Dematerialization in The Cloud

modern office building

Photo by Manuel Geissinger on Pexels.com

Whenever you log on to Facebook or YouTube or your bank or your favorite online game, you’re connecting to computers in some data center somewhere on the planet. All those servers and all those data centers consume a huge amount of electricity.

In fact, a new research paper published in the journal Science titled Recalibrating global data center energy-use estimates (paywall) found that data centers consume about 1% of the world’s electricity.

Well there’s an interesting article in the New York Times today that looks at this new research.

Cloud Computing Is Not the Energy Hog That Had Been Feared

The study, which examined energy use in data centers across the world, found that,

“… while their computing output jumped sixfold from 2010 to 2018, their energy consumption rose only 6 percent. “

The main reason for this is the huge gains in energy efficiency achieved by large cloud data centers run by companies like Google, Amazon and Microsoft.

“In 2010, the researchers estimated that 79 percent of data center computing was done in smaller traditional computer centers, largely owned and run by non-tech companies. By 2018, 89 percent of data center computing took place in larger, utility-style cloud data centers.”

By moving to the cloud, non-tech companies have handed over responsibility for data center operations to a few large utility-scale companies who have a strong interest in energy efficiency to reduce costs.

This is a great example of dematerialization, the idea of producing more goods and services while using less energy and resources.  If you’re interested in reading more about dematerialization, I would recommend Andrew McAfee’s book More From Less, which I reviewed here.

Ideally, you want to achieve absolute dematerialization where output increases while energy and resource consumption stays flat or actually declines.  It seems like the big cloud computing companies are getting very close.

Posted in Computers and Internet, Energy, Environment | Tagged , | Leave a comment

Doughnut Economics

Doughnut Economics:  Seven Ways to Think Like a 21st Century Economist
By Kate Raworth
Chelsea Green Publishing, White River Junction, Vermont.  2017

How do we shift our economy from a focus on never-ending GDP growth to living within the “Doughnut?”

Doughnut?  What doughnut?

Scientists are telling us, with increasing certainty and urgency, that human activity is damaging the Earth’s biosphere.  We must take action to prevent potentially catastrophic consequences. For example, we need to limit global warming to no more than 2 degrees Celsius above pre-industrial levels. That’s one example of a “planetary boundary” that we should not exceed. There are actually nine of these planetary boundaries relating to critical ecological systems that we all depend on.  You can read more about them here.  Together they form a “safe operating space” for humanity.

But we also need to address hunger, poverty, disease, illiteracy and other social development issues, best summarized by the United Nations Sustainable Development Goals adopted in 2015.  These too are a set of boundaries; social development boundaries that form a foundation, or a floor that we should not fall below.

These two sets of boundaries form a “safe and just space for humanity,” a doughnut with an outer circle of planetary boundaries and an inner circle of social boundaries.

Kate Raworth, a “renegade economist” and research associate at Oxford University’s Environmental Change Institute, popularized the idea of the Doughnut in a paper she wrote in 2012.  (I blogged about it here.)  It looks like this.

The Doughnut: A Safe and Just Space for Humanity

Source: Oxfam

But how do we get there?  We need new economic thinking to help drive the transition to an economy that fits within the social and environmental boundaries of the Doughnut.

That’s what Kate Raworth proposes in her 2017 book Doughnut Economics:  Seven Ways to Think Like a 21st Century Economist.

Doughnut Economics - cover

Doughnut Economics is about reforming the field of economics, about changing the way economists think, view the world, and practice their profession.  But along the way it paints a pretty clear picture of what a new economy should look like, or at least what Raworth thinks it should look like.

Reading a book about economics might not be everyone’s cuppa, but I found Doughnut Economics to be anything but dry and monotonous.  Raworth writes with conviction and urgency, and although she occasionally becomes a little strident, her arguments are well-researched.

Each chapter of the book examines one major topic or aspect of traditional economic theory and essentially stands it on its head.

These ideas in the book are neatly summarized by this chart from the Introduction.

Doughnut Economics - Summary Chart

Source:  Chelsea Green Publishing (https://www.chelseagreen.com)

For me the most profound change Raworth proposes is to stop thinking about the economy as an entity that is separate and distinct from society and the environment.  Instead we ought to recognize that the economy is embedded in society which is in turn embedded in the biosphere.  The economy, she says is not a machine that can be modeled with Newtonian laws.  Instead it is a complex adaptive system governed by the interplay of stocks and flows of resources, feedback loops, and delays.  Contrary to classical economic theory, disequilibrium might be the norm.

