This article appears in the December 2010 issue of Foreign Policy here.
Why throwing money at today's clean-energy technologies could keep us from discovering tomorrow's.
Whether or not the United Nations-brokered talks on a global carbon-reduction agreement currently limping toward their conclusion in Cancun go anywhere, climate change isn’t waiting. Scientific assessments, such as the Intergovernmental Panel on Climate Change’s regular reports, have noted more significant climate change impacts than previously expected, and amplified their warnings of the changes to come. The environmental bad news is economic bad news as well: A mid-2009 report by the reinsurance giant Swiss Re found that climate change could shave off anywhere from 1 to 12 percent of GDP in many countries thanks to shifting climate zones, floods, droughts, and sea-level changes. The stakes are high, and it’s time we started treating climate change as a risk we insure against through investment, just as we treat national security, natural catastrophes, terrorism, and nuclear proliferation risks.
Governments, however, seem paralyzed. Some countries have actually retreated from the progress made in Copenhagen. Not all of their reasons for inaction are indefensible: In a world where just 15 percent of the population concentrated in the developed world accounts for half of all global carbon emissions, fairness and effectiveness in climate policymaking don’t often line up. The nations involved in the Cancun summit are trying to hammer out an agreement without many of the most basic bedrock questions answered: Who gets to make the rules governing global climate solutions? The countries with the biggest bulk and heaviest sticks? How do you strike a balance between a country’s needs today and its needs in 2050? Perhaps the only morally defensible “fair thing” to do is to give every person the equal right to pollute the air -- but this formula does not work well for the planet, or for the influence, politics, and self interest of the Western world.
Fortunately, while governments ponder what to do, the world’s best and brightest are inventing our way out of the climate crisis. This global race to create clean energy stands a better chance of helping us avert climate change than any political agreement. Thus, it is critical that technology investment continues -- or, better yet, accelerates.
What matters isn’t just technology investment, but also the kind of technology investment. Near-term carbon reductions -- such as switching from coal to natural gas, building wind turbines, or incrementally increasing residential energy efficiency -- are nice, but they’re not enough. What we need are more efforts to speed up and expand the search for “black swan” technologies: innovations that disrupt our current trajectory and establish economically feasible means of reducing carbon, to build what I call our “economic carbon reduction capacity.” These advances are crucial for the simple reason that the clean technologies we have now are not enough -- we are not yet at a point where we can simply “deploy” our way to a prosperous, ultra-low carbon future. Our current suite of policies makes the mistake of putting nearly all of our efforts into using the limited tools we have in our carbon-reduction toolbox today, when we should also be focusing on developing the better tools of tomorrow.
First, let’s look at the problems with the status quo approach. Given a 3.1 percent global GDP growth rate, McKinsey has estimated that the carbon efficiency of the world’s GDP needs to grow at about 5.6 percent per year to meet the recommended global targets of 80 percent carbon reduction by 2050. Many argue that since we already have some technology today, we should simply deploy it. I believe doing this alone runs the risk of spending a significant amount of money on infrastructure that will require continued subsidies to survive. By diving into ambitious deployment efforts -- for instance, massively scaling wind farms or today’s geologic carbon capture and sequestration technology -- too early, we will be yoking ourselves to a carbon-reduction plan that is massively expensive to build and maintain.
As an alternative, we could aggressively develop next-generation technologies which build our economic carbon reduction capacity, while continuing to deploy current technologies on a limited basis to drive continuous improvements. This shift in focus will help change the cost equation by developing more economic clean technologies, and increase the likelihood that economic gravity -- not subsidies or government imperatives -- drives large-scale deployment on a broad scale. This strategy may yield fewer emissions reductions in the short term, but will enable faster and more economic carbon reduction in the coming decades.
So what are these next generation technologies, these black swans of energy? These are risky investments that stand a high chance of failure, but enable larger technological leaps that promise earthshaking impact if successful: making solar power cheaper than coal, for example, or economically making lighting and air conditioning 80 percent more efficient. Consider 100 percent more efficient vehicle engines, ultra-cheap energy storage, and countless other technological leaps that we can’t yet imagine. Our portfolio at Khosla Ventures has several companies that are focused on each of those goals, and there are thousands more not in our portfolio targeting similar ones.
