First Amongst Equals
When running towards a cliff, being first may not be the best strategy.
Nobel House
It should be clear to even the most ardent Net Zero advocate that if countries such as Canada, the UK or indeed, Burkina Faso achieve Net Zero by some arbitrary date - it will make no difference to global GHG emissions, climate change or the nebulous temperature targets. For a country like Burkina Faso, one might argue that if it can reduce its almost-zero carbon emissions to net-zero and get paid to do so there is a logic.
Both Canada and the UK (along with many others) have justified being at the forefront of Net Zero by the act of “leadership” itself.
The United States and the European Union have committed to reducing GHG emissions by 50% from 2005 levels by 2030, while the UK has legislated a 78% emissions reduction from 1990 levels by 2035. Canada must keep pace with, or even exceed, these targets in order to lead and compete in a net-zero emissions future.
Canadian Clean Electricity Standard Discussion Paper (March 2022)
As the first major economy to commit in law to net zero by 2050 and hosts of the historic UN COP26 climate summit, the UK is leading international efforts and setting the bar for countries around the world to follow.
UK Net Zero Strategy (October 2021)
I won’t open the can-of-worms concerning the wisdom (not) of “committing into law” Net-Zero aspirations - but surely only the lawyers can be looking to benefit from that act of hubris.
Leading from the Front
The idea of “leading” has many attractive qualities such as the prestige and economic benefits of technological leadership as well as the more sanctimonious aim of “the moral high ground”. Whilst the economic arguments are duly considered, the role of leadership is also promoted as a necessary “role model” such that others will follow. A modern-day Moses leading his people out of slavery to the promised land: “the UK is leading international efforts and setting the bar for countries around the world to follow”. A noble calling indeed, but again the word “hubris” comes to mind.
However, the over-riding sense one gets is that “leading” is almost a circular and somewhat narcissistic end in itself - “Canada must keep pace with, or even exceed, these targets in order to lead and compete in a net-zero emissions future”, which sort of reads like “Canada must lead in order to lead”.
Dead-end Alley
In business the term “First Mover Advantage” is part of Silicon Valley law - the idea that a business can put blue-water between themselves and the competition who are sure to follow; creating “moats”, occupying the “real estate” and so on. Undoubtedly there are examples of this where speed has led to size and dominance - Amazon comes to mind. There is also the concept of “lock-in” to be considered.
A first-mover may have an inferior product but once it has reached a critical mass (usually through early adoption) it can be hard or impossible to replace. Examples of this are VHS beating out Betamax in the pre-digital days, and the weirdly odd QWERY keyboard (which was designed to slow typists such that the mechanical levers of typewriters would not entangle at high speed).
But one must be careful when looking at successes and be mindful of survivorship bias. The road to a market-leading position will be littered with dead-ends and competitors who didn’t survive. In web-search, Yahoo with its glorified searchable list was top dog pre-1999; it saw Google coming and at first integrated Google search into its hugely messy “portal” home page and later tried to buy Google (for $3bn) in 2002. Amazingly, Yahoo still exists, but it is very much a back-water. Other “first-movers” such as AltaVista and AskJeeves are long gone and long forgotten.
In some ways this is the invisible hand of the market working - Google won out not by being first, but by having a noticeably superior product.
Likewise, in the early days of automobiles, there were as many electric models as gasoline models. In fact, electric cars existed before internal combustion engine ones. Due to the familiar advantages of the energy density of gasoline - ICEs won out for the first 100 years, (notwithstanding the shameful scandal around lead additives and general pollution). Whilst EVs are far from perfect, there is clearly something “better” about the mechanical simplicity of electric propulsion. There is now a second-coming of the “first mover”, albeit 100 years later and still needing significant incentives.
Second-Mover Advantage
Whilst First-Mover advantage is well known and speaks to the hype and hyperbole of start-up land. More prosaically, learning from the mistakes of others can have enormous benefits. Technological development is rather like a Hash House Harriers race - whereby the course is set with a lot of faux routes - which dead-end. The faster runners have to double-back, allowing a regrouping with slower runners.
First movers get a chance to shape the landscape, but second movers can change the game. (What Apple and Netflix Got Right About Being Second Movers)
This has been widely studied and is often distilled into three phases: Disruption, Awareness and Correction.
