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Date of review: June 2021
Book author: Bill Gates
Вook published: 2021

How To Avoid A Climate Disaster by Bill Gates (2021)

Seeing hundreds of headlines, statements and comments on the urgent need to address climate change issues, I was hoping to find one source of knowledge on this subject to get a clear picture. I wanted to understand Why the issue is so serious, How serious it is and What we can do to solve it. Luckily, this book by Bill Gates addresses exactly these questions in very simple terms, from top to bottom, supported by facts rather than just opinions, well structured and concise.

My main conclusions are as follows:

Climate change is a big theme for investors, no excuse to ignore it. If Direct Air Capture costs $200/t of CO2 and we emit 51bn t of CO2 every year, the world would spend over $10tn to achieve zero emissions (12% of global GDP).
Demand for metals will rise dramatically. It still requires lots of innovations, but even if technologies are there - the whole infrastructure needs to be rebuilt - starting from 1bn cars going electric which on average need 4x more copper than traditional cars (this is just passenger cars), building charging stations and connecting them to the grid, re-wiring economies to connect new sources of power with major centres of consumption (or in certain cases moving consumers closer to source of power), building new types of houses etc. This will require a lot of metals (including copper which is the best conductor of electricity). And in fact basic power to accomplish this transition (so too early to call peak demand for oil this year or next, perhaps 2030 at the earliest).

Another argument for higher demand for key metals is the structural changes in electricity supply - currently, 60% of power still comes from fossil fuel and only 11% from renewables. By 2050, Gates thinks we would need to have over 70% of power supplied by renewables (and close to zero using fossil fuels) - this means not simply replacing one for the other, but consuming several times more copper for the same amount of power generation. The reason for that is that wind power requires 5-6x more copper than fossil fuel power plant and new sources of power have to be connected with consumers of electricity.

Gates writes: "With all the additional electricity we'll be using, and assuming that wind and solar play a significant role, completely decarbonising America's power grid by 2050 will require adding around 75GW of capacity every year for the next 30 years… Over the past decade, we've added an average of 22GW a year".
Since governments are keen to tackle climate change (although not 100% aligned on exact targets and mechanisms) - there will be much more readiness to spend on infrastructure even if it means bigger deficits, higher inflation. This could be quite pro-inflationary.
As a value investor, I know the perils of making long-term forecasts, so to be clear - I am not simply calling a new super cycle in commodities, but I do encourage other fellow investors not to ignore this subject. I plan to keep digging deeper across the full value chain including Copper and other metal producers, supplies of machines and equipment, various types of batteries and so on.
This book made me think of one more reason to own Berkshire Hathaway which has spent the biggest amount of capital on renewables and transmission lines among all utilities in the US (over $30bn on renewables alone with plans to spend another $18bn by 2030). If US is on course to cut its emissions, then Berkshire is one of the best companies to deliver it as it has capital and track record.

More detailed notes after reading the book:

The starting message is that we need to cut emission of CO2 and other greenhouse gases (GHG) to essentially zero by about 2050 to avoid major catastrophes on our planet (e.g. bigger hurricanes, flooding, extreme heat, droughts and so on). Currently, the world produces 51bn tonnes of GHG and this has to drop essentially to zero. It is possible to produce some as long as it is captured, stored or absorbed (by trees, for example) - this is called net zero emissions.

Gates shows a very strong correlation between rising CO2 emissions and global temperature: from 1850, CO2 emissions from industrial processes and burning down fossil fuel increased from zero to 37bn tonnes and this has been accompanied by the rise of global temperature by about 1.2C, on average. Even if we do not increase the amount of CO2 emissions and keep them flat, taking into account already accumulated gases in the atmosphere, by 2050 the amount of gases in the atmosphere would be critical. According to Gates, if we do nothing then world's temperature would be almost 4C degree higher, if we slow down emissions - by 1.5C and only if we cut them to zero can we expect stable temperature. It also takes some time for the Earth to cool down - so the positive impact may not be felt for 10-20 years after we cut emissions.

Gates proposes a 5-question framework when analysing climate change issues:

1. Keeping big picture in mind when looking at individual solutions.

51bn tonnes is an important reference point to measure benefits of proposed solutions and how much they can help in achieving this goal.

2. Sources of emissions are much broader, so important to focus on various issues, not just one (EV would help eliminate traditional passenger cars which are less than 50% of transportation emissions which itself account for just 16%!).

Gates breaks down key human activities and their contribution to this 51bn tonne figure.

  1. Making things (cement, steel, plastic) - 31%.
  2. Plugging in (electricity) - 27%.
  3. Growing things (Agriculture) - 19%.
  4. Getting around, mobility - 16%.
  5. Keeping warm and cool - 7%.
Electricity looks quite low, but it will likely play a more important role in the future with the rise of electric cars, electrification of industrial processes, housing (cooking, heating etc).

