Record coal usage, carbon markets, death of dollar, and OpenAI
Issue #16
Change in the newsletter format
Hi people, hope you had an amazing year.
We had fun writing long-form content for you but we have now taken a call to set you in the direction of reading important stuff published by so many good people out there as opposed to just writing our own content. We will, of course, from time to time come up with our own long-form content as well 😃
As the year draws to a close let's begin by taking a look at the most important events of this year.
Coal consumption is at an all-time high
Source: IEA
According to a report released last week by the International Energy Agency (IEA), 2022's global coal use will surpass the last record set in 2013. The IEA expects coal use to peak either this year or in 2023, then plateau until 2025, before declining again. Click here to know why the world is using more coal than ever before.
We had also written about this and energy transition in general in one of our previous newsletters.
This doesn't sound like good news if we have to limit climate change. Then the question is, how do we move towards a cleaner world with more efficient carbon utilization? Well, one of the ways is a well developed carbon market.
Carbon markets
What are carbon markets?
In a nutshell, carbon markets are trading systems in which carbon credits are sold and bought. One tradable carbon credit equals one tonne of carbon dioxide (CO2) or the equivalent amount of a different greenhouse gas reduced, sequestered or avoided. To read more about them and why they are important click here.
It seems that the European Union (EU) is carrying out important changes to its carbon market.
The EU’s “emissions trading scheme” (ETS) is the bloc’s most important climate policy. It currently covers emissions from about 10,000 power plants and industrial facilities across its 27 member states, making it the world’s biggest in terms of covered facilities—China, which has the biggest carbon market in terms of CO2 emissions, only about 2,000 power plants.
While this article focuses primarily on changes happening in the EU, it is just a matter of time before we will see a universal carbon market and universal carbon pricing. But until we don't see universal carbon pricing, won't the EU lose out to the competition? Well not really.
The EU recently settled on a long-negotiated policy to levy import tariffs on steel, cement, fertilizer, iron, aluminium, and electricity, based on the volume of carbon emissions created during their manufacturing in exporting countries.
“The carbon border adjustment mechanism (CBAM) is meant to protect the competitiveness of European manufacturers. Once the price of carbon emission permits in Europe—some of which are now doled out for free—begins to rise, companies will face increasing pressure to decarbonize. The tariff, in effect, effectively imposes Europe’s carbon price on countries that don’t have their own. In this way, EU policymakers hope to prevent high-carbon industries from simply relocating outside the EU. Known as “carbon leakage,” this effect would not only damage the European economy but, from a planetary perspective, render the EU carbon price pointless.”
How will this carbon tariff work? Can some countries be exempt from it? Click here to find out more.
If you want to know more about how to go about internalizing the cost of carbon in a manner consistent with the aims of a zero-carbon world click here to see what Nobel Laureate Joseph Stiglitz has to say.
Lack of transparency at Binance
Binance is in the news again after it said it dealt with net outflows of around $6 billion over 72 hours last week. After FTX’s fall, Binance's CEO had said that his company would lead by example in embracing transparency. it seems he hasn’t really put his money where his mouth is!
To put things into perspective, Binance processed trades worth $1.6 trillion in October, about half of the entire crypto market’s trading volume, while FTX handled some $230 billion worth of trades in the same month.
“Binance declines to say where Binance.com is based. It doesn’t disclose basic financial information such as revenue, profit and cash reserves. The company has its own crypto coin, but doesn’t reveal what role it plays on its balance sheet. It lends customers money against their crypto assets and lets them trade on margin, with borrowed funds. But it doesn’t detail how big those bets are, how exposed Binance is to that risk, or the full extent of its reserves to finance withdrawals.”
Binance has no legal obligation to share its finances since it's not a publicly listed company. It hasn’t raised money from outside since 2018, so it has not had to share information with any external investors as well.
Binance is also under investigation for possible money laundering and criminal sanctions violations. This does not bode well for the industry which has already been shaken by the FTX saga.
Source: CoinMarketCap.
The market cap of Binance’s BNB token has plummeted to around $40 billion from a peak of around $90 billion.
Click here to read more about what's happening at Binance.
What's happening at Indian Crypto exchanges
Winter may be late to North India this time, but the crypto winter is definitely here. On top of that, the Indian government has imposed a flat 30% tax on crypto profits. Indian crypto exchanges have seen their transaction volumes, and therefore revenues drop sharply.
