Episode 91: Kingsmill Bond, Carbon Tracker
Today's guest is Kingsmill Bond, Energy Strategist at Carbon Tracker.
Carbon Tracker is a nonprofit financial think tank that carries out in-depth analysis on the impact of the energy transition on capital markets and the potential investment in high-cost, carbon-intensive fossil fuels. It has cemented the terms “carbon bubble”, “unburnable carbon” and “stranded assets” into the financial and environmental lexicon.
Having a long career in banking and finance, Kingsmill has written about the impact of the energy transition on financial markets, domestic politics and geopolitics, and authored a series of reports on the myths of the energy transition, looking at the many arguments made by incumbents to deny the reality of change.
This episode is an interesting one in that Kingsmill has strong opinions, not just about what needs to happen, but also what is already happening and inevitable as it relates to the phasing out of fossil fuels and the phasing out of fossil fuel companies. I thought this was a great one and I learned a lot. I hope you do as well.
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:
What is Carbon Tracker and what’s it role in the financial markets?
How fossil fuels and carbon emissions play into the valuation of stocks, etc.
How Carbon Tracker influence investors and their strategies
The investment risk associated with not factoring in climate change
The meaning and examples of a “stranded asset”
How the energy transition to cleaner technologies can disrupt incumbent industries to the detriment of investors
How inertia continues to drive the construction of fossil fuel infrastructure
Asset reallocation as the primary lever in Carbon Tracker’s strategies
Kingsmill’s prognosis of the fossil fuel industry
Allocating out of the “losers” than allocating into the “winners”
Kingsmill’s journey to working on energy-transition financial strategy
Fossil fuel incumbents, friend or foe to the climate change movement?
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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.
Today's guest is Kingsmill Bond the energy strategist for Carbon Tracker.
He believes that the energy transition is the most important driver of financial markets and geopolitics in the modern era. Carbon Tracker is an independent financial think tank that carries out in depth analysis on the impact of the energy transition on capital markets and the potential investment in high cost carbon intensive fossil fuels.
Carbon Tracker has cemented the terms carbon bubble, unburnable carbon and stranded assets into the financial and environmental lexicon. This episode is an interesting one in that Kingsmill has strong opinions, not just about what needs to happen, but also what is already happening and inevitable as it relates to the phasing out of fossil fuels and the phasing out of fossil fuel companies.
I thought this was a great one and I learned a lot. I hope you do as well.
Kingsmill Bond, welcome to the show.
Kingsmill Bond: Thank you, Jason.
Jason Jacobs: Well, I'm excited for this one. It's funny, as the my climate journey audience grows, some people are in situations where they can speak freely and other people for whatever reason, are in situations where they can't be as outward facing as they would like. And so we've got an avid listener that will remain nameless that I think was kind of itching for his perspective to see the light of day on the show, and since he isn't in a position where he can speak freely, he sent me to you.
Kingsmill Bond: Okay, great. I'll do my best.
Jason Jacobs: So why don't we just take things from the top? What is Carbon Tracker?
Kingsmill Bond: Carbon Tracker is a think tank that focuses on the implications of the energy transition for financial markets.
Jason Jacobs: Great. And when you say implications of the energy transition to financial markets, is that all aspects of the energy transition?
Is it only certain elements and also is it all kinds of layers of the stack in terms of the financial markets or is it public markets? Any color would be great.
Kingsmill Bond: I think. At the stage of the game. The key issue is to understand and explain what this remarkable technology driven energy transition means as a whole for all financial markets and in so far as we distinguish and focus on different areas, I guess since a lot of us have background in equity, but probably focusing more on equity in large particles because you would expect equity to be the most receptive areas changed, the most vulnerable, the area which shows change most rapidly.
Jason Jacobs: And so the organization itself, what's the origin story? How long has it been around? What does it look like today?
Kingsmill Bond: So Carbon Tracker was set up about 10 years ago by the great Mark Compagnoni who wrote a report, which at the time is very groundbreaking, which basically said, look, we have a carbon budget and we can't break the carbon budget.
And if we decide as a society that we're not going to break the carbon budget, then there's a huge amount of stranded assets that will result from that huge amount of unburnable coal and gas and oil. And that's not being factored into financial markets, not being crouched into valuations of stocks.
That was the original premise behind upon which contract was set up about 10 years ago.
Jason Jacobs: And in terms of how that manifests, what are the objectives of the organization?
