On The Rise w/ Marcius Extavour
On the Rise is a podcast about climate and the future—but not in the usual way. Across energy, technology, business, and culture, it features honest conversations with people building things, making decisions, and figuring out what actually works. Grounded, curious, and occasionally funny—a more human conversation about the future.
On The Rise w/ Marcius Extavour
Why Is Insurance Getting So Expensive?
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Marcius starts this episode by explaining why climate risk is a helpful mental model for understanding climate impacts. Then, David Victor returns to discuss the complexities of insurance markets, the diffrene between adaptation and resilience, and rare earth minerals. Finally, Vish joins the show to ask Marcius some burning questions about the conversation with David.
Let us know what you think at podontherise@gmail.com
00:00 Introduction
08:09 Planning Systems vs Market Systems
14:50 How is Thinking About Climate in Terms of Risk Helpful?
18:54 Why Resilience Will Be the Watchword of the Future
20:28 Climate Tech has to Look and Smell Like Normal Tech
24:08 The Politics of Mitigation vs the Politics of Resilience
27:18 The Importance of Collaboration in Innovation
30:14: How Do We Know That We've Made Progress on Climate Change?
33:25 Rare Earth Minerals
42:47 Q from VIsh: Is the Market Good At Taking in the Right Signals?
48:00 Q from Vish: What Are the "Right" Signals?
51:48 Q from Vish: How Can Climate Insurance Work For All People?
56:11 Outro & Music
Keywords: climate risk, insurance, rare earths, resilience, climate change, market signals, policy, technology, sustainability
Show Credits:
Vishrudh Sriramprasad, Producer
Claire Davis, Theme Music (Long Gone, Get It Right) | @clairedavismusic
Kheya Patel, Art | https://kheyapatel.com/
Contact: podontherise@gmail.com
I have a working hypothesis, which is that as climate impacts start to really bite, that the whole world is going to sift around resilience, that there we're going to see this tremendous variation from very low resilience societies, which are correlated with income, but not perfectly. Quite there are a lot of other factors that affect resilience. Low resilience societies that are going to be hit really, really hard by climate change. Just like nature and fragile natural ecosystems will be hit really, really hard by climate change because there's only one of them, and the way they respond to things is through extinction. So same will be true for very low resilience societies where small events can have huge amplifying effects. To the opposite extreme, the kind of the Netherlands, if you like. I mean, the Netherlands shouldn't exist in some, it should be at the bottom of the North Sea. And the Netherlands exists because the entire society is organized around managing water. And now that's one example. Wildfire will be the same where the California, other places become obsessed about managing wildfire risk and pre-cuts, and uh and and uh planned burns and fire breaks and so on and so on and so on. Some of it's gonna look ugly, some of it we'll figure out. Those parts will do okay. You know, there will be wildfires, but they won't be these the probability of superfires will be radically lower. So I think we're headed now into this world where where the where the watchword is resilience.
SPEAKER_01Hello my friends, and welcome to the On the Rise podcast. I'm your host, Marcus Hextavore. Now, for today's episode, I have a very special announcement. Get ready. I am no longer gonna say the phrase climate change. That's right. I'm only gonna say climate risk from now until forever. Okay. I'm kidding a little bit. I probably am still gonna say climate change. But I want to introduce this phrase climate risk before I set up today's conversation because I think it's a really helpful framework through which to deal with and even think about these topics. Think about it like a software upgrade. It's like a mental software upgrade. Once you understand this concept, I think it becomes a lot easier not just to understand what's going on, but to figure out why you should care and what you may want to do about it in your own life. Today's conversation is the continuation of a chat I had with David Victor. David is a professor of public policy and innovation at University of California, San Diego. He thinks about international government relations, he thinks about law, he thinks about global climate accords, and he thinks specifically about how innovation intersects with those things in energy, in decarbonization, um, in and in other areas of technology. David and I started to talk about resilience and risk and adapting to changes in climate, or adaptation, as people often call it, in this conversation. So before we get there, I wanted to set that up with this mental software update that I'm mentioning about climate risks. There are three reasons that I think the climate risk phrase is really helpful and practical for us to adopt when we think about these issues. So let me go through these quickly before we introduce the conversation with David. The first reason to think in terms of risk is that it makes the experience of changing climate much more local and real and proximal to us. I don't think most of us are going to experience a generic changing climate. And most of us, frankly, probably aren't going to care about something happening very far away, like melting of a polar ice cap or disappearance of a species unless you live nearby. I know that's harsh to say, but I think it's true. On the other hand, when you speak in terms of risk, at minimum, it allows each person to ask, what's the risk to me in my environment? Am I going to experience heat, or am I going to experience flood, or am I going to experience property damage? Maybe I'm already experiencing cost increases for food and fuel. So connecting or bringing the experience more proximal down to where we are and what we experience is helpful about risk. The other reason, though, is that it also connects cause and effect with risk sort of in the middle. We know there could be flooding or sea level rise, and we know it's driven by too much CO2 in the air and oceans, but exactly how much flooding, exactly when, exactly how bad is it going to get, how much is it going to cost, etc. That's that fuzzy middle, and risk is a really helpful way, not to totally crystallize it, but to really get into that middle conversation where we need to be. That's the first reason. Proximity to effect. The second reason is thinking in terms of risk, I think just gives a much better answer to the why should I give a shit question. This is a big question in climate. We don't often like to admit this, but most people are still at the point of wait, why do I need to care about this again? Why do I specifically need to care about this? Thinking in terms of risk doesn't totally answer it, but it brings us a lot closer. And it's not just why should I care, but as I was saying earlier, how much, how soon, how much is it going to affect me? Thinking in terms of risk is a great way to do that. There are some areas, some regions that are gonna face