Climate Change
Last week, the United Nations concluded its COP26 climate conference in Glasgow. Many headlines were penned about the progress made, though the authors of the Paris Agreement say it fell short of what is needed to keep global warming within the 1.5C limit before extremely bad things start (continue?) happening to life on Earth.
The conference produced a couple carbon offset proposals under Paris’s Article 6:
At its very simplest, Article 6 has to do with carbon markets and carbon offsets. These are the schemes that allow countries to pay for projects that take carbon out of the atmosphere—planting trees, for instance, or funding a renewable energy project—in order to get what amounts to a get-out-of-jail-free card to keep up pollution at home.
These offerings alarmed climate activists, and Greenpeace has called offsets a “scam” which obviously got my attention.
So what happens if countries agree to a carbon market with loose or poorly governed rules?
But as countries disagree on key issues such as emissions accounting rules, the threat is that a weak deal would enshrine rules so loose they could end up allowing for pollution to rise rather than fall.
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Talks on carbon trading collapsed at the previous summit in Madrid in 2019, with Brazil and the European Union at odds over how to avoid the double counting of emissions reductions by countries and companies. That could happen when both the investors in offsetting projects abroad and the countries hosting them claim credits for cutting pollution.
This seems very bad! If a carbon market allows for double counting, it will enable rich, dirty nations like the US and China to greenwash their own pollution by investing in other countries.
As a matter of fact, some efforts within the US to create carbon credits haven’t been going well:
California’s top climate regulator, the Air Resources Board, glossed over much of this complexity in implementing the state’s program. The agency established fixed boundaries around giant regions, boiling down the carbon stored in a wide mix of tree species into simplified, regional averages.
[…]
The offset program allows forest owners across the country to earn credits for taking care of their land in ways that store or absorb more carbon, such as reducing logging or thinning out smaller trees and brush to allow for increased overall growth. Each credit represents one metric ton of CO2. Landowners can sell the credits to major polluters in California, typically oil companies and other businesses that want to emit more carbon than otherwise allowed under state law. Each extra ton of carbon emitted by industry is balanced out by an extra ton stored in the forest, allowing net emissions to stay within a cap set by the state.
One thing to remember is a very small number of very dirty companies produce more than a third of all carbon emissions on the planet. What plans like the one in California allow them to do is pay some money to the owner of a forest to continue to pollute exactly the same amount or more because it’s now “offset” by moving some numbers around in a spreadsheet. Because, like, the forests are already there, capturing carbon! Making a company pay some money to whoever owns the forest doesn’t reduce anything! Am I losing my mind? It feels like I am! At least the people at CarbonPlan seem to agree:
CarbonPlan estimates the state’s program has generated between 20 million and 39 million credits that don’t achieve real climate benefits. They are, in effect, ghost credits that didn’t preserve additional carbon in forests but did allow polluters to emit far more CO2, equal to the annual emissions of 8.5 million cars at the high end.
Those ghost credits represent nearly one in three credits issued through California’s primary forest offset program, highlighting systemic flaws in the rules and suggesting widespread gaming of the market.
“Our work shows that California’s forest offsets program increases greenhouse gas emissions, despite being a large part of the state’s strategy for reducing climate pollution,” said Danny Cullenward, the policy director at CarbonPlan. “The program creates the false appearance of progress when in fact it makes the climate problem worse.”
So, climate activists are understandably concerned that if we create a global market for these same accounting gimmicks - allowing companies to pay to offset emissions on paper, rather than actually reducing them - that also allows for double-counting to give the appearance of greater progress on emissions, it’s going to have the same result. A lot of money sloshing around between rich companies and rich landowners (or corrupt governments, etc) and no reduction in the pollution that’s cooking the planet.
Nelson Partners
Student housing at colleges has been in the news lately. As if college kids attempting to navigate the pandemic didn’t have enough troubles, a company called Nelson Partners (Student Housing) bought up a bunch of buildings and let them fall into disrepair:
Between the busted elevators, the malfunctioning fire alarms and the utilities being shut off for weeks at a time, the students at a half-dozen off-campus housing complexes across the country say they’re not getting what they paid for.
