Climate Change, Energy and Finance
In this episode, we speak with Bradford Cornell, a managing director in BRG’s Disputes & Investigations group and leader of the firm’s Climate Change, Energy and Finance practice. Our conversation focuses on the financial realities of global warming. Brad talks about a realistic timeline for moving past carbon-based fuels, upgrading energy infrastructure and how to make the cost of carbon clear to consumers.
TRANSCRIPT
S1: 00:01 Hi, ThinkSet listeners. Eddie Newland here. As you might know, Phil Rowley, BRG's executive director and chief revenue officer is getting into the podcast game. Check out his conversation with Jaime Diaz at the Golf Channel and other experts on leadership. Phil's podcast is called Intelligence That Works, and it's available in this feed and wherever you get your podcasts.
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Welcome to BRG's ThinkSet podcast. I'm your host, Eddie Newland. BRG is a global consulting firm that helps leading organizations advance in three key areas: disputes and investigations, corporate finance, and strategy and operations. Headquartered in California with offices around the world, we are an integrated group of experts, industry leaders, academics, data scientists, and professionals working beyond borders and disciplines. We harness our collective expertise to deliver the inspired insights and practical strategies our clients need to stay ahead of what's next. For more information, please visit think BRG.com.
On today's episode of the ThinkSet podcast, we'll be speaking with BRG Managing Director Brad Cornell. Dr. Cornell is a financial economist and leader of BRG's new Climate Change, Energy, and Finance practice. Over more than forty years, Dr. Cornell has taught courses, written extensively, and testified in a wide variety of legal matters involving valuation damages and securities. He's provided expert analysis in some of the largest and most widely publicized finance cases in the United States. Our conversation with Dr. Cornell will focus on the financial realities of global warming. Dr. Cornell talks about a realistic timeline for moving past carbon-based fuels, upgrading energy infrastructure, and how to make the cost of carbon clear to consumers at large. And with that, let's get started.
Well, Brad, thank you so much for joining us today on the ThinkSet podcast. How are you?
S2: 02:09 Just fine.
S1: 02:11 Great. Well, I want to dive right into it here. You have a relatively long outlook on when we as a planet can move past carbon-based fuels. Can you explain why that is and why your outlook differs from others?
S2: 02:23 Well, before I do that let me just say I hear the word “planet” often used in that context. And actually, the planet is going to have no problem at all. The planet's been through four-and-a-half billion years of ups and downs and mass extinctions and meteor strikes and so forth.
The problem is going to be for humanity, whether we provide an environment that will allow our society to flourish without undue conflict. So that's what we're really talking about.
And it's going to be a difficult transition to move beyond carbon-based fuels. It's not going to be something that we can do in a decade or two, and, in particular, the costs are going to be large. And we need leaders who will tell people that. And we also need leaders who will tell people there are many things that we're going to have to use fossil fuels for a good deal of time. One of the most prominent is air travel. I doubt that many Americans want to permanently give up air travel. But there are also a host of industrial processes that use fossil fuels that will be very difficult to transition.
S1: 03:30 So you mentioned air travel, and I think that ties in travel, and then also infrastructure, I believe, is one of the largest challenges that it's involved in the fossil fuel consumption to get us eventually off of it, past carbon-based fuels. What about infrastructure in particular do you think would be the biggest hurdle for the US to get past if we're going to truly wean ourselves off of carbon?
S2: 03:50 Well, the really nice thing about carbon is that it's very easily storable. You can put it in storage tanks, and it will stay there long term. You can transmit from one spot to another very easily, pump it into your tank and so forth. Renewables, on the other hand, like solar and wind, you can only use them via electricity, and they only produce electricity intermittently. So in order to transition to renewable, we're going to need a host of major enhancements. And the two biggest issues will be a complete rethinking and rebuilding of our electric grid and then some solution to the storage problem. And that solution to the storage problem, no matter how we do it, is going to be expensive.
S1: 04:35 And so different enhancements to the electric grid—in particular, I've read about microgrids, the idea of breaking up bigger grids that currently exist. Would that be at least part of an answer in your mind?
S2: 04:47 Well, it's part of an answer, but it's certainly not a full answer. I mean, take New York City, for example. How is New York City, which uses an immense amount of power, going to get that power in January? They're not going to get it from solar and wind nearby New York. Maybe they'll have to get it from solar and wind in Texas, and that's going to require a smart national grid, as well as local microgrid.
S1: 05:11 You mentioned that the big-dollar figure that somebody has to be willing to confront. In your mind, is that going to come mostly, or would that come both from public and private funding? Or is this something that the private enterprises should be looking to take head on, because there's an opportunity and investment in that?
