scientific research and existing data sets to project the short-term and long-term environmental impact that self-driving vehicles could have. Its findings? The emergence of self-driving vehicles could essentially go either way; it could reduce energy consumption in transportation by as much as 90 percent, or increase it by more than 200 percent.

That’s a margin of error so wide it might as well be a total guess, but there are too many unknown variables to form a solid conclusion. There are many ways autonomous vehicles could influence our energy consumption and environmental impact, and they could go well or poorly, depending on how they’re adopted.

Driver Reduction?

One of the big selling points of autonomous vehicles is their capacity to reduce the total number of vehicles—and human drivers—on the road. If you’re able to carpool to work in a self-driving vehicle, or rely on autonomous public transportation, you’ll spend far less time, money, and energy on your own car. The convenience and efficiency of autonomous vehicles would therefore reduce the total miles driven, and significantly reduce carbon emissions.

There’s a flip side to this argument, however. If autonomous vehicles are far more convenient and less expensive than previous means of travel, it could be an incentive for people to travel more frequently, or drive to more destinations they’d otherwise avoid. In this case, the total miles driven could actually increase with the rise of self-driving cars.

As an added consideration, the increase or decrease in drivers on the road could result in more or fewer vehicle collisions, respectively—especially in the early days of autonomous vehicle adoption, when so many human drivers are still on the road. Car accident injury cases, therefore, would become far more complicated, and the roads could be temporarily less safe.

Deadheading

Deadheading is a term used in trucking and ridesharing to refer to miles driven with an empty load. Assume for a moment that there’s a fleet of self-driving vehicles available to pick people up and carry them to their destinations. It’s a convenient service, but by necessity, these vehicles will spend at least some of their time driving without passengers, whether it’s spent waiting to pick someone up or en route to their location. The increase in miles from deadheading could nullify the potential benefits of people driving fewer total miles, or add to the damage done by their increased mileage.

Make and Model of Car

Much will also depend on the types of cars equipped to be self-driving. For example, Waymo recently launched a wave of self-driving hybrid minivans, capable of getting far better mileage than a gas-only vehicle. If the majority of self-driving cars are electric or hybrids, the environmental impact will be much lower than if they’re converted from existing vehicles. Good emissions ratings are also important here.

On the other hand, the increased demand for autonomous vehicles could put more pressure on factory production, and make older cars obsolete. In that case, the gas mileage savings could be counteracted by the increased environmental impact of factory production.

The Bottom Line

Right now, there are too many unanswered questions to make a confident determination whether self-driving vehicles will help or harm the environment. Will we start driving more, or less? How will they handle dead time? What kind of models are going to be on the road?

Engineers and the general public are in complete control of how this develops in the near future. Hopefully, we’ll be able to see all the safety benefits of having autonomous vehicles on the road, but without any of the extra environmental impact to deal with.

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Economy

New Zealand to Switch to Fully Renewable Energy by 2035

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renewable energy policy
Shutterstock Licensed Photo - By Eviart / https://www.shutterstock.com/g/adrian825

New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.

New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.

Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.

Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”

The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.

Zero net emissions by 2050

Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.

Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.

She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.

Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”

A worldwide shift to renewable energy

Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.

Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.

Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.

Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.

Sources: https://www.bloomberg.com/news/articles/2017-11-06/green-dream-risks-energy-security-as-kiwis-aim-for-zero-carbon

https://www.reuters.com/article/us-france-hydrocarbons/france-plans-to-end-oil-and-gas-production-by-2040-idUSKCN1BH1AQ

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