‘Peak Oil & Green Energy: Both Fossils?’—A Milken Global Conference Expert Panel

Issue: 
Cathy Zoi

Greg Dalton: Scott, talk about the connection between oil prices and clean energy. What’s real and what’s not so real?

Scott Jacobs: A lot of folks have seen the commodity price decline over the last six months. Many folks have also come to the conclusion that the decline has something to do with electricity prices in the United States. It does not. It hasn’t for many years. Let us debunk that myth today: Oil prices at $50 or $100 will have zero impact on what you pay for the electricity coming out of the wall. We diverged a long time ago here in the United States, with the marginal price of electricity being set by oil or gas. 

Natural gas obviously has a major impact on electricity prices here in the US, but those natural gas prices diverged from oil many years ago with the advent of unconventional sources of natural gas. 

It’s amazing to me that people think electricity companies or renewable electricity companies should be hurt by a lower commodity price for oil.

Greg Dalton: Ian Wright, does cheap oil hurt Tesla?

Ian Wright: I don’t think that’s why people buy Teslas. Have you driven one?

Greg Dalton: I have—it’s exhilarating. Are you saying that most Tesla buyers don’t worry about the price of gas?

Ian Wright: Yes. They buy Teslas because they’re really nice cars. They like the fact that they’re clean, but they’re not really buying them to save money. They’re $100,000. You’re selling to the CFO. 

Greg Dalton: So, there is some connection between cleantech and oil prices. But in a lot of places, it gets conflated and cleantech stocks get hammered for reasons that people don’t really understand. 

Cathy, is peak oil dead with fracking?

Cathy Zoi: Famously, there was a former oil minister of Saudi Arabia who said that the Stone Age didn’t end because we ran out of stones. 

The same is going to be true here. We have better energy technologies that perform well and that advance our environment. Those technologies are quickly replacing our reliance on oil. It’s good. 

I think the framing is wrong. The peak oil issue is not a big one anymore. We have the rise of unconventional sources, which means that we do have abundant supplies but they’ll probably stay in the ground.

Greg Dalton: Some very powerful companies want to get it out of the ground and burn it, but there’s a debate about whether those assets need to stay in the ground to stabilize the climate at a certain level. How will they stay in the ground if they’re valuable and the world’s demanding them?

Cathy Zoi: We heard three former Treasury secretaries today agree that one of the most pressing issues to the global economy is addressing climate change. Those weren’t environmentalists. 

I had the privilege of working in the Clinton White House when Bob Rubin was head of the National Economic Council. I can remember those early days, when he began to understand: “This is indeed a really important issue.” He’s now become one of the most important advocates for taking action urgently on this. 

I think the markets will adjust as our global economy—for economic, environmental, and security reasons—needs to rely on a different set of technologies.

Greg Dalton: It was pretty amazing to hear those three Treasury secretaries give that universal endorsement of the importance and urgency of climate change for financial markets.

Scott, one way that’s going to happen, potentially, is revaluation. What does that mean for fossil companies and their evaluations?

Scott Jacobs: We take a broad perspective on energy and resources.

We just heard the Treasury secretaries also talk about productivity growth and how that’s been an engine for economic development. The last three major shifts in the economy—the Agricultural Revolution, the Industrial Revolution, and the Digital Revolution—are really about the productivity of the individual, incremental worker. With drones, artificial intelligence, and software, I’m not sure we even need another worker. 

That raises big questions about what will supply the economy and the productivity growth that we need to see in the economy, when labor is no longer the hardest problem to solve. 

We believe a “Resource Revolution” is underway, where it’s actually all about the other inputs to the economy that are costly, volatile, and often precious—or, at least, very environmentally sensitive. Energy, food, water, materials, land, and air have not seen the same sort of productivity growth that we’ve seen over the last 150 years. This creates a major disruption, or set of dislocations. 

There are fundamental shifts in the valuations of all of these energy and resources companies that are underway. That will continue as this resource revolution continues, where we use these resources more effectively. In other words, we have higher efficiency or higher productivity with respect to these resources. 

The roads, for example, in the United States alone, are billions and billions of dollars of infrastructure investment with four percent utilization. Cars—the most expensive asset for most households—are five-percent utilized. That is a terrible productivity statement about our economy. We will figure out better ways to make more use of those assets. 

