Investing In Solutions To Reverse Climate Change

Children starving in East Timor, record floods in America’s Midwest, melting glaciers and permafrost — sometimes you just want to ignore the issue of climate change because it all seems so hopeless.

“I bet you in five years, forget the Euro, forget the dollar, the carbon unit is going to be the new currency.”

Or is it? Beginning Aug. 22, Discovery Channel‘s eco-series Project Earth looks at huge, often mind-boggling, ideas to save the planet. Each episode looks at one grand idea — such as wind turbines that ride on cables 1,000 feet above sea level; a means of making clouds brighter so they reflect more of the sun’s rays and keep ocean waters cooler; and machines that actually pull carbon dioxide from the air like giant room purifiers. Three experts — a space scientist, an engineer and an investment specialist — look at the potential each project has, and try to decide if it will work.

Thinking of my own languishing stock portfolio, I chose to follow the money and spoke with Kevin O’Leary, who made his fortune by developing The Learning Company, which he later sold to Mattel, Inc. for $3.7 billion. He also has some green credentials, having studied environmental science long before Al Gore made it cool.

I reached him in Toronto, and we discussed at length the visionary projects he’d witnessed in action, and which would bring the most lucre to environmentally conscious investors.

I wanted to talk to you because investment is paramount if these projects are going to be successful. So, first of all, what inspired you to become involved in environmental investments?

Kevin O’Leary: I am an investor, first and foremost, so I try to see what’s going to happen over the next five years because I try to take long-term views on investments. The No. 1 theme is that there was a time when the environmental movement and the corporate movement were at war with each other. But we’ve completely reversed that environment. [Now] we’ve got shareholders who want change. Corporations want change. You don’t find anybody saying the environmental movement is a bad thing anymore, because it isn’t. If you think about the challenges we have in energy, you’ve got all of these new technologies. You don’t need government subsidies anymore. There’s so much capital wanting to be part of the next wave that every new idea in ways to save energy or change the look of alternate energy or reverse climate change effects is private-market driven in many cases. We don’t need the government even supporting ethanol anymore because the economic incentive is there.

Real sustainable change is about economics, and what really makes people change their habits is money. If you understand that, you can be a very successful investor and you can be a supporter of many great causes because, over history, change has come from economics. I hate to say it in such a crass way, but greed works and it’s going to be greed that saves the world, not green. I know that sounds a little inconsistent, but now investors are looking at all of this and saying, “We can make a difference,” and that’s very consistent with what the environmental movement wants.

There are some intriguing ideas in this series. How were they selected?

You have to look at them from different perspectives. One is, “What can you actually implement in a way that you can measure?” Because there are a lot of great ideas out there, but if you can’t measure the results, it’s very hard to know if an experiment was worth doing or not.

From an investor’s point of view, the M.A.R.S. turbine [which flies wind turbines like kites 1,000 feet above sea level] is fascinating because when you look at the whole investment thesis for wind turbine farms, you’ve got to find places that fit two metrics. One, is there a close population that needs the power because the transmission costs per mile are a million bucks plus? So whenever I see a wind project I ask myself, “Where’s the grid?” Two, less than 15 percent of the Earth’s surface actually supports the 20 mph winds that make wind turbines efficient. And here’s this group saying that doesn’t matter anymore. We can put these turbines anywhere. I jumped all over that one. I thought it was just fantastic. And the potential is very, very big, and the company has already found investors. It’s easy to see how this could be applicable. We tested it. It works.

And it gets rid of the whole NIMBY thing. It’s so far up, that it isn’t going to ruin anyone’s view.

That’s right. And in addition, it lets you move [a turbine] up and down at will, so if you are dealing with bad weather you can just take it down for a period of time and then put it back up. And “not in my backyard” is a big problem for some people. I’ve heard a lot of negatives about wind farms, and people are concerned about how much damage it does to bird migration. This technology isn’t going to have anywhere near that impact because it’s higher than most birds are flying.

What about reforestation by dropping seed packets from the air? I don’t see the potential for investment there.

Right now, the hottest area of private equity is infrastructure investment. There couldn’t be anything more sizzling hot in the private sector than this. So let’s say you cut a deal with the Brazilian government to seed 100 acres of land. And let’s assume you can’t harvest for 15 years. And you’ve got a situation where the government will throw in the land for free because it’s already been damaged. … At a dollar a ball — or a seed bomb or whatever you want to call it — you could do all of the planting in just a matter of days from the air versus months or maybe even years if you do it by foot.

