What Shouldn't Be in a Green Energy Portfolio
The London Accord took a look at what portfolio theory would suggest as the most effective ways to address Climate Change. Knowing which technologies don't make the cut is at least as useful as knowing which technologies do.
I recently looked at a paper from the London Accord which used portfolio theory to recommend the best mixes of technologies to deliver different levels of carbon abatement. The most useful technologies to achieve the needed levels of carbon abatement were Forestry, Hydropower, Biofuels, Wind, Efficiency, and Geothermal. I suggested stocks that investors might consider to invest in each of these sectors.
Other technologies played on bit parts in the abatement portfolios (left) the report found are likely to achieve the needed levels of climate reduction most efficienctly.
If we were to assume intelligent political policies, these bit-part technologies should be avoided by investors. The assumption of intelligent political policy is unlikely to be realistic, however: Some of these technologies will turn out to be good for investors, even if they fail to achieve the desired goals for the climate.
Below, I try to imagine the political decisions which would lead to each of these also-ran technologies rewarding investors.
Nuclear power plays a large role in abatement portfolio 1, shown to the left. This portfolio delivers about 3 gigatons of worldwide CO2 equivalent (Gt CO2e) abatement per year, at a cost of $25B annually. Given that necessary level of abatement is at least 5 times that amount, portfolio 1 represents a vastly inadequate policy response to climate change. We could get such an inadequate policy response if opponents manage to convince decision makers that an adequate response to climate change will do unacceptable harm to the economy.
Such policies would sad for humanity, ibut good for investors in suppliers of nuclear equipment.
Nuclear does not play a big role in the larger mitigation portfolios simply because it's potential for carbon mitigation is limited. Nuclear plants take a very long time to build, and concerns about the disposal of waste and the desire of most people not to live anywhere near a nuclear plant are not likely to go away. Furthermore, nuclear power and other baseload technologies which are difficult to stop and start quickly are somewhat incompatible with variable renewable energy such as wind and solar. If wind is to meet its much larger potential for climate carbon mitigation, nuclear will have to play an even smaller role.
Solar only plays a significant role in the most aggressive portfolios, 4-6. As you can see in the chart above, portfolios 5 and 6 do not produce much extra carbon savings even though they cost two and three times what portfolio 4 does. The implication is that solar will do best if society decides that action against climate change is worthwhile regardless of the cost (scenarios 5 and 6,) or in a scenario where we decide that we need to be very aggressive about dealing with climate change, but should keep an eye on costs.
One significant caveat here is that the above abatement portfolios are based on the 2007 IPCC Working Group report, "Mitigation of Climate Change." This report may have had much too conservative assumptions for cost reductions in solar technology (right).
With Sarasin's more optimistic assumptions about cost reductions for solar technology, it plays a large role in all mitigation portfolios on the efficient frontier. Here "solar" refers to solar photovoltaic (PV) and Concentrating Solar Thermal Power (CSP): solar thermal collectors were not modeled.
Stock market investments in solar make sense so long as you believe that you are investing in a company which is capable of drastically reducing the cost of the technology, and will be able to cut solar costs more quickly than its rivals, including those which are yet to emerge.
Carbon Capture and Storage
Carbon Capture and Storage (CCS), the enabling technology for so-called "Clean Coal" does not play a role in any of the mitigation portfolios which achieve less than 15 Gt CO2e (portfolios 1-3) and only small roles in portfolios 4-6. This is very similar to solar under the 2007 IPCC Working Group assumptions. However, CCS differs from solar in that all the believable cost estimates I've come across (even those originating from CCS proponents) expect it to remain very expensive.
Coal with CCS also has the same problem as nuclear: because it is difficult to ramp such "Clean Coal" plants up and down, they are relatively incompatible with large penetrations of wind. If CCS does take its place as part of an efficient carbon abatement portfolio, it will probably be CCS used in conjunction with natural gas turbines, rather than coal.
Hence, it would only be reasonable to make stock market investments in CCS technology if you expect significant spending on the technology by governments with little regard to cost. Given the power of the coal lobby, such a scenario is a real, if unappealing, prospect.
I do not include any of these technologies in green investment strategy. Even though I believe that the optimistic case for quick reductions in the cost of solar technology makes sense, I do not think that I have the skills necessary to pick a company today which will be able to survive the rapid industry upheaval a technological revolution in PV technology would entail.
All three technologies have the potential to receive large amounts of government largesse, even if the economic case for such help is weak. However, I am not confident that I can predict the direction of such largess, and more deserving green technologies with better economic prospects seem just as likely to receive government money than these three. Given my uncertainty about the future direction of government support, I think it makes more sense to invest in forestry stocks, building and industrial efficiency stocks, transport efficiency stocks, and geothermal stocks, than it does to invest in nuclear, carbon capture and storage, or solar stocks.
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