Climate Change And The Impact Of Laudato Si by Bill O’Grady of Confluence Investment Management

Last week, the Vatican held a meeting of the mayors of some of the world’s largest cities to discuss climate change. This meeting was part of Pope Francis’s efforts to add to the discussion of climate change, which was the subject of a recent encyclical, Laudato Si. In this report, we will begin with our position on climate change, discuss the encyclical and try to measure its potential impact on the direction of climate change policy. As always, we will conclude with market ramifications.

Climate Change

Since we began writing the Weekly Geopolitical Report in 2006, we have mostly avoided discussing the topic of climate change, although we have been monitoring the issue for years. We did examine geoengineering1 a few years ago and have looked at El Niño2 as well. There are a number of reasons why we have been reluctant to take on this topic. First, we are not climate scientists and the science involved is quite complicated; in general, our concern was our inability to accurately evaluate the methods and conclusions. Second, the topic is highly emotional; usually, we are willing to delve into controversial topics, but, without clear scientific or political consensus on the matter, it was unlikely that we could add anything to the discussion. In fact, the lack of global consensus was behind our initial report on geoengineering; if a consensus failed to develop, states and others might be inclined to take matters into their own hands and use geoengineering methods to affect the climate.

If one accepts that climate change is mostly caused by humans burning too many fossil fuels, the problem is figuring out the best way to reduce that consumption. The temptation to “free ride”3 the cuts in consumption is very strong. Every nation can come up with good reasons why it should be spared from reducing consumption while other nations should bear the brunt of the change. There is no supranational body that can consistently enforce international law. Even if a supranational law is agreed on, enforcement, outside of either a hegemon leading the attack or a U.N. body creating an “international force” (for which there will be free riding), is almost impossible. Although treaties may be made, history shows that during recessions or other calamities, environmental rules will often be ignored in pursuit of growth. In addition, climate change probably has a stronger negative impact on future generations than those currently roaming the earth. The temptation is strong to force these costs onto the ultimate powerless (those who haven’t been born yet).

It is our perception that the consensus of both right and left-wing elites is that anthropogenic climate change is real and a major policy issue. Right-wing populists most strongly seem to oppose the concept and left-wing populists appear neutral.

Our position on climate change is similar to other policy issues; although we have opinions, we don’t view them as important to our primary task, which is operating in the financial markets. If policy is going to lean toward reducing greenhouse gases, it is our job to adapt our investing to this reality. In other words, we see our role as accurately determining the evolution of policy trends and investing accordingly. We don’t expect to be able to affect the direction of policy.

From this perspective, the Papal letter adds to evidence that sentiment is shifting toward anthropogenic climate change. However, Pope Francis’s perspective on this issue is fundamentally different than the usual discussions of this topic. And so, it isn’t obvious that his solutions will gain much traction. We would expect supporters of policy change toward reducing the consumption of fossil fuels will try to use the Papal position to support their goals. We suspect they will find a broader reading of the encyclical frustrating in that the goal of the letter isn’t to support a particular political or policy position. Instead, its goal is to change society at its roots. Thus, the encyclical will add to the commentary about climate change but, due to its lack of a clear policy direction, will have a limited impact on steering policy in the near term.

Laudato Si

Like most encyclicals, this one begins with a recap of related comments from other encyclicals and seminal Catholic documents. Unlike many Protestant religions, Catholicism holds that both scripture and tradition are sources of revelation and so it is important to show that previous popes and bishop councils have held similar positions. Of course, relevant scripture is quoted as well.

The key point of this encyclical is that environmental concern is simply one facet of a spiritual whole; disregarding the earth is part of general sin. In other words, the same sin that leads to abuse of the poor, the elderly and the unborn and the disregard for the powerless is also behind the environmental degradation that has led to climate change. However, this sin isn’t simply bad individual behavior; instead, its origin is found in the very organization of modern society.

Catholicism has never accommodated itself to the Enlightenment. The Enlightenment, which strongly influenced nearly all modern political, economic and social movements, contains several key ideas. First, the Enlightenment focused on relying on reason to determine truth. The scientific method is part of this process. Instead of following revelation or tradition in finding truth, these philosophers said that people should weigh the evidence and draw their own conclusions. Second, the Enlightenment philosophers argued that people should be able to find their own happiness; Thomas Jefferson’s “life, liberty and the pursuit of happiness” in the Declaration of Independence was quite similar to arguments made by John Locke in his Two Treatises of Government.4 The Enlightenment political figures tended to support democracy over aristocracy as a better way to expand people’s ability to find fulfillment.

In terms of economic relations, David Hume and Adam Smith, who laid the groundwork for classical economics, were both Enlightenment figures. Hume discussed, in his Treatise on Human Nature, the “is/ought” problem. Essentially, moralists were involved in telling people what they “ought” to do instead of observing what they actually did. What Hume and Smith observed in human nature was self-interested behavior. Hume postulated that self-interest was a powerful passion, so powerful that it could only be contained by the self-interest of others. In Wealth of Nations, Smith argued that economic behavior was driven by self-interest, and to get others to provide goods and services, it makes more sense to appeal to self-interest than to benevolence or duty. In other words, Smith and Hume advocated an economic system that relied on what they observed about human nature, not one that was dependent upon behaviors rarely observed.

The principles of free markets and democracy became powerful forces in the West. However, this does not mean they were completely accepted. There were two counter-reactions, traditionalists who tended to support the aristocracy and the Church, and radicals, who opposed the disparities brought by capitalism. The latter group found its best expression in Karl Marx and the Communist movement.

Catholicism rejects both communism and unrestrained capitalism as dehumanizing. It argues that both systems create disparities and divisions, and tend to treat humans as instruments instead of people created in

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