Can the Free Market Fix Climate Change?

Within the world of business and investing, the words "climate change" often invoke extreme points of view. One on hand, a changing environment poses significant risks to industries, companies, and thus, stock prices. On the other, legitimate concerns exist over increased government regulation, diminishing economic growth, and the elimination of jobs, all of which could affect – you guessed it – stock prices.

In recent years, these different perspectives have appeared irreconcilable. But to Ramez Naam, author of a new book, The Infinite Resource: The Power of Ideas on a Finite Planet, a viable "win-win" solution is just around the corner. In fact, history has shown that humans can solve these types of problems by embracing the free market – without sacrificing economic prosperity.

Over the summer, The Motley Fool invited John Vechey, founder of PopCap Games, to visit our headquarters and chat with a wide variety of climate change experts. The focus was on how investors can avoid certain risks, 'green' their portfolio, and prompt market-driven solutions.

Vechey and I spoke with Mr. Naam, who won the 2005 HG Wells Award for his nonfiction book, More than Human, about his latest research and ideas for addressing climate change. What follows are excerpted highlights from this eye-opening and inspiring discussion.

For the full audio interview and transcript, click here.

On the current polarized debate...

[W]hether it's climate or energy and fossil fuels or feeding the planet, it's really very polarized.

You've got people who say, "Hey, look. There's no problem whatsoever" and ignore the real problems, and there's other people who say, "We're doomed," or "The only way that we can address these problems is to give up on wealth and affluence and economic growth."

I thought both of those were wrong and there was room for something in the middle.

On human ingenuity ...

Two hundred years ago, someone named Malthus -- we now talk about "Malthusian" catastrophes -- Malthus was a philosopher, or actually a reverend, who wrote that there was no way that food supplies could keep up with population and we were going to have massive famine.

In 1968 Paul Ehrlich, who wrote this book called The Population Bomb, a top New York Times best-seller, where he said humans are going to die, the hunger rate is going to go up because we can't possibly keep up with the population growth to feed the world.

The hunger rate and the starvation rate have gone down following both of those books. We faced the ozone hole, and that's not fixed yet but we've eliminated emissions of CFCs. The same thing with acid rain.

Whenever we get serious about these problems, we learn to innovate in a way that solves them without being overly expensive and without really impacting economic growth.

On the lack of a catalyst for change...

It's about self-interest in a certain sense. Wherever a solution is well aligned with somebody's self-interest...the market kind of figures it out by itself.

When it's an externality; when it's steam or sulfur dioxide coming out from your factory causing acid rain hundreds of miles away or thousands of miles, then we need to help fix the market.

You're right that climate change is kind of more spread out than any of the other problems, except maybe the ozone layer, and it does operate on a somewhat longer-term basis, but it's not all long-term. Some of it is here, right now.

This past year we saw a spike in people's belief in climate change as a problem in the U.S. Why? Because of Superstorm Sandy hitting New York, because of the drought that wiped out a quarter of the corn crops in the U.S. this summer.

People don't really get persuaded by science or by fancy graphs or something like that. It's those kind of visceral things they can touch and feel that sway opinion. That's what will ultimately sway opinion on climate.

On pricing carbon and profit sharing...

Americans, in surveys say, "Yeah, we should do something about climate change," but if you ask them, "Hey, what if we made fossil fuel energy a little bit more expensive?" they'd say, "Oh, no. Not that."

Imagine this. Imagine you get up in the morning, you go to your mailbox, you check your mailbox, and there's a check there. The check says, "Hey, Mr. and Mrs. Smith, here's your check for $600, which is your fraction, this quarter, of the fees that companies paid to emit carbon dioxide and other greenhouse gases into the atmosphere."

The idea is we'll levy a fee whenever carbon dioxide is emitted because we know that it does damage to all of us, indirectly. But then the government doesn't keep that fee. They just pass it back to consumers.

How does that help you? Well, your energy prices have gone up. Certainly if you use coal electricity, or to a lesser extent natural gas, your electricity prices at home may have gone up.

