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Kelly Evans: They Bitcoined Carbon

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The price of fossil fuels keeps surging. The situation in Europe is getting worse. Natural gas prices are spiking through the roof--even worse than they were last week. Even oil is higher today as Goldman says $80 for U.S. crude could be next, up from about $70 where it's trading today. Why? Because there is "growing scarcity across physical markets," with demand for all energy except oil back at pre-pandemic levels  while "the system is becoming increasingly constrained in its ability to supply goods."  

The crucial difference between the energy spike today and any prior one over the past couple decades is that this one comes as policymakers (and "ESG" investors) have chosen to cap supply. Europe, as I've mentioned, has basically, depending on how you run the numbers to get to "net zero" emissions by 2050, about 600 gigatons of carbon left to produce. Even traders are taking the goal seriously this time. It's why the price of carbon in the EU spiked above 60 euros for the first time a couple weeks ago. And if it costs more to emit carbon, then it costs more for natural gas and coal plants to provide electricity (if they can even stay in business), and unless renewables step up "bigly," the supply chain gets fragile and the cost for consumers goes up.  

And to be clear, renewables are going to fill the gap in the long run, because policymakers have already made that choice, and fortunately, the cost of solar and wind has dropped precipitously. But it's still painful to watch how much this has all botched the energy supply in the meantime. California was just granted emergency approval to run dirtier energy plants to keep its power going. The U.K. has had to fire up old coal plants. Across the U.S., households are scrambling for natural gas or gasoline/propane-powered home generators (witness $GNRC up 93% this year), which are obviously worse for the environment. I was looking at our own electricity bill the other day, asking my husband why our natural gas usage dropped 80% from last August. "Because last August, we lost power for five days," he replied--meaning our generator ran the entire time.  

The demand-supply imbalance for energy is so bad, that, as Goldman puts it, "demand destruction" is the only way to resolve it. So if the price goes up, obviously those who can least afford it have to stop using it first. And remember, lower-income workers are already the ones most affected by high energy bills, and most reliant on gasoline-powered cars, especially post-pandemic. So it more or less sends them into a recession, and if it gets bad enough, it can send the whole economy into recession in order to "destroy demand."  

 Why do I say they "bitcoined carbon"? Because the whole point of Bitcoin's attractiveness, on top of its intricate code and entrenched network effects, is that the supply is capped at 21 million. (Remember the argument from bulls like Bill Miller--that there aren't even enough for every millionaire on the planet to buy one.) By "capping" the carbon supply, policymakers have effectively done the same thing with carbon prices--especially because demand today is still so high.  

And yes, they want carbon demand to subside (i.e. be destroyed) over time. That's how high prices work--they encourage people to substitute to other energy sources like wind and solar. They make EVs (if the grid gets cleaner and thus cheaper) more attractive than "ICE" vehicles. You pair that with the eye-watering subsidies in the Democrats' spending bill--more than $12,000 if you basically buy an EV from the "big three"--and suddenly the EV is the obvious choice. I joked to my husband the other day that we should sell our ICE cars while they're still hot, because the way this is going Cathie Wood might be under-estimating how much EV demand is about to skyrocket. 

 But if this whole mushy transition means the price of fossil fuels really does remain structurally high, lower-income households are going to need a lot more relief than  just EV subsidies--especially when the economics of EV charging stations still discourage their proliferation.  

If you got in early on Bitcoin, you benefit if the price keeps spiking. If you're taking the price of carbon, however, the opposite is true.  

See you at 1 p.m! 

Kelly

Twitter: @KellyCNBC

Instagram: @realkellyevans

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