By Shelburne, Vermont Financial Advisor Josh Kruk
April 6, 2022
The latest report by the U.N. Intergovernmental Panel on Climate Change (IPCC), released this week, presents some depressing conclusions. However, it also allows us to consider some interesting and more optimistic possibilities that leverage human nature and ingenuity.
Perhaps the report’s most alarming conclusion is that in order to reach the Paris Agreement’s goal of limiting future warming to 1.5C, global emissions would need to peak within about three years. That seems close to impossible. The IPCC also believes that reaching net zero emissions in time to hit the 1.5C target by 2100 makes the use of carbon capture and removal techniques “unavoidable” by the middle of the century. Taken together, this means that emissions will almost certainly exceed targets and then will need to be brought back down by removing carbon from the atmosphere.
While the report’s overall tone comes across as bleak, it’s worth remembering two concepts we have discussed in the past: exponential change and incentives.
Humans tend to be linear thinkers, meaning that we often underestimate the probability of extreme outcomes. This is most often discussed in terms of underestimating bad extremes (e.g., investing’s “black swan” events, or the possibility that global warming could become catastrophic).
However, it also applies to positive extremes. We tend to under-appreciate that with enough investment and brain power, cost reductions and technological adoption rates are often exponential, not linear. The IPCC report highlights that the cost of solar and wind power has dropped much more quickly than what was anticipated a decade ago. The same has happened with EV batteries. As a result, the level of adoption of those technologies has also outpaced projections. Exponential progress looks small for a long time before it becomes explosive.
Humans also respond to incentives, particularly if those incentives yield near-term, tangible benefits large enough to overcome natural inertia. There is a subset of the population that will alter behavior because they believe it is the right thing to do, even if it costs more. But for change to really take hold, incentives need to be powerful enough to remove the indifference of the average person. In light of the exponential effects underway in renewables and the additional incentives created by the conflict in Russia, it will be fascinating to see if we can reach a tipping point in adoption sooner than expected.
And relative to carbon capture, the greatest hurdles so far are the cost and the inability to scale the technology (see this start-up). However, the incentive to invest in the technology is increasing. And as more investment and intellectual capital moves in this direction, the potential for exponential cost and efficiency gains will increase, just as it did with renewable energy a decade ago.