The Race of Our Lives Revisited. Jeremy Grantham, GMO. Aug. 8, 2018.
IntroductionIt was always going to be difficult for us – Homo sapiens – to deal with the long-term, slow-burning problems that threaten us today: climate change, population growth, increasing environmental toxicity, and the impact of all these three on the future ability to feed the 11 billion people projected for 2100.
Our main disadvantage is that our species has developed over the last few hundred thousand years not to address this kind of long-term, slow-burning issue, but to stay alive and well-fed today and perhaps tomorrow. Beyond that we have a history of responding well only to more immediate and tangible threats like war.
Ten thousand years ago, or even a hundred years ago, these problems were either mild or non- existent. Today they are accelerating to a crisis. And at just this time, when of all times we could use a lucky break, our luck has deserted us. We face a form of capitalism that has hardened its focus to short-term profit maximization with little or no apparent interest in social good just as its power to influence government and its own fate has grown so strong that only the biggest, most powerful corporations and the very richest individuals have any real say in government. To make matters worse, we have an anti-science administration that overtly takes the side of large corporations against public well-being, even if that means denying climate change and stripping the country of the very regulations designed to protect us. The timing could not be worse. It is likely we in the US will lose – indeed, we are losing already – the stable and reasonable society that we have enjoyed since the Great Depression. Beyond the US, the risks may be even greater, with the worst effects in Africa – threatening the failure of an entire continent.
Our one material advantage is in the accelerating burst of green technologies, which has been better than anyone expected 10 or even 5 years ago, and that may in the future be able to offset much of the accelerating damage from climate change and other problems. Yet despite these surprising technological advances, we have been losing ground for the last few decades, particularly in the last few years. Somehow or other we must find a way to do better. We must expand on our strengths in technology while fighting our predisposition toward wishful thinking, procrastination, and denial of inconvenient long-term problems. We must also find inspirational leadership, for without it this race,possibly the most important struggle in the history of our species, may not be winnable. It is about our very existence as a viable civilization. We will need all the leadership, all the science and engineering, all the effort, and all the luck we can muster to win this race. It really is the race of our lives.
Ten thousand years ago, or even a hundred years ago, these problems were either mild or non- existent. Today they are accelerating to a crisis. And at just this time, when of all times we could use a lucky break, our luck has deserted us. We face a form of capitalism that has hardened its focus to short-term profit maximization with little or no apparent interest in social good just as its power to influence government and its own fate has grown so strong that only the biggest, most powerful corporations and the very richest individuals have any real say in government. To make matters worse, we have an anti-science administration that overtly takes the side of large corporations against public well-being, even if that means denying climate change and stripping the country of the very regulations designed to protect us. The timing could not be worse. It is likely we in the US will lose – indeed, we are losing already – the stable and reasonable society that we have enjoyed since the Great Depression. Beyond the US, the risks may be even greater, with the worst effects in Africa – threatening the failure of an entire continent.
Our one material advantage is in the accelerating burst of green technologies, which has been better than anyone expected 10 or even 5 years ago, and that may in the future be able to offset much of the accelerating damage from climate change and other problems. Yet despite these surprising technological advances, we have been losing ground for the last few decades, particularly in the last few years. Somehow or other we must find a way to do better. We must expand on our strengths in technology while fighting our predisposition toward wishful thinking, procrastination, and denial of inconvenient long-term problems. We must also find inspirational leadership, for without it this race,
Part I: Summary of the Argument
I’m going to give you a broad overview of this topic first, then follow with considerable back-up data and supporting exhibits.You could call this the story of carbon dioxide and Homo sapiens. You may not know, but if we had no carbon dioxide at all, the temperature of the Earth would be minus 25C – a frozen ball with no life with the possible exception of bacteria. at crucial 200 to 300 parts per million of carbon dioxide has taken us from that frozen state to the pretty agreeable world we have today. CO2 is therefore, thank heavens, a remarkably effective greenhouse gas. The burning of fossil fuels, which is the main cause for increasing CO2 and warming the world, has played a very central role in the development of civilization. The Industrial Revolution was not really based on the steam engine – it was based on the coal that ran the steam engine. In a world without coal, we would have very quickly run through all our timber supplies, and we would have ended up with what I imagine as the great timber wars of the late 19th century. The demand for wood would have quickly denuded all of the great forests of the world, and we would have returned to where we were at the time of Malthus, living at the edge of our capability, enduring recurrent waves of famine along with every other creature on the planet. A few good years, the population expands; a few bad years, we die off.
