Climate Change & Court-Ordered Inflation

A Dutch court has found an oil company, Shell (RDS-A), to be partially responsible for causing climate change, and has ordered Shell to reduce carbon emissions by 45% by 2030. Crucially, the 45% reduction is not just for Shell's own emissions, but the emissions caused by the use of its petroleum products on a global basis, by the consumers and companies of the world.

The attorneys and environmental activists involved are jubilant, and are hoping to use the case as a precedent for similar court decrees in other nations. There is also talk of using similar lawsuits to force the transformations of the agricultural, transportation and mining industries, due to their own emissions and purported contributions to global warming.

There are obviously extraordinary environmental, scientific and political issues involved - but we won't be going there in this analysis. We will be sticking to the potential financial implications. Those implications are huge, and could indeed end up dominating the financial markets of the 2020s. This could be called simple common sense - an unprecedented change in the very basics of how our global civilization functions will of course have extraordinary financial implications, there will be no getting away from it. Specifically, if this decree is upheld on appeal, and if it does create precedents for similar actions by other courts in potentially multiple industries, then as developed in this analysis, there is a strong chance that these actions will artificially induce persistent and major supply side inflation on a global basis over the coming decades.

The court-ordered inflation would set off a mathematical process of the destruction of wealth and standard of living for those who are not prepared. At the same time, the court order could set off an unusually reliable mathematical process for the creation of wealth, for those who thoroughly understand how to turn inflation into wealth. This is particularly true if supply side inflation merges with the separate force of money creation inflation at some point.

This analysis is part of a series of related analyses, which support a book that is in the process of being written. Some key chapters from the book and an overview of the series are linked here.

Small judge gavel placed on table near folders

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Supply Side Inflation Shocks

In the previous analysis linked here, a series of supply side inflation shocks that are currently hitting the U.S. economy were identified. This is an entirely different kind of inflation than the type of inflation that can be created by excessive money creation, but as explored in that analysis, the two types of inflation can merge in a multiplicative fashion, that is more powerful and more persistent than just the sum of the parts.

One of the key distinctions in that analysis was the difference between the transitory and the structural. The establishment response to sharply rising inflation in multiple categories is that it is transitory, a temporary condition existing because of the supply shortages that were created by the pandemic shutdowns. As the shutdowns cease, then the supply shortages should cease, and the inflation should end - or so the talking points go.

However, the order by the Dutch court in the Hague on Wednesday, May 26, 2021, is intended to be the direct opposite of transitory, indeed the intent is to force a permanent change in energy usage for wherever Shell's products are sold and used.

While this particular use of judicial power was previously unprecedented, it didn't happen in isolation. The rationale for the 45% reduction order was to force Shell to be in compliance with United Nations guidelines and the Paris Agreement. There are extremely powerful political forces in alignment with the judicial decision, and this is intended to move the enforcement of the Agreement and the UN guidelines to the courts and attorneys, instead of the unpredictability of voters, elections, legislatures and the democratic process.

If the decision holds, then there is no particular reason to believe that it will be restricted to just Shell, or to just oil companies. Once the reason for the decision is accepted, then it is entirely rational to believe that it will be extended to other major emissions producers, including the agriculture and transportation industries, as well as manufacturing and perhaps home building as well.

The current discussion is that the main implications at this stage are for European companies, with the decisions of the other courts in Europe being more likely to be influenced by the decision of the Dutch court. This means that consumers and businesses in the United States are most likely to be directly impacted as the numerous multinational corporations that are headquartered in Europe are potentially ordered to make changes.

That said, a globalized economy is subject to judicial controls on a global basis. At the least, there is a good chance that the European operations of U.S. multinationals will be under court orders to reduce their emissions. It is also possible - perhaps even likely - that an attempt will be made to make the court orders global for any company doing business in Europe.

It is also possible that any such attempt might find willing support from the current U.S. government and at least some federal judges. What the Dutch court is ordering is in exact political alignment with what many U.S. politicians and government officials believe as well. We may very well have federal judges in the U.S. opening up new areas of law, and expanding their judicial powers in this process.

It is, of course, far too early to say the full extent of how this will impact U.S. consumers as well as others around the world. But a door has been opened, one of judicial decrees that mandate the achievement of global environmental goals. If this first decree is upheld and reinforced, other judicial orders like it could indeed spread to include not just fossil fuels, but also food, transportation, and possibly many other aspects of day to day life.

Mandated, Relentless Inflation On A Schedule

Restricting this analysis to the financial and economic implications, the issue is that the world predominately runs on fossil fuels for a reason - they are relatively cheap and relatively plentiful. At least at this point, the alternatives are more expensive, and less plentiful. It is more expensive to build an electric vehicle, all else being equal. The rare earths for the batteries that power the electric vehicles are not at this stage as globally abundant as petroleum, and are quite reliant on Chinese extraction and refinement. The alternative sources of power for the electric grid, such as solar and wind power, are expensive to build, they aren't always online, and they are therefore more expensive and less reliable sources of energy than fossil fuels.

In other words, the impact of the court order is that on average anything that uses energy becomes more expensive every year, as an increasing percentage of the source of cheap energy is withdrawn, and is replaced with more expensive but more environmentally friendly sources of energy. If this weren't true - there wouldn't be any need for the judicial decrees or the extensive government financial support of alternative energy, the markets would instead take care of the transition.

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