Jul 31 • 24M

#179 The Flesh is Willing but the Mind is Weak

ESG, Building Models, BSNL Revival, and the Export of Outrage

5
1
 
1.0×
0:00
-23:44
Open in playerListen on);
Frameworks, mental models, and fresh perspectives on Indian public policy. Audio narrations by Ad Auris.
Episode details
1 comment

Global Policy Watch: Energy Is Flagging

Insights on burning policy issues from an Indian lens

— RSJ

Who do you think has a better long-term view of the world? An administration struggling to control inflation and rising oil prices, one that’s facing midterm elections with the lowest approval ratings, or large institutional investors projected to own about 20 per cent of all US listed companies by 2028?

I don’t know.

I mean, it is conventional wisdom that all that the likes of Blackrock, Vanguard and State Street care about is making profits on their investments. On the other hand, the government is expected to take long-term decisions in the interest of society. But when you own 20 per cent of everything, I would suspect you will conclude there’s no other way to maximise profits except trying to do good for everyone. I mean, there won’t be a lot of arbitrage left anymore in choosing specific industries or sectors. You will have to do ‘sabka saath, sabka vikaas’. No wonder ESG (Environment, Social and Governance) investing has been important for these large institutional investors. That ESG is now a critical agenda tracked by the board of every company because of these investors' efforts.

All good.

Now, let’s look at the incentives of political parties. It is to win elections. Everything else follows only after you have the keys to power. And elections in democracies are a permanent affair. There’s a key election of some kind happening every other year. Will a political party craft a policy that’s painful in the short run but good in the long run? They do, but it requires a combination of inspiring leadership or ideology, a looming crisis and a powerful communication strategy to walk on this difficult path. That’s rare. Instead, what you have is parties taking the easy, opportunistic way out while hoping it will somehow make sense in the long run. 

Two Roads Diverged

Here are two news items from last week for you.

#1: Democrats may be on the verge of passing historic climate legislation after all.

The $369 billion of climate spending in the Inflation Reduction Act that Sen. Joe Manchin (D-WV) announced on Wednesday includes funding for clean energy and electric vehicle tax breaks, domestic manufacturing of batteries and solar panels, and pollution reduction.

If the bill’s policies work as intended, it would push American consumers and industry away from reliance on fossil fuels, penalize fossil fuel companies for excess emissions of methane, and inject needed funds into pollution cleanup.

The bill would use tax credits to incentivize consumers to buy electric cars, electric HVAC systems, and other forms of cleaner technology that would lead to less emissions from cars and electricity generation, and includes incentives for companies to manufacture that technology in the United States. It also includes money for a host of other climate priorities, like investing in forest and coastal restoration and in resilient agriculture.

#2: Blackrock warns it will vote against more climate change resolutions

BlackRock (BLK.N) said on Tuesday it expected to support fewer shareholder resolutions on issues such as climate change in the current season of annual general meetings, as many proposals were too prescriptive.

While BlackRock said its view on the importance of managing climate risk remained unchanged and it continued to engage with companies over their efforts, a number of resolutions put forward at recent AGMs were too constraining on boards.

Among such resolutions that it said it could oppose were those requiring management to stop providing finance to traditional energy companies, or those requiring alignment of bank business models to a specific climate scenario.

Among votes that BlackRock has already opposed was an April 13 call for Canadian lender Bank of Montreal to adopt a policy to link financing with the International Energy Agency's Net Zero Emissions by 2050 Scenario.

While the US administration is going down the path of spending more on tackling climate change, Blackrock seems to be signalling a u-turn. 

What Led Them Here

So, back to the question with which we started. Who do you trust is taking a long-term view here?

Some context here will help. These moves have come on the back of an energy crisis facing the world today. Most of the commentary on this has attributed this to the Ukraine war and the sanction on Russia that followed. The general view is that this crisis will disappear once the war ends. How true is this? Not very if you look closely. Over the past many years, the energy inventory has been declining because the supply has held flat or gone down while the demand continues to be robust (except for the pandemic blip). The green sources of energy haven’t been able to fill the gap on the supply side. As we have come out of the pandemic, the global demand has gone up (though still below 2019 levels) while the supply isn’t keeping pace. This was even before the Russian invasion.