This may sound obvious, even trite, but economic theory is not taught this way at most universities.  Pollution, climate change, even technology, are treated as “externalities” in economic theory, relegated to the sidelines instead of being centrally important.

Another key idea is that the economy must be designed to be regenerative.

We can picture today’s economy as a straight line.  It runs in a sequence: take, make, use, lose.  We take resources from the environment, make the things we need and want, use those things, and then lose the leftovers or the byproducts.

  • We take petroleum from the ground, make it into gasoline, use it in our cars and trucks and lose the CO2 into the atmosphere.
  • We take wool and cotton from farms, make them into clothing, wear it for a season or two and then lose it into landfill.

You get the picture.  The take-make-use-lose economy is a straight line.  It’s also unsustainable.  In the end, everything ends up as waste.

Raworth says we need to move to a circular economy, one where all materials belong to either a biological cycle or a technical cycle – like two wings of a butterfly.

Many of us try to recycle at home.  Some of us even compost food waste.  However, what Raworth and others are calling for is a profound restructuring to make restoration and regeneration a central organizing principle of the economy.

“Take mobile phones, for example, which are chock full of gold, silver, cobalt and rare earth metals, but are typically used for just two years.  In the European Union, over 160 million mobile phones are sold annually, but in 2010 … 85% ended up in landfills or lay defunct in the back of some drawer.”  [p. 186]

In a circular economy, Raworth says, phones would be designed for easy collection and disassembly. They might be built in a more modular fashion allowing for easier repair, refurbishment, or reuse of components.  This impacts not just the design and manufacturing of products, but how they are sold, delivered and collected again.  Like I said, a fundamental restructuring.

Finally, Raworth urges us to abandon GDP growth as our economic North Star.  She’s not against growth, but she says we should be agnostic about it.

 “No country has ever ended human deprivation without a growing economy.  And no country has ever ended ecological degradation with one. “ [p. 208]

We need to design our economy so that it “promotes human prosperity whether GDP is going up, down, or holding steady.” [p. 209]  Growth, if it occurs at all, should be in service to human well-being.

Thriving within the Doughnut is humanity’s most important goal.

Unsolicited Feedback

I remember taking a bunch of economics courses at university. The first year courses really frustrated me because they presented such a grotesquely simplified view of the economy.  The models we learned about were based on a laundry list of assumptions that were divorced from reality. I knew there was no such thing as perfect competition.  I read all the time about mergers and acquisitions leading to concentrations of economic power.  I was majoring in computer science, so I knew first-hand that technology was not just a static input.

In my upper years, I took some econometrics courses.  The models got a little more sophisticated, the assumptions a little less ridiculous.  Still, the underlying premise was that we could in fact develop accurate and predictive models of how billions of humans would interact and behave, or at least billions of “rational economic actors.”  Looking back, the hubris was incredible.

So it was refreshing to read Raworth’s call for a thorough revamping of economics.

But it’s her ideas about how to reshape the economy into a more sustainable form that make Doughnut Economics worth reading.  You probably won’t agree with them all.  I didn’t.  But if we are to respect planetary and social boundaries, we must change course.  Raworth is out there at the bow of the ship pointing one way forward.

Related Links

A safe and just space for humanity
Paper defining the Doughnut by Kay Raworth, February, 2012

A safe operating space for humanity
Paper describing planetary boundaries by Johan Rockström, September, 2009

A healthy economy should be designed to thrive, not grow
TED Talk by Kate Raworth, April 2018

Why we need to move toward an economy that can regenerate itself
ideas.ted.com article by Kay Raworth, April 2018

Posted in Books, Environment | Tagged , , , , , , | Leave a comment

No growth, slow growth or green growth?

John Cassidy avatar

Source: The New Yorker

In the February 10, 2020 issue of The New Yorker magazine, journalist John Cassidy has a very interesting article called Can we have prosperity without growth?  (In the print version, the article is titled “Steady State.”)

Cassidy surveys a wide spectrum of opinion among people who say we need to rethink our attachment to, or obsession with economic growth.  Here are some highlights and links from the article.  

There seem to be three main viewpoints:    

De-growth: We need to radically shift our economy and our way of life away from endless economic growth in order to live more sustainably.