Kingsmill Bond: So, the key goal, I think Carbon Tracker to try and get it in a single word is to speed up the energy transition. And you'll read, this will be, I'm sure, familiar with your listeners, be familiar with George Soros and his whole concept of reflexivity.
The idea that change in expectations in financial markets itself drives change in the real world, which then drives prices down, which then drives financial markets and the kind of positive feedback loop, and I guess that's what Carbon Tracker is trying to speed up that process of change.
Jason Jacobs: And given that it's such a systems problem, and as you said, each thing kind of feeds into the other tactically, which areas of that equation are the ones that you're focused on?
And then how does that manifest in terms of the actual work that you do?
Kingsmill Bond: So we are very focused on financial actors, on investors, and specifically on persuading investors that the world is changing very rapidly and they need to change the investment strategy to accommodate that world. And as I say, I mean that the rational for that is that as they do change their investment strategy and they do allocate capital to new energy technologies and remove capital from fossil fuel technologies that in and of itself drives change because it drives down the cost of capital for innovative new organizations, and that means that the energy transition will happen more rapidly.
Jason Jacobs: And so if I'm hearing right, it's your view and the view of Carbon Tracker that the necessary energy transition, the risk is not properly factored in to the markets of the fossil fuel and other kinds of highly admitting industries and by helping educate the large institutional investors that invest in the Chevrons and the Shells and among other things about how to properly factor in this risk, it will help the markets better aligned to the situation we're in and accelerate the transition.
Did I get that right?
Kingsmill Bond: Look, I think the heart of this shift is a technology shift from fossil fuels to cheaper, cleaner, faster, superior clean energy technologies. There's an enormous amount of resistance and incumbency and misinformation, which is encouraging people just similarly to carry on doing what they're doing regardless.
And I guess our role is to make it clear that this is an unsustainable strategy and it strategy, which actually will lose you a lot of money. And I think we've really highlighted above all two key points. One is that there's a vast amount of stranded assets at risk and where we can come into this more in the discussion, but it's at least $20 trillion worth of assets, which will be stranded in an energy transition.
And then the other positive side of the story is that there's a huge amount of growth to come, and there's massive amounts of disruptive change, which entrepreneurs and companies can exploit.
Jason Jacobs: So when you say that there's assets that will be stranded, I noticed the use of the word will not could or should or needs to be, but will.
What does that mean exactly? What is it that will lead to those assets getting stranded and what's the definition of a stranded asset?
Kingsmill Bond: Well, there are many definitions of a stranded asset. We'll come on to that in a sec, but let's pick up on this word will, because we say it with confidence and what's driving this energy transition is the same thing that has driven many other transitions in many other areas of investment, which is simply superior costs of about a technology. And as you know, the cost of solar and wind and batteries and electrolyzers are on these extraordinary learning curves where their costs fall by about 20% for every doubling of capacity and in country after country, sector after sector, the cost of the new technologies are falling below the cost of the fossil fuel technologies.
And that is creating spectacular amounts of disruption. And that's why assets will be stranded. And to give you an ever growing series of examples of assets which are being stranded. So the first example is the $150 billion of write-downs that the European electricity sector took in the period after 2006 about $60 billion in the U S actually, incidentally, in a similar period in the U S right now, that closing down coal fired power stations, that's a stranded asset.
It goes far beyond simply an impact on the electricity system. If you look at what Russell did at the end of last year, they took a $5 billion write down on some of their reserves that they felt no longer had value or take a company like Continental, which took a write down on some of their diesel engine factories and this all Schlumberger with their famous $13 billion write down.
I think the point we're making is that right across the fossil fuel system, people have massively overbuilt assets, which are not going to be required and will not earn the return on capital that the builders expect. And that's how we define a stranded asset.
Jason Jacobs: Well, I am certainly no expert in these areas, but some things that have been brought up by prior guests are things like intermittency as one example and how the storage problem isn't solved yet, or energy poverty as an example, in the billion plus people that still don't have access to basic electricity that will be coming online in this emerging middle class and developing countries in the, in the months and years to come, and I'm sure there's other things that I haven't mentioned yet. The importance of baseload power, for example, and again, I don't want to speak over my head here, but it seems like while it's true that the costs are coming down, that we are going to need other forms of power, whether it's coal, whether it's nuclear or something, that renewables alone can't get there at least today. How do you respond?
