Paul Gilding

It’s time for a true confession. I don’t believe in climate science.

That’s because I’m a rational person. Belief is important in my life and I apply the term to things involving faith. Faith is how we believe when there is no rational basis for a decision – which doesn’t mean its irrational or wrong, just that there is no evidence to support the view taken. Faith and belief often apply to matters of the spiritual realm. But they also apply to matters of a more worldly nature, where the capacity for faith and belief has framed many positive developments in humanity over history. Despite the lack of supporting evidence, Churchill believed the allies would win WWII and Mandela believed majority rule would come, relatively peacefully, to South Africa. Faith is a powerful driver of human behaviour.

However, I don’t “believe” in climate science because it’s not a religious or a faith question. It’s just numbers and science on which to make rational judgements. The scientists tell us what they know, and what they don’t, and we decide how to respond. This is not a binary question, like the earth is flat or not, this is a system description based on best available knowledge.

Belief is actually a dangerous concept in relation to climate science and we should stop using the word in that context. Because belief is based by definition on “non-rational” thought, framing it this way leads to a tendency to resist counter arguments and associated data. It’s hard for more data to change a belief, because it wasn’t data based to begin with. As a result, interpreting science using a belief based approach leads to sloppy intellectual behaviour, where we discount data that challenges our “beliefs” and exaggerate the importance of data that supports them.

Climate science is at it essence just data. Always incomplete and open to challenge and debate but, fundamentally, just data which we then interpret and act on. We navigate this at times complicated process quite successfully in a range of other fields such as aeroplane and bridge design, food safety and medicine.

Where this process occurs in the absence of strong cultural or economic self-interest, there is little controversy, such as bridge design. As we move into economic self-interest, things get a little complicated, such as the reappraisal of safety levels for volcanic dust during the recent Icelandic volcano, when airlines pushed for a review, based on economic losses, from the application of what they saw as too strict an interpretation of the data. Again it worked out fine.

When we move into areas of strong cultural influence and beliefs, such as medicine and health, things get more complicated. So, for example, whereas many traditional medical scientists would argue the evidence for some alternative therapies is weak, people act on their “beliefs”, spending over many billions on them each year, including some where the science is definitely not proven and sometimes quite disproven.

In all these areas though, from bridges to medicine, as a society overall we accept the dominant scientific conventions. When a body of qualified scientists reviews the evidence and issues their judgements we generally act accordingly and the broad societal level. We make decisions on flight safety, on bridge design and on public health – not without controversy, but in the end we make decisions and we base them on rational thought.

Sometimes, though, it gets really messy, and such is the case with climate change. Here we see a great clash of cultural and political beliefs, mixed up with enormous economic self-interest. The result is quite irrational, belief-based debate and decision making or, in this case, the lack of decision making.

It’s important to recognise what’s going on in this process and to respond appropriately. So, for example, we should by now know that arguing science with a climate denier (as opposed to a genuine sceptical scientist) is as pointless as arguing the benefits of market economics and liberal democracy with an al Qaeda leader. No amount of rational data will help because they don’t want to believe, so they will deny any evidence that confronts their own beliefs.

The right approach with climate deniers is to ignore them. Fortunately their influence is on the wane and their cause now quite terminal because, in the end, we are a rational society and the evidence is clear. As US Senator Daniel Patrick Moynihan said: “Everyone is entitled to his own opinion, but not to his own facts.”

For genuine sceptics, and indeed for all of us, it is very important we maintain an open mind and keep the debate alive and vibrant. We must act urgently to reduce the risk of climate change by eliminating the net CO2 emissions of the economy as a fast as possible. But we must also keep researching, challenging and exploring the details as we do so, not least of all to identify the most effective actions we can take. Not all greenhouse gases are the same and, given what the science tells us about the urgency, it is going to take all of our ingenuity to pull us back from the cliff we seem to be racing towards.

So when someone asks if you’re a climate believer, tell them no, your far too rational for that.

Much has been written lately about the emerging battle between China and the United States in the race to a low-carbon future. While the US clearly has considerable advantage with its history of success in innovation and technology, its lack of responsiveness, to date, is seeing the advantage steadily move to China.