Three years ago Patrick Nelson founded a real estate company that solicited money from investors - many of them individuals - to buy upscale apartment buildings near college campuses and market the housing to students. It was supposed to be a safe bet - student rent payments often come out of their loans - but when COVID-19 struck, many Nelson properties became financially unsustainable for the firm, stretched thin after an acquisition spree:
Nelson Partners delayed construction on a new housing facility near Utah State University, where Mr. Nelson received a master’s degree in business, forcing more than 100 students who had signed leases for the fall semester to scramble for somewhere else to live.
And Mr. Nelson put three other properties — near the University of Mississippi, Texas Christian University and the University of Houston — into bankruptcy to stave off foreclosure attempts by other lenders.
It didn’t work for the Taylor Bend apartments in Mississippi; a bankruptcy judge allowed North American Savings Bank to take control of the property after he heard testimony about the poor conditions there.
Nelson was able to get his hands on hundreds of millions of dollars by accessing networks of well-off individuals seeking tax-advantaged investments:
Like many others, Mr. MacKinnon invested in the Nelson Partners deals through what are called private placements, a kind of unregulated offering that is often pitched to well-off individual investors by securities brokers. The arrangements — which generated millions of dollars in fees for Mr. Nelson’s firm and the brokers that set up the deals — were popular with investors because they could take advantage of a provision in the federal tax code called a 1031 exchange. That allowed them to defer paying capital gains on the proceeds from the sale of one property by rolling them into a new real estate project.
So, stockbrokers pitch their clients on unregulated investment offerings that allow them to evade capital gains taxes and receive steady return on investment. Assuming, of course, they aren’t investing in someone who’s bad at running a real estate empire. While the courts unravel Nelson’s property holdings through a mix of lawsuits and bankruptcies, the college kids living in his buildings have to make do with broken elevators, piles of trash, and nonexistent building security, all of which they’re still expected to pay rent on.
Gary Vee
I made it many years of my life without registering the existence of Gary Vaynerchuk aka Gary Vee, who is apparently some sort of business influencer or life coach or unholy combination thereof. He became popular over the years by going on YouTube and telling people how they could become successful, by doing business things. Anyhow, now he’s disrupted the NFT space, by using them to sell copies of his book:
Over a sleepy weekend in late August, entrepreneur and business author Gary Vaynerchuk racked up more than one million preorders of his coming book. It was one of the industry’s biggest advance orders for a single title in a 24-hour period.
The reason was less about his new leadership book, “Twelve and a Half: Leveraging the Emotional Ingredients Necessary for Business Success,” than the gift he promised with every purchase of 12 print copies: one mystery nonfungible token, or NFT.
You are reading that correctly: he is (supposedly) giving away NFTs for buying twelve copies of his book, which a lot of books. Amazon says one of his books costs $21 in hardcover, meaning people were spending at least $250 to potentially acquire an NFT from Gary Vee. NFTs that don’t yet exist, and that Vee is waiting to send until the return deadline for the books has passed:
Mr. Vaynerchuk says he will wait to airdrop the NFTs into consumers’ online wallets until the return window closes for many retailers. With the average order during the promotion at 36 books, costing roughly $900, that leaves consumers with lots of copies to unload.
Thirty! Six! Books! Don’t be surprised if you receive a copy of Twelve and a Half for the holidays this year, as you may know someone with a lot of them to unload.
The book itself is an “argument for empathy and self awareness over tough talk and bluster in professional relationships” written by a guy who demanded his followers buy at least twelve copies:
In a nearly three-hour live stream on YouTube and Instagram, he used a variation of the F-word 205 times as he urged viewers to buy multiple groups of 12 books. “I just want to say one thing: If you don’t buy an extra 12 right now, you’re f— up,” he said. “Pay a-f—tention!”
He sold a million books in a day. Whatever, I give up.
Apple
We have talked about Apple losing a court ruling and being ordered to allow app developers to offer alternative payment options to their users. This is a big deal not only for Apple - who has levied 30% fees on in-app payments for years, reaping billions a year in profits - but for the developers, who can now capture more of their user revenue.
It seems Apple wasn’t content with passively taking its fees, however, and was paying to advertise popular apps to get its cut:
Apple is secretly buying Google ads for high-value apps to collect potentially millions of dollars in subscription revenue, multiple app publishers have told me. Apple is placing the ads without the app developers’ consent, and Google won’t delete them, they say.
The cost: potentially millions of dollars in lost revenue. Plus, high advertising costs for their own campaigns.