Kingsmill Bond: Let's just start with, uh, an examination of the facts. 10 years ago. Coal provided 40% of generation in the UK; this year it's basically zero. Wind 10 years ago with zero now it's 25% so, I mean, that's, I think a pretty good example of how quickly you can shift from one paradigm to another and how quickly assets are no longer required.
And don't forget in order for an asset to be stranded and investors to be damaged, you don't actually need to drive demand down to zero. You merely need to drive a peak and a decline in demand. I'll come back to that possibly in a minute, cause it's a really important part of our narrative. But let me talk about a little bit about the emerging markets.
What are the arguments often made by the incumbents is people say, well look you have all these people in emerging markets and they need energy and energy equals fossil fuels. That has been true for 200 years. But the whole point is that because of very quick cost fall that we've seen in electricity and now in transportation, and that'll be followed up in other sectors.
The emerging markets now for the first time actually have a choice. They have a choice between fossil systems, which are largely fueled by imported fuels, which drive tremendous pollution problems and make them dependent upon imports quite apart from global warming. Or they can use their own homegrown resources of solar and wind and fuel themselves and increasingly led by China and India the emerging markets are doing precisely that, and I think it's a failure of understanding by people who have been stuck in one paradigm for their entire lives to realize that actually the game has changed.
Jason Jacobs: So if people in their self interest are going to go with the lowest cost option, and it is true that as you're saying that we're largely there with wind and solar, then why are so many new coal plants getting built?
Kingsmill Bond: So, I mean, the first point to be made, I guess, is that the number of coal plants being built is a dramatic fall on where it was four or five years ago. So we're talking about 20 gigawatts receiving FID rather than 80 gigawatts. And then even if you come back to these final legacy plants that are still being built you have to realize that this is just a question of inertia. No systems stops overnight. So these decisions, which were largely made many years ago in specific locations, and they're still being, they're still being constructed. What you have to ask yourself is, are they being used? So in China right now, the coal stations are being built, but they're not being used because increasingly the incremental energy supply is coming from solar and wind.
So to give you one specific fact, Chinese coal demand for electricity generation actually fell by 3% in 2018 in spite of them continuing to build these coal fired power stations. And the reason why is simply that the coal fire system now in China is any running at 50% it's just a legacy issue.
Jason Jacobs: So what is it that the investors are doing today that leads you to believe that they are not properly factoring in this risk?
And what would you like them to do directionally to better align?
Kingsmill Bond: I guess the first point to be made is that actually increasingly investors are wising up to the risk. So we have seen over the last three or four years the manifestation of a lot of the arguments that we've been making already start to be factored into financial markets.
So the best example of the initial example was the collapse in the share price of the German utility sectors like RWE and Ian. Then you saw the first bankruptcy of of Peabody and bankruptcy of half U S coal sector in the period after 2013 then you saw the collapse in the share price of GE. And now more recently you've seen the collapse in the share price of companies like Schlumberger or continental that I mentioned earlier.
And now increasingly we've started to see this in late shipping sector since the start of this year. Some of the big bulk shipping companies have seen a very significant fall in their share prices. So I think the point to be emphasized is that financial markets are starting to wake up to the risks that are involved in holding the stranded assets of the fossil era, but we would argue that there's a lot more yet to come. And the most extraordinary thing is to, to build up a context around this stuff, there's about, as I say, call it $25 trillion worth of fossil fuel assets out there, and that's an extraction and electricity usage assets, and we're still building $1 trillion a year, which seems to be quite extraordinary given that we're right at the end of the fossil fuel era.
People are still building this stuff and while they're still building it, they haven't understood what's happening.
Jason Jacobs: I mean, if you simple it down to its truest form, is the goal of Carbon Tracker to get every dollar to just divest, divest fully and completely.
Kingsmill Bond: No. Actually, interestingly enough, we do not have a divest mandate whatsoever.
Our mandate is what does it take to speed up the energy transition and to alert? I guess we're more here, isn't it? To alert investors to the risks of what's going on. And I should say that Mark has been doing this for 10 years. If people had been listening to him for 10 years, they would have saved themselves a lot of money.
I mean, energy sites has been the greatest underperformer, the S and P for the last 10 years. Um, so it has to be worth lifting to what we've been saying and I think continues to be.
Jason Jacobs: But if your mandate is not to divest and you believe that they're not properly factoring in the risk, then what does it mean to properly factor in the risk?
What do you hope that they do with this information?
Kingsmill Bond: So what we're suggesting to investors is that they reallocate their capital out of dying industries into growth industries. Which death would mean holding less capital in the energy sector, particularly holding less capital in those parts of the energy sector, which are particularly vulnerable to change.