very little risk from wildfire, whereas others will face much more. So risk not only helps us figure out how it's how it impacts us and answers that why should I care? Question, it helps answer a related question, which is what should I do about it? Sometimes the answer might be not much. This is a very low risk for us. But it also allows us to rank and sort the risks that are very high and acute to us, whether us means you, your family, your loved ones, your community, your business, your country, your part of the world. So that's another the second reason I like the risk framing. It gives a better answer to why should I care, and even how should I think about taking action and when and why and doing the trade-offs. The third reason is that we already know how to manage risk in our society. We don't really know how to manage this thing called climate change. We're really struggling with that. But we know how to manage all kinds of other risks. Risks of property, risk that uh a person can't do their job anymore, risk of personal injury, all kinds of different risks. Every government does long-term planning. They have to think about risks. Democratic governments also think about political risk, and frankly, even non-democratic ones do all the time. We think about property risk. Every well-governed corporation in the US or Western style must think about risk. They have titles like chief risk officer. I used to work for one of those people, they have boards of directors. We have structures in place to deal with risk. So if we can describe climate change in terms of risk, maybe we can get faster action because we can rely on the tools we already have to dealing with risks. One of those tools is insurance. Insurance is either that annoying administrative, expensive thing in your life, or maybe a lifesaver or a property saver, depending on how you think of it. No matter what you may think about insurance companies themselves or the insurance industry, and there's totally fair critiques there. I think the idea of insurance, pooled insurance, is one of our best human ideas ever for dealing with very damaging, very unlikely events, you know, like a severe storm. It combines motivated capital, money, somebody that doesn't want to lose their money or their property or their loved ones or that thing that they value. It combines all the tools we already have for dealing with risk, insurance, planning ahead, whatever they may be. It also brings in calculation of the risks. In this case, that comes from climate science and other forms of study that tell us exactly what could happen and exactly what we think the risks are. And finally, it helps to funnel them towards some kind of action. In the corporate context, this might be an action taken by the board or the executive team at the direction of the chief risk officer. In your family, it might just be an emergency preparedness plan that you have. You know, in my family, we have a here's what we do if there's an earthquake, we're all gonna meet up and follow this route, that kind of thing. So we risk allows us to take advantage of some of the structures we already have in our society for dealing with risk. Okay. So with that introduction to climate risk and this mental uh software update that you've all now undertaken with me, let me bring in David. He and I, in part one, we're talking about the United States and China and specifically the different political and social systems and whether they're good at planning in the long term or the short term. This conversation picks up right there with China and the United States being compared in terms of their ability to think ahead and plan for these kinds of big risks. Here's my conversation with David Victor. What about short-term versus long-term planning? Like short-term versus long-term, I think, is one of these other big axes in climate. There's short-term stuff we can do. We may not see, we sometimes see the benefits right away, like you know, reduced electricity bill, cleaner air, right? There are huge long-term risks. So those are the ones we're really afraid of, like massive sea level rise, actual big shifts of climate, farms have to move, you know, that kind of huge disruption. Do you think one or either system is a little bit better at long-term planning, short-term planning when it comes to climate risk or let's say clean energy and development, that kind of thing?
SPEAKER_02Yeah, so the there's I think it's almost axiomatic, almost, okay, that the planning system is going to be better at planning over a longer time than the one that that doesn't, that doesn't do as much planning or or doesn't do planning. Um I think it's helpful to distinguish, though, between the macroclimate problem. We have long-term risks, sea level rise, extreme storms, wildfires, and on and on and on. How do you get those internalized into your in into decision making and so on? Both decision making about the right mix of medication and adaptation, so controlling emissions and adaptation or adaptation really is mislabeled because the best adaptation is usually prepared, preparedness, and resilience. I think the concept of resilience is better than adaptation implies, you know, we're just sitting on the porch drinking my ties and suddenly the sea level rose, and so we better adapt by putting on boots. Okay, a little late there. So resilience is a better, is is is the is the better concept. I'm fighting a losing battle in this because everyone keeps calling it adaptation. So I'm gonna keep fighting.
SPEAKER_01I don't know if it's totally a losing battle. Well, I'm very familiar with like the culture wars between, let's say, mitigation and adaptation, which is a gigantic waste of time in my view. But maybe this whole jiu-jitsu the culture wars, too. I don't know. But I think I just to just a small point, I am hearing the phrase resilience um a lot more in the world. We're hammering it. I would have heard the word adaptation. I'm not saying I'm giving you credit for that, but uh you may not be the only person advocating for that.
SPEAKER_02No, I uh absolutely and it's the right way to think about it, but why do we care about this? We care about this because if that's the macro strategy, market systems can be extremely good at taking those long-term signals and bringing them in. So for the for the last five or six years, I've been spending a lot of time on the climate impact side, and in particular trying to understand which parts of the American economy understand what the impacts are going to be and which parts don't. Um and the the and from an economic point of view, the most extreme impacts are heat stress, because you literally kill people and you reduce productivity and a bunch of other things. The economic effects of that are horrific. Um wildfires are really bad, cyclonic storms are really bad, and so on. You kill some people, you destroy a lot of property.
SPEAKER_01I was in a seminar the other day, somebody claimed that flooding is uh they considered flooding to be the number one risk uh in measured in terms of like dollar loss and property damage, sort of like that could be fine, but one has to be super careful about the data.