3. Scale matters.

Gates has a useful table on power demand depending on category (5,000 GW for the world, 1,000GW for US, 1GW - mid-sized city etc). Important to keep this when dealing with various alternative solutions. It is also important to keep in mind that renewable power (wind, solar) can only generate power for about a third of its full capacity as wind / sun do not blow / shine 24 hours. This means that intermittent source of electricity need to be supplemented with other sources (baseload).

4. Area size matters.

This is about space required by different sources of energy. One idea is that Wind power needs 5-10x more space compared to solar, which itself needs at least 100x more space to generate same unit of energy. Important to keep in mind when thinking of supplying big cities with renewable power.

Watts per square meter for different type of electric power:
  • Fossil fuel - 500-10,000
  • Nuclear - 500-1,000
  • Solar - 5-20
  • Hydropower - 5-50
  • Wind - 1-2
  • Wood & biomass - below 1.

5. How much would it cost?

Reasons for so much emissions is because fossil fuels (major source of emissions) are the cheapest form of energy. Here, Gates proposes to use the concept of Green premium - the additional cost of using green energy compared to GHG emitting energy. Green premiums should be affordable in developing world. Research should be focused on renewable energy with highest premiums, while zero premium energy should already be deployed now.

2030 targets should be only milestone to achieving net zero emissions by 2050

The author decides a separate chapter to discuss how to cut emissions within each category, what technologies already exist and which solutions we still need to find. He also discusses regulation (mostly in the US, though) and how it needs to change to incentivise the transition. One particular important technological solution is Batteries which are needed to balance the electricity market and allow for wider use of renewables. I found this section of the book quite useful for my analysis of potential investment opportunities in this space. Currently, existing batteries for use in large scale power grids are extremely expensive and hard to use on industrial scale.

One important point on regulation is the need for long-term thinking - in particular, 2030 targets should be only milestone to achieving net zero emissions by 2050. If we instead focus on simply cutting emissions somewhat by 2030 and then cut more afterwards, we may end up switching power from coal to gas which would help reduce emissions by 2030 but not much further. Instead, going all out on electrification now even if it means still burning fossil fuel to generate electric power would help us to achieve the ultimate goal by 2050. Essentially, this idea implies possibly more demand for metals and somewhat less for gas, although gas demand will still rise (in my view).

Another important point (although with less practical solutions) is how to share the burden between countries. 40% of the world's emissions are produced by the richest 16% of the population (and potentially more because this does not include emissions from products that are made someplace else but consumed in rich countries). Gates asks a very reasonable question: "What will happen as more people live like the richest 16%?". Based on trends in population growth (10bn people by the end of the century, economic growth and urbanisation trends), Gates estimates that by 2060 the world's building stock - a measure that factors in the number of buildings and their size - will double. That's like putting up another New York City every month for 40 years.

The inertia in adopting new energy sources and the reasons behind it

China now emits more GHG than US and Europe combined, although per capita China is at par with Europe but almost half compared to US. However, China can argue that a lot of its emissions are linked to production of goods consumed in the US and Europe. There has to be solution for the wide use of green energy at affordable price so that this issue of climate change does not slow down economic growth of poorer countries. Green premiums for new sources of energy should be low enough to be affordable in developing countries.

Gates also discusses the inertia in adopting new energy sources and the reasons behind it (not least the size of the energy industry, its long and complex value chain, high upfront costs, long life of operations, regulation and strong impact on human life - like installing wind turbines and connecting them to energy consuming centres). Oil was discovered in 1859, but 50 years later it represented just 10% of the world's energy supply. It took 30 years more to reach 25%. It took natural gas 70 years to reach 20% of global energy supply.

Energy efficiency is also a slow process and does not follow Moore's Law which predicted that microprocessors would double in power every 2 years. Consider that Ford's Model T could cover 21 miles with one gallon of petrol in 1908, while the top hybrid today gets 58 miles (more than a century later). Another example of slow improvement is solar panels - first models introduced in 1970s converted 15% of the sunlight into electricity, now (50 years later) the best models convert only 25%.

Gates brings examples of regulations some parts of which are so outdated (for example fuel-efficiency standards do not even take into account EVs) as another reason for slow changes in the energy industry.

Lastly, I have this interesting point from my scribbles which I don't want to forget - it does not really fit into any specific points above - more just to illustrate the magnitude of changes and size of current demand relative to 30-50 years ago (supports my view of much higher demand for commodities than we currently expect). The point is that China has produced more cement in the XXI century than US did during the whole XX century.

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