At the Envirotech & Clean Energy Investor Summit in London on Thursday, former US vice-president Al Gore, now chairman of Generation Investment Management, spoke about climate change, renewable energy and investment. The full text of his speech can be found below.
Someone asked me in advance of this event about how I’m feeling these days about sustainable investing and alternative energy. I said I feel fine, but I always think of a story that I first heard 35 years ago in my home state of Tennessee in the American south, where we have an institution called the Grand Old Opry, the mother church of country and western music.
In those days, they had a comedienne called Cousin Minnie Pearl, who wore a straw hat with a price tag still hanging from it. She was actually quite a sophisticated actress, but her character was extremely rural – as country as country can be.
She told a story on the radio and I was listening on the way home one Saturday night as a young congressman. She spoke about a farmer who as involved in an accident and sued the other driver for damages. When they went to court, the other driver had his lawyer cross-examine the farmer, and the lawyer said, “Isn’t it true that immediately after this accident, you said, ‘I feel fine’?”
The farmer said, “It’s not that simple. You see, I was taking my cattle to town in the back of my truck and this man came driving across the centre of the highway.” The lawyer said, “I object. Just answer the question: yes or no. We don’t want to hear a long story. We’re in the middle of a trial here. Did you or did you not say, immediately after the accident, ‘I feel fine’?”
And the farmer said, “I was leading up to that. You see, I was taking my cattle to town in the back of my truck and this man came driving across the centre of the highway and then right into my truck, and knocked it over, throwing me and the cow out. I was on one side and the cow was on the other. A policeman came up and took one look at that cow and said, ‘She is suffering’. He pulled out his gun and shot her right between the eyes. He came around to my side of the truck and said, ‘How do you feel?’”
I think there’s that kind of feeling in this investment space right now.
The current market
We’ve got through a kind of perfect storm [in the last seven years] which had four components that all combined. One was the great recession in 2008; then there was the Chinese juggernaut of subsidies that pushed the cost of renewable energy components and systems below the cost of production in the west; then there was the shale gas revolution which pushed the socket price, especially in North America, below what the business models were counting on to succeed; then there was the failure of policy in Copenhagen, preceded and caused by a failure of policy by the US senate.
In my own country, where unfortunately denial is still a serious problem, the same people engage in denial over the question of whether or not it was actually important to protect the full [inaudible] of the US government a few weeks, claiming that a default on the debt would just be a pinprick, and that we could just pay the Chinese bondholders instead of retirees and active duty military. One of our comedians Stephen Colbert uses a pin and represented the economy as a balloon.
In any case, this perfect storm has a number of effects – some of them good. But those of you have survived and who have come through this period of decline are now watching another momentous change in this space. You’ve noticed the strategic investors are coming in in a very big way with follow on investments; you’ve noticed that even though there have been many failures in the market, that’s always been the case with new technologies and some of those that have succeeded are now mature.
Cost competitiveness of new technology
The cost-down curve for [solar] photovoltaics, wind and a whole suite of energy efficiency technologies now bring the price of renewable electricity below the grid average of price in quite a few regions in the world.
There was a study, that we actually don’t fully agree with, that found four billion people live in such regions of the world now. We think that’s an overstatement, but we don’t think it’s an overstatement to project where this trend is going, because in the next six to seven years, this cost-down curve will push the price of renewable electricity to a level equal to or below the grid average price in regions where 85% of the world’s people live.
There is a difference of between zero degrees and one degree that’s a difference of more than one degree. It’s the difference, of course, between ice and water. In a similar fashion, the difference between offering renewable electricity at a price below that produced from fossil fuels is a big difference compared to offering it at a price above that generated by fossil fuels.
Let me draw another analogy. I think that the market generally speaking doesn’t always operate on perfect information – I know that doesn’t necessarily come as a newsflash to this group – but over the last several years, the standard model in economics has been challenged quite severely by behavioural finance and a whole range of other assumptions. But the repeat appearance of bubbles in the market actually gives a lie to the assumption of perfect information.
I remember back in 1980, I was a young congressman, and as a wannabe geek I’ve always been something of an early adopter, particularly in information technology. And I bought one of the early cellphones. You may remember how big and clunky they were. I thought it was the coolest thing around.
I had a close friend in the Congress whose house I used to go to from time to time in the evenings when the congress was in session, and I called him up as I normally did, to see if he was available, only this time I had my new gadget.
He said, “Yes, sure, come on over. What time do you think you’ll get here?” Knock, knock, knock. He opened the door and it was like the old Saturday Night Live skit with the wild and crazy guys. “Woah, you have a phone you can walk around with? Amazing!”
