Why investors care about climate tech’s green premium

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Talking about money can be difficult, but it's a crucial piece of the puzzle when it comes to climate tech.

I've been thinking more about the financial piece of climate innovation since my colleague James Temple sat down for a chat with Mike Schroepfer, former CTO of Meta and a current climate tech investor. They talked about Schroepfer's philanthropic work as well as his climate-tech venture firm, Gigascale Capital. (I'd highly recommend reading the full Q&A here.)

In their conversation, Schroepfer spoke about investing in companies not solely because of their climate promises, but because they can deliver a cheaper, better product that happens to have benefits for climate action too.

This all got me thinking about what we can expect from new technologies financially. What do they need to do to compete, and how quickly can they do so?

Look through the portfolio of a climate-focused venture capital firm or walk around a climate-tech conference, and you'll be struck by the creativity and straight-up brilliance of some of the proposed technologies.

But in order to survive, they need a lot more than a good idea, as my colleague David Rotman pointed out in a story from December outlining six takeaways from this century's first boom in climate tech. Countless companies rose to stardom with shiny new ideas starting around 2006 before crashing and failing by 2013.

As David put it, there are lessons in that rise and fall for today's boom in climate technology: The brilliance of many new climate technologies is evident, and we desperately need them. But none of that will ensure success. Venture-backed startups will need to survive on the basis of economics and financial advantages, not good intentions."

Often, companies looking to help address climate change with new products are competing with an established industry. These newcomers must contend with what Bill Gates has called the green premium."

The green premium is the cost difference between a cheaper product that increases pollution and a more expensive alternative that offers climate benefits. In order to get people on board with new technologies, we need to close that gap.

As Gates has outlined in his writings on this topic, there are basically two ways to do this: We need to find ways to either increase the cost of polluting products or cut the cost of the version that causes little to no climate pollution.

Some policies aim to go after the first of these options-the European Union has put a price on carbon, raising the cost of fossil-fuel-based products, for example. But relying on policy can leave companies at the whims of political winds in markets like the US.

So that leaves the other option: New technology needs to get cheaper.

As Schroepfer explained in his chat with James, one of the focuses at his venture firm, Gigascale Capital, is picking companies that can compete on economics or offer other benefits to customers. As he put it, a company should basically be saying: Hey, this is a better product. [whispers] By the way, it's better for the environment."

It's unrealistic to expect companies to have better, cheaper products right out of the gate, Schroepfer acknowledges. But he says that the team is looking for companies that can-over the course of a relatively short, roughly five-to-10-year period-grow to compete on cost, or even gain a cost advantage over the alternatives.

Schroepfer points to batteries and solar power as examples of technologies that are competitive today. When it's available, electricity produced with solar panels is the cheapest on the planet. Batteries are 90% less expensive than they were just 15 years ago.

But these cases reveal the tricky thing about the green premium: Many new technologies can eventually make up the gap, but it can take much longer than businesses and investors are willing to wait. Solar panels and lithium-ion batteries were available commercially in the 1990s, but it's taken until now to get to the point where they're cheap and widespread.

Some technologies just getting started today could be the batteries and solar power of the 2040s, if we're willing to invest the time and money to get them there. And I already see a few instances where people are willing to pay more for climate-friendly products today, in part because of hopes for their future.

One example that comes to mind is low-emissions steel. H2 Green Steel, a Swedish company working to make steel without fossil fuels, says it has customers who have agreed to pay 20% to 30% more for its products than metal made with fossil fuels. But that's just the price today: Some reports predict that these technologies will be able to compete on cost by 2040 or 2050.

Most new technologies designed to address climate change will need to make a case for themselves in the market. The question for the rest of us: How much support and time are we willing to put in to give them the best shot of getting there?

Now read the rest of The SparkRelated reading

For more on what the former Meta CTO has been up to in climate, read the full Q&A here. There's a whole lot more to unpack, including work on glacier stabilization, ocean-based carbon removal, and even solar geoengineering.

For more on the lessons that companies can take away from the first cleantech boom, give this story from my colleague David Rotman a read.

Another thing

The US Department of Energy is putting $33 million into nine concentrating solar projects, as my colleague James Temple reported exclusively last week.

Concentrating solar power uses mirrors to direct sunlight, which heats up some target material. It's not a new technology, and the DOE has been funding efforts to get it going since the 1970s. But it could be useful in industries from food and beverages to low-carbon fuels. Read the full story here.

Keeping up with climate

Western battery startups could be in big trouble. While new chemistries and alternative architectures attracted a lot of investor attention a few years ago, the companies are now facing the reality of competing with massive existing manufacturers. (The Information)

California's largest wildfire of the year has burned well over 300,000 acres so far. Climate change has helped create the conditions that supercharge blazes. (Inside Climate News)

The UAE has been trying to juice up rainfall with high-tech cloud seeding operations. But the whole thing may be more about the show than the science-check out this great deep dive for more. (Wired)

Congestion pricing plans-like the one recently proposed and then abandoned in New York City-can be unpopular with voters. Yet people generally come around once they start to see the benefits. Here's an in-depth look at how attitudes toward these plans change over time. (Grist)

Air New Zealand backed down from a goal to cut its emissions nearly 30% by the end of the decade. The first major airline to walk back such a promise, the company points to a lack of supply for alternative fuels, as well as delays in new aircraft deliveries. (BBC)

Global methane emissions are climbing at the quickest pace in decades. The powerful greenhouse gas is responsible for over half the warming we've experienced so far. (The Guardian)

Demand for air conditioning is swelling in Africa. But the industry isn't well regulated, and some residents are struggling to get reliable systems and keep harmful refrigerant gases from leaking. (Associated Press)

Southeast Asia is home to a fleet of relatively new coal power plants. Pulling these facilities off the grid early could be a major step to cutting emissions from global electricity production. (Cipher News)

Correction: an earlier version of this story misstated the name of Mike Schroepfer's firm. It is Gigascale Capital.