David Stockman, a former congressman from Michigan and the first director of President Ronald Reagan’s Office of Management and Budget in the 1980s, has written a provocative commentary entitled “GreenMageddon.” Stockman compares the current COP26 UN climate change gathering to the worst actions of assembled nations at the 1919 Versailles conference which, he notes, “laid the groundwork for the catastrophes of depression, World War II, the Holocaust” and more. Stockman foresees a catastrophe of similar magnitude from COP26 because, by his reckoning, the world cannot replace the quantities of fossil fuels it now consumes with renewables in 30 years, and economic disasters will follow should the energy transition effort stay on its current path. Stockman’s analysis is incorrect because he ignores the power of “creative destruction,” the dynamics of technical progress, and the power of global finance determined to consign fossil fuels to the past. 

Stockman’s manifesto is almost 14,000 words long and presented in five parts. The first three offer his unorthodox and unsupported layman’s view on the well-established science of climate change. He discusses the obvious at great length — that the Earth has been and will again be warmer — without so much as mentioning the real issue, namely the unprecedented speed of temperature change.

In his final sections, Stockman focuses on the economic impact of the effort to replace fossil fuels. He begins by informing us that we have utterly no understanding of economics. He then attempts to show that the idea of converting to a green economy is impossible.

Stockman’s economic discussion begins, “to grasp the full extent of the impending calamity it is necessary to recall that Keynesian GDP accounting inherently obfuscates the true economic cost in a drastically downward direction.” This statement undermines the rest of the manifesto because the GDP system of accounts and techniques, developed nearly a century ago by Simon Kuznets, is used by almost every country in the world to measure economic activity. The methods favor the economic views of neither interventionist economist John Maynard Keynes nor total free market advocate Milton Friedman. They are a set of standards, much like corporate accounting systems.

Stockman disapproves of the Kuznets approach because, in his view, it does not deal properly with depreciation in the value of assets. The result is that climate activists fail to account for capital losses on non-fully-depreciated assets: “Gross capital spending gets added to the total of GDP with no offset for depreciation and asset write-offs. That’s why, we suppose, climate change activists get all giddy about the alleged economic growth benefits and job gains from green investment: They just don’t count all the assets wasted and jobs lost by shutting down efficient coal mines or fossil-fired utility plants.”

Here, Stockman is quite simply wrong. Today, the authority on this accounting is the Bureau of Economic Analysis (Bea), a division of the US Department of Commerce. Their most recent version, prepared in 1997, details the steps taken by the Bea to account for depreciation. In short, the agency does account for the shutdown of efficient — or inefficient — coal mines and fossil-fired utility plants.

Anger Over Early Shutdowns

Stockman, however, is not just enraged by the accountants who tabulate GDP. He is also furious that plants will be shut before their useful lives are finished: “To come even close to the utterly ridiculous COP26 target of net-zero emissions by 2050, literally tens of trillions worth of fossil-fired power plants, heating units, chemical processing plants and internal combustion engine vehicles would have to be decommissioned and taken out of service long before their ordinary useful economic lives had been reached.”

Here, Stockman offers a view that is popular among both opponents of action and environmental zealots: Owners of major assets built with the expectation that they could be used for decades, such as coal mines or oil refineries, will not shut them down before the end of their useful life just because a different technology comes along that is cheaper or otherwise better.

This thinking reflects the view of the “old order” defenders who have followed and worked in the energy sector for decades and reflects the work of Vaclav Smil, among others. Daniel Yergin makes a similar point about capital asset retirements.

Economic developments over the last 50 years show that these views are incorrect. Examples abound: the telephone, aviation, railroad, computation and photography industries all provide examples. US landline phone companies invested more than $10 billion per year up to 2010 in facilities to provide improving customer communications. Most of these assets today are essentially worthless, thanks to the rapid penetration of wireless communications. Those former or current “telephone companies” that have survived -—such as Verizon and AT&T — wrote down their investments in undepreciated land-line facilities while transforming themselves, mainly into suppliers of wireless communication.

