Climate change, in the words of technologist Ramez Naam, "may be the largest test we've ever faced, as a species." For investors, the effects of a rapidly changing environment could wreak havoc on the economy and the companies in our portfolio.
In recent months, the Motley Fool hosted a variety of climate change experts, including Naam, to better inform investors of the challenges posed by a warming climate and the opportunities in emerging green industries.
Along with special guest John Vechey, founder of PopCap Games, I spoke with Naam, author of the new book, The Infinite Resource: The Power of Ideas on a Finite Planet, to identify a market-oriented solution to one of our most vexing global problems. The in-depth and inspiring conversation is presented in audio form below and in a lightly edited transcript that follows.
Isaac Pino: Welcome to a Motley Fool discussion with author Ramez Naam. My name is Isaac Pino. I'm an analyst here at The Motley Fool and I'm joined today by John Vechey, the founder of PopCap Games.
Ramez? John? Are you both there?
Ramez Naam: Yeah.
John Vechey: Yes, I am.
Isaac: All right. To kick this off, let me give a brief intro. Ramez was born in Cairo, Egypt, came to the U.S. at the age of 3, recognized immediately the incredible opportunities available in America. His family decided not to return to Egypt.
He has stuck around for some time, became a computer scientist who worked for 13 years at Microsoft while leading teams working on email, web browsing, search, artificial intelligence. He holds almost 20 patents in those areas, and he is the winner of the 2005 HG Wells Award for his nonfiction book, More than Human. We are now going to discuss a little bit of background on his most recent book, The Infinite Resource.
To kick this off, Ramez, thanks for being here, first of all.
Ramez: Thank you for having me.
Isaac: Obviously you have an interest in technology and addressing some of the most important issues of our time. One of the things that seems to be very near and dear to you is addressing climate change. As a quote from your book, you point out that, "Climate is a challenge that exacerbates all others. It may be the largest test we've ever faced, as a species."
Let's go ahead and start from point one. How did you get interested in addressing this very daunting challenge that we're facing in America and around the world?
Ramez: Well, it was sort of a cliché experience, actually. I was swimming on a beach off the coast of Mexico and just marveling at how incredibly gorgeous the place was. I was on vacation and decided that I needed to understand what the situation was with the environment.
I'd heard so many things from other people and I needed to learn for myself and see what I thought the situation was and what we should be doing.
Isaac: It's a direct encounter with nature and understanding ... kind of an epiphany, I guess you could say.
Ramez: Yeah, that's right.
Isaac: Let's start with the book. The decision to write the book; how did you come to that? How did you see that as a means to an end to get that message out there? Writing the book; why was that the first thing that you decided to take on?
Ramez: The book came after five or six years of research and reading everything else out there. One of the things that I was struck with as I read other books was that people's view on the situation ahead of us, whether 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 that was realistic about how big the challenges are, but also optimistic about, "Hey, if we take the right steps we can actually beat all of these challenges and still end up on a richer planet than we were before."
Isaac: I think what I got most from reviewing some of the work that you've done is that there can be an inspirational, pragmatic, and helpful way of addressing this.
John, I know, has a few questions for you. I guess one of the things I wanted to ask was, looking at this issue -- I was going to bring up the conversation and how it's so polarized -- one of the things that you deal with in technology is that these ideas can solve problems. In the past we have used technology, we have used human innovation, to address problems.
You go back through history and outline some of these instances. For someone younger like me, this is obviously the challenge of our generation, but if you could give us some insight into where in the past we've addressed huge challenges in front of us, I thought that was an interesting story for listeners and for people who are not as acquainted with ... we've been through this over the course of human history.
Ramez: So many ways, over thousands of years. 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, has gone down following both of those books. The reality is we've faced very, very large environmental challenges and then we've gone and solved them.
In the 1960s, in 1969, the Cuyahoga River that runs through Cleveland caught on fire. That wasn't even that anomalous. It was actually the 13th time it caught on fire because people just dumped gasoline and oil and used debris onto the rivers.
We just decided to get serious. That led to the creation of the Clean Air Act and the Clean Water Act and the EPA, and now you can just drink from that river, which you had no chance of doing before.
We faced the ozone hole, and that's not fixed yet but we've eliminated emissions of CFCs, which are the chemicals in refrigerants, mostly, that destroy ozone.
The same thing with acid rain; you might have heard about acid rain in the '90s, and now it's basically not a problem because we put in place some policies. People said, "Oh, it's going to be horribly expensive." Turns out it wasn't, because we innovated and made the solutions cheap, and now we don't emit the sulfur dioxide that causes 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.
