The Great Disruption (24 page)

These are some of my conclusions on technology. We'll return to more examples of such new business opportunities in later chapters on building a new economy. If you want to investigate the energy issues more deeply, there are many high-quality analyses available. In particular for the whole picture of climate solutions, I would recommend Al Gore's book
Our Choice
. For a brief overview of how we could shift to 100 percent renewable energy in twenty years, I would recommend the Stanford University study summarized in
Scientific American
that I referred to earlier.
4
For those who want a deep dive into energy, I'd recommend the free downloadable book from David MacKay at http://www.withouthotair.com.

The key investor point is that we have many, many options for clean energy; they are not laboratory experiments but serious full-scale commercial enterprises today. If you have any remaining doubts this is a short-term commercial issue, consider that in 2008 and again 2009, more capital was invested in new renewable power generation than in new fossil-fuel and nuclear power generation.
5
The game is now firmly on.

As the market sorts this out, something else will come into play that I am convinced will kill off nuclear power and coal with CCS. That is the speed of change.

There is an understanding in the long cycles of technology penetration, one which holds that people usually underestimate how long it takes for a technology to reach critical mass and then overestimate how long it will take to go through exponential growth. We see this play out in many areas on a regular basis, like digital music being around a long time with little impact, then suddenly booming. Likewise digital cameras, e-book readers, and so on.

This is how it has been and will be with clean energy technologies. People say solar has been twenty years away from being competitive for forty years! True, but now we're actually seeing the price fall dramatically and, perhaps even more critical, the amount of investment in the area growing exponentially. While the percentage of installed energy from renewables is small today because of the long capital cycles, growth rates of 25 to 40 percent per annum will soon overcome that. And again, that's before government gets serious about driving change.

What are the business and investment implications of all this?

Much has been said about the economic transformation to a low-carbon economy. None of this compares with the real scale of the opportunity or the commensurate level of risk to those companies that aren't ready. As outlined in previous chapters, government will have to act ruthlessly and firmly when they act. They will not tolerate the prevarication and debate we have seen around us in recent years. Government attitudes will resemble those in war, with a level of determination and focus that will see change occur messily and inefficiently but quickly and reliably. Government will ensure the public is deeply engaged and supportive, as they will need this support to implement the required actions.

The scale of change needed has been compared to a transformation like the Industrial Revolution. Even this doesn't adequately frame it, because that happened relatively slowly. I think of the coming transformation being like a twenty-year dot-com boom on steroids with military support. Schumpeter's creative destruction will move through the economy like a wild fire through a dry forest.

To implement this change quickly, government will have to direct the market to achieve a given level of emissions reduction in a certain time frame. The economic shift will be much faster than most commentators believe, because most analyses assume normal market conditions and investment cycles, not government mobilizing on a war footing with associated market intervention.

So we can assume humanity will respond late, with a plan something like what Jorgen and I developed in the one-degree war. This is not a pretty story for most companies, many of which will be replaced by smarter, faster, new companies.

Change on this scale will create some big winners among disruptive companies with new technologies and business models that address what will then be urgent social needs. It will also create some big losers among companies that are slow to respond or make the wrong call on the direction of change, such as backing the wrong renewable technology or staying with fossil fuels too long.

Consider some of the changes that have been associated with the move toward digital technology—minor in scale compared with those we face in dealing with our current challenges, but interesting examples of industry shifts. Kodak, one of the giants of the photographic industry until the 1990s, proved unable to cope with the shift to digital, even though they knew it was coming, and had to sack 60 percent of their workforce of sixty thousand. One of the successes of digital technology is the U.S. company Netflix, started as a DVD-by-mail company but now increasingly focused on unlimited streaming movies online. By taking advantage of the smaller size of a DVD and now streaming technology, Netflix was able to essentially destroy the giants of the video rental market in just a few years. Blockbuster shares, trading at $30 in 2002, now fetch less than $0.20. At one movie a day, the Netflix service costs just $0.30 a movie—a price that the old Blockbuster model simply can't match.

