Real Cost of Growth

UNIVERSITY OF CHICAGO · BUSINESS & TECHNOLOGY THE REAL COST OF GROWTH Climate Physics, Ecological Economics & the Business Case for a Different Framework April 2026

TODAY'S ROADMAP Eight acts, one argument 01 The Physics Doesn't Negotiate What the data actually shows 02 Missing the Market $11–21T in unpriced externalities 03 Rethinking Economic Metrics Beyond GDP — alternative frameworks 04 The Growth Trap EROI, neoclassical limits & biophysics 05 Climate Tipping Points Non-linearity, risk & investment models 06 The Innovation Landscape Funding, breakthroughs & the valley 07 Short-Termism Is Expensive How incentives drive the wrong outcomes 08 What Success Looks Like Policy, business models & a new framework

OPENING EXERCISE · PART 1 OF 3 A perfectly profitable company. Scenario: A gas station sold 50,000 gallons last month at $3.20/gal. Revenue: $160,000. After wholesale fuel, labor, rent, and compliance costs, net profit: $12,000. A straightforward, legal, tax-paying business. CALL OUT YOUR ANSWERS: What happened last month that didn't appear anywhere in that P&L?

OPENING EXERCISE · PART 2 OF 3 Name a company you consider successful and why.

OPENING EXERCISE · PART 3 OF 3 Which company would you invest in? Four companies. Same broad sector. Vote by raising your hand. A Rev growth +14% CAGR · EBITDA 22% · ROIC 16% · Carbon: not reported B Rev growth +6% CAGR · EBITDA 38% · ROIC 11% · Carbon: industry avg. C Rev growth +22% CAGR · EBITDA 18% · ROIC 28% · Carbon: high/opaque D Rev growth +31% CAGR · EBITDA 41% · ROIC 9% · Carbon: near zero

OPENING EXERCISE · VERBAL POLL Hands up if you agree. Five statements. Raise your hand if you agree. We'll count — and revisit at the end. 01 A company that consistently grows revenue and profit is, by definition, creating value for society. Hands: ___ 02 If a cost doesn't appear on a balance sheet or income statement, it's not the company's responsibility. Hands: ___ 03 GDP growth in a country is strong evidence its citizens are becoming materially better off. Hands: ___ 04 Technology and efficiency gains are sufficient to decouple economic growth from environmental harm. Hands: ___ 05 Financial markets will price in long-run climate risk as data improves — regulation isn't the primary lever needed. Hands: ___

⚡ INTUITION CHECK #1 True or False — no Googling

1. Solar and wind are now the cheapest source of electricity ever built — in history.
2. Global fossil fuel subsidies (explicit + implicit) exceed total global healthcare spending.
3. The IRA (2022) has so far unlocked more private climate investment than the entire EU Green Deal.
4. Of the 30 largest companies by market cap, fewer than 10 have a credible SBTi-verified net-zero pathway.
5. Carbon capture (DAC) today removes more CO₂ than is emitted by the aviation industry each year.

⚡ INTUITION CHECK #1 True or False — no Googling

1. Solar and wind are now the cheapest source of electricity ever built — in history. TRUE
2. Global fossil fuel subsidies (explicit + implicit) exceed total global healthcare spending.
3. The IRA (2022) has so far unlocked more private climate investment than the entire EU Green Deal.
4. Of the 30 largest companies by market cap, fewer than 10 have a credible SBTi-verified net-zero pathway.
5. Carbon capture (DAC) today removes more CO₂ than is emitted by the aviation industry each year.

⚡ INTUITION CHECK #1 True or False — no Googling

1. Solar and wind are now the cheapest source of electricity ever built — in history. TRUE
2. Global fossil fuel subsidies (explicit + implicit) exceed total global healthcare spending. TRUE
3. The IRA (2022) has so far unlocked more private climate investment than the entire EU Green Deal.
4. Of the 30 largest companies by market cap, fewer than 10 have a credible SBTi-verified net-zero pathway.
5. Carbon capture (DAC) today removes more CO₂ than is emitted by the aviation industry each year.

⚡ INTUITION CHECK #1 True or False — no Googling

1. Solar and wind are now the cheapest source of electricity ever built — in history. TRUE
2. Global fossil fuel subsidies (explicit + implicit) exceed total global healthcare spending. TRUE
3. The IRA (2022) has so far unlocked more private climate investment than the entire EU Green Deal. TRUE
4. Of the 30 largest companies by market cap, fewer than 10 have a credible SBTi-verified net-zero pathway.
5. Carbon capture (DAC) today removes more CO₂ than is emitted by the aviation industry each year.

