The Great Disruption (22 page)

Companies will rarely ask for such change by themselves; indeed, the U.S. auto industry fought furiously against tighter fuel economy standards in the mistaken belief they were bad for business. Government needs to apply some tough love to such irresponsible adolescents and put in place the boundaries that will make them better grown-ups.

So the major transformation we are about to embark upon will be initiated and driven primarily by government, when forced to do so by the people. However, when government acts, the change will be delivered by business and markets, and at that point the companies that are best prepared, like DuPont, will win the competitive game. In the meantime, many leading companies, who see this as the right thing to do and in their self-interest, are actively supporting tighter regulation. But government will in the end drive it. That is government's role—to cage the market tiger.

How will this unfold in practice? When the awakening occurs, governments will, under pressure from citizens and progressive companies, look to the science for advice on what is needed. The science is already clear on this and will be even stronger by then. It will be, for example, to slash CO
2
e emissions urgently and dramatically, and such advice will frame government policy.

The one-degree war plan outlined earlier gives one scenario of how this might unfold, as well as an indication of what response will be necessary. While the actual program put in place will vary from this, the science suggests the scale and timing are not likely to.

This will then unleash a torrent of investment by old companies and entrepreneurial start-ups that will reshape whole industries. The new companies will pose a serious threat to the incumbents, as we are already seeing in the auto industry, where both global giants and scrappy start-ups are racing to bring electric cars to the mass market. This is just one example of the game-changing transformations we will see that will reshape industries.

Schumpeter's creative destruction means that many of our current companies simply won't make it, though many will. It also means that a good proportion of the world's top one hundred companies in twenty years' time are names you haven't heard of yet but exist today and are champing at the bit for the race to start and the opportunity to knock over some of the old players. This is exactly what markets are good at.

What the final shape of all this will be, with what technologies, what companies, and which countries end up winners and losers, is full of uncertainty, but the outcome is not. When we act, we will eliminate net CO
2
e emissions from the economy in an amazingly fast transformation and then move on to the rest of sustainability.

Slow, but not stupid.

CHAPTER 12

Creative Destruction on Steroids—Out with the Old, In with the New

Whenever I give a presentation to a business audience about how dramatic the change is going to be, there are always some who respond, “Yes, I can see
why
it should be like that, but I can't see
how
it's going to happen, so I just don't think it's going to.”

When I say it's inevitable because the science says these kinds of reductions are essential for economic and social stability, they respond, “Perhaps, but I can't see
how
,” and they go into the limits of known technology, markets, incentives, government regulation, public support, and so on. Then I ask, “So how do you think it will unfold? Will we just slide into collapse?” There is rarely a cogent answer, just a repeat of the reasons they think it won't happen.

I now understand this common response but didn't until a conversation I had a few years ago with the CEO of a large global coal company. We were having a private conversation about the scale and pace of change on climate policy. I was saying how, based on the scientific assessment of required emission reduction pathways, the change would have to come fast and furious when it did because of our continued delays—delays they were advocating. Therefore, short of some remarkable progress on carbon capture, coal would then go into rapid decline. His response was he couldn't see
how
this could happen. He said there was simply too much coal and too much momentum in the economy to stop it from being burned. Society needed the energy, and coal was plentiful and cheap. It suddenly occurred to me just how different our worldviews were in framing business strategy.

He saw the world as an engineer. He had to see
how
it would happen to believe it
could
happen. This is a good attribute in engineers, by the way, who work with the laws of physics, which are constant. But in this case, as the CEO, his “how” was considered only in the context of his present market framework, where price determined success and political support was high. So from his worldview, although he was a rational person and saw what the science demanded, he just couldn't see the world acting to achieve that outcome. He didn't think about the implications of that deeply because it wasn't a changeable outcome for him—the shift simply wasn't going to happen. Of course, his self-interest and that of his company made having this view easier for him, but that wasn't the only driver.

My worldview was as a systems thinker and environmentalist. I saw what
needed
to happen, based on what the science was telling us were the consequences if we didn't act. I knew society would, in its own interest, have to make that result happen to suit those immovable needs.