Unlike the boom in the dot-com industry, when the new economy was hard to touch, making it at times difficult to differentiate talk from reality, the transition to a low-carbon economy is more nuts and bolts. I heard recently about a green investment fund that bought stocks in a ball-bearing company because they expected dramatic growth in sales to wind power companies for their turbines.

Also different from the dot-com boom is that many of these new businesses will have real-world income, selling electricity to utilities obligated by law to buy an increasing percentage of their power from renewable or other low-carbon sources. The numbers quickly become substantial. In 2008, about 125 million households in the United States spent an average of about $104 a month on electricity bills. That's over $150 billion a year (and growing), just in residential consumer spending, just on electricity, just in the United States. When you include commercial and industrial electricity bills, total U.S. end user spending in 2008 amounted to a staggering $363.7 billion.
6
This is just what end users pay for what they consume each year, so behind that is trillions invested in the capital equipment and infrastructure required to generate and deliver that output. Given that is just for electricity, not counting the much larger value in oil for transport being converted to renewable power in a few decades, this is a breathtaking opportunity.

There's certainly massive numbers involved. The 2009
World Energy Outlook
by the International Energy Agency forecast that $10.5 trillion in
additional
capital spending would be required for energy infrastructure under a proactive response to climate change just between now and 2030. Many analyses focus on the cost of all this change and wonder how we can afford it, especially if the economy is struggling at the time we choose to act. What they're not taking into account is the similarly breathtaking opportunities to save money through energy efficiency, perhaps one of the most exciting areas of short-term opportunity for investors in this whole space.

The IEA's current estimates suggest that the economic benefits of energy efficiency will be significantly greater than all the costs of the investments required to start decarbonizing the energy system. Their assessment suggests that from now to 2050, the incremental investment required to reduce emissions by 50 percent is around $46 trillion, with a major focus on energy efficiency. It sounds like a lot until you consider that resulting fuel cost savings of $112 trillion delivers a net economic benefit of around $66 trillion. Even discounted at 10 percent, this means a net savings today of $8 trillion.
7
So again we see that the actual action required isn't hard or expensive, it's the decision to get on with the job that seems to be challenging.

As a result of the delays to date, we can be sure the coming market-driven change will not be smooth. But then markets rarely are. This poses particular challenges for investors who have to make decisions on timing. If you're still thinking this is decades away, though, think again. HSBC estimates the global market for low carbon technologies will exceed $2 trillion per annum by 2020, with capital investment of around $10 trillion during the current decade.
8
It also forecasts that China will overtake the United States in share of the global low carbon market while India will overtake Japan, cementing the geopolitical power shifts I will cover shortly. With the transformation thus in full swing by the end of this decade, anyone guiding a company or investment fund needs to pay careful attention now. While it will start with a focus on energy and water it will soon spread to all aspects of the high-carbon economy and then to sustainability more broadly.

Some of you are thinking, “Haven't we heard all this before, several times? Wasn't the energy revolution going to start in the 1970s with the oil shock and the beginning of the solar revolution? Then oil prices went down and it all went away? Haven't people been saying ever since that the boom is ‘just around the corner'?”

Yes, all true, but this is fundamentally different for a simple reason. Each previous time, the transformation has been driven by economics; fossil-fuel prices went up so alternatives became competitive. We have let the market determine the pace of change, yet put no price into that market for the damage caused by climate change. So before, the argument that the alternatives were uncertain, or more expensive, was a really significant commercial impediment to change and a barrier to new policy to support that change.

This time, it's driven by science. It doesn't matter if oil and coal completely collapse in price, which I think they may well do at some point as clean energy takes off. We simply won't be able to burn them because of the CO
2
impact. Through markets, taxes, or straight-out regulation, the science dictates that government stops us from burning fossil fuels that emit CO
2
. (Unless, of course, the much lower price for coal then makes coal with CCS economically competitive! That would be a good example of the unpredictability for investors in this area, but either way energy generation that emits CO
2
is finished.)

All this means that, unlike the past forty years, it doesn't matter if clean energy is more expensive anymore. In many cases it's not anyway, and it will all get cheaper from here on, but that is now irrelevant. When you accept what we face, price no longer matters.