I mean, I guess you might call that divestment it. I just, I've got a financial background. I just see it as a asset allocation decision.
Jason Jacobs: And where should it go? Or is that somebody else's role?
Kingsmill Bond: No, no, because we looked to this too, because the spectacular amounts of growth to come in all of these new areas, and it's solar and wind and batteries and EVs and hydrogen and all of the infrastructure surrounding it.
So there's a huge demand and huge need for capital in all these new areas. And let's be clear and let us now quote the Warren Buffet, famous Warren Buffet aphorism, that it's easier to shoot the horse than by the car. He was talking about what you should have done as an investor in 1910 as cars started to replace horses, much easier to identify companies which are going to lose with the transition then to buy into ones that win.
But of course, if you do buy into the right ones, the Fords of, of a hundred years ago, then, uh, you stand to make spectacular returns.
Jason Jacobs: So do you believe that the big fossil fuel companies deaths are inevitable, or do you believe that some of them will be able to navigate this transition effectively?
Kingsmill Bond: The first question you got to ask yourself is, if you look back at financial market history, how many incumbents survived disruptive change the shift from one paradigm to another, and you've very rapidly see the answer is not many.
So I think the default position for an investor has got to be one which recognizes that it's very hard to move from one paradigm to another, and that most of the current incumbents won't make it through to the new world. That said, I guess some of the will, you can take a company like DONG, Danish oil and natural gas, which has reinvented itself as a wind developer, is all stead and has flourished quite spectacularly by so doing.
But what we're seeing actually in the moment. For most of these companies, they're just tinkering around at the margin and spending probably more on PR than they're actually spending on new ventures.
Jason Jacobs: But I mean, what I'm hearing from you is for the public equity investors get out of fossil fuels and into things like solar and wind, but from a public equity standpoint, isn't it the same holdings that are largely doing both?
I mean, if you want to get out of fossil fuel and into solar and wind, couldn't you just go from. Exxon, the Exxon or shelter shell?
Kingsmill Bond: The short answer is no, because Exxon is a tiny player in the renewable sector. And to put this in context, it's a bit like saying, if you want to play the electric vehicle revolution, why don't you just buy general motors?
Why bother to buy Tesla? And the answer is you buy Tesla. Because I focused on the issue. And in the same way you want to be buying companies, which are completely focused on this transition. I mean, of course the great Christiansen who sadly died this week, he, in his book The Innovator's Dilemma, he completely understand to describe the situation whereby incumbents find it very, very hard to cope with disruptive change.
And it's almost always new companies, which are the ones which sees the sunlight up plans of opportunity.
Jason Jacobs: So what are some of the more established players then that you think are part of the future instead of the past?
Kingsmill Bond: Actually, I mean, I think a Carbon Tracker, we, I don't even know where license now to talk about specific companies with a future looking basis, but we would look at a lot of Chinese EV manufacturers, for example.
We'd be looking at some companies which are doing interesting work in the specialized areas, like Japanese glass or Korean batteries, that kind of story. But again, I emphasize it's, speaking as an investor here, is considerably easier to allocate out of the losers than to find the winners. And the Grantham Institute has done some very interesting work, basically showing that for the last century, it didn't make any difference if you were in or out of the fossil fuel sector.
And now what we're saying is, here's the sector which is about to be wiped out by disruption. Why hold it?
Jason Jacobs: And so, tactically, how does that actually manifest in terms of the work that you do? How big is the team? What type of skill sets on the team, and then from an initiative standpoint, what types of initiatives do you guys take on and carry out in order to achieve these objectives?
Kingsmill Bond: So there's about 30 people Carbon Tracker; we have full primary teams. We look at the coal and coal generation sector. We look at the gas sector, we look at policy, and there's myself looking at strategy and we get a very wide range of reports. I think we've been very focused on understanding the detail, the financial consequences of shifts. Have you done some of the shifts that we've done a lot of very detailed analysis of where companies sit on the global cost curve and which companies are particularly vulnerable as a result of where they sit on the cost curve to an energy transition. I've been writing a lot of analysis on the impact.
The peaking demand in other sectors and specifically in this sector and just understanding what's been happening in the coal sector, in the car sector, in the VC generation sector as demands have peaked, how that had a very quick impact on investors and we've been also liased with a lot different organizations to examine, for example, the different narratives of the energy transition and just explain to investors that most of the current thinking on the energy sector is dominated by incumbents who have, shall we say, a lot of skin in the game of continuity and are very, very clearly misleading investors as to the prospects for continuity of the current system.
