A Capitalist’s Guide to Decarbonisation

Posted in on Mar 4 2024,by Alan Keogh Alan Keogh
A Capitalist’s Guide to Decarbonisation

Alan Keogh

Alan Keogh


Share on

Decarbonisation has long been framed in terms of scarcity and sacrifice. 

Avoid plastics. Eat less beef. Turn down the heating.

Drive a Range Rover? Trade it in for a Prius. 

But this framing divides us. It creates two factions — capitalists vs. environmentalists. And the idea that you have to be one or the other doesn’t drive progress. 

Capitalism, the economic system most of the world lives under, is built on consumption, so asking most people (or companies or countries) to do less isn’t a winning argument. Instead of trying to fight the current, why not try to work with it? 

The truth is decarbonisation and capitalism aren’t mutually exclusive. Decarbonising can be looked at as a capitalist endeavour. Fossil fuels are expensive, and decarbonisation can save us loads of money.

Does decarbonising mean ditching fossil fuels? Yes. But it also means being more efficient, producing more, and growing faster.

Plus, decarbonisation embraces the free market. A dyed-in-the-wool capitalist would do anything to unplug from the oil and gas industry — if you’re against government regulation, you'd logically be against a cartel of governments determining the price of energy. And it doesn’t take an MBA to understand that it’s a bad idea to rely on a specific raw material when a small group of countries and companies hold all the supply. Today, the free market is pointing companies in one direction, and it’s away from wasteful and pricey fossil fuels.


How environmentalism became obsessed with sacrifice

Environmentalism’s moralistic message has been with us since the very beginnings of the movement in the 1960s and 1970s. From the start, environmentalists have failed to account for the broader economic forces shaping society. They haven’t made room for growth or market dynamics. Instead, they expect capitalism to change to meet their demands. 

Take, for instance, the Club of Rome report in 1972 titled The Limits to Growth, which forecasted trends in consumption and industrial expansion and expressed concern over their impact on the planet. The report was printed as a book and sold millions of copies. Environmentalists embraced it as a kind of bible and interpreted it as a critique of pro-growth capitalism. 

But Limits was not anti-capitalist. It was a sober look at the pressures we were putting on the earth. Based on data models developed at MIT, the book argued human ingenuity should be harnessed to get an early start on problems like emissions, extinction, resource management, and global warming. This was a pro-environment message, a heads-up on the question of how many middle-class consumers the planet could support. It was not a mandate for dismantling capitalism. 

Nonetheless, the template was set. These were formative years for the environmental movement, and the language of sacrifice became embedded in its worldview. Instead of working on technology and efficiency, the idea became — let’s give things up and scale back. 

Conceptual pillars of the free market going back to Adam Smith — like growth’s desirability and innovation’s potential to boost productivity — were ignored. 

Fast-forward a few decades, and even more radical ideas began to cohere (if cohere is the right word for many of these ideas, which are poorly supported by any empirical evidence or research).

For example, consider a concept like “degrowth,” which proposes actually rewinding the clock on economic expansion. Its supporters openly advocate throttling capitalism in order to make progress in areas like emissions reductions. Maybe surprisingly, the idea has been taken seriously by climate-change activists, including Greta Thunberg, the media, and academics. The idea of economic growth, argues writer George Monbiot, should “scare us almost out of our wits.”

The hectoring tone that accompanies degrowth rhetoric is understandably a turn-off for many in business and policy. It is counterproductive in that it casts any pro-growth or pro-business aspiration as being on the “wrong” side. The stridency undercuts opportunities for consensus-building around decarbonisation in many influential circles. 

Even if degrowth were necessary for fighting climate change — and it’s not — shrinking the economy would be a very difficult pill for industry (and voters) to swallow. 

Luckily, we don’t have to ditch free market values to embrace decarbonisation. Instead, we need to reconnect with them. 


Embracing decarbonisation as a capitalist mission

What are those free-market values? Save money. Be efficient. 

Deliver what customers demand: the lowest possible prices without sacrificing quality. 

Take Henry Ford, the father of the mass-produced automobile. He was maniacal about factory efficiency. His goal wasn’t to reduce emissions, of course, but to make Model Ts affordable for blue-collar workers, including his own. Ford would have turned on a dime to dump fossil fuels if they became inefficient. 

And they have.

Take a look around. The market has already delivered efficient and desirable substitutes. The sexiest (and, in some markets, bestselling) car brand on the planet now is Tesla, which happens to be electric. The Hummer’s electric now. And Rivian’s doing the same with pickups. In other words, we can take significant steps toward decarbonisation without ever worrying about guilt over the environment. 

We’re not decarbonising. We’re optimising — the bottom line for every hard-nosed CFO.

Digitisation and software have been underpinning a quiet revolution in how we track and manage energy consumption in just about every business context, from building construction and HVAC to supply-chain management and factory optimisation. As a result, we also enjoy much better visibility into the upside of energy efficiency. 

Meanwhile, two things are changing calculations on efficiency: the increasingly attractive price of clean energy and the breakneck pace of climate tech innovation. And these two trends are self-reinforcing.