⚡ INTUITION CHECK #1 True or False — no Googling

1. Solar and wind are now the cheapest source of electricity ever built — in history. TRUE
2. Global fossil fuel subsidies (explicit + implicit) exceed total global healthcare spending. TRUE
3. The IRA (2022) has so far unlocked more private climate investment than the entire EU Green Deal. TRUE
4. Of the 30 largest companies by market cap, fewer than 10 have a credible SBTi-verified net-zero pathway. TRUE
5. Carbon capture (DAC) today removes more CO₂ than is emitted by the aviation industry each year.

⚡ INTUITION CHECK #1 True or False — no Googling

1. Solar and wind are now the cheapest source of electricity ever built — in history. TRUE
2. Global fossil fuel subsidies (explicit + implicit) exceed total global healthcare spending. TRUE
3. The IRA (2022) has so far unlocked more private climate investment than the entire EU Green Deal. TRUE
4. Of the 30 largest companies by market cap, fewer than 10 have a credible SBTi-verified net-zero pathway. TRUE
5. Carbon capture (DAC) today removes more CO₂ than is emitted by the aviation industry each year. FALSE

ACT 01 The Physics Doesn't Negotiate 1.45°C above pre-industrial baseline (2024) Crossing 1.5°C Paris target within 5 years 422 ppm atmospheric CO₂ (April 2026) Highest in 3 million years $?? climate damages by 2050 The system has tipping points. Arctic ice loss, Amazon dieback, permafrost methane release — once crossed, these feedbacks are self-reinforcing. No business model survives a 4°C world.

Unpriced Damage Costs: $11–21 Trillion Per Year Annual cost of environmental harm imposed by economic activity but never charged to those who caused it · UNEP / TEEB / IMF, 2023 USD USD Trillions (annual) → $0T$2T$4T$6T$8T Carbon / GHG emissions $8.2T IMF 2023 / UNEP Air pollution health damage $4.6T WHO / Muller & Mendelsohn $2.5T Biodiversity loss TEEB / Dasgupta Review $2.1T Water depletion & damage World Bank / WWAP $1.4T Soil degradation FAO / UNCCD 2022 $0.9T Ocean & marine damage High Level Panel for the Ocean ~$19.7T/yr in unpriced damage costs per year — roughly equal to the entire US GDP $7T fossil subsidy Of this, $7T/yr benefits fossil fuels via unpaid externalities (IMF 2023). At $190/ton SCC, petrol should cost ~$1.40/gal more. If priced: Clean energy already beats fossil fuels on LCOE. Circular economy beats linear. The market failure IS the subsidy. Note: These figures measure annual damage flows — costs that economic activity imposes but never pays. Distinct from (a) the value of ecosystem services nature provides ($125–140T/yr, Costanza) and (b) projected losses if tipping points are crossed (see Act 05). All three are real; they measure different things.

The Value of Ecosystem Services Nature provides services to the economy worth $125–140 trillion per year — roughly 1.5× global GDP. None of it appears on any balance sheet.  Climate Regulation $28.6T/yr Carbon sequestration by forests, oceans, wetlands. Atmospheric temperature buffering. Without this the greenhouse effect accelerates non-linearly.  Water Cycle & Purification $26.1T/yr Freshwater provision, flood control, aquifer recharge. 2B people rely on groundwater recharged by forest root systems. No substitute at scale.  Food System Support $22.4T/yr Pollination ($235–577B in crops), soil formation (takes 500–1000 years/inch), pest control by natural predators, marine fisheries replenishment.  Biodiversity & Habitat $17.0T/yr Genetic library for pharmaceuticals (50% of drugs derived from nature). Resilience against disease. Coral reef coastal protection worth $9B/yr in avoided storm damage.  Nutrient Cycling $13.6T/yr Nitrogen and phosphorus cycling by microorganisms. Without functional soil microbiomes, synthetic fertilizer demand would increase 10×. Soil is non-renewable on human timescales. ⛰ Cultural & Recreational $3.0T/yr Tourism, mental health, existence value. Knowable but hard to price — the value of knowing Amazon rainforest exists even if you never visit it. Source: Costanza et al. (2014) updated to 2023 USD. The Dasgupta Review (2021) estimates the stock of natural capital at $90–125T — declining at ~2% per year.