S2: 05:29 Well, I think it's going to have to be both. I don't think that private enterprise can do it alone. And one of the reasons I say that is the problem with pricing electricity. Remember that once we move to renewables, virtually all our power use will be electrical. Who's going to set the price of electricity? That is going to be so intensely political that I think investors will shy away from providing all the necessary monies, not knowing what their return's going to be, because they don't know how electricity is going to be priced. So I think it's going to take a very careful coordination between public and private sources.
S1: 06:07 If we give you unencumbered power to set the agenda for how the US and other governments around the world should act now to set the right course for the future, what would you say are the first couple of priorities?
S2: 06:19 Well, I'm an economist. In fact, I'm one of the three thousand economists that signed the economist statement on this subject. And virtually every economist—including all the living Nobel Prize winners, all ex-heads of the Federal Reserve, all ex-heads of the President's Council of Economic Advisors—we all say that you have to make the cost of using fossil fuels be reflected in the price. Right now, there's external costs that are not reflected, and the way to do that is to have a carbon tax—and a significant carbon tax. And virtually, like I say, every economist recommends that, as do I, because it will provide the proper incentives for consumers to save on the use of fossil fuels and from entrepreneurs to develop alternatives. But it's a political big hurdle, because it makes people confront, right away, the costs of using fossil fuels. The true cost.
S1: 07:17 What do you think would be the biggest hurdle for the carbon tax? Is it the fact that people are going to be scared of the price they see at the pump, or that all of a sudden the price of a flight across country is now the equivalent of a private plane flight?
S2: 07:28 Well, it won't be as bad as a private plane, but it will go up. And the price at the pump will go up. Those costs are there now, but we don't see them as dollar costs. They're hidden in the cost of putting CO2 in the air and all the environmental damage. And if we don't internalize and confront those costs, people will not make the appropriate decisions.
S1: 07:54 To my knowledge, the largest on-scale governments getting together to talk about this is the Paris climate accords that obviously the US is making its way out of right now. Some would say, quite unfortunately. What could the US do right now in a leadership role to help people realize the additional costs that come into carbon that you're not seeing at the pump, that you're not seeing on the price of an airline ticket, but that, as you say, we are already seeing just in different forms?
S2: 08:21 The United States really needs to take the lead on this. In some sense, we're the bad guys. We have developed our economy in large part on the back of fossil fuels for the last two centuries. China's the largest user of fossil fuels, and we're second. But on a per capita basis, we're far ahead of China. So if we don't step up, how can we say to developing countries in Africa, the Middle East, or in India that they shouldn't be using fossil fuels because they're using so much less than we are right now? So I think America really has to be a leader. But we're a long way from that right now.
S1: 09:00 The Chinese economy consumes more fossil fuels than we do. What about their economy in particular is consuming all those fossil fuels? Is it the fact that they're building toward a more developed economy, or is it the manufacturing that they do that consumes so much of it?
S2: 09:14 Well, both. They have four times the number of people we do. And if those people want to warm their houses and air condition in the summer, they're going to need energy. And as their economy grows—and they do undertake a lot of the world's manufacturing—that's going to take energy. In the United States, we're at about 225 kilowatt hours per day, per capita, and China's about 70. So even with all their manufacturing and growth, they're there's still less than a third of where we are, and they're likely to use more as they as they develop further.
S1: 09:49 So here at BRG, we recently created a new practice group specifically to focus on these issues, how climate change can affect the economy and what organizations and companies and governments can do to prepare that. Can you explain a little bit of the thought process behind the putting together of the team and what we're hoping to do here?
S2: 10:09 Well, I think it's critical for BRG to plant its flag and be a leader here. As I've said, the costs involved in a transition to renewables are going to be in the multitrillions of dollars, even in the US alone, let alone worldwide. And there's going to be all sorts of legal battles, political battles, negotiations, regulatory hearings on this. And I think we're perfectly positioned to really play a central role in helping to think through the issues involved in this transition. And that's the goal of the new practice.
S1: 10:44 Where do you see issues arising when it comes to risk mitigation or investment in hardening of infrastructure assets? Is that part of this plan too, or is that just kind of doubling down on where we already have problems?
S2: 10:59 Well, this is one thing that's not understood broadly enough. It's often said that our solution to the climate problem is reduce emissions, and that is a partial solution. But like I said, if you still want to have air travel and many industrial processes, you're still going to have emissions. We need not only to be thinking about how emissions can be reduced, but given the fact that there are going to be emissions, given the fact that there's going to be warming, given the fact that there's going to be sea-level rise, we also have to figure ways to adapt to that, and that ought to be part of the ongoing discussion as well.
