Episode 33: Jim McDermott, Rusheen Capital Management, LLC
Today’s guest is Jim McDermott, Managing Director of Rusheen Capital Management, LLC.
Rusheen Capital Management is a Santa Monica, CA-based private equity firm that invests in growth-stage companies in the carbon capture and utilization, low-carbon energy and water sustainability sectors. Prior to co-founding RCM, Jim has started, invested in and run numerous companies. These include: US Renewables Group (Founder & Managing Partner), Stamps.com, Inc. (NASDAQ:STMP – Founder), Spoke Software, Inc. (Founder & CEO), Archive, Inc. (Founder & CEO – sold to Cyclone Commerce), NanoH2O, Inc. (Founder & Board Member – sold to LG Chemical), SolarReserve (Founder & Board Member), Fulcrum Bioenergy, Inc. (Founder & Board Member), Common Assets (Founder & Board Member – sold to NASDAQ:SCTY), SET Technology (Board Member) and OH Energy, Inc. (Founder & Board Member). Jim holds a BA in Philosophy from Colorado College and an MBA from the Anderson School at UCLA.
Jim shares his thoughts on a number of important topics related to climate change, innovation, and capital, so if these are areas you care about, this one is for you.
Enjoy the show!
You can find me on Twitter @jjacobs22 (me), @mcjpod (podcast) or @mcjcollective (company). You can reach us via email at info@mcjcollective.com, where we encourage you to share your feedback on episodes and suggestions for future topics or guests.
In today's episode, we cover:
Jim’s transition from dot com entrepreneur (back) to energy/climate
Formation and operation of US renewables group
Some examples of companies Jim has backed
His views on impact capital and how it returns relative to a more mercenary approach
Importance and necessity of carbon removal
Role of the big hydrocarbon companies looking backward and forward
Importance of policies like the 45Q tax credit
The emergence of the carbon-to-value economy
Some of the most exciting innovations to keep an eye on
What Jim would do with $100B if he could put it to work to maximize impact in the climate fight
Jim’s advice to people trying to find a way to help
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Jason Jacobs: Hello, everyone. This is Jason Jacobs, and welcome to My Climate Journey. This show follows my journey to interview a wide range of guests to better understand and make sense of the formidable problem of climate change, and try to figure out how people like you and I can help. Hey, everyone. Jason here. Today's guest is Jim McDermott, an investor and entrepreneur in carbon capture and utilization, low carbon energy, and water sustainability. Jim is a long time energy entrepreneur and investor. And we talk about a number of things in this episode, including Jim's career, and his evolution in terms of the types of companies and innovations that he invests in. We also talk about what's getting Jim most excited today, including the role of hydrogen, as well as carbon sequestration, removal and converting carbon into valuable products.
Jason Jacobs: Jim's perspective on the role of the big hydrocarbon companies is fascinating. And he's got an interesting take in terms of whether they should be held accountable for their ills of the past, and what their role should be looking forwards. And he's also got a great perspective on the policy side, both in terms of 45Q, as well as the importance of a price on carbon looking forwards. Most importantly, though, I think Jim has some really profound advice as it relates to how each of us should be approaching the climate crisis, and the role that we can play to help. Jim McDermott, welcome to the show.
Jim McDermott: Thanks for having me.
Jason Jacobs: Thanks for being here. I've been excited to talk to you for a while. I think it was Matt Rogers who initially put us in touch. And your story really resonates with me because you had a kind of a stint in the early days in the dot com land, and ultimately came to the same conclusion I did, which is that there's more important work to be done. And here we are.
Jim McDermott: Yeah, yeah. Matt and I, as you know, are investors along with you in Carbon Engineering, and have a number of other overlaps that sort of, as you say, dovetail back into starting in tech and ultimately moving on into sustainability and carbon related activity. So yeah, a lot of overlap there.
Jason Jacobs: So talk to me a bit about that transition. So I know back in the day in the first dot com bubble, you were the founder and CEO of stamps.com, which was this big high profile internet company. So how did this transition come about? When did it come about? Why did it come about?
Jim McDermott: A little bit of background is that prior to being in the internet, I had been an energy project finance banker, so I was the guy who put together very large scale projects. And in those days, they were largely hydrocarbon, so they were coal and natural gas and the like. And it was pretty clear prior to the internet where the world was heading was towards sort of a lower carbon future. We were on this long, slow trajectory to decarbonize things, and wind and solar were kind of the next big wave. So I actually moved out to California to go to graduate school with an idea to become a renewable energy developer. And when that didn't occur, I was out looking for jobs. And I had printed up all my resumes and whatnot, and realized that I didn't have any postage, and sort of came up with the idea to build an internet based company that delivered postage over the internet.
Jim McDermott: And from an entrepreneurial perspective, that was a wonderful thing, and gave me a lot of opportunity to sort of go through an entire cycle of starting a business and building it up and growing it. I think there was a moment actually, for me, that really kind of sent me down a different pathway, which was actually in 1998. Part of our team was installing our first instances of the stamps.com servers in a places called [inaudible 00:03:34] Communications in Orange County. And I was inside the data center, and I had this sort of realization that, my goodness, if the whole future is going to be these banks and banks and banks of internet servers, that's a lot of electrons. And those electrons are coming from somewhere, and I happen to know that most of that's from combustion. And that means there's going to be a lot of carbon in the atmosphere as a result of this.