ACT 05 Climate Tipping Points The non-linear risks that make standard risk models structurally inadequate — with estimated annual economic costs TIPPING POINTTHRESHOLDANNUAL ECON. COSTKEY IMPACT Greenland Ice Sheet Collapse ~1.5°C $8.9T/yr by 2100 (Dietz et al., 2021 — sea level + displacement) 7m sea level rise. 630M coastal residents at risk. Miami, Amsterdam, Shanghai underwater. West Antarctic Ice Sheet ~1.5°C $3–6T/yr (overlaps with Greenland; additive in worst case) 3–5m additional sea level rise. Threshold possibly already passed. Amazon Dieback ~3–4°C or 20% deforest. $2.5T/yr (Burke et al. GDP loss; rainfall disruption to 2B people) Releases 90Gt CO₂. Destroys rainfall patterns across South America. Agriculture collapse. Permafrost Thaw ~1.5–2°C $43T present-value (Hope & Schaefer, 2016 — total damages discounted to 2015) Releases 1.5T tonnes of stored CH₄ and CO₂. Self-reinforcing warming loop. AMOC Collapse ~3–5°C $11T/yr by 2100 (Caesar et al. European agricultural + weather disruption) Ends Gulf Stream. N. Europe cools 5–15°C. Tropical rain belt shifts. Crop failure. Coral Reef Collapse ~1.5–2°C $375B/yr (Hoegh-Guldberg — fisheries, tourism, coastal protection) 25% of marine species at risk. 1B people depend on reef fisheries for protein. Boreal Forest Dieback ~3–4°C $1.5T/yr (carbon sink reversal + timber + water cycle disruption) 2nd largest terrestrial biome. Carbon sink turns source — adds ~0.3°C by 2100. Monsoon Destabilization ~2–3°C $1.2T/yr (South/SE Asian agricultural output — World Bank, 2022) 4B people depend on monsoon systems. Pakistan, India, Bangladesh, Vietnam at risk.

Why Tipping Points Make Standard Finance Models Wrong The structure of financial risk modeling assumes linearity. Climate physics does not. 01 Fat Tails Are Not Modeled VaR, DCF, and scenario analysis assume normally distributed outcomes. Tipping points produce fat-tailed distributions — catastrophic outcomes with non-negligible probability. A 2% chance of losing civilization is not priced into most equity multiples. 02 Non-Linearity Breaks Discounting Standard NPV discounts future damage to near-zero. But tipping points mean damage is exponential with temperature, not linear. Crossing 2°C is not 'twice as bad' as 1°C. It may trigger cascades worth 10× or more. 03 Irreversibility Has No Residual Value Corporate valuation assumes you can always sell the asset. Extinct species, collapsed ice sheets, destabilized monsoon systems have no liquidation value. Once crossed, these thresholds have negative terminal value. 04 Investment Horizons Are Misaligned PE funds: 5–7 yr horizon. Infrastructure bonds: 20–30 yr. Tipping points: triggered now, full impact over 50–200 years. A 30-year infrastructure asset built on current flood maps in Miami is systematically mispriced short-termism.

ACT 02 Missing the Market Why standard economics systematically misprices the natural world — and how ecological economics corrects it  Neoclassical Economics ✗ Economy is the primary system ✗ Nature is a subset of 'the economy' ✗ Resources substitutable via price signals ✗ Externalities correctable at margin ✗ Infinite substitutability assumption ✗ Discount rate erases future generations ✗ Growth = welfare, always  Ecological Economics ✓ Economy is a subsystem of Nature ✓ Biophysical limits are real & binding ✓ Many natural systems are irreplaceable ✓ Externalities = systemic market failure ✓ Thermodynamic constraints on growth ✓ Intergenerational equity is non-negotiable ✓ Wellbeing ≠ GDP — need new metrics

ACT 04 The Growth Trap How standard business investment logic hits a biophysical wall — and what the data already shows Premise: Economic growth requires and enables continued investment returns Physical reality: GDP growth has been decoupling from energy throughput only slightly. At current efficiency rates, hitting net-zero by 2050 requires either a 90% reduction in energy-per-unit-GDP, or a 90% clean energy substitution — while the economy grows. No wealthy country is on track for either. Premise: Technological progress means we can decouple growth from resource use indefinitely Physical reality: Jevons Paradox — efficiency gains typically increase consumption, not reduce it. UK energy intensity fell 60% between 1970–2010; total energy use barely changed. Absolute decoupling (growth + falling total resource use) has never been demonstrated at scale in a wealthy economy. Premise: Capital can substitute for natural capital — if we run out of oil, price signals will find alternatives Physical reality: You cannot substitute capital for soil, biodiversity, or a stable climate. These are complements, not substitutes. A factory without water, arable land, or a functioning climate is not a factory. The neoclassical substitution assumption collapses when applied to irreplaceable systems.