Analyst: In both of those instances there were short-term effects and, certainly in the food scarcity, a huge amount of self-interest already natural in the process for the solution. That is, the people who solve the problem often have the benefit from it.
With climate change it's not quite so either short-term, as in the case of, "Oh wow, my river's on fire," or as incentivized to self-interest, such as, "Oh, well if I find a way to have more yield from this land then I'll make more money."
How do we, as a society then, even if you believe that innovation is there, kick-start that in a way that we could start reaping those benefits of solving the problem?
Ramez: That's an awesome question because you're right that it is about incentives. It's about self-interest in a certain sense. Wherever a solution is well aligned with somebody's self-interest; in other words, "Hey, it's my land, it's my property, I don't have to touch it," 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. The drought's been going on for two years, now looking like it's going to be a third year. And because the Arctic ice cap melted to its all-time record low.
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.
Analyst: One of the things that you talk about in your book as a solution to that externality is putting a price on carbon, and specifically a price that dividends out that money, back to the constituency and back to the voters. Could you describe what that is in more human language?
Ramez: Absolutely. 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."
OK, so why are you getting this check? 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 impoverish you. 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? Why does that help solve the problem? 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.
Analyst: Looking at that, the Cap and Dividend makes sense. It changes people's attitudes, it incentivizes them to do certain things. What is an example of a company or a supply chain where they've looked at the entire ecosystem, perhaps they looked, at least, at the entire supply chain for that product, whether it's an iPhone or...
I know Patagonia, for example, has taken a look at trying to find ways to recycle the clothing that they produce, to reuse it, to take the material back and repurpose it.
Are there any examples out there that you can look at, where there's a product that we're seeing, end-to-end, the company paying the price or at least giving a kickback to consumers who help them see through the entire lifecycle of the materials used?
Ramez: It's really tough now. Some companies are trying it. Even Wal-Mart (WMT 2.56%) 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.
That said, a lot of companies do try to make it possible. Virgin Airlines makes it easy for you to go pay for a carbon offset for your flight, so if you're concerned about the environmental impact of flying you can pay a little bit of money that results in installation of better insulation or better scrubbers, or some other way to reduce carbon emissions somewhere else in the world.
It ends up actually being not very expensive at all.
Analyst: One of the things you also talk about in the book was, you characterize it as "the easy way" or "the hard way" for our society as in, the easy way is to get ahead of the problems of climate change, to spur and invest in long-term innovation and essentially solve our society in a more pain-free, beneficial way.
The hard way was ignore it and deal with the consequences, which might be catastrophic to our short-term society, even if the belief is that human race will be able to innovate out of it in 100 or 1000 years.
What are the similarities? In both of those, easy way and hard way, our society is changing pretty dramatically. What are the similarities between those two directions?
Ramez: The difference, I'll say first, is the old adage of "An ounce of prevention is worth a pound of cure." This is really, really true.
People have actually gone and looked at the cost of EPA policies on the environment, and for the ones that were "Let's prevent this emission," "Let's prevent this release" of something bad into the environment, those ended up costing about 1/4 as much as the EPA expected. They were really cheap.
The ones that were "Let's go clean it up after the fact," those always cost more than expected. We have some evidence for this.
The similarities are we're going to do the same set of things either way; it's just a matter of when we start. 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 deploy that. 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, but if we wait until things get really bad and we're really convinced -- by "really bad" I mean no ice on the Arctic Sea anymore, massive forest fires, massive dust bowl-level droughts -- and then we start to act, well then we're going to have to do it even faster.
That's going to be more expensive to us, and it's going to leave more scars for the future.
Analyst: One of the things we talk about with the easy way and actually solving these problems and having the ounce of prevention is that it's estimated that current carbon companies have around $27 trillion in market worth. What happens to them if our ounces of prevention add up to preventing a problem?
Ramez: Yeah, I think it's a challenge for them. Now, many of them are quite aware of this so you see companies, like BP (BP +1.73%) for instance, is investing a fair bit in renewables, or Duke Energy (DUK 1.65%), which is a massive utility.
Duke Energy, 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. The smarter the company is, the more they're going to be investing in those renewables now.
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.
We already see that EPA is working on rules to regulate new coal-burning power plants. We might have basically reached the end of the coal burning power plants we're going to build in America, or just a few left.
Even China -- which has been consuming lots of coal -- we saw China's coal consumption actually dropped; or the rate of growth dropped tremendously, and the rate of production actually dropped in real terms in the first quarter of this year.
