The Decarbonization Imperative: How the Entire Economy Can Meet the Climate Moment

Electric vehicles are everywhere. Renewable energy like solar and wind, too. The U.S. is back in the Paris Climate Accord. Progress to stop climate change has come so far, yet still has a long way to go and the road from here only gets harder. Professor Mike Lenox and Senior Researcher Becky Duff at the University of Virginia Darden School of Business talk with the Batten Institute’s Sean Carr about their new book on what it will take to decarbonize the economy. Not just one sector. Every sector. And their insights have big implications for every business leader, investor and policymaker.

Read full transcript here:

Mike Lenox:

I choose optimism because I think the alternative is quite scary, but it's going to take more. I think we all have to be very clear. It's going to take more from the policy arena, it's going to take more from the public sector and the private sector, it's going to take more from us as individuals.

Sean Carr:

Electric vehicles are everywhere, renewable energy, like solar and wind, same thing. US is back in the Paris Climate Accord and yet society is far from taking a victory lap in the fight to avoid catastrophic climate change. We've come so far yet have a long way to go and the road from here only gets harder. Is this a fight we can even win? Mike Lenox and Becky Duff at the University of Virginia's Darden School of Business are the coauthors of a new book on what it will take to decarbonize the economy, not just one sector, every sector and their insights have big implications for every business leader, investor and policy maker. I'm Sean Carr and welcome to Darden Ideas to Action. Mike and Becky, thank you for joining us and welcome to Darden Ideas to Action.

Mike Lenox:

Pleasure to be here.

Beck Duff:

It's great to be here.

Sean Carr:

Today on the podcast we're going to be talking to you about your new book, an exciting new collaboration. The Decarbonization Imperative: Transforming the Global Economy by 2050. That's a big ambitious topic, but I'm excited to talk to you about it. And let's actually start off with something a little definitional, decarbonization, that's a big word. What does that mean?

Mike Lenox:

It does not mean that we need to remove carbon from the environment. Carbon is one of the building blocks of life on earth, but it's become a term of art to refer to net zero greenhouse gas emissions being admitted from human activity into the environment. And so when we talk about the decarbonization imperative, we're talking about in essence the need to get to net zero greenhouse gas emissions. Typically by the year 2050 or what the climate scientists are telling us if we want to avoid the worst impacts of climate change and to meet the goals set in the Paris Accords to try to limit global warming, to either 1.5 degree Celsius optimally, or at the very least two degrees Celsius.

Sean Carr:

There's a linkage in your title, obviously, between that imperative that you just described and the global economy. Connect the dots a little bit for me on that.

Mike Lenox:

I think when people think about our climate change challenge, their minds immediately go to electricity and the possibilities of renewable energy and things like transportation and automobiles being electrified. And those are incredibly important parts of the puzzle, if you will, that need to be solved. But one of the things we highlight in the book is that while they're necessary, they're not sufficient into themselves. In fact, there's other large parts of the economy that are major greenhouse gas emitters. One of those for examples, industrials. Everything from the production of steel to cement that are major greenhouse gas emitters.

Mike Lenox:

And then one that I think is probably least appreciated and maybe most difficult to address is agriculture. Agriculture makes about 25% of our global greenhouse gas emissions. Everything from the use of beef to the use of nitrogen based fertilizers in our global agricultural system. So if we're going to really take climate change seriously, it isn't just one sector it's really across all of these sectors that we need to think about decarbonization.

Sean Carr:

Implicit in what you just said is that governmental policies and maybe even corporate policies are inadequate to the challenge. What are some of those inadequacies?

Beck Duff:

Let me be clear first that the commitments that have been made to energy efficiency and lower emissions have been great, but as Mike mentioned, to meet this goal we really need to be more aggressive. Where federal government can be very effective is investment in R&D and commercialization of new technologies. Taking on the risk where others cannot. Unfortunately, these investments have declined over the years and it takes time to scale from idea to market ready. I'll just give one example with solar, which was first deployed by NASA in the 1960s and just in the last few years, we've seen it really start to compete with traditional energy sources. So these innovations can take time and this is where government can help.

Sean Carr:

Let's talk about this role of innovation. I think it's the central thesis of your book. Is innovation the answer? Now, if I were to say, well, my one big takeaway innovation, there is the solution?

Mike Lenox:

I think sometimes there is this notion that innovation is this panacea, the solution to all of our problems. In the book what we lay out are two important facts. The first is it's hard to see how we address this decarbonization challenge, this decarbonization imperative, without having significant disruptive innovation across a wide number of these sectors. Again, this isn't about just 10% reductions in emissions and fuel standards. This is about electrification of vehicles, 100% reduction in those at least a direct emissions from the tailpipe.