ACT 03 Rethinking Economic Metrics GDP measures activity. It does not measure welfare, sustainability, or whether we are better off. Here is what the alternatives look like.  Genuine Progress Indicator (GPI) Maryland, Vermont, multiple governments Starts with GDP, adds value of household/volunteer work, then subtracts cost of crime, pollution, loss of leisure, loss of natural capital. US GPI has been roughly flat since 1978 — even as GDP doubled.  Inclusive Wealth Index (IWI) UN Environment Programme Tracks produced capital (machines), human capital (health, skills), and natural capital (forests, fisheries). Natural capital per capita has fallen 40% globally since 1990 — even as GDP rose.  Doughnut Economics Kate Raworth / Amsterdam, Brussels, Portalegre Two boundaries: a social foundation (food, education, health, housing) and an ecological ceiling (climate, biodiversity, water). The goal is a safe and just space for humanity — not maximum throughput.  SEEA (Environmental-Economic Accounting) UN Statistical Division — 90+ countries Formally integrates ecosystem services into national accounts. Depletion of natural capital counted as a cost. Ecuador, UK, Australia publish quarterly. Reveals 'growth' often liquidates natural balance sheets. ❤ Wellbeing Economy / GNH Scotland, NZ, Iceland, Wales; Bhutan Redefines government success as population wellbeing — mental health, ecological health, community, time. NZ Wellbeing Budget (2019) explicitly trades GDP growth for outcomes on mental health and child poverty.  Social Cost of Carbon (SCC) US EPA / Interagency Working Group Monetizes the marginal damage of each additional tonne of CO₂. Biden SCC: ~$190/ton. Current US carbon market price: ~$15/ton. The gap between these two numbers is the size of the market distortion.

EROI: Energy Return on Investment How many units of usable energy are returned for every 1 unit invested to extract it · Sources: Hall et al. (2014), Murphy & Hall (2010), NREL, IEA ← EROI ratio (energy out : energy in) 5:1 Oil sands (Canada) Murphy & Hall 2010 7:1 Shale gas / tight oil Hall et al. 2014 10:1 Deepwater oil Hall et al. 2014 10:1 US oil (2020) Guilford et al. 2011 upd. 12:1 Solar PV — utility scale NREL / IEA 2023 30:1 US oil (1970) Cleveland et al. 2000 30:1 Coal — global average Hall et al. 2014 30:1 Nat. gas (conventional) Sell et al. 2011 34:1 Wind — onshore Kubiszewski et al. 2010 Large hydro 84:1 Hall et al. 2014 Nuclear (lifecycle) 75:1 Weissbach et al. 2013 US oil (1919) 100:1 Cleveland et al. 2000 020:140:160:180:1100:1 14:1 ↑ EROI cliff (Hall et al.) Fossil — marginal/decliningFossil — incumbent avg.Fossil — conventionalRenewable (wind) Renewable (solar)Renewable (hydro) / hist. ref.Nuclear The EROI Cliff Modern economies need EROI ≥ 14:1 to sustain complex industrial civilization (Hall et al., 2014). Below this threshold, too much of society's energy is consumed just extracting energy — little is left for hospitals, schools, infrastructure. US Oil Has Already Fallen Off US oil EROI fell from ~100:1 in 1919 to ~10:1 today. Every incremental barrel requires more energy-intensive extraction. This is not an investment thesis problem — it is a physics problem. Renewables Are Different Wind and solar EROI of 10–40:1 is competitive with fossil fuels — and their 'fuel' is free. EROI improves with scale and manufacturing learning curves, not extraction depth. This fundamentally changes the long-run cost trajectory. The Investment Implication DCF models for oil & gas projects assume stable or rising production yields. Declining EROI means production costs rise structurally even when commodity prices are stable. Most fossil fuel valuations do not model this explicitly.

