–Psst: this financial crisis solution might surprise you: hint, it’s taxpayers selling something they largely give away for free

Analysis by Mathew Carr

Sept. 29, 2022 (LONDON): Short sightedness is bad.

That’s what’s gotten us into this acute climate crisis.

It’s also to blame for the Ukraine war, because we didn’t think about investing more in clean energy when we knew it was the right thing to do.

Europeans suspected Nord Stream’s expansion would potentially give Europe’s biggest natgas supplier, i.e. Russia / Gazprom, too much leverage over energy prices.

The region should have simultaneously expanded other, cleaner, supplies, to compete with Gazprom, even though that would have cost more.

Europe could have added extra investment, say in 2016, after the Paris climate deal was signed in late 2015, which would have looked like peanuts compared with costs consumers and businesses are forking out today.

Could Have. Would Have. Should Have.

U.K. PM Liz Truss might not even know it yet, but perhaps the legacy of her self-inflicted financial crisis — her financial crisis solution, if you like — will be to make the British population think about the long term, not just the short term.

The trend to long-term thinking will then quickly spread beyond the U.K., invading many markets around the world. Perhaps, even the USA might stop worshipping only at the alter of the fast buck.

The financial crisis solution will place 2030, 2040 and 2050 higher, as governments and consumers set priorities in our minds.

First, Truss is apparently doing us a favour (I live in London, alongside about 12 million other increasingly angry people).

She’s protecting us from surging energy costs, which could blow up to $5,000 (£5,000) plus plus plus per year from $2,500 (they already doubled to that level, you see, so we the general population are already angry about this. After all, the UK government is part of NATO, which stoked the war with Russia).

The rising energy costs are, in turn, driving inflation.

That’s leading central banks to boost interest rates (too quickly in my opinion because the energy and food-cost jumps are a one off — from this year’s super-high levels, prices are likely to be lower at this time next year, so inflation will probably be negative. Probably. I’m trying to think long term.)

According to the vastly inflated natgas forward market known as the Title Transfer Facility, prices will have fallen by 9% next year and halved by summer 2024 (Sept. 30 data from ICE). Prices could drop much faster if there is a Ukraine solution (or not).

Turning the energy crisis into a house-mortgage crisis is weirdly a cloud with a silver lining.

Payers of mortgages are super angry as the Bank of England hikes interest rates so quickly, boosting yearly costs by another grand or two per year, in many cases.

Yet those forward thinkers who fixed their mortgage a few months ago are sitting pretty — at least for a while.

Those who didn’t?

Could have. Would have. Should have.

As a result of the immediate pain of the financial crisis, people just might begin to think longer term about mortgages AND energy (and climate).

See this excerpt from a Guardian story on 10-year fixed-interest-rate mortgages in Britain, as variable rates potentially head toward 6%:

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Locking into a 10-year fixed-rate mortgage used to come at a considerable cost but as interest rates on shorter-term home loans have edged up, the price of a decade’s worth of certainty has fallen.

This week the best two-year fixed-rate mortgages had a rate of 2.54% for those borrowing 60% of the property’s value, while five-year deals were at 2.64% and the best 10-year rate was 2.73%.

“The margins between two-, five- and 10-year fixes have fallen, so it has become a much more favourable environment for people to consider a long-term deal,” says David Hollingworth of the brokers L&C Mortgages. “They’re not having to pay as big a premium for it.”

It is important not to make your decision based solely on the rate because it could turn out to be an expensive mistake

Mark Harris of SPF Private Clients

On a mortgage of £180,000 over 20 years the monthly price difference between the cheapest two-year deal and the cheapest 10-year deal is £16.78 [per month]. Over the first two years, that means paying a total of £403 more. But in year three, you could be better off. Hollingworth says he can see fixed rates “going through 3% sooner rather than later”. They could go as high as 4% by the end of the year.

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So the mortgage market is giving a clear signal. Because interest rates are rising fast, a borrower needs to act fast. If he or she waits until the end of the year, they could pay 4%. If they do nothing and stay on a variable rate, they could soon pay 6%.

Indeed, a mortgage broker interviewed by BBC NewsNight said some borrowers were taking up 10-year deals so they didn’t suffer the short-term pain.

Result!

They are winning in the market because they are thinking long term.

Otherwise, it would have been: Could have. Would have. Should have.

The same is now happening in energy, or at least it might.

A household can seek a utility who will do it a 10-year deal, where the monthly payment will be much lower — potentially — than the $2,500 a year.

Truss should structure her “guarantee” incentive to encourage this long-term thinking, cutting taxpayer risks (taxpayers are bearing the risks of her energy-price-guarantee plan, another reason for rising anger).

Before the IMF rebuked the U.K. for its tax-cutting strategy, it said something interesting about long-term thinking, as CarrZee reported here.

It’s worth repeating.

As energy prices come down, governments are likely to replace a portion of that cost with higher carbon prices, the IMF said. There will be more political space for carbon prices, was the message.

Also, governments are finally getting brave on climate action (maybe).

It’s also true that if they don’t do something urgently they will go down in history as failed politicians.

And worse, the climate crisis is also rapidly boosting the chance of social unrest (that anger again — something the IMF is also warning about).

The immigration crisis is already damaging the UK government’s chance of reelection (and indeed many governments around the world. Italy’s regime change earlier this month is partly down to immigration stoked by the climate crisis).

Financial Crisis Solution

IMF boss Kristalina Georgieva here:

“We also have to create real incentive for businesses and households to reduce emissions by introducing [a carbon price where it doesn’t exist and where it does, increasing that price] — not today because energy prices are high. To go and say, ‘Oh, now you’re going to have a high carbon price’ [as well]– It’s not going to work [right now].

She continued: “But we know that energy prices are going to go down eventually. And when they go down carbon price must step in and go up.

“Here is the data — positive, good news. The carbon price globally doubled in the last year. So it was $3 a ton, now it is $6 a ton.

“Bad news? Where do we have to be to actually reach the Paris Agreement [targets]? We have to be at $75 a ton by 2030.”

So she’s [the IMF boss is] asking politicians to think long term.

What I find slightly puzzling is what Truss is not saying. I hesitate to say the following: the markets may be reading the British situation wrongly, too.

Britain’s fiscal deficit is not as bad as it seems.

That’s because it’s already planning to sell carbon allowances for higher prices in the future.

Britain’s published carbon price is currently £75/metric ton. (It’s actually much more when you take other climate policies into account and ignore fossil-fuel subsidies).

Remember the pound is now the same value as the $US. And the IMF said carbon prices need to be $75 by 2030.

Yet the UK might be interested in a carbon price of £150 a ton in 2030, because it wants to transition faster (and it’s under pressure from emerging countries to do this at a quicker speed because of its historic responsibility for the climate crisis).

By that year, perhaps the UK will be selling allowances for nearly all its emissions, not just a portion.

So with likely emissions of 345 million tons at £150 a pop [per metric tons of Co2], that’s £52 billion or so. $52 billion. In 2030 alone. Handy for repayment of 2022 government borrowing during the energy crisis right now, right?

Yet Truss and her minions are not talking about it. Which, I guess, is somewhat understandable right now.

The Financial Times’s editorial board on Thursday said the UK “must rapidly restore its economic credibility.”

By making people, and markets, think longer term, it can.

Sunk, Sinking or Under Repair?

(Language smoothed Oct. 21, 2022)