Similarly, we will see that the price of some of these other assets on balance sheets for fossil fuel companies, for example, get revalued in the opposite direction.

Cathy Zoi: Scott’s talking about a vision for the future, but we’ve already seen evidence of the decoupling of economic growth from energy growth. When I was a little girl, they were linked. If you wanted to have the economy grow, any analyst would say, “Well, look at what’s happening to energy consumption.” 

The data shows that link between 1950 and 1990. Electricity grew 6 percent per year in terms of demand. Then, for the next 20 years, it dropped to about 1.9 percent years. In the past five years, there’s been zero growth in energy demand, and yet the economy grows. 

What Scott’s talking about in the future is an even more enhanced resource revolution with digital materials, computing, and all the extra things that we can harvest out of this, so that we can have growth without resource depletion.

Greg Dalton: Ian, Scott just talked about valuations of companies. Tesla, with a $25 billion market cap, makes a few thousand cars. That seems to be an example of the market saying, “We really value this new technology.” Is it overvalued?

Ian Wright: No comment.

Cathy Zoi: Do you still own shares?

Ian Wright: I do not.

Greg Dalton: Let’s talk about other areas of innovation and what’s going to drive it. Where’s the innovation going to happen on air, water, and food as energy? 

Scott Jacobs: I come from a technology background. I spent over a decade as an entrepreneur in software and then also as a VC. I wish that that were perfectly applicable to the energy and resources equation that I undertook a career in about a decade ago. Naively, like many people in Silicon Valley, I thought that we could just reinvent energy and resources and then we’d solve all these problems—whether it’s environmental problems, or the fact that we spend most of our money defending sources of oil all around the globe, and the folks who receive a lot of funding from the US thanks to their resources often don’t like us very much. 

The idea that technology can solve those problems is just patently false. I fortunately realized the error in my own ways. This is an infrastructure problem, not an invention problem. 

Energy and resources are all about infrastructure. These are long-held assets. There is no technology investor in the world that has a long enough time horizon to reinvent the energy equation—except for maybe the government or a philanthropist, but those are not the commercial sources of capital that I tend to work in. 

However, we’re seeing a lot of business-model innovation that doesn’t take a fundamental reinvention of the physics, but actually just deploys some of the great innovations that we’ve been doing in a re-combinatorial way for decades. Lots of incremental changes have happened, whether it’s microchips or digital information, that now we can take advantage of in building new infrastructure—rebuilding the world, rather than reinventing the world. 

You can make a lot of money with these business-model innovations, like we’ve seen SunEdison pioneer, for example. There, someone’s not coming up with a new solar array or new solar cell, but is just finding a better way to sell that electricity. That was a business-model innovation that, frankly, unlocked what was a less-than-$1 billion industry 10 years ago. Now, it’s a $150-billion-a-year industry and growing like mad.

Greg Dalton: Cathy, you’re not at SunEdison yet, but it’s a good example of financial innovation, whereas we often think of technology innovation.

Cathy Zoi: Absolutely. The YieldCo creation has been a boon to both investors and to development. 

There are a billion and a half people without electricity in the world, and another billion and a half that are underserved in terms of electricity. The company that I’m going to help build within SunEdison is going to take a bunch of little rural assets and apply innovative business models to get underserved communities renewable-energy microgrids all around the planet, which makes good economic sense. We’ll create a real win-win. 

But I did want to add to the business-model innovation perspective. I was lucky, when I was at the Department of Energy, to oversee a significant R&D budget. While we are now cost-competitive on so many of these technologies—solar, wind, biofuels, and geothermal—we continue to get better. We are still on really fun, interesting parts of the learning and experience curve. When we apply Moore’s Law to solar, we’re still making a huge difference. 

When I was at the Department of Energy working with Steve Chu, we kicked off this program called the SunShot. The idea was to get to a dollar-a-watt install for solar. Steve and I had a fight where I said it could be 2017, and he said, “No, Cathy, we need it to be 2020.” We were both wrong: It happened faster. It’s continuing to accelerate, in terms of the cost coming down in markets around the world. That sort of innovation is going to continue to take place. 

We think about seeding that continued innovation on the technology side—whether it’s batteries, LEDs, or new permanent magnets in wind turbines or solar cells—and then applying it innovatively to models to get it to market and finance, and we’re talking about a giant transformation.