What the EROI Model Explains — and Predicts EROI is not just a measure of energy efficiency. It is a framework for understanding economic growth, geopolitical power, and investment risk across long time horizons. WHAT IT EXPLAINS — HISTORICALLY Why the 20th century was uniquely prosperous Oil at EROI 100:1 (1919) meant almost all extracted energy went to civilization — building, healing, educating. Every unit spent extracting returned 100. That surplus funded the modern world. EROI 10:1 means 1 in 10 units goes to extraction overhead. That's a structural drag on everything else. Why emerging markets can't replicate Western industrialization cheaply The high-EROI fossil fuels that powered US, European, and Japanese industrialization are largely depleted. Late industrializers access oil sands, deepwater, and shale — all EROI 5–10:1. The physics of the path have changed. Renewable leapfrogging isn't just idealistic — it's becoming the economically rational trajectory. Why oil price volatility is structural, not cyclical As EROI falls, the floor cost of production rises regardless of market conditions. Shale operators need $55–75/barrel to break even at current EROI — a number that rises with each marginal well. This is not a supply management problem. It is thermodynamics. Why resource wars happen where they do Geopolitical conflict clusters around high-EROI resources (Saudi Arabia, Strait of Hormuz, South China Sea). Nations don't fight over low-EROI resources. EROI maps onto strategic importance with remarkable accuracy across the 20th and 21st centuries. WHAT IT PREDICTS — FOR INVESTMENT Fossil fuel production costs will rise structurally Every model that assumes flat or falling extraction costs for oil & gas is implicitly ignoring EROI decline. Production cost floors rise as easy resources are depleted. This is already visible in capex-per-barrel data for every major producer. Renewable EROI will continue improving — uniquely Solar EROI has risen from ~3:1 in the 1970s to ~12:1 today and is still improving. Wind is ~34:1. Unlike fossil fuels, renewable EROI is not limited by resource depletion — it improves with manufacturing scale and technology. This asymmetry is structurally decisive over 20–30yr investment horizons. Energy transition is economically inevitable, not just moral When renewable EROI consistently exceeds fossil fuel EROI — which is happening in increasing geographies — markets will shift even without carbon pricing. EROI predicts the crossing point. In solar-rich regions, it has already occurred. Carbon pricing accelerates it everywhere else. DCF models for fossil assets are systematically optimistic Standard oil & gas DCF assumes flat EROI over project life. Actual EROI declines as wells deplete — raising lifting costs, lowering margins, shortening economic life. A 20-year oil field modeled at today's EROI will underperform. EROI-adjusted valuations consistently show lower NPVs than industry projections. EROI doesn't tell you when the transition happens. It tells you that the direction is physically determined — and that standard financial models, which ignore it, are systematically biased toward fossil fuel assets.

⚡ INTUITION CHECK #2 Which country is doing better? MetricCountry ACountry B GDP per capita (2023)$58,000$12,000 GPI per capita$31,000$28,000 Natural capital per capita–$4,200/yr+$1,800/yr Life expectancy78 years79 years Self-reported life satisfaction6.9 / 107.4 / 10 CO₂ per capita14.5 t4.2 t Gini coefficient0.410.28 Country A = United States. Country B = Costa Rica. (Approximate values, 2023 sources) Discussion: If you were designing a 30-year investment strategy, which country's trajectory would you rather bet on? What does your answer reveal about what 'economic health' actually means?

⚡ INTUITION CHECK #3 What does standard investment logic miss? Scenario: A PE firm is evaluating a deepwater oil project. Projected IRR: 18%. They use a Solow growth model assuming continued 2% productivity growth. They discount future revenues at 10%. → What three things does this model not capture? ▸ EROI of deepwater oil (~10:1) means production costs rise structurally even if commodity prices hold ▸ Solow model treats energy as one input like any other — but energy is the pre-condition for using all other inputs ▸ At a 10% discount rate, stranded asset risk in 2040 has near-zero weight in the NPV today Scenario: A McKinsey report projects that a developing country can reach $25,000 GDP/capita by 2045 by following the standard industrialization pathway — fossil-fuel-led growth, then transition. → Why does EROI make this projection structurally questionable? ▸ The fossil fuels available to late industrializers have EROI of 5–15:1, vs 30–100:1 that powered the West's industrialization ▸ Energy prices will structurally rise as cheap resources deplete — this wasn't true for Japan in 1960 or Korea in 1980 ▸ The 'then transition' assumption requires a second enormous capital build — the data suggest simultaneous transition is cheaper

⚡ INTUITION CHECK #4 How would you price this risk? Scenario: A major reinsurance firm estimates a 5–8% probability that at least one major tipping point (AMOC collapse or Amazon dieback) is triggered before 2060. The estimated economic cost of that outcome is $50–80 trillion in present-value damages over the subsequent 100 years.