That is a fuel that's going to get phased out first, and I would be extremely careful about touching any stock that has anything to do with it.
Analyst: The energy sector. That is an interesting one to delve into. One of the things I look at with these energy companies or the big oil companies is that, as you said, these companies aren't dumb. Are there any that are actually smart?
Some of the solutions that we've come up with in the past that have actually been effective, although there's lots of shades of gray between the EPA Clean Air Act, the ones that you mentioned earlier; there's going to be government intervention.
A lot of companies don't see the government as being very effective, but are there companies that are finding ways to, perhaps ... I don't want to say "lobby," but push the envelope so that we're moving toward cleaner fuels -- being smart about it?
Not necessarily addressing things to say, "Oh, the market's going to change and I'm going to wait and be ready for it when it comes," but actually forcing the issue and perhaps putting game plans in front of key political folks to make this happen sooner rather than later?
Ramez: I think there are a couple that are really thinking about it. BP, historically, has actually done some of the most investment in renewable energy. Now they got a really bad environmental score as a result of the BP oil spill, but they're still one of the most aggressive in terms of investing in alternative energies.
Shell is also very, very smart. Shell is really looking at, not solar and wind so much, but next generation biofuels.
All the oil that we use is really stored up solar energy. It's kind of funny to think about it that way, but really it's plants that got their energy from the sun, that then got pressurized for millions of years, and we're now extracting that.
Shell knows that we can actually take sunlight and turn it into fuel directly. We have to get smart enough with technology. They've invested about $600 million in a very advanced biofuel research project with Craig Venter, who's the man who led the private sector's sequencing of the human genome.
He's an absolutely top flight geneticist. He and his institute are working with Shell on this. I'm pretty impressed by that project, so those are the two that I would pick.
Analyst: I noticed just off the cuff that BP, Shell -- both European companies. Is there something about the operations over there? Are we falling behind over here in America? Is there some kind of structural situation that's pushing them farther ahead?
Ramez: I don't know. I'm not sure that that's the case. I've mentioned Duke Energy. Again, it's not a fossil fuel company directly, but they're a utility. But Duke is a very pro-action on climate change company.
When we were debating the Cap and Trade bill in 2009, Waxman-Markey, Duke CEO Jim Rogers went to Capitol Hill and argued that we should clear a Cap and Trade bill, that we should be doing something about climate change, so there's people on both sides of the pond that are motivated about this, even inside the traditional energy sector.
Analyst: Keeping with the international trend; German right now -- I think its utilities are either 40% or 60% so I'll say almost 50% solar and wind. China, as I understand, is the biggest producer of solar right now.
What happens if the U.S. ignores this and the rest of the world focuses on innovation? What happens to the U.S. economy if -- your premise is that innovation can get us out of this -- of the U.S. just ignores it, is that a sentence?
Ramez: Well, it's not good for the U.S. We are looking at a multi-trillion dollar disruption of the energy industry. If you look at the growth of solar and wind right now, you compare them to the growth of cell phones in the mid-1990s, it looks identical.
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.
Analyst: One of the conversations I have with a lot of analysts, because I cover transportation companies, so you're looking at Tesla (TSLA 1.69%), we're talking about solar companies -- First Solar, General Electric -- is battery technology.
I feel like it's a complicated science that I don't know a whole lot about, but have we been making these gains in battery technology? I know you lined out that the cost of solar has been creeping down. Have we been making solid advancements in battery technology to help us store the solar power? How do you see that playing out in the next decade?
Ramez: We have. We've made incredible advances. We're not there yet, clearly. The reason that a Tesla is so expensive almost entirely comes down to the battery pack, which costs I think $28,000 in the Model S for just the battery expense.
That's the biggest issue with electric vehicles, and with the use of renewables. Once you get about 30-40% penetration you have to have batteries for night time load and when the wind isn't blowing.
Now, lithium-ion is the kind of battery you have in your cell phone, in your laptop, and that's the kind that's used in these high tech cars, and we've made incredible progress in price there.
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 was really driven by competition between phone manufacturers and laptop manufacturers and so on.
That technology is reaching its limits, though. There's only so much farther we can push lithium-ion, so now people are working on a few different new battery technologies out there, and some of them look super promising.
Some of them might have the ability to store 10 times as much energy per unit of weight as the current ones, and bring the price down dramatically. The sooner those come to market, the better.
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's 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.
