Warren Buffett made headlines – and a handsome profit for charity – by betting that a stock index could outperform hedge funds. Could he make a similar bet on climate change?
More than a decade ago, Mr. Buffett made a friendly million-dollar wager with a hedge fund manager that the S&P 500 index would outperform a basket of hedge funds.
Buffett’s view, which he was willing to back with a sizable check (to benefit a local charity), was that it would be hard for hedge funds, no matter how talented their managers, to beat the low cost and diversification offered by the index over a decade.
He was right. When the wager reached the 10-year mark in 2017, Buffett’s investment had gained about 125%, compared to just 36% for the hedge funds. Hedge funds reported dismal performance figures last year, but the sector still retains its allure.
Rather than repeat the hedge-fund wager, perhaps Mr. Buffett will announce a new one when Berkshire Hathaway shareholders gather in Omaha next weekend.
Here’s a suggestion: He should bet on the best way to tackle climate change, using California as the yardstick and finding one of its billionaire residents to take the other side.
Why California? For starters, the state has long promoted aggressive policies to reduce greenhouse-gas (GHG) emissions and has said it wants to reduce them by 80 percent by mid-century, a very ambitions target. It has also been clear about its preferred technologies and strategies to get there: wind, solar, battery storage and other zero-carbon sources. But nuclear, the largest source of zero-carbon energy in America, is a non-starter. California will shutter its last remaining nuclear plant by 2025, while other states have acted to keep their reactors open for their clean-energy benefits.
California also has an index to measure its progress on lowering emissions. The state’s Air Resources Board has a long-established, transparent methodology for reporting GHG emissions and publishes emissions levels annually.
Surely there are deep-pocketed Californians who have championed the renewables-only approach and would take the wager. Or perhaps Buffett himself will take the all-renewables side. His views on nuclear power aren’t known, and Berkshire’s Mid-American Energy has only a tiny fraction of nuclear in its generating mix. Mr. Buffett could ask his friend and fellow Berkshire board director Bill Gates, an outspoken supporter of nuclear energy, to take half the action.
A Buffett-led wager would shine a light on California’s strategy to cut carbon emissions. Its approach stands in contrast to that of other states, such as New York and Illinois, that recognized the zero-carbon benefits of nuclear plants and included them in their power-purchase plans, a policy upheld in a Supreme court decision last week.
While electricity generation represents just 16% of California’s carbon emissions, fully de-carbonizing the sector will be very challenging. A recent report from the Energy Futures Initiative, a think-tank led by former U.S energy secretary Ernest Moniz, noted just how difficult it will be (emphasis added):
California will, however, have to manage the significant operational issues that arise from high penetration of variable renewable electricity to ensure reliability, manage costs and minimize system emissions. The Western Energy Imbalance Market, demand response, and increased deployment of energy storage technology, including battery storage, pumped hydro and other technologies, will be critical to balancing electricity from intermittent renewables; these options are, however, currently limited in size, and by duration or geography.
The report was equally sobering about prospects for battery storage, a key part of California’s strategy, saying that current technologies “cannot provide the load-following and weekly/seasonal storage needs to reliably operate California’s grid.”
The stakes are high. If California’s plan fails, the state could end up as a three-way loser, with an underperforming economy, rising electric rates and worsening public health. And that’s before accounting for the ravages of a changing climate.
So let’s put this debate to the test with a financial bet among billionaires and a worthy charity as its beneficiary. Its lessons will be important for policymakers, far more visible than dry academic studies and more instructive than partisan posturing.
Over to you, Mr. Buffett.