Sunday, March 20, 2011

Going Green – The very pressing case for “Black Swans”


I go to graduate school at a university which can be described as “ground zero” for the environmental movement in North America, that’s if anywhere can be described as such. I was also fortunate to take a class on environmental policy these past few weeks and this exposed to some of the latest thinking in the fields of conservation, solar energy, windmills etc. Although I cannot in good faith describe myself as an environmentalist or activist of any sort, I am enough of a pragmatic business person that I realize the clear and present danger posed to the world by the warming climate and degrading environments.

However, a lot of what I have been hearing has been along the lines of why we should conserve more and consume less energy. I do not think waste is good and I think the energy-intensive lifestyle of the developed world is less than ideal but I also realize that the world cannot conserve its way out of the crisis that confronts it. One person I really respect in the environmental debate is the Silicon-Valley Billionaire: Vinod Khosla, co-founder of SUN Microsystems and former big-hitting partner at the VC firm: Kleiner Perkins. I have listened to some of his speeches and I am more than impressed by his pragmatic approach to the entire issue of climate change and conservation. The Economist recently ran a piece about him and some of the investments he has made in the “green” space. And they all seem to have something in common: a high probability of failure mixed with the potential to be significant game changers.

The first of Mr. Khosla’s assertions is that of the “Chindia price”: basically the price at which a product or service will become generally accepted by the poor and emerging middle classes of China and India. The mistake many people make in the environmental lobby is to think that because a product has gone mainstream in Northern California, Germany and Scandinavia then the world has a workable product. Consumers in these markets have shown a willingness and ability to pay a premium for environmentally conscious products. However, this works for them because they are typically well-heeled and educated. However for consumers in markets like China and India, paying extra for a “cleaner” or “greener” option just would not cut it. Given that these will be the fastest growing consumer markets in the world, they will ultimately be the test case for any new technologies that will replace current fossil-fuel based technologies. And for this people, price is key! Mr. Khosla illustrated this by saying that for electric cars to make a real dent they must approach the “Tata Nano price”. I could not agree more.

The 2nd and probably more important theme for the article is the need for the world to concentrate on finding game-changing “black swan” solutions to our problems. We are not going to “LED light” and “low-flow toilet” our way out of the challenges that face. We need to come up with solutions that ensure that consumers can continue with the lifestyles they’ve grown accustomed to and what’s more? we cannot deny the hundreds of millions of Chinese and Indians coming out of poverty the washing machines and machine dryers they’ve been waiting for. The world has got to find a way to do this cost-effectively.

This brings us to why “black swans” are the solution that the world’s business, political and scientific leaders should concentrate on. A lot of the technologies that are being discussed represent incremental progress that may move the needle a bit but will not ultimately provide the “oomph” that the world needs. The world is so bad at forecasts, imagine if someone had tried to forecast intercontinental travel at the turn of the 20th century. Their forecasts would have been way off because they would have based their forecast on the technologies available at the time: steam ships, railroads etc. They would have absolutely no idea that airplanes will be invented by the Wright Brothers in 1913 and the invention of the airplane totally changed intercontinental travel. Anyone in 1990 that was asked to forecast telecom penetration in developing countries would have grossly underestimated the future as no one knew of the technological innovations that dropped the cost of telecoms equipment and made the cellphone ubiquitous. Bill Gates once said in the 1980s that he saw no reason why anyone will need more than 64KB of computer memory and he is a really smart guy! To solve the world’s toughest environmental and social problems, everyone needs to be on the lookout for black swans and game changers. Incremental progress won’t cut it and that’s why my fingers are crossed for Mr. Khosla’s investments.

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