Whoever gets to market first with a next-gen battery that brings prices down and density -- how much energy you can store up -- is going to make a killing.
Analyst: With that, what is the disruptive technology? I believe that if we put a proper price on carbon that would be a disruptive market force, but let's pretend we don't have the political will for that. Would the batteries be enough? Is solar enough? What would be the disruptive force to accelerate in a positive way the disruption that's going to happen?
Ramez: 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.
In solar we're almost there. Solar is now price competitive in the Southwest; in Arizona, Nevada, parts of Texas, parts of California it's right there in price with coal and natural gas, and it's dropped in half in price in the last five years. If it drops in price half again, it's at a sufficiently low price for what we need.
I think we'll get there. That won't be one giant breakthrough. That'll be a million small process improvements and a million small efficiency gains.
Then batteries, there is some exciting stuff coming out. The biggest one, really, is metal-air batteries. You can have a lithium-air battery, or a zinc-air battery. These cut the weight of batteries tremendously, and can store up to 10 times -- sometimes even 20 times -- as much energy in the same weight as current ones.
They're in development now but the biggest problem is they just wear out a little bit too fast. You can recharge them maybe 100 times, a couple hundred times. We need to get to where they can be recharged thousands of times to live up to the lifetime of a car, say. That's the biggest issue there.
Then in biofuels, even if we had those next-gen batteries today we'd still have about a billion vehicles on the road around the world with internal combustion engines, and those are not going to be phased out fast. People are not going to just switch on day one to electric cars. If there's a carbon neutral way to power those vehicles, that would be amazing.
Current biofuels made from corn just do not cut it in any way. They're not really a win for the environment.
The next generation biofuels that people like Craig Venter, who sequenced the human genome, and Shell are working on take algae and other microorganisms and actually engineer these single-celled organisms to where they just spit out fuel. You feed them carbon dioxide, sunlight, and sugar, and they just spit out biodiesel, ethanol ... you can just turn a spigot and capture it.
Those, if they can come to fruition, look like they'll be real game changers and may even, without any market policies, without any government policies, undercut the cost of gasoline right now, which would be a huge change obviously.
Analyst: Is there something about an algae biofuel that doesn't have a cost to increase the CO2 in the atmosphere?
Ramez: Well the fuel that comes out, when you burn it, produces CO2, but the way that the carbon got in the fuel was the algae sucked it out of the air so it's almost carbon neutral in that respect. The CO2 you're emitting is the same CO2, or the same carbon anyway, that the algae had to inhale to make the fuel.
What they do in the short term is, they don't even have to inhale it from open air. They take the output of a coal burning power plant or a natural gas power plant and they pipe it into these algae beds that are sucking up that CO2, and you get to use it twice, essentially.
Analyst: Some time ago, Al Gore's documentary came out, "An Inconvenient Truth." After the documentary came out, it caused all kinds of alarm and attention but immediately after, if you were to ask people -- even environmentally progressive people -- "How did that affect your lifestyle? Did you go out and change the light bulbs in your house" for example, most people would throw up their arms and say "No. I didn't really do anything at all."
Is that because we look at this as just, how can we individually have an impact and it's just so daunting and the system is so geared toward fossil fuels that it's tough to see what changes you can make? I guess my question is, what changes can we make, as individuals perhaps in our everyday lives, and also as investors?
Do you see it as something that we should look at as investing in the companies that are driving this market toward sustainability?
Ramez: Great question. As individuals there are certain things we can do, but they're honestly pretty limited. Most attempts to live a greener lifestyle have only little impact on the edge.
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. You can just pick up the phone. Most states have renewable energy portfolio standards, so they have to have so much solar or wind. Call your state legislator. That person probably does not get a lot of constituent calls at all but those state policies are actually very huge.
Many cities ... my city of Seattle has a commitment to being a zero carbon city. 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.
This year so far, a piece came out the other day that the S&P Global Clean Energy Index is up 20% while the S&P is up 14% so we're seeing strong growth in renewables right now and there's a lot of exciting companies out there.
When you look at -- again, comparing it to the cell phone revolution or the computer revolution -- people who invested in companies that bet big on mobile phones early on made a killing, and solar is going to grow that much.
Solar is currently less than half a percent of the energy used in the U.S. and over the next couple of decades it'll rise to about 100 times that to be probably close to half of the electricity used in the U.S. That is a gigantic rate of growth. It's a chance to make a killing and at the same time do some good for the planet.
Analyst: With all that, what are the companies where the average investor ... how do they invest in those companies? Or is that an exclusive small amount of people investing in solar?