Greg Dalton: Let’s pick up on batteries, because energy storage is often talked about as a place where we need a breakthrough. Prices have not come down as fast as some other areas. Ian, why not?

Ian Wright: Cathy mentioned Moore’s Law. People make that mistake: It doesn’t apply to batteries. Moore’s Law is all about the geometry of semiconductors. In a Tesla, there are nearly a thousand pounds of fairly expensive materials in the battery pack. They’re all material costs you can’t do much about. In fact, if you scale up the production, it probably gets worse. 

The next big problem is that it’s immensely capital-intensive to build a battery factory. If you want twice as many batteries, it’s twice as much capital. You have to amortize that over the life of the asset, and the number of batteries you can make. It doesn’t scale well. All the things that you’re used to for electronics that make it cheaper with volume and with time do not apply to batteries. 

When we started Tesla, we thought this through fairly carefully. Toyota or Honda can make a little, cheap four-cylinder engine for about $300. But the battery pack in the Tesla costs tens of thousands of dollars. It’s not ever going to get down to $300. It’s not even going to get to ten times that. That’s a fundamental problem to overcome.

Greg Dalton: That seems to be an area where the economics are not going to come into play the way we’d like them to. That raises the question: Do we have all the technology we need, which then needs to be scaled or deployed? Or are new breakthrough innovations needed?

Ian Wright: I’m an entrepreneur. We started Tesla in 2003. At the time, we said, “We’ll use laptop batteries because they’re already starting down the experience curve, they’re cheap now, and they’ll get a lot cheaper.” We had some guesses about how much cheaper they would get. That hasn’t happened. 

At Tesla and Wrightspeed, we’ve seen every new battery startup and new technology you can imagine. They all pitch to us. I’ve become very cynical about them. Until they can actually put a cell in my lab and I can test it, I don’t even bother. For 99 percent of them, it never happens. They can’t get them to production, they don’t have a cycle life, or they can’t get the cost there. 

There’ve been some big improvements since we started Tesla. The high-power batteries that we use let you build quite small battery packs at extremely high power. You put 1,000 horsepower into garbage trucks, and that’s a 52-kilowatt-hour battery pack. The power level’s gone so far up, and that lets you run range-extended EV power architecture. That lets you get a lot of use out of the batteries and extract a lot more value out of them in the life of the vehicle. 

We’ve got big increases in power and in lifetime. But in terms of driving the cost down for a mile driven in an EV, it hasn’t really happened.

Cathy Zoi: I would not like the audience to be left with the sense that we’re not on a good part of the learning curve. My colleagues, like Steve Chu and Arun Majumdar, who are thinking about a lot of these things and are making investments, have a decidedly more bullish view than you. They may be wrong and you may be right, but there’s not an agreement that we’re stuck and not going to be able to get there. Even Elon Musk is talking about more bullish numbers on lithium-ion than you are.

Ian Wright: Sure—but he’s scoured the world trying to buy those, and what is he doing about it?

Cathy Zoi: He’s building a gigafactory.

Ian Wright: He’s building a gigafactory because it’s not going to happen otherwise.

Cathy Zoi: He’s building a gigfactory to provide cost-effective batteries for his cars. He’s going to sell a car for $35,000—and he’s not going to do that if the battery’s going to cost $25,000.

Ian Wright: The plan was to sell a car for $30,000 back in 2003, and they’re still selling them for $100,000.

Cathy Zoi: Let’s let the record show that we have a disagreement.

Greg Dalton: Let’s talk about capital flows: where the money’s going to come from for this innovation. VCs got burned. They kind of swaggered into the cleantech saloon, then got roughed up a little bit and kicked out. Scott, you’re very keen on peer-to-peer, non-bank lending. Is that where the real money’s going to come from? What’s the role for VCs?

Scott Jacobs: We’re seeing a lot of new innovation in the financial markets. We have to. Financial markets are stuck, and they’re regulated so that they’re going to be more stuck. 

Non-bank lenders, whether it’s Lending Club or others, have emerged to fill a major gap. People need money, whether it’s a loan or equity, and the traditional capital markets are not satisfying that need. 