The reasons for this aren’t hard to locate. Conventional energy companies have found it hard to fund new projects because ESG investing norms have made the availability of capital difficult. The so-called ‘extractive industries’ are orphans in capital and debt markets. Most of the growth in energy supplies in the last decade has come from shales. A lot of money was put to work to increase the efficiency of pumping out oil from shales. The three big shale fields in the Permian, the Bakken and the Eagle Ford pumped out enough oil to not have anyone worry about supply shortages anytime in the last decade. But like all good things, we have depleted these fields at rates faster than predicted. There’s been hardly any capacity developed that has backfilled these fields elsewhere. And it is unlikely we will get a second-time lucky so soon in finding rich fields like them.

If the market were efficient, we would have seen capital find its way into funding newer sources. But the ESG overdrive led by the Big 3 index funds put up a barrier to that flow. And the energy companies that are making big profits now because of the high prices aren’t themselves putting money into conventional extraction. That would be seen as a negative in the market. So, even they are being constrained by the ESG norms. Into this decadal low in investment in production came the Ukraine war. Things have gone further south since. Europe needs Russian gas, and Putin is enjoying the gradual choking of the supply that will make things worse during the oncoming winter. Only last week, Russia’s Gazprom told its customers in Europe it cannot guarantee gas supplies because of ‘extraordinary’ circumstances. Heh!

Gazprom said stopping another turbine at the Nord Stream 1 pipeline would cut daily gas production to 20%, halving the current level of supply. It is likely to make it more difficult for EU countries to replenish their stores of gas before winter.

The Nord Stream 1 pipeline, which pumps gas from Russia to Germany, has been running well below capacity for weeks, and was completely shut down for a 10-day maintenance break earlier this month.

The European Commission has urged countries to cut gas use by 15% over the next seven months after Russia warned it could curb or halt supplies altogether. Under the proposals, the voluntary target could become mandatory in an emergency. On Tuesday energy ministers will meet in Brussels in an attempt to sign off the plans.

But numerous opt-outs are expected amid resistance from some member states.

To this, add that the US has been depleting its SPR (Special Petroleum Reserves) to boost supply and keep prices under control. Last week it announced another 20 million barrels were released from SPR. But this isn’t sustainable, and it is likely this is the last of it.

I don’t know about you, but I think the supply situation looks to worsen in the future. 

Evaluating the Responses

Now, look at the two news articles that we started with. After a decade of not adding real capacity to boost energy supply, starving investments in conventional energy, stupidly shutting down nuclear plants and going for investments in wind and solar that are by themselves energy and capital intensive to set up, we are here with two kinds of response.  

One is from the US government. Instead of finding ways to invest in the sector to solve this crisis is going the other way. Releasing special reserves, cutting taxes on gasoline, placing more restrictions on the conventional energy sector and planning to deficit fund more investments in green energy without a clear answer on how it will help with supply. These will only increase demand in the short term without any corresponding increase in supply to address it.

The other is from the face of greedy capitalism, Blackrock, who thinks we might have overdone the ESG investment thesis without fully appreciating the unintended consequences of starving the oil and gas sector of investments. Maybe the rhetoric against conventional energy has gone overboard without an immediate answer to the supply shortfall. So, some calibration is needed now. Else, there will be significant pain ahead with misallocation of investments and a deepening energy crisis. The poor and the developing nations are most affected by higher oil prices. And poverty is worse for climate change. More than fossil fuels.  

Those then are the two narratives. As London and NYC sweat in an unprecedented heat wave this summer, you know who will win the narrative battle.

The war will be lost though. 

Thanks for reading Anticipating the Unintended! Subscribe for free to receive new posts and support our work.


A Framework A Week: Building Models

Tools to help think about public policy

— RSJ

Last week I came across this piece on ‘Models as mediating instruments’ by Margaret Morrison and Mary S. Morgan. You should read the full chapter. The authors lay out the importance of model building in helping us learn about theories and how they might operate in the world:

Models are one of the critical instruments of modern science. We know that models function in a variety of different ways within the sciences to help us to learn not only about theories but also about the world. So far, however, there seems to be no systematic account of how they operate in both of these domains.