When better tech emerges at a fast clip in areas like batteries or materials, clean energy tends to get even cheaper. As this happens, incentives grow stronger for more corporate adoption of decarbonisation. Finally, as markets around decarbonisation expand, that incentivises more innovation and so on. 

This shift in incentives away from fossil fuels that are sweeping the economy has not gone unnoticed. It has even helped some prominent voices in the climate debate find their inner optimist. 

David Wallace-Wells is known for his 2019 bestselling book on the consequences of global warming: The Uninhabitable Earth. The book scared the pants off a whole generation of climate watchers. To give an idea of its tone, 12 of its chapters are titled after what Wallace-Wells dubs the “Elements of Chaos.” These include “Heat Death,” “Hunger,” and “Drowning.” And there are nine more Elements to read in-depth about after these first three.

As of late, Wallace-Wells sounds a lot more cheery. In his own words, he is “more optimistic” about climate change because, today, “the economics are arguing for a faster transition.” 

In a recent interview, he pointed out that renewable energy is running cheaper than fossil fuels in much of the world. That’s the case even when factoring in the cost of building new renewable capacity from scratch to replace existing fossil-fuel sources. 

Put in plainer words, Wallace-Wells is saying that the free market is starting to behave like an engine for accelerated decarbonisation.

Indeed, emissions are still rising, and the IPCC believes they will not peak before 2025. But there are positive signs. First, there’s the “decoupling,” which refers to the fact that rates of emission growth in 2022 were significantly lower than global GDP growth (.9% vs. 3.2%), and have been for most of the last decade. 

There are also encouraging signs like China’s first emissions reduction, showing that a bending emission curve in the world's largest economy is not an impossibility. Emissions lowered by 1.5% in China in 2022, after growing an estimated 6% in 2021.

The real question is how we will bend the emissions curve, and whether it requires ditching capitalism. 


Efficiency is key in decarbonisation and capitalism

One of the misconceptions about decarbonisation is that it requires overhauling physical infrastructure, finding new energy sources, or adopting new-fangled clean technologies. 

It can include those things. In cargo shipping, as an example, companies might deploy cleaner fuels, more efficient engines, and sleeker ship hulls. All of these represent switch-outs of existing materials and technology. They are the kinds of changes that get the most media attention since they are tangible and sexy. 

But decarbonisation is just as much about a dogged, all-around search for operational efficiencies, i.e., the eking out of energy savings through changes in process or maintenance, including automation or simple repairs.

Instead of researching new fuels, shipping execs might improve route efficiency to save on energy or better distribute weight on ships to reduce unneeded drag. Or they may wring more out of the existing engine with ho-hum tactics like replacing valves or patching leaks.

These mundane strategies can sometimes be more impactful than flashy overhauls. These adjustments, though less conspicuous, are often easier and quicker and don’t demand large capital investments or extended payback periods.

Michael Liebreich, former CEO of Bloomberg New Energy Finance, has adopted Marc Andreessen’s famous “Software Will Eat The World” mantra. In the decarbonisation context, Liebreich says that “Software Will Eat the Inefficient.” What he means is that software technologies like machine learning, big data, and edge computing are super effective at helping companies find and squeeze out energy inefficiencies.

Likewise, decarbonisation is less about "clean energy" and much more about seizing opportunities for cost savings. The heart of it is efficiency, not necessarily "climate-friendliness." Decarbonisation aligns more with corporate terms like "cost-cutting," “restructuring,” or "rationalisation" than with eco-friendly labels. After all, isn’t the essence of capitalism finding efficiencies in a business?

Ideological debates aside, the business impact is clear: efficiency equals lower costs and, thus, improved earnings. There’s no difference through a profit lens whether those cost reductions come from wind energy or a repaired valve.

As far as the income statement is concerned, it’s all gravy. 


Just how much money can be saved with decarbonisation? 

Case studies across varied industries articulate a clear message: ignoring decarbonisation costs companies millions.

Take the food and beverage sector. A UK brewery's decarbonisation efforts saved it 285,000 GBP annually. The payback period for the initial investment? Under three years. These savings didn't arise from revolutionary technology but from simple changes. It consolidated refrigeration, used only the most efficient boiler for daily operations, and addressed leaks in its compressed air system. The discovery of a mis installed valve on a fridge that was consuming 70% more energy further underscored the importance of regular monitoring.

In manufacturing, a glass container factory achieved even greater savings: €455,235. The source? Enhanced cooling fans, reduced furnace gas, and improved glass-making processes. The investment was recouped in a mere nine months.

These examples demonstrate the simplicity of effective decarbonisation. Minor equipment tweaks and process alterations can lead to substantial savings. While future tech or infrastructure upgrades might become essential, pairing them portfolio-style with cost-effective, short-payback period changes can alleviate the overall capital expense.