Green growth:  Some economic growth is still necessary for achieving environmental goals.

Slow growth:  Slow economic growth is a normal and even desirable state for advanced economies, especially if the benefits are distributed more equitably, quite irrespective of environmental goals. 

Cassidy also highlights some of the challenges that any shift to a low-growth or no-growth economy will bring:

  • How do we address the inevitable distributional conflicts that will arise when there is no “rising tide” to lift all boats?  
  • How do we help the roughly 800 million people still living on less than $1.90 a day, which is the World Bank’s definition of extreme poverty?

These questions echo themes I’ve highlighted in some of my own recent posts.

Definitely worth reading.

Posted in Environment | Tagged , , , , | Leave a comment

The Case for Growth: An Interview with Marc Andreessen

In my last few posts I’ve been looking into the relationship between economic growth and environmental sustainability. Can we find a healthy balance between them?  Or are they fundamentally at odds?

Well a couple of weeks ago I was listening to the a16z podcast during my morning run on the treadmill when I heard Kevin Kelly interviewing Marc Andreessen on this very subject.

Some background:  Marc Andreessen co-wrote the original web browser called Mosaic and then went on to found the company Netscape.  These days he runs a Silicon Valley venture capital firm called Andreessen Horowitz also known as “a16z”.  Kevin Kelly is a founding editor of Wired magazine.

Marc Andreessen

Marc Andreessen. Source: a16z.com

The interview took place at the annual a16z Summit on December 12, 2019, in a session called Why We Should Be Optimistic About The Future.  Together, Andreessen and Kelly explore a wide range of subjects including the issue of economic growth.

Here’s the relevant portion starting at 34:17, which I’ve transcribed from the audio with some “light editing” for readability.

Kelly:  Capitalism so far has depended on growth, and growth is something that VCs pay attention to.  But we’re now wondering what’s the minimum amount of growth that you might need to have prosperity?  Can you have prosperity with low growth?  Can you have prosperity with fixed growth?  Do you have any insights about that at the civilizational scale?

Andreessen:  Yes.  I’d say the issue is even more intense these days because there’s now very prominent people in public life arguing that growth is bad, that in fact it is ruinous and destructive and that the right goal might actually be to have no growth or to actually go into negative growth.  Especially a very common view in the environmental movement.

So I’m a very strong proponent, a very strong believer that growth is absolutely necessary.  And I’ll come back to the environmental thing in a second because it’s a very interesting case of this.

I think growth is absolutely necessary.  I think the reason growth is absolutely necessary is because you can fundamentally have two different mindset views of how the world works.  One is positive-sum, which is a rising tide lifts all boats.  We can all do better together.  And the other is zero-sum, where for me to win somebody else must lose and vice versa.

The reason I think economic growth is so important at core is because if there is fast economic growth then we have positive-sum politics and we start to have all these discussions about all these things that we can do as a society.  And if we have zero-sum growth, if we have flat growth or no growth or negative growth, all of a sudden the politics become sharply zero-sum.  And you see this if you track the political climate.  Basically, it’s the wake of every recession.  In the wake of every economic recession the politics just go seriously negative in terms of thinking about the world as zero-sum. And then when you get a zero-sum outlook in politics that’s when you get anti-immigration, that’s when you get anti-trade, that’s when you get anti-tech.  If the world’s not growing then all that’s left to do is to fight over what we already have.

And so my view is you need to have economic growth. You need to have economic growth for all the reasons that I would say right-wingers like economic growth, which is you want to have higher levels of material prosperity, more opportunity, more job creation, all those things.

You want to have economic growth for the purpose of having sane politics; like a productive political conversation.

And I think the kicker is you also want economic growth actually for many of the things that left-wing people want.

One of the best new books this year, Andrew McAfee has written a book called More From Less.  It’s actually a story of a really remarkable thing that a lot of people are missing about what’s happening with the environment which is globally carbon emissions are rising and resource utilization is rising.  In the US, carbon emissions and resource utilization are actually falling.  So in the US we have figured out to grow our economy while reducing our use of natural resources which is a completely unexpected twist to the plot.  If you listened to environmentalists in the ‘60’s and ‘70’s, nobody predicted that.