And then, they proceed to outline how we should think about developing models that function as autonomous agents and as instruments of investigation of the world. Here’s a short extract from their introduction to model building:

In order to make good our claim, we need to raise and answer a number of questions about models. We outline the important questions here before going on to provide detailed answers. These questions cover four basic elements in our account of models, namely how they are constructed, how they function, what they represent and how we learn from them.

Construction
What gives models their autonomy? Part of the answer lies in their construction. It is common to think that models can be derived entirely from theory or from data. However, if we look closely at the way models are constructed we can begin to see the sources of their independence. It is because they are neither one thing nor the other, neither just theory nor data, but typically involve some of both (and often additional ‘outside’ elements), that they can mediate between theory and the world. In addressing these issues we need to isolate the nature of this partial independence and determine why it is more useful than full independence or full dependence.

Functioning
What does it mean for a model to function autonomously? Here we explore the various tasks for which models can be used. We claim that what it means for a model to function autonomously is to function like a tool or instrument. Instruments come in a variety of forms and fulfil many different functions. By its nature, an instrument or tool is independent of the thing it operates on, but it connects with it in some way. Although a hammer is separate from both the nail and the wall, it is designed to fulfil the task of connecting the nail to the wall. So too with models. They function as tools or instruments and are independent of, but mediate between things; and like tools, can often be used for many different tasks.

Representing
Why can we learn about the world and about theories from using models as instruments? To answer this we need to know what a model consists of. More specifically, we must distinguish between instruments which can be used in a purely instrumental way to effect something and instruments which can also be used as investigative devices for learning something. We do not learn much from the hammer. But other sorts of tools (perhaps just more sophisticated ones) can help us learn things. The thermometer is an instrument of investigation: it is physically independent of a saucepan of jam, but it can be placed into the boiling jam to tell us its temperature. Scientific models work like these kinds of investigative instruments – but how? The critical difference between a simple tool, and a tool of investigation is that the latter involves some form of representation: models typically represent either some aspect of the world, or some aspect of our theories about the world, or both at once. Hence the model’s representative power allows it to function not just instrumentally, but to teach us something about the thing it represents.

Learning
Although we have isolated representation as the mechanism that enables us to learn from models we still need to know how this learning takes place and we need to know what else is involved in a model functioning as a mediating instrument. Part of the answer comes from seeing how models are used in scientific practice. We do not learn much from looking at a model – we learn more from building the model and from manipulating it. Just as one needs to use or observe the use of a hammer in order to really understand its function, similarly, models have to be used before they will give up their secrets. In this sense, they have the quality of a technology – the power of the model only becomes apparent in the context of its use. Models function not just as a means of intervention, but also as a means of representation. It is when we manipulate the model that these combined features enable us to learn how and why our interventions work.

The whole chapter and Mary Morgan’s book (The World in the Model: How Economists Work and Think) is a great tool for building models.  

Leave a comment


India Policy Watch: Hoping Against Hope

Insights on burning policy issues in India

 - Pranay Kotasthane

Earlier this week, the union cabinet approved a revival package for the ever-embattled Bharat Sanchar Nigam Limited (BSNL) worth ₹1.64 lakh crores. Let’s analyse this decision ground-up

Let’s look at the two stated aims. The first argument is that the presence of BSNL in the telecom market acts as a market balancer; it plays a significant role in providing services to rural areas and during natural disasters. The second argument is that the telecom sector is strategic; hence, BSNL will become the vehicle for the government to “promote indigenous 4G technology development”. In other words, BSNL will have to commission an atmanirbhar 4G technology that Tata Consultancy Services and C-DOT are developing. A part of the bailout—₹22,471 crores—is allocated for capital expenditure on this deployment.

For a moment, assume that both objectives are desirable. The question is, are there alternative methods to achieve the two stated objectives?

Given the positive externalities of network infrastructure today, government intervention in rural connectivity makes sense. But the instrument required to achieve this objective doesn’t require the government to produce this service by itself through a public sector unit. The same objective could be achieved by a government procurement contract which finances private sector players for capital expenditure on network infrastructure in low-density areas. Think of a non-coercive version of the Regional Air Travel Connectivity Scheme - UDAN, but for mobile connectivity. This method would likely be far cheaper than attempting to revive a government-run company that incurs losses despite playing a game in which the umpire also belongs to the same team. This would be beneficial for the people living in far-flung areas too. Why condemn them to slow 3G services of BSNL when the government can finance private players to provide 4G services instead?