Mike Lenox:

Subsequent to that, we don't believe innovation occurs in a vacuum. Innovation actually occurs in what we call the broader institutional envelope. That includes government policy, the engagement of other stakeholders like universities, even activists, all play a role in how innovation takes place and whether innovation takes place. So yes, innovation, but to recognize the broader set of forces that actually help catalyze innovation through the economy.

Sean Carr:

In your book, you talk about the economics of disruption playing a significant role in how new technologies get some market traction and begin to address the challenges that you've laid out. How do the economics of disruption come into play in terms of this climate change imperative that we have?

Mike Lenox:

If you go all the way back to the economist, Joseph Schumpeter, he's long talked about the idea of the gales of creative destruction. That a hallmark of market-based economies is this ability to invent a new and replace old technologies and markets. So when you see an electric vehicle company go out of business, that's to be expected right now. We would actually want to see that because that suggests there's a lot of ferment and a lot of evolution of the technology occurring at this point in time.

Mike Lenox:

So a lot of what we do in the book is read the tea leaves. Look at what's happening in various markets and try to judge, are we on the path to disruption, or is it going to take significant interventions from the policy sphere or otherwise to try to make these changes come about?

Sean Carr:

So what are the sectors that you focus on in the book and maybe give me a sense of what change you foresee or perhaps would like to see in each of those sectors.

Beck Duff:

We basically look at every sector that contributes to greenhouse gas emissions. So we're looking at energy, transportation, buildings, industrials, and agriculture. There are some sectors where decarbonisation is happening very quickly, but there are others like agriculture and industrials, where we're still very early in the R&D phase. There are technologies that folks are looking at, but that's really where the investment needs to be.

Sean Carr:

I can see that electric vehicles are on their way to widespread adoption, but in sectors, as you call it the industrial sector with steel and cement, people are going to still need to build buildings all around the world. That's a big global problem. And certainly in agriculture that require all kinds of changes. Is it really too much to expect? Let me be a little skeptical, is it really too much to expect that we could see meaningful change even by 2050?

Beck Duff:

We will be hard pressed to broadly replace products like steel and cement and even beef though, there are efforts underway to come up with those replacements. For agriculture, one of the biggest challenges is the desegregation of the market. So yes, you can work with large corporations, but there are millions of farmers around the world. At the end of the day, farmers will produce what the market demands and with food, consumer choice really moves the market. I'll give you an example. Let's look at dairy. Dairy cows produce methane. 10 years ago in the US your choice was largely cow milk or soy milk, which you actually found in a different Island.

Beck Duff:

I know this because I was actually one of those consumers looking for alternatives, but over time, more people became interested in non-dairy options, whether due to lactose intolerance or other perceptions around health. And today, a huge amount of shelf space is devoted to alternatives like, oat, coconut, almond and others and they represent 40% of market share today. And that's radical change, but that product replacement took 10 years to really get going. For like beef, I think ultimately it will be a mix of options. Everyone knows the Impossible Burger and I can tell you as a former meat lover, it's getting pretty close to the real thing. But there are also exciting efforts around probiotics and seaweed for feeding that greatly reduce the methane produced by cows. So we're going to need all of these solutions if we're going to shift this very difficult industry.

Sean Carr:

I'm curious who is this book for? This has compelling stuff, but why should I read this book?

Mike Lenox:

The quick answer is the book is for everyone, of course. We do talk about this being for an educated lay public in that we really do hope that just concerned citizens are willing to read this and understand the scope of the problem and what the necessary elements of a true solution would look like. Obviously in the back of our minds, there's makers of various sorts who I think could make use of this book to understand the complexity of the policies we need in the breadth of the policies we need.

Mike Lenox:

I think for business people and for investors, not only does it suggest some of the climate risks that increasingly businesses are having to think about and talk about, but it also highlights some of the opportunities that are going to exist as market shift and these opportunities with new technologies come about. And then I think for anyone from activists to concerned citizens in any number of ways. Again, it might even be about your own personal behavior as Becky was saying about beef and what the alternatives are and how we might address that. So again, we hope the book has a little bit of something for everyone here at the end of the day.

Sean Carr:

Should I interpret this book as effectively a playbook? Is it something by which policy makers and others could look to guide action?

Mike Lenox:

Yeah, we take a very explicit look at a policy playbook, especially in the last chapter. I think what differentiates our position and our perspective from some others out there is this notion that we need a sector based technology policy at the end of the day. The scope of the problem is so large that we need to break it into its constituent parts. And we need to think about the differences across those sectors and where they are from an innovation and technology standpoint and address it where it is.