It turns out, he talks about this in the book, but it turns out basically what happens is when economies advance to a certain point they get really, really good at doing more with less. They get really, really good at efficiency. They get really good at energy efficiency. They get really good at use of environmental resources. They get really good at recycling in lots of different ways. And then they get really good at what’s called dematerialization, which is what is happening with digital technology, which is basically taking things that used to require atoms and turning them into bits, which inherently consumes less resources.

And so my view on environmental issues is you’ve got a global problem which is you have too many people in too many countries stuck in mid-industrial revolution.  They’ve got to grow to get to the point where they’re in a fully digital economy, like we are, precisely so that they can start to have declining resource utilization.

The classic example is energy.  A huge problem with emissions and with health from emissions is literally people burning wood in their houses to be able to heat and cook.  What you want to do is go to hyper-efficient solar or ideally nuclear.  You want to go to these super-advanced forms of technology.

By the way, if you want a big social safety net and all the social programs, you want to pay for that stuff, you also want economic growth because that generates taxes that pays for that stuff.

Growth is the single biggest form of magic that we have to be able to actually make progress and hold the whole thing together.

* * *

Andreessen makes one of the clearest statements I’ve ever heard about the benefits of economic growth.  Three points stand out for me:

  1. Zero-sum politics really suck. “If the world’s not growing then all that’s left to do is to fight over what we already have.” I’ve seen this myself at companies where growth has stopped.  The fights get personal and vicious.  At the international level they can lead to war.  We need economic growth to have sane politics.
  2. There are billions of people on the planet, and more being born every minute, who want and deserve the kind of safe, healthy, prosperous lives we enjoy today in the so-called developed world. Economic growth is the best way we know of for achieving that.
  3. Economic growth can lead to more efficient energy and resource utilization and to innovative new technologies that bring environmental benefits.

boats on body of water

Photo by Matt Hardy on Pexels.com

There are some things I disagree with here too, or perhaps more accurately a couple of things Andreessen doesn’t talk about.

First, you can have solid economic growth and still have lots of debate about income and wealth distribution.  Even with the growth since the Great Recession, there is legitimate concern that income and wealth distribution are seriously out of balance and that the global economy has become way too unfairly tilted in favor of the wealthy.  Arguably, this is one factor that led to the election of Donald Trump.  Hardly an indicator of sane politics.  To put it another way, the rising tide seems to be leaving many boats at the bottom these days.

Second, on the environment, Andreessen is essentially arguing in support of something called the environmental Kuznets curve (EKC).  This is the idea, named after the economist Simon Kuznets, that as an economy develops, environmental degradation will increase as consumption increases, but once a certain level of prosperity has been reached, people become more concerned about the environment and demand improvements from both governments and corporations.   It’s a nice idea – growth solves pollution – but the evidence is mixed and the whole idea is, as they say, highly contested. Even if growth and innovation do bring some environmental benefits, we can’t assume they will automatically cure all environmental problems, and to be fair I don’t think Andreessen is making that claim.  But further, we do not know if we can have growth within environmental and social boundaries like the “safe and just space for humanity” that I wrote about in a previous post.

Regardless of these points, the whole podcast is well worth listening to. Andreessen and Kelly are both really smart and really insightful observers of our evolving tech economy that, in important ways, they’ve both helped to create.

 

P.S.  To Marc, Kevin & Sonal Chokshi (a16z podcast host), I hope I’ve done justice with my transcription.  If there’s an official version I can link to, or if you want to suggest corrections, please leave a comment.  Thanks.

 

Related Links

My review of More From Less by Andrew McAfee
https://unsolicitedfeedback.blog/2019/12/02/more-from-less/

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A Safe and Just Doughnut

Today’s post is about the doughnut.  I’m not talking about an ordinary sugar-glazed, jam-filled, deep-fried doughnut.  No, this is a safe and just doughnut we can all live in together.

If safe and just aren’t the flavors you normally look for when buying a dozen fresh ones at your local grocery store or Tim Hortons, then please stay with me.

assorte flavoured donuts

Photo by Sides Imagery on Pexels.com

I’ve been reading a lot recently about how we can live more sustainably on Earth. A hotly debated question is whether economic growth is compatible with sustainability or whether we need to move to a no growth or even a de-growth model.  One thing does seem pretty clear though; to build a sustainable future we need to set broader goals for ourselves than just GDP growth.  But what exactly should those goals be?