Ramez: 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. They'll go out of business.
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.
I would say, unless you're a professional in the solar or renewable energy industry, don't try to track all the individual companies. Just pick a fund that invests in this area that has a good track record and you'll do well.
Analyst: OK. For investors you mention that coal stocks are getting hit right now. This might be an industry that you might want to avoid altogether. Is there another industry or subset of companies that you're looking at, "Stay away from these in the future" because climate change could have an outsized effect on their bottom line?
Ramez: There's no really easy way to short coal that I know of right now. I would just not aggressively invest in fossil fuel funds.
Analyst: All right. Do you see this taking shape industry by industry? It seems like some of the industries that they realize, "Climate change is very important to us. It affects our supply chain" -- the food industry, for example, the restaurant industry to an extent.
There are some companies that you can invest in -- Whole Foods -- that have said our mission is to address climate change ... well, not address climate change, but take practices that are sustainable, think about all the stakeholders involved, including the stakeholder without a voice, which is nature or the environment.
Do you think this will take place industry by industry over time, starting with perhaps the food industry?
Ramez: Yeah, I think the food industry is a great example. The food industry, people are very concerned about what they eat, for their health and from an ecological impact perspective. Companies that really position themselves and brand themselves as being kind to the planet really get to tap into a market of consumers that want that. I think that's an excellent place to look at there.
Another industry that I think is really interesting to look at, for good and for bad, is the insurance industry. The insurance industry faces a lot of potential losses from climate change right now, and it's not clear that they are really well prepared for that.
That's one that I'd be careful about investing in. We see reports from insurers and reinsurers saying that there's a very large risk, very large and growing cost of climate linked disasters for their industry. If you're interested in that, Ceres has a report that looks through all of the largest insurance companies in the U.S., looking for their responses to climate change risk. That can help you gauge which ones are best prepared, which ones aren't.
They have a report on insurance companies' response to climate risk. If you're interested in insurance company investing, they can help you understand which ones are best prepared for climate risk in the future.
Analyst: To provide a takeaway, the structure of societies was so important for so many years that it led to increased innovation in Europe, compared to a Chinese structure that was very different, back centuries ago, and not built toward disparate innovators coming up with new ideas, taking advantage of the market opportunities.
How do you look at the structure today? What are the things that need to be fixed? Or do you think that the tools are in place, we just need to get out there and start solving these problems and the market economy will provide for that?
Ramez: Yeah, that's a great question. I'm a huge believer in bottoms-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, and so on, we have that sort of innovative structure. We have that competition, that diversity of ideas. We just don't always have the incentives for victory. The reality is that if you burn fossil fuels, that feeds into storms like Sandy so somebody somewhere else is facing economic damage as a result of your actions, and that's not priced into your actions.
One look at this is the incentives, mostly. 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.
Analyst: OK. Just based on what you just said I think I know the answer to this question, but do you think that we can innovate fast enough? Say we're just completely detached from the idea of government taking any strong role, or all of the different governments around the world working together. Do you think that we can innovate fast enough without a price on carbon from the government?
Ramez: I think we will fix the problem, one way or another. It's kind of a question of how much damage we take. I think there's a good chance that we'll get there without government intervention, but it'll be a slower road and we'll have more damage and more droughts, more lost species, more forests burning down, and more risk of very bad things happening.
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.
But you know I think we will take government action. I don't think it'll be this year, although Obama might, with the EPA, do some things about coal. 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.
Isaac: All right. John, any more questions on your end?
John: No, I really appreciate your time.
Ramez: Awesome.
Isaac: Thanks a lot, Ramez. For our listeners, you mentioned Ceres as something they could look into. Obviously, your book, The Infinite Resource: The Power of Ideas on a Finite Planet. What's next on your plate, going forward?
Ramez: I'm out speaking and talking about this book. I'll probably be at South by Southwest Eco in October in Austin, and I'm also a science fiction author and my second science fiction novel comes out this August.
Isaac: All right. We'll look forward to that. Is that title announced?
Ramez: That's Crux. The first one was Nexus, and its sequel is Crux.
Isaac: All right. Good deal. Well, thanks a lot for joining us today on The Motley Fool. We are always interested in more discussions around the economics of climate change, how it affects companies, and what individual investors can do to address it.
Hopefully your book is a great resource and start to understanding this complicated issue, but then also thinking about how it might fit into your portfolio. Thanks a lot, Ramez.
Ramez: Fantastic. Thanks for having me.