Beck Duff:

While each sector will require its customized approach, there are some interesting technologies where investment could have a cross sector impact. And so you look at batteries for energy and transportation, and you look at green hydrogen, which could have significant impact on greenhouse gas emissions in industrials, transportation, and energy. So there are some of these key technologies that could really have a significant impact in driving down costs more quickly and helping these technologies to be adopted more broadly.

Sean Carr:

Leaders within large organizations, big companies, what do you hope might be their takeaways from some of the guidance you have to offer?

Mike Lenox:

It gets back to, again, thinking much more broadly about industry transformation and disruption. Saying you're going to reduce your greenhouse gas emissions by 10% from 1995 levels is not going to get the job done. You see a lot of promises now in terms of trying to reduce greenhouse gas emissions. In some cases it's even pledges to decarbonize their operations, which I think is a positive trend. We're outlining how transformation and disruption can take place and that can open up opportunities for both investors and businesses if they have the foresight to come take advantage of it.

Sean Carr:

If I am neither a governmental policy maker nor the head of a major company, and I'm an investor in one form or another, well, I think I could feel pretty good about myself if investing with environmental and sustainable goals is my objective. Isn't that sufficient?

Mike Lenox:

Yeah. I mean, I think there's such increased interest in environmental health and safety in terms of environment governance and social issues. And you're seeing the investor class being more sophisticated in what they're asking of companies in terms of assessing their climate risk and what are they doing to address it? I think these are all very, very positive steps forward. There's sometimes a tendency to focus on what I'll call large incumbent firms, right? The existing players and industries and how they're going to transform themselves. So to be somewhat controversial, what are our expectations that an ExxonMobil or a BP will become renewable energy companies? I'm very doubtful. I mean, you look at their certain capability base and the like.

Mike Lenox:

So if you're really thinking about change and you're really thinking about making a major impact, in some cases, it might be that certain businesses need to go away and they need to be replaced by new businesses that have a different technology, different focus there. So as an investor class, how do you think about that? It's not the existing incumbent firms that lead the charge and become the big change agents. So as an investor, think more broadly about how you're having an impact on the types of firms you're looking at.

Sean Carr:

So I definitely hear from both of you a sense of constructive concern, not alarmism, but constructive concern. And my takeaway is that both of you fundamentally are optimists. Maybe in general, but certainly on this topic. What accounts for your optimism?

Beck Duff:

As Mike knows, I get very excited about the technologies, right? I get very excited about the innovative activity that we're seeing in many of these sectors. Agriculture, we talk about there's so much work to be done, but that is where a lot of the investment is being put right now. There's a lot of exciting innovation happening across all of these sectors. I'm optimistic that we will innovate and find some solutions, both in terms of mitigation and adaptation. I'm just a little pessimistic that we'll do so in the time needed to avoid all impacts to the environment and our way of life, but I am optimistic that we can innovate.

Mike Lenox:

Timing is everything here. The 2050 date that scientists have provided is dependent on us immediately starting to reduce our emissions. If we go for five, six years with increased emissions, which current trajectories would suggest, that just shortens that due date to 2040, or even earlier. So it even raises the prospects even more. With that said, I like Becky tend to be an optimist and feel like there are paths to solving this problem. I'm an engineer, I think at heart and so I like the idea of what is it going to take to solve this problem? I do think there's a lot of positive things that have been happening on the technology front and on the business front that give us some hope here, but it's going to take more.

Mike Lenox:

I think we all have to be very clear. It's going to take more from the policy arena, it's going to take more from the public sector and the private sector, it's going to take more from us as individuals. I choose optimism because I think the alternative is quite scary. You read about, and we hear about what the impacts of climate change could be. They could be non-linear in ways that the difference between a two degree versus a three degree warming could be significant and that's quite disconcerting. But try we must and I think if we ring in that energy, that I think innovation and the possible futures can bring, I have confidence that we can figure it out, but it's going to take a lot. It's going to take a lot of effort.

Sean Carr:

Mike and Becky, thank you so much for spending time with us today on the Darden Ideas to Action podcast. I'm excited to see your book out there. I think it's going to have a big impact. I appreciate your taking the time to talk to us.

Mike Lenox:

Thank you very much.

Beck Duff:

Thanks for having me.

Sean Carr:

I'm Sean Carr and that's it for today's episode of Darden Ideas to Action. Mike Lenox who's a professor and chief strategy officer at the University of Virginia Darden School of Business. Becky Duff is a senior researcher at Darden's Batten Institute. They all the co-authors of The Decarbonization Imperative. Available online and on bookshelves in October, 2021. Join us next time for more research, analysis, and commentary from the University of Virginia's Darden School of Business. You can subscribe to Darden Ideas to Action on Apple podcasts, Spotify or Podbean. To read more expert insights on this topic and more, visit ideas.darden.virginia.edu.