Apple targeted popular apps like Tinder, Bumble, Masterclass, and even HBO and paid for Google results above the companies’ own. It didn’t disclose it was paying for the ads. When users sign up for services through Apple, the company doesn’t hand over much information to the developer, so Apple has been secretly stealing customers from developers on its own platform, taking a significant cut of the proceeds, and inflating advertising costs for those same developers, who have to pay increased ad rates to compete with Apple’s ads. Very cool company!
Apple has gone to great lengths to position itself as the benevolent tech giant, claiming that new privacy measures are meant to protect consumers, not to give it more control over what ads iPhone users see. Apple has long argued it needs to charge high fees and keep iron-fisted control over the App Store to keep its users safe. Now, it turns out they’ve been exploiting that monopoly to take money out of the pockets of developers for years.
Lucid Motors
Last week we talked about Rivian Motors, an EV company that hasn’t built any EVs but is (as of this writing) nonetheless worth more than GM and Ford. Well! This week Lucid Motors became the second EV company that doesn’t yet produce any cars to be worth more than the two auto giants:
The surge in the shares came after Lucid said Monday it remained confident in its ability to produce 20,000 vehicles in 2022.
GM sold 6.8 million cars in 2020. A lot of things these days (movie theaters, video game retailers, home goods stores) look suspiciously like purely speculative investments unrelated to any underlying asset, and we’re apparently adding “electric car companies” to that list.
Zillow
A couple weeks ago I wrote about Zillow Offers and how it had failed so spectacularly it had to fire a quarter of the company’s staff. At the time I said:
The thing about software companies is that they sometimes mistake having a lot of data and hiring a lot of smart people as a replacement for, I don’t know, being an expert at buying and selling houses? Normally, when a software company writes an algorithm that doesn’t behave as expected, they can just turn it off and say oh, whoops, we won’t use this anymore.
Well, the WSJ has written a postmortem of the whole kerfuffle and it is interesting. When Zillow launched Offers, the algorithm was programmed to make lowball offers, and it worked great, and was too profitable:
The first quarter delivered home-sale profits that were more than twice as high as anticipated, the company said.
Oops! Zillow had actually spent a lot of time and energy fine tuning its pricing algorithm:
To get around the challenge of accounting for aesthetics, Zillow said in 2019 it had incorporated photographic analysis into its method of pricing homes, including factors such as natural light, quality of interior finishes and curb appeal.
And hired - gasp! - human beings to double check the estimates:
The company hired an army of more than 100 pricing analysts to double-check the algorithm’s numbers by looking at comparable sales, according to current and former employees. That reduced the risk of overpaying, but also made it harder to flip lots of homes quickly and cheaply.
So, Zillow created a relatively conservative pricing system that would only offer below-market bids on aesthetically pleasing houses. Which, if their goal was to make money, was a great way to do things. But! Their goal was to buy and sell lots of houses, and become the market-maker in housing. This was a problem, as far as executives were concerned:
“This is code red,” Joshua Swift, senior vice president of Zillow Offers, said during the virtual meeting, according to the person who attended. Mr. Swift declined to comment through the company.
Zillow put together a plan to speed up the pace and volume of home purchases, dubbing it Project Ketchup—which employees took as a play on the team’s mission to catch up to Opendoor. Zillow planned to buy more homes by spending more money, offering prices well above what its algorithm and analysts picked as market value, people familiar with the matter said.
Project Ketchup, excellent. So, whose fault was this whole mess? Well, here was my wrong take on the debacle from two weeks ago:
However, when that algorithm has purchased a few billion dollars’ worth of houses in Scottsdale or wherever, you need a bunch of non-algorithmic people in the finance department to clean up the mess, and maybe you need to fire all the people who wrote the software.
Turns out, it wasn’t an algorithm buying all those houses, it was company executives overruling the algorithm to purchase houses at inflated prices, despite staff objections. Then, when that didn’t work - for very obvious reasons! - everyone got fired.
Short Cons
Bloomberg - “…the man behind Archegos Capital Management used derivatives to secretly build a more-than 20% stake in a U.S. regional bank, right under the noses of financial watchdogs…”
The Verge - “Hackers targeted the Federal Bureau of Investigation’s (FBI) email servers, sending out thousands of phony messages that say its recipients have become the victims of a “sophisticated chain attack,””
Bloomberg - “The IRS seized $3.5 billion worth of cryptocurrencies during fiscal year 2021, a figure that accounted for 93% of all the assets seized by tax enforcement that year, according to an IRS criminal investigation annual report published Thursday.”
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