When investing in clean tech and other solutions that mitigate the climate crisis, businesses need to take a higher risk than they normally would. The risk is largely a regulatory / political one. The problem with many parts of our economy today is that the externalities, the global costs of supplying the goods and services, are simply not borne by those entities that make the profit from meeting the market demand. There are many examples.
Let’s take flying, and compare the cost of getting from London to Glasgow by plane vs. the train. These are two competing, maybe complimentary products that fulfil the need of getting from London to Glasgow. There are non-price differentiating factors in the two products such as how long it takes, comfort, and getting to and from the airport / station. For most customers, these are probably secondary to price. And if you look at the ticket prices, it is invariably cheaper to fly than get the train. How can this be?
Price is largely a function of costs and this is where the problem lies. Flying is a classic example of a market failure because the costs borne by the airline do not fully reflect the social costs of flying the plane which include the emissions and the impact they will have on the rest of the global economy. It is a tragedy of the commons and the only way that it can be fixed is through government intervention.
In almost all countries of the world, it is clear that this government intervention is not coming in quickly enough to avert the crisis the scientists have been predicting with a strong consensus for some time now. Apart from general inertia and aversion to change, there are two specific reasons for the lack of action:
- It is a global crisis, and it is not in the interest of any one country to do things that they might perceive as harming their short-term competitiveness, unless all other countries will do the same. A parallel from economics is an oligopoly. In a normal market, the competition will push the market price to the lowest sustainable point where “normal” profits can be made by lots of suppliers. In an oligopoly, there are fewer suppliers so they can collude on price and keep the price higher thereby all being able to make “super-normal” profits. It can be tricky to agree this (not least because it is illegal) and tricky to maintain it because at any point, one player could drop their price in order to increase market share which would probably force the others to do the same. We need our governments to agree an oligopoly position, this is effectively what they are trying to do at the moment in Madrid. In their case, it is not illegal, but it is hard because there are so many players and it is complicated because there are many more factors than just price. But so long as all players can see the benefits clearly enough it can be done. Large transnational players such as global corporations have a major role to play here as they can more easily enter into an oligopoly with their competitors. There are fewer of them and some of them may feel their customers (the consumer) pressuring them to act. An example of this is the Alliance to End Plastic Waste, a non-profit that has been funded to the tune of $1.5bn over the next 5 years from over 40 global organisations involved in the production and recycling of plastic packaging. The companies are taking a hit to their short-term profits by funding the AEPW, but they believe their brand will benefit over the longer-term.
- Climate change is a long-term threat, at least it has always seemed that way. It is human nature to discount threats or opportunities that are far into the future and that is perfectly normal. But we are failing to compute the size of the risk here and the scope of the actions we should take today because although the threat is in the future it is also very, very big. However, we have to believe that this is changing. We have waited long enough. We are now seeing that the threat is not so far away, and in fact there is pretty clear evidence it is already here. We have to believe that the actions that governments should have taken 10 years ago, will be taken in the next 10 years and that those actions will be at a much larger scale than if they had been spread out over a longer time frame.
So for some investments, it will not be clear right now where the return is. The required incentives, tax breaks, and customer demand may not be there right now. But we have to believe that they are coming, that they are coming big and that they are coming fairly soon. Back to the airline example, we need to find alternatives to kerosene-fuelled planes. Whether that is through risk capital or government funded R&D, there is clearly a need and we have to believe that the conditions will be right at some point that the return on investment will be there. We have to be prepared to sacrifice profits, maybe to the point that we can only just stay afloat in order to make these investments. That, after all is what entrepreneurship is all about. Taking risks to find a path to a bigger future profit rather than continuing to do the same thing which will ultimately decline to zero.
Build it and they will come. If nobody builds it, they certainly won’t come and we are screwed. If we build it and they don’t come, we are also screwed. And we are properly screwed, not just loss-making in the short term but facing a global collapse in social and economic order. But if the conditions are right and they do come, we will make profit. We have to have faith that those conditions will come. The alternative is unthinkable to the extent that it makes no sense planning for and no sense being in business for. Why be part of the problem when you just might be part of the solution?