SPEAKER_02So we've had a couple years where we've had a lot of inland flooding um that has had a really big impact uh on on insured and uninsured risks. If you look at the table of total dollar losses in natural disasters, um what you see are those numbers going up. You see the insured fraction going up with lots of noise in the data. A lot of people use those charts to say, well, climate change is causing this. That's mostly not a climate change signal. And this is uh Roger Pilke is absolutely right in the work that he's been doing on this. What you're seeing mostly is more valuable property being built in places that are going to get hit by storms and a lot more insurance coverage. And if you put all that together, then not surprisingly losses go up. There's also a climate signal in that, and increasingly the signal isn't in there, but it's a very, very noisy, uh, very noisy environment. But the larger point here is about you know planning systems. Yes. If you get the right signals in markets, it's impressive what the markets are going to do in terms of cost of insurance, um uh decisions about infrastructure design, location, and so on. Uh Tom Raimi, who who is a a big deal in the insurance world and sits on some of these boards and was a key person at liberty and so on, he had from him. I've learned a lot over the last last few years. And then also from a guy named Tom Doe, who's in the middle of the municipal bond market. If you want to change our public sector exposure to the physical impacts of climate change in this country, what you need to do is convince the bond markets to take climate seriously. And so for a long, long time, the bond markets mostly focused on preferential tax treatment, like they're obsessed about that. And now increasingly they're starting to pay attention to climate. I've given a bunch of talks to those folks, written several papers, Tom Doe has helped and others. Um, and uh it's the metaphor they're using is this is a little bit like the unfunded pension liability problem that many municipalities had. And so once the bond markets understood, oh my goodness, the risk of loaning to this municipality is higher than we previously thought, they totally changed the questions they asked and so on. We're in the middle of that period right now, along with the ratings agencies, Moody's and and and Fitch and others, changing the way they evaluate. Maybe Moody's is probably in the lead on this and is bought an interesting company that's doing a bunch of analytics. We at Brookings, I'm connected to the think tank Brookings, we did a lot of work with an organization called AIR, which is a big catastrophic risk analysis company. Yeah. We helped them rerun their CAT models, catastrophic risk models, on the largest insurance exposure in North America, actually in the world, which is cyclonic risk, hurricanes and typhoons. And what we did is help them resample the historical catalog that's used for those models. And the historical catalogs were historical, so they didn't know that the profile of storms was about to change, and most likely the number of storms, big storms is not going to go up, but the extremity of some of the biggest ones will go up. So it's going to rightward shift and the tail is going to get fatter. So we helped them resample the catalog. And what happens when you do that? You see, not surprisingly, a lot more damage from big storms near the coasts, and you see a lot more damage from inland flooding. Because the probability of a storm getting big and accelerating quickly beyond detection and preparedness, and then moving rapidly inland, like we just saw in the Carolinas, that probability goes up, and then you have these extreme events that your colleague was talking about.
SPEAKER_01So interesting. Yes, that was the argument in the room at that time was like, okay, there's a lot of flood damage, but are these floods climate-induced floods, or are they just like this river floods every six years?
SPEAKER_02It's a highly stochastic process. And then you know that these tail risks all are have nonlinear effects because as you warm the planet more, you go from a one year and fifty event to a five-year and fifty event with just a degree of warming and the curves are are unpleasant.
SPEAKER_01Sorry to cut you off. Just to put a button on this, like I mean, if if you're listening to this, uh if you have insurance in your life, whether it's like renter's insurance, insurance on your car, property insurance, the idea that insurance gets more expensive or maybe unavailable because of some of these risks, I think that's a nice analogy. Like I just moved to Santa Rosa, California last year. This is a major fire zone. People, I want to do a couple episodes on this eventually, but people in the community, let the coffee shop, this is what people talk about. Has your fire insurance been canceled yet? Or it's either like mine's about to be canceled or I can't get any. So it's just becoming um uh it's just becoming um uh like a community conversation, not just a conversation for insurance nerds or risk adjusters or uh people.
SPEAKER_02So it's a community conversation. It's also, I think, gonna be one of the ways that some more climate science enters the public discourse. And this has always been the case. Those of us who are climate scientists have always been surprised that you know nobody's reading global biogeochemical cycles and having the focusing on the latest results and so on. They're not gonna do that. They're gonna they're gonna talk about climate when climate effects is connected to air pollution, heat stress when it's connected to insurance risk. And the insurance markets are phen as a as an analyst, they're really, really interesting because it's one of these great examples of industrial organization. Here you have a group of firms that are providing a service, the retailers of insurance and then the bundlers of them and the reinsurance companies and so on, they're trying to manage uncertainty with a portfolio, so they're diversifying risk by lots of portfolios, but their ability to charge actual risk is itself is affected by state regulation. And so most of the insurance in the United States is affected at you know by 50 states with 50 different insurance regulators, with different regulations in different states, such that if you have a, if you're um you know, on the border between two states that regulate in very different ways, you can have exactly the same peril with very, very different in insurance costs, and in effect the company is recovering more of its costs in the in the less well-regulated market from the other market. No regulator wants to be in the news for that. And so the regulators then go off and do extreme things like cap rates, and then the only option is for firms to exit. And so insurance used to be a bundled product for the most part. That was people's experience. And more and more people are now seeing their insurance coverage turn into multiple lines where they have uh coverage for fire is separate from coverage for for flood and for earthquake and so on. And part of that is the consequence of regulation.
SPEAKER_01I think insurance is one of the most fascinating topics in climate. I can't believe I'm saying insurance is fascinating. I know people are probably falling asleep, hear me say this, but it's the thing that connects, you know, we go from like the logical thing in my mind is climate ri climate change. It's changing, it's happening, it's not good. The thing that really screws us is the risk. That's the actual effects that, you know, impinge our lives. Risk is a key word to connecting, of course, to the insurance industry. That's what the insurance industry is about. It's about trying to estimate and calculate the risk. And risk and insurance are foundational ideas in business and politics, and also a lot of regular life. So that's one of my very I be I'm becoming nerdy about this topic because it's one of these ways to connect all of these concepts from places where people are to natural, normal climate risk and climate science and make it one conversation.
SPEAKER_02Yeah, and I and I know you want to go back to the question of a long time, Rosen, but just one more element of this. There is tremendous variation across this country and around the world in the extent to which societies are looking ahead and saying, hey, there are various things that climate's gonna make this worse and that worse, and maybe this a little bit better, and on and on and on. And that variation is leading to tremendous variation in the extent to which markets are being allowed to price those risks and opportunities, and public infrastructure is being designed around them and so on. I've seen that up close and personal in the bond in the municipal bond market, where you've got some places that are now doing a lot to get ready for extreme climate events, and others that are doing almost nothing. I I have a working hypothesis, which is that as climate impacts start to really bite, that the whole world is gonna sift around um uh resilience, that there we're gonna see this tremendous variation from very low resilience societies, which are correlated with income, but not perfectly. Quite there are a lot of other factors that affect resilience. Low resilience societies that are going to be hit really, really hard by climate change. Just like nature uh and fragile natural ecosystems will be hit really, really hard by climate change because there's only one of them, and the way they respond to things is through extinction. So same will be true for very low resilient societies where small events can have huge amplifying effects. To the opposite extreme, the kind of the Netherlands, if you like. I mean, the Netherlands shouldn't exist in some things, it should be at the bottom of the North Sea. And the Netherlands exists because the entire society is organized around managing water. And now that's one example. Wildfire will be the same, uh, where the California, other places become obsessed about managing wildfire risk and and and pre-cut and uh or and and uh planned burns and fire breaks and so on and so on and so on. Some of it's gonna look ugly, some of it we'll figure out. Those parts will do okay. You know, there will be wildfires, but they won't be these the probability of superfires will be radically lower. So I think we're headed now into this world where where the where the watchword is resilience.