Some of them are now trying to make their platforms better by introducing new features or even launching new products. What is clear is that Indian crypto exchanges are trying to be seen as safe, secure, and trustworthy. Can they stick around till the next bull run?
Click here to check out the latest developments.
Is the demise of the petrodollar near?
First, let’s take a look at how the dollar became so important.
“When oil prices skyrocketed in 1973, the USA decided to create a system of dollar seigniorage through Saudi oil profits. In 1974, U.S. Treasury Secretary William Simon arrived in Riyadh and proposed that the USA will purchase large amounts of Saudi oil in dollars and that the Saudis use these dollars to buy US Treasury bonds and weaponry and invest in US banks as a way to recycle vast Saudi oil profits. And so the petrodollar was born, which anchored the new dollar-denominated world trade and investment system.”
The petrodollar system has, however, received two serious blows.
The 2008 financial crisis highlighted the perils of being fully dependent on the dollar. Arguably, this was the point when other countries around the world seriously started looking for alternative payment systems not dependent on the dollar and SWIFT.
The centrality of the dollar in global trade and financial markets has also allowed the US to weaponize it on a massive scale. Most recently, we saw this when the US, Europe, and their allies froze over $300 billion of Russian central bank reserves. Entire countries like Iran and Venezuela have also been cut off from the global banking system.
Here are all the countries sanctioned by the US and its allies
Even though we are currently far from the demise of the dollar, is it possible that the world can de-dollarize? Are there enough incentives?
We discussed this topic in brief in our podcast with Debashish Bose, you can click here to hear what he has to say.
Eswar Prasad, senior professor of trade at Cornell University, published this report on whether dollar was losing ground as dominant international currency.
As of 2019Q1, the dollar’s share of global FX reserves was 62 percent, essentially the same as during the 2009-2012 period. It remains by far the dominant global reserve currency.
Compared with 2007, however, the dollar’s share of global FX reserves has declined by 2 percentage points while the euro’s share is down 6 percentage points. Over this period, the Japanese yen’s share has risen by 2 percentage points, while other less prominent reserve currencies have increased their total share by 4 percentage points. The renminbi, which was not an official reserve currency in 2007, now accounts for 2 percent of global FX reserves.
More recently, Mr. Vijay Prashad, a prominent historian, editor, and journalist, has also written about this topic. You can read it here.
OpenAI
OpenAI has taken the world by storm. If you still haven't used it, you are missing out on something. Click here to explore the OpenAI Playground.
Worldwide interest over time on Google Trends for OpenAI (blue), and Chat GPT (red).
OpenAI began as a nonprofit in 2015 with grants from Sam Altman, Elon Musk, LinkedIn co-founder Reid Hoffman and others. It aimed to form a research counterweight to big tech companies like Google.
“Shortly after he became CEO, Mr. Altman received $1 billion in funding from Microsoft marking a demise from OpenAI’s early days, when it said its aim would be to build value for everyone rather than shareholders. The deal with Microsoft gave OpenAI the computing resources it needed to train and improve its artificial intelligence algorithms, leading to a series of breakthroughs.”
Now OpenAI seeks to make money for its investors, albeit capped. Interestingly, Altman has previously said he would solicit input about how to make money for investors by posing the question to a software program demonstrating general intelligence, which would then provide the answer!
Continue reading here to know more about OpenAI.
Reading Recommendations
Investing Resolutions for Life
In the investing world, instead of resolutions at year end we often hear forecasts. All of these things garner a lot of attention, but investors would be wise to ignore them.
Why?
Because they are rarely correct, as we learn year in and year out.
History is in the making
An understanding of the past in which not just our intellectual successes but our technological breakthroughs occupy pride of place would be very different from the political one that dominates now. Instead of politics and war, and the growth, rise, and decline of states and empires being the focus, the central story would rather be one of human cooperation and inventiveness, innovation and scientific and technological progress and discovery, and the improvement in human well-being than the deeds (often diabolical) of those with power.
The important figures would no longer be rulers, generals, prelates, and revolutionaries but scientists, entrepreneurs, and businessmen and -women.
Our Future Decisions Will Be Defined by Our Past Decisions
It is easy to think of the choices we face as discrete, one-off decisions with a set of specific consequences (good and bad), but they are not. Each time we make a decision it impacts the choices we will be able to make in the future – it might commit us to a certain direction or close off other potential routes. There is a huge amount of path dependency in the decisions we make. This means that we should not consider only the immediate implications of any option we pursue but also its consequences for our subsequent behaviour.
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