Climate Change : talk with Michael Webber, ENGIE Chief Science & Technology Officer

Jo Paisley: When talking about climate financial risk, a distinction we often make is the difference between our impact on the climate and the climate's impact on us. Two perspectives that are important for risk professionals to bear in mind. So, we impact the climate in a variety of ways: through emissions from using electricity, from heating, transportation, deforestation and the like. The changing climate is impacting us through increased physical risks, such as more intense weather-related events and rising temperatures; but also through the risks associated with the transition to a low-carbon economy arising from new regulations, changing technologies, and shifting consumer preferences. But it's complicated because these two perspectives are highly inter-related: the more we continue to affect the climate, the more it will affect us, over time.

Now we don't know how policies or regulations will evolve, which makes it hard to risk-manage them; but we do know that the sectors which are having a bigger impact on the climate are more likely, all else being equal, to be more directly impacted by new policies, be that a carbon tax or caps on emissions. And to make matters even more complicated, there will be knock-on consequences or indirect impacts on other firms, for example via supply chains; and on households, via the impact of higher prices on their real incomes. 

When we speak about climate change, we are never far from energy and water, two factors that are themselves highly interconnected. Of course, energy is central when thinking about climate risk both through the lens of our impact on the climate, and through that of the climate's impact on us. It is, after all, the exponential growth in the consumption of fossil fuels that has been the dominant driver of climate change, and we know that the transformation of the energy system will be a critical part of the response to climate change. 

Michael, I want to understand a little more about your personal climate-related journey, and what brought you to where you are today.

Michael Webber: I started off in aerospace engineering, thinking I might be part of a space exploration program, as an engineer. I never thought I would be an astronaut, I'm afraid of heights and have poor eyesight, but I thought I could work in spaceship design. I was very space-oriented in my undergraduate engineering training. But ironically, the more you go into space, the more you get to see the Earth. So space is a great way to learn about climate change and study Earth Sciences. I worked a couple of terms at NASA, who have many research facilities in the United States. One is the NASA Aims Research Center, near San Francisco, where I worked on high-speed combustion systems for SCRAM jet engines. High-speed transit: California to Tokyo in two hours! And even though this was for Space, it was a reasonable introduction to Energy, because 85% of the world's energy comes from burning something: coal, oil, gas, wood, straw, cow dung... and I was working on combustion, or burning things. And if you learn about burning, then you learn about the heart of the energy system. You also learn how to pollute; and if you want to tackle pollution later, understanding the mechanisms by which pollution is created is useful. So I was a NASA space exploration guy, but became a combustion guy, which led me to become an energy guy. And I became an energy-environmental guy as I thought about the world and its fundamental resources, with energy and water at the top of the list.

JP: You may not have been an astronaut, but what a journey! So, talk to me about energy and water. Your books have made me think a lot more about that. I hadn't appreciated quite how energy-intensive water is, nor how water-intensive energy is. Could you just explain your insights there?

MW: Yes. I suggest that energy and water are the two most critical resources for a modern society: important on their own, but also interconnected. The good news is that the availability of one enables the availability of the other. If you have a lot of water you can get energy, because you can use that water to spin a turbine, to irrigate bio-energy crops, to produce oil and gas... to get access to energy. And if you have access to energy you have access to water, because you can use that energy to drill a deeper well, to de-salt the ocean, to move water over great distances, to treat it to make it safe to drink, and so on. The bad news is that interdependence means vulnerability and risk. If one of these resources is not available in the quantity and quality you need, then that can lead to a failure that ripples through the system. If the energy system depends on water – for cooling a power plant, for example – and that water is not available because of drought, or too hot because of a heatwave, or too cold because of a freeze, or if there's too much water because of a flood, then you have to turn off your power plant. The fact that water is not available where, when and how you need it affects the energy system. You have to dial back your power plant, or you can't grow your bio-energy crops, or you can't produce oil and gas. It's also true the other way round. If you have a power outage because of a windstorm, your waste-water treatment plant can't function without that energy. So water enables energy and energy enables water, but a constraint in one implies a constraint in the other. The system means cross-cutting risks and cascading failures. So whether it's a good-news or a bad-news story depends on how we design the system. There's a lot of opportunity there for conservation – saving one means saving the other – but there's also a lot of risk.

JP: Do you feel that there's enough awareness of this interdependence at the policy level?

MW: I do not think there is enough awareness. One of the challenges with the energy/water worlds is that the water planners are off in one room, the energy planners in another room, the regulators in a different room, the funders in yet another... In the United States congress, the committee that deals with water is different from the one that deals with energy, for example. And that affects funding, oversight, standards, regulations... It also happens at state and local levels, where the planners are different people in different places, or have different backgrounds. And even an energy company building power plants might not think enough about the water they need for cooling. I have been amazed by examples in Texas, where a company will try to build a power plant, and focus on trying to get a permit for the air emissions while water is an afterthought, even though they can't run the plant without water. One company wanted to build a power plant in a place called Sweetwater – Sweetwater! – and discovered at the end of the process that the only water available in Sweetwater is salty. They couldn't build the power plant. A company spending hundreds of millions of dollars to build a power plant and not thinking about the water they need? That's a sign that we don't have enough awareness. Education is still necessary, even for the experts. I think there's a long way to go.