A gallon of gasoline can do work equivalent to 400 hours of manual labor. This extraordinary advance meant that the ordinary middle class had the power that only kings had in the distant past. And what it did, this incredible gift of accumulated power from the sun over millions of years, was to create an enormous economic surplus that catapulted civilization forward in terms of culture and science. Above all, agriculture has benefited, allowing our population to surge forward.
The sting in this tale, however, is that this has left us with 7.5 billion people today, going on a predicted 11 or so billion by 2100. Such a large population can only be sustained by continued heavy, heavy use of energy. Fossil fuels will run out, destroy the planet, or do both. The only possible way to avoid this outcome is rapid and complete decarbonization of our economy. Needless to say, this will be an extremely difficult thing to pull off. It requires the best of our talents and innovation, which miraculously, it may be getting. It also needs much better than normal long-term planning and leadership, which it most decidedly is not getting yet. In theory, Homo sapiens can easily handle this problem; in practice, it will be a very closely run race. We should never underestimate technology but also never underestimate the ability of us humans to really mess it up.
If the outcome depended on our good sense, if we had, for example, to decide in our long-term interest to take 5% or 10% of our GDP – the kind of amount that you would need in a medium-sized war – we would of course decide that the price was too high until it would be too late. It is hard for voters, and therefore politicians too, to give up rewards now to take away pain in the distant future, particularly when the pain is deliberately confused by distorted data. It is also hard for corporations to volunteer to reduce profits in order to be greener. Given today’s single-minded drive to maximize profits, it is nearly impossible.
But technology, particularly the technology of decarbonization, has come surging in to help us. This is the central race. Technology, in my opinion, will in one sense win. If we were able to look ahead 40 years, I’m confident that there would be a decent sufficiency of cheap green energy on the planet. In 80 years perhaps it’s likely we would have full decarbonization. Lack of green energy will not be the issue that brings us down. If only that were the end of the story. The truth is we’ve wasted 40 or 50 years since the basic fact about manmade serious climate damage became known. We’re moving so slowly that by the time we’ve fully decarbonized our economy, the world will have heated up by 2.5ºC to 3ºC, and a great deal of damage will have been done. A lot more will happen in the deeper future due to the inertia in the environmental system: if we no longer produce even a single carbon dioxide molecule, ice caps, for example, will melt over centuries and ocean levels will continue to rise by several feet.
I don’t worry too much about Miami or Boston being under water – that’s just the kind of thing that capitalism tends to handle pretty well. The more serious problem posed by ocean level rise will be the loss of the great rice-producing deltas: the Nile, the Mekong, the Ganges, and others, which produce about a fifth of all the rice grown in the world. Agriculture is in fact the real underlying problem produced by climate change. Even without climate change, it would be somewhere between hard and impossible to feed 11.2 billion people, which is the median UN forecast for 2100. It will be especially difficult for Africa.
With climate change, there are two separate effects on agriculture. One is immediate: the increased droughts, the increased floods, and the increased temperature reduce quite measurably the productivity of a year’s harvest. Then there’s the long-term, permanent effect: the most dependable outcome of increased temperature is increased water vapor in the atmosphere, currently up over 4% from the old normal. This has led to a substantial increase in heavy downpours. It is precisely the heavy downpours that cause soil erosion. In regular rain, even heavy rain, farmers lose very little soil. It is the one or two great downpours every few years that cause the trouble. We’re losing perhaps 1% of our collective global soil a year. We are losing about a half a percent of our arable land a year. Fortunately, it is the least productive half a percent. It is calculated that there are only 30 to 70 good harvest years left, depending on your location. In 80 years, current agriculture will be simply infeasible for lack of good soil. We must change our system completely to make it sustainable, which, critically, involves reducing erosion to almost zero by using no-till or low-till farming combined with cover crops. Because these are significant changes for a conservative community, it will take decades and we’ve barely started.
Happily, there are impressive advances in new technology in agriculture too. From intensive data management that tells us square meter by square meter exactly what is going on, where the nutrients are lacking and where more water is needed; to the isolation of every single micro-organism that relates to a plant. This race, too, is finely balanced.