In terms of the Energy Transition - we are clearly in the “Disruption” phase, with elements of “Awareness” possibly appearing. The scale of the problem is vast and there is a consequent vast range of solutions to what is an almost unsolvable problem (“wicked problem”). Inevitably, we are going to see many technologies being hyped only to fall at the hurdles of scale, economics, technological limits - just this week to the surprise of almost no one “Pioneering electric plane shelved as batteries only last a few hundred flights”.
The Awareness and Correction phases will be long drawn-out and potentially very costly, especially for the first-movers. I’m not going to go deeply into naming names here - but I am personally very sceptical of mechanical gravity-storage solutions (I put this at the top of my “Pyramid of Desperation”), hydrogen for electricity or home heating, and Direct Air Capture of CO2.
Distortions
Failure is a natural part of the disruption cycle - and we can think of Edison’s famous quote “I have not failed 10,000 times—I've successfully found 10,000 ways that will not work.” However, an additional layer of concern is that much of the Energy Transition is being driven by governments picking winners. Conventional wisdom suggests that this is a sure-fire recipe for failures, although Marianna Mazucato of the LSE has some compelling counter-arguments and case-studies.
I am in no position to opine on the relative merits of these arguments, but would simply point out that massively subsidising any sector will lead to poor choices. When the cost-of-capital is low-to-zero, any crazy idea looks good. High cost-of-capital limits innovation, but imposes a certain discipline. When we see the (woefully named) IRA and poor-man’s copies from Europe, Canada and the UK we must assume that there will be a lot of expensive dead-ends that will be tested at cost to the tax-payers.
It can take ten years to make an “overnight success”, but what you don’t hear is that it can take ten years to make a “bitter failure”
First off the cliff
It is laudable to want to lead the transition as Canada and the UK (as just two examples) have stated, as noted at the top of this article. The unspoken, and indeed deliberately-excluded-from-debate, side of the coin is the potential cost when leading into dead-end solutions.
When discussing this this week with a large Asset Manager in North America - I suggested that, to understand the energy transition, they keep a regular watch on Europe, and especially Germany. If there is one country that has gone way beyond the “intention” to be in the vanguard - and actually committed hard cash in almost unimaginable amounts - it is Germany. The “Awareness” phase is starting, and it looks like it will be a painful process. Painful from an ideological as well as economical point of view. The de-industrialization of Germany will be gradual then sudden, and it is a terrifying question of whether Germany will have any economic strength left when the “Correction” phase is needed.
Just like in a Hash House Harriers race - the fittest runners should lead, because ultimately, they will have to do the most running - chasing down and eliminating the dead ends. It is questionable whether a country like the UK, discovering that it is a resource-poor, post-industrial country can really afford to see itself as a “fit runner” in this race. Canada has the resources to run an endurance race, but should be wary of too many dead-ends.
Simply saying “we want to be first because we want to be first” in policy papers underlines the lack of awareness that there are economic consequences to Net Zero ambitions - not just “sunlit uplands”. When a company innovates and fails, it hurts shareholders - who typically in the VC community will have taken a scatter-gun approach - backing multiple companies in the hope one succeeds. If a country innovates and fails the consequences are potentially devastating.
Was there a man dismay’d?
Not tho’ the soldier knew
Some one had blunder’d:
Theirs not to make reply,
Theirs not to reason why,
The charge of the noble six hundred.
It really is like a fad and perhaps almost a religious compulsion - pragmatically speaking, there's no real reason to go so hard for Net Zero. Hopefully the Awareness comes sooner rather than later, as the longer we spend doing it, the more painful it will be to stop.
Great article, Richard. However, I don’t believe Germany, the UK or Canada “want to be first because we want to be first”
They are claiming to be the first because their governments lack the knowledge and the courage to really understand the energy transition and explain to their very large majority that the vocal minority, whilst expressing a very desirable end state, lack basic understanding of energy economics and have no tangible idea how we will get from where we are to where they demand that we be.
The energy transition is, as you say, a “wicked problem” but how does a politicien tell their voters that there is no envisageable solution and to get to a desirable place we will have to work though trail and error a multitude of solutions, many of which will fail.