Renewable energies have traditionally been associated with counter cultural movements, something for tree-huggers, do-gooders and the like. Mainstream thinking, on the contrary, has treated pollution as an unavoidable price to pay for progress; a sort of large-scale version of the “tragedy of the commons”, as no one in their right mind would be willing to “go solo” and scale back living standards to pre-industrial times. Such a radical action is what would be needed to stop greenhouse emissions, taking into account that energy is a key input of most products and services, and that the vast majority of it is generated from polluting sources (oil, gas and coal).
In defense of this stance, one has to consider that the impact of CO2 emissions on climate change was still far from obvious a couple of decades ago. There were concerns about acid rain and the ozone hole, but temperatures had been moderately rising for decades in line with post-glacial climate models, and it could not be told whether the abnormal levels of the 80s and 90s were just outliers. By now however, evidence is overwhelming, and it is not just a question of if, but how much and how fast will our climate change.
Waking up to reality could have been much worse had the two oil crises in the 70s not occurred. They were a blessing in disguise, as they started the technological race for producing clean energy at economic prices. Nuclear energy was also a beneficiary, and for many it was seen as a backstop solution should climate change prove to be a real problem; until Chernobyl and Fukushima revealed that the tail risks of the technology are too large. On the other hand, nuclear fusion, the inverse atomic reaction free of nuclear waste, is still in its infancy (The ITER experimental reactor is expected to start harnessing energy by 2033)
This leaves us with solar and wind as the only realistic clean sources of energy, once hydro is constrained by geography and climate. Efficiency gains in both technologies have been dramatic, and now they are competitive against traditional sources of energy. Critics argue that these technologies are only viable when subsidized by governments, but this is only partially true, as subsidies have also fostered technological advance. In fact, the argument can be reversed, as fossil fuel technologies enjoy a huge implicit subsidy insofar as producers and consumers internalize only a tiny fraction of the pollution costs – courtesy of future generations.
Mindsets can change very quickly though, and consumers are starting to have the possibility to reduce their carbon footprint without having to live in a cave. To date, only the wealthy can afford to pay a premium for a Tesla car or a carbon-free electricity mix, but “going green” is quickly becoming an aspirational goal that is forcing the auto industry to fast-forward the introduction of electric cars.
If you think that the carbon transition may not happen that fast, the tobacco industry offers some revealing parallels. For many years, cigarette makers went to great lengths to conceal the harmful effects of smoking, even funding biased medical research. But when scientific evidence became conclusive, smoking in public spaces ceased to be socially acceptable and smoking bans became ubiquitous. Oil companies had also scientists on the payroll doctoring research on climate change, but this can now be directly observed as seasons go by. It is then not hard to imagine that once consumers are offered a clean affordable alternative, internal combustion cars will be soon looked at with disdain. Paradoxically, both traditional cigarettes and cars may end being superseded by electric versions, despite years of tangling with filters.
Fernando de Frutos, MWM Chief Investment Officer
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