S1: 12:07 A few different states have unveiled 100 percent clean power targets, which would obviously require a dramatic shift in the composition of our grids. What's your outlook on the different states and the timetables that they've set? Are they too aggressive; not aggressive enough? How feasible do you think it is for a state like say, New York, that by 2050 you want to have 85 percent of their greenhouse emissions compared to the 1990 levels. Is that a realistic and attainable goal?
S2: 12:37 Well, first you've got to understand exactly how they're doing the calculation, and often that's not very transparent. Are they talking about the generation of electricity? Or are they talking about all uses, including industrial and air travel and so forth? Here in California, we're usually talking about the generation of electricity, so let me assume that that's what the goal is, that most all electricity would be generated by renewables.
As the fraction of renewables grows, the problems grow right along with it. The intermittency of renewables is not too bad as long as you have a bunch of gas peaker plants sitting on the side, ready to turn on if the wind isn't blowing or the sun isn't shining. But as you go toward 100 percent renewables, what's going to happen when the wind stops blowing and the sun stops shining, and you've closed down your gas power plants? I don't think we have an answer to that yet. So we have to be very careful in attempting to achieve those goals. Because as bad as emissions are, it's a lot worse to have no electricity.
Here in California, there's been blackouts related to the fires. If that became routine because we didn't have a storage solution, I think the population would get the pitchforks out.
S1: 14:00 Yeah, so you mentioned the storage problem if it were, as it stands now. The technology, as I understand, it's come a long way in the last twenty years to the point where you have companies like Tesla that are succeeding on not only developing electric cars, but also using their battery storage capabilities for other uses. Is there some quantum leap that we can't yet foresee, but we're kind of banking on happening in order to get to the point where we won't run into the intermittency issues that you describe? Or is the technology there, but we just still need to scale it?
S2: 14:35 The fact of the matter is, largely because of the basic laws of physics, it's hard to believe that batteries are ever going to be as cheap as fossil fuels. They're just an expensive way to store energy. So we're going to have to move ahead on all fronts here. That's why the really smart grid might be part of the solution, so that the sun is shining someplace and the wind is blowing someplace, can we move the power around well enough? But as of yet, we do not have anything like solutions to the, what I'll call the reliability problem, at the scale at which we consume electricity. So we really have to be careful on that going forward. And the population has to be properly informed about how expensive it might be to switch to close to 100 percent renewables, and the type of risks that involves such as ongoing blackouts.
S1: 15:29 You work with college students. I believe you still teach quite a bit. Does working with members of the younger generation—do they provide you with incentive? Do you have a sense that they have a better awareness of what the costs might be going forward than perhaps folks in an older generation who might see this as somebody else's problem at this point?
S2: 15:47 Well, I know that the ones in my classes are going to. I have developed a new course entitled Energy, Climate Change, and Finance, which I'll be teaching at both the Anderson Graduate School of Management at UCLA and the Rady Graduate School of Management at UC San Diego this winter and spring, respectively. And that's exactly the focus of the course is to give business students an understanding of how large the financial obligations and costs are likely to be, so that they can perhaps be leaders in the next generation of taking these problems on in a realistic way.
S1: 16:26 If you could give us a glance at a semester's worth of lectures in two minutes, what are the topics that you hope to tackle with those future leaders of business to prepare them for the coming storm?
S2: 16:37 Well, the first is to just give them a very thorough understanding of the data. How much energy do we use, both in United States and around the world? What forms is that used in? What are the impacts of that usage, and what are the problems that arise? That's the first half the course.
The second half is suggested solutions for dealing with it. I plan to have the students play a major role in developing their own suggestions. It's an interesting course to teach. I told the administration at both schools I would have to grade this pass/fail, because usually when I teach, if I teach the capital asset pricing model, I know what the answer is and so I can give a test and grade people. When it comes to the transition to a more renewable world, I not only don't know what the answer is, I'm not sure I even know all the questions. So there's no real effective way to grade people.
S1: 17:31 Well, if you were going to pair this course with an entrepreneurial course and encourage your students to take the lessons that you teach them, and take it to where they're learning about balance sheets and opportunities and where they could best apply this new knowledge, where do you think are the industries or the opportunities for new industry or new companies might exist as it comes to combating climate change?
