The influential scientist and environmentalist James Lovelock provides a frightening view on the future of humanity: the Gaia hypothesis. It suggests that organisms interact in such a way so as to create a self-regulating environment. When an organism is in over-reproduction, the environment reacts by limiting its population.
Lovelock insists that humans are no different. As our carbon footprint increases, the earth reacts with climate change, which eventually limits our population in order to preserve the other forms of life. Humans will therefore better survive and spread if they promote the conditions needed for their own growth. If this balance is not achieved by humans, scientists such as Loveland agree that the planet’s natural coping mechanisms will find it.
The driving force behind climate change is the emission of greenhouse gases, waste-products of our currently booming global industry. With the world population having grown by roughly 25% since the early 2000s, it is no wonder that despite our best efforts to increase energy efficiency, global warming is only getting worse.
Three options currently exist: reduce the amount each person consumes, reduce our population size or make each unit of growth less carbon-intensive. Any suggestion of slowing the high-speed train of modern consumerism does not seem plausible. Instead of stunting the current economic and welfare growth, it seems more reasonable to attempt to increase our carbon efficiency, to ensure the survival of our species.
Governments all over the world are implementing new ways to try to limit the destructive effects of carbon emissions. The UK has a legally binding carbon reduction commitment (Climate Change Act) whereby they have implemented carbon budgets and a target of net-zero emissions by 2050. So far, this budgeting has proved to be very successful, as emissions are now 45% lower than in 1990. Might this suggest that we will be able to sustain consistent economic growth without fossil fuels and save our planet?
In order to answer that question, one must first consider the future of energy. Over the years, the primary reason that our carbon footprint has decreased so significantly is that we have become more efficient with our fossil fuels. Only 25% of our electricity production is made using renewable energy sources.
For this percentage to grow, firms need the incentive to switch to greener alternatives. Governments are important to catalyse the process and, by using various methods such as the cap-and-trade system or simply a carbon tax, the negative externalities produced by the burning of fossil fuels can be limited. However, in order to sustain economic growth at the same time, it seems more logical to incentivise firms to use alternative energy sources through government spending in the industry, in turn helping the development of various technologies. In this way the free market would be less compromised, enacting positive economic growth.
Another reason why firms might change energy sources is to adapt to investor preferences. Environmental, Social and Governance (ESG) factors are becoming more and more influential as investment criteria. An example of this importance is Morgan Stanley’s quality assessment of firms they seek to invest in. During this evaluation, they consider 5 characteristics, of which ESG is a critical part. The authors Marc Fox and Christian Heughs highlighted the value of this component in their investment insight: “We believe ESG factors are integral to assessing the quality of a company and thus a vital part of our investment process”.
Investment funds give serious consideration to the ESG aspect of companies. Hence, it is becoming more and more difficult for firms with negative environmental effects to secure investors such as Morgan Stanley. Needless to say, the lack of funding resulting from this now crucial factor will further encourage firms to seek a better ESG rating.
While investment in fossil fuels has yet to significantly decrease, the effect of the lack of funding in polluting industries is seen in the significant growth of investment in the renewable energy industry. This investment stimulates growth in the sector, in turn promoting the advancement of technologies and incentivising firms to switch to greener methods of energy production, lowering the global carbon footprint while sustaining a free market level of economic growth.
This interest in renewable energy will only continue to grow. Many investors are also following this trend. During a Bloomberg interview, Cathie Wood, a successful fund manager, uncovers the sectors she considers will shape the world and our future. Among these she cites sustainable technological advancement as an important part of their investment strategy. In consideration of this, her fund ARK took a considerable position in Tesla, the company responsible for over 20% of the fund’s returns over the past five years. The exponential growth seen in Tesla is a sign of how important eco-friendly firms will play a part in shaping the future.
This increasing interest in sustainable companies suggests that as long as the free market is not compromised, it will eventually find a natural equilibrium, whereby limiting our global carbon footprint. As funding for sustainable energy increases, we will undoubtedly see a considerable switch from fossil fuels to alternative sources of energy, which will sustain economic growth.