SPEAKER_01So let's talk about I want to come back to um the two systems.
SPEAKER_02Yeah, the two systems and planning I kind of just so there's a kind of planning which is about the overall policy strategy. What should we do in terms of controlling emissions? What should we do in terms of resilience? That's what we were talking about. Then there's a then there's a kind of planning which is about a particular focused on emissions and on infrastructure investment and so on. Nuts and bolts, how does it affect individual projects? All else equal, some stability and longer-term planning is helpful for that because it creates a predictable environment in which capital can be deployed, and then projects can be turned into not one of a kind, but many of a kind, and can be turned into long time horizon projects where you're amortizing the cost of the project over a long run or over a long time horizon.
SPEAKER_01Let's say give an example of that kind of thing. Like a power plant is a nice example of a long amortized thing, those things are.
SPEAKER_02Or take a nuclear plant. So if you go build a nuclear plant and you're in the expectation the plant's gonna operate for 40 years, then you can amortize those costs over a very, very long time horizon. If you build a nuclear plant and then on day one the government says, you know what, you've built the nuclear plant, but we're not gonna let you have it run, either you have have, as a firm, have to absorb those costs, or then you have to figure out how to put those costs on your ratepayers, and they're upset at you, and and you've got this political toxicity from day one. Real examples. Um The Jeep Geothermal example that you gave is a great one. You know, it's still risky. There are all kinds of innovations in drilling that have not been brought into geothermal that make deep geothermal look a lot more plausible. Those first projects are going to be risky. But if some Sits ready, as is now seems to be happening, to pay for the services from that geothermal plant over a long enough time horizon, then that starts to look to the investor like a normal project. It doesn't look like some wackado cowboy thing that's all equity and everything's at risk. It looks like, yeah, there's some cowboys who have some equity at risk, and then there's a big debt comp proponent uh component that looks normal. And if to the extent that you can make these projects look not like wacky first-of-a-kind climate finance, but just look like finance, then you scale. And the story about like the Bloomberg data showing last year, we saw now more than two trillion dollars globally going into clean tech. A big part of that is these projects are looking normal to people and and they scale.
SPEAKER_01I think it's looking I was having this conversation with a friend a couple weeks ago, um, and uh it was in sort of a busy area, and I mean I yeah, well, I I a person who does project finance for a living was just eavesdropping. We were sort of talking about climate risk, and we were he and I were closer on the technology side, but we were saying something similar like these projects have to look and smell like what you know normal project finance bankers are used to. You can't come in all I'm technology guy, the future innovation. That just sounds like no risk, bad, goodbye. No. It's more like like here's there's a joke in Canada that if you want to get your startup funded, you have to make the business look like a mine, like a mining company. Because that's what the joke is. That's what Canadian bankers and business people understand. Like, oh, okay, there's a bunch of upfront money, and then there's risk, but then the payouts come regularly, and you produce a thing, and there's a market that tells you how much to sell the thing, and like we know how to structure the money around this deal. You can here's your loan. Um, but uh okay, so coming coming back to uh to the two systems, I want to ask about resilience, and then I want to talk about rare earths. But um the idea of uh collaboration versus competition, you talked about the idea of maybe climate risk leads to a sorting of the world in terms of who is resilient and who's not, who can stand these stresses and who can't. Um do you think I I I know what I think deep down. It's hard for me to say that competition between these two huge powers is gonna make us more resilient or make the rest of us, so to speak, more resilient, speaking for everyone in all the other countries. But is it possible that and that collaboration would certainly be better and lead to better resilience? But is that true? Does one lead to the other more or less? Do you think, or is that like some different access for that question?
SPEAKER_02Well, first I think we have to recognize what we don't know, um, which is there's a lot of unknowns here, and there's a tendency in the um, you know, the analyst class, as it were, to emphasize things you know or you think you know because then you have very clear statements, and then hopefully nobody wrote them down, so then you're never accountable. So let me first say we don't really know. Fair enough. Um I want to separate the resilience part from the the part of the collaboration between the United States and China, which I think is really important for the for the energy transformation and for climate. Resilience, resilience and adaptation are mostly local and regional affairs. So so and the politics of them are really interesting because if you think about the politics of controlling emissions that cause climate change, everything you do to cut emissions is probably gonna cost more than you were paying before. Eventually costs might come down, something may be essentially.
SPEAKER_01At first, it's probably gonna cost more.