A separate thread also closely related to fossil fuels is that we’ve apparently created a toxic environment, not conducive to life, from insects to humans as we will see. We must respond by a massive and urgent move away from the use of complicated chemicals that saturate our daily life.
A subtext to all of what I have to say here is that capitalism and mainstream economics simply cannot deal with these problems. Mainstream economics ignores natural capital. A true Hicksian profit requires that the capital base be left completely intact and only the excess is a true profit. Of course, we have not left our natural capital base intact or anything like it. The replacement cost of the copper, phosphate, oil, and soil – and so on – that we use is not even considered. If it were, it’s likely that the last 10 or 20 years (for the developed world, anyway) has seen no true profit at all, no increase in income, but the reverse.
Capitalism also has a severe problem with the very long term because of the tyranny of the discount rate. Anything that happens to a corporation over 25 years out doesn’t really matter to them. Therefore, in that logic, grandchildren have no value. Corporations also handle externalities very badly. Even the expression “handle badly” is flattering, for corporations typically don’t handle them at all, they’re just completely ignored. When they are not ignored it is usually because of direct or implied pressure from customers collectively. We deforest the land, we degrade our soils, we pollute and overuse our water, and we treat our air like an open sewer. All of this is off the balance sheet and off the income statement. Worse, any sensible response is deliberately slowed down by skillful programs of obfuscation, well-funded by fossil fuel interests and their allies. These deliberate obfuscators were known as the merchants of doubt when the problem was tobacco. (One of those merchants, MIT professor Richard Lindzen, actually went seamlessly from defending tobacco – where he famously puffed cigarettes through his TV interviews – to denying most of the problems of climate change.) This does not happen in China, India, Germany, or Argentina. This is unique to the English-speaking, oily countries – the US, the UK, and Australia – where the power of the fossil fuel interests is used to influence both politics and public opinion.
I think I understand the capitalist argument. Milton Friedman, a patron saint of today’s brand of capitalism, famously said “There is only one social responsibility of business…to increase its profits (so long as it…engages in open and free competition without deception or fraud).” It makes for a simple enough world. But it is very different from the US I came to in 1964, which (except civil rights) was with hindsight perhaps at the sweet spot of the social contract. CEOs were content with 40 times the income of their average workers (as Japan still is) and not today’s 300 times. Corporations acted as if they really had obligations to the cities and states in which they operated. And, of course, to their country. This is true to a much smaller degree today.
that's about 10 pages of his 35 page report; see the rest, and download the PDF, at the GMO website.
p.s. Grantham is a rare breed in the investing world, a hero
I think I understand the capitalist argument. Milton Friedman, a patron saint of today’s brand of capitalism, famously said “There is only one social responsibility of business…to increase its profits (so long as it…engages in open and free competition without deception or fraud).” It makes for a simple enough world. But it is very different from the US I came to in 1964, which (except civil rights) was with hindsight perhaps at the sweet spot of the social contract. CEOs were content with 40 times the income of their average workers (as Japan still is) and not today’s 300 times. Corporations acted as if they really had obligations to the cities and states in which they operated. And, of course, to their country. This is true to a much smaller degree today.
Corporations also acted as if they had real responsibility to their workers: to prove it they set about designing generous, i.e., expensive, well-managed defined benefit pension funds. Which they did not have to do. Today they claim, despite much higher profit margins, that they cannot afford them. The US as a whole also projected an idea of a global social contract – whenever the cold war would allow it – to promote the idea that ethical behavior had value (there were some miserable exceptions, but mostly it tried). It was always the US leading the way in promoting cooperative international trade, to enormous beneficial effect globally. Today both of these contracts appear to have been torn up and climate change is the epitome of what those who did the tearing up really hate: it occurs everywhere and very slowly. It is the ultimate Tragedy of the Commons: so it can only be dealt with by government leadership and regulation. All this is anathema to the new regime of maximizing an individual country’s advantage and short-term corporate profits. Yet however much libertarians may hate regulation – and in general I am sympathetic – when it comes to climate change it is simple. There is no other way.
As a footnote to the data provided, I will also examine the long and widely held view that any form of divestment is guaranteed to ruin performance. And together we will discover this view is completely inaccurate.
