Investors and consumers balk at costs of replacing fossil fuels with renewable energy, highlighting painful economics of climate mitigation
4 min
In the past few years, Washington and Wall Street started fantasising that the transition to net-zero carbon emissions could be an economic bonanza. “When I think climate change, I think jobs,” President Biden said. When Wall Street heard green energy, it saw profits. As Ford Motor launched an electric Mustang and pickup truck, its market value topped $100 billion for the first time.
This year the fantasy ended. With electric vehicle demand falling short of expectations, manufacturers are dialling back production and buying back stock instead. Offshore wind developers have canceled projects. The S&P Global Clean Energy Index has fallen 30% this year. Ford’s market cap is down to $42 billion.
This doesn’t mean the transition to net zero is over. Officials meeting this week at the United Nations climate conference are just as worried about climate change. Renewable energy continues to expand. In the very long run, it is still the case that economic welfare will be higher with less global warming.
But the economics of getting to net zero remain, fundamentally, dismal: Someone has to pay for it, and shareholders and consumers decided this year it wouldn’t be them.
Politicians and the public tend to think all investment is good for growth, an error that leads to all sorts of muddled thinking about climate.
Technological transformations are positive supply shocks: a new, more efficient technology comes along, and investment naturally gravitates toward this new technology because it is profitable.
By contrast, the green transition is driven by public policy. It is “a negative supply shock, with an accompanying need to finance investments whose profitability cannot be taken for granted,” French economist Jean Pisani-Ferry wrote in a report commissioned by the French prime minister and released in English in November. “By putting a price—financial or implicit—on a free resource (the climate), the transition increases production costs, with no guarantee that the reduction in energy costs will eventually offset them, while the investments it calls for do not increase productive capacity but must nevertheless be financed.”
Pisani-Ferry, who is affiliated with the Bruegel think tank in Europe and the Peterson Institute for International Economics in Washington, is an uncommonly clear thinker on this issue.
He notes the transition involves hefty capital spending today to replace fossil-fuel consumption in the future. Pisani-Ferry estimates a middle-class French family would spend 44% of annual disposable income for a heat pump, and 120% for an electric car. These investments boost demand, but don’t leave families better off since they simply do the same thing as what they replace. And if taxes rise to pay for these investments, families will be worse off, financially.
“It would take an incredible act of blindness to fail to recognise that climate change is happening, that it is—and will increasingly become—severely damaging,” he writes. “It would also be incredibly flippant to claim that this urgent and imperative action will have no economic cost by 2030.”
The most efficient way to redirect consumption and investment from fossil fuels to zero-emissions energy is a carbon tax, or a cap-and-trade system. Europe has adopted such a system plus ever more stringent goals, especially after Russia cut off natural-gas supplies following its 2022 invasion of Ukraine. But as the cost has grown, so has public discontent, from France’s “yellow vest” protests in 2018 to last week’s first-place finish in Dutch elections by the far-right Freedom Party, which wants to ditch all climate regulations.
U.S. leaders have rejected any federal tax or fee on carbon. Biden’s solution is to not ask consumers to pay for the green transition; his Inflation Reduction Act pours, by some estimates, roughly $1 trillion into electric vehicles, renewable energy, hydrogen and other zero-emissions technology.
Subsidies can play a vital role by giving green energy time to scale up and innovate until it is competitive with fossil fuels. But the IRA has been undermined by extraneous conditions such as made-in-America requirements, and by green tech inflation—a byproduct of the IRA itself, which helped fuel demand.
Finally, Biden’s investment agenda was designed for the pre pandemic era when low interest rates flattered the financial profile of renewable energy investment and federal budget deficits were less likely to crowd out private investment. Those assumptions no longer apply.
For years, the cost of wind and solar plummeted, but since 2021 they have risen, according to investment bank Lazard. Interest rates are an important factor, which Lazard estimates affect offshore wind and solar more than natural gas.
Many developers can no longer economically supply power at the rates previously agreed to. Denmark’s Orsted, the world’s largest wind developer, took a $4 billion charge in early November for pulling out of two projects off New Jersey. The company today is worth 75% less than in early 2021.
ClearView Energy Partners estimates about 30% of state-contracted offshore wind capacity has been canceled, and another 25% may be rebid. ClearView analyst Timothy Fox noted lawmakers often mandate increased renewables, but utility regulators must approve the contracts, and one of their primary considerations is cost to ratepayers.
“I am an unapologetic economic regulator,” Diane Burman, a member of the New York state Public Service Commission, said in October as the commission refused to pay wind developers more. Decarbonization and grid improvement must proceed “with costs in mind.”