The reason I’m telling you that anecdote is that that same year – 1980 – AT&T, which is still the single biggest [mobile operator] in the US, did a comprehensive study of how quickly this new technology of mobile phones would be deployed in world markets. It concluded after a great deal of study that by the year 2000, there would be 900,000 of these phones – almost 1m, can you imagine? Of course, by the year 2000, there were 109m – they were off by [108m] – and now there are 5 billion of them.
Now, why were those projections not only wrong but unbelievably wrong? I think there are again four parts to the explanation. Number one: many market analysts had difficulty shifting gears in the presence of a cost-down curve that is steep and relentless. Certainly, Moore’s law has created serious challenges for those forecasting the future of IT markets, but the cost-down curve continued, even as the quality improved and those big, clunky phones became so small that in the movies the gag was the tiniest phone you could have. Both of those things were unanticipated.
Third, the decisions to purchase were not, as they had been with previous generations of telephone technology, in the hands of utilities or large, centralised companies. The purchase decision was in the hands of individuals and individual business owners. Some of them were early adopters and more of them were as the costs came down and the quality improved.
And fourth, they did not take into account the infrastructure context specifically the fact that in developing countries and emerging markets, the dense network of landline telephone infrastructure was simply non-existent, and so the opportunity in poor countries, for populations to leapfrog the old legacy technology develop in the west and goes straight to this new, widely-distributed model, was not fully taken into account in those market projections.
Think about distributed energy – both photovoltaic and wind. The same four almost are present. The cost-down curve has been surprising to people, and only 20% of the cost of PV – or thereabouts – is in the panel itself. It’s in the casing, the installation, the capital costs and all of those other factors are being squeezed by the competitive pressures now, and the cost is coming down quite dramatically.
One of our investments is in a company called Solar City, and in California and some 15 other states in the US, their business model is they’ll go to a homeowner or business owner and say, “Here’s our proposition. We will put solar panels all over your roof and the next day your electricity bills will go down by 20-25%.”
“Great, how much will I have to pay to do this?”
“Nothing, we’ll do it for free.”
That’s an attractive proposition. The more the costs come down, that will be possible in unsubsidised environments. The disruption that is coming is quite significant. We began quite some time ago with Colin le Duc’s management of the Climate Solutions Fund, and he doesn’t brag and my partner’s cautioned me not to, but we’re really very proud of what Colin and his team have done.
There was one organisation that rated his fund the number one in this sector, and I have to acknowledge that the organisation that did so was one that I had absolutely never of but I now believe they are the most authoritative rating organisation in the world.
Fossil fuels: the next bubble?
[Generation co-founder] David Blood and I wrote a piece yesterday and our firm put out a large paper which I would shamelessly urge you to read. It’s available on the Generation website. We put about six months of work into it on stranded carbon assets. Because it just came out with a piece in the European Wall Street Journal, I’d just like to briefly refer to it. It also illustrates this theme of where investors have to take into account the absence of perfect information.
You remember of course, painfully, as most of us remember, the sub-prime mortgage fiasco. In the aftermath of the credit crisis and the great recession, it certainly did seem ridiculous to have ever believed that it was a good idea to invest in millions of mortgages given to people who had no possible way to pay the mortgages. Somehow, that risk was invisible to so many, to the majority. And why is that?
There are a lot of reasons, and again, behavioural finance offers some help in this, but basically the complexity of these instruments tempted investors to go along with the enthusiastic crowd and confused risk with uncertainty. As the economist Frank Knight has established, there’s a really important – subtle but crucial – distinction between risk and uncertainty.
Uncertainty is more dangerous in the view of most good investors, because you can’t price it. But there is a tendency to mislabel risk as uncertainty, and then to conclude that since it can’t be measured, it’s safe to ignore it.
And those sub-prime mortgage assets were massively re-priced. There was a stripper in Las Vegas who got seven of them, and the market realised she was not going to be able to pay off even one of them, and there were 7.5m of them in the US alone. When they were re-priced, it really caused ostensibly a global run on the banks, the credit crisis and other factors contributed to the great recession and the larger housing bubble, but in retrospect it was obviously a mistake.
We believe that the same mistake is being made right now with sub-prime carbon assets. There are $7 trillion worth of sub-prime carbon assets on the books of multinational public companies today. There’s another $14 trillion owned by sovereigns. Now, this group knows better than most that the climate crisis is unfortunately real, and Mother Nature is kind of underscoring the seriousness that is approaching.
But the scientific community, most recently in the Intergovernmental Panel on Climate Change’s fifth assessment, has long since reached a conclusion that we’ve really got to do something about this.
The evidence is right in front of us
You look at the extreme weather events around the world that are 100 times more common statistically now than 30 years ago. Look at Hurricane Sandy in my country, one year ago this week. The day that storm came ashore, and for the days preceding, the Atlantic Ocean was 5C above normal average temperatures. That’s where the stronger winds come from. That’s where the extra moisture that makes the storms more destructive comes from.
