We will completely de-carbonize our economy this century, and it will be the biggest economic event since the Industrial Revolution, according to Jeremy Grantham. But we face a painful path to that end, including more frequent natural disasters and disruption of our food supplies.
Grantham spoke at the Morningstar Investment Conference on June 12. He is the co-founder and chief investment strategist of Boston-based Grantham Mayo Van Otterloo (GMO). He is an investor with 50 years of experience in the markets, and he is widely recognized for predicting the asset bubbles that led to the 2000 and 2008 recessions.
Grantham presented his predictions about how climate change and the advance of technology will impact markets. According to Grantham, accelerating climate damage will define the future of the global economy.
But luckily, technology will help us.
Grantham said that he has 98% of his personal net worth allocated to two foundations in this space. “I am all in on the topic of climate and toxic damage to the environment,” he said. He is also part of GMO’s asset allocation team, which launched climate change funds discussed in this recent interview with Advisor Perspectives.
In his keynote address, Grantham reviewed his forecasts related to the future of climate change. “You could call this presentation the story of carbon dioxide and homo sapiens,” he said.
According to Grantham, fossil fuels have played a very central role in the development of civilization. But the Industrial Revolution was not based on the steam engine, he explained. “It was based on the coal that ran the steam engine,” he said. “Without coal, we would have very quickly run through all our timber supplies, and we would have ended up with what I think of as the great timber wars of the late nineteenth century.”
“Fossil fuels will either run out, destroy the planet, or both,” he said. “The only possible way we can avoid this outcome is, frankly, to complete de-carbonize of our economy.” This will be the most significant economic event since the Industrial Revolution, Grantham predicted.
Here are Grantham’s four major predictions about climate change.
- We will have an abundant pipeline of cheap energy thanks to technological advances
Lack of green energy will not be the issue that brings us down, according to Grantham. Advances in technology, particularly the technology of de-carbonization, are accelerating, he said.
“When we come back in 40 years, I'm pretty confident that there will be a decent sufficiency of cheap green energy on the planet,” he said. “In 80 years, perhaps, it is likely we will have full de-carbonization.”
According to Grantham, the issues we face will be caused by the slow adaptation of these new technologies. By the time we have reached a new stability and we are de-carbonized, he said, a great deal of damage will have been done, “and a lot more will happen in the deeper future due to the inertia in the environmental system.”
- Natural disasters will increasingly impact markets
Grantham reviewed data to explain that, with ocean levels rising, natural disasters will become increasingly disruptive to the economy and financial markets.
According to Grantham, we should not focus on the potential decline of vulnerable urban areas. “I don't worry too much about Miami or Boston,” he said, “that's just the kind of thing that capitalism tends to handle pretty well.”
Rather, he said, we should focus our worry on how natural disasters will impact global agriculture. “The more serious problem posed by ocean level rise will be the loss of the great rice-producing deltas around the world,” he said. In a world with rising population levels, Grantham cited droughts, floods, and other environmental events as the key threat to resources.
- Environmental toxicity will impact both markets and economies
A separate threat related to fossil fuels “is that we've created a toxic environment apparently not conducive to life,” according to Grantham.
“I think chemicals will turn out to be a hotter button than climate change,” Grantham predicted.
He discussed how changing policies are impacting chemicals markets. “We must respond rapidly by a massive and urgent move away from the use of complicated chemicals that saturate our daily lives,” he said, citing plastics as an example of a key problem area.
Grantham discussed why he believes health issues resulting from toxicity levels will hurt economies, and commented specifically on the implications this will have for labor markets.
- Our capitalist economies cannot deal with these environmental problems
Grantham concluded his presentation with his conviction that “capitalism and mainstream economics simply cannot deal with these problems.”
“Mainstream economics largely ignores natural capital,” Grantham said. “A corporation's responsibility is to maximize profits, not to waste money attempting to guess how to save the planet.”
Grantham said that corporations don’t consider issues that will impact their business in 25 years, and he argued that they handle externalities very badly. As a result, he said, we are engaging in environmentally harmful behavior like deforestation and soil degradation, with a short-term focus on balance sheets and income statements.
Marianne Brunet is a financial markets analyst at Advisor Perspectives.
Read more articles by Marianne Brunet
We will completely de-carbonize our economy this century, and it will be the biggest economic event since the Industrial Revolution, according to Jeremy Grantham. But we face a painful path to that end, including more frequent natural disasters and disruption of our food supplies.