Venture capital has always gotten a lot of the attention, especially here in our little bubble in California, and particularly in my even-smaller bubble in Northern California. We think that all of the innovation capital in the world is located there—which, firstly, is not true. Secondly, the energy and resource markets are global markets. In fact, very little of it is coming out of Silicon Valley. Even at its peak, VC funding was $8 billion for energy-related innovation in a total clean energy funding world of over $300 billion a year. That’s a tiny fraction. 

If you look at energy as a whole, you’re talking about trillions of dollars of capital flow. VC just doesn’t matter, despite the media.

Cathy Zoi: I would ask, “The capital for what?” The capital for R&D? 

A lot of the capital for early-stage R&D comes from the government now. It ought to come from the government in larger amounts. 

There have been a series of studies over the past five years with eminent businesspeople and former politicians of high repute from both parties agreeing that we are underinvesting in energy R&D in this country by a lot. If you compare the amount of R&D that goes into the energy sector to pharmaceuticals or other sectors, energy is well under-invested in. So R&D, early-stage stuff would come from government. 

Is there a role for venture capital and energy? In capital-light technologies and businesses, probably so—because it’s a little bit less messy and has a little bit shorter of a gestation period.

Scott Jacobs: But what’s capital-light in energy and resources?

Cathy Zoi: Software control, sensors, efficiency…

Scott Jacobs: We both know a software company that’s raised hundreds of millions of dollars in the energy space. Just pick Workday, which is a software-as-a-service company. That’s theoretically capital. How much money did it raise before it went public? A lot—like $80-something million. That’s not a capital-light business. 

There are very few capital-light businesses. VCs like to claim, “Let’s do something capital-light because then my money has a higher multiplier.” But that’s analytically inconsistent with the reality of the world. I think it’s important for us to be a little bit more intellectually honest.

Greg Dalton: Did Google overpay for Nest? Is a thermostat capital-intensive?

Scott Jacobs: At the risk of seeming like an idiot, I passed on a round a few months prior to it at $2 billion valuation. I made my bet at the time, and I’m wrong. I’m wrong a lot.

Cathy Zoi: Let’s talk about the later-stage stuff. 

Once you get to a proven technology, you’ve got innovative business models, and you’ve got companies like SunEdison, project finance comes into play, public markets come into play, and there’s a lot of capital available for that. Again, it’s all about the risk-return. 

What seems to be a giant disagreement between Scott and me on the role of venture is not necessarily a giant disagreement. It is an important part of the system development chain of energy technologies, but the tail of the dog is not the whole dog.

Greg Dalton: Ian, you’re on the raising side of this. How are you seeking to fund? Where do you see the money coming from?

Ian Wright: It’s been very hard, and it’s become harder in the cleantech stuff. We’ve raised money from super angels, from venture capitalists, from California Energy Commission grants. We’ve applied for Department Energy loans but haven’t ever had one. 

We now have investors that are customers and suppliers. For us going forward, there’s a lot more of that. A lot of customers are getting quite smart about strategic investing. They have little venture arms. If you’re doing something that they think is innovative, going to be valuable to their business, and strategic, then there are quite good sources of capital there. 

As an entrepreneur, I probably spend well over 50 percent of my time raising money, and have for the entire time at the company. It’s very frustrating. All sources would be better. We don’t spend a lot on building technology in this country.

Greg Dalton: Scott, you mentioned water and food earlier. There’s a lot of embedded energy in these issues. There’s a question whether agtech—which is very trendy in Silicon Valley right now—is the new cleantech. Is that just going to be a bad sequel to the cleantech chapter?

Scott Jacobs: I don’t know the answer. But if it follows the same pattern that it followed before: a bunch of IT retreads like me trying to invest in a hard asset infrastructure incumbent-led world. It’s got disaster written all over it. 

To invest in an industry, especially in VC, you have to know the industry. You have to know the customers. You have to be a value-added investor by helping your companies find great leadership and great customers. You fundamentally can’t do that if you have never been in the agriculture industry. 

To me, it looks a lot like energy and water—where it’s very hard to imagine a small amount of money going into a small team of a few people that, within a small amount of time, turns into big revenue and big margin. That’s the formula for a successful venture capital investment. All of those criteria don’t apply in the energy space. I think they probably don’t apply in the ag space, although I’m not well-versed enough to know. 