Jim McDermott: And I think once I had that idea in my head, or I'd made that connection about sort of the secondary and tertiary effects of how we consume energy, it never really left me. At that point, I started to read quite widely and fairly deeply on the topic of carbon pollution and what was going on. And frankly, after I left Stamps and sort of exited that, pretty quickly thereafter, I stopped the internet just because I didn't think the problems were fundamental enough. And I moved to form a private equity fund that I'd run for the last 16 years called US Renewables Group.
Jason Jacobs: And when you initially set up that fund, what was the charter of it? What types of areas were you focused on?
Jim McDermott: The way we refer to it now is sort of clean tech 1.0, which was it was focused almost excursively on asset finance. So it was stationary power generations, so wind, solar, hydro, geothermal, clean fuels, so ethanal biodiesel, bio jet, things that basically reduce the amount of CO2 emitted per gallon or kilojoules consumed. And then energy infrastructure, so storage for biodiesel, things like that. So it was very asset heavy. And by the way, that is something that in many respects was sort of hearkened back to the cycle of the internet, which is at first you've got to build the pipes and the connectivity. And then you start to build products and services on top of that. And so I was really just following sort of a tried and true approach to emerging markets, which is figure out the infrastructure plays first, go do them. And then as the next wave emerges, start to invest in that.
Jason Jacobs: Are you saying that with the benefit of hindsight? Or was that your perspective at the time?
Jim McDermott: A little bit of both. I mean, it was very apparent to me by about 2003 or 2004 that ... I'd done a lot of reading about technology cycles throughout my life, and it's very clear that technology cycles follow sort of a tried and true thing, which is that a new technology comes on the scene, everyone's very excited about it. It really is going to change the world. Evaluations and excitement usually get way ahead of delivery. There's a big crash, then everybody declares that it was a bad idea, and they should never do that again. And then amidst the wreckage, some very strong and battle tested entrepreneurs continue on. And then within about three to seven years, those guys produce companies that are usually world class.
Jim McDermott: And it was very clear to me that in the same way that sort of the internet class from 2004 to 2008, which gave us Google, LinkedIn, Amazon, well, Amazon was public in '99, but sort of all these companies, that the same thing would happen in the clean tech world once we had the initial infrastructure built out, which was to sort of produce cheap wind and solar electrons. So yeah, I was following that. I think what I didn't see was in the wake of the 2008 crash, the downturn was a lot deeper and a lot longer in clean tech that I think anybody anticipated.
Jason Jacobs: And so since you jumped in, has your role consistently been investor all the way through? Or have you worn different hats?
Jim McDermott: I've done kind of all of it. I think one of the really seminal experiences for me at Stamps was that oftentimes when an entire industry is emerging, being a pure investor, or being a pure operator, or sort of only having one hat, is really not a very useful thing for the overall growth of the industry. So in my time at USRG and in the first wave of clean tech, I mean, we did everything from invest in other people's projects that were fully baked all the way through. I created a company from whole cloth called Fulcrum BioEnergy that gasifies municipal solid waste and makes jet fuel out of it. I mean, literally, I wrote the first $100,000 check. Our firm has invested directly through the firm, and the fund's probably $90 million, and have helped raised probably $600,000 in project finance and debt and equity of the years. So I've kind of done whatever's required.
Jason Jacobs: And how have you picked which projects to get involved with? Is there a consisted checklist from deal to deal?
Jim McDermott: No. I mean, I think what I would say is that I was always fundamentally unsatisfied with a lot of the metrics around ESG, or impact, or a lot of things that are called today, because I fundamentally believe that in order to drive forward what I'm doing now, which is really just kind of pushing forward the low carbon economy, or the carbon to value economy, that you have to pick things that are fundamentally justified on the economics. So for me, it's always about trying to figure out: How is something doing something, but in this case, related to energy, where they're solving a fundamental problem and being paid for that insight, but that isn't reliant ultimately on a subsidy?
Jim McDermott: If there are subsidies available, and they can make a business more profitable, all the better. But I don't like businesses that solely rest on the idea that we're going to just sort of do good for other people, but we're not going to get market returns.
Jason Jacobs: And so when it comes to raising money for these funds and things like that, has it always been positioned with market rate, market timelines, market upside? Or I guess, has it been concessionary in any vector?
Jim McDermott: No. No. I mean, I've tried always to stay away from concessionary things. Like I said, I fundamentally believe that if you want to attract large amounts of capital, and we're going to need trillions of dollars as we go forward here, that in order to attract and maintain that level of investment or direct investment in projects and companies and services and all the rest, there has to be market based returns that underpin the whole thing. I think a lot of people, for a while, maybe felt like that was a problem that was too great to take on.
Jim McDermott: My view has always been that, that's a challenge that you accept, and you try to solve for that because if you can solve for that, then you're going to build real sustainability. And so I've limited that to what I would say is sort of carbon capture, reuse, low energy, low carbon energy production, and then water sustainability, because those are sort of the pillars of the water energy emissions nexus that I think is sort of the most fundamental in this challenge that we face. But I've always tried to stick to those and stick to market based returns.
Jason Jacobs: And when you say most fundamental, do you mean most fundamental from a human standpoint, or from a market standpoint?