There is great irony in this. For decades, many western companies have argued against stronger environmental policies on the grounds of loss of competitiveness to China and the developing world – so-called carbon leakage. The argument has been that if western countries made their companies behave more cleanly, Chinese companies would be able to out-compete them because they could pollute freely and therefore have lower costs.

What’s been happening while the west has been delaying action, partly in response to this argument, is that China has caught up and is now seriously pursuing a low-carbon economy. Do they want to save the world? No, they want to own it. As The New York Times‘ Thomas Friedman has argued:

“Yes, China’s leaders have decided to go green — out of necessity because too many of their people can’t breathe, can’t swim, can’t fish, can’t farm and can’t drink thanks to pollution from its coal- and oil-based manufacturing growth engine. And, therefore, unless China powers its development with cleaner energy systems, and more knowledge-intensive businesses without smokestacks, China will die of its own development.”

So China has become an example of what I call The Great Disruption. It is being forced to act, with rapidly increasing intensity, because it is hitting the physical limits of its economic growth model.

Whatever the motivation, China has the potential to dominate the technologies of the future with the advantages of both scale and the capacity for rapid change. It’s looking increasingly likely China will put a price on carbon pollution before the US or Australia can get it through their respective political processes.

China already boasts the world’s richest solar entrepreneur, Dr Zhengrong Shi, and a world-scale electric car and battery company, BYD, that has already boosted Warren Buffett’s wealth by $US1 billion. Indeed in, lists of the top 10 companies in various new energy technologies compiled by investment bank Lazard, the US lags behind Japan, Europe and China, an uncomfortable place for a country that has prided itself on technology and entrepreneurial leadership.

Longer term, there are some deeper issues that will emerge as we see who succeeds in adapting to the emerging world. The western model of market-based democracy clearly dominated the 20th century. Indeed, without China’s success late in the century, it would have been indisputable. While people express various levels of discomfort with the political, social and cultural approach of the US, the world’s people have largely tried to emulate much of what the country represents. Reinforcing this has been the dominance of US power in most areas of competition and conflict, whether it was WWII, the Cold War, the technology revolution, music and film, or overall wealth creation – the US represents the success many aspire to.

As the 21st century gathers momentum however, it is not at all clear the US will be able to maintain its dominance and, critically, whether it will still represent the most effective political and economic model that others will want to follow. China, in recent years, has been making increasingly dramatic decisions to force environmentally-driven change in its economy, while market-based democracies have floundered.

While some are sceptical of China’s capacity to carry through, there is plenty of evidence to suggest their market is already accelerating ahead of the US, being the world’s largest solar PV manufacturer, currently, and the largest market for wind power.

What if the US, saddled by debt and military costs and well behind in the race to new energy technologies, continues to drift while China races ahead? What if China can maintain stability and lead the way forward on the environmental and technology transformation now underway? Will China’s very different approach to decision-making, democratic freedoms and open society be a hindrance as many commentators argue? Or will it be an advantage, enabling them to leapfrog in technology and drive change without the pesky limitations of western democracies’ corporate lobbying and populist politics slowing down change.

If China succeeds and the US fails, the implications could go well beyond the shift in economic competitiveness and wealth. It could undermine the moral authority of democracy and lead to a shift in global geopolitics back towards autocratic regimes. The worse the crisis of The Great Disruption becomes, the greater the risk this will occur. What’s at risk here is certainly more than economic success.

Such a result is certainly not inevitable, after all the US and UK led the victory in WWII against non-democratic enemies. And there are many powerful and proven economic benefits to democracy and freedom, with the US success in technology and innovation often being put forward as an example. Likewise many argue China’s restrictions on freedom will lead that country to political instability and possible breakdown.

Nonetheless, however many of us, myself included, view democracy as a clearly superior system, we should not lose sight of the inherent risk to it in the period we are entering now. This is now a high stakes game.

Whichever way all these issues unfold, and this is probably the most unpredictable area of all, what is very clear is this: The social, security and economic implications of climate change and sustainability will force a major realignment in national competitiveness and geopolitics. In this process, responsiveness to change will determine the winners and losers, not pre-existing power or authority.