Now let’s look at the internal rate of return. Assuming we don’t get a return on that capital for the first 15 years, it is worth it? Do we beat a 7 percent bond rate? And the answer could be a resounding yes, [if] are you trading any carbon credits in this market.* … Because when you create a forest, you’re doing both the economic value of the hardwoods being harvested on a sustainable basis — remember, you don’t have to go in there and raze the place again — and the carbon credits.

Cloud seeding seems like the most far-out idea. Is it really possible to control the weather?

This one on paper is the most, call it visionary, and for me as an investor, I was the consummate skeptic. … [It] sounds right out of science fiction [but] if you could keep a constant cloud cover off the west coast of Africa, you would reduce the intensity of hurricanes in America by a very large amount.

The theory is that hurricanes like Katrina start off the west coast of Africa, and you need high water temperatures to create them. So here’s the investment thesis on that one: If I came to you in the state of Louisiana and offered you an insurance policy that would reduce the intensity of hurricanes over the next hundred years by 50 percent, how much would you pay me? If, in fact, I’m wrong, you don’t pay; but if I’m right, you pay. I started to push those numbers; it’s very interesting because you’re talking about billions in damage on one event. So you can see how you could tax the infrastructure and it would be very economical in value.

Let me play devil’s advocate here. How do you know it works?

Because the event itself didn’t occur. All you care about as the state of Louisiana is that you don’t get Katrina’d again. What is insurance, anyway? If you could go back a few years and offer the people of Louisiana a chance to pay, do you think they’d pay? You bet they would. You have an economic cost that you can actually quantify now. You have a history of all the hurricanes that come from that region for the last hundred years, and every year we have better science explaining how the intensity occurs. So all you are attempting to do is something very measurable — reduce the water temperature. Just a few degrees and you save billions in hurricane damage. That’s how you as a skeptic should be silenced — by the fact that you do not have the events. Could I go on the road and sell that insurance? … If you came out with me on that boat, all you would have to do is feel the effect of the temperature drop and you would get a jolt. It goes from hot to cold and it happens in a few seconds.

And blanketing glaciers? That’s pretty extreme.

When I got on the chopper to land up there, I said, “This is nuts, this is just TV. There’s nothing here that makes sense as an investment.” Then I meet Jason Box (a glacierologist from Ohio State University), who is a very rational guy. I’m not sure he even liked me because I was so skeptical. [O’Leary notes that the blanket works, but even then he did not see the value of it.] The weekend after we got off the ice, I went up to the place where the iceberg that sank the Titanic came out of. It’s a beautiful town up in a fjord. If you spend a weekend there and talk to the people who have lived there 50 or 60 years, they’ll tell you that in the last 10 years, the fjord has not frozen. When I was there, the museum was closed. The front door was sinking into the ground because the permafrost is melting. These old timers are really freaked out because they have not seen this in their lifetime. That got me a little nervous.

So here’s the thinking: If [the glacier] melts significantly, the water is going up 5-10 feet in towns like Miami and every other coastal region. This is catastrophic thinking. The cost of blanketing the entire Greenland ice cap would be billions, but the cost of losing that coastal infrastructure would be billions more, and if that was the only thing that worked, you have to pay. I don’t like it because I think it would be very hard to sell politically. I think there are a lot of environmental issues associated with it, but if it works, and there’s a lot of evidence that it does, why wouldn’t you do it?

Why not just seed the clouds over Greenland?

You could, I guess, do it over land, too. My attitude about all these projects is this. You start this journey at Point A. You think you are going to Point B, but you could end up at Point L and find out something else that is really good. … I don’t think it’s very easy to know the outcome when you start, and that’s what makes this fascinating television. I had a very rigid format of thinking — “If I’m going to be an investor, I need an intrinsic rate of return of at least 7 and a half percent long term and … I’m only going to look at traditional technologies because I want my investment to be low-risk.” This stuff is starting to say to me, “Wow! There are going to be a lot of private/government partnerships that are going to be very lucrative with an infrastructure investment.”

Whenever people say, “What are we doing about this warming problem?” I remind them that there were only one or two listings for computers in a 1990 phone book. We can’t know what sort of things will be common in 15 or 20 years, but I thought that some of the things on this project are rather frightening, because they imply that nothing else has worked.