SPEAKER_02But at first they're gonna cost something, and so it could be very high. Like look at what's going on with steel right now. Hold on to your wallet. So it's expensive. The benefits are mostly in the future. They're mostly because it's a globally mixed pollutant, not just in the future, but in other countries. So it's not surprising that with that political structure, you know, it's hard to get folks out of the driveway. What's impressive is that some folks are out of the driveway, and we have some, you know, what we used to call coalitions of the willing until we used that term for the second trip to Iraq, and it didn't go so well. But they're coalitions of the willing. There are firms and governments that are out there creating new facts on the ground, bringing down costs, and from that it it it it it's it's it's spreading out. So in that sense, that's that's gonna be great and that's gonna work. Um but resilience, the the politics of resilience and adaptation are the exact opposite. Whether you think climate change is a serious problem or not, if you have sea level rise and storms and wildfires and so on, and they're burning your house down and your insurance costs are high or whatever it is, you know. And so you're highly motivated, and the benefits mostly accrue locally. And so the politics of resilience and adaptation are much more favorable to getting things done. In terms of collaborate, and so I I think we we actually for a lot the the shift to more to more attention and resilience is long overdue, part because we're in for a significant amount of climate change despite all the progress we're making about on the climate problem. Overall, the progress is actually amazing. But but we're in for a lot of climate change, it's overdue. But as we move into this, I think we're gonna be pleasantly surprised to see how places that are reasonably well organized are gonna be able to get their act together and manage a lot, not all, but a lot of a lot of the impacts of climate change. So collaboration in all of that world, that collaboration takes the form of collaboration around climate science and things like that. There's a role for collaboration, it's important, and so on. The place where I'm most worried about collaboration is commercial collaboration around new tech and putting new product out there, where where the gains from a global perspective on technology, those gains are massive. For me, the one of the most powerful studies in this area is Greg Nemet's lovely book and website called How Solar Got Cheap. Love it. Just been put out in second edition. And um the story is solar starts off in Japan and the United States, and it's really expensive, and the early applications are you know, satellites and remote mountain huts and things like that. High performance sensors. Yeah, exactly. I mean you can't stuff when you're really willing to pay a lot. Right. You can't run an extension cord up to the moon, but you need a solar panel. So you're willing to pay anything for it. And then over time, the technology improves, the costs come down, and then the then the policy frontier moves for different reasons. So you go to the energy vend in Germany, they pay a boatload of money through the feed-in tariffs, costs come down further. Part of the logic of that is we're going to build a German solar industry, and we're going to have all these Germans employed in it. This was, by the way, through sort of the 1990s and 2000s, this feed-in-tariff regime keeping it. It didn't work out very well. I mean, like all those guys lost their jobs when the next frontier moved, which was to China and the manufacturing revolution, which broad costs down uh further. But the result of all this is that globally solar is the often the lowest cost technology for making certain kinds of power, not for clean firm power all the time. And you everyone knows that story. But that's a global technology and a global story. And I'm just deeply worried, I'm kind of terrified that we're going to see, because of the gumming up of supply chains and because of the need to onshore everything politically, or people believe that, the uncertainty or the chaos may be the better word. Um, you're seeing costs go up, and all of that is bad for the energy revolution, but it's also bad for the politics, because it takes things that we want people to do and makes them more expensive. Michael Davidson and I were in Shanghai, a colleague of mine here at UCSD uh were in Shanghai just about exactly a year ago, May, May of 2024, visiting car factories and other things, and came back from it and wrote a piece for Brookings that was all making exactly this argument that the the dissolution of the tight US-Chinese relationship is is, and it's not just tariffs, it's foreign entities of concern, it's suspicion, it's the inability of Goshen to do a joint venture, it's on and on and on. You put all that together, and that's terrible news for the clean energy uh revolution.
SPEAKER_01I think it's terrible news too. I want to ask you about rare earths, but before we segue into that, because I think it's a it encapsulates all these things, you said uh you said the quiet part out loud, or you said the loud part quietly or something a minute ago when you said actually a tremendous amount of progress has been made in mitigation and uh climate resilience. I was speaking to somebody that never thinks about climate, you know, a few minutes a year type of thing. And I think for somebody like that, which is honestly most people, that's a shocking thing to say. We just don't hear messages like that. Wow, we've made tremendous progress. Like, can you believe like the thing you just said, solar is sort of the cheapest form of electricity. There's an asterisk, yes, not clean firm power. That's the most important, that's the stuff that runs all the time, it never shuts off. However, yeah, uh it makes no sense, let's say in the United States, to build a new coal plant to peak the summer days. It doesn't make sense anymore. Not for green reasons, just if you only care about the money. And that's been true for several years. These kind of things I don't think are too widely known. So I think there are huge, huge challenges, but I just want to highlight that point because it's an important one that doesn't get spoken too often.
SPEAKER_02And it's a the point comes from thinking about the counterfactual, which is very, I think, very hard. So if you look at how's progress measured right now in global agreements and so on, Paris Agreement says we should stop warming well below two degrees. Struck me as always obvious we were going to blow through two degrees.
SPEAKER_01I wrote a paper with Charlie Connell in Nature in 2014 saying I think you were one of the first people, at least loudly, or at least in nature, saying like we got a lot of hate. What are we talking about here? This is a hater.
SPEAKER_02It's true. Um, but the right way to measure progress is where were we headed before? 15 years ago, we were headed to four or five degrees Celsius over the coming century by 21. Now we're headed to like two and a half or three. And yeah, we can disagree, but it's still a lot of climate change. I mean, it's not like we should just sit around and have a victory parade, but it's not five. Like I think about that too.
SPEAKER_01Sometimes I have always thought the organizing around 1.5 was like really what? How why are we? But I and when I first became aware of it, I didn't I didn't I didn't feel confident enough to sort of challenge it out loud. Like, this is nuts, right? I'm a little more confident in that now. And now we're we're actively debating have we crossed 1.5. But the point is um what I don't love about the target setting for that, for the temperature setting, is not that I know better than climate modelers what the right number is, but it's that it sets up a failure mode in the same way that every year the media reports on COP, the big international climate meeting, is COP failed again to reach a climate agreement. I make jokes and talks that like I can write the headlines for the next 50 cops or the next at least 10 cops, it's gonna be the same thing. Um when we blow through 1.5, does that mean the world ends? It doesn't mean the world ends. And sometimes a way I try to motivate that is like, well, crossing 1.5, very bad. Real consequences and real suffering for real people. But you know what's worse than 1.5? Two. And if we cross, do you know what's worse than two? Three. There's always something to fight for, and it's always important to kind of count the victories along the way. So as you said, measuring success relative to what? It's not relative to