Watch Jeremy Grantham's 'Race of Our Lives' Speech
At the 2018 Morningstar Conference this month, Grantham gave an insightful presentation about climate change.
Jeremy Grantham: In the interest of full disclosure, I should say that I am all in on the topic of climate and toxic damage to the environment; 98% of my net worth is either in two foundations or is committed to it. Fortunately, I come from a vastly overpaid industry, ours, and so that still leaves me enough to have two houses and a Tesla Model 3, if they would just deliver it to me. I'm going to give you first a broad overview of this topic, which I'll read to save time, because if I ad lib all this we'll be here all day. Then I'll give you lots of backup data with slides.
You could call this presentation the story of carbon dioxide and Homo sapiens. You may not know, but if we had no carbon dioxide at all, the temperature of the Earth would be minus 25 degrees centigrade, and we would be a frozen ball with no life except bacteria perhaps. 200 to 300 parts per million of carbon dioxide has taken us from that frozen state to the pretty agreeable world we have today. CO2 is therefore, thank heavens, a remarkably effective greenhouse gas. The burning of fossil fuels has played a very central role in the development of civilization. The Industrial Revolution was not really based on the steam engine, it was based on the coal that ran steam engine. Without coal, we would have very quickly run through all our timber supplies, and we would have ended up with what I think of as the great timber wars of the late 19th century. The demand for wood would have quickly denuded all of the great forests of the world, and then we would have been back to where we were at the time of Malthus, living at the edge of our capability with recurrent waves of famine as every other creature on the planet does. A few good years, the population expands and bad years, you die off.
A gallon of gasoline has at least 400 hours of labor equivalent. It means that ordinary middle-class people have the power that only kings used to have in the distant past. And what that has done, that incredible gift of accumulated power over millions of years is to catapult us forward in terms of civilization, in terms of culture and science. It's created an enormous economic surplus with which we could do these things for the first time in history. And above all agriculture has benefited allowing our population to surge forward.
The sting in this tale however is that this has left us with 7.5 billion people going on 11 or so billion by 2100. And that can only be sustained by continued heavy, heavy use of energy. Fossil fuels will either run out, destroy the planet, or both. The only possible way to avoid this outcome is rapid and complete decarbonization of our economy. Needless to say, this is an extremely difficult thing to pull off. It needs the best of our talents and innovation, which almost miraculously, it may be getting. It also needs much better than normal long-term planning and leadership, which it most decidedly is not getting yet. Homo sapiens can easily handle this problem, in practice; it will be a closely run race, the race of our lives. I like to say never underestimate technology and never underestimate the ability of Homo sapiens to screw it up.
If the outcome depended on our good sense, if we had, for example, to decide in our long-term interest to take 5% or 10% of our GDP--the kind of amount that you would need in a medium-sized war--we would of course decide that the price was too high I think, until it would be too late. It is hard for voters to give up rewards now to remove distant pain particularly when the pain is deliberately confused by distorted data. It's also hard for corporations to volunteer to reduce profits in order to be greener. Given today's single-minded drive to maximize profits, it's nearly impossible.
But technology, particularly, the technology of decarbonization has come leaping to help us. This is the central race. Technology in my opinion will in one sense win. When we come back in 40 years, I'm pretty confident that there will be a decent sufficiency of cheap green energy on the planet. And in 80 years perhaps it's likely we will have full decarbonization. Lack of energy, green energy will not be the issue that brings us down. If only that were the end of the story. The truth is we've wasted 40 or 50 years. We're moving so slowly that by the time we're decarbonized and have reached a new stability of plus two and a half to three and a half degrees centigrade, a great deal of damage will have been done. And a lot more will happen in the deeper future due to the inertia in the environmental system, for even if we stop producing a single carbon atom, ice caps, for example, will melt for centuries and ocean levels will continue to rise by several perhaps many feet.
I don't worry too much about Miami or Boston, that's just the kind of thing that capitalism tends to handle pretty well. The more serious problem posed by ocean level rise will be the loss of the great rice producing deltas around the world--the Nile, the Mekong, Bangladesh, Thailand, and others, which produce about a fifth of all the rice grown in the world. They're all heavily populated areas. The great Himalayan rivers, which support one and a half billion people, depend on the normal springtime runoff of the glaciers which are now diminishing in size at an accelerating rate.
Agriculture is in fact the real underlying problem produced by climate change. But even without climate change, it would be somewhere between hard and impossible to feed 11.2 billion people, which is the median U.N. forecast for 2100. It will be especially difficult for Africa. With climate change, there are two separate effects on agriculture. One is immediate, the droughts, the increased droughts, the increased floods, the increased temperature reduce quite measurably the productivity of a year's harvest. Then there's the long-term, permanent effect, the most dependable outcome of increased temperature is increased water vapor in the atmosphere, currently up over 4% from the old normal. And this has led to an increase, a substantial increase in heavy downpours. It is precisely the heavy downpours that cause erosion.
In a rain, even a heavy rain, the farmers are not stupid, they lose very little. It's the one or two great downpours every year or two that cause the trouble. We're losing perhaps 1% of our collective global soil a year. We are losing about a half a percent of our arable land a year. Fortunately, the least productive half a percent. It's calculated that there are only 30 to 70 good harvest years left depending on your location. In 80 years, current agriculture would be simply infeasible for lack of good soil. We have to change our system completely to make it sustainable. With conservative farmers to deal with, it will take decades and we haven't even started.
One of the impressive parts of new technology though is in fact in agriculture from intense data management where you know square meter by square meter exactly what is going on to the isolation of every single micro-organism that relates to the plant.
This race too is finely balanced. A separate thread also closely related to fossil fuels is that we've created a toxic environment apparently, not conducive to life from insects to humans as we will see. We must respond rapidly by a massive and urgent move away from the use of complicated chemicals that saturate our daily life. Finally, in terms of this introduction, a subtext to all of what I have to say is that capitalism and mainstream economics simply cannot deal with these problems. Mainstream economics largely ignores natural capital. A true Hicksian profit requires that the capital base be left completely intact and only the excess is a true profit. And, of course, we have not left our natural capital based intact or anything like it. The replacement cost of copper, phosphate, oil, and soil and so on is not even considered. If it were, it's likely that the last 10 or 20 years for the developed world anyway has had no true profit at all, no increase in income, but the reverse.
Capitalism also has a severe problem with the very long term because of the tyranny of the discount rate, anything that happens to a corporation over 25 years out doesn't exist for them. Therefore, grandchildren, I like to say, have no value. They the corporations also handle externalities very badly. Even the expression "handle badly" is flattering for often they don't handle them at all, they're just completely ignored as are the tragedies of the commons. We deforest the land, we degrade our soils, we pollute and overuse our water, and treat air like an open sewer. We do it all off the balance sheet and off the income statement. Indeed, sensible capitalist response is deliberately slowed down by well-funded and talented programs of obfuscation by what is called the merchants of doubt, familiar in the past with tobacco particularly in the U.S., but here also the U.K.
One of these merchants, Richard Lindzen, a professor at MIT actually went seamlessly from defending tobacco--where he famously puffed cigarettes through his TV interviews--to denying most of the problems of climate change. Let me just add this doesn't happen in China or India, Germany, Argentina. This is unique to the three English-speaking, oily countries--the US, the UK, and Australia.