To bring net greenhouse gas emissions down to zero, many things need to happen. Transportation needs to go electric, electricity supply needs to go renewable, agricultural practices, construction practices… it’s a long list. In each sector, we need scientific and engineering advances, product design, scaling, marketing, adoption. It’s enough to make you think that rebuilding the planet’s entire energy, transportation, manufacturing, construction, and agricultural sectors is a big job.
Fortunately, the adoption of new technologies is subject to a positive feedback loop, sometimes called the Flywheel Effect. In our case, the cycle goes something like this: early adopters generate demand; this allows producers to advance up the learning curve, thus lowering costs; which stimulates further demand. It takes a big push (research, development, and early customer acquisition) to get the flywheel started, but once it’s moving, it tends to continue.
The rate at which the flywheel spins is influenced by many factors; one of the most important is friction, or hurdles to adopting the new technology. So if we want to accelerate the green transformation, we need to get the flywheel started, and reduce friction.
How do we do that? Two of the most important levers are early demand from motivated buyers to kick-start a market, and business model innovation to reduce friction. To understand why, it’s helpful to focus on three factors that control the rate of adoption of a new technology:
Supply: how much of the new / green solution is available?
Price: how does the price compare to existing alternatives?
Friction: what barriers hamper adoption?
If a green solution is widely available, priced below the alternatives, and easily adopted, it will ramp up quickly. However, the wide array of emerging green solutions have not yet, in most cases, checked all three boxes. I’ll discuss each in turn.
Disclaimer: I am not a climatologist, or any other sort of ologist. I'm just trying to wrap my head around the climate challenge and find opportunities for effective action. Corrections, reactions, and feedback are welcomed! Drop me a line at steve [at] snewman [dot] net.
Supply
We need to deploy green solutions at massive scale: billions of tons of carbon-neutral concrete per year, terawatts of solar panels, over one billion electric vehicles. The numbers are staggeringly large.
Virtually none of the necessary solutions exist at the needed scale today. Some are still in a lab; some exist in pilot form; some are farther along. Solar power is one of the standout success stories of recent years; the world produced about 140 gigawatts of solar panels in 2019. This is an outstanding achievement, and yet even in this sector we’re well short of where we’ll need to be.
Increasing supply takes money, and lots of it. As a solution scales, different sources of finance become relevant:
Grants are very helpful in the earliest stages, when a technology is too unproven even for seed stage venture capital.
Venture capital can step in when a solution is ready to leave the lab and enter field trials. However, this form of financing is too expensive (“dilutive”) to singlehandedly fund later stages of growth.
Public markets can supply additional capital to help a business scale, once the business model has been sufficiently well proven.
Project financing allows a company to borrow against the anticipated revenues from a project, providing the money needed for construction and initial operations. This form of financing is important because it can scale with the business: more projects means more financing.
At each stage, a critical factor to unlock more capital is reducing uncertainty. Moving down the list of financial sources, from grants to VC to IPO to project finance, requires eliminating or at least characterizing risks. (This list is not strictly in order; project finance can come into play well before an IPO.)
Financiers will consider many risks, but one of the most important is market risk: is there a market for the product? The best way to prove existence of a market is by having actual customers who are paying cash money for your product. Thus, by stimulating early demand, we can reduce market risk and help companies get the financing to scale up.
The idea of stimulating early demand deserves an entire post in its own right. Private initiatives, government subsidies, and actual or anticipated regulation all have a role. Stripe’s carbon removal initiative is a great example of how a motivated early adopter can help kick-start an industry.
Price
Through various miracles of science and engineering, there are an increasing number of green technologies that are cheaper than the traditional solutions they replace. For instance, solar (photovoltaic) electricity is increasingly cost-competitive.
In many sectors, we have not yet reached price parity; in some, we may never get there. Regardless, it is always helpful for the price of a green solution to come down. If the green solution comes with a price penalty, then reducing that penalty will make it easier to push adoption; if it has a price advantage, then a greater advantage will further accelerate adoption.
The most important way to bring down the price of a new technology or product is to increase usage. As the scale increases, costs come down. Moore’s Law famously describes this pattern for integrated circuits. The general formulation is known as Wright’s Law. Notably, while Moore’s Law was based on the passage of time (“the number of transistors in a dense integrated circuit doubles about every two years”), Wright’s Law states that prices decrease “as a function of the cumulative production.” In other words, price reductions are driven by increased production, not the mere passage of time. (Chip production increases over time, so prices go down over time, but it is the increased production that is the critical factor.)