1. What is the expected value of that risk in dollars?
2. How many publicly traded companies have this risk in their 10-K filings?
3. If you ran a sovereign wealth fund with a 75-year mandate, how would you weight this vs. quarterly returns?
4. What discount rate makes a $50T loss in 2070 look like 'not our problem' today?

⚡ INTUITION CHECK #4 How would you price this risk? Scenario: A major reinsurance firm estimates a 5–8% probability that at least one major tipping point (AMOC collapse or Amazon dieback) is triggered before 2060. The estimated economic cost of that outcome is $50–80 trillion in present-value damages over the subsequent 100 years.

1. What is the expected value of that risk in dollars? → ~$3–6 trillion EV — roughly the GDP of Germany or Japan, as a one-time loss
2. How many publicly traded companies have this risk in their 10-K filings? → Almost none. SEC climate disclosure rules are new and face legal challenge.
3. If you ran a sovereign wealth fund with a 75-year mandate, how would you weight this vs. quarterly returns? → Norway's GPFG explicitly models this. Most US pension funds do not.
4. What discount rate makes a $50T loss in 2070 look like 'not our problem' today? → At 7%: $50T in 2060 ≈ $12T today. At 10%: ≈ $4.7T. Still catastrophic.

ACT 06 The Innovation Landscape Where the money is going — and where the critical gaps remain 2025 Investment by Sector Energy Storage / Batteries28% Solar & Wind22% EV & Mobility18% Green Hydrogen9% Carbon Capture (DAC)7% Food & Agriculture7% Industrial Decarbonization6% Adaptation & Resilience3%

The Most Impactful Areas: Where Physics Meets Commerce Next-Gen Energy Storage Commercial breakthrough Sodium-ion, solid-state & flow batteries approaching lithium-ion cost parity. Grid storage additions tripled 2023–25. Bottleneck: permitting & interconnection, not technology. Ready to scale Solar PV (Perovskite) Lab → demo phase Perovskite-silicon tandems hit 33.7% efficiency (2024). Could reduce LCOE by 40%. Durability & lead-content challenges remain. ~3–5 years to commercial deployment. 2–3 year horizon Green Hydrogen Cost challenge Green H₂ at $5–8/kg vs grey at $1–2/kg. Electrolysis capex falling. Critical for aviation, shipping, steel. IRA & EU subsidies shifting the economics. Needs policy bridge Industrial Decarbonization Severely underfunded Cement, steel, chemicals = 23% of global emissions but only 6% of climate VC. High-temp heat & process emissions are hardest to abate. Enormous funding gap. Severely underfunded Food System Tech Emerging Precision fermentation, alt proteins, regenerative ag. Food = 26% of global emissions. AgTech investment <5% of climate VC despite enormous abatement potential. Scaling now Carbon Removal (DAC) Not economically viable yet DAC at $300–1,000/ton CO₂. We need ~10 Gt/yr removed by 2050; today's capacity: 0.01 Mt/yr. DOE targeting $100/ton by 2030 — requires massive R&D. Needs 100× scale

Emerging & Underinvested Climate Tech Sectors Beyond solar and batteries — the next wave of solutions that will define the 2030s Ocean-Based Carbon Removal TRL 3–5Invest: <$200M Kelp farming, ocean alkalinity enhancement, marine CDR. Potential: 1–10 Gt CO₂/yr. Near-zero investment relative to potential. Building Electrification & Retrofit TRL 8–9Invest: $8B/yr Heat pumps, induction cooking, smart building controls. Buildings = 13% of global emissions. Retrofit market is enormous and shovel-ready. Zero-Emission Shipping TRL 4–7Invest: $2B/yr Ammonia, methanol, LNG as interim fuel. Shipping = 2.9% of global emissions but highly concentrated industry — 10 firms own 40% of tonnage. Regenerative Agriculture TRL 7–9Invest: $5B/yr Soil carbon sequestration, cover cropping, silvopasture. Agriculture emits 10–12 Gt CO₂e/yr. Strong co-benefits: water retention, biodiversity, yield stability. Long-Duration Energy Storage TRL 4–7Invest: $1.5B/yr Iron-air batteries, compressed air, gravity storage, thermal. Grid reliability at 90%+ renewable penetration requires storage lasting days to weeks, not hours. Green Cement & Concrete TRL 5–8Invest: $800M/yr Cement = 8% of global CO₂. Alkali-activated materials, CO₂ mineralization, supplementary cementitious materials. $13T construction market. Massive abatement potential. Tropical Forest Finance Policy/MarketInvest: $3B/yr REDD+, high-integrity carbon credits, debt-for-nature swaps. Forests sequester 2.6 Gt CO₂/yr. Protecting them costs <$10/ton — cheapest mitigation available. Smart Grid & Demand Response TRL 8–9Invest: $12B/yr AI-optimized grid management, demand response, virtual power plants. Essential infrastructure for renewable integration. Software-defined grid could eliminate 20% of capacity needs.

