A Weekend in the Hamptons—A Good Excuse to Think About Energy Investing

Along with some real experts, I was fortunate enough to be asked to participate on a panel at the South Fork Natural History Museum in Bridgehampton, New York, on the topic of climate change, its impact on the east end of Long Island and what should be the local response to the problem.

I was also extremely fortunate to have spent part of the previous afternoon with Jesse Ausubel, Director of the Program for the Human Environment at Rockefeller University. Professor Ausubel was one of the main organizers of the first United Nations World Climate Conference in Geneva in 1979. His research, which covers a broad range of environmental topics, presents a very thoughtful and balanced view on many of the positive environmental elements taking place today as well as where there is work to be done. I would highly recommend Googling Jesse regardless of one’s position on environmental and climate change issues, if one wants thoughtful and balanced views on the topics. His work on marine life is stunning.

That afternoon with him had an influence on the prepared remarks below. While there are always investment implications in any expression of thought, the focus here goes back to some earlier and continuing interests of mine on this specific subject. This was a timely presentation though, as energy and climate change were key topics at the Krun G7 talks and highlighted in President Obama’s press conference following the meetings. Worth paying some attention to the topic, certainly more globally than the remarks below:

“Climate change is not a religion. It isn’t something to believe in or not. It is based on data over long periods of time, the analysis of which leads to some probabilistic conclusions about the degree, the source and the effect. Yes, it involves science. We are all scientists, as my daughter reminds my grandchildren every day. They observe, ask questions, reach conclusions, ask more questions and reach more conclusions. As she has said to them, ‘when you hear people say they are not scientists, they are saying they don’t have a brain…’

Our climate has always been changing. What we know is that, since the beginning of the industrial revolution, human activities have changed the chemical composition of the atmosphere, most significantly with additions of carbon dioxide. Changing what is in the air does very likely change the climate. In particular, we have added CO2 and notable amounts of other stuff that absorb and reflect radiation and, therefore, create warmer temperatures. How much warmer is of some question. The general conclusion—forget about the polarization that has taken place between a very large group who expect global warming and a small but loud group who don’t—is that we are at some defined risk of seeing significant changes in the climate, that, with reasonable odds, would appear to be caused by us—us defined as humans on the planet.

We can ignore the risk and go on with our lives or we can conclude that the risk is great enough not to ignore it. You can decide where you are on this scale. I am of the view that the risk of doing nothing and being wrong about that is too high. We need to respond to this tail risk. My view on the significance of being wrong is similar to Pascal’s wager. Pascal posited that even though one may be an atheist and absolutely not believe in a Heaven or a Hell, he should lead the life of a religious person…just in case he is wrong. The penalty is too great if he is. I think the risk for the planet is high enough to lead the life of an advocate for change and do what one can to raise the odds of a more positive outcome, whatever that is. We can’t afford to have been wrong, particularly for our children and grandchildren. 

We, the United States, have actually been working on this seriously for over a century, but particularly since Richard Nixon established additional agencies to respond to the risk of dependence on foreign oil, oil in general and the tripling of oil prices at the time, from $4 to $12 a barrel. The primary focus was on increased nuclear energy, but the sun always played a role. It was a different time as reflected by this quote from a Nixon radio broadcast in 1974:
… the scare stories that the American people will soon be paying a dollar for a gallon of gas are just as ridiculous as the stories that will say that we will be paying a dollar for a loaf of bread…’ Well, at the time…

So what does this all mean for folks on the East End and maybe elsewhere? It means that, if nothing else, you can take advantage of the fact that the government and businesses have accelerated the development and use of energy systems reducing carbon and other emissions approaching costs that actually provide a return on the investment in such systems. And, right now, the Federal government and New York state are offering rebates for the installation of energy efficient systems that do produce a good return, without even thinking about what good one may be doing for the planet. The Federal system offers a 30% tax credit against the full cost of putting in an energy efficient system. The state has a 25% credit up to a maximum of $5,000 of your state taxes. The problem is that the federal rebates are, at the moment, scheduled to disappear at the end of 2016. They may be extended but don’t count on it.

We installed a solar thermal system three years ago, which included cold start boilers and has been keeping us in hot water and producing a significant reduction in our energy bills. We need about four more years before the cash outlay after the rebate is fully recovered. That’s about a 14% return on the investment. It might take another year if oil prices stay where they are now. The return would have been about 9% without the rebate, which would have meant about a 10-year payback period. It is silly not to do this now. You can also find companies like Solar City that will do solar installations for you at no cost other than a sharing of the returns on lower utility costs and credits for the electricity you put back into the grid.

There are lots of other steps you can take to reduce your carbon footprint and other footprints as well that, in particular, have an impact on the waters that surround us—a primary reason why we are here. It may decrease the odds of global warming. But, even if you are an atheist when it comes to those words, whatever you do will affect the marine life and the quality of our oceans, regardless of whether ocean levels rise to a threatening level. While other changes can easily be adapted to, the impact on the ocean and marine life would appear to be one of the most defined problems from what we are putting into the air and into the ground. That water is most important to the life we lead out here and globally. We do need to break some habits. And, as the great 19th century sage, Rabbi Lipkin, said, ‘The loudest noise that can be made in the universe is that of the breaking of a bad habit.’ We can spend time on those habits and what can be done locally, after this panel ends.”

There was a lively discussion, which went on an extra hour beyond the intended end. The local community is getting activated on the east end and elsewhere. “NetZero” seems to be the focus locally, as well as from a growing universe of individual corporations.

Some folks may be thinking, “doesn’t this guy have more important topics to spend his time on?” I do have a few more immediate topics to focus on, and I am. Certainly, there are better things to do on a weekend in the Hamptons. However, this topic has worked its way into the investment world and the impact may be growing. Energy is a big enough sector to affect many portfolios. Technology and climate change have affected values. As we have said in many fora over the last nine months, and continue to believe, energy may be one of the most interesting investment sectors, particularly for active managers who can play all sides of the markets. It was a serious highlight at the Krun G7 talks, and the geopolitical environment makes it a sector where choices can be made. Pay attention.

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