The upshot is that to drive down the price of a green solution, we need to increase demand. Happily, this also stimulates an increase in supply, so we can address both supply and price through the same actions – early adoption, subsidies, etc.
Friction
“Friction” refers to all the squishy, intangible factors that hamper adoption of a product. Does the target customer know about the product? Do they understand its benefits? Does the product actually do what the customer needs? Is the person who makes the purchasing decision the person who would benefit? Do they know how to purchase the product?
When talking in the abstract, it’s easy to underestimate friction. But in practice it can be very difficult to overcome. To bring this home: do you, personally, have solar roof panels? An electric car? A heat pump for home heating + cooling? An induction stove? Probably not all, plausibly not any! Take a minute and think about why you, personally, haven’t made the switch.
To be clear: I’m not trying to send you on a guilt trip! Most people are still at “none of the above”, and it’s important to understand why. Cost is often a factor, but I bet you came up with other reasons as well. In my case, despite being in more or less the best case circumstance (freestanding house, own-not-rent, financially comfortable, environmentally motivated), I’m only at 1.5 out of 4 and even that was partly luck:
Rooftop solar panels: yes, but only because at one point our town negotiated a group purchase for anyone who wanted to opt in. Previously, I was hung up on having to find a competent installer and figure out whether I was being quoted a fair price.
Electric car: halfway (one of our two cars); the other is a hybrid, which we keep for longer trips, having not yet gotten comfortable relying on public charging stations.
Heat pump: nope. I looked into it once, but there wasn’t a lot of information out there; it wasn’t clear to me whether we could feasibly add a heat pump to an existing home (easier to install the ground loop before the foundation?) and the contractor who was doing our job hadn’t worked with them before.
Induction stove: also no. I only recently encountered the idea that they are environmentally preferred over gas stoves, and our gas stove isn’t ready to be replaced.
Removing Friction
This is where we often leave technical innovation behind, and product innovation and business model innovation come into play. Here are two examples from the (highly recommended) My Climate Journey podcast:
BlocPower “greens” older buildings by installing heat pump HVAC, solar panels, insulation, etc. They’ve developed software and procedures for quickly determining what modifications are appropriate for a given building, and what savings will result. Using this analysis, they’re able to economically identify suitable buildings, obtain project financing, and offer an end-to-end solution for the building owner, catalyzing projects that otherwise would not have taken place.
Energetic Insurance provides “counterparty credit risk” insurance for commercial solar installations. In plain English, they insure lenders against the risk that the customer for a new solar installation fails to pay for the electricity generated. This unlocks project financing and makes it feasible for these commercial-scale projects to take place.
Both companies are primarily in the business of removing friction for the deployment of technologies (heat pumps, solar panels) that they do not themselves design or manufacture. They aren’t building a better widget; they’re making it easier for a property manager to sign the widget purchase agreement. The road to carbon zero will involve a lot of this kind of thing.
The Role of Regulation
Regulation can help overcome friction. The history of energy efficiency includes many examples of products that save money in the long run, but weren’t broadly adopted until mandates came along. Energy Star appliances, higher-MPG cars, better home insulation, etc. It’s hard to get people to try new things; regulations can be effective in overcoming inertia.
But we can’t expect regulation to get too far ahead of the market. It’s hard to push through a regulation that requires people to meet a standard that can’t be met by products already on the market or clearly on the short-term horizon. For example, consider anti-lock brakes in automobiles. This technology started to appear in the 1970s, was widespread in the 90s, but only became mandated (in the US) in the year 2000. It’s not like ABS wouldn’t have been beneficial earlier; the idea had been in use in airplanes since the 1920s, and thousands of lives would have been saved by requiring ABS for cars as well. But we didn’t get a mandate until the market had already shown that the technology could be deployed at scale and costs were coming down.
Societal pressure can have an effect similar to regulation, but also can’t be expected to get too far ahead of the market.
Summing Up
Climate change poses massive challenges, but the flywheel effect can be enormously powerful. To start the flywheels spinning, we need to encourage early demand for solutions in each of the many emissions categories. To help them spin faster, we need to reduce friction through new business models, or overcome friction through regulation and social pressure. A journey of a billion kilowatts begins with a single solar roof.