The Valley of Death — Where Climate Tech Goes to Die The gap between laboratory breakthrough and commercial scale — and who (rarely) fills it Basic Research DOE / NSF Universities Applied Research ARPA-E National Labs Pilot / Demo ⚠ FUNDING GAP First of Kind ⚠ FUNDING GAP Commercial Scale Project Finance PE / Infrastructure Mass Market Public Markets IPO / M&A THE VALLEY OF DEATH TRL 4–7 Gap VC wants software-like returns. Hard climate tech capex doesn't fit. Most promising technologies die here — not because they don't work. The Numbers Of 100 promising climate tech pilots, ~5 reach commercial scale. Cost overruns average 3×. Timeline slippage: near-universal. What Helps DOE Loan Program Office, catalytic philanthropy, offtake guarantees, government procurement — all underfunded relative to the need.

ACT 07 Short-Termism Is Expensive The incentive cascade: from quarterly earnings to planetary-scale risk Fund Manager Pressure: Beat benchmark this quarter Outcome: Underweights stranded asset risk → planetary harm deferred, not avoided CFO / CEO Pressure: Hit EPS guidance, protect stock price Outcome: Defers climate capex, relies on greenwash → planetary harm deferred, not avoided Lobbyist / Legal Pressure: Protect current revenue streams Outcome: Blocks carbon pricing, weakens environmental standards → planetary harm deferred, not avoided Politician Pressure: Win next election (avg. 4-year horizon) Outcome: Short-term energy cost > long-term climate stability → planetary harm deferred, not avoided

⚡ INTUITION CHECK #5 Common investment intuitions — still true? Claim: Natural gas is a responsible 'bridge fuel' to renewables over the next 20 years. Challenge: At a $150/ton carbon price, gas-fired power is more expensive than renewables + storage — today. New gas infrastructure locks in 30 years of emissions at an EROI that is already declining. Claim: Carbon offsets let companies credibly reach net zero while maintaining current operations. Challenge: Up to 90% of forest carbon credits from the largest verifier found to be 'phantom credits' (Guardian/CarbonPlan, 2023). Offset market is structurally under-regulated. Claim: ESG ratings reliably identify companies with lower climate risk. Challenge: ESG rating agencies agree only 40% of the time. MSCI ESG and Sustainalytics correlate at 0.42 — lower than credit rating agencies correlate with each other. Claim: Adaptation is cheaper than mitigation — we can deal with impacts as they arrive. Challenge: Stern (2006): mitigation costs ~1% of GDP; unmitigated damage costs 5–20%+. Adaptation becomes geometrically more expensive above 2°C, especially once tipping points are factored in. Claim: Economic growth in emerging markets requires following the fossil-fuel industrialization path. Challenge: The fossil fuels available to late industrializers have EROI of 5–15:1 vs. 30–100:1 that powered Western industrialization. The physics of the path have changed. The 'leapfrog' argument is now the economic argument.

The Stranded Asset Time Bomb Assets that will lose economic value before the end of their book life — and who holds them $1.4T Fossil Fuel Reserves CRITICAL Booked on balance sheets; unburnable under 1.5°C scenario $300B Gas Power Plants HIGH Avg. 30-yr plant life vs. ~15-yr window to decarbonize the grid $4.5T Combustion Engine Vehicles HIGH Global auto fleet + supply chain at risk as EV mandates accelerate $1.0T Coastal Real Estate HIGH US alone: >$1T in property facing flood risk within 30-yr mortgage lives $150B Airport Infrastructure MEDIUM Decarbonization requires SAF at scale — current fleet incompatible $500B Petrochemical Plants MEDIUM Plastics under legislative pressure; bio/recycle feedstock shift