I know this seems like a ridiculous argument when so much of the impediment to change has been price, but think about it. When we wake up to the issue, do you really think we'll do the assessment “Can we afford to save civilization, or would we rather keep our energy costs down while we hurtle off the cliff into collapse”? Of course we won't.

I've used power generation as my prime example of the business opportunity and of technology options. This, however, is just the opening shot in a business sense. Yes, we have to produce power differently, but we also have to retrofit every house in the world to make it far more efficient, with insulation, draft proofing, double- or triple-glazed windows, and the like. We have to replace the auto fleet and build new infrastructure to support electric cars or whatever technology wins that race. We have to recycle and reuse 100 percent of all materials, including all drink containers, computers, and cars, by offering incentives to do so, like having container deposits on the one hundred billion or so plastic bottles and aluminum cans used in the United States each year.

And then we move into changes in agriculture to maximize the uptake of carbon in soil and to prevent the nitrification of our waterways. We'll also need infrastructure and systems to manage and deliver water differently with changes in rainfall patterns. And on and on it goes, all the way through the economy.

This has all been argued before, in fact for many decades. This entire time people have advocated the need, to investors, governments, and corporations, that we should drive these changes—and by the way, it would be a great commercial opportunity if we did so. It was just that, though: advocacy that people
should
pursue it.

Now it's different. I am not advocating the change; I'm saying it's here and it's unstoppable. The only question for business and investors is who gets on the boat and who drowns, because the tide has clearly turned.

CHAPTER 13

Shifting Sands—From Middle Eastern Oil to Chinese Sun

History has many examples of powerful companies, countries, and empires that have fallen because of complacency. They think they are protected by their size and momentum, forgetting the lessons of the world's oldest surviving “civilization”—the global ecosystem: Survival in a system is not about size or strength, it's about capacity to adapt to changing circumstances. Consider the dinosaurs.

Being responsive to change requires us to understand what might be coming and to be as ready as we can be for surprises—to consciously and deliberately develop resilience.

The reason resilience is now so important is that we have unleashed massive change on every level. Change that is physical—the impacts of shifting climate zones, refugees, weather disasters, and rising sea levels—but also geopolitical and economic. In this new world, which resources are valuable in economic and geopolitical terms changes dramatically, including the end of oil, shifts in economic competitiveness, and conflicts over resources, including water.

To get ready for these new system conditions, we have to consider both practical preparedness—investing in the right technologies—and psychological readiness—can we cope with uncertainty and rapid change? Will we seize the opportunities or get stuck lamenting and resisting the pace and scale of change?

In this context, all participants need to keep their eye on the prize on the other side and ask: Is my family, company, community, or country ready for what's coming?

As we covered in the first half of this book, system shocks are now unavoidable. What
is
avoidable is failing to respond effectively to stabilize the system in response. The more we think through the possibilities and the better we prepare and respond, the greater our chances of both dealing with situations that arise and leveraging them for maximum benefit.

This brings me to the geopolitical implications of what this all means for countries and national competitiveness. In this context, there are four issues I'd like to cover:

• The security and economic consequences of the
physical
impacts of climate change, coming as they are on top of existing sustainability challenges.

• The global and national shifts in economic competitiveness caused by both the shifting value of resources and the shift to new technologies.

• Challenges to the moral authority of different cultures and economic systems, driven by their ability to respond to the coming crises.

• The process of retribution and accountability for creating the problem.

The physical, security, and economic consequences will now be significant regardless of our response. Even with a response as dramatic as the one-degree war, the climate will continue to change physically and many other sustainability issues will have significant social and economic impact. We are already seeing this with water availability shifting, increased extreme weather, sea level rising, food supplies being threatened by climate, and other sustainability limits being breached. All these trends will now accelerate. While this is well understood at the scientific level, we are just beginning to think about planning for the economic, security, and social implications.