Billions more were invested annually in computer technologies, with most allocated to mainframe computers until the mid-1990s. Most large computers were scrapped long before their useful lives ended. Mainframe manufacturers like Burrows, Control Data, and Univac vanished or became part of larger companies as the microcomputer revolution led to a collapse in demand for big computers.

The iPhone introduced by Apple in 2007 disrupted not only land-line phone service, but also the traditional photography business, forcing billions of assets to be scrapped. The advent of the Boeing 707, the first jet used for commercial passenger service, accelerated the early scrappage of billions invested in four-engine propeller-powered passenger aircraft. Decades earlier, the appearance of the diesel-powered tractor resulted in a massive cull of horses used on farms.

The economic message is simple: technical progress waits for no one. This is hardly a new concept. The Austrian-born Harvard Economist Joseph Schumpeter popularized the notion of "creative destruction" in 1942 with the publication of Capitalism, Socialism and Democracy. Both the environmental extremists who want to end investment in fossil-fuel firms and opponents of COP26 such as Stockman fail to heed this message.

Over- and Underestimating

The final section of the Stockman manifesto focusses on the alleged impossibility of converting the economy from fossil fuels to renewables in 30 years. Using 2020 as the base year, he calculates how much renewable energy would be required by 2050 and then declares that goal out of reach.

On the contrary, however, data on the penetration of renewables and the falling cost of various technologies reveal that the pace of adoption of solar and wind generation has continually exceeded rates projected by forecasters and other experts — by leaps and bounds.



NOTE: Solar photovoltaic base-case capacity projections to 2030-50 made by the International Energy Agency between 2006-21, compared with actual installed capacity, in gigawatts.
Source: International Energy Agency

What’s more, in making his calculations, Stockman assumes the rate of change in costs and operating efficiency is zero. The data show his assumptions are wrong. Indeed, if the rate of technical change and declining costs continue at current speeds, the US and world economies can achieve the targets for 2050 and, quite probably, add a percent or two per year to GDP while doing it.



Projected cost of generation to 2050 for select technologies, in $ per megawatt hour. Grid connection and system costs are excluded. Source: Energy Intelligence.

Finally, Stockman ignores the immense pressures those in global finance are applying to accelerate the move off fossil fuels. Soon, no large public finance institution such as the World Bank, nor most shareholder-owned financial institutions, will be willing to finance or sponsor investment in any business related to the production or processing of fossil fuels. Fossil fuel-related investments in developing nations other than India and China will be effectively blocked.

Emerging market countries will be forced to turn to renewables or find other sources of finance, such as oil-exporting countries for investment dollars. Supplies of oil and gas will decline as a result of natural declines in developed fields. As many in the industry have predicted, the supplies of fossil fuels will drop.

Stockman sees disaster occurring from the rush to renewables, but fails to note that few support further investment in fossil fuels. In 30 years the fossil fuels will not be there. One must hope that the renewable energy will be there. History suggests it will. Time and time again the pessimists have warned that aggressive policy interventions in the economy would lead to economic disaster. Time and time again the pessimists have been proven wrong. This time will not be different.

Philip Verleger is an economist who has written about energy markets for over 40 years. A graduate of MIT, he has served two presidents, taught at Yale and helped develop energy commodity markets since 1980.

Philippe Roos is a senior reporter with Energy Intelligence, based in Strasbourg. He served earlier as an energy and finance specialist at the World Bank, and as senior energy and industry specialist at French bank Crédit Agricole. He holds an MSc in engineering, an MSc in metallurgy and material science, and a PhD in industrial economics, all from the École des Mines, Paris.



Further disruption lies ahead. The 2021 Outlook provides important context and pointers to help you navigate these changes, and understand how sometimes confusing events fit the broader picture.