Beware the coming climate storm. A moment is approaching when science and markets will collide, but then merge, with chilling consequences for investors who miss the moment, and great excitement for those who are well prepared.

The signs are all around us now. Signs that a storm of climate action will soon rage through the economy, sweeping away denial and, along with it, those companies, politicians, investors and industries that aren’t ready.

Signs like our past two Prime Ministers and opposition leaders  in Australia being removed with climate change a central issue in their downfalls. Signs like 2008 being the first year when the money invested globally in new renewable energy generation projects was greater than that invested in new fossil fuel energy generation. Signs like the last decade being the hottest on record, as of course each decade has been since 1980. Signs like the first new car company IPO in the USA for half a century being a disruptive electric car company.

There is great investment and excitement now in renewables, with over $100 billion invested in 2008 and the same in 2009, despite the uncertain financial climate. Yet we see growth in coalmines, new coal export facilities and a lack of action in politics in Australia and the US. What is an investor to do with such confusing signals?

Simple. Observe the science, because the science drives everything else.

The facts are now very straightforward on the problem and its causes, as stated by the peak US science body The National Academies of Sciences. They said last month the science of climate change is in the category of those theories that had “been so thoroughly examined and tested, and supported by so many independent observations and results, that their likelihood of subsequently being found to be wrong is vanishingly small. Such conclusions and theories are then regarded as settled facts.”

So this is not a philosophy or a political viewpoint. These are facts. Smart investors deal in rational analysis, not ideological perspectives or wishful thinking. As US Senator Daniel Patrick Moynihan said “Everyone is entitled to his own opinion, but not to his own facts.”

So if you believe in facts, you will be understand that science will, in the end, overcome resistance and denial, as argued by Professor Stephan Lewandowsky from the University of Western Australia: “The laws of physics will relentlessly assert themselves, unswayed by public opinion, political shenanigans, or elections. Ultimately, the laws of physics will speak so loudly that no amount of wishful thinking can prevent them from being heard.”

The reason we can be so confident that this storm, when it hits, will be ferocious and effective at driving change, is by considering what happens when science meets markets. The science dictates that when we act it will now have to be dramatic action.

We know that to avoid catastrophic risk we must keep warming below two degrees and, as a result, this is the target agreed to by governments from US, to China, to India to Australia. If you don’t like political metrics then consider that this is also the target endorsed by hundreds of global corporations from GE to Rio to HSBC.

Acting as late as we are, achieving this target will require us to virtually eliminate CO2 emissions from coal oil and gas within a few decades. This means eliminating whole industries and replacing them, which is where the science meets the market.

Markets are particularly good at challenges like this, using what Austrian economist Joseph Schumpter called “creative destruction”. Markets are unconcerned about collateral damage and friendly fire. They won’t deliver the change steadily or calmly. Markets don’t play politics and will have no regard for sunk capital or prior commitments.

When we act on climate this will be creative destruction on steroids, with the resulting economic storm wreaking havoc and wiping out companies and whole sectors, while creating tomorrow’s new economy and corporate giants. It will be volatile, chaotic and exciting for investors, with fortunes made and lost based on the quality of judgements.

It’s hard to look at today’s politics and investment strategies and accept this analysis. It’s hard to imagine so many people being so wrong. It was also hard to imagine, in 2007, that the world’s governments would nationalise banks and car companies and spend trillions bailing out the financial system. It was hard to imagine, in the USA in 1940, that the coming four years would see military spending go from 1.6 per cent to 37 per cent of GDP and that government would take over and direct the economy, with actions like banning the production of private vehicles. In hindsight, though, such things are always obvious. And with the benefit of hindsight in 10 years time, the coming climate storm will have been obvious as well.

There is only question you have to ask yourself when you see the signals that are now flashing in bright neon lights, screaming “warning, warning, everything is about to change”. Am I ready?