I do think you’re right that these resources are overlapping. When I was advising a lot of pension funds and sovereign wealth funds, we talked a lot about this risk that is pervasive across asset classes, sectors, and geographies. Energy issues are not just energy issues: they’re water, food, and land issues. 

Yet, as an investor, allocators often say, “Just do energy. And don’t just do energy—just do energy in North America. And don’t just do energy in North America—just do private equity. And not just private equity, but $50 million at a time.” 

Then you’re in this tiny little field. That’s great, because you’re specialized—but that person doing the $50 million deal might be the best in the world for CalPERS to have looking at a water deal in California, but they’re not allowed to.

That’s part of what the system change we need involves in the capital markets. We have a whole screwed-up capital market system when it comes to long-term assets with risks that spread across sectors and geographies. 

We saw this with the financial crisis in 2008. Is anyone really still under the assumption that we can have uncorrelated asset classes, sectors, and geographies with risks that spread across them? I don’t think so. But we seem to continue doing what we just did, and saw pretty big problems from.

Cathy Zoi: One of the other challenges with bringing water/food into the nexus is that water, in most markets, is underpriced. That makes it really difficult to invest in. 

There are giant externalities that are not accurately reflected because it’s a central service, and politically, it’s darn near impossible to raise water prices. That’s hard. 

The other added complexity with food is the distributed nature of how food gets done and made. If we thought energy was hard and messy for the traditional capitalist investment community, I think the food/water nexus makes it even more complex.

Greg Dalton: Talk about a culture clash! 

In terms of energy poverty, Cathy: you’re going to be working around the world trying to get people connected who are not connected. Is that going to be a big market segment? Those are people who don’t have a lot of money to pay for that energy.

Cathy Zoi: I’ve been in this sector for nearly 30 years. What’s so fascinating today is that the unit economics are now good enough so that, for people in rural areas who are not connected to the grid, if their current energy supply is intermittent diesel, then solar can beat it in most places. 

The company that I’m starting to build has got dozens of people around the world across SunEdison that are working in India, Senegal, and Tanzania on micro-grids and on solar water-pumping. They’re creating a service for people in little village economies where those people are better off economically having a renewable power source.

Greg Dalton: So, solar’s competitive today—and not just for island nations that are isolated.

Cathy Zoi: Correct. In Tamil Nadu, they are connected to the grid, but it’s such a bad, intermittent supply that they don’t get to pump most of the time. Or the electricity’s on at night so they have to pump their fields at night, which makes no sense. Solar competes with that sort of service.

Greg Dalton: Scott, you were involved in the Recovery Act, which helped solar. China and German consumers helped create a public good by paying some high prices. You’re excited about the new generation coming online that’s solar these days. The best story around is solar.

Scott Jacobs: You look at the curves of prices for conventional versus renewables, and it’s an X. Would you rather be betting on the thing that’s going down in cost, or would you rather be betting on the thing that’s going up in cost?

Greg Dalton: We’re not going to conflate transportation and electricity, but oil has been way down. Not all fossil fuels have been going up. 

Scott Jacobs: That’s right, but again, not necessarily talking about fossil fuels. 

The extraction costs of getting new oil out of the ground has gone up. Every incremental new supply of oil is more expensive than the last. That’s true outside of the United States—basically everywhere. 

I think Cathy made the bigger point, which is that it’s just plain better. Communities of people are using a cleaner version of energy that is cheaper, more reliable, and more modular. That’s true across a lot of these energy and resource areas. That’s the resource revolution I was talking about. 

That’s why, when we were at McKinsey, we did all this work for people. It wasn’t because people were paying us out of altruism to make themselves feel better. It was to find billions of dollars of profit by making millions of dollars of investments. Hundreds and hundreds of clients did it every year in “sustainability.” That’s a big deal. 

Sustainability only matters because it’s economical now. It’s a big deal because it’s just better business, if you take measures that reduce your costs, reduce your risks, and increase your profits.

Cathy Zoi: I agree. Actually, the increase in cost that’s Scott’s talking about is true with coal, empirically. We’ve tapped out on the learning curve with coal. Meanwhile we’ve realized that there are some problems with coal. 