Yeah. I don’t think people have focused on the impact of glacial melt. It wasn’t even on my radar screen. The whole thing to me was a bunch of hype. But when you go and see the water coming off that ice sheet, it’s primordial. You feel like an insect compared to the volume of water flowing off that. And when you talk to the people [who live there], it isn’t good.

Given the summer storms we’ve had and the hurricanes that likely will be forming in the warmer water, I think climate change will be a huge issue in the upcoming campaign. In your mind, what is the best way to encourage environmental investment and innovation?

First of all, awareness of potential solutions is most important to the investor. Everybody understands there’s an issue. There are all kinds of theories of why global warming is happening, but I don’t think that even matters anymore. … Understanding what ideas are available, just like you and I are discussing whether we should be covering a glacier with a blanket or seeding clouds. It starts with potential ideas versus just hype and hysteria, which add no value.

There is a lot of television that focuses on this, but nobody I’ve ever seen has mounted such an ambitious piece of programming as this. The cost of this series and the time it took to film have never been done before.

The publicity for Project Earth says it has been done with the same degree of quality as the series Planet Earth.

If not more. I’ve done some work on TV and have never seen this form. We went to places with some pretty interesting technology and shot it in very interesting ways. Often it felt like we were filming a feature film and not a documentary.

It was an interesting theme, too, because I always kept looking at it from the financial aspects. But these scientists — they are a very eclectic group of people doing stuff for all kinds of different reasons. You’re working with them for weeks or months and you finally get to sit down with them over a bottle of wine and say, “Walk me through the numbers.” I did this with Mark Hodges on reforestation. We broke his project down into dollars and cents and we had a lot of fun. I did the same with Jason Box. He said, “Miami is under 12 feet of water. What’s it worth to you to prevent this?”

How do you feel about cap-and-trade investment? Do you feel that’s where we are headed?

I do, [because] there is a tremendous political pressure for it. You saw the first attempt with the Kyoto Accord, which was not successful because India and China and the U.S. were not on board. But in India and China, they are dealing with the cost of carbon emissions to their own infrastructure with the pollution and the weather that they are dealing with. I think that what will happen — and I’m talking over the next 36 months, you won’t have to wait 10 years — is you’re going to get a consistent view, worldwide, that there is a measurable cost to climate change and the debate to how you control it is finally agreed upon. Carbon emissions are the culprit and they have to be reduced. The way to successfully do that on a global basis is some form of a tax that pays for the effects because it alters behavior and it’s a common currency that all governments can agree to trade.

I’m always against increased taxation. As an investor, I want low taxes in all jurisdictions because that’s how you form capital. Great success stories, like the Irish move from a tax rate of 11 percent changed lives in just 20 years. Ireland became a successful economy because of low taxation. But if you take a view that there is a cost to climate change, then the only effective methodology is going to be some universal unit. And I think it’s going to be a huge market, a very liquid market, a quantifiable one and a very good investment. All of us who invest … are tying to understand how this currency is going to be formed so we can be ahead of it. I can’t see a scenario where it won’t happen. There will be some form of cost and that’s why I think the topic is sizzling hot in the investment community.

I bet you in five years, forget the Euro, forget the dollar, the carbon unit is going to be the new currency. I’m more convinced than ever. It doesn’t matter which political party you are in. You have constituents screaming about this. … It may be we’re in a cycle that’s caused by sunspots. It doesn’t matter. You have to deal with it. You have to lower emissions.

I don’t know if they showed you the carbon scrubber project [on the Project Earth series], but there’s an old technology that was envisioned in the ’40s that an American scientist implemented in Canada, and we just tested this in Calgary. He has developed a carbon scrubber that you just put out in the air and you can count the pounds of carbon by the hour. I saw that thing and I said to the guy that’s doing it, “There’s absolutely no question that you have found a machine that prints money.” Because if you believe in a cap and trade or any kind of carbon tax, you turn this thing on and you actually sequester carbon. He’s creating money out of thin air. Of all the ones … it’s so clear the path, so measurable, it works. It’s a gold mine.

So larger firms could buy small versions and just meet their limits?

Totally! If you are offside on your carbon emissions, you turn on the machine and you pull down a million pounds of carbon and you’re back on side. Of course you’re going to buy that technology.

Anything to add?

This is the most interesting project I’ve ever worked on television. There are a lot of things coming into play here that are going to be very interesting. I just think that at the end of the day, it’s going to be fascinating television. I think it will be controversial, as well. It will be great TV.

*Visit the Social Science Research Network for a straightforward explanation on carbon credits, sans all the pro and con bias found on most sites.