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A killing in clean technology

By Paul Gilding - posted Monday, 18 August 2008


For more than 20 years many have emphasised the money to be made in cleaning up the environment. The theory's been right, though, with some notable exceptions at relatively small scale, the timing's been wrong. The reality is that investing in good old-fashioned polluters such as ExxonMobil has generally made better, larger and more reliable returns than acting with your heart. So with the arrival of climate change into the mainstream economy, and the increasing shakiness of traditionally safe investments such as banks, is now finally the time? Is there serious money in doing good at last and if so, where are the best bets?

The answer to the first question is easy. Yes, this is the time. And while the risk is still considerable, tomorrow's equivalents of Microsoft and Google are likely to be in this space and they are probably already in business and looking for capital.

The reason this is such a reliable forecast is that, unlike most other investment propositions, this one is not driven at its core by the vagaries of technology, regulation or consumer preference. In this case the science gives us the clear overarching trend against which to invest. Yes, there are still many uncertainties in the science but not in the basic nature of the risk, the causes of the problem or the required response. So whatever the ups and downs of international negotiations, whether the price of carbon is $10 or $40 a tonne and whether our ETS starts in 2010 or 2012, the traffic is going one way: we're going to dramatically cut greenhouse gas emissions for many decades and there's big bucks involved.

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The numbers in achieving this are dramatic and are getting the market excited, with billions now flowing from some of the world's most accomplished investors such as Kleiner Perkins and Khosla Ventures. According to the Cleantech Group, while overall venture capital investment was drying up over the past quarter, clean technology investments increased by 48 per cent, building on their annual increase over the past five years of 47per cent compound annual growth rate. While this is early days, the growth forecast is breathtaking.

Take Australia for example. Our total greenhouse gas emissions are rapidly heading towards 600 million tonnes of CO2e per year (CO2e means the six key greenhouse gases converted into their CO2 equivalence). If we price that at a conservative $40 a tonne (we'll start lower but then move higher) that means even in Australia's small market there'll be about $24 billion of value effectively changing hands between consumers, sectors and industries each year for the next two decades, focused on the task of cutting pollution. As the old saying goes, $10 billion here, $10 billion there and you're soon talking serious money. And that's just Australia.

So it's not surprising the key global investment banks have become climate change believers. Every melting glacier means water flowing into the ocean and money flowing into their bonuses.

If you want some of the action they see, here's three simple rules to follow.

First, understand the underlying driver, simply explained by the science. Climate change poses significant ecological, and therefore economic, risk. The cause is CO2 pollution, therefore the way to reduce the risk is primarily to reduce CO2 pollution. So don't focus on carbon trading as an investment question, that's just a mechanism for value transfer. The real money is in real world economic activity that results; activity that cuts CO2 emissions as quickly and as cheaply as possible.

Second, go where others aren't. Everyone's obsessed with finding major technological breakthroughs, particularly in energy generation. There will be some spectacular successes in that area, most likely in solar power such as solar concentrators, second generation bio-fuels that don't use food crops and energy storage such as super capacitors. The challenge is that everyone knows this and is on to it, including some seriously smart investors. According to the Cleantech Group, 70 per cent of investment in clean technology in the past quarter went to energy, despite the reality that these investments won't cut a large amount of CO2 quickly or cheaply for some time. Unless you really have a game-changing technology or a great deal of domain expertise, leave that to those who do.

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Third, when in a gold rush invest in picks and shovels if you want reliable returns. That is, invest in the simple, proven and reliable stuff everyone needs. Tests for judging this would be things like: Do we know how to do it already? Is there consumer acceptance? Is the technology risk low? And back to rule two, does it cut CO2 cheaply and quickly?

The obvious and clearest example, but only one of many, is energy efficiency, particularly solar thermal water heating. It passes all the tests above: it's huge in scale and beautiful in simplicity. If we put a solar hot water service on 50 per cent of households in Australia, that would be about $8 billion of activity, even if going to scale halved the unit price. Then we can change every light bulb, insulate every house, double glaze the windows, replace the old fridges etc. Doing this would cut domestic power consumption by more than 25 per cent, generate tens of billions of dollars of job-intensive economic activity and largely pay for itself through energy savings. That's a lot of coal-fired power stations.

These are just small examples. We're going to transform transport from fossil fuels probably to electricity or hydrogen, forcing us to replace our infrastructure and the entire transport fleet. We're going to change business models in many sectors. Perhaps we'll make every home a power station, still connected by the grid but reducing our reliance on large centralised power stations. Look out utilities.

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First published in The Australian on August 7, 2008.



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About the Author

Paul Gilding is an independent adviser and commentator on sustainability and climate change and a Special Advisor to KPMG. Former roles include executive director of Greenpeace International, founder of Ecos Corporation and CEO of Easy Being Green. www.paulgilding.com

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