Practically, trying to get a new coal plant sited in America is darn near impossible. We’ve retired 25 gigawatts of coal—that’s between 25 and 50 major power plants in the last five years. We’ve got another 38 gigawatts of coal plants slated to come offline by 2025, because they’re old, they’re thumping, they make pollution, they make mercury, and they’re too expensive to fix and make clean. The costs of coal are increasing while the costs of solar and wind are decreasing. That’s the major driver pushing all of this.

Scott Jacobs: Importantly, it’s not getting that much cheaper to build a combined-cycle natural gas plant, from a capital expense standpoint. The commodity prices have come down, although they’ve been about the same for the last eight years.

Greg Dalton: Capital’s cheap, though.

Scott Jacobs: Capital’s cheap, but it’s still hundreds of millions of dollars to build a facility. I can spend literally $10,000 and power this room, at least. 

The minimum efficient scale for delivering these resources has come down multiple orders of magnitude over the last several decades. Twenty-five years ago, in order to power the City of LA, we had to build infrastructure: billion-dollar power plants, usually powered by coal or nuclear, and more billions of dollars’ worth of transmission and distribution lines. To do that, you have to socialize those costs, give a regulated monopoly away to a utility, set prices by the government—all these things that capitalists don’t like. 

Now we’re at a point where that’s not relevant anymore. The minimum scale for efficiently delivering electricity for this building is not billions of dollars. It’s thousands of dollars.

Greg Dalton: What does that mean for utilities and all the people who buy utility stocks?

Scott Jacobs: This is well documented. 

Utilities are in what some people have called a “death spiral.” I think it’s just a “change spiral.” They have to figure out a new business model in order to manage the resources that they have, and the resources they need to have, more effectively. They have not had the incentive to do so because they are regulated and have all sorts of other market imperfections that cause us not to see the most efficient outcome. 

But it is absolutely the case that utilities are adapting today. Initially, they were adapting by defending their territory.

Greg Dalton: Some are still defending.

Scott Jacobs: But we’ll see. 

Cathy Zoi: We’re doing work at Stanford that you might find of interest. Very clever graduate students have built a model we are calling “Hotspots.” 

Here’s the idea: Almost every utility in this country has a part of their distribution system that’s constrained. In the old way, if you were an engineer and saw that you were getting too hot on some summer afternoons, you’d say: “Fred, we need to put some more wire through here.” 

Now, you don’t have to build more pipe that’ll bring power from a long way away in the desert, from some hydro-facility, or from some nuclear plant up the coast. Instead you can say, “Actually, it’s just this little pocket that’s constrained. What about meeting that demand by a combination of things downstream of that congestion point? Why don’t we look at the cost of adding distributed solar, some energy efficiency, some storage, and, maybe, some demand response?” 

My graduate students have built this model that we’re making an open-source tool—it’ll be available at the end of this spring quarter—so that any utility, or anybody selling a technology, can populate this model to figure out the most cost-effective solution for a particular place. 

In conversations we’ve had, utilities say, “We’d better start thinking this way.” We are in the midst of that transition. 

We’re looking not only at the technology, but also at the economics. If utilities are not going to be in a death spiral, but in a change spiral, they’re going to have to figure out how to make money. Do they keep it on their books? Do they rent the equipment? Do they incent their house owners to put solar on, or do they buy the solar panels and rent the roof space from their customers? Any of those models could probably work. But we want the utilities to be on the team, having the conversation.

Greg Dalton: Utilities become some combination of eBay and UPS—an intermediary market delivery service that’s not in the generation business. 

Let’s talk about putting a price on carbon to drive innovation. Ian, would a price on carbon help Wrightspeed sell cleaner trucks?

Ian Wright: It’ll make electricity and fuel a lot more expensive. It’s a wash. It won’t do anything to the batteries. You’ve got to be careful of unintended consequences when you mess with that stuff.

Greg Dalton: It’ll make electricity coming from fossil fuel more expensive.

Ian Wright: That’s most of it.

Greg Dalton: It depends on where you are—not so much in Northern California. 

Ian Wright: But in most of the country, yes.

Cathy Zoi: We absolutely need a price on carbon. 

All of the policy instruments we have in place now—the incentive programs, the investment tax credit—are a proxy for a price on carbon. We’re saying there’s a shadow price. We want to reward the things that make carbon less, so we create this other incentive pool. 