So, yeah, we've looked at a lot of different issues in our analysis.
Jason Jacobs: Why is this a nonprofit?
Kingsmill Bond: Because I guess that's how it started 10 years ago. We have a mighty task ahead of us.
Jason Jacobs: And I mean, do you think this could, is it kind of a fork in the road where it could be a for profit entity or a nonprofit? And I guess what are some of the trade offs as you sit as a nonprofit that are different as a nonprofit than it would be if it was, say a for profit entity selling research and analysis to these large institutional investors.
Kingsmill Bond: Well, there's two answers to your question. First of all, most companies which are operating in the energy space very quickly become nothing more than tools of the incumbents just reflecting what the income of fossil fuel companies want to hear. Without naming names.
Jason Jacobs: Now you've got me intrigued, Kingsmill.
Kingsmill Bond: Yeah. Anyway, so it's just one generic problem, but I think the other point to be made is that there are, in fact, quite a few. For profit entities now being set up to exploit this energy transition. There's a lot of long-short funds, which are being set up, and obviously we are seeking to work with them. I think it's quite good there to be at a bit of an arms length because I guess we're trying to set out the story or they're trying to profit from it and they're quite different issues.
Jason Jacobs: But personally, you came from the private sector before Carbon Tracker, correct?
Kingsmill Bond: So yeah, I guess I have a slightly unusual journey into this because I came into this world not from a --not to my shame-- from a green perspective, but I came into it from purely a financial perspective because I am my day job prefer for about 25 years I've been working as a strategist and, as a strategist, you're always interested in tipping points and disruption. And what intrigued me when I started looking at the new energy sector as it was about six, seven years ago was how quickly these technologies were growing, how quickly the costs were falling, and I guess I figured out that it was going to be an extremely interesting disruption, which would have tremendous financial market consequences.
And that's how I came to it actually.
Jason Jacobs: Is this your first foray into the nonprofit world?
Kingsmill Bond: Well, yeah like I said, as other things in my youth, but yeah, I mean, I've been a city strategist for many, many years and it clearly is different world, but it, it's interesting.
Jason Jacobs: So if it wasn't impact that led you down this path, but it was more about the intellectual challenge and things like that.
I'm curious, what was the motivation to go the nonprofit route as you thought about the right way to participate in this transition?
Kingsmill Bond: I guess the primary attraction was working for Carbon Tracker, cause Carbon Tracker is a really cool think tank. It's got some really great people in it and lots and lots of good ideas and yeah, it's just, it's fun to be surrounded by like minded people who I think understand what's happening.
Jason Jacobs: I have a quick punch list of some topics that just as we were talking came to mind that be great to get your take on if that's okay.
Kingsmill Bond: Sure.
Jason Jacobs: So I think I know the answer to this, but just to clarify, I've heard from a number of people that, while big oil does have blood on their hands, at the same time we need their help in this transition and no one understands carbon like they do.
How do you respond?
Kingsmill Bond: That's completely irrelevant and completely wrong. The big oil is an impediment. It's not doing anything to advance this transition and it's doing its level best to impede it. I guess actually that is the main thing I have discovered since I entered into this world, which is the degree to which the incumbents are fighting tooth and nail to maintain their incumbency.
That's an absolutely false narrative to imagine that they will advance or improve or do anything to make this transition happen. So to give you the numbers, the $300 billion a year going into renewable energy generation, out of which the current oil majors are putting in less than 10.
Jason Jacobs: One example where this has manifested recently, and I guess it's one degree removed, but when it comes to types of capital, one entrepreneur was telling me that they had a heavy infrastructure focused company and they ended up raising money, skipping venture capital and raising right from private equity.
And the reason they raised from private equity is that the firm that they raised from had a lot of experience investing in heavy infrastructure in the oil and gas world. And, and while their business is not an oil and gas business, they understood big infrastructure, which a lot of other types of startup and growth asset classes do not.
Kingsmill Bond: Yeah, I guess so.
Jason Jacobs: Got it.
So I get the incentives are not there for oil and gas and actually quite the opposite, but isn't, I guess the point I'm pushing on is what about the expertise? If we don't get it from them, where does it come from?
Kingsmill Bond: I mean, what expertise are you thinking about? What expertise do they have in putting up solar panels?