There is 4% more water vapour in the Earth’s atmosphere today than 30 years ago. And by the way, that 4% may sound like a small number, but it’s actually not, because the moisture that falls to the ground as it did three days ago in southern England doesn’t just originate in the part of the sky directly above where it falls.
It is funnelled toward the storm’s release point from often 2,000km away, and so the extra 4% must be multiplied by the vast volume of the sky contained in that 2,000km tail that’s funnelling the moisture towards the drain. If you have a bathtub filled with water and you open the drain, obviously the water rushing down the drain doesn’t just come from the part of the tub directly above the drain; it comes from the whole tub.
These basins of water vapour in the sky are much more full than they were only three decades ago. And so every storm is different. Every storm.
You may have noticed in the news coverage here that Boulder, Colorado was inundated by a once-in-a-16,000-year rainfall. Of course, all the statistics are completely irrelevant now, because the tables upon which they are based originated in a world in which we no longer live. We have changed that world.
We’re still putting 90m tonnes of global warming pollution into the atmosphere every day, as if it’s an open sewer. And it’s trapping a lot of heat. The cumulative amount of manmade global warming pollution that is now in our atmosphere traps as much extra heat energy in each day as would be released by 400,000 Hiroshima class atomic bombs exploding every 24 hours on the Earth’s surface. It’s a big planet, but that’s a lot of energy, and it is causing a huge increase in global temperatures.
Ninety per cent of the increase in heat energy is going into the oceans, and that’s why these ocean-based storms are so much stronger. But the 10% that’s in the air is now drying out the soils and making droughts deeper and longer.
Melting ice in Antarctica and Greenland […] is due to contribute a very significant increase in sea levels as this century proceeds. But the increase in the floating ice in the Arctic ice cap is also a problem, because even though it doesn’t increase sea levels, it radically changes the heat absorption in the Arctic Ocean when it no longer reflects the sun’s rays. Instead of 90% bouncing off, 90% of the energy is absorbed. That changes the high-pressure/low-pressure balance and changes the jet stream.
The scientists are still trying to work out exactly how this happened, but some have predicted long since that the movement of the jet stream across North America, the north Atlantic and then to Europe and Eurasia, is going to become disorganised and more chaotic, and indeed that is happening.
2012 last year was the wettest year in the history of the UK. It was the hottest year in the history of the US. And indeed, 12 of the 13 highest years ever measured have been in the last 15 years. The last decade was the hottest decade measured since instruments were first used. So it’s not an open sewer that the waste products of this combustion really are changing the conditions that facilitated the flourishing of humankind and human civilisation.
Putting a price on carbon
There is a consensus that we have to stay below a 2C increase, and the scientific community says that is a political compromise already, because you see what 1C is already doing, but policymakers have agreed to target that 2C target as likely to give us a 50% chance of avoiding truly catastrophic changes. But in order to seize that 50% chance, the International Energy Agency devised a carbon budget that calculates how we have to reduce.
Reliable measurements show that at current emission rates – the 90m tonnes a day and increasing – we will very soon cross that 2C threshold. That’s insane. We really should not do that.
The IEA established a carbon budget of what we would have to do by 2050 in order to avoid that catastrophe, and what it shows is that no more than one-third of the carbon assets in the ground can be burned. To put it another way, two-thirds will be stranded.
Some investors have confidently convinced themselves that that risk of stranding is an uncertainty, because look at what happened in Copenhagen, and look at what’s happened in these negotiations for so long now. And since it does not appear in prospect that the world will have a binding global treaty that puts a price on carbon, then investors are safe in ignoring that. We believe that’s wrong, because that’s only one pathway towards stranding.
There are three other broad risks. Number one: regulation doesn’t have to be global. It can be regional. It can be national. It can be local. Look at what happened on Monday. In my country, the states of Washington and Oregon joined with the state of California – our largest state – and the Canadian province of British Columbia, in a unified, Pacific rim agreement in North America to sharply reduce carbon emissions. If those three states and one province were a nation, it would be the fifth largest economy in the world. They are regulating carbon emissions. That will have an impact on the value of carbon assets.
China takes this seriously
Look at China. It’s hard to see China for all the air pollution, but look at China. We were looking today at a little app in the iTunes Store for Chinese air pollution. You can see it on a minute-by-minute basis. Right now, on the roof of the American Embassy in Beijing, the particulate pollution is 199 parts per million (ppm). The safe level is 25ppm.
Harbin […] which has 11 million people in the north-eastern part of China, was shut down last week: all the schools, all the government institutions and most of the businesses. Why? Because the particulate air pollution was above 1,000ppm. Couples walking on the sidewalk holding hands reported that they could not see each other.
