A new clean energy subsidy in California has encouraged businesses in the US’s most determinedly green state to start making lots of money from cow manure.
California’s legislators have decided that renewable natural gas (RNG) produced from cattle dung is more environmentally friendly than RNG produced from landfill waste. In tandem, they have also decided that the former should entail incentives that are significantly more generous.
As a result, garbage is out – and cows are in. Suitably rewarded, Californian dairy farmers are clamouring to reduce methane emissions by installing anaerobic digesters and selling a by-product that can be used to power non-petrol vehicles.
It sounds like another small but notable victory in the fight against the climate crisis, and in many ways it is. If we pause to look beyond the superficial appeal, though, we might also find an illustration of a paradox that continues to surround responsible investing.
Unintended consequences
Growing awareness of ESG is rightly shaping more and more decisions by companies, policymakers and investors. Promoting a greener, apparently scalable and clearly profitable way of producing fuel seems entirely in keeping with this trend.
Yet humanity’s relationship with the planet is complex, and interventions in any complex system can invite unintended consequences. What is happening in California underlines this, because the fact is that incentivising the production of RNG from cow manure also incentivises investment in livestock.
The Food and Agriculture Organisation of the United Nations has reported that livestock accounts for 14.5% of all anthropogenic greenhouse gas emissions. Crucially, 65% of this total comes from cattle.
It has also been calculated that livestock takes up nearly 80% of agricultural land globally yet produces less than 20% of the world’s supply of calories. In addition, it need hardly be said that livestock is central to the enduring blight of factory farming.
Subsidising dung-derived RNG might therefore be thought of as a double-edged sword. It could be viewed as delivering a positive impact by utilising a proportion of the emissions that cows generate, but it could also be viewed as a means of perpetuating a broader overreliance on livestock and all the risks that this can pose. Doing good in the short term does not invariably translate into doing good over the long term.
Real change?
It is not difficult to propose other ways of reducing emissions from farms. For example, why not instead subsidise plant-based meat and dairy, lab-grown proteins and other alternative food sources? Why not make traditional meat and dairy more expensive by imposing a carbon tax?
The problem, of course, is that these prospective solutions are seen as radical. Political support for the radical is traditionally scarce, and economic backing is more often than not in short supply as well. What we are seeing today is basically a question of whether we want to embrace full-blown disruption or settle for piecemeal change.
This conundrum casts an especially uncomfortable shadow over the journey to net zero. Six years after the Paris Agreement’s ratification, there remains limited appetite for many of the measures that might conspicuously accelerate the reduction of emissions – among them bioenergy carbon capture and storage, the mass planting of trees, hydrogen energy, geo-engineering and advanced nuclear energy.
With opportunities to substantially intensify the response to climate change consistently sidelined in favour of steady progress, incrementalism still holds sway. As with California’s cow dung, subsidies and incentives are routinely applied with honourable intentions but a paucity of longer-term thinking.
Overall, the gentle breeze of step-by-step innovation is far more likely than the gales of creative destruction. The focus is on the probable rather than the possible.
Growth opportunity
Such an approach is particularly curious in light of the past two years. After all, the Covid-19 pandemic has supplied unique proof of what can be accomplished when the conventional barriers to innovation are removed.
So why do attempts to transform a raft of closely interrelated, ESG-centric aspects of our everyday lives appear so lethargic by comparison? Why is enthusiasm for decisively disrupting our energy systems, our food systems and so on so modest?
The torpor is in no small part attributable to politicians and policymakers, who are seldom first in the queue to endorse the truly novel. This means that others must take up the slack – and this is where the investment community can make a massive difference.
It is wrong to imply that investors represent the one and only answer to this quandary. We cannot bring about radical, ESG-driven change by acting alone. Multi-stakeholder collaboration, including the public sector, is imperative.
Yet there is no doubt that the necessary degree of innovation and subsequent adoption cannot happen without investors. Ultimately, the businesses that might save the planet and its inhabitants through creative destruction need capital if they are to fulfil their exceptional potential.