What expertise do they have in making electric vehicles? What expertise did they have in wind turbines? They don't have any expertise. I mean, there's nothing special about these companies.
Jason Jacobs: So do you think we need to do carbon removal at scale? As one example.
Kingsmill Bond: Maybe, I doubt it. Well, you got to realize about carbon removal at scale.
It's as an idea it's there purely and simply in order to try and stop change, and it's right at the far end of the marginal abatement costs curve. There are many, many other technologies which we can put into place long before we have to go down the route of CCS. Even to think about it, talk about it in my opinion, is idiotic today. Before we do CCS, we have to be charging the people who are putting carbon into the atmosphere, the cost of the CCS.
So when we're charging $100 per ton globally, then fine. Let's talk about CCS, but at the moment it's free.
Jason Jacobs: Do you think we should be charging $100 per ton globally?
I think we should. Make the polluter pay in the same as we do in all other aspects of life. So if you pour pollution into a river and kill your neighbor's land, you pay for it.
That's all it is. I mean, as you know, there's three and a half million people a year dying from the pollution associated with fossil fuels, and if we carry out on the current trajectory, there'll be hundreds of millions of climate refugees and where they live are going to hothouse earth. That can't be free.
As I've made the rounds and talk to different people, there's arguments to be made that renewables can get us, if not, there certainly a large chunk of the way there. What I've heard from a lot of people is that we're so far behind and the stakes are so high that it should be an all hands on deck approach, and so we should not just lean into renewables, but we should lean into carbon removal.
We should not just keep the existing nuclear fleet, but we should be leaning into things like advanced nuclear and micro reactors. We should of course be putting a price on carbon, but more is better and we shouldn't be taking anything off the table. It doesn't feel like that's what I'm hearing from you.
Am I hearing correctly? How do you think about that?
Kingsmill Bond: Yeah. Listen, I have no problem with, let's do whatever we can. I guess I'm again, because I approached this from a financial perspective, I see how quickly the cost of renewables are falling. If you're now talking about $30 solar and wind, in a decade, we'll be talking about 10 to $20 solar and wind, and we'd be talking about very, very cheap hydrogen.
We'll be talking about huge global electric vehicle fleets, that game would have changed. So I think what I cannot emphasize enough in this whole debate is that we should not be focusing on what may or may not be happening in 20, 30 years time. We going to focus on what we can do right now today, which is put into place these technologies at scale and thereby drive a peak in demand and then a decline in the existing system.
And it's actually, again, going back to the history of energy shifts, it's very similar to what we saw, for example, as gaslighting got pushed out of lighting in the UK, or whale got pushed out of lighting in the United States. Or horses got pushed out of transportation. You've got a peak, and then it applied and then things changed and the whole paradigm shifts.
Jason Jacobs: So should we be decommissioning the existing nuclear fleet?
Kingsmill Bond: No, I don't think so. Actually. I think nuclear, it's quite helpful for nuclear. To keep on going in order to continue to provide part of the solution. I mean, the real story, but don't forget the real story. If you look at this in terms of change and transition, the real story lies in the speed with which these new energy technologies are coming into the system and disrupting the incumbents.
Nuclear for what it's worth is also an incumbent, which will be disrupted eventually, but we may as well keep it for the next 20, 30 years.
Jason Jacobs: Yeah. Cause when you talk about the here and now, one of the things I've heard, and again, I have to caveat everything with, I'm just trying to learn, and I'm still very much a newbie, but that as solar and wind, people say, well, renewables are better than nuclear.
And it's like, Whoa. But what's actually happening is that in the quest to stand up renewables, there's not enough storage, and so we end up decommissioning nuclear, but swapping it out with coal to support the renewables.
Kingsmill Bond: Where you're thinking about Germany, right? That's the only example I think where that's been happening elsewhere, that's not been happening.
The real story here is S curves, and in the math of S goes, it's pretty simple. You start out small. You get to about 5% and then it takes you, then you get very, very quickly to about 80% market share. And that's a very well established trajectory that you can see in products right across the 20th century all the way from giant systems like electricity and cars back up the 1900 all the way through to the rise of the internet and the mobile phone. More recent years, you get free these incredible S curves. What's really interesting now about these new energy technologies is the kind of apex will, the tipping point of the S curve, whether at about 3% or 4% global market share and about to go up very, very quickly.