JP: The other thing, of course, is that water availability is going to change, as climate change impacts.

MW: In the United States, there was a big build-out of power plants just after World War Two, and then with increased population, rural electrification and economic growth, another one in the Seventies. In Texas, the population then was sixteen million people, and it was a very wet decade. Now, in 2020, the population is twenty-nine million, and the decades are progressively drier. So the demand on the water resources is increasing, and there is less water available. That's a risk that the planners did not have in mind in the Seventies. They didn't think about water becoming less available, neither because of population growth nor because of climate change... and both are happening simultaneously.

JP: I was very struck by some of the examples that you gave in your book: California, for example, where there are growing water shortages, has wildfires at the moment. And there are these feedback loops... Could you talk us through what you have seen, where climate has affected the availability of resources? How should we think about this from a risk point of view?

MW: This is one of the challenges. The feedback loops are complicated, perhaps accelerating in some instances. It often seems that the feedback loops go in the direction we don't want them to go, making the problem more intense rather than better. Take the climate change situation: there are more people and there is economic growth, so we're consuming more energy; and as we get richer, we want the conveniences and comforts energy brings. That leads to more CO2 and greenhouse gas emissions, which lead to more climate change. Climate change makes a hotter world, where we need more energy for air-conditioning, or for refrigeration to prevent food spoiling. It also means water is less available or farther away, or saltier or deeper in the ground. So as climate change affects the accessibility of water resources, we spend more energy getting that water, which increases the CO2 emissions, and so on. There is an acceleration effect where climate change makes things tough, we overcome the difficulties by using more energy, and this produces more climate change. We have to break that cycle in some way. We can focus on CO2 emissions to slow down climate change; but there is a 'lag effect' of fifty or a hundred years, where decisions that have already been made and executed will give us global warming for decades to come. So we have to not only slow down emissions, but also correct prior mistakes. It gets expensive pretty quickly. It's expensive to do nothing, but it’s also expensive to take action.

JP: But there has to be a way through this. You have talked about working on both sides, supply and demand. What do you think is the best way forward, to try and break this?

MW: What is the best way forward? The answer is 'Yes, we have to do all that.' On the supply side, we have to work on making low-carbon sources available, so that we're not just doing things the same way as fifty years ago. And on the demand side, we have to change what, how, and when we demand, and where; resources might be available in different locations. We also have to worry about behavioural changes, mindsets, technological changes, and efficiency in conservation, to get the same goods and services as before, but with less resource requirement. We have to change everything, and go through this revolution within the constraints of markets and policies. It sounds so difficult, but I'm optimistic. I'm an engineer, and engineers have to be optimists because they are problem-solvers. And a problem-solver has to believe the problem can be solved! The Cold War was difficult, we solved that. World War Two was difficult, we solved that. So we can solve yet another difficult problem, but only if we all actually try to solve it, and dedicate effort to doing so; it won't solve itself.

JP: Can I ask you about some of the other environmental risks you have seen? You noted, for example, that people think about hydropower, building dams, 'That must be good, it's clean, isn't it?' but you have pointed out the huge environmental cost. And almost everything you have looked at involves trade-offs and costs. How do you navigate your way through this and choose the best option?

MW: When I teach my semester-long class for graduate and upper-division engineers at the University of Texas, on day one I tell them that the entire theme of the course is trade-offs, and if that is the one thing they take away from the course I will be thrilled. Then, I spent the next sixteen weeks repeating that! There are so many options; so many fuels, technologies, behaviours, policies and market mechanisms. Everything you can imagine has some good and some bad. There are always trade-offs. It's all about optimizing, minimizing the bad. How to get more of the good stuff and less of the bad stuff. And any option can have less bad stuff on certain factors, like air emissions, and more bad stuff on other factors, like land use. Take coal versus wind. Coal has several benefits: it tends to be a domestic resource, so it's secure and local, which is nice; it tends to be cheap and reliable, has a pretty good energy density, doesn't require a lot of land... these are all good things. The prices are very stable too: you can get a fixed-price contract for coal for something like thirty years! The downsides to coal? It's very dirty to produce, the mining has land-use and water-quality impacts, it's very water-intensive when you cool the power plant, and it produces a lot of emissions, in particular carbon dioxide and other pollutants. So it's a trade-off. Coal's not all bad; it has a lot of good, but it also has a lot of bad, and we tend to care more about some of the bad things more today than we did forty years ago when we built a lot of coal plants. So wind turbines might be the solution, because they don't produce air emissions. The factory making them might produce some pollution, but only a little. They tend to be abundant, there is wind in a lot of places; though not everywhere. In the United States, the wind tends to be pretty far from cities and you have to build transmission lines, which is a downside. The wind is variable, which is also a downside, and it's very diffuse, meaning you need a lot of land. So the wind has a lot of qualities, but some downsides as well. So how do we design a system to minimize all the negative factors - CO2, pollutants, water use and land use – while maximizing availability, reliability, sustainability, domestic sourcing... and minimizing cost? There's no one easy answer. It's not just wind, or just batteries, or whatever, it's some complex suite of options. Let's target what our priorities are and then design the answer. If our priorities are reducing CO2 emissions, then that tends to push us from burning things, like fossil fuels, towards wind and solar power. This is how I think about it, and it's what I preach to my students: it's always a trade-off. And there are always winners and losers. You find entrenched interests: industries that are built up around one particular option. If you tell them that they don't have a part of the future, then they are not going to be very excited about that future. They will feel that they are one of the losers on that policy, and they will fight you for it.