A prime example of this is food shortages, supply shocks, and price volatility. Given that we experienced shortages and price spikes in 2008 and again in 2010, the pressure now piling up on the food supply system makes it inevitable that more of this will come. On top of the already stressed supply situation, we face a 33 percent population increase and greater per capita demand driven by more wealth and associated expectations for more complex diets. While agricultural production has increased dramatically over recent decades, it has stopped increasing on a per capita basis. There is also a price to pay for the industrialized farming techniques that have delivered this, such as the nitrogen overload that has yet to fully work its way through the system.

We see food as a natural healthy industry. In reality, the nitrogen fixation on which it relies is highly carbon intensive, and industrial agriculture (in stark contrast with traditional agriculture) is a nonrenewable industry (that is, dependent upon things that run out). This makes it unstable in the coming world.

The industrialization of food is not just about the physical impacts on the environment, however. We now have an integrated global food supply system that is highly specialized and commoditized. While these types of systems deliver great efficiency and low costs, they are particularly prone to shocks and change. As the New Economics Foundation (NEF) pointed out in its report
96 Hours to Anarchy
, Western countries have now created such a finely tuned, just-in-time food supply system that the loss of transport, for example, would see supermarket shelves in some countries empty in just four days. All it would take would be a terrorist attack on fuel depots, a peak oil price panic, or a pandemic keeping drivers at home, and chaos could erupt very quickly, with enormous social and political consequences.

This system is already tightly wound and highly stressed. Climate change is only increasing the pressure, making the global geopolitical risks even greater. We can expect major issues in India and China because, already struggling under the impacts of environmental degradation, the water supplies that feed their agriculture are being threatened by over use, magnified by climate-related shifts. Serious food shortages affecting this region of two billion people could soon lead to widespread geopolitical, economic, and social consequences, with resulting refugees and social and security instability.

There are many other such examples around the world. With so many of the world's people living in coastal regions, sea level rise will have major impacts on security and stability, particularly in poor countries, with the potential for millions of refugees well documented.

The conflicts that will inevitably arise and the shift in power among countries that will result are impossible to accurately predict. However we certainly need to get our militaries, security think tanks, and development and aid bodies to ramp up their planning for these developments. We can't now avoid such impacts, but we can certainly get ready to manage them by building the requirement for resilience into our planning.

These are the negative geopolitical impacts, but there will also be some significant impacts for the relative competitiveness of nations in the transformation to a low-carbon economy. For some, these will be positive, for others much less so.

Countries that depend on oil income, for example, could find this income virtually disappear over a few short decades. The security implications of resulting failed or conflict-ridden states across the Middle East and elsewhere could be dramatic.

While not significant on a global scale, my own country, Australia, is an interesting illustration of the global trends. We will lose our significant historical competitive advantage of cheap energy and export income from plentiful coal. With one of the highest per capita CO
2
e emissions in the world, Australia quickly finds itself at a competitive disadvantage when a high-carbon price is applied. We are already suffering the physical impacts of climate change disproportionately, with severe drought and water shortages wreaking havoc both on our agriculture and on city water supplies. We have had tragic wildfires in recent years that have been so far out of historical experience, they have necessitated the design of new ratings systems for severity of fire conditions. With the likely loss of coral reefs, we also face severe impacts on one of our key income earners, tourism. Some would say all this was karmic retribution!

On the other side, however, we have many advantages and opportunities. Our large land area means we have the potential for significant scale impact with soil carbon. If the science confirms that cattle can be grazed in ways that lock up soil carbon and thus make grazing cattle a net carbon sink, then our vast areas of country become an exciting opportunity with potential global impact.

Our hot, dry continent is blessed with lots of high-intensity sunshine, making our country particularly well suited to solar power. This applies both at the domestic level with distributed power and solar hot water and at the utility level with solar intensity, meaning we can produce energy at a lower cost than many other places in the world. We also have a long coastline for wave power, plentiful agricultural land for wind, and some excellent geothermal areas.

These issues play out differently in each country, but it is already clear they will lead to major shifts in relative economic power around the world.

At the global scale, the most interesting competitive battle is likely to be China vs. the United States. While the United States has considerable advantage with its history of success in innovation and technology, its lack of responsiveness to date is causing this advantage to move steadily to China.