I think I just can't emphasize enough the degree to which this is not a conversation we'll be having in 10 years or even five years time, because it will be completely obvious how quickly these new technologies are taking all of the growth and, and then starting to push the old technologies out.
Jason Jacobs: And where does natural gas fit into all of this?
Kingsmill Bond: So. Natural gas is an interesting one. The industry loves to tell us the natural gas is a bridge, and I guess it is a bridge, but it's a fairly short one. And what people always forget when they talk about natural gas is that the only way natural gas can compete with renewables is by allowing its price to fall at the same prices as renewables.
So as you know, 40% of natural gas is being used for electricity generation in the illustrious degeneration sector, solar and wind in two thirds of the countries of the world, the cheaper the natural gas, and they're falling by about 5% a year. So, gas has a role, but it's got a role, a lower a lower price.
And I think that's the point that people forget.
Jason Jacobs: So for things like methane leaks and technology to better detect methane leaks in natural gas pipelines, are you for solutions like that getting in place, or should we just skip that and try to phase natural gas out as quickly as possible?
Kingsmill Bond: No, of course we should stop pumping pollution into the air, and it's, as you know...
Jason Jacobs: So we should focus on plugging the leaks then?
Kingsmill Bond: Obviously, why wouldn't you?
Jason Jacobs: Well, the argument not to is that by doing that, it's just going to give more reason to prolong keeping natural gas and extending its bridge or trying to make a case for it to be a longer term part of the equation.
Kingsmill Bond: It's as with any kind of pollution, why would you want it. So, yeah, we should plug all leaks. Obviously it's like having a a water main leak in your water main down the street and say you shouldn't plug it because what? I don't buy the argument at all actually.
Jason Jacobs: Well, it's like, it's a weird analogy. I don't know why I thought of it, but if your arm has an infection and it has to get amputated, do you bother to fix your bum finger?
If you know the whole arm's going to get amputated, like why would you mess with the finger? Because the whole arm is ultimately going to come off a few months later. Something like that.
Kingsmill Bond: Okay. Okay. Well, yeah, but it's all that quick. I mean, we're going to need this stuff for awhile. So in this already transition, you don't move overnight from using a hundred million barrels of oil and 3,800 BCM of gas to zero, right?
It's going to take decades and decades and decades. But what I find analytically interesting here is that this is an industry which has been growing for basically 200 years and their case coal a hundred years. In the case of everything else, almost without cease and the current incumbents still think it's going to carry on growing without cease, and actually in reality, they've got the peak staring them in the face in the course of the next decade.
So it will be a very, very different paradigm that the incumbents will have to face. We still going to be using this stuff. Of course, you should fix the holes and plug the leaks and improve your effectiveness and your efficiency and who seek to retool yourself and all the rest of it. There's no point giving up,
Jason Jacobs: I guess I don't understand why you are for fixing the methane leaks, but it's, unless I misheard against things like decarbonize fossil fuel.
Kingsmill Bond: What do you mean by decarbonized fossil fuels?
Jason Jacobs: So for example, capturing the carbon at point of emission and storing it.
Kingsmill Bond: Look, at the end of the day, it's just cost, right? I mean, CCS, you put CCS onto coal plant, it increase your costs by whatever.
$50 per per megawatt hour? And then you've got the cost of the coal, the cost of building it. I mean, it was hard to get a CCS coal plant for less than a hundred dollars per megawatt hour. I mean, it's just dumb when you can get solar or wind for 30 or 40 so I guess for me, this whole debate, people need to think a lot harder about the numbers and the costs and recognize that these technologies like CCS or right at the, as I said already, and right at the top end of the marginal abatement cost curve, the most expensive, difficult, high cost things. And why would you do that when there's so many other things you can do right now?
Jason Jacobs: So if you had a big pot of money, say $100 billion, and you could put it towards anything to accelerate the transition.
So basically, how would you allocate that money to maximize its impact on accelerating the clean energy transition?
Kingsmill Bond: Oh, we thought, I put some thought into this, Jason.
Jason Jacobs: I know I need to change my questions around and keep people guessing I'm too predictable.
Kingsmill Bond: Exactly. Who would've thought, look, I think there are four things.
Gosh, can I have four? I put four parts for ...
Jason Jacobs: You sound like a prepared man. It's almost like cheating, but actually it isn't because it truly is the substance that matters. So I think a little prep on this question, maybe only this question, no other prep, but for this question, I think it does actually make sense to put some thought into it.
Yes. Four things is great.