Jim McDermott: I think both. I mean, look, the fundamental challenge that we face, one of the big lessons from running USRG for 15 years was that we're making great progress. If you think about it, there's sort of two sides of the coin. There's slowing down the rate of emissions for the existing things that we do, so transportation, industrial, and energy production. Right? These are the big three. And we're making real progress there. Right? I mean, we're slowing down, whether it's power generation or industrial emission, we're slowing that rate. But then the other side of the coin is dealing with legacy emissions, so the emissions that are already in the atmosphere that are the result of the last 150 years of industrialization.
Jim McDermott: And I think what I really, the sort of the shift as I moved from USRG into what I'm doing today is the realization that no matter how successful we are in reducing the amount of CO2 that we emit on a go forward basis, or think of it this way, if tomorrow we went to zero emission globally, all of the effects that we're feeling from climate change, and all of the sort of negative externalities, are going to persist for hundreds of years. And so there was this new, I guess, realization for me that occurred really kind of four to five years ago, which is that the requirement to extract CO2 directly from the atmosphere and do something with it, whether sequester it underground, or turn it into value added products, or find uses for that carbon, was going to be a significantly larger business ultimately than just reducing the amount of emission that we put up into the atmosphere. And so as I've moved forward, my focus has moved from generation one was: How do we reduce? But generation two is: How are we going to reuse?
Jason Jacobs: I guess one question that immediately comes to mind is given that emissions went up overall last year, I mean, it's not like generation one is signed, sealed, and delivered by a long shot. So where are we on that trajectory? And is moving on to gen two going to distract from driving hard on gen one?
Jim McDermott: No, actually, not at all. I mean, look, there's sort of two problems. One of them is: What does our carbon intensity look like per unit of produced energy? That's actually going down, and that's great. Problem is growth, that as you bring more and more people online because there's a significant portion of the world that's not consuming the same rate of energy as say, the OECD world, the developed world. As you bring those people, and there's many more of them than there are of us, that even if they are lower carbon intensity, the gross number is going up. And that's why you see us moving up to 415, and adding three parts rather than two. It's because as we add more people to the system, their sheer numbers can in this case overwhelm the amount to give us the unit of intensity per person.
Jim McDermott: But if you look at it from the perspective of sort of new build globally, I mean, look. Probably the best example of this is this week, I don't know if you read this, but Los Angeles Department of Water and Power signed a $13 per megawatt hour of solar. So that's 1.3 cents per kilowatt hour and $17 a megawatt, or 1.7 cents per storage, for 10% of all the electricity consumed in the city of LA. So there will be no more coal or natural gas built going forward. We're not building it in the United States. Europe's not, and everywhere else in the world, all of the new buildings is increasingly tilting towards wind and solar at a very, very high rate.
Jim McDermott: So I think we're doing a great job. We're going to need to manage the CO2 that's already in the atmosphere, which is sort of the next really big task ahead, the [inaudible 00:13:45] I'm investing in because I'm the business of sort of trying to get ahead of things a little bit. But no, I'm not concerned.
Jason Jacobs: One prior guest, Bret Kugelmass from Energy Impact Center, when he was on, he was talking about how given that there's so much carbon in the atmosphere relative to new emissions, the new emissions are actually very small percentage. So his argument was that actually emissions reduction doesn't matter. And we should be putting all our guns at carbon removal. How do you feel about that?
Jim McDermott: I agree with that. I agree with that. I mean, it's a sobering thing when you realize that the amount of CO2 in the ... Think of it this way, all emission right now are equally 3 PPM per anum, and there's 415 already up there. And 280 was where we were pre industrial. So you just look at that number, and you say, "Okay. So let's say there's 180 PPM that we've put up there. And we've been doing it at about two, so that's 90 years of output, roughly." So he's got a great point. And candidly, maybe this is a good thing to sort of talk about, is the reason that I sought out and ultimately joined the Board of Carbon Engineering is that if you look at this problem, it's sort of a three phase problem.
Jim McDermott: First of all, we've got to go capture it. Then we've got to convert it into something. And then we've got to commercialize that. And by the way, there's an order of operations. You can't convert or commercialize if you haven't captured. There are a limited number of companies in the world right now that are really driving towards a commercial scale capture regime. And Carbon Engineering's one of them, and it's the reason that I went out and frankly got involved in the company before I even had an investment, something I've never done before in my life. I just went to them and said, "I believe in what you guys are doing. What can I do to be helpful? Maybe I'll invest, maybe I won't, but I've got to get involved in here because this part of the puzzle, which is to extract CO2 at a very low cost, is a problem that we need to get solving right now, and I want to be part of that, so put me to work. What do you need me to do?"
Jason Jacobs: I guess one puzzling thing for me is that the yous of the world, and the Brets of the world are saying that focusing on emissions reduction doesn't matter, and we should only focus on carbon removal. But if you look at where seemingly 90% plus of the people focused on climate change are focused on emissions reduction. Do you agree?
Jim McDermott: Well, I would not go as far as to say that emissions reduction is pointless. That's not true. That is patently untrue. We need to reduce emissions. And by the way, we've been reducing emissions since the beginning of the 20th century, in terms of carbon intensity's been going down for a long, long time. So it's not like we can't do it, and we just have to keep on the path.