yesterday, it's relative to a terrible future that could be that we're trying to avoid. That's a lot to hold in your mind for the average person. Most people don't think that way day to day, I think, but I think that can be a source of optimism, and at least I find it motivating. Rare earths. I think rare earths are a great example of why is China doing this so well in the United States, as and how does it play into manufacturing, the idea of making cleaner stuff, goods, services, and then selling them to other people to support our own economies. About first just a couple things about rare earths. I happen to be uh I happen to be more interested than maybe I should. I used to work on this professionally when I worked in the Senate, rare earths, and also I'm a materials science nerd, and so here are a few fun facts about rare earths. I just want to share for the audience. So the rare earth elements are a group of elements in the periodic table, and they're known kind of publicly to be mysterious and very important ingredients in all kinds of high-tech stuff. Famously, people say you can't make an iPhone without rare earths. That's true. You can't make magnets that go into airplane fighter jet guidance systems. You can't make GPS satellites, you can't make most electronic stuff. Um ten years ago, the price of rare earths was the reason a TV would cost $75 more at Walmart than it did, you know, the month before. Famously, China has all the rare earths. That's not totally true, but like to first approximation, I think they have something like 70% of the total global supply now. Ten years ago is over 90%. So there was a period of time where it's like there's a metal, a set of metals on Earth, because these rare earths are just metals. China has them all, and China's actively telling everyone else, if you want them, you have to come to us. And the deal is you should actually relocate your factory here, uh, and then we'll give you access to that metal that you need. Um I'll let you respond in a second, but a couple more factoids about rare earth. So they're I want people to know they're just metals. They're just metals, like copper, gold, iron, tin. Uh, if you can picture in your mind from middle school or high school the periodic table and what it looks like, uh you might remember there's a weird little strip on the bottom that's not really connected to the rest of us. It's just the rest of it is just hanging out there. Those are called the lanthanides and the actinides. That's where the rare earths are. So if you really want to get periodic table about it, go to that weird thing at the bottom. They're they're in the numbers of like the 90s and 100s, they're numbers, I think. Um the last thing I want to say is they're not rare. This is the most funny thing about rare earths. Despite their name, which is I think based on a older use of that word, they're not rare at all. They're more abundant than gold, silver, platinum, copper. I don't think any we make pennies out of copper. That's how, quote, common copper is. Uh the rare earths are just really annoying to mine. The United States used to be their leader at development of rare earths. And then the United States kind of let it lapse. Um yeah, Vish is pointing out USA has something like 14% of global rare earth production, which I believe is all from reprocessing of spent material at a previous mine in Mountain Pass. So I just want to set the table with respect to the rare earth, key ingredient in all kinds of high-tech clean energy stuff, certainly AI-related stuff, electronic stuff. Um the United States used to be the world leader and let it lapse by just not developing or redeveloping new mines and keeping it going. Um rare earth processing is quite nasty. It's not it's less of a card rock crushing and grinding and more of a chemical process. So there are a lot of chemical wastes, so it's quite gross. I would want to live, I would not want to live next to a rare earth mine. Um you have to really pay attention to environmental safety and just worker safety, of course. But China over decades established this position, not because they have all the rare earths. It's not like they're the Saudi Arabia of rare earths, they just happen to be under their feet. They actively developed mines, and then they became the only game in town. That seems like a really great uh example of the long-term planning thing and kind of a condemnation of the market-based system. Do you agree with that characterization? And then beyond that, I'm curious whether you think rare earths uh or how you see them in sort of the broader context of trade, collaboration, development of clean energy stuff.
SPEAKER_02Yeah, mostly I don't agree. I mean, I I agree the rare earths are not rare. Yep. I um I Chinese have like a lot of control over the rare earths. Uh-huh. All the things that one can worry about these days, the things I worry about, rare earths rarely show up.
SPEAKER_01Why not?
SPEAKER_02The press is telling us we should be worried about this all the time. The press tells us lots of things. It turns out to be mostly wrong. So here's why. This is a great example where trade and collaboration are really, really important, where a global perspective on things is just vitally important. Rare earths are globally traded commodity. The Chinese a long time ago made some decisions that they needed to control their supply chains because that was very important for their integrity of their supply. This is a great example where they've probably overinvested in that, and they've they've they're spending more on rare earths than if they had some mixture of more Chinese con of Chinese, some Chinese control, and then letting the market uh operate. But their fear about dependence on imports is obsessive, and it comes from history and a bunch of other things. I don't want to overstate that claim. But you know, the same as said about China's reluctance to become dependent on Russian uh imports of Russian natural gas and where they want to get their gas from and their wariness about the LNG market initially and the need for more coal inside the economy because they control those resources. Like across the board, there is that obsession. But at least it's expensive in a lot of ways. It's expensive from an environmental point of view and so on. And rare earths are a wonderful little microcosm of this. So they've probably overinvested in control that they didn't need to have. We're terrified that they're going to cut us off from rare earths, and they've tried that a couple times. They made some announcements recently, they did something a few years ago. Um, but but rare earths or lithium, which is the key ingredient for the batteries, they aren't oil. And and so if the demand picture is totally different. The entire world economy needs a hundred million barrels per day of oil to run. And if it misses a million, folks go bonkers, and understandably so because of limited inventories, and then you don't know the million just to start, yada, yada, yada. That's just not true for lithium or any of the rare earths. You can slow down production, you've got some onsite inventories, and if you think about this as a commodity that we should manage through diversity, um, then what we should be encouraging is some incentives to have ex-China production of rare earths. For example, the U.S. is now what, at 14% on some of these. Significant amount, as you said, is one mine. Just a little bit of an incentive convert is produces a huge amount of supply elasticity, the response of supply to a new price. So this is an area where, and this is true for almost everything in the so-called critical minerals mania right now. The supply elasticity is much greater than than people think, certainly than than an oil, with in with a few exceptions. Copper, I am a little bit worried about copper. If we really go all in on the energy transition, we know the copper demand probably goes up faster than the expansion of supply. So I am a little bit worried about the copper side, not in panic.
SPEAKER_01Hold on, just to challenge you on lithium a little bit, because I mean, don't wouldn't you expect that I can understand you you're saying that for some of the rares and lithium in particular, basically they're nice to have, not need to have. No one's gonna freak out if the deliveries aren't made on a daily basis, the same way it is for oil right now. The world runs on oil, it doesn't run on lithium. But as EVs and other electrical things, not you know, electric drives of all type, penetrate deeper and deeper. Are we not on a trajectory where it's going to become that way? And that's why everyone's freaking out about this.