Kingsmill Bond: So the first one has got to be education. So to explain to people what are the real costs, the real benefits of change. Because you read stuff from people like arena for example. And the cost benefit ratio from having an energy transition is between three and seven to one. So there's a massive advantage for all of us to do it, and the more people realize that and realize the facts of the case, the more they'd be happy to get behind it.
So education is the first. The second very clearly is support. You need gotta be just transitioned. You've got to support the people who are inevitably going to be damaged by the shift from one paradigm to another. But let's be clear. You want to support the individuals, not the owners of capital, and they're very different things.
So you want to support coal workers, not the coal mine owners. That both makes it more just and also makes you money go a lot further. Your third area is we as a, as a world to putting spectacularly small amounts of money into energy research, pure energy research. This is for that really hard to solve sectors and I think we should be putting a lot more money into energy, pure energy research.
Jason Jacobs: What does that mean, pure energy research?
Kingsmill Bond: Well, I guess it's stuff like how to drive down the cost of hydrogen above all. And then my final area, since I'm a banker and you've very kindly given me 100 billion, I want it all back again, and I've got a clever way of getting it all back, which is, I'll put my last 20 billion into a hedge fund to short the losers of the current system, and I'm very confident I'll get the whole lot back again.
Jason Jacobs: You know, I had a guest on already who is building that hedge fund, at least for mispriced real estate assets. Yeah. But I'm sure there's others popping up.
Kingsmill Bond: There are others popping up.
It's going to be an interesting trade --trade of the decade.
Jason Jacobs: And my last question is just the audience of this podcast, it's kind of split. Half of them are people like me that are kind of new blood coming in and trying to find their lane and get up the learning curve and figure out how to have an impact on this problem in an ambitious way in the next phase of their career.
And then the other is just veterans who've been working on this problem for a long time, but maybe it's one piece of it. Maybe it's from the policy side or from the innovation side, or from the capital side, or as a scientist or in academia, et cetera, but who are, you know, trying to get a fuller picture so they can discover other organizations that they should support, or people they should be partnering with, et cetera.
But for that kind of audience, that's not mom and pop, but is more looking at this at like the systems level and trying to get mobilized with their resources and time. What advice do you have for them on how to maximize their impact on accelerating this transition?
Kingsmill Bond: Well, I would say, again, speaking to my own experience though, having shifted from finance into this world, we desperately need more people.
Who have financial expertise, who can understand, analyze the impact of this transition. It's really, really deep necessity and need. So I think that's one area, if you've got expertise, come and join us. And then secondly, we need people with expertise in each of these different areas to be coming up with new, innovative ways to solve the problem.
And this, I guess, brings me right back to the beginning, which is that we as humanity have a kind of, we have a mighty problem ahead of us, which is that we need to solve the fact that all of our, almost all of our energy comes from, and our prosperity has in the past come from carbon and society needs to be reinvented.
And therefore each sector now needs a combination of youth, talent and expertise to reinvent it. And I would say, again to people, this is an exceptionally inspiring moment to be alive.
Jason Jacobs: Yeah, I agree. It's a daunting challenge. So that's the same time. It's to your point about intellectual stimulation and purpose, but also, I mean, with change, change is scary, but with change also comes great opportunity and I refuse to let my optimistic spirit die and I don't feel like I'm blinded. It's self fulfilling in both directions. If you go in as a cynic. Then your fate is kind of preordained, and if you go in thinking you can bring about real change at a big scale, then that's the only way you stand a shot of actually doing it.
Kingsmill Bond: That's right, Jason; you're a great man, to do what you do. It's very impressive and I think, as I say, it's a very exciting moment to grab this opportunity.
Jason Jacobs: Kingsmill anything I didn't ask that I should have or any parting words for listeners?
Kingsmill Bond: The one thing I guess I didn't really get across is the one point that we emphasize all the time, and actually it's what Larry Fink said two weeks ago, which is that financial markets look into the future and bring future risk forward.
And because we're so confident that you're going to see a peak in demand for fossil fuels, and you're going to see, um. Therefore, a totally new paradigm. That's why we're very confident that financial markets are bringing it forward, and we'll continue to bring it forward into the present. So that was, I guess, the only point I failed to make enough.
Jason Jacobs: Great. Well, this was an awesome discussion. Thanks so much for coming on the show.
Kingsmill Bond: Thanks, Jason.
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 my climate journey dot C. O. Note that is dot C O. not dot com.
Someday we'll get the.com, but right now dot C O. 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.