For over a decade I have gone out of my way to buy fuel from BP. They’ve always seemed the best of the bad, with their solar business, climate policy leadership and forward thinking culture and people. The other day I couldn’t bring myself to do it. In fact I doubt I’ll ever drive into a BP station again.

Although BP has rather bigger problems on its mind than whose fuel I buy in Australia, while driving past I started considering a potential development that would certainly get their attention. It all starts with BP’s CEO Tony Hayward now famous approach to leadership on environmental questions. He proudly explained his views in a frank speech at Stanford University last year. He said too many BP people were “working to save the world” whereas they should focus on making money because BP’s “primary purpose in life is to create value for shareholders.”

I understand quite a bit about saving the world and about creating value for shareholders. I’ve spent roughly half my working life as an environmental campaigner, including as global head of Greenpeace, and the other half as a business owner and corporate advisor working with the CEOs of a number of the world’s largest companies. The former taught me how people think and act on environmental issues, the latter taught me about the relationship between profits and good corporate citizenship. BP’s Deep Horizon disaster may bring these two issues together in ways that I never expected. As a result Tony Hayward may, ironically and unintentionally, do more to “save the world” than anyone before him at BP. Here’s why.

We live today in a global market which no one can control. It is too complex and too global for governments to effectively regulate. It also has too many inbuilt tendencies and pressures for even the most powerful and visionary CEO’s or investors to push against the tide except in marginal ways.  Yet this powerful beast of a machine is pushing us all towards a cliff, with all key indicators showing the global ecosystem and resource supply, on which our economy depends, is now on the edge of catastrophic, system wide failure – what I call the Great Disruption. The global economic consequences of such failure will be profound, not least of all being the end of economic growth.

As long argued would occur, this has now started with diminishing resources driving us to dangerously drill deeper for oil, dig up dirty tar sands and take more and more risk. In that context, the Deep Horizon disaster starts to look like the beginning of the end, a haunting specter of things to come as we push past our limits in a desperate bid for shrinking resources to feed our gluttonous economy.

With the public now increasingly aware of such challenges, BP’s business strategy under Hayward was seriously misguided. He ignored the clear lessons of decades of global experience in this area by investors and companies: good corporate citizenship boosts profits and companies that do good for the world do better for their shareholders. They attract and retain better people, they get an easier run from regulators, they face less risk, they find investors who are more patient and they are more closely in touch with the values of society and therefore their customers and employees. What struck me as I drove past the BP station was the potential for all those drivers of profitability to be reversed. What would happen if a viral campaign focused the world’s general environmental concern sharply onto BP, as the modern age’s perfect example of the sort of company we don’t want to exist anymore?

What if good people didn’t want to work for BP? If regulators subtly but consistently made life harder for BP, through thousands of little decisions taken by people who didn’t like the company? If nervous investors got worried that BP had a fundamentally flawed culture that made it more risky to invest in? If customers around the world just drove on by to the next gas station? What would happen, if this approach took hold through a viral mind shift around the world, is that BP would quite simply be removed from the economy. BP would become the historic first scalp of a new approach – “Global market regulation, by the people, for the people”.

Hard to imagine? The brutal logic of the market is very powerful. A company like BP lives and is valued on its ability to turn hard assets, in its case oil and gas reserves, into cash. What determines its ability to do this efficiently are its people, customers, regulatory support and capital. If these capacities drop off significantly relative to competitors, the assets are worth more outside the company than within. This translates into the company being valued less than its assets and the company is taken over or its assets are sold. The impact on BP would be fast and simple – it would cease to exist. However, the impact on the broader market and on environmental campaigning might last for much longer and be very deep. What Tony Hayward has done is to create the perfect storm for just this to happen, starting with investors attitudes.

Under Hayward, at the direction of the Board of Directors, BP shifted its focus sharply onto generating cash for shareholders. For BP employees the message was clear – cut corners, cut costs and deliver in the short term. No more saving the world, people, get back to making cold hard cash. In response to this very public shift, the company’s owners, the pension funds and other investors, stood by and watched. They didn’t raise the warning that should have been obvious to any modern investment risk manager. They should have said: yes, we want shareholder returns, but don’t send a signal to your people that protecting the environment doesn’t matter, because if you do, our investment will be at risk. If BP ceases to exist as a result of this chosen direction, no investor will make that mistake again.