Decarbonisation's versatility also extends its benefits to “asset-light” sectors. GroupM, a global media-buying agency, doesn't operate expansive factories. However, its focus on data-intensive video ads led it to collaborate with a streaming vendor proficient in efficient data handling, reducing energy usage during video ad delivery. This partnership now forms a cornerstone of GroupM's decarbonisation strategy


Ditching fossil fuels is a capitalist move

Environmental critiques of Big Oil often paint a monolithic picture: an industry harming the environment and wielding political clout. However, the true narrative extends beyond morality. It captures the disadvantages businesses face by depending on the fossil fuel industry.

First, consider the cost. Energy price data reveals a rise in fossil fuel prices in the last five or six decades coupled with high volatility. This is especially true with natural gas prices, which are expected to be extremely volatile in the next few years. This unpredictability hampers long-term planning and hedging. CFOs often find themselves on the losing side of this equation. 

CAPTION: The pronounced rise in the price of natural gas recently, as well as the manic volatility, makes it hard for businesses dependent on fossil-fuel energy to remain in control of their own competitiveness.   

Moreover, relying on a few suppliers poses significant risks. OPEC exemplifies the oil sector's concentrated power, and a handful of oil majors, like Exxon and Shell, dominate global oil and gas production. The refining sector and many regional utilities, often fossil-fuel-dependent, further exemplify this concentration. These entities exert substantial influence on governmental policies to favour their interests.

And we don’t have to label these entities as "evil." They're strategically navigating the capitalist landscape to maximise their profits. But that doesn’t mean you shouldn’t do the same. And as of now, that means doing so without them.

Where fossil fuels are controlled by a few powerful players, renewables, by contrast, emerge from diverse sources — wind, solar, hydro, geothermal, etc. These energies are often locally produced, with a vast and growing capacity. Renewables present a decentralised energy sector, not a regulated one. More critically, as the below chart illustrates, renewables are increasingly cost-competitive. 

CAPTION: The cost per MWh of wind and solar energy sank lower than that of coal and gas before 2020. Coal and gas are by far the most common fossil fuels used to generate electricity in most countries. 

The abridged version of the chart above? Fossil fuels have only been getting more expensive, whereas solar and coal have been less expensive per MWh for years. It’s true that these figures do not take into account costs associated with wind and solar such as grid upgrades, back-up generation, and energy storage. Nonetheless the incentives are building for changes to the energy mix.

Businesses aiming for cost-efficiency should work to minimise their fossil fuel reliance. 

Even utilities, like Eversource in Massachusetts, have cut ties with fossil-fuel associations, saying they want to embrace decarbonisation.

Nassim Nicholas Taleb's concept of "antifragility" is apt here. An antifragile business strengthens amidst shocks. By decarbonising, companies can achieve this energy antifragility, gaining an edge over fossil-fuel-dependent competitors, especially during fossil-fuel price surges. Historical trends affirm that such shocks are inevitable.

The trajectory is evident: fossil fuels' influence will wane. Companies must decide: to remain fossil-fuel-dependent or embrace a clean energy market that is more equitable and dynamic. And has cheaper prices, too. 


Decarbonisation will soon be a fiduciary obligation

Decarbonisation is hardly a fringe concept. It is now increasingly standardised as a methodology. The "Deep Decarbonisation Pathways'' initiative, for example, provides a structured set of recommendations for jurisdictions or sectors interested in overhauling their energy consumption, with a short-term emphasis on eliminating inefficiencies. The ISO has relevant guidelines. It’s increasingly supported by policy: the US government passed $300B in decarbonisation investment in its latest infrastructure act, and EU companies must heed the CSRD.  

By law and tradition in most capitalist economies, corporations are obligated to work for the betterment of shareholders, primarily through the growth and distribution of profits. Some business leaders, however, have recently advocated for broadening this focus to “stakeholder capitalism,” including an eye to environmental impacts. 

The beauty of decarbonisation is that it doesn’t require the corporation to twist itself into new ESG-style shapes. 

Decarbonisation is already perfectly aligned with the corporation’s centuries-old profit-minded ethos. It’s not eco-centric; it's a pragmatic and prudent tactic with well-documented pathways.

There are few if any excuses left for executives who ignore the cost-savings potential. So much so that in the foreseeable future, it’s easy to see decarbonisation transition from a strategic choice to a fiduciary duty.

Decarbonisation, in fact, presents a unique chance for businesses to gain a competitive edge and enhance earnings. Executives, irrespective of their stance on climate change or capitalism's role in the world, risk a lot if they ignore the window of opportunity. It would be no different than missing the boat on previous cost-cutting opportunities, like putting customer service on the web or digitising back-office processes. 

These changes also promote a broader culture of continuous striving for business efficiencies and upgrades that pay dividends across an organisation. This is no small thing. As the quote attributed to management guru Peter Drucker says, “culture eats strategy for breakfast.”

Shareholders, the foundation of capitalism, wield decisive influence, especially during challenging times, as seen with numerous CEO and board ousting's due to shareholder dissent. 

How will shareholders evaluate directors and top execs who fail to act on decarbonisation in the next few years? 


It takes will and leadership to act on decarbonisation, but it doesn’t require any moral grandstanding or trailblazing. Just the courage to follow capitalism’s incentives.