Exhibit 1 is the famous chart you might have seen used by Al Gore. It shows that for hundreds of thousands of years, the Earth’s atmosphere has had 180 to 300 parts per million of carbon dioxide. At 180 parts per million, we had ice ages (in the popular parlance) where, for example, 20,000 years ago New York was over a thousand feet deep in ice: enough to cover any building there today. At the previous highs of 280 parts per million, we had the interglacials, four of them, where our species benefited from the temperate and relatively stable environment we have enjoyed for the last few thousand years: a remission from cold that allowed for and facilitated the growth of civilization in the last 12,000 years. (Just for the record, 75% to 80% of the last 400 thousand years were spent in the “ice ages” and only 20% to 25% were in the warmer interglacials.)
In 1950, carbon dioxide levels were pretty much at the top of this historical range, and we were perhaps ready to slide into a new ice age in the next few thousand years. Then, bang, we added another 120 parts per million in the blink of an eye! We have added the same amount that separates the bottom of glacial phases from interglacials, and we’ve added it in just 70 years. It is a dramatic and reckless experiment. The best word to describe it is feckless. We are going to add another 120 parts per million, I give you my personal guarantee. By the time we finish, we will have tripled the difference between an ice age and an interglacial. We must sincerely hope it is not worse than that.
I’m proud to say I did Exhibit 2 about four and a half years ago because back then the scientists would not use the word “accelerate.” Scientists can be pretty chicken: not unreasonably given they are anxious to protect the dignity of science; they also desperately don’t want to be caught out exaggerating. With climate change they tend to underestimate and then are surprised by accelerating data. I sympathize with them – in science, overstatement is often dangerous – but in climate change work understatement can be very, very dangerous if it leads politicians to underreact in their policies.
I have kept an informal check on the number of peer-reviewed articles where the conclusion is a change in the climate outlook – with much help from the “Carbon Brief” and many others. My informal count is that about 80% conclude that, from the specialized work they have just done, the climate outlook is likely to be worse than consensus. The remaining 20% is either compatible with existing consensus or predicts a mitigating factor, a recent example of which would be that accelerating ice melting in Antarctica leads to an unexpectedly rapid rise in the bedrock from the reduced weight of the ice, which slows the rate of ice cap melting. But an 80-20 ratio in peer-reviewed science is pretty scary in itself. In stock market work – even economics – when a trend is systematically underestimated time after time models usually change to catch up. Climate science to date has been content to lag. What I must concede, though, is that since the US presidential election and the declaration of open war not just on climate science but science and research in general, the tone of climate research has toughened up considerably and become more realistic, and the term “acceleration,” almost overnight (and considerably overdue), has become commonplace.
As a footnote to the data provided, I will also examine the long and widely held view that any form of divestment is guaranteed to ruin performance. And together we will discover this view is completely inaccurate.
Part II: Back-up Data
Climate Change Damage Is AcceleratingExhibit 1 is the famous chart you might have seen used by Al Gore. It shows that for hundreds of thousands of years, the Earth’s atmosphere has had 180 to 300 parts per million of carbon dioxide. At 180 parts per million, we had ice ages (in the popular parlance) where, for example, 20,000 years ago New York was over a thousand feet deep in ice: enough to cover any building there today. At the previous highs of 280 parts per million, we had the interglacials, four of them, where our species benefited from the temperate and relatively stable environment we have enjoyed for the last few thousand years: a remission from cold that allowed for and facilitated the growth of civilization in the last 12,000 years. (Just for the record, 75% to 80% of the last 400 thousand years were spent in the “ice ages” and only 20% to 25% were in the warmer interglacials.)
In 1950, carbon dioxide levels were pretty much at the top of this historical range, and we were perhaps ready to slide into a new ice age in the next few thousand years. Then, bang, we added another 120 parts per million in the blink of an eye! We have added the same amount that separates the bottom of glacial phases from interglacials, and we’ve added it in just 70 years. It is a dramatic and reckless experiment. The best word to describe it is feckless. We are going to add another 120 parts per million, I give you my personal guarantee. By the time we finish, we will have tripled the difference between an ice age and an interglacial. We must sincerely hope it is not worse than that.