Hayward’s approach also sent clear signals to BP’s employees and executives. BP’s leadership role on climate change and sustainability resulted in many of the company’s people becoming passionate advocates on these issues. Indeed, I’ve worked with many BP executives and they are some of the most committed corporate people I know on sustainability. They have felt BP was a place they could make a difference to the world and prove that good business and good environmental performance go together. Under Hayward’s short-term cash focus, many of these people, including top executives like Viv Cox, have moved on while many others will be questioning if they still belong there. Losing such creative and forward thinking people seriously undermines a company’s culture and its value creation prospects.

With the US oil disaster, customer and brand risk will be high on the risk screen at BP. Soon after I left Greenpeace in 1994, the Shell oil company faced a barrage of criticism for trying to dump a disused oilrig in the North Sea. Greenpeace occupied the rig and a largely spontaneous consumer boycott erupted in Germany, costing Shell tens of millions of dollars, every day, in lost sales. With the share price falling, Shell backed off and the consumers returned.

BP will likewise assume any boycott that erupts now will be short lived and will fade once the media and political storm dies down. They maybe right, but they may be very, very wrong.

Environmental groups around the world have historically struggled with boycotts. They were hard work to maintain, draining resources for years before having an impact, if they ever did. But in today’s world two things have changed that should have the risk people at BP scurrying for their web monitoring services.

The first, as outlined above, is that the evidence is clear on how to run a campaign to deliberately undermine a company’s value by mobilising and focusing public concern for environmental issues and corporate responsibility. It is broader and easier than a consumer boycott, instead focusing on employees, investors, regulators and consumers, all targeted at once. This would be modern, market focused, non-violent guerilla warfare. No one has ever organized such a deliberate value destruction campaign, but plenty of people know how to do it if they chose to.

The second and the key to likely success is the connected world of the internet. When I was at Greenpeace we would need to send activists to visit individual outlets urging a boycott, picket offices to engage employees and approach each individual investor. Today a powerful idea can spread like wildfire, recruiting quiet supporters deep inside the global economy – inside investment houses, inside government and most worrying of all, inside BP.

The scary thing for BP is that such a movement may not come from a mainstream environmental group, all of whom BP has relationships with. The threat is more likely to grow through a spontaneous web based, viral movement, probably driven by people they’ve never heard of, like the guy in Louisiana who set up a Boycott BP Facebook page that now has 650,000 supporters. This is scary for BP because these movements are based on ideas and are organized by informal networks of friends. There’s no one to call, no one to negotiate with, just a viral cancer that steadily eats away at BP’s value, until one day it’s all over.

Why would such a movement take hold? Simply because nothing else is working. Despite unprecedented levels of public support, government action and corporate engagement on climate change and sustainability, nothing of consequence is actually changing. CO2 emissions are rising, companies like BP are investing in filthy tar sands oil and governments appear powerless to stem the tide. So with all the old tactics failing, there is a huge vacuum in what is effectively a free market of campaigning approaches. In that context, there could be great appeal in global market regulation by the people, for the people, with a company’s removal from the economy a kind of environmental capital punishment.

BP is perfectly positioned to be the guinea pig. I’m sure the US oil disaster will be shown to be the direct result of cash grabbing compromises on environmental and human safety. So there is arguably no company more deserving of such punishment and certainly no more powerful symbol for the consequences of putting short term shareholder value at the centre of business strategy.

Who knows if such a movement will erupt in this case, but it no doubt will before long. When it does, the world, and the market, will be a very different place. If the Deep Horizon disaster signals the end of the old economy, then a popular movement that brings down BP would be the beginning of the new one.

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Amongst all the focus on carbon trading around the world, the power and simplicity of taxes has taken a bit of a back seat. This may be changing with new moves in China and Australia, along with renewed debate elsewhere, to use direct taxes and charges to drive social and environmental objectives.