We don't want that to make things worse for a typical American family, so you get this check that is an even dividend for every man, woman, and child in America, of how much industry had to pay for emitting carbon dioxide.

Why does that help? Because now with this money in hand, you've got a couple of options. You could pay more for that electricity, or you could say, "Hey, maybe I should go ahead and install solar on my roof," or "Hey, maybe I should install better insulation."

Because the cost of coal and natural gas and oil has gone up, but the cost of insulation hasn't, the cost of solar and wind hasn't, it shifts people's purchasing behavior and industry purchasing behavior, toward those renewables.

That's a very big effect, actually.

On company's current sustainability efforts

It's really tough now. Some companies are trying it. Even Wal-Mart (NYSE: WMT  ) recently has announced a big sustainability initiative, and that's huge. They're the largest retailer in the world.

But the incentives still don't align right because if a company tries to pass these costs on to consumers, the price goes up so a consumer might go to their competitors. That's why you want it to be an even playing field.

On the inevitable rise of green energy...

We're going to deploy green energy. Solar energy, for a long time it was incredibly expensive but it's gotten cheap fast -- so cheap that you can now buy 20 times as many solar electricity per dollar as you could in 1980 -- and that trend's continuing...We're going to build better batteries, we're going to develop next generation biofuels, and we're going to find ways to reduce our carbon emissions.

The question is just how fast do we have to do these things? We already need to do it kind of fast, on a historical scale.

On potential 'stranded assets'... 

Duke Energy (NYSE: DUK  ) , if it was a country, would be the ninth largest emitter of carbon dioxide on the planet. It's the largest utility in the U.S., but you see them investing heavily in wind and solar because they're not dumb. They see where this is happening.

That said, I would be very, very careful about fossil fuel-based stocks right now, especially stocks of companies that are linked to coal because coal is the dirtiest fuel. It's the one that releases the most CO2 per unit of energy that you get, about twice as much as natural gas, so it's the one that's going to get hit by regulations the hardest.

On China's huge renewables advantage...

Renewable energy, especially solar, is set to massively disrupt the traditional energy industries. It's going to be a multi-trillion dollar industry and we're basically handing it to China. If you look at investment just in the private sector last year, China invested almost twice as much -- $65 billion, versus our $35 billion -- in deploying solar and wind.

China has the biggest supplier and the biggest manufacturer of solar. They have two of the biggest manufacturers of wind. They know there's going to be a huge, huge industry and they want to own it, and we're basically handing it to them right now.

On advancements in battery technology...

We've made incredible advances. We're not there yet, clearly. The reason that Tesla's (NASDAQ: TSLA  ) Model S is so expensive almost entirely comes down to the battery pack, which costs I think $28,000 for just the battery expense.

The price of a lithium-ion battery is at 1/10 of what it was in the mid-1990s, per unit of energy storage. That technology is reaching its limits, though...so now people are working on a few different new battery technologies out there, and some of them look super promising.

I will say the solar industry, it still isn't mature but it's super crowded right now. It's going to be a huge boom, but there are literally hundreds of companies.

I think the boom in battery technology is going to be even larger from an investor standpoint, because there's so much investment that needs to be made in deploying batteries.

On the false promise of a single energy breakthrough... 

It's going to be a blend of technologies. You're not going to see that, "Hey, solar is 100% of energy around the world." That's just not going to be the case because where I live in Seattle it doesn't make sense to deploy solar on my rooftop, ever.

Wind is going to be big in some places. We'll probably keep using fossil fuels for decades; nuclear as well. That said, the biggest things in terms of growth rate really are solar and batteries. Then further I'd say possibly next-gen biofuels.

On how to invest in renewables...

I would say, for most investors, don't try to pick individual stocks because it's a very Darwinian market. What I mean by that is it's early stage. It's a huge market opportunity but there's a lot of companies and it's a very fungible commodity. It's whoever has the cheapest product so a lot of companies will fail.

The way that I advise people is really pick a fund or a set of funds that invest broadly in the area and track that. As I said, the S&P Global Clean Energy Index is doing extremely well. That's an easy way for investors to diversify while getting into this area.