Safe

If we’re concerned about the environment and sustainability, if we want to preserve the Earth for our kids and their kids, then we need goals aimed at protecting the environment.  You’ve probably heard about one of these goals:  limiting global warning to 2 degrees Celsius above pre-industrial levels, preferably 1.5 degrees.  That’s a good goal, but is it enough?  What about other problems like deforestation, ocean acidification, and mass extinction?  Should we have goals around those problems too?

Yes, we should.  We need a comprehensive set of environmental goals that we can use to measure and guide our activity on the planet.  Fortunately, we already know what they are.

Back in 2009, Johan Rockström, director of the Stockholm Resilience Center gathered together a group of scientists and came up with a set of nine “planetary boundaries” that we should not cross.  These boundaries correspond to critical ecological systems or processes that scientists think are necessary to preserve the stable Earth environment that humans have been living in for about the last 12,000 years, a geological epoch known as the Holocene.

The nine planetary boundaries establish thresholds for:

  • Climate change:  primarily caused by CO2 and other greenhouse gas emissions.
  • Biodiversity loss: the number of species becoming extinct each year
  • Stratospheric ozone depletion:  thinning of the Earth’s protective ozone layer
  • Ocean acidification:  Earth’s oceans absorb most of our CO2 emissions but in so doing become more acidic. This harms coral reefs and other marine life.
  • Nitrogen and phosphorus overloading:  nitrogen and phosphorus leaching into the water supply, primarily from excessive use of chemical fertilizers.
  • Fresh water consumption:  the amount of global runoff humans use each year
  • Land use/Deforestation:  the fraction of ice-free land under cultivation or development
  • Aerosol loading:  discharge of soot and other particles into the atmosphere
  • Persistent chemical pollution:  manmade chemicals like plastics and heavy metals that persist in the biosphere

These nine planetary boundaries form what Rockström called a “safe operating space for humanity.”  Crossing these boundaries could destabilize critical earth systems and push the biosphere out of its current equilibrium into an unpredictable and far less hospitable state.

To learn more about planetary boundaries, you can read Rockström’s 2009 paper published in the journal Nature, or you can read his fabulous 2015 book called Big World, Small Planet, which I reviewed here.

Just

There are about 7.5 billion people on Earth today. We’ve made enormous progress in the last 50 years against hunger, poverty, disease, illiteracy and many other social development goals.  But nearly 800 million people still live in extreme poverty and billions don’t have access to safe drinking water, sanitation or handwashing facilities.

How do we make further progress?

Meanwhile, population is still increasing.  Growth rates have fallen, but our population is not expected to level off until around 2100 at about 11 billion.

How are we going to accommodate all those additional people?  How will we feed them, clothe them, shelter, educate and employ them?

It seems like we need social development goals too; goals that will help us ensure that everyone on the planet can live safe, healthy lives with dignity and opportunity.

Here too we already have a good set:  The United Nations Sustainable Development Goals or SDGs.

UN Sustainable Development Goals

Source: United Nations

Adopted in 2015 by the UN General Assembly, the SDGs are a set of 17 goals for the year 2030.  They include:

  • No poverty
  • Zero hunger
  • Good health and well-being
  • Quality education
  • Gender equality
  • Clean water and sanitation
  • Reduced inequalities
  • Peace, justice and strong institutions

Together they provide “a shared blueprint for peace and prosperity for people and the planet, now and into the future.”

You can think of these goals as social boundaries.  If the planetary boundaries form a ceiling that we should not exceed, then these social boundaries form a floor, a foundation built on human rights that we should not fall below.

The Doughnut

Kate Raworth a “renegade economist” and research associate at Oxford University’s Environmental Change Institute first put these two concepts together to form “the doughnut” in a 2012 paper called “A safe and just space for humanity” published by Oxfam.   Here it is.

The Doughnut: A Safe and Just Space for Humanity

Source: Oxfam

The nine planetary boundaries are the “safe” part of the doughnut.  They form its outer circle.  The social boundaries are the “just” part, forming its inner circle.  Raworth’s original social goals line up pretty well with the UN SDG’s.

Our task, according to Raworth, must be to find ways to live within these boundaries, to live within the doughnut.