With trading schemes struggling to get up in democracies like Australia and the US, and governments everywhere facing huge mountains of debt, taxes may start to make a comeback. China is reported to be considering a carbon tax from 2012 and is also directly targeting high-energy users like aluminium by dramatically increasing their electricity charges as reported here. In Australia, where the government has shelved plans for carbon trading until 2013 after it failed to get the legislation through the Senate and decided the issue was politically unappealing, there is now a proposal for a mining “super profits tax”. It’s basically a higher tax rate being applied to mining and resource companies when, and only when, projects are very profitable.

The government argues this is about more equitably sharing the huge profits mining giants have reaped in the resources boom as China gobbles up the Australia’s resources. The money raised will used to build infrastructure, lower the standard company tax rate and boost investment in pensions for the public as whole. There is of course a huge uproar against this, with a well-funded campaign by mining companies that have become accustomed to the boom, not to mention the resulting huge executive bonuses. They are crying lost jobs, investment driven off shore and Australia becoming uncompetitive. Some are threatening an investment strike with the shelving of planned projects.

These cries are self-serving, short term and should be ignored by intelligent policy makers. Putting aside the irony of the Australian government embracing a new resources tax as it runs full speed away comprehensive climate action, this is still good economic and environmental policy. Here’s why.

Resource extraction is very different to other economic activity. If a country misses a trend like solar power, high-speed broadband or competitive manufacturing, it’s really hard and expensive to catch up. The train of economic opportunity has often left the station. Resources are different. When a major global company threatens to take their wind turbine manufacturing offshore they can do just that and it’s gone. However when BHP goes and invests in a mine in Kazakhstan instead of Australia, the minerals stay put. Is there potential loss? Yes, clearly investment leads to jobs, taxes and other benefits so in the short term there may be but what about the economic impacts in the medium to long term?

To answer that we need to consider the other way mining resources are different. Unlike innovation, knowledge and technology, which we create, mineral resources are limited and we can’t make any more of them. We have now arrived at a point where the global economy is stretching our capacity to feed it with these natural finite resources. That’s why when we grow the global economy up against those physical limits, as we did in 2007 and 2008, the prices of things that come directly from the earth, like food and oil, rise so rapidly. I cover this in detail in my writing on The Great Disruption.

Where will this approach to growth lead us? Consider the current state of our system, which is well and truly up against its limits, as having a starting measure of 100. This measure of 100 represents our current burden on a strained system, one where we have barely adequate resources to feed our economic and social needs. Then we plan to go to around 9 billion people by 2050. That takes our system to 150. Then we plan to increase the per capita income (and consumption) in that time frame by around 2 – 3 times as well, taking our system up to 300 to 450. So if prices spike and the system shows strain at 100, guess what happens at 450? Many things, but one of them is that resources become a lot more valuable and we use them a lot more carefully.

The economic implications of this are clear for countries that have a strong natural resource base. These resources are of absolutely limited supply and their value will keep going up. And up and up. This means those countries have plenty of time to extract them and the longer they leave it the more value they will get for doing so. The finite nature of those resources also means it is good policy to invest the resulting income to build long term economic security, not to grab the quick bucks or short term jobs on offer.

More broadly, it also means we will have to accept that an economy built on “stuff” is inherently risky when the supply of the original “stuff” is limited, as argued by proponents of peak oil. So we are all going to need to use our resources much more efficiently, and the higher the prices we pay for them the more efficiently we will use them. This means we need to steadily shift our tax base away from employment, which we want more of, and towards stuff and pollution instead, which we want less of. So the logic of higher taxes at the start of the “stuff” value chain, by taxing mining companies more, and lower taxes for activities further down the chain by taxing other companies less, is good environmental as well as economic policy.

So for Australian readers in particular: as you watch the debate on this issue rage over the coming months, consider both your economy and your kids’ economy. Think about where we are all heading and what kind of economy we need to build. And when a mining CEO earning $6 million a year talks about his heartfelt concern for Australian miners’ jobs and Australia’s economy, just observe the whole process with that great quote in mind “Hell hath no fury like a vested interest disguised as a moral principle.” And realise that this is just the beginning of a long and inevitable economic transformation.