There's a number of mutual funds in the area that have done well. Guinness Atkinson Alternative Energy has been doing very well. Firsthand Alternative Energy has been doing very well. New Alternatives is another one.

How to uncover the 'infinite resource'...

I'm a huge believer in bottom-up innovation. Innovation doesn't typically come when somebody from the top says, "Hey, let's do this." It really comes when you have a whole lot of ideas competing with one another, and the best one wins and ideas can cross-pollinate.

I think in green energy, renewable energy...we have that competition, that diversity of ideas. We just don't always have the incentives for victory. 

You can point to a lot of other ecological things around the world that have value. Getting off of climate change for a sec, say, the ocean's coral reefs actually bring the planet about a trillion dollars' worth of services each year, it's estimated, based on filtering water and nursing fish and so on.

Trillion dollar service; why isn't there a billion dollar start-up opportunity in helping coral reefs stay healthy, because they're at great risk? Well, it's because the incentives aren't there.

We have the competitive part down. We have the fast-moving part down, but the incentives need to get tweaked in various places to reflect the real value of our shared resources, our shared commons.

On whether we'll run out of time... 

I think we will fix the problem, one way or another. It's kind of a question of how much damage we take. If the Arctic ice cap really melts, that's going to release a huge amount -- about another trillion tons -- of buried carbon that could heat up the planet a lot, so taking more of a risk.

I think we'll take government action when two lines cross.

One is the trend line of how much people believe that climate change is a problem, and that's kind of a jagged line. It's kind of two steps forward, one step back, but it generally rises as weather gets weirder, as droughts happen, as forest fires happen, it's always going to go up as things get worse and worse.

The other line is the cost of solutions, and that line is dropping because of the innovations in solar and wind and batteries. When those cross, I think Americans will say, "OK, the problem is real, I'm convinced, and the cost isn't that bad. Let's do something about it."

Then we'll actually -- later than we needed to -- but then we'll actually take government action, I believe.

On how you can make a difference...

I'd say the biggest thing you can do, as an individual if you're convinced that these are issues is communicate with other people, especially those who don't agree, and you try to persuade them as to why these are real issues.

And act politically. That doesn't have to be a whole lot. Call your state legislator. Call your city councilmen. They don't get many constituent calls at all – maybe one a day. That one call can actually make a difference in terms of their voting pattern.

As investors, though, I think we have bigger leverage and really it's a win-win. We have the ability to help push the companies that are going to make the things happen that will help the planet, while helping us get richer, and we have a chance to get a good rate of return on those already.

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Read/Post Comments (8) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 11, 2013, at 11:56 AM, DaSky wrote:

    MF,

    AGW is a hoax and con! What part of this do you not understand!

  • Report this Comment On October 11, 2013, at 9:39 PM, NorwayRed wrote:

    When pollution is "free", business decisions involve economics plus government regulations. Use of Pigovian taxes might eliminate a lot of unnecessary government regulations. When the polluter pays, business decisions can be more free of government regulations.

    An example is the Keystone XL pipeline. The business decision takes many years because of opinion differences about carbon emissions. If a carbon tax existed, the business decision might occur far more quickly and efficiently.

    British Columbia has a carbon tax that works. http://www.globe-net.com/articles/2013/july/24/bc%27s-carbon...

    http://en.wikipedia.org/wiki/Pigovian_tax

  • Report this Comment On October 12, 2013, at 8:18 AM, devoish wrote:

    Of course it can! Especially without a description of what it means to "fix" climate change.

    There are many solutions. One might be to let the chips fall where they may until climate strengthened disasters like Sandy or the cyclone Phailin hitting India this morning reduce consumption and GDP and with it oil and coal consumption enough to lower greenhouse gas levels below 350ppm.

    Another might be to take back the dollars the investment industry redistributes and stores as notional value and use what is left after notional value meets the real economy to lower greenhouse gas levels below 350ppm by reducing oil and coal consumption through energy efficiency and renewable energy spending, while not getting fooled by marketing into believing that renewables and alternatives are the same energy sources and provide the same results.