It’s unlikely that any single shot works, of course. But even 10 Google-like disruptions out of 10,000 shots will completely upend conventional wisdom, econometric forecasts, and, most importantly, our energy future. We should learn from Craig Venter; he sequenced the
human genome faster and more cheaply than the government-funded Human Genome Project, by designing better tools for sequencing rather than relying on the brute force sequencing techniques that existed when he started his work.
There will be winners and losers -- ultimately, some of these technologies will scale and have declining costs while others won't scale or have sufficiently low costs. This makes decisions tricky; some investments will be “wasted” and the development path will be chaotic. Still, these investments are in a country’s self interest: The International Energy Agency estimates a $13 trillion global market for low-carbon technologies over the next two decades. Countries that invent these technologies will lead the race for these markets while increasing their GDP efficiency and competitiveness. Though the private sector will achieve these advances in time, the right government involvement will speed the process and could affect which country develops and scales the advances first.
How can individual governments help make this happen? They should consider technology-neutral low carbon standards, such as low carbon standards for fuel (similar to California's) and electricity. They should also support emerging clean-energy technology by providing money for more, riskier technologies for limited periods of time. Government support for a new class of low-carbon technologies should start declining approximately seven years after the technologies start scaling, or when they account for a few percent of their market. At that point, they should be allowed to sink or swim on their own merits.
The increased cost of helping that few percent should be viewed as societal investment, one that sets aside a small segment of each market as fertile ground to nurture competition and continuous innovation. These temporary scaling subsidies are in contrast to subsidies that pump money into mature technologies such as corn ethanol.
Meanwhile, the money saved by creating a leaner, more adaptable subsidy regime can be put to work, for instance as R&D tax credits and grants, investing in far more potential disruptive technologies -- in other words, more shots on goal.
A global climate treaty can play an important role as well, provided that it can maintain the flexibility to react to disruptive changes while still providing a stable marketplace for monetizing low carbon advances. In my view, the best mechanism is what’s called emissions intensity targets: an alternative to a carbon cap system, in which countries’ emissions targets are calculated as efficiency of GDP rather than remaining fixed as their economies grow or shrink. It’s a better tool because it encourages, rather than punishes, economic growth, thus enabling higher levels of investment in new technology and energy efficiency. In fact, countries that invest in efficiency and improved carbon intensity of GDP reward themselves with increased market competitiveness due to reduced energy costs. A global framework that focuses on carbon intensity targets linked to GDP and actively supports R&D investment in disruptive technologies will allay many of the concerns that major players -- chiefly the United States and China -- have about the impact of carbon reduction on their economies.
When technology takes the lead, entrepreneurs repeatedly prove the market models, experts, and pundits wrong -- and now that the world’s best minds are focused on revolutionizing energy and clean tech there is no way to predict what technologies will be developed. In even 5 years, the technologies available could be completely different than what is available now; in 10 or 15 years, entire industries could be created (or destroyed) due to technology that has not yet been dreamed of. We have seen this before with the internal combustion engine, the airplane, the personal computer, and the Internet. In 1986, when working with AT&T, McKinsey forecasted that there would be 900,000 mobile phones in use in the United States by 2000. They missed the mark by over 10,000 percent.
To make these innovations a reality, though, we must change how we think about encouraging technological growth. We should start building additional ARPA-E-like programs for research and development around the technology we want to have in the future, not the technology we have now. To date, most of the world’s clean-tech investments have been incremental, aimed at taking advantage of government subsidies, tax breaks, and the like. Aside from a few exceptions, like solar photovoltaics (where substantial advances continue), we need to think much bigger, and invest in the blockbuster ideas that will rewrite the history of climate change. In the end, black-swan innovations will reduce carbon economically, and on a scale that incremental innovations cannot.
We can’t write a global treaty to create clean cities and wealthy rural communities, but we can invent our way there with technologies that don't attempt to defy the laws of economic gravity. If governments and investors join the innovators in the hunt for black swans, we can accelerate and take the risk out of the technological process of mitigating climate change. And for those who are skeptical about climate change, we need these same technologies to enable 5 billion people to achieve the energy-rich and resource-rich lifestyle that only 500 million (mostly western) people enjoy today. We can relegate petrodictatorships to the history books and save millions from the ravages of rising sea levels and expanding deserts. Or we can remain on our current path, hope for the best, and face entirely foreseeable energy shortages and dwindling resources. It's our choice.