"Climate Change is a Market Failure"

"Climate Change is a Market Failure"

December 4 2023

That’s one of the most succinct statements I’ve heard so far here at COP28 in Dubai. Correcting that market failure is what climate capitalism is all about.


The speaker was Bernd Heid, a McKinsey senior partner, at a session hosted by the consulting firm on scaling up climate tech. One of his central messages: business leaders who drag their feet on progress towards green business will fall behind and eventually lose.


“Wait and see is not a clever strategy for climate investing,” said Heid. “An early mover has an advantage. There is a learning curve, which may prevent someone from entering from the sidelines at a late stage.” He was speaking especially about companies that can use challenging new technologies like systems involving green hydrogen, which he expects will become critical in many industries. Panelist Tom Linebarger, who until last year was CEO of Cummins Engine, echoed Heid: “You have to start spending money today. If you don’t, you’re going to lose.”


One reason sitting still is fruitless: things are moving really fast. Heid says there is actually a “Moore’s Law of climate tech” – it is improving at an exponentially-increasing pace. “The climate tech opportunity will roughly double every decade,” he explained. While he conceded that most climate technologies remain way too expensive, some have dropped in price faster even than McKinsey predicted. Both solar panel and Lithium-Ion EV battery costs, for example, plummeted dramatically in the past decade.


McKinsey projects the global climate tech market will grow to $4 trillion by 2040, about the size of today’s auto industry. It could almost make you think we can move quickly enough to stave off the worst of global warming.


But for climate tech to really satisfy our dire need for progress, Heid said, the global economy needs to shift in key ways. For one thing, he sees “a tremendous opportunity to re-globalize.” One reason: energy demand is concentrated in the northern industrial economies while the most efficient wind and solar resources are in the Global South. “We need a new energy supply chain to link the energy-abundant regions to the industrial centers,” he explained. He also believes some industries, like steel, may begin to migrate toward regions where energy is cheaper.


My friend and energy and climate mentor Vijay Vaitheeswaran, Global Energy & Climate Innovation Editor of The Economist, was moderating. He asked Heid how the world can overcome “headwinds” and achieve the goal of tripling renewables globally by 2030, which many here hope will be formally adopted by governments as a goal at COP. “It’s 1000 steps in parallel rather than we wait for one big solution and then we’re done,” replied Heid. “Climate techs don’t come in isolation. For example, for hydrogen to work you also need both renewable energy and CCUS [carbon capture and storage]. Batteries and heat pumps don’t make sense unless the power sources are clean ones.”


Linebarger of Cummins spoke in a way I haven’t much heard business leaders speak until very recently. He takes the need for radical climate action as a given. “We are out of time,” he said. (Some banking leaders talk like this too, as I’ll explain in an upcoming dispatch.) I was impressed to hear Linebarger say “We know there will be a day when diesel engines are not welcome.” He continued: “So you start launching strategies. The problem is, you don’t know what the market is going to look like.”


Cummins is a leader in large engines for transport and industry. About those, Linebarger said, “I believe both hydrogen and electrons will win. I put money on both. Small vehicles will be electric. Hydrogen lost that race because batteries got better faster. But for big energy users like long-distance trucking, it’s not so easy. Batteries won’t keep up.”


At this COP28 there is a lot of talk about “electrons vs. molecules.” Many experts believe the recent hyper-focus on “electrifying everything” did not take into consideration the challenges of decarbonizing heavy industries – not only trucking but also shipping, cement, and steel. For those, hydrogen and other carbon-free fuels based on “molecules” will be necessary.

There are plenty of market failures to correct.

David Kirkpatrick - Senior Editor

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