The green industry just stepped into this new decade of revenue driven growth.

There is an interesting game to think about whether the theory of Adam Smith is still the main governing principle?

Any game converges to an optimal result by each individual member acting in their own interest. Many, including John Nash questioned its applicability, adding that a stable state may be acceptable by the members, as long as nobody wants change. Groups may decide that they act together like in the case of carbon reduction. There is a single case, when that invisible hand still rules. It is a loss of money and interest rates of a subgroup.

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Copyright© Miklos Szegedi, 2022.

What Adam Smith’s thinking implies is that nobody wants less than the median. What if a group decision increases the average GDP by giving more to a few, but it reduces the per capita contribution of a subgroup? That group will simply not participate by Western standards, and they will leave the game.

If an equilibrium is set, people won’t accept less. This is the thinking behind phenomena like Brexit, chips shortages, or US withdrawal from significant international agreements. It is too big to fail, but also not too small to suffer. This is the case with carbon reduction.

The two theories align well with this convenient explanation. An average is higher than the median, if there is significant passive income and fixed costs like interest payments. If lower earners leave, the average cannot be maintained. Inflation builds and the GDP growth erodes like soil in the rainy season.

The difference in this case is that Smith deals with a flow of money, and Nash explains phenomena like large investments in energy triggering a short term spike in inflation. Nash fans begin the fixed investment climbing that mountain, and accepting some collaboration. Smith fans make sure that it is carried out to make profits overall by spreading the benefits to everyone.

The same thinking applies to green technology. It is neat, if it helps everyone. However, it is not too small to suffer. People will opt for their gas engines, if they simply cannot afford an electric one anymore.

The author was considering building a solar farm in Southern California. The risks of the project were higher interest rates, and liquidity. The sun is there. However, what if California or Nevada invests in nuclear plants and just attaches them to the grid? What if somebody manages to generate fusion power without side effects?

Will nuclear energy fuel the millions of electric cars manufactured? The answer is probably not. Nuclear power is extremely cheap but it has extremely high fixed costs. It needs expertise, equipment, so it is concentrated. It will likely become a monopoly in the area where it is built. Grid is still a significant part of your energy bill.

Nonetheless, countries with nuclear plants complain that they cannot sell energy cheaper, since the grid is priced for gas plants. The grid is a monopoly. You may want to consider building parallel grids. That would make remote nuclear power less efficient in money, energy, and labor. Solar and wind have higher unit costs, but they can be built by different companies. Their price can fluctuate more as a result. They can be local. The competition will probably keep their prices at bay, and they will set the price for electricity in the grid for cars in the long run. Nuclear plants and their grid may cash in the economic rent.

It is interesting how the green industry took off. Governments subsidized the technology for a long time helping it to mature. It was important, so that the risky non-investment grade research and development process is carried out.

Interestingly, the logic above shows that CO2 emissions will eventually be solved by market principles. As electric vehicle demand took off, existing financing was split between the E(lectric) and O(il) industries to replace amortized assets. Gas distribution will become more expensive making electric cars more and more attractive. Why?

Gas technology was allowed to improve for a long time with ever lowering costs and better efficiency. Electric disruption affected this. The author remembers the $2-$3 per gallon prices when he moved to British Columbia in 2008. Nowadays, it is almost $5 a gallon in California.

This proves that you should not enforce carbon reduction. Electric is cheaper, if markets move the prices, gas would not get more expensive, they would compete and be efficient on $2. Those, who are stuck with old gas guzzlers, cannot switch to shiny Teslas. They keep green progress back, and they keep prices high together with inflation and interest rates

There are many retirement funds that will hold both types of E and O energy assets. These funds will become activist investors, to protect their investment. They will not just push for wider oil margins but also protect their property investment on low plains, or attractive farmlands. What if they do not? Their extra gains on energy will get lost on real estate by floods, hurricanes, and people moving due to higher insurance prices.

Carbon quotas may slow down progress at that point. Quotas may keep prices high. Some companies may hide government support encapsulated in quotas making the time for green competition hard.

Quota payments will act as an excise tax, a kind of “license” that increases entry barriers to energy markets. O companies that have quotas will have more proprietary knowledge, better efficiency, government influence, and a stronger market presence. They will be able to compete on the E market as well raising green energy prices. Higher prices would keep interest rates higher, deterring and slowing green investment.

It is better to combine the securities of O and E industries in retirement savings.