Jason Jacobs: Well, when you say reducing emissions, I mean, overall emissions went up last year. So do you mean per person?
Jim McDermott: Carbon intensity, which is: How much carbon are you using? The OECD economies have been reducing carbon intensity for a long, long time. The issue is when you bring new people on, if they weren't there at all, no matter what their carbon intensity is, they're bringing a lot more carbon to the table. So until the whole world has sort of level-ized on the carbon intensity, you're going to see gross PPM going up, which is why you do need to get actively involved in pulling CO2 back out of the atmosphere. So I think it's a more important problem to pull CO2 out of the atmosphere, and figure out how to sequester it, either above ground or below. But you shouldn't stop trying to reduce the carbon intensity per unit, that would be madness, because we know how to do it.
Jason Jacobs: So for the people that say that the big hydrocarbon companies are criminals, and the executives that knew about climate change since the '70s, and haven't done anything about it, and have actively misled the public on what's been going on, that we should divest, and that they should go to jail. I think what I'm hearing from you is that, and I don't want to put words in your mouth, but that they should not only not go to jail, and that we shouldn't divest, but that they should keep doing what they're doing with emissions.
Jim McDermott: No. Let's break that problem down. Look, it's beyond question that there have been hydrocarbon companies and all these folks, executives in those places, who systematically obfuscated, lied, did all sorts of things, in order to not address the problem. I don't think anybody who's got their head on straight or have done any reading would ever say otherwise. I take the view that, look, that's true. But it's sort of like the truth in reconciliation in South Africa. It's true, but if we're going to just basically keep going on that forever, how are we ever going to get out of the problem? We have to recognize things and call them for what they were, which is that these people lied and did the wrong things. And then we have to go forward.
Jim McDermott: And going forward, look, the hydrocarbon companies as an example, know more about how to manage CO2 than anybody else on the planet by a mile. It's not even close. So the idea that you would say, "Because of your past sins," many of the people who run these companies weren't there for that, or weren't in positions of authority, I would also add, and say, "We're going to basically say that you can't participate in trying to fix the problem going forward, now that you're willing to recognize that it is a problem." I think that's madness. I think it's shortsighted. I mean, candidly, I think about it from a political standpoint. I think about, that's basically what happened in Iraq, which is, we went in, and the only people who knew how to run the government in Iraq were the Ba'athists. And we said, "No Ba'athists can participate ever." And then what did we get? We got insurgents.
Jim McDermott: And so I think the answer going forward, particularly as it relates to the hydrocarbon companies, is get them under the tent and show them an economic model where they can use the fact that they have enormous amounts of engineering expertise and free cash flow, and help them reposition their businesses to a low carbon world, and simultaneously demand they don't lie and cheat, and say that they're doing well if they're not. But the idea that you would simply say, "Because people used to do bad things, that we can't." We have to basically say, "We're going to have no involvement with them." The other things is that I think most people don't understand is the scale of the global hydrocarbon business, it's so vast that the idea that you're not going to include these large companies as part of the solutions set, it doesn't make any sense.
Jim McDermott: It'd be the equivalent of sort of saying, giving the internet context, well, because people abused privacy, we're going to get rid of Facebook, no social networking. That ship sailed. It doesn't work that way. Find the existing guys and work with them.
Jason Jacobs: So should those companies be held accountable?
Jim McDermott: I think at this point, given the scale of the problem and the rate at which it's approaching, I think that spending a disproportionate amount of time castigating them for what happened, as opposed to simply saying, "Look, we're going to demand that you really get on it and go forward," I think the enormity of the problem is so big that spending a lot of time going back and arguing about who did what, when, to whom, probably is not a great use of time or capital. I'm not saying I disagree. I'm saying I think the problem's so big, we should just get busy fixing it.
Jason Jacobs: So isn't one way to fix it to hold them accountable and make them pay to clean up the mess that they made?
Jim McDermott: Yes and no. To me, that's what a global carbon tax is. It's all of us coming together and saying, "Look. There was a set of externalities that we, to a greater or lesser degree, some of us knew more than others, but we all participated." Right? We all drove cars. We all consumed electrons. And yes, the oil executives maybe knew more than the average guy on the streets, so okay, maybe we can find some way to have them put additional money in. But fundamentally, what we need to do is we all need to reorient to a world in which we consume, or we produce less carbon for the kilojoules that we're consuming. And so my view is a global carbon tax is the answer because it uses a market to set a price, and it simply says, "If you can hit this price, we're technology agnostic, go hit the price." Right?
Jim McDermott: And that allows everybody, irrespective of where they're coming from, whether they're a legacy oil company, or a technologist in Silicon Valley, to address the problem from, as long as I can get underneath that price, I can make a market rate of return, and I'm off to the races. And we don't have to fight the old war. I don't think fighting the old war really helps. You could pursue it. You could try sort of a tobacco style litigation. But I mean, again, when you look at the numbers that are required, it's tens of trillions, if not hundreds of trillions of dollars are going to have to go into this. You're never going to be able to get an oil company to pay a trillion dollars in a lawsuit. You're much more likely to get them to invest a trillion dollars over a ten year period because they see an economic return in it.
Jason Jacobs: So if we don't go after them because it's too urgent, and we all need to work together, then I guess given that they have actively dragged their feet and stalled and tried to milk every last drop out of the existing system, and seemingly will continue to, how do we actually get them mobilized to the degree and in the timescale that we need?
