Firing up a cigar at lunch a century or so ago, just as the gasoline-burning car began its ascent to preeminence, Thomas Edison lamented the primitive aspects of lighting stuff on fire for energy:
Sunshine is a form of energy, and the winds and tides are manifestations of energy. Do we use them? Oh no; we burn up wood and coal, as renters burn up the front fence for fuel. We live like squatters, not as if we owned the property.
Edison had some skin in the game, given Henry Ford’s Model T was running over the early market for electric vehicles. Still, his words have newfound relevance as we reckon with the deferred costs of modernization powered by fossil fuels. Like burning the fixtures, we are also using up the planet’s finite capacity to absorb emissions without catastrophic consequences.
Yet the intangibility of this resource has obscured its value. In our quest for growth, we often treat the atmosphere, among other natural systems, as bottomless landfill. Testifying at a recent hearing of the House Select Committee on the Climate Crisis, Andy Karsner, a technology entrepreneur and former energy policymaker, summed it up like this:
Today, the erroneous presumption, built upon prior generations’ thinking, that the world provides unending resources is why we tend to measure and fully account for certain things (like the processed and manufactured goods we consume) and not others (the natural resources required to produce these material comforts).
In the classic “tragedy of the commons,” we pay willingly for the gasoline we burn yet incur no charge for releasing carbon emissions that inflict a cost on everyone. It’s like dumping your trash on your neighbor’s lawn secure in the knowledge you’ll never pay a fine. In other words, we price the fuel like a scarce commodity and the atmosphere as an infinite one, ascribing it a value of zero. Pricing environmental goods is critical to redirecting our capitalist impulses — and the ingenuity they foster — toward more sustainable ends.
It just so happens we have a recent example of a commodity flipping the other way, from scarcity to abundance: oil. Fears of peak supply have given way to expectations of peak demand. Naturally, prices, and price expectations, have fallen and, as you would expect, spurred demand.
The other thing that flip from scarcity to abundance has impacted: investment. Global spending on upstream oil and gas has dropped more than 40% since 2014.
Oil majors are responding to price signals for barrels but also for their own securities. If investors now price the commodity as abundant, then the last thing they want is to encourage more of it. So big capex budgets are out and dividends are in.
Oil’s switch from scarce to abundant resource makes the creation of “natural currency,” as Karsner puts it, even more imperative, as the well-being of our ecosystem now competes with seemingly cheaper fossil fuels. That switch also raises some useful pointers.
Ascribing value to common goods is often framed as economically disastrous or stealth taxation, with people made to pay for stuff that was “free.” This has things backwards. The current flow of incentives encourages fossil-fuel production and consumption, with profits accruing to relatively few while the negative consequences are spread far and wide. That’s a system, I suppose, but it is less capitalism and more socialism with carboniferous characteristics.
Putting a value on systems that sustain life isn’t raising prices, it is revealing and reapportioning them. The price of ecological damage is being paid already — just in disruptive, inefficient ways. California’s wildfires are a prime example. Climate change isn’t the only factor there, but it is the essential one making it a chronic emergency. And the disruption extends beyond death and property damage. PG&E Corp., one of the largest members of the supposedly safe utilities sector, looks all but unownable. Homeowners are paying ever more for (often inadequate) insurance, assuming they can still get a policy. And for anyone tempted to dismiss California’s victims as short-sighted for living among the trees in the first place, a lack of proper signals in everything from insurance premiums to permitting have fostered communities on marginal land across the U.S. and beyond.
Valuing sustainability, and associated resiliency, isn’t primarily about deterrence, though. It is mainly about encouraging investment along new paths. Consider utilities. Incentivized with regional monopolies and regulated returns, they electrified the U.S. in a matter of decades. We spent the 20th century obsessed primarily with encouraging economic growth and were wildly successful. But if our standard of living is to be maintained, then we must incentivize other things: energy and water efficiency; network integrity; carbon sinks; electrification of combustion technologies; renewable energy.
In his remarks, Karsner cited the value of mangroves, which not only sequester carbon but also mitigate coastal flooding. It may seem tough to value them given we are used to rewarding harvesting, rather than conservation. But really, if we can put a price to several decimal points on something as largely useless as gold — we even trade futures on the stuff — then this should be doable. Gold is a good example, in fact, because it is valued chiefly for its sheer scarcity, which is how we need to think about mangroves and other essential ecosystems.
As the oil market’s recent experience shows, explicit signals can start shifting investment intentions, and thereby physical outcomes, relatively quickly. There’s an added nuance here specific to energy. As investment in upstream oil fell, so did industry inflation. So a dollar spent on drilling in 2018 went further, with North American tight oil’s productivity gains being the most obvious example. Yet renewable energy, which benefits from a manufacturing, rather than extractive, learning curve, is way ahead on this.
Such dynamics provide even more incentive to embrace systematic incentives. Sure, more investment will likely spawn some bad bets and losses. But as with the pre-2014 oil bubble or, further back, the technology bubble, capitalism is messy like that, and even bubbles can leave useful legacies.
Time is also at play here, and, again, the oil industry offers a useful indicator. The shift in attitudes regarding climate change on the part of at least some oil majors reflects pressure from a motley crew encompassing nervous fund managers to social media-savvy children. It is also an insurance policy, advocating for market-based solutions even as the urgency of climate change stokes calls for more prescriptive, blunter tools to be deployed. In the U.S. context, while Democratic candidates’ climate platforms comport with scientific realities as opposed to widespread Republican denialism, competing on ever-bigger trillion-dollar spending plans isn’t the most efficient way of fostering and embedding change.
We are remarkably adept at allocating effort and resources when costs and rewards are transparent in a fair, functioning market. And putting a value on the natural systems we rely on ultimately expands, rather than restricts, our concept of well-being and living standards. People may not necessarily see the full picture at any given moment, but aren’t stupid. We all know, as Edison alluded to, you can’t burn the furniture without someday ending up on your butt. -Bloomberg