We need to tackle both sets of goals at the same time. Why?  Because poverty can exacerbate environmental stresses, she says.  For example, billions of people still people burn wood, coal and biomass for cooking and heating. This contributes to CO2 emissions, particulate pollution and deforestation.  Similarly, the effects of climate change, such as droughts, severe storms, and changes in seasonal weather patterns will severely affect people’s food security, health and access to clean water and sanitation. The poorest will be hit hardest. We can’t successfully address environmental issues without solving poverty and we can’t solve poverty without addressing the environment.

Traditional GDP growth, if it is to continue at all, must be harnessed to help us move into the doughnut.

* * *

What does all this mean?  Why is it important?

For me, the doughnut and the work of Johan Rockström and Kate Raworth and countless others, shows us what sustainability might actually look like. I haven’t studied all these goals in depth so I can’t say with certainty that every detail of every goal must be met.  In fact, some of them are in tension with each other.  And it is true that meeting them will require significant changes to the way we live and work, produce and consume.  But these goals and boundaries paint a picture and set out a course of action that gives shape and direction to achieving sustainability.  I think that’s helpful and hopeful.

So how are we doing?  Are we meeting these planetary and social goals?  Are we moving towards the doughnut?  I’ll be looking into that in an upcoming post.

* * *

We’ve been talking about sustainability for 30 or 40 years.  Many of these ideas are not new.  Maybe I’m just catching up.  If this post has helped you catch up too, that’s great.  If there are questions on this topic that concern you, or books and articles you’ve read that have inspired you, please leave a comment.  Thanks.

Related Links

A safe operating space for humanity
Paper by Johan Rockström, September, 2009

A safe and just space for humanity
Paper by Kay Raworth, February, 2012

5 transformational policies for a prosperous and sustainable world
TED Talk by Johan Rockström, September 2018

A healthy economy should be designed to thrive, not grow
TED Talk by Kate Raworth, April 2018

 

Posted in Environment | Tagged , , , , , , | 2 Comments

Is Decoupling GDP Growth from Environmental Impact Possible?

Can we have economic growth while reducing our impact on the environment?

Some people believe growth is incompatible with sustainability and that we need to move to a “no growth” or even a “de-growth” economy.

Others think we can still have growth if — big if — our consumption of energy and resources did not increase as the economy grew.  This idea is known as decoupling.

Relative decoupling occurs when resource and energy consumption grows more slowly than the economy; in other words, when we use energy and resources more efficiently.  There’s lots of evidence that we are indeed using fewer resources and less energy to make the things we need and want.  In some areas those efficiency gains have been really impressive.

Absolute decoupling would occur if resource and energy consumption stayed constant or better yet declined while the economy continued to grow.  Here too, there seems to be agreement that absolute decoupling has occurred for some specific resources or pollutants.  For example, we’ve done a good job dramatically reducing the use of chlorofluorocarbons that once threatened the Earth’s ozone layer.

And according to this report, in 2019 greenhouse gas emissions actually declined in the US while the economy grew moderately, largely due to declining use of coal for electricity generation.

These are good steps forward, but the real question is whether absolute decoupling is happening, or even possible, at a national or global level over a sustained period of time.

gray industrial machine during golden hour

Photo by Pixabay on Pexels.com

I’ve been reading quite a bit about this question over the last few months. I’ve written a couple of posts about it too – one post about a book called More From Less, and one about a research paper called Peak Stuff.

In this post I am going to look at another paper about decoupling.

James Ward of the University of South Australia and his co-authors examined decoupling in Australia in a 2016 paper called Is Decoupling GDP Growth from Environmental Impact Possible?  While Peak Stuff looked at empirical data about material as it flows through the economy, this paper takes a more theoretical approach by building a mathematical model of environmental impact and then attempting to determine if absolute decoupling is possible using that model.

Warning: there’s a bit of math coming up.  This won’t hurt a bit.

Ward and his associates modeled environmental impact using something called the IPAT equation which looks like this:

I = PAT

where

I = environmental Impact
P = Population
A = Affluence, usually measured in $ GDP per capita
T = Technology

The IPAT equation has been used since the 1970’s. It represents the relationship between population, affluence, resource consumption and environmental impact.  Increasing population for example will increase environmental impact.

T is probably the most difficult part of this equation.  Apparently, T is usually interpreted to mean the “factor intensity” of a resource or pollutant – the amount of that resource or pollutant required to produce one dollar of GDP.  For example, it might measure joules of energy per dollar of GDP, or metric tons of steel per dollar of GDP.

