After an invitation from the Turnaround Management Association to participate in a panel discussion about climate change investment opportunities, I started thinking about the concept of “paradigm shifts” and what it really means to be living and investing during one of these shifts.
Climate change will necessitate a drastic modification in the technologies we use and in the very structure of our society. The closest parallel I could call to mind for the process on the verge of which we find ourselves today was the drastic changes that occurred in the mid-19th century as a result of the Industrial Revolution.
The Industrial Revolution radically reshaped society by concentrating the means of production in specific geographical areas.
In pre-Industrial times, society was essentially comprised of a collection of hamlets, whose size was primarily determined by access to key input materials: wood for burning, fields for planting, rivers for fresh water and transport, and harbors for fishing and trade.
This was the age of Malthus, who drearily pointed out that limited resources would necessarily constrain population size through boom-bust cycles.
The book Energy: A Human History by Richard Rhodes brilliantly explains the technological innovations that led human civilization from hamlets into cities.
The development of steam engines allowed the high energy density fuel of coal first to be mined successfully (coal mines filled up with water, so pumping out the water was a critical precondition to pulling up the coal) and second to be easily taken from the mine site to a central location (by using the revolutionary technology of steam-powered rail transport).
In addition, coal-powered steam engines also allowed for the development of machines which could easily and tirelessly do the work of hundreds of craftspeople at once.
The local hamlet no longer needed spinners and seamstresses: factories in London could produce those quickly and cheaply and send them along to the hamlet via rail. The local hamlet no longer needed blacksmiths: metal tools could be stamped out by the gross in the time that it took a blacksmith to craft a single one.
For the last 150-plus years, the technology paradigm of centralization and building economies of scale has become so entrenched that we consider it a matter of fact. We shop at Big Box stores rather than local Five and Dimes. We commute for hours to get to our high-rise office buildings, which are sited in the midst of many other high-rise office buildings. Our homes are lighted and the temperatures controlled thanks to power from centralized nuclear, coal, or natural gas-fired plants.
The weakness of this centralized, scale-rewarding paradigm — based implicitly on the promise of cheap and essentially unlimited amounts of fossil fuels — came into focus with the bankruptcy of Pacific Gas & Electric, an event about which I wrote about in the article PG&E: The First S&P 500 Climate Change Casualty.
PG&E’s business model was based on the premise that every business and household within the service region would need to pull power from the transmission grid, which was in turn supplied by enormous generation plants. The natural gas-powered generation plants benefited from economies of scale — energy generation became more efficient the larger the turbines in use. Solar and wind plants, too, obviously benefited from economies of scale.
But the proliferation of rooftop solar panels meant that more and more Californian households and companies no longer needed to pull power from the grid; in fact, many of them wanted to sell the excess power they generated back onto it.
PG&E’s capital spending and strategic planning process failed to take this decentralization trend into effect. Reduced revenues and profits meant that it was harder to maintain the long transmission lines necessitated by the centralized but distant generation facilities. Ill-maintained transmission lines, high winds, heat, and dry timber was all that was necessary to drive a nail into the coffin of PG&E’s operations.
Another topic about which I have written a lot is farming. In my article Agriculture is Broken; AgTech Can Fix It, you can see the implicit reliance upon economies of scale and cheap, unlimited fossil fuels as well.
California’s Central Valley produces an enormous amount of the fruits, vegetables, and nuts consumed in the U.S. Efficiencies of scale favors the production of maize and soybeans, to the extent that huge swaths of the American breadbasket of the Midwest are textbook examples of farming monocultures. Factory cattle, pig, and chicken farming are affronts to decency and hygiene but are mandatory for companies competing in a commoditized world reliant upon economies of scale.
As the summers become hotter, the soil drier, and flooding more common — all effects presently observed and forecast to worsen as climatic change becomes more extreme — I believe we will see the model of the centralized scale-based farm also break down in disastrous ways similar to the way in which PG&E’s centralized power generation model failed.
As this begins to happen — slowly at first and gaining speed and momentum as the years pass — humans will begin to look for local solutions. Strawberries grown at local vertical farms will more than compete with those flown in from Argentina or shipped overland from Southern California. Community mini-grids will be looking to connect to grids only for catastrophic risk control and for a place to dump any energy that has been produced locally in excess of local storage capacity.
Whereas the Industrial Revolution radically reshaped society by concentrating resources, the Climate Change Revolution will radically reshape society by distributing them.
In effect, our civilization will need to reverse out the trends of the last two centuries of economic development.
This process is likely to be painful for those operating according to the prior paradigm in the same way that investors in buggy whips were disappointed with the results of their investments early in the 20th century.
For those who have the foresight to Invest In Reality, however, the ongoing and intensifying paradigm shift will be a time during which great fortunes — the types of fortunes that persist through generations — will be made.
Intelligent Investors take note.
I am an investor interested in public and private companies whose focus is finding ways for human civilization to adapt to climate change. You can find out more about my work at IOI Capital.
A version of this article was originally published at www.forbes.com on March 29, 2019.