JP: I'm wondering about how the world of financial risk will change. If, as you say, fossil fuels have got quite a lot going for them, versus renewables, how do you think the financial risks associated with them will differ?

MW: There is a variety of risks for fossil fuels. One is investors. Shareholders are now doing disinvestment campaigns: they don't want to invest in particular types of fuel, so it might be harder for fossil fuel interests to get the capital they need. This includes pension funds and individual shareholders. Oil and gas and associated refined products suffer commodity price variability. This is typical, and happens with other commodities like corn, copper, or whatever. There is always volatility in the prices; and this volatility, historically, has always been a problem for natural gas over the last few decades - although in the last decade or so, natural gas prices have been very stable, which is interesting. But the volatility has been tricky. In the United States, we might have had a price as high as thirteen dollars per million BTUs of energy from natural gas in 2008, and then a few years later it's two dollars. So the price collapses from thirteen to two, and this creates all sorts of problems. An industry launches a product to extract gas, assuming the price to be thirteen dollars, and then the price turns out to be two dollars; they make less money. And power plant construction companies might build a coal plant, assuming gas prices are going to be high for ever; and then gas is cheap, and a gas plant would have been more competitive. There's a lot of risk for the consumers of the commodity... and then there are insurance problems. One American refinery just couldn't get insurance, and they had to shut down. No-one wanted to insure the facility because there was too much risk: air pollution, explosion, fire and other things. At the moment, there are banks who won't lend to coal-mining companies. Insurance, lending and finance are starting to have a bigger say in what we do. Maybe they always had that say, and we didn't notice because the money was always available. But there are constraints now. Insurers are saying 'We can't insure that, the price would be prohibitive'. From the investors' point of view, we can talk about what happened with COVID over the last six or seven months. The primary impact of COVID in the energy world has been on transportation fuels. The fact that people are working from home means that the demand for diesel and gasoline has dropped by about 50% in many places. Because we're not travelling as much by plane, the demand for jet fuel is down by 80%. Incredible numbers. This creates an over-supply situation, so prices for diesel, gasoline and jet fuel have fallen. Historically, low fossil-fuel prices make it hard for renewable energy projects to get financing, because wind and solar power look expensive compared to cheap natural gas, whose prices are coupled to oil prices. But during COVID, the renewable projects were being financed anyway, which is rather fascinating. The reason is that investors like the renewable energy projects because they come with twenty or twenty-five-year PPAs [Power Purchase Agreements]: fixed prices for that long means the risk is minimized. Profit might be lower, but is guaranteed, as opposed to oil and gas, where profit may be higher but where there is more volatility. So availability of capital is now preferring renewables over fossil fuels! I wouldn't have guessed, a year ago, that in a time when fossil fuel prices might collapse, renewables would have an easier time getting money.

JP: Is it also, though, the anticipation of future policies like a carbon tax that is making fossil-fuel investments unattractive? The risk of stranded assets?

MW: I think so. But the risk of stranded assets has been there for years, frankly, so the big oil and gas companies have been using carbon prices internally for their projects, anticipating that there will be a carbon policy that comes to fruition sometime during the lifetime of that asset. So the risks from carbon policies have already been priced in. I don't think there's a new price mechanism attributable to COVID, although we can ask ourselves, 'Is COVID an accelerant for climate policies, or an inhibitor?' You might think 'inhibitor,' since we feel poor with the economy down because of COVID, and we're less likely to invest in climate solutions; but it might be an accelerant because a down economy needs recovery, and that could well be a green recovery, with investments going preferentially towards green infrastructures. So we don't know how COVID will affect this. There might just be more market risk, but there will be a CO2 price which will affect projects sooner, or more, than anticipated.

JP: Now we've talked about risk, but there is a huge amount of opportunity as well, and I wondered if you had some views on the key trends that you're expecting to see.