I’m proud to say I did Exhibit 2 about four and a half years ago because back then the scientists would not use the word “accelerate.” Scientists can be pretty chicken: not unreasonably given they are anxious to protect the dignity of science; they also desperately don’t want to be caught out exaggerating. With climate change they tend to underestimate and then are surprised by accelerating data. I sympathize with them – in science, overstatement is often dangerous – but in climate change work understatement can be very, very dangerous if it leads politicians to underreact in their policies.
I have kept an informal check on the number of peer-reviewed articles where the conclusion is a change in the climate outlook – with much help from the “Carbon Brief” and many others. My informal count is that about 80% conclude that, from the specialized work they have just done, the climate outlook is likely to be worse than consensus. The remaining 20% is either compatible with existing consensus or predicts a mitigating factor, a recent example of which would be that accelerating ice melting in Antarctica leads to an unexpectedly rapid rise in the bedrock from the reduced weight of the ice, which slows the rate of ice cap melting. But an 80-20 ratio in peer-reviewed science is pretty scary in itself. In stock market work – even economics – when a trend is systematically underestimated time after time models usually change to catch up. Climate science to date has been content to lag. What I must concede, though, is that since the US presidential election and the declaration of open war not just on climate science but science and research in general, the tone of climate research has toughened up considerably and become more realistic, and the term “acceleration,” almost overnight (and considerably overdue), has become commonplace.
Still, the data in Exhibit 2 is clear. The trendline through the first 50 years of the last century is an increase of 0.007ºC per year. In the second half, the trend had doubled to 0.015ºC per year. Then between the two El Niños – climate events that cause a temporary surge in global heat – of 1998 and 2016 (like lining up the top of bull markets), the temperature increased at an average of 0.025ºC per year.
Exhibit 3 shows what that looks like in color coded form from 1850 to 2017. Deep red goes up to +0.6ºC above long-term average and dark blue goes down to –0.6ºC below. This is an exceptionally clear way of showing data. Yes, there’s a little variability, but my, oh my, the dark red is all on the right.
This exhibit reminds me of all the talk about pauses – the claim that 1998 was supposedly the top of the warming, which had then stopped, a favorite refrain of both deniers and “don’t worry-ers.” This argument was still remarkably in full force as late as 2013 and is repeated even now. Indeed, a famous British politician, former Chancellor of the Exchequer, Lord Lawson, said on BBC Radio 4 this past April that the previous 10 years had not had any warming. He was not just wrong. The last 10 years were 10 of the hottest 11 years in history and contained the 3 hottest years ever. Please explain to me, if anyone knows, why these people say stuff like that. I have no idea. Perhaps they hate their grandchildren.
Exhibit 4 shows ocean temperature, which is accelerating even more than air temperature. The oceans absorb 93% of all the heat, with the rest spread between dry land and the air.
The black line from the bottom left to the top right shows the heat energy of the ocean from the surface to 2,000 meters deep. From 1950 to 1990 it warmed at 37 heat units a year. From 1990 to 2016, the warming almost tripled to 99 units. Acceleration in something this dangerous should make the hair at the back of your neck prickle a bit. It does mine.
Ice is melting even faster. Exhibit 5 is a view of a famous glacier valley in Alaska at the same time of year in each picture. It has just vaporized in 63 years.
The most dependable effect of climate change, as I mentioned, is downpours. Exhibit 6 shows the annual number of three inches per day downpours in the US.
Last year in Houston, Hurricane Harvey dumped 10 inches of rain in a day, followed by 10 inches, followed by 10 inches. If you try to put a probability on that it just does not compute. Perhaps a 1-in-1,000-year event, perhaps almost impossible. It turns out that within the prior 18 months, Houston had already had a 1-in-200-year event. Within 18 months before that, a 50- to a 100-year event. In a terrible update from Japan just this month (July), almost 200 lives were lost and 2 million were asked to evacuate because of a downpour that was so far off the scale that it made Harvey look like a drizzle: 23 inches of rain in 1 single day.
Exhibit 7 is a quick survey of this kind of damage: the number of floods is up by 15 times from 1950, the deaths from droughts up by 10 times, wild fires by 7 times, and extreme temperature events by 20 times.