    But the path to one of these options is like using energy to dig holes and then more energy to fill them back in until the energy is exhausted.

    I would also like to suggest that the best way to invest in renewables is to put them on your rooftop, not in your portfolio.

    I would also like to suggest that we will "take action" now that the financial industry has caused financial savings from installing rooftop solar by bidding up oil prices, and can also recapture them from lending through lease arrangements rather than let them escape to individuals through Government taxes and subsidies.

    Best wishes,

    Steven

  • Report this Comment On October 12, 2013, at 1:12 PM, xetn wrote:

    First question: What free market? There is no free market. There is only fascism.

  • Report this Comment On October 12, 2013, at 3:06 PM, todamo13 wrote:

    Great article. I'd like to add that some positive changes in one area of society can help in a seemingly unrelated sector.

    For instance, a lot of the CO2 we've released has come from our destructive chemical-based industrial agricultural methods.

    In an 'organic' system (in the sense of organic food), good, healthy soil contains a lot of organic matter (carbon) because CO2 has been captured from the air by plants which have died and been incorporated into the soil. The carbon in the soil captures water, helping plants be more drought tolerant, preventing erosion, and nourishing soil microbes, which make minerals more available to plants, resulting in healthier plants.

    Unfortunately, in our current industrial agriculture model, chemical fertilizer and pesticide quickly burns out the organic matter in the soil, resulting in a release of stored CO2 into the atmosphere, reduced drought resistance of plants, reduced health and nutrition value of plants, increased erosion, etc. Not to mention the harmful effects of toxic chemical fertilizers and poisons. Which, by the way, are also made from fossil fuels.

    By switching from chemical industrial food production to organic sustainable food production, not only will we improve our health, but at the same time we will be removing poisons from our air, land, and water and helping to sequester a large amount of CO2 from the air.

    Also, organic farmers are usually small-scale, so supporting a local organic farmer will help revitalize your local community economy.

    Like switching to rooftop solar, it's a win-win.

  • Report this Comment On October 13, 2013, at 9:18 AM, wvowell wrote:

    This so called "climate change" is a fabrication of the globalists that want to control all of us on earth.

    The data was proven false, misleading, inaccurate, during the Bush administration. Unfortunately Bush folded up and didn't use the bully pulpit to send this message out.

    Climate Change is NOT occurring due to human life on earth. This is obsurd, with NO factual basis.

    Please stop this nonsense!!! MOTLEY FOOL you need to stop allowing this propaganda to be broadcast in your forum!!

  • Report this Comment On October 13, 2013, at 10:09 AM, cmalek wrote:

    @todamo13:

    The reason for the introduction and continued of artificial fertilizers and genetically engineered seeds was and is the inability of "organic" agriculture to feed the growing population. The return to "organic" agriculture will doom about 75% of the world's population to starvation. Of course, to some groups that may be desirable because it would reduce human impact on the environment. While "organic" farming works quite well on a small scale, it is a totally inadequate when it comes to feeding billions of people.

  • Report this Comment On October 13, 2013, at 11:20 AM, HanSoLow wrote:

    Global Cooling (70's) vs Global Warming (90's) vs Man Made Climate Change (00's).

    When the alarmist narrative doesn't play out, change the narrative.

    Hasn't America's co2 emmisions been reduced to 90's levels while China's have risen? How is a carbon tax on Americans going to solve the rising "co2" problem?

    How many super storms or huricanes have hit this year, last year, over the last decade? Aren't they unusually lower these days?

    I am in no way a believer of Man Made/caused climate change; however, I do believe in being a good steward of God's creation. I love the sustainable efforts that companies have made because of their financial sense. Reduce, Reuse, Recycle makes sense to me. Taxing co2, something that comes out of my mouth, does not.

    Investing in SCTY and TSLA appeals to me because of the small sense of freedom from the system (reliance on government sponsored big utilities). Investing in CLR and KMI appeals to me because of their efforts to produce/move American Oil and not other nation's oil who are hostile towards Americans.

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