Life expectancy in northern China has already dropped by five-and-a-half years. The mandate of heaven is the phrase that the Chinese use in discussing the license to operate for the Chinese Communist party. The Chinese Communist party values stability more than anything else. And economic growth is only a means to that end. When the growth takes a form that generates instability, then they shift gears.
They just announced a ban on any new coal-burning facilities in three of the most heavily polluted regions. They were ready this year to put in place a cap and trade programme in two regions and five cities, where they say it will be a pilot for a nationwide cap and trade programme by 2015. Some sceptics say they’ll never follow through on that; I’m not so sure.
[Chinese president] Xi Jinping’s speeches have been very encouraging to me, since he took over in March. I think they’re serious about this. I won’t go down the list of other nations that are moving: South Korea, Ireland, Scandinavian countries etc. The problem in Australia… who knows how that will play out.
Pathways to strength
The regional governments, the provincial governments and state governments – many around the world are moving. So that’s a pathway to strength. The market forces that I referred to earlier bringing this cost down curve for renewables – that’s a pathway to strength. And then there’s public opinion and the divestment campaign, which was launched here in the UK this week and has already gained a lot of traction in the US.
The city of Seattle has just joined in divesting. Many more are going to be divesting. Do you remember the anti-apartheid divestment campaign? I’m not making the moral case – I guess in a way I am, and I certainly agree with it – I’m making the financial case.
My partners at Generation and I are saying that these stranded carbon assets are going to have to be dealt with. It’s the largest bubble in the history of the world’s economy. When will this bubble deflate? Well, in some ways it’s already beginning.
Consol, a huge coal company in the US […] started mining coal during the American civil war. In 2012, 80% of their revenues came from coal. Why did they just announce that they were reviewing a range of options, including the complete divestment of all coal assets? Maybe they see something that others in the market don’t. There are many other examples.
Most or all of the coal-fired generating plants in the US that have been proposed in the last decade have been cancelled. There are not going to be anymore coal-fired generating plants in the US. They’ve lost their license to operate. And by the way, regulation of health consequences like mercury can also be a pathway to strength.
Water availability: the average new fracking well requires 20m litres of water. How many of those are you going to build in northern China, India or the American south-west? The assumption that water is free and limitless is also an assumption that flies in the face of perfect information.
I do feel fine about the future of this area of investment, and I do congratulate those of you who have walked through the fires of the last seven years, who have learned so much and are now watching this new wave of investment come through.
And yes, it’s true that some of the lessons were not artefacts of circumstances. Capitalisations have been somewhat larger than many expected seven years ago, times to exit have been somewhat longer. But once the base is established and the fuel is free – I’m talking about renewable energy here – then the advantages continue to grow. I think that the predictability of energy supply at a given price is an extremely valuable feature of renewable energy systems.
The sustainability challenge that we face writ large is part of the need to create a form of capitalism that we call sustainable capitalism. We need to look carefully at some of the features of capitalism that are not operating as they should.
Capitalism is the best system ever devised for organising economic activity – that’s pretty obvious. It’s the base of every successful economy in the world. It’s more congruent with higher levels of freedom and allocation of sources, and balances supply and demand, and most importantly it unlocks a higher fraction of the human potential.
That’s what we’ve decided to do as a world, but in spite of these advantages, it is now being, as a system, increasingly associated in the minds of publics with more frequent and more troubling market disruptions, and higher levels of inequality.
In my country, since the recovery began in 2009, 95% of all the additional national income has gone to the top 1%. That’s not an Occupy Wall Street slogan; it’s a fact, unfortunately. Inequality is necessary for capitalism, but like inflation and corruption, you may always have some but you’ve got to avoid the hyper variety. Hyper inequality threatens the stability of capitalism. It threatens the ability of a marketplace to continue function. This has to be addressed.
One reason why there has been this blindness towards the global warming pollution is that it’s not included in profit and loss statements, GDP and corporate books. When GDP was launched, the creator of GDP – a man named Simon Kuznets – in 1937 was greatly honoured. It was an advance, for sure, but he said publicly several times, “Please, don’t use GDP as a guide for national economic policy.” Well, we do. It’s the Holy Grail.
And the accounts that are derivative from the categories in GDP represent growth as the Holy Grail for every corporate business plan. But it excludes the depletion of natural resources; it excludes not only negative externalities but positive externalities like investments in education and mental healthcare. And it excludes the distribution of income.
So we need to examine how to make our systems more sustainable, but for the moment, the most urgent challenge of all is to accelerate the level and quality of investing in sustainability. There is a huge cost of these stranded carbon assets, and there are huge opportunities to be gained.
It’s not easy, it’s extremely challenging, but those of you who are part of this effort, in my humble opinion have made the right decision. I hope that it will be extremely successful financially for you. I know that it is work worth doing, and I congratulate you for it.
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