Cheaper faster better, p.3
Cheaper, Faster, Better, page 3
These are not difficult questions to answer.
But it was also clear back in 2006—and it’s even clearer now—that we can prevent the worst effects of climate change before it’s too late. In the mid-1800s we developed oil and gas to replace existing forms of energy. Today we need to develop sources of energy as good as or better than fossil fuels, but without the dangerous side effects. And we need to do it in a way that allows developing countries to leapfrog oil and gas, so that as they expand their economies, they can go straight to cleaner sources of energy without having to use fossil fuels as a stepping stone.
What’s interesting is that today, even in a politically divided country, most people understand this. A survey conducted by Yale researchers in October 2023 found that 71 percent of Americans believe global warming will harm future generations, 73 percent would like to see regulation of carbon dioxide as a pollutant, and 69 percent believe we should transition the US economy to 100 percent clean energy by 2050. The point is that when you dig into the evidence on climate, which these days includes reading the news or looking out the window, most people don’t have a hard time figuring out what’s going on or where we’re headed.
Climate change is the most dangerous global threat facing humanity right now. And that’s not a controversial statement, or at least it shouldn’t be. It’s like saying two plus two is four.
But though adding up the numbers is probably the easiest way to identify the obvious choice, it’s not always possible. Sometimes, instead of looking at numbers, we find ourselves looking at stories—hypothetical scenarios that lead to different futures—and deciding which one to believe.
That’s what happened to me in 1985, when Great Britain’s ninety-nine-year lease on Hong Kong approached its final decade. The return of Hong Kong to China was significant for all sorts of geopolitical reasons: as the end of a major piece of Britain’s colonial legacy; as a potential threat to the island’s then-stable democracy (which unfortunately has backslid enormously in recent years); as a signal of China’s rising influence throughout the Pacific.
The pending expiration of the lease was also a huge deal in the financial markets, because under British rule, Hong Kong had become a major Asian financial hub, with a stock market second in size only to Tokyo’s. What would happen to the stocks of companies listed on that market the day after Hong Kong was, quite literally, taken over by communists?
Chinese officials tried over and over again to reassure the public that trading would continue as usual after the handoff. But the markets weren’t reassured. Stock prices plummeted. At that point, a typical price-to-earnings ratio for a stock on the Tokyo exchange was somewhere between twelve-to-one and twenty-five-to-one. On the Hong Kong exchange, it fell to between two-to-one and three-to-one. (To put it differently, a stock that would have been worth at least $100 a share on the Tokyo exchange was worth no more than $25, just because it was listed in Hong Kong.) People worried that Hong Kong might shut down the day the PRC took over.
I found myself asking the same question I asked when I was dealing with Braniff Airways certificates: what were these assets really worth? There was, however, a key difference. I had no numbers to add up. I couldn’t know what the market value of a stock listed on the Hong Kong exchange was after Hong Kong was returned to China because Hong Kong hadn’t been returned to China yet.
What I had to do instead was choose between competing stories. In one story, Chinese officials would leave the Hong Kong stock exchange unaltered, at least in the short term. In another story, communists would immediately restrict, or even shut down, market trading. If the first story was true, the stocks were worth far more than they were selling for. We should buy. If the second story was true, the stocks had plummeted in price for good reason and might fall further. We should avoid them like the plague and sell any we already owned.
We bought. Unlike with Braniff Airways, I wasn’t 99.9 percent sure my decision would turn out to be correct. But I was still extremely confident, and here’s why: the buy story was much, much simpler than the sell story. The Chinese government had promised to leave the markets untouched, and they had no reason to lie—Hong Kong was being handed over to the PRC either way. What’s more, China was desperate to grow its economy and had strong incentives not to jeopardize relationships with major companies and potential trading partners.
Just about all the Asia experts I talked to shared this view. They worried, with good reason, about the long-term prospects for Hong Kong’s democracy and economy. But they couldn’t find a plausible explanation for why China would want to blow up the Hong Kong stock exchange on day one.
The sell story wasn’t impossible. But it was much more complicated. It would involve Chinese officials making unnecessary pronouncements, then deciding to go back on their word even though it was against their economic interest to do so. You could see how such a thing might happen—but it would take a chain reaction of unlikely events.
When Hong Kong was eventually handed over to the PRC, both stories were put to the test. And what happened next? The Chinese government allowed the market to continue functioning, just as they said it would. Stock prices surged back up as the threat receded. People who bet on the more complicated story did poorly, and those who bet on the simpler story did really well.
Today, when it comes to climate, each of us has to choose between two competing stories about the future. I want to compare those stories, and do so with just one question:
Which climate story is simplest?
Let’s start by looking at the story told by oil and gas when they try to convince their investors—not to mention the public—that we can keep burning fossil fuels at our current rates. Basically, it relies on some combination of things happening. One, the earth will self-regulate its climate indefinitely—even though there’s no evidence or scientific basis for thinking that will happen. Two, we’ll soon be able to make carbon-capture technology so cheap that we can afford to remove all the greenhouse gas we emit from the atmosphere—even though most projections from those in the carbon-capture industry say that we won’t be able to counteract more than 20 percent of our current emissions by 2050. Three, if the first two predictions don’t work, we’ll be able to geoengineer our planet using unproven technologies that have vast, irreversible consequences—without any serious negative effects.
