The Many Arbitrary and Capricious Aspects of SEC’s Climate Risk Disclosure Rule

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Yesterday (June 16), CEI submitted two comment letters to the Securities and Exchange Commission (SEC) on its proposed rule: “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” The letter prepared by CEI colleague Richard Morrison is here. The letter prepared by Heritage Foundation data scientist Kevin Dayaratna, CEI colleague Patrick Michaels, and your humble servant is here.

Both letters are joined by several co-signers from public policy organizations. As Richard aptly states in his blog post today, neither comment letter aims to help SEC improve its proposals. Rather, “CEI’s comments recommend that the Commission abandon its climate disclosure proposal entirely.”

What follows is a brief overview of the comments Kevin, Pat, and I prepared.

The SEC’s proposed rule is the cutting edge of the environment, social, governance (ESG) movement’s campaign to align private capital investment with an aggressive climate policy agenda—one that aims to cut greenhouse gas (GHG) emissions dramatically by 2030 and achieve a net-zero emission economy by 2050.

The SEC approvingly cites several reports and numerous comments by prominent ESG advocates. However, the Commission seems unaware of the questionable premises on which much of that literature is based. The studies informing and underpinning the SEC’s proposal:

  • Favor climate risk assessments based on warm-biased models run with warm-biased emission scenarios.
  • Attribute to climate change damages that chiefly reflect societal factors such as increases in population and exposed wealth.
  • Overlook the increasing sustainability of our chiefly fossil-fueled civilization.
  • Assume away the power of adaptation to mitigate climate change damages.
  • Underestimate the resilience of financial markets to climate-related risks.
  • Exaggerate the political prospects of the NetZero agenda.
  • Ignore the vast potential of climate policies to destroy jobs, growth, and, thus, shareholder value.
  • Overlook the economic, environmental, and geopolitical risks of mandating a transition from a fuel-intensive to a material-intensive energy system.
  • Downplay the regulatory impediments to building a “clean energy economy.”
  • Ignore the systemic risk their own advocacy efforts could create—an ideologically charged, mandate- and subsidy-fueled “green” investment bubble.

Our detailed comments repeatedly make the case that the SEC’s proposal is “arbitrary and capricious” and, therefore should not be implemented.

Under the Administrative Procedure Act (APA), an agency’s use of a model is “arbitrary” if the model “bears no rational relationship to the reality it purports to represent.” The climate impacts assessment literature on which ESG advocates and the SEC expressly or implicitly rely is based on:

  1. Hot models that overshoot observed warming by more than 100 percent;
  2. Inflated emission scenarios that implausibly assume a global “return to coal” absent new and additional climate policies; and
  3. Anemic adaptation assumptions that fly in the face of the more than 99 percent reduction in global weather-related mortality rates during the past century. Three strikes and you’re out!

Moreover, under the APA, an agency’s action is arbitrary and capricious if it “entirely ignores a significant aspect of the problem” addressed by that action. The SEC’s proposal ignores multiple important aspects—scientific, technical, legal, economic, geopolitical, and regulatory—of the agenda it seeks to advance.

Let us count the ways. The SEC ignores:

  • The well-documented criticisms of the hot models, inflated emission scenarios, and lame adaptation assumptions underpinning the “climate crisis” narrative and NetZero agendas.
  • The dramatic declines in weather-related mortality and the relative economic impact of weather-related damages—trends that undercut the climate crisis narrative.
  • The case for prioritizing economic growth as the foundation of successful long-term adaptation
  • The economic risks of imposing “sustainability” criteria that would restrict fossil-intensive companies’ access to capital and credit.
  • The widespread misattribution to climate change of damage trends actually driven by socioeconomic factors.
  • The slow and additive nature of previous energy transitions, which renders highly dubious and misleading to investors claims that renewables can replace fossil fuels within three decades.
  • The enormous macroeconomic, household, and energy market costs of a forced transition to a NetZero economy on anything like the timetable envisioned by the Biden administration.
  • The abysmal benefit-cost ratio of even a revenue-neutral carbon tax—supposedly the most efficient GHG reduction policy.
  • The gargantuan costs of backstopping wind and solar power with battery storage rather than fossil fuels (estimated at $1.5 trillion for the State of New York alone).
  • The immense cost, difficulty, and geopolitical risks of replacing today’s largely fuel-based energy system with a material-based system dependent on mining and processing infrastructure that would take decades to build, and which would favor China vis-à-vis the United States.
  • The sclerotic, litigation-prone environmental review and permitting process, which makes it difficult to build practically anything quickly in the U.S. today, including green energy infrastructure.

In short, the SEC ignores numerous important factors that would make the supposed transition from fossil fuels to renewables more likely to be a shift from abundant and affordable fossil fuels to scarce and unaffordable fossil fuels. The recent spikes in energy and mineral prices are certainly consistent with that concern.

In his remarks for the September 2009 Solyndra groundbreaking ceremony, then-Vice President Biden boasted that the Department of Energy’s $535 million loan guarantee would create “1,000 permanent new jobs,” “jobs of the future,” and “jobs that cannot be exported.” Energy Secretary Steven Chu agreed: “And here’s the best part, none of these jobs can be outsourced.”

Almost two years later to the day, all the Solyndra jobs disappeared and the company filed for bankruptcy protection. The Solyndra loan guarantee was part of a $30 billion program administered by one agency. The administration and its political allies seek to channel capital flows totaling trillions of dollars into what they claim are “industries of the future.”

To sum up, the scientific, economic, and political assumptions on which NetZero investing is based are detached from reality. Somebody should warn the public of the risks to investors. If not the Commission, then who?