From my worldview, I saw his strategy, which was to assume decades of further growth in coal consumption, and
knew
it couldn't happen. For me, the mechanism that would prevent it from happening was a secondary issue—we would find a way to get it done—whereas for him, it was the primary issue. To me, either we would cut CO
2
emissions and he would lose his market or the world economy would collapse under the weight of climate and sustainability impacts and he would lose his market. He looked around and saw energy demand rising, coal being cheap, and many major countries having strong policies in support of coal. This made the science, while important, just one consideration. We agreed to differ.

Science is absolutely central to business strategy in this area. Science is also the reason I am so confident in how these issues will unfold. The world is a system that includes the ecosystem, the market, and human society. This means that even though we can't pin down precise forecasts of individual events and the behavior of individual system components, we can safely assume, with sufficient certainty for planning, that the system as a whole is going to behave in certain broad ways, according to the laws of science and the history of how humans respond to threats.

I recognize, of course, that there is always some inherent uncertainty, but for the purposes of planning business strategy or our lives, there are some things we can pretty much rely on. So when I say “near certainty,” this is what I mean—a likelihood so high that it should be central to planning for the future.

Many such near certainties are currently being ignored by major global companies and investors. As a result, they face catastrophic financial risk that hasn't yet been priced into the market.

One of these certainties is that the only future a business should plan for is dramatic, discontinuous change. Remembering that our economy operates inside our environment, this is what the science says is inevitable, so this is what will happen. If I am wrong about a one-degree war kind of response and we don't act, then the economy will collapse under the weight of climate and sustainability impacts. That will also result in dramatic, discontinuous change. Mind you, there is little point in planning for that scenario, because a collapsing global economy would be so chaotic that any business strategy made today wouldn't be of any relevance!

To further explore how this all translates into the market and business strategy, including how investors should see these issues, I will focus on climate and energy. There is much more to how this will unfold than energy, including, for example, huge changes in food and agriculture, transport and city design, materials flow, manufacturing, and packaging. But a focus on climate and energy provides us with a critical insight into the process as well as the most important short-term economywide impacts on both markets and emissions.

I will start with the things we know, the things I'm calling near certainties. One of these is that there is no significant future for coal or oil, short of some surprising breakthrough in technology. I realize I'm making a big call here, one that means pretty much every coal mining and oil company in this multitrillion-dollar market is more or less finished. This will be a surprise to most of them, so I had better explain.

We discussed earlier the need to reduce CO
2
e (greenhouse gas) concentrations to 350 ppm and aim for one degree of warming above preindustrial levels. While I'm confident this is close to the target we'll end up with, for now we'll explain what's coming using the much less stringent target already accepted by most of the world's governments and major corporations. This target is for us to limit warming so it does not exceed the very dangerous two degrees. Even this “plan for failure,” as I referred to it earlier, means we face discontinuous and dramatic change in the market—change that few investors and companies are considering, even though it is clear for all to see.

To examine these implications, let's take a look at the science. A useful starting point is a study conducted by the highly respected German government–funded Potsdam Institute for Climate Impact Research (PIK), led by Professor Hans Joachim Schellnhuber, whom I've worked with on various Cambridge programs. The PIK conducted a study that calculated what a two-degree target meant for the total amount of CO
2
that could be emitted—in other words, what was our total fossil-fuel budget? Remember in this context that a significant proportion of CO
2
stays in the atmosphere for a long time after it is emitted, some for over one thousand years. This means what counts is the total amount we put up there, rather than when we put it there. That gives us a budget—the total amount we can burn to achieve a given outcome in CO
2
concentrations in the atmosphere and resulting temperature. The answer provided by PIK is that we can emit around 890 billion tons of CO
2
between 2000 and 2050, if we want to reduce the risk of exceeding two degrees to below 20 percent. (Some would argue a one in five chance of catastrophic warming is still too high, but let's accept this for now as the minimum sensible target.)

The PIK then calculated, if we carried on with business as usual, when would the budget be used up—when would
all
the fossil fuels we can afford to burn be gone, requiring a complete stop in their use? Assuming we chose to reduce the risk of going past two degrees to about 20 percent, the answer would be that it will all be gone by 2024. This would still leave around 75 percent of proven economically recoverable reserves in the ground and an even greater proportion of total reserves never to be used. As the famous quote goes, “The stone age didn't end because we ran out of stones.”

Remember, these are scientific, business, and economic assertions, not moral or ideological ones. This is good old-fashioned rational analysis.

