The transition to net zero was already a gigantic task. But the AI boom puts the Paris Climate commitments further out of reach. Factoring in rising power demand from data centres, on top of decarbonisation, as well as increased military spending, reshoring, higher (green) technology tariffs, and an increased frequency of natural disasters, the case for structurally higher capex spending remains compelling.
A bipartisan group of Senators has now called on Congress to approve $32bn of funding annually for non-defence AI research, to keep the US ahead in the race against China. In the context of perpetual >5% of GDP deficits, this might seem small, but it underlines the point: the threat of China supersedes considerations of fiscal prudence.
The surge in the price of copper to a record high, has been driven in part by speculative activity. But the long-term secular bull thesis for copper is intact, with demand projected to outstrip supply over the coming decade. All energy transitions will involve a degree of speculation, as the market figures out the right price. Nevertheless, the potential for higher commodities prices, and bottlenecks in the green energy transition, should be reflected in higher term premia for government debt, which is still historically low. The prospect of a second Trump term should also put upward pressure on term premia, as will climate change itself.
Up until recently, studies had tended to show that a 1°C rise in the world’s temperature reduces world output at most by 1-3%. But new research is showing that the effects are likely to be much larger. The 12-month moving average of the global mean temperature now stands at 1.65 ± 0.07 °C (2.97 ± 0.13 °F) above the 1850-1900 average. Sea surface temperatures have been at a record high for the past 13 months. CO2 levels in the atmosphere jumped by a record in March too.