The financial appeal of EVs has similarly faded. Tesla proved making them can be profitable, but so far it looks like an outlier. Tesla captured the lion’s share of early adopters—drivers willing to put up with the cost and recharging hassle of an EV in return for performance and green credentials. For most drivers, the trade off still doesn’t work—even with subsidies.
True, the IRA has spurred a boom in EV and battery factories. But a successful green transition requires that those factories be profitable, and Detroit’s automakers are still losing money on every EV they sell.
EVs should eventually require less labor and thus be cheaper to build than gasoline-powered vehicles. But auto workers are no more willing to pay for the green transition than consumers or investors. In its recent strike, the United Auto Workers extracted commitments that make it even harder for Detroit to make money on EVs.
In a sobering report this week, Morgan Stanley auto analysts estimated the average non financial company in the S&P 500 spends its market cap in capital expenditure and research and development in about 50 years. GM and Ford spend theirs in 1.9 and 2.6 years, respectively. “This cannot continue, in our view.”
The green transition remains critical, but its path will be fraught until someone agrees to pay for it.
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CIOs can take steps now to reduce risks associated with today’s IT landscape
3 min
As tech leaders race to bring Windows systems back online after Friday’s software update by cybersecurity company CrowdStrike crashed around 8.5 million machines worldwide, experts share with CIO Journal their takeaways for preparing for the next major information technology outage.
IT leaders should hold vendors deeply integrated within IT systems, such as CrowdStrike , to a “very high standard” of development, release quality and assurance, said Neil MacDonald , a Gartner vice president.
“Any security vendor has a responsibility to do extensive regression testing on all versions of Windows before an update is rolled out,” he said.
That involves asking existing vendors to explain how they write software, what testing they do and whether customers may choose how quickly to roll out an update.
“Incidents like this remind all of us in the CIO community of the importance of ensuring availability, reliability and security by prioritizing guardrails such as deployment and testing procedures and practices,” said Amy Farrow, chief information officer of IT automation and security company Infoblox.
While automatically accepting software updates has become the norm—and a recommended security practice—the CrowdStrike outage is a reminder to take a pause, some CIOs said.
“We still should be doing the full testing of packages and upgrades and new features,” said Paul Davis, a field chief information security officer at software development platform maker JFrog . undefined undefined Though it’s not feasible to test every update, especially for as many as hundreds of software vendors, Davis said he makes it a priority to test software patches according to their potential severity and size.
Automation, and maybe even artificial intelligence-based IT tools, can help.
“Humans are not very good at catching errors in thousands of lines of code,” said Jack Hidary, chief executive of AI and quantum company SandboxAQ. “We need AI trained to look for the interdependence of new software updates with the existing stack of software.”
An incident rendering Windows computers unusable is similar to a natural disaster with systems knocked offline, said Gartner’s MacDonald. That’s why businesses should consider natural disaster recovery plans for maintaining the resiliency of their operations.
One way to do that is to set up a “clean room,” or an environment isolated from other systems, to use to bring critical systems back online, according to Chirag Mehta, a cybersecurity analyst at Constellation Research.
Businesses should also hold tabletop exercises to simulate risk scenarios, including IT outages and potential cyber threats, Mehta said.
Companies that back up data regularly were likely less impacted by the CrowdStrike outage, according to Victor Zyamzin, chief business officer of security company Qrator Labs. “Another suggestion for companies, and we’ve been saying that again and again for decades, is that you should have some backup procedure applied, running and regularly tested,” he said.
For any vendor with a significant impact on company operations , MacDonald said companies can review their contracts and look for clauses indicating the vendors must provide reliable and stable software.
“That’s where you may have an advantage to say, if an update causes an outage, is there a clause in the contract that would cover that?” he said.
If it doesn’t, tech leaders can aim to negotiate a discount serving as a form of compensation at renewal time, MacDonald added.
The outage also highlights the importance of insurance in providing companies with bottom-line protection against cyber risks, said Peter Halprin, a partner with law firm Haynes Boone focused on cyber insurance.
This coverage can include protection against business income losses, such as those associated with an outage, whether caused by the insured company or a service provider, Halprin said.
The CrowdStrike update affected only devices running Microsoft Windows-based systems , prompting fresh questions over whether enterprises should rely on Windows computers.
CrowdStrike runs on Windows devices through access to the kernel, the part of an operating system containing a computer’s core functions. That’s not the same for Apple ’s Mac operating system and Linux, which don’t allow the same level of access, said Mehta.
Some businesses have converted to Chromebooks , simple laptops developed by Alphabet -owned Google that run on the Chrome operating system . “Not all of them require deeper access to things,” Mehta said. “What are you doing on your laptop that actually requires Windows?”