Jim McDermott: A carbon tax, it's simple.
Jason Jacobs: Caveat, I'm no expert. But from my investigation so far, that makes sense to me conceptually. But what I continue to hear is that it's not politically palatable. And what I've heard from some people on the right side of the aisle is that it's a third rail issue, and that it'll never happen, and don't even try. And I've also heard that any major climate legislation requires bipartisan support. So I guess how do you feel about those rebuttals?
Jim McDermott: Patently untrue. See the section 45Q tax credit. It's a bipartisan thing that's been passed. It's the single most important piece of legislation that's been passed in carbon in 50 years. It's activating everybody from to do direct air capture in the Permian Basin. Large oil companies are positioning to invest tens of billions, if not hundreds of billions of dollars because now there is a pathway to monetize the fact that if you take CO2 out and sequester it in the ground, the government recognizes that. I do not accept that it's a third rail item. It was a third rail item 10 years ago under Obama, but it's not now.
Jim McDermott: Go talk ... I mean, again, if you can get these guys on the line, there are plenty of oil executives who are super excited about the fact that we're going to be able to capture CO2 from industry, whether it's ethanol plants, or steel plants, put those into pipelines, pressurize those pipelines, move the CO2 down into the basins, and use that for EOR. And inject more CO2 into the ground than we're pulling up, creating negative carbon crude oil. It's a reality, and it can be done today. And this is a classic example in my mind, Jason, of the popular press and the engineering are just divergent at this point. The engineering is way ahead of what the press understands.
Jason Jacobs: Why is that, do you think?
Jim McDermott: Because chemistry's complex. And in this case, the chemistry ... The example I can give you is, as I'm sure you've had this, if you're ever deep in a topic, and you read the Wall Street Journal on the topic, you're amazed how cursory the Journal can be. You're like, "Wow. These guys really haven't covered any of it." And I think it's just that in the hustle bustle and the haste of the world, it's a detailed analysis for why this will work. It involves electricity prices. It involves capital prices, interest rates, logistics, global oil markets, all these things. And so it's not just, I just sort of wave my hands, and it's obvious. But it's here today, and it can be done. I'm here to tell you, I fully believe it.
Jim McDermott: And I'm in a position in a couple companies where I can see that it's actually happening. So I think that it's just that maybe the popular press either doesn't take the time, or the general public doesn't want to take the time to dig all the way in. And maybe that's why you're doing this wonderful podcast, is to help people understand that it is a lot closer to reality than I think a lot of people think.
Jason Jacobs: And what is it specifically that you're hearing from the popular press that you take the most issue with?
Jim McDermott: That climate change is an inevitable thing, and we should just sort of accept it. I worry that people, there's sort of this drum beat, this steady drum beat of, it's bad, it's bad. The seas are rising. The fires are increasing. All of the problems that we faced, we created. They were chemical and mechanical engineering things that we did, and we can get ourselves back out of it. A lot of the people have been sort of fed this steady diet that it's all doom and gloom, and that there's no actual engineered solution to it, and there is. Direct air capture to capture, convert and commercialize, it's going to be the biggest industry in the world because we're going to fundamentally reorient how we use a waste product that ubiquitous, and turn it into a value added product. That'll drive business for the next 50 years. And we're right in the first inning. I don't think people understand that there is a solution set for the CO2 that's in the atmosphere.
Jason Jacobs: So you talked about the engineering, and you talked about the popular press and the consumer perception. But one piece, and we touched on the price on carbon. But I guess if the popular press is missing the mark due to lack of education, or whatever the reason, what about what's happening in Washington? Where are the legislators?
Jim McDermott: Before we go there, one of the things that as you were talking, I realized I didn't make as a point. I think one of the reasons that the general population thinks that there's no fix is, remember, 70% of the American economy is consumer based. And there aren't a lot of consumer items you can buy that allow you to participate in that, we'll call it the carbon to value economy, which is taking CO2 out of the atmosphere and turning it into a value added product that you might buy. I can tell you because we're looking at this stuff every day, there are a whole raft of products that are coming, where you as a consumer are going to be able to sort of act at a consumer level, rather than investing in a big project financing or something.
Jim McDermott: So I think as this wave starts to turn more into a consumer oriented or consumer focused product set, you're going to see people really starting to accelerate in that. I mean, the equivalent of things like I'm sitting here in my office, Carbon Engineering, I'm a board member there, they gave me a cup that's made out of solid carbon that was extracted from the atmosphere. You can't buy any home office anything, but I get them because I'm on the board. But you can make a cup. You can make tables. You can make chairs out of solid carbon.
Jason Jacobs: Is the point here that that's actually going to move the math Or is the point here that that's just going to increase awareness?
Jim McDermott: Both. It will move the math.
Jason Jacobs: The consumer products.
Jim McDermott: Oh, yeah. Oh, absolutely. Absolutely. Again, you have to think about very basic things like: Well, what if we used solid carbon to make I beams, or 40% of a tire is made out of carbon black? And you can make carbon black out of CO2 from the atmosphere. So what if every tire in the world, which is 40% carbon black, was made from CO2 that had been repatriated from the atmosphere? That's a lot of tires. It's a ton of tonnage. So now, moving on to DC, I actually think that DC, there is an awareness. But the big shift has been people are recognizing that there's an economic opportunity in all of this.