I’m not saying all that is literally impossible. We’re talking about the future, where, by definition, nothing is 100 percent certain. But the fossil fuel industry’s story requires an elaborate combination of good luck, sheer coincidence, and outrageous levels of inaccuracy on the part of every serious scientist and researcher working on climate today.
To call the fossil-fuel story complicated doesn’t even begin to describe it.
Now let’s look at the climate-people story.
To do that, I want to go back to 2010, when an out-of-state oil company got a measure onto the California ballot that would undo nearly all the climate measures our state legislature had passed. This was in the middle of the Great Recession—unemployment was more than 9 percent—and the fossil fuel lobby was spending a ton of money on ads arguing that we just couldn’t afford pro-climate policies. At the time, the conventional wisdom in California was that you didn’t fight the oil companies, because they had too much money and always won. But the brilliant Chris Lehane, a longtime political strategist and friend, called me up and said, “You’re always talking about climate, here’s your chance to do something.” So I decided to lead the fight against the ballot measure.
First, though, I needed a Republican partner, and Chris thought of the perfect guy—my good friend, a lifelong Republican, and Ronald Reagan’s former secretary of state, the late George Shultz. George was well-respected, especially among conservatives. After leaving the Reagan Administration, he’d become a fellow at the highly conservative Hoover Institution, joined the board of Chevron, and did all kinds of other things successful Republicans from that era did. No one would ever accuse him of being a bleeding heart or a socialist.
But George was a data-driven guy, and I knew he could see the numbers on climate just like anyone else. And because of his background, he could make his case to the business groups and the chambers of commerce and they’d listen.
George agreed to come on board, and what he’d say was this: “You have fire insurance because it’s unlikely your house is going to burn down, but if it burns down it’s a devastating loss. If your business had a 20 percent chance of bankruptcy, you’d have to deal with it, even though there’s still an 80 percent chance everything would be fine. Well, what if there’s a 20 percent chance that the entire planet might destabilize? Don’t you think it’s worth taking out an insurance policy against that?”
George knew how to speak the language of conservative business leaders. He got many prominent Republicans, including then-governor Arnold Schwarzenegger, to endorse our side—and he got others to stay neutral. Our goal wasn’t just to defeat the oil companies at the ballot box. George always said to me, “We don’t just need to beat these guys. We need to smash them.” And we did. Our winning margin was more than 23 percent.
As it happens, I think George greatly understated things. If we act too slowly on climate, the odds of global catastrophe aren’t 20 percent, they’re probably more like 99 percent. He also left out the part of the story that involves the benefits of clean energy—if new technologies could not just prevent catastrophe but could provide cheap, clean, reliable power for everyone, wouldn’t it be worth developing those technologies as fast as we possibly can? But even in George’s telling, which downplayed both the costs of doing nothing and the benefits of positive action, the climate-person story is incredibly simple: we’re facing a remarkably dangerous threat, and we should do something about it.
Do I sometimes wonder if the fossil-fuel story about the future is true—if the earth, for example, has some secret self-regulating mechanism unknown to science? Sure I do. But it seems tremendously unlikely. In fact, it’s so unlikely that the oil and gas companies’ own scientists have repeatedly said that they don’t think it’s possible. And here’s the thing: if it turns out that against all odds, the fossil fuel industry’s complicated explanation for why we can keep emitting carbon at our current rates is accurate, then we have nothing to worry about. But if we bet on their story and it isn’t true, we won’t be able to correct our mistake. By the time we find out, it will be too late.
Choosing among different methods for fighting climate change—policy approaches, technologies, and financing models, for example—might be complicated. But deciding whether to go all-in on fighting climate change or not just requires us to decide whose story to believe. And that couldn’t be more obvious.
With both Braniff Airways and the Hong Kong stock exchange, there’s a similarity that goes beyond the chance to buy something at a discount. In each case, it was clear that the status quo was about to change dramatically. Braniff was going to be liquidated. Hong Kong was going to revert from British to Chinese control. In most cases, however, there’s less advance warning that a major change is coming. And that often leads people to make one of the biggest mistakes when trying to predict the future: they rely on the entirely unreasonable assumption that the status quo will persist forever. But human history shows us that the opposite is true. In fact, one of the best quotes about identifying the obvious comes from a Wall Street Journal op-ed written by the conservative economist Herbert Stein:
“If something cannot go on forever, it will stop.”
It’s easy to think that the status quo will go on forever because of the nature of large-scale change. People imagine change happening linearly, at the same pace every year. Usually it doesn’t work like that. Instead, things change slowly, or not at all, for a very long time. For a while, people who bet on the status quo look really smart. Then, the dam breaks, and the rate of change goes from a snail’s pace to breakneck speed. The status-quo people don’t look so smart anymore.