So again, staying rational, there are only two paths we can go down. We act dramatically, within a decade, to slow down and then eliminate the burning of coal, oil, and gas, or we race past two degrees, racing toward the cliff of climate change spiraling out of control, not being sure where that cliff is or how big the fall will be. Not really a hard choice.

Now let's consider this simple scientific analysis of the available fossil fuels in the context of business and markets. By definition, here we move from science and certainty to markets and assertion.

What about CCS? Can't capturing the CO
2
and burying it in the ground save at least the coal industry? There is little doubt in my mind that CCS can work in a technical and environmental sense. It seems it will be possible to capture CO
2
from power plants and bury it safely. It will be complex and may take longer than we'd like, but it seems achievable. That is not the problem.

The challenge is economics. The question is, will the cost of burning coal added to the cost of capturing the CO
2
and
transporting it
and
burying it safely be able to compete with the cost of renewables? (Noting as well that using CCS dramatically reduces the efficiency of power generation from coal.) By contrast, renewables are proven technologies, are already being invested in at scale, are falling in price rapidly, and are not burdened by the capital risk and time delays of the massive new infrastructure required for CCS.

The time frames involved and the immaturity of CCS compared with the large commercial investment and research under way in renewables make it hard to see how coal with CCS can win the market battle.

I support government investment in CCS, and I hope it becomes a viable technology because we'll need it for purposes other than coal, such as removing CO
2
from the atmosphere. One way of doing so would be burning biomass like trees in power plants and then capturing the resulting CO
2
and burying it, thereby generating electricity with negative CO
2
emissions. So it should be supported.

Many otherwise rational people analyzing the coal issue fall into what I call the economic inertia trap—we have an enormous amount of coal, the industry is large, therefore it will keep going. Markets are far more brutal than that. If coal can't compete, including maintaining government and community support, it will die a market death. While its inertia will slow that death it will not prevent it.

I am skeptical of CCS's viability as a commercially competitive option when used with coal. Consider this: Despite decades of talk, at the time of writing there is not one commercial-scale demonstration project capturing and sequestering large amounts of CO
2
from a coal-fired power station. Not one. All the various technologies needed are being used somewhere, but that doesn't mean they are commercial in combination, especially given the time challenge of mass deployment by 2020. So the market's view is clear. Despite coal-mining companies having their whole existence at stake, that a successful CCS industry would be worth trillions, and that there is enormous government political support for CCS, including funding, no company in the world has committed to building a full commercial-scale power plant with CCS.

Meanwhile we are already seeing spectacular growth in renewables, with investment approaching $200 billion per year even in the context of difficult economic conditions. Unlike politics, markets are ultimately rational, that's why we see so little commercial money going into CCS. Or as we say in Australia: Talk is cheap, it takes money to buy beer.

I should be clear I'm certainly not against society investing in CCS and matching commercial money to do so. As we'll discuss shortly, I think the market should be let rip on finding solutions, and we should not dictate technologies that are in or out. We should only dictate outcomes in terms of clean and safe. I'm just expressing my opinion on this particular one, as a business strategy risk question.

So is CCS technically possible? Yes. Would I recommend an investment fund relying on it to save their investments in coal? That would be a big call.

So back to our 2024 deadline and the investment implications of all this. Given that a sudden stop to all coal, oil, and gas consumption is not realistic and that CCS is at best a risky strategy, action will have to be taken, and urgently, to slow down growth in the use of fossil fuels, to allow our budget to last longer. Since no serious action is on the table yet, it will still be some years away. Yet we know the longer the delay, the harder the brakes will then be put on because the cliff can't be moved. It's those damn laws of physics again.

What this means is that, as of today, there is a huge risk in the valuation of all coal and oil reserves and therefore of all coal and oil companies. The market hasn't yet priced in that around 75 percent of known economic reserves may never be extracted
and
sometime in the next decade, government will have to dramatically curtail the consumption of coal, oil, and gas.

This means that within this decade, and I think earlier rather than later, whatever government actually does, the market will wake up to the political and commercial risk and dramatically mark down those companies' value. Every year that passes the risk gets higher and the fall becomes harder. When it happens, lower share price equals lower capital for investment, and the terminal decline of those industries will begin. Money will then move into clean forms of energy, making the perception shift self-fulfilling. When it happens, it will occur virtually overnight, as markets tend to shift sentiment in that way. Governments will then abandon support for coal and oil and go with the market toward renewables.