Jim McDermott: I've been to Wyoming. I've been to Texas. I've been all over the country where people are in extractive industries. And what they're realizing is if we don't figure out how to turn carbon into an economic opportunity, the basis of our extractive businesses, they're going to become uncompetitive. No one's going to want our coal, no one's going to want our natural gas. So I think, and as that realization, one of the things that always happens in Washington DC is that we're a big country, and it's hard for us to come together on very difficult issues at the federal level. So in the words of Thomas Jefferson, the states are the great experimental parts of a nation. They go back, and they experiment at the state level. And that's what the RPSs were. That's what the California low carbon fuel standards have been in California, which are driving enormous demand for low carbon fuel.
Jim McDermott: And as the states have recognized this, the individual politicians have been coming together. And as I said before, the section 45Q is a perfect example of a lot of extractive states realizing, hey, if I can put something in the tax code that rewards people for taking CO2 and sequestering it, we've got a lot of guys in my state who will benefit from that, and all the folks who are in the non extractive states, generally speaking are on the coasts, who want that CO2 sequestered because they're very concerned about environmental issues, are saying, "Hey. That's a great idea because now we're generating a win-win." And we're not pointing fingers about what was done in the past because the past is the past.
Jim McDermott: I mean, it's sort of like rule number one in investing is sunk cost is not something you should spend your time worrying about. So I think that the answer in DC is to come together and find ways where everyone can profit from doing the right thing, and increasingly, we're seeing that.
Jason Jacobs: And so on the one hand you're saying the math needs to work from a market based standpoint, and not require subsidies. But then on the other, the price on carbon is required. How do you reconcile those two statements?
Jim McDermott: Well, very simply. All energy in one form or another has subsidy in it. The only difference between oil subsidy and, say, carbon subsidy is that oil subsidy has been around so long that people just take it for granted and treat it as if it's a market based thing. I mean, look at the oil depletion credits, the accelerated drilling credits, all the rest of that stuff. That's all subsidy, but it's just been around for 60 years, so people treat it as if it's sort of an a priori assumption of, oh yeah, well, that's how it works. But the reality is all energy is subsidized. That's one of those things in the popular press that's always funny to me, is it's a market based price, but markets are all driven by government in the end. There's no such thing as a free market. That doesn't exist. There are greater or lesser degrees of freedom in markets, but all markets are regulated.
Jason Jacobs: So one recurring theme I've heard as I've made the rounds is that there's no silver bullet, and it's just going to be essentially slogging away in tons of different areas. I feel like what I'm hearing from you is that in some ways, this carbon to value is a silver bullet. Am I hearing right?
Jim McDermott: I think it's a silver bullet in that I believe that the opportunity to take what effectively is waste material, all the CO2 that we put into the atmosphere, take that waste material, and then repatriate it and turn it into value added products, is something that will fundamentally reorient our economy. Now is that alone going to solve everything? Absolutely not because that's going to affect every single facet of the modern economy. So I agree simultaneously with the people who are saying, "We're going to have to be active on all fronts." But I think that what's going on is that we're going to fundamentally ...
Jim McDermott: Right now, if you think about it, growth equals emission. Going forward, growth has to equal sequestration. And if we reorient around that, what it essentially means ... Because right now what the problem is, you've got all these emerging economies. They come online, and all the established guys say, "Well, hey, you're emitting all this CO2. You've got to stop that." And all of the emerging economies say, "Well, but that's how you guys got to where you are. So how dare you say we don't have the right." What we need to do is fundamentally reorient so that the faster we grow, the faster we sequester. And that's what the carbon to value economy's about.
Jim McDermott: Think about it. So let's say we cast forward four or five decades. And there's 4000 one megaton carbon engineering plants on the planet, all pulling down CO2, and then repurposing that CO2 into things, building materials, putting it into cement, making it as steel substitute, all these things. Right? Then the faster we grow, the more CO2 we pull down. And in that respect, I do believe that carbon to value has the capacity, because then every time someone moves into a city, we pour more concrete, that concrete is pulling down CO2 and sequestering it. So go build more buildings, not fewer. I mean, that's a gigantic challenge that will take the rest of our lives. But yes, I do think it's a silver bullet if you want to characterize that way, in that it provides a pathway forward and a framework through which we can orient our economic opportunities, that the faster we grow, the more CO2 we pull down. And yes, that in my opinion, is the way to solve the problem.
Jason Jacobs: And what are the one or handful of things that don't exist today, that if they were put in place would significantly increase the trajectory of this deployment?
Jim McDermott: Well, one of the reasons I've been working my tail off for the last six months so hard is that the section 45 tax credit was possibly the biggest thing I could've imagined, which is essentially saying, "If you make an investment in something that actively sequesters CO2, we will give you a tax break." That's a huge one. I think the other thing, frankly, would just be to propagate that same regime globally. And again, it's happening. The UK just passed a law that is literally a one for one overlay on California's low carbon fuel standard. So I think that the single biggest thing that could happen is that if we could have instantly normalized legislation globally, which of course won't happen. And really, what that is, is if we could just have a single price of carbon that traded globally like the way we trade oil, that would be the single biggest thing to help fix it.