This leads to another point:  you need an IPAT equation for every resource or pollutant you’re trying to measure.  So in general, for resource “j” the equation would be:

Ij = PATj

Finally, you need to run this equation over time, say each year, over the period you are trying to model.  Using “t” to represent the year, the equation really would be something like:

Ij (t) = P(t) * A(t) * Tj(t)

OK, I don’t want to dive too deeply into the math. Please read the paper if you’re interested.  And if you want to learn more about the IPAT equation you can read a 2001 paper called The IPAT Equation and Its Variants.

Suffice it to say that Ward and his associates make some assumptions, do some calibrations and run the IPAT equation for energy and resource extraction in the Australian economy out to the year 2100.  Their conclusions:

“On the basis of this simple modeling, we conclude that decoupling of GDP growth from resource use, whether relative or absolute, is at best only temporary. Permanent decoupling (absolute or relative) is impossible for essential, non-substitutable resources because the efficiency gains are ultimately governed by physical limits.”

and

“Our model demonstrates that growth in GDP ultimately cannot plausibly be decoupled from growth in material and energy use, demonstrating categorically that GDP growth cannot be sustained indefinitely.”

Essentially their argument boils down to two key points:

  1. In the long run, some resources have no substitutes (e.g. land, fresh water) and therefore efficiency gains will eventually run up against hard physical limits.
  2. For any given resource or pollutant, absolute decoupling requires declines in use or intensity at a rate equal to or greater than GDP growth not just for a year or a decade but forever.

I’m not completely convinced.  I think the authors have overstated their case. They’ve reached some very definite conclusions on the basis of a relatively simple, perhaps simplistic, mathematical model.  My concerns come down to this: the farther out you try to project, the less confidence you can have in the accuracy of your predictions.  Even looking out to 2100, within the lifetime of kids being born today, there’s enough time for some wildly unpredictable events or innovations to occur.  Or for elements of the model to interact in unforeseen ways.  Or for substitutes to be found for supposedly non-substitutable resources.

That said, I think the models do point to a set of plausible outcomes based on current trends and data. The paper should dissuade anyone from assuming that absolute decoupling is going to happen automatically.

As with models predicting global warming and sea level rise out to 2100, we should use them as warning signals that tell us action is needed now if we want to avoid highly undesirable outcomes.

This is also a good time to note that the debate about decoupling is related to but separate from taking action on global climate change.  Without question, one of the things we need to decouple from is CO2 emissions.  And that challenge ought to be our most critical and urgent and overriding concern.

Unless we bring CO2 emissions under control, decoupling will become moot.

UN Sustainable Development Goals

Source: United Nations

The authors make one more important point towards the end of their paper: if we want to build a more sustainable society, we need to adopt a broader set of goals than just GDP growth.  They point to the United Nations Sustainable Development Goals which include eliminating hunger and extreme poverty, providing health care and quality education for everyone, addressing gender inequality, building sustainable cities, action on climate change as well as inclusive and sustainable economic growth.

On that, I completely agree.

References

Chertow, MR (2001) The IPAT Equation and Its Variants. Journal of Industrial Ecology, Vol. 4, No. 4. https://notendur.hi.is/bdavids/UAU_102/Readings/Chertow.pdf

Ward JD, Sutton PC, Werner AD, Costanza R, Mohr SH, Simmons CT (2016) Is Decoupling GDP Growth from Environmental Impact Possible? PLoS ONE 11(10): e0164733. https://doi.org/10.1371/journal.pone.0164733

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20/20 Foresight

20/20 Foresight: Crafting Strategy in An Uncertain World
By Hugh Courtney
Harvard Business Review Press, Boston, 2001

What better way to start 2020 than a book called 20/20 Foresight?

There’s an old Danish proverb that says,

“It is difficult to make predictions, especially about the future.”

Difficult for sure, but we do it all the time anyway.  Whether it’s something as simple as arranging to meet friends after work, or as complex as developing business strategy, we’re making predictions and dealing with uncertainty.

20-20 Foresight - cover

20/20 Foresight: Crafting Strategy in An Uncertain World is about how to define business strategy in the face of uncertain predictions about the future.

Hugh Courtney, Professor of International Business and Strategy at Northeastern University, wrote this book back in 2001, but I think the framework he created is still useful and powerful today.