S2: 17:53 Well, if I really knew how to make money off this, I'd be starting a company myself. But certainly the storage problem is going to be a critical one. The reengineering of the grid and making its smart. Products that will help individual homeowners make more efficient use of energy. Communications and media things.
People can make a huge difference if they just don't cool their house below 78 degrees in the summer. Air conditioning's a huge use of energy, and that alone would make a big difference. I carry a little thermometer, a digital thermometer, with me and when I go into a place of business in the summer here in Los Angeles, where it's hot, I'll walk into a restaurant and it will be so chilly I'll have to be carrying a sweater.
So there's much that media and education can do to help us cope with this, and I think we have to move ahead on all these fronts simultaneously.
S1: 18:50 I have been reading about residential batteries as a way to kind of help with the grid and then also maybe with the storage issue. And some states, I believe California in particular, will reimburse somebody if they want to put one of these into your garage to help with their own electricity needs. Have you ever looked into that, or do you have any further insights as to the usefulness of having something like that in every house?
S2: 19:13 Well, I have one [laughter]. I did not only talk the talk, I walked the walk. So I have solar cells and I have batteries and so forth. I can tell you the batteries are very expensive, and they don't store that much. So I don't think many normal homeowners are going to put them in yet. If they do, it's a good way to help deal with the storage problem, if you have a smart grid. Because the batteries can be charging when the wind is blowing and the sun is shining and the solar cells are perking away, and then they can be drawn down when times are bad, when the wind stops blowing, sun stops shining. But this takes a really smart grid. Because I'm going to have to trust the system that when my battery's charging, I get credit for it. And when I'm putting my energy back into the grid to help others, I get credit for that too.
S1: 20:12 And to give an idea to our listeners of a smart grid on a scale of kindergartener to say post-doctoral PhD economist, where is our grid now, and obviously the end goal trying to be getting it to an economist level of intelligence, how far off are we? What sort of improvements need to be made incrementally to get us to where it would actually be able to do the things you just described?
S2: 20:35 Well, we have a long, long way to go. We're still basically on a 1930s grid. It just moves the power, but it doesn't do it at all intelligently. It doesn't know, for example, there should be certain times when the power is easily available, and it's putting it all out to storage and it's pricing it differently. And then there's other times when it's taking it off the storage around the city, and it's pricing that. It's going to take a lot to build it and a lot of politics to get people to buy into it.
S1: 21:06 And in this instance I imagine there are probably some that are further ahead than others, but is there one state, or one country, that you think is at least making larger strides than others that we can start modeling or keeping an eye on is they're the ones to follow?
S2: 21:21 Being a citizen of California, one thing that bothers me is the California legislature treats this too much like an environmental dictatorship. They tell you, if you build a new house you have to have solar cells. If you build a new house, you can't use natural gas. I have two problems with that. One, it just interferes with individual freedom, and two, it's not economically rational. The rational thing to do is to get the prices to reflect the cost and then let people have the freedom to do whatever they see is best in light of those prices.
And if you look around the world, maybe a country like Denmark might be a good example. But I really don't see that a state can do this, because it's going to require something like a national carbon tax. You can't have one state pricing it one way and one another; that's going to lead to all sorts of unnecessary back and forth between the states. We really have to tackle this as a society as a whole. In fact, probably as a world as a whole. But at least for now, as a society as a whole.
S1: 22:26 So here at the end of the podcast we like to kind of think forward—whatever the topic of the day is—where it's going to be in ten years. So if you were to make a prediction, are we going to be having these same conversations in a decade? Or is there enough momentum right now that it gives you hope?
S2: 22:41 Well, there is momentum now, and it gives me some hope. But the problem is so large and the hurdle is so high, that we're still going to be having this conversation too. So I would take it both ways. We need to do all we can do now, but we have to recognize it's going to take more than a decade to really come to grips with this. This is a civilization order-of-magnitude problem, probably greater than any one we've ever faced. Even wars and so forth tend to be short-lived and then they end. But this could easily go on for a century. It's something of a nature we've never faced before.
S1: 23:23 Well, Brad, thank you so much for taking the time today. It was really insightful, and I certainly look forward to following up as we get this practice off the ground here at BRG and hear about the different things you all are able to do.
S2: 23:34 I appreciate it. I enjoyed it.
S1: 23:37 This ThinkSet podcast is brought to you by BRG. You can subscribe to the podcast and access other content from ThinkSet magazine by going to thinksetmag.com. Don't forget to rate and review on iTunes as well. I'm Eddie Newland and thanks for listening.
The views and opinions expressed in this podcast are those of the participants and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, or its other employees and affiliates.