SPEAKER_02Unlike oil, it's gonna be radically easier to hold small stockpiles to be able to have some responsiveness in supply and some responsiveness in demand. But at least that's the macro argument. Yep. Okay, okay, fair the the the macro argument. Now, that's for lithium. I think that's essentially for all of the rare earths. Okay. For most of the critical minerals or critical materials, I think this is true. Okay. I think I'm persuaded by the piece that that Stanford Porsche did um on copper that that you know, that maybe it's a different story for copper. What really worries me about this is that this is this is the kind of topic that is ideal for the threat industry. The threat industry is in the business of finding threats. And now we are terrified about the lithium crisis. You know, a little bit about the Albanian threat from Wag the Dog. And so now we're worried about the lithium crisis. And once the threat industry spins up, the the Bob Gates concept of what do you need to really protect as American, small yard, high fence, a few things that are really important, a few critical technologies put a high fence around them. What's happened over time is the yard's gotten big, gigantic, and the fence has gotten bigger and electrified and on and on and on. And that is a long-term recipe for gumming up the value of global trade and the value of global collaboration. So we have to find our way forward with a little bit more onshoring, smarter industrial policy, more longer time horizons, but not go into full panic mode lest we end up trying to put an American flag on every corner of every supply chain. David, this has been sweet.
SPEAKER_01Thank you, Marcus. What a pleasure. Thanks for your time. Maybe we'll do it again sometime. Look forward to it. All right, take care. That does it for part two of my conversation with David Victor, the scholar, the international thinker, and uh sometimes the iconoclast. Vish and I had a really interesting time putting this conversation together. And before we close the episode, I actually wanted to bring him in to share some of his thoughts. He and I haven't really had a chance to debrief or talk about this. And uh, since we think see things in slightly different ways sometimes, I always appreciate getting his perspective. So, Vish, I want to welcome you in. And I'm curious what you thought about that. Uh, how do you think it how do you think it all went?
SPEAKER_00Yeah, thanks, Marcus. Um, I really enjoyed this conversation as with the other ones. Um, David makes some really interesting points about the US China relationship, and I agreed with much of what David was saying as well. Um, but I wanted to kind of uh pick at a couple of things that I was like a little skeptical about or disagreed with a little bit. So one of them was David mentioned that the market signal the the market is really good at taking in signals, um, the right signals, especially, and then guiding innovation and um strategy in the right direction. And I guess my first question is do you think that as well? Like, I don't know if I believe that the market is great at taking in. Signals and then reacting in the way that we want it to.
SPEAKER_01Okay, yeah, that's a great question. I'll say that I have become more interested or more of a believer in the value and power of free markets to allocate resources well as I've got older. Now, I don't think this is me like becoming more conservative as I get older, but I do see that more than I did when I was, let's say, 20, and I hadn't like thought about a lot of this. But the reason I'm saying that is I still believe markets are efficient at distributing a lot of resources. However, I question the market signals. In climate, it's clear to me that the right signals are not being understood or digested by the markets. I actually think there's a knowledge gap. So, in that sense, the system is only as good as its inputs. Does that make sense or does that answer your question? Yeah.
SPEAKER_00Um I think for me, the the market you make this distinction in your conversation with David about short-term planning versus long-term planning. And it feels like the market is better at uh taking in signals and making better decisions in the short term. But like we talked about with Tom, like seven generations thinking, or long-term planning, like we talked about today with David, I feel like the market fails to do that because the when we talk about the market, like we're also talking about humans making those decisions. And humans are just less good at making super long-term uh decisions unless they're being constrained by you know something else, regulations, governments, other, like other things. So um that's kind of uh where I was like, I don't know if if the long-term planning aspect of it aligns with how markets function best.
SPEAKER_01Okay, I think we I think you and I may agree on this one too. I I definitely I remember raising an eyebrow when I heard David say that. Uh, I don't think I said anything. I want to hear him say his thing. If I remember correctly, he said something like the planning-based system axiomatically, or by definition, should be better at the long-term thing. However, the market thing is really good at the long-term thing, too, better than you might think. Something like that. So the second part of that, I think that's questionable, especially and sort of to your point about maybe markets are better for the short-term thing. That that agrees with my experience and what I can see too. What we know for sure is that in corporate America, the timelines are shrinking. CEOs get fired more quickly, uh, expectations for quarterly results are reported as if they mean something, and sometimes they do, but often they they can't possibly mean anything because not nothing has changed. But you still have to report every quarter if you're a public company. And you are not going to become the CEO of a big company by saying, I have a 25-year vision and I want the room to execute it over 20 years. That's just not a thing, especially in public markets. And then when you go to the short-term stuff, it's easy. This is just maybe too trite, but it's easy for me to just think about a lot of noise, a lot of churn, and specifically lack of climate signal inputting, because you can, it seems like you can just ignore the climate effects on a scope of three or six months, but the real risks are longer-term risks, and they're also high consequence increasing probability or high consequence risks. And so those are exactly the type of risks that we know. In finance, they call these black swan risks sometimes. The market is terrible at dealing with these, and many books and papers have been written about this. And every time there's a black swan event, the economists explain to us why they're going to predict the next one, and they never do, and it happens again. So that's a clear hole for me. So I think, you know, in summary, I think I agree with you that I'm still skeptical about the market ability to internalize info and deliver long-term planning. And then from the short-term side, it's I'm I'd say I'm neutral to negative on the market's ability to actually ingest energy and climate signals specifically and respond to them.
SPEAKER_00So that's um helpful. And I'm I'm glad uh I'm seeing things kind of the same as you there. Um the second kind of uh point that I wanted to uh bring up is David mentioned when the markets get the right signals. And the right signals uh not to be too harsh, but seem like a little bit of a cop-out to me because it sounds like if the system works perfectly, then and it's like, well, the system's not gonna work perfectly. And right now, to me, it seems like the market systems are working in the way the people who influence the market, the CEOs, the the people who have a lot of like capital investment in the market want it to. It's helping um make them uh money. And it's how we I think maybe partially got our first trillionaire a few days ago. And so my question to you is like, what are the right signals? Like, do you think they exist? Do you think we can actually get the market to hear the right signals?