Take the example of local newspapers. Around the turn of the century, the internet became a brand-new, easily accessible source of news. It soon became obvious to most media-industry observers that there was no longer any reason for people to advertise in the classified pages now that they could do it online. But for several years, nothing really changed. Advertisers kept paying money to appear in the classified section, even though it didn’t make sense for them to do so. They clung to their old ways. Newspaper revenue snuck down, but it was nothing like the catastrophe one might have predicted. During that time, if you argued that the threat posed to newspapers by the internet was real, you probably would have been called an alarmist. If you argued that the threat was overstated, you probably would have felt pretty smug.
Then, seemingly overnight, the classified pages didn’t just shrink, they basically vanished. Local news went from a slow and steady decline into a tailspin.
This kind of pattern, where a barely noticeable downward incline drops off a full-on cliff, has repeated itself throughout history. Which is probably why history is full of examples of people who refuse to see—or admit they see—the writing on the wall. Unwilling to accept that things will ever change, they cling to the way things are.
Take the American whaling industry. In the mid-1840s, whale oil was a precious commodity, used in lamps to light homes and businesses long before the advent of electric lighting. America was the world leader in whaling. From Nantucket to the West Coast, whaling made some people wildly rich and provided a good living for many more. At one point, it was the fifth-largest industry in the United States. But even at what appeared to be its peak, the industry was dying. New sources of energy, like kerosene and petroleum, were becoming cleaner, safer, cheaper, and more abundant every year. Meanwhile, whales themselves were becoming scarce—fleets had to travel farther to reach them.
As Eric Jay Dolin writes in Leviathan, his history of American whaling, many people did the obvious thing: they left the whaling industry for Pennsylvania, the new center of petroleum production. But others, especially those with major financial interests in whaling, became dead-enders. In 1843, the Nantucket Inquirer sneered at those who thought “Lard Oil, Chemical Oil, Camphene Oil, and a half dozen other luminous humbugs” would replace whale oil. In 1852, Whalemen’s Shipping List argued that whale-oil alternatives were dangerous and should be banned by the government.
As late as 1867, Massachusetts senator Charles Sumner publicly lauded “the Whale, whose corporal dimensions fitly represent the space which he occupies in the Fisheries of the world, hardly diminished by petroleum or gas.” Like a lot of people with political and economic interests, Sumner became a kind of dead-ender. He was a smart guy, and a brilliant politician. But in the face of ever-growing evidence that the whaling industry was being replaced, he didn’t listen. He kept betting on blubber instead.
The Inquirer, the Shipping List, and Senator Sumner were all ignoring an important truth: things change. The cost of lighting a house with petroleum kept going down, while the cost of lighting it with whale oil kept going up. New innovations made lamps fueled by whale-oil alternatives safer, so that Americans no longer had to choose between affordability and risk. Politicians from whale-oil-producing states like Massachusetts might have been an exception, but lawmakers weren’t exactly eager to follow the Shipping List’s suggestion of a ban when new technologies were saving people money and creating jobs in the process.
By 1878, the whaler Alexander Starbuck could, despite his industry affiliations, comfortably write of petroleum, “Its dangerous qualities at first greatly checked its general use, but, these removed, it entered into active, relentless competition with whale-oil, and it proved the more powerful of the antagonistic forces.” In other words, while whale oil didn’t disappear completely, the fight between it and newer forms of energy could now be described, even by whalers, in the past tense.
I’m not trying to be subtle about this, nor am I the first to make this observation: the whaling industry in the mid-1800s sounds a lot like the fossil-fuel industry today. Nearly two centuries ago, a product that had been a seemingly irreplaceable part of modern life was gradually rendered obsolete. The same thing is happening today. Compared to the alternatives, oil and gas are becoming less economically competitive every year—especially in America, where we’ve already extracted everything that was inexpensive to extract. New technologies are making alternatives to oil and gas more abundant and reliable.
In fact, I’d argue that the oil and gas industry is in a much worse place today than the whaling industry was back then. Why? It’s pretty simple. Whaling killed the whales. Oil and gas are killing us.
Yet plenty of people are still betting that the fossil fuel era will go on forever. For many years, I invested in a private equity fund, one where the partners have done an amazing job of generating returns for decades. They’re first-class, high-integrity people. But about four years ago, I was surprised to find out that this firm had spent more than $4 billion on a software company that does software for oil and gas drilling in the United States of America.
I was really concerned, for two reasons. First, I thought we’d agreed to avoid investing in fossil fuel companies. Second, and no less important, I worried about the investment from a purely capitalistic, maximize-returns point of view. I said, “What are you guys doing investing in a company that helps drill in the United States? What we drill today, or what we try to drill today, we’re going to be producing in ten years. So, you’re making a bet that in ten years, all that American oil and gas is still going to be valuable. And on top of that, you’re doing software for these companies. So in ten years, when you want to sell your software company, you’re going to be doing projections for ten years after that. You’re betting on oil, in 2041, in the United States, when the cheapest oil in the world is probably going to be in Saudi Arabia, Venezuela, and Russia?”