Jason Jacobs: And would that come from a body of governance that exists today? Or would some type of new entity need to exist?
Jim McDermott: No, I think it's competitive pressure. I'll give you an example. I am the founder and the executive chairman of a company called Fulcrum BioEnergy, which effectively takes garbage and gasifies it, and makes jet fuel. And in doing that, no CH4 is produced in landfill. So there's lot of other places in the world that there are garbage, we're building plants where we're going to take that fuel, and we're going to bring it into California. Well, all of the local guys where we're doing this are like, "Why can't we do the fuel here?" And the answer is because there's a higher price somewhere else, net of transit. So what ends up happening is as soon as they see this, they say, "Well, what do we need to change in our legislation, so the fuel will stay here and not exit the country?"
Jim McDermott: And as soon as they do that, then they start to change the legislation. It's just free markets, because when free markets realize that a commodity or a business is going to some other market because they're not matching the tax rate, or the subsidy rate, then they change the rules so that they can be competitive. And that's a process that takes time, as you said, if I could wave my magic wand, it would be that tomorrow morning all countries everywhere would agree that we're going to have a price of carbon at say, $150 a ton, because then it allows everybody in their home market to figure out. How can I sequester, given my relative advantage? Whether I've got low cost labor, or I've got lots of coal plants, or whatever I've got, how do I utilize that, so I can get as much carbon as I can, and monetize into this global market?
Jim McDermott: We need a global clearing price for carbon, and we're getting there. The good news is we're getting there, but we have to continue to keep pressure on people. And make the argument that when you create these things, it creates growth. California's economy is growing faster than anywhere else in the United States, and we've also reduced CO2 emissions by 12%. We're the fifth largest economy on the planet. We are taxing carbon. We're growing faster and we're reducing emissions better than anybody else in the United States. And by the way, the only other place that's right on our heels is Texas. And again, very deregulated market in Texas.
Jason Jacobs: If you look at all the different levers that we have available to us, it sounds like this carbon to value is a big one. Are there other big ones that stand out in terms of things that can be highest impact outside of this? Or is there just a big long tail?
Jim McDermott: I mean, personally, I think one of the biggest areas is going to be in ... I actually think that ultimately where this is going to end up is that there's going to be some very, very interesting opportunities in and around hydrogen. I think that photocatalytics, again, because hydrogen is this wonderful energy carrier that we've been unable to liberate without a lot of CO2 emissions. But if I could really wave another magic wand, it would be ways to find very, very low cost ways to sort of improve electrolysis, which is effectively running electricity through water to get to hydrogen, because hydrogen's just an awesome energy carrier. It's the best. So I would say that any research or dollars that could go into sort of reducing the cost of a produced kilogram of hydrogen, it's another area that I think will be very, very big in the carbon to value economy.
Jason Jacobs: I've done 30 something episodes at this point, and I think you're the first person that's mentioned hydrogen to me.
Jim McDermott: Well, I'll give you a concrete example. Probably the top eight emitters under the California low carbon, so in California, all emitters are regulated, and they're being forced to reduce. Probably the top five, five to 10 for sure, are the oil companies. And it's the CO2 that they're emitting as a result of steam methane reforming. And steam methane reforming is a process where you take natural gas, and you basically cleave the hydrogen from the CH4. And in the process, you emit enormous sums of CO2, that if we could find ways to radically reduce the amount of CO2 as a result of SMR, which is just another way of saying, if you could find ways to get hydrogen without emitting CO2. There's sort of an endless supply of products and things you can do with a hydrogen molecule if you don't have to emit an enormous amount of CO2 when you do it, or when you acquire it.
Jason Jacobs: So I guess taking a step back, if you had a big pot of money, let's say $100 billion, and you could allocate it towards anything to maximize its impact on the climate fight, where would it go? How would you allocate it?
Jim McDermott: If I had $100 billion, I think I would probably put maybe a quarter of it into sort of, call it R and D and early stage technology to drive down the cost of direct air capture, and to establish the lowest energy pathways to get to solid forms of carbon, one. Two, I would build a gigantic global reinsurance company because the single biggest problem that a lot of the projects that are ready to go face is that the debt is still fundamentally uncomfortable. So a reinsurance market for debt, I'd put 25 of it into, there's a lot of super interesting stuff in agriculture around low till stuff. But I think I would spend probably the bulk of it, 25 on that.
Jim McDermott: And then I'd probably do 25 on figuring out how to productize the CO2 that's been pulled out of the atmosphere and turning it into value added products, finding ways to turn it into I beam, or aluminum substitutes, and things like that because the thing is, if you can take CO2 out of the atmosphere and turn it into something like, let's just say you could turn it into an I beam, the amount of CO2 that's emitted in creating an I beam is so huge that if you could just substitute and use a product, even if that product was expensive to build, but didn't have the emissions. So I think it would be around figuring out how to create, make the built environment a solid carbon environment from CO2 that you've extracted from the atmosphere.
Jason Jacobs: And last question is just a bunch of our listeners are people that are concerned about climate change and not really sure how to help, where to start, how to go about trying to pitch in to help us out of this crisis. And they come from a wide variety of backgrounds. So either generically speaking to everybody, or if you want to call out to specific types of backgrounds, just what advice would you have for our listeners on how to think about what their role should be?