Next, consider the strategic necessity argument. 4G was introduced in India a full decade ago. When the world (and India) is commissioning 5G connectivity, an Indian consortium has now done trials for home-grown 4G technology. Granted, that 4G is not going away anytime soon, but why should it now be shoved down BSNL’s throat?

To me, it seems like a classic error—a violation of the Tinbergen Rule, which we had discussed in edition #135. The rule says: use one policy instrument for just one target (or as few as possible). Burdening one instrument with several objectives often results in a system that fulfils none. In the current case, it means that BSNL can either be an instrument to connect remote areas or it can be a testbed for indigenous technologies, but not both. To expect it to do both would make things tougher for an already troubled entity. More important, it would be a waste of taxpayers’ hard-earned money.

Since allowing adversaries to manage your core networks is a strategic vulnerability, a better alternative would be to give domestic players a target for eliminating Huawei from their 4G networks over time. If the indigenous solution is any good, some players will consider opting for it. The second option is to support the indigenous 4G’s go-to-market programmes in other countries. Either way, the objective can be achieved without hoping against the BSNL hope.

Finally, a reminder. The cost to society for one rupee raised by governments in India is ₹3 (Marginal Cost of Public Funds). So, Indians will be incurring nearly ₹5 lakh crores. For comparison, that is nearly 10 per cent of RBI’s foreign exchange reserves in equivalent rupees. Is protecting BSNL really worth this kind of expenditure?

Share Anticipating the Unintended


Course Advertisement: Admissions for the Sept 2022 cohort of Takshashila’s Graduate Certificate in Public Policy programme are now open! Visit this link to apply.

All about GCPP


PolicyWTF: Playing with Fire Again

This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?

 - Pranay Kotasthane

A couple of weeks ago, a film poster depicting Kaali Maa began an outrage cycle. As it happens with frightening regularity nowadays, it culminated in a couple of FIRs being filed against the director. Forget the fact that the movie was released in Canada by an Indian citizen from Tamil Nadu; the FIRs were nevertheless registered in Delhi and UP.

It’s not worth spending time and energy on these Whack-A-Mole outrages. What concerns me more is the Indian High Commission in Ottawa’s press release. It read:

We have received complaints from leaders of the Hindu community in Canada about disrespectful depiction of Hindu Gods on the poster of a film showcased as part of the 'Under the Tent' project at the Aga Khan Museum, Toronto.

Our Consulate General in Toronto has conveyed these concerns to the organizers of the event.

We are also informed that several Hindu groups have approached authorities in Canada to take action.

We urge the Canadian authorities and the event organizers to withdraw all such provocative material.

In the past, the official Indian position would have been to play the matter down and leave the issue to the host country. It is unusual and disappointing for an Indian embassy to act as a messenger for religious groups in other countries. Canadian citizens of the Hindu faith aren’t Indians. This admonishment by an Indian government entity is out of place.

I say that the government is playing with fire here because acting on behalf of citizens of other countries—for whatever reason—is a slippery slope. There’s a reason that Indian immigrants are welcomed in many countries. Contrast that with China. The aggressive opposition by some Chinese immigrants against criticisms of the Chinese Communist Party in their host country ends up being detrimental to all Chinese immigrants. It’s in India’s interest that emigrants become trustworthy members of their host community. We shouldn’t go down the path China has.

Leave a comment


HomeWork

Reading and listening recommendations on public policy matters
  1. [Article] In the last edition, we had written about the Enforcement Directorate’s zeal to slap charges of money laundering. This week, the Supreme Court upheld its powers under the Prevention of Money Laundering Act (PMLA). In his latest column, Pratap Bhanu Mehta explains why this implies, “Rather than being the guardian of rights, the Supreme Court is now a significant threat to it”.

  2. [Podcast] In the latest Puliyabaazi, we take a long hard look at the consequences of emigration on India.

  3. [Article] How can the government intervene to reduce dependence on Chinese pharma APIs? Bambawale et al. explain.

  4. [Paper] Jonathan Haidt has helpfully combined all the latest research on social media’s impact on society in this one master document.