SPEAKER_01Okay, that is a great question. And I'll admit that I don't know the answer right off the bat, but I'll still tell you what I think. Um yeah, a lot a few great questions in there. Can we rely on the markets to operate correctly if they do get the right signals? And what are the right signals? I will also admit that I I see the flaw, I see that flaw in maybe that you identified maybe in David's reasoning, like, well, the system works as long as it works perfectly and has perfect inputs, right? That does kind of sound like a cop-out. And to be honest, I think of technology this way a lot. A lot of people will say, well, you know, technology can be used well or can be not used well. And I tend to see the upside in technology because I tend to want to believe it will be used well. Of course, that's not always the case. With markets, one of the right signals. I swear I'm not just trying to stall to answer. I think we need what we don't have enough of are uh hard calculated probabilities and likelihoods of different specific local events. Now, I think that's changing, and I think it's actually the risk insurance industry, or sorry, the insurance industry that is changing that. Parametric insurance, um, in the same way that like the analytical um revolution took over sports, which is a funny phrase, but it just means a lot of analytical people started dreaming up other things to measure, and some of those things to measure are really important and meaningful, even for just traditional sports people that don't think in terms of calculation. I think something like that is happening in climate risk, better ways to characterize it, understand it, not for fun, but so you can make practical capital allocation decisions. I think that's happening. But long-rended warm-up to answering your question. I think we need better calculations about specific risks in specific local areas, um, estimates of costs, which are frankly easier than doing the risk calculation. I think the probability calculation is harder. Once you know the likelihood of the thing, it's easier to get the cost because you can decide how much you want to spend to fix it. And I would say uh mismanagement of natural resources over the long term is a big, big risk. I think that market signal is weak. And I think the value of natural ecosystems is sort of underpriced. Uh, this is getting a little technical now, and I'm not a conservation person, but I really think that the average financial marketplace does not understand how important our natural systems are to us, even if you only care about yourself. Forget the birds and the bees, even if you only care about yourself, those ecosystems are materially valuable to us. And I think the third thing that I'm suspicious about in terms of market signaling or a place to improve has to do with um, okay, I can't remember what the third thing is. But in any case, uh maybe it'll come to me later. But those are the things that come to mind when I think about uh what I think is weak about some of the market signals and what better market signals might be.
SPEAKER_00Um that was uh a super helpful answer, especially off the top of your head. The last question I have is when we you're talking about risk and and climate risk and insurance. If we we look at other um insurance industries like health insurance, a lot of the uh issues with insurance, people have with insurance, is that it kind of exploits the people at at the kind of the bottom layer who uh who might who who need that insurance, you pay a big premium, and then it doesn't cover a bunch of things. For climate, you mentioned that uh you might not be able to get fire insurance in your area because of like how prevalent wildfires are and they just don't want to insure that.
SPEAKER_01Uh is there uh like I guess what are your thoughts on um insurance reacting to climate in a way that just ends up harming the people that actually might need that safety net of insurance the most maybe the way I can internalize it is uh is it possible to implement an insurance-oriented system that doesn't just operate like US healthcare insurance, in which it really feels like the people at the bottom get screwed to support the people at the top. I will never support the idea of health insurance in the United States. I think it's insane. So I'm not gonna try to touch that. I'm speaking as somebody that grew up in Canada, so I'm predisposed to think it's nuts, but I think it is objectively nuts, and specifically I mean destruction of value. A lot of money is being lit on fire, and people are not getting the services that they need. But here's the part of insurance that I think is genius, and I would like to believe is applicable to climate. Now, let me preface this by saying maybe this is just Marcus again saying, I believe in the system if the inputs are good. You maybe you can make that critique. The genius of insurance for me is we found a way to all, you know, we all put a dollar in, and now there's a hundred dollars in the pool, and somebody's roof is gonna collapse. It's probably not gonna be mine. And then when that happens, that person is not going to be uh out of a roof forever that we will all have pitched in to support their rebuilding of a roof, in this very simple example. Now, presumably the insurance company that put that thing together, it could be the community council or it could be a private insurance company, um, they're profiting off this, no doubt, okay? Um, and so probably it's the profit motive where uh the crack is, because that's what I see in health insurance. I see the insurance company just trying not to actually do the thing we're paying them to do. We pay them the dollar, the roof collapsed, then the roof collapsed, and they're like, actually, the roof was yellow, so we're not paying you. That kind of thing. And now I've put out a dollar and only I didn't help my neighbor, but I'm certainly out my own money. So that thing, if we can close that, and I don't want to sound naive when I'm saying that, but I think that can be closed. There are public insurance models. Maybe that's the best antidote. It doesn't have to be rapacious private insurance, but and I think this is in your question, we will still be stuck with I called it genius insurance. You still have the thing of, you know, I paid a dollar, my neighbor's roof collapsed, I just paid a dollar. That's it. And now I'm out a dollar. And this is, I think, why people grumble about insurance. Ah, why do I have to pay if I don't need it? Well, it's a collective action. It's best, it's like one of our most socialist ideas. But, and so we all have to be okay with that. And so, yeah, in climate, that means maybe some of us will pay to avoid a flood that doesn't actually directly affect us. Maybe we'll even pay to support somebody that gets flooded in a faraway place and we don't know them, we've never met them. But I still think pooling resources to deal with unlikely devastating events, that's my simplistic understanding of insurance. That is a genius idea. And if we can apply it to reduce specifically the costs of climate effects, I think it's a good thing. In addition to the other insurance things I spoke about, that is the part that I think is interesting to me.
SPEAKER_00Awesome. Well, thanks for answering and playing my game of poke marks with a stick and see if you have any interesting thoughts.
SPEAKER_01I uh there was a joke I was gonna make, I'm not gonna make, but I think um I think skepticism is actually really important because it's what allows us to get to like the core of an issue and then allows people to just sort of unpack their opinions like mine. And you know, look, I'm willing to be wrong about these things, but I think it's good to surface them. So always appreciate the questions. Okay, well, with that, um, we know Vish has got great questions, but we know you in the audience may have great questions too. We always love hearing from you at podontherize at gmail.com. You can email us anytime. That's podonthherise at gmail.com. Thank you to David Victor for sitting down and speaking with us. We'll try to get him back on the show at some point in the future. China, US, and resilience and risk are never dull topics. Thank you to Vish for uh producing this episode and producing this series. And thank you everybody for tuning in and giving this episode a chance and these ideas some thought. Before we close, here is the great music of Claire Davis.