Jim McDermott: I think I would break it into three categories. One is frankly, be politically active and demand carbon pricing. Just demand it. In whatever form, or whatever venue you feel comfortable, demand it. Just say whatever, it's part of my value system. I believe it's good for the economy. Just demand it. Demand it from your local politicians. Demand it from your federal politicians. Just demand it because that pricing mechanism unleashes just all sorts of creativity that you can't possibly imagine in markets that none of us are smart enough to be able to anticipate. So that would be one.
Jason Jacobs: And that's in any form, as long as it's some form, preferably high priced. Or is there a specific form that you think?
Jim McDermott: No, I think the most important thing, frankly, around carbon pricing is just the durability of the regime. It doesn't necessarily have to be a huge, high price. It just has to be one that businesses can look at and say, "Yeah. This is going to be here. It's not going away." It's the certainty of it. Okay, look, the state of California is going to tax carbon. And the businesses that operate here now know that. And it's been a 10 year fight, but they now know. The oil companies that are here are like, "If you want to do business in California, you have to pay for carbon. It's how it works." And so they adjust around that. So I think it's just demanding, not necessarily a price, but a durable regime that can withstand political attacks and all the rest of that, which means the price of democracy is to be ever vigilant. I mean, that's the deal.
Jim McDermott: We get to be free, but you have to exercise your freedom. And in this case, you've got to demand it and continue to demand it. That would be one. Two is, I'm a big believer in this, is exercise your consumer right. Again, and this is sort of the other side of it, demand a price of carbon. But then demand and reward. As an example, I bought the 91st Tesla with that little buggy. I don't even know what I paid for it. But I was like, "Elon Musk is making a move to try to electrify the auto fleet, and I believe in that. And I'm going to buy it." Be an early adopter of products that reduce carbon. Spend your disposable income because 70% of the US economy is about consumer spending. So if you find a product or a service that is actually driving your values, spend against it. Really be a profligate spender.
Jim McDermott: I bought a $105,000 car that I probably shouldn't have paid more than $70,000 for, but I did it because somebody had to get in there and get that going. And I believe in capitalism that you spend against your values. So if you find products or services that are reducing carbon and that are really actually, even if they're not going to change the world in the sense of total gross tons, spend anyway, because as that feedback loop starts, because if that entrepreneur builds a business, and it works, then they're going to get more money. And more venture capitalists are going to come in, more at risk equity will come in, and then it drives the thing forward. So that would be number two.
Jim McDermott: And then the third one is that it's a little bit of a philosophic comment, but when I was a kid in the '70s, everybody was certain that we were going to die in a big nuclear holocaust. The last big sort of really existential threat that we faced was nuclear annihilation. And I was 10. And I guess what I would say is treat climate change like Pascal's wager. Pascal's wager basically is, they asked this guy, French philosopher. Should you believe in God? And his answer was, well, I'm going to believe in God because if I spend my whole life sort of acting like I believe in God and doing all these good things, and I get to the end, and I die. And lo and behold, I get to go up, and the pearly gates are there, and I'm going to get in because I believed in God and I did the right stuff. And if I get to the end, and it turns out, no, it's all just darkness, and you die, then I at least felt good doing all the right stuff because I thought I was going to get in.
Jim McDermott: Climate change has a very, very similar thing, which is people need to understand, it may well be that we're all screwed. But there are examples in the past where people came together, and we came back from the nuclear brink, and we didn't all die. And the reason that happened is that collectively, we all took a piece of it, and we all believed that we could find a solution. And so the answer is make a Pascal's wager on climate change, which is find some part of it, and just get involved and believe we can fix it. And if we get to the end, and the seas all rise, and the methane releases from the Arctic, and we're all screwed anyway, well than at least during the fight, you weren't depressed. I really believe that.
Jim McDermott: And I really do believe that if all seven billion of us are working our tails off, I think we survive. I think we survive and we prosper because we're a crafty species. So it's like, get involved, demand a carbon price, spend your money on things that really do reduce carbon pollution, and then also understand that we've overcome these types of things before. And if we all just in there and believe and keep all working, you'll get this collective thing that happens at some point, where all of a sudden, it'll just start to turn, and we'll be sucking carbon out faster, and the numbers will go down. It happens. And also, remember, reversion to the mean mathematically, things don't go out forever. They eventually revert to the mean. And the way they revert to the mean is when psychologically, everybody decides that they're going to.
Jason Jacobs: That's an inspiring point to end on, and thought provoking as well, so you've given me a lot to think about, and hopefully our listeners too. So Jim, thank you so much for coming on the show.
Jim McDermott: Thanks so much for having me. And I think what you're doing's great, and I encourage you to continue to do more of it.
Jason Jacobs: I absolutely will. Thanks again, Jim.
Jim McDermott: Thank you.
Jason Jacobs: Hey, everyone. Jason here. Thanks again for joining me on My Climate Journey. If you'd like to learn more about the journey, you can visit us at myclimtejourney.co. Note, that is .co, not .com. Someday we'll get the .com. But right now, .co. You can also find me on Twitter at @jjacobs22, where I would encourage you to share your feedback on the episode, or suggestions for future guests you'd like to hear. And before I let you go, if you enjoyed the show, please share an episode with a friend, or consider leaving a review on iTunes. The lawyers made me say that. Thank you.