There is great irony in this. For decades, many Western companies have argued against stronger environmental policies on the grounds of loss of competitiveness to China and the developing world. The argument has been that if Western countries made their companies behave more cleanly, Chinese companies would be able to outcompete them because they could pollute freely and therefore have lower costs.

What's been happening while the West has been delaying action, partly in response to this argument, is that China has caught up and is now seriously pursuing a low-carbon economy. Do they want to save the world? No, they want to own it. As Tom Friedman argued:

Yes, China's leaders have decided to go green—out of necessity because too many of their people can't breathe, can't swim, can't fish, can't farm and can't drink thanks to pollution from its coal- and oil-based manufacturing growth engine. And, therefore, unless China powers its development with cleaner energy systems, and more knowledge-intensive businesses without smokestacks, China will die of its own development.

So China has become an example of the Great Disruption and perhaps provides an important insight into our future. They are being forced to act, with rapidly increasing intensity, because they are hitting the physical limits of their economic growth model. They are not quite in an emergency response phase, but they are seeing clear economic consequences of environmental system impacts and are taking stronger action in response, including major interventions in the market such as closing down dirty industries and strongly supporting the growth of new cleaner ones.

Whatever the motivation, China has the potential to dominate the technologies of the future with the advantages of both scale and the capacity for rapid change. I wouldn't be surprised if China puts in place a national system for pricing carbon pollution before the United States and Australia can get it through their respective political processes.

China already boasts the world's richest solar entrepreneur, Dr. Zhengrong Shi, who spoke to me passionately about the need to address climate change when I addressed an event launching his business in Australia. An accomplished solar scientist, he is determined to make solar cost competitive with coal. Chinese born Dr. Shi was educated in Australia but saw the urgent need and great business opportunity to apply his skills in his home country so went home and founded Suntech Power. In a move laced with irony, Suntech is now opening a plant in Arizona, making it the first Chinese clean tech company to bring manufacturing jobs to the United States. China also has a world-scale electric car and battery company, BYD, that has significantly boosted Warren Buffett's wealth. Buffett bought 10 percent of BYD in 2008. BYD beat GM and Toyota to market with the first plug in hybrid vehicle and proposes to sell all electric cars in the United States by 2011. Unusually, the United States is looking like a laggard in this technology race. Indeed, in lists of the top ten companies in various new energy technologies compiled by investment bank Lazard,
1
the United States lags behind Japan, Europe,
and
China, an uncomfortable place for a country that has prided itself on technology and entrepreneurial leadership.

China is not alone. India already has in place a carbon tax on coal to raise money to invest in promoting renewables. Brazil is emerging as a bioenergy superpower. According to the bankers at HSBC, South Korea committed 78 percent of its recent economic stimulus packages to environmental measures, while the United States focused just 11 percent in this area.

The point of all these examples is not to prescribe an approach, but to argue that all countries now need to see this issue for what it is—a
current
driver of change in what makes a country competitive. Countries that assume their current strength will protect them are likely wrong. Remember, strength counts for little against a more responsive competitor.

In the longer term, some deeper issues will emerge as we see who succeeds in adapting to the emerging world. The Western model of market-based democracy clearly dominated the twentieth century. Indeed, without China's success late in the century, it would have been indisputable. While people express various levels of discomfort with the political, social, and cultural approach of the United States, the world's people have largely tried to emulate much of what the country represents. Reinforcing this has been the dominance of U.S. power in most areas of competition and conflict; whether it was World War II, the cold war, the technology revolution, music and film, or overall wealth creation, the United States represents the success many aspire to.

As the twenty-first century gathers momentum, however, it is not at all clear that the United States will be able to maintain its dominance and critically whether it will still represent the most effective political and economic model that others will want to follow. China in recent years has been taking increasingly dramatic decisions to force environmentally driven change in its economy while market-based democracies have floundered. While many are skeptical of China's capacity to carry through, there is plenty of evidence to suggest its market is accelerating ahead of the United States already. China is already the world's largest solar PV manufacturer and the largest market for wind power.