The most efficient way would be to have an economy-wide price on carbon, if it were set at a level sufficient enough to change behavior. That’s politically challenging. Cap-and-trade can work as well. Lots of buckets of incentives and penalties can work well, too. There’s a whole variety of policy instruments that can achieve that objective. 

A bunch of really conservative political leaders in this country are advocating for a revenue-neutral carbon tax. That is a fascinating conversation.

Scott Jacobs: I’d like to underscore one point that Cathy just made: There’s a major “if” in the carbon price debate—if it’s set at a point that changes behavior. No policy has been proposed—not Waxman-Markey, McCain-Lieberman, or anything else in the US, and there’s never been a price contemplated anywhere outside the US—that actually changes behavior in a meaningful way in the short term. 

If you care about climate change, which is why most people care about a carbon price, you’re going to be disappointed if we get a carbon price. It’s not actually going to solve the climate problem. 

I’m going to take a slightly contrarian view: yes, I would love a carbon price because I’d like to see a level playing field. We’re still not really putting a carbon price in place when you have more subsidies for fossil fuels than you do for clean fuels. I’m all for a carbon price, and I think gradually we’ll get to a point where behavior changes. But unfortunately, from a climate standpoint, we need a lot more change a lot more quickly than any carbon price will ever get us. Don’t be fooled into thinking that’s the magic silver bullet.

Greg Dalton: Has California’s carbon price of about $10 a ton done anything except make some people feel good?

Scott Jacobs: It’s too low to really change behavior. I don’t know even if it’s changing behavior at the margins. I actually haven’t seen it doing that.

Cathy Zoi: I’ve had this conversation with some policy-wonk colleagues recently, about the clean power plan versus a carbon tax. What it does is change the investment behavior. It puts the damper on making big capital investments in carbon-emitting technologies. Does it change what gets dispatched on the margin? Not as much.

Scott Jacobs: I think you’re right. Most of the fossil fuel companies, even the worst ones that we all love to hate, have a price on carbon in their models. They did that years ago. It’s not high enough.

Greg Dalton: Some of them are up to $80.

Scott Jacobs: We saw the internal modeling from a very interesting perspective when we were starting to help people think about pricing carbon. People don’t realize that pretty much every energy-related company has a carbon price internally baked into every single capital investment decision that they make. You can debate what level it should be at. 

Frankly, it’s all too high relative to the current policy environment. They’re not getting paid for that carbon price. But they do have it.

Greg Dalton: It’s kind of funny money. 

I want to touch on China. China’s known as a place that doesn’t innovate. They cop and drive down costs. We’ve heard that the US is not innovating as much as it should in this area. Is innovation going to come out of China?

Scott Jacobs: China is where a good chunk of the innovation is happening. If you expand to places like Korea, Japan, and Singapore, in energy and resources they’re more attuned to the need for these technologies to continue to develop and scale up—primarily for their own consumption. 

China has not only the largest consumption of renewable energy, but also the largest production of it. They’re building 50 cities the size of Chicago in the next 10 years, I think—from scratch. You’ve got to be more thoughtful about the resources you use to build those cities.

Greg Dalton: The Paulson Institute is working on that. How China urbanizes is going to have a big impact. Cathy, are you going to be spending some time in China?

Cathy Zoi: I will probably be spending less time in China, but my colleagues at SunEdison spend a huge amount of time there. SunEdison manufactures in China.

Greg Dalton: Is it an innovative place, or is it just a place for implementation, scale, and driving down costs?

Cathy Zoi: My colleagues would argue that it is truly innovative. I remember a conversation with Secretary of Energy Steve Chu, whose parents were educated in China. When he did his first or second trip to some of the big universities in China, he came back and said, “Look out, American innovation.”

Scott Jacobs: They have the most advanced high-voltage transmission lines in the world. They have the most advanced batteries in the world. They did it themselves. Sure, we all benefit from market-based recombinations, but it’s absolutely the case that they own a lot of the most innovative stuff that we use today. They’re ahead of the curve on that stuff, too.

Greg Dalton: Ian, do you have any thoughts on China’s role: innovator or implementer?

Ian Wright: In my little piece of the world, no, we don’t use Chinese batteries. The best ones come from Detroit or Japan. We don’t actually get any innovation for any of the broad range of our technology from China. 

But they’re very innovative in figuring out how to get high-volume production ramped up very fast at very low cost.

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