NextEra Energy controls Florida Power & Light, as well as the world’s largest trading unit for wind and solar. So he really should know what he's talking about. And he says that without incentives, wind will be $0.02 to $0.03 per kilowatt-hour early in the next decade. Including a few hours of battery storage to carry that power into the evening surge will add another penny. What that means is that wind and solar are going to be cheaper than the operating costs of coal and nuclear, even the best coal and the best nuclear.
Once again: you can receive a gift of a nuclear plant and just the cost of operating it is higher than the cost of building and operating a modern solar plant or a modern wind farm. This economic contest is therefore a done deal. Six months after that comment from Mr. Robo, Xcel Energy in Colorado wanted to close a couple of coal plants early and asked for bids for renewable energy. They were swamped by an amazing 850 bids. The median bid, the one in the middle, below which half were cheaper, was 2.1 cents per kilowatt-hour for wind including storage. The median bids they received for solar and wind power are shown in Exhibit 9.
Exhibit 3 shows what that looks like in color coded form from 1850 to 2017. Deep red goes up to +0.6ºC above long-term average and dark blue goes down to –0.6ºC below. This is an exceptionally clear way of showing data. Yes, there’s a little variability, but my, oh my, the dark red is all on the right.
This exhibit reminds me of all the talk about pauses – the claim that 1998 was supposedly the top of the warming, which had then stopped, a favorite refrain of both deniers and “don’t worry-ers.” This argument was still remarkably in full force as late as 2013 and is repeated even now. Indeed, a famous British politician, former Chancellor of the Exchequer, Lord Lawson, said on BBC Radio 4 this past April that the previous 10 years had not had any warming. He was not just wrong. The last 10 years were 10 of the hottest 11 years in history and contained the 3 hottest years ever. Please explain to me, if anyone knows, why these people say stuff like that. I have no idea. Perhaps they hate their grandchildren.
Exhibit 4 shows ocean temperature, which is accelerating even more than air temperature. The oceans absorb 93% of all the heat, with the rest spread between dry land and the air.
The black line from the bottom left to the top right shows the heat energy of the ocean from the surface to 2,000 meters deep. From 1950 to 1990 it warmed at 37 heat units a year. From 1990 to 2016, the warming almost tripled to 99 units. Acceleration in something this dangerous should make the hair at the back of your neck prickle a bit. It does mine.
Ice is melting even faster. Exhibit 5 is a view of a famous glacier valley in Alaska at the same time of year in each picture. It has just vaporized in 63 years.
The most dependable effect of climate change, as I mentioned, is downpours. Exhibit 6 shows the annual number of three inches per day downpours in the US.
Exhibit 7 is a quick survey of this kind of damage: the number of floods is up by 15 times from 1950, the deaths from droughts up by 10 times, wild fires by 7 times, and extreme temperature events by 20 times.
Part III: Decarbonizing the Economy
The good news is that greener technologies are also accelerating. This puts me in a very interesting position. I deal with green technologists and they have no idea how bad the situation is for the environment. Then I deal with environmentalists, who I must say are a gloomy lot, and they have no idea how rapidly the science is advancing in this area. Exhibit 8 is a bit dry, but it is absolutely vital. This is from the boss of one of the three largest utility companies in America, not one of our greens. This is a guy from the dark side, you might say, who is just telling it like it is.NextEra Energy controls Florida Power & Light, as well as the world’s largest trading unit for wind and solar. So he really should know what he's talking about. And he says that without incentives, wind will be $0.02 to $0.03 per kilowatt-hour early in the next decade. Including a few hours of battery storage to carry that power into the evening surge will add another penny. What that means is that wind and solar are going to be cheaper than the operating costs of coal and nuclear, even the best coal and the best nuclear.
Once again: you can receive a gift of a nuclear plant and just the cost of operating it is higher than the cost of building and operating a modern solar plant or a modern wind farm. This economic contest is therefore a done deal. Six months after that comment from Mr. Robo, Xcel Energy in Colorado wanted to close a couple of coal plants early and asked for bids for renewable energy. They were swamped by an amazing 850 bids. The median bid, the one in the middle, below which half were cheaper, was 2.1 cents per kilowatt-hour for wind including storage. The median bids they received for solar and wind power are shown in Exhibit 9.
that's about 10 pages of his 35 page report; see the rest, and download the PDF, at the GMO website.
p.s. Grantham is a rare breed in the investing world, a hero
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