Levels of Uncertainty

The first thing Courtney does, and probably the most valuable part of the book, is to show us that not all uncertainty is alike.  He identifies four levels of uncertainty.

20-20 Foresight 4 Levels

In situations with Level 1 uncertainty, there is only one possible outcome, or a very narrow range of outcomes.  An example might be predicting population growth to estimate the size of a potential market.  Population growth is well-understood and changes relatively slowly, so projecting, say, ten years into the future, does not involve much uncertainty.

With Level 2 uncertainty there is a small set of discrete, mutually exclusive outcomes.  Take government regulation. The government could decide to step in and regulate political advertising on social media, for example. While the exact regulations may not be known, there is only a finite number of ways this can be done. Policy analysts should be able to identify the most likely types of regulation and maybe even assign probabilities to each one.

Under conditions of Level 3 uncertainty there is a continuous, rather than discrete, range of possible outcomes and the actual outcome could fall anywhere in the range.  A good example would be trying to predict the value of the S&P 500 stock index five years from now.

Finally, Level 4 represents radical uncertainty. Here there is true ambiguity, many “unknown unknowns” and both the range and the nature of possible outcomes is unbounded.

As time passes and more information becomes available, the level of uncertainty decreases.

Knowing the type of uncertainty you’re dealing with helps you set strategy.  Courtney lays out a set of questions that people should ask themselves when defining strategy, and provides some guidance on how to answer those questions depending on the prevailing level of uncertainty.

Shape or Adapt?

Should you try to shape the market or industry or situation you’re in, or adapt to it?

To be a shaper, you’ll need to introduce fundamentally new products, services or business processes.  You might need to redefine industry standards.  You could reshape your industry through mergers, acquisitions, integration or divestment.  Or you might replicate existing business systems in new markets.  As a shaper you will influence your competitiors’ behavior.

Adapters on the other hand may choose to follow a shaper’s lead.  This could be a good hedge against multiple possible outcomes (level 2 or 3 uncertainty).  It requires continuous experimentation and a flexible organization to adapt quickly and successfully.

Apple’s introduction of the iPhone is a clear example of a company, well Steve Jobs really, deciding to be a shaper. Apple completely redefined the mobile phone industry despite the presence of established incumbents.

Now or Later?

Do you need to act now, or can you wait, perhaps until more information become available?

Courtney suggests that “no regret” moves, that is moves that make sense no matter what the outcome, should be done now.

Beyond that, you need to ask yourself are you trying to maximize upside potential or minimize downside risk (i.e. reduce uncertainty)?  You’ll need to make big bets for the former, and explore real, present-day options for the latter.

When looking at real options, Courtney suggests they should provide an asymmetrical payoff.  In other words, a small investment should yield a large reward.  The Black-Scholes model can help you figure this out.  Examples include options that help you learn about new business opportunities, markets or technologies, and options that help you hedge agains undesirable outcomes.

Courtney says that situations of high uncertainty favor exploring real options, while known competitive threats favor making bit bets.

Focus or Diversify?

Should you focus your investments or diversify?

Courtney describes different types of investments that can help reduce risk:

  • Diversification: a group of investments that have uncorrelated outcomes or risk.
  • Hedge: investments that have negatively correlated outcomes.
  • Insurance: provides specific payoffs for worst-case scenarios

If you’re a shaper acting now, Courtney says you should focus.  If you’re an adapter who can afford to wait, you should diversify.

The answer also depends on the type of uncertainty you’re facing.

  • Level 1: No need to diversify.  In fact, diversification would be wasteful.
  • Level 2: Use hedging and/or insurance to reduce risk
  • Level 3: Diversification plus insurance to guard against the worst-case outcomes
  • Level 4: Focus if you’re willing to accept high risk/reward, otherwise diversify and insure.

Tools

Courtney ends the book with some tools for thinking about strategy under radical Level 4 uncertainty. He suggests working backwards from your desired strategy and asking questions like:

  • “What would you have to believe …” or “What assumptions would you have to make …” in order for a given strategy to succeed?
  • Or what facts or developments are needed to reduce the uncertainty to Levels 3, 2 or 1?

All in all, 20/20 Foresight is a powerful way of thinking about and developing strategy in uncertain conditions.

Related Links

A fresh look at strategy under uncertainty – a 2008 interview with Hugh Courtney in McKinsey Quarterly
https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/a-fresh-look-at-strategy-under-uncertainty-an-interview

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