ACT 08 What Success Looks Like Not just 'avoid catastrophe' — a concrete, buildable alternative framework PROVEN Carbon ETS (EU) Price €60–80/ton. EU industrial emissions down 37% since 2005. IRA Tax Credits (US) $3T private investment unlocked through 2032 (Rhodium Group). Renewable Portfolio Standards US 30+ states. Drove 72% of US wind & solar build 2010–2020. PROMISING Carbon Border Adjustment (CBAM) EU live 2026. Prevents carbon leakage, levels global playing field. Government Green Procurement US federal buys $500B/yr. 'Buy Clean' de-risks first-of-kind plants. Natural Capital Accounting Ecuador, UK piloting GDP replacements counting ecosystem services. NEEDED — POLITICALLY STUCK US Federal Carbon Price Blocked. Without it, IRA is incomplete. $50–150/ton needed. Methane Regulation Methane 85× more potent over 20 years. EPA rules face legal challenge. Fossil Fuel Subsidy Reform $7T implicit subsidy (IMF). G20 commitments made; action near zero.

What Successful Climate Business Models Actually Look Like Not sustainability reports — fundamental redesigns of how value is created and captured Product-as-a-Service (PaaS) Why it works: Aligns incentives: supplier profits from product longevity, not replacement. Durability and repairability become competitive advantages. Michelin charges per km driven (not tyres sold). Rolls-Royce charges per engine flight hour. Philips: light-as-a-service. ▸ Michelin reported 2× tyre lifespan improvement after switching model Outcome-Based Contracting Why it works: Customers pay for results (tons of CO₂ avoided, energy saved) not inputs. Forces measurement, accountability, and genuine delivery. Energy performance contracts in buildings. Water stewardship credits. Regenerative agriculture payments for soil carbon verified by satellite. ▸ US ESPC market: $8B/yr — buildings pay contractors from energy savings Internalized Carbon Pricing Why it works: Internal shadow carbon prices change capex decisions at the business unit level — without waiting for government policy. Microsoft ($15/ton, all BUs). BP ($100/ton in project decisions). Unilever (£30/ton). Creates internal market for efficiency and clean investment. ▸ Microsoft: internal carbon fee funds $1B Climate Innovation Fund Circular Economy Models Why it works: Design products for reuse, remanufacture, recycling. Eliminate the concept of waste. Natural capital is preserved, not liquidated. Renault remanufacturing (Flins factory — 80% less energy than new). Caterpillar Reman: $1B revenue, uses 85% less raw material. H&M garment takeback. ▸ Ellen MacArthur: circular economy = $4.5T in economic opportunity by 2030 Shared Value & Community Benefit Why it works: Porter & Kramer: solving social/environmental problems as business strategy, not philanthropy. Creates new markets and sustainable competitive advantage. Natura (Brazil): sourcing from Amazon communities who then preserve forest. Danone: farmer-suppliers earn more, churn less, produce higher quality. ▸ Natura: 38% of raw materials from Amazon biome — sales at premium vs. conventional Platform Models for Resource Efficiency Why it works: Digital platforms can dramatically increase asset utilization rates, reducing total material throughput without reducing economic value. Airbnb: 3.9M units without building hotels. Uber Pool. Ostro Energy: AI for grid-scale renewable forecasting. Pachama: satellite forest monitoring platform. ▸ Airbnb hosts avoid construction of ~2M hotel rooms worth of concrete/steel

What a Successful Transition Economy Actually Requires Not incremental improvement — a coherent systems redesign across capital, measurement, technology and institutions 1 Price Signals That Reflect Reality Carbon price of $100–200/ton by 2035, credibly committed and rising. Natural capital on balance sheets. SCC-aligned discount rates in public investment. Without this, every other intervention is fighting gravity. Where to look: Carbon markets, SCC, SEEA accounting 2 Patient Capital at Scale $4–6T/yr in climate investment needed globally by 2030 (IEA). Today: ~$1.7T. Gap requires redesigned capital structures — 20-yr green bonds, MDB catalytic tranches, insurance-backed guarantees — not just more VC. Where to look: Sovereign wealth funds, pension funds, MDBs, central banks 3 Technology at EROI-Positive Scale Renewable EROI must be maintained or improved as we scale — manufacturing efficiency, grid integration, storage. The goal is not just clean energy but energy that is abundant, cheap, and genuinely net-positive for civilization. Where to look: Grid modernization, long-duration storage, nuclear, geothermal 4 Measurement Systems That Match Goals GDP as the primary national metric is incompatible with a sustainable economy. SEEA, GPI, IWI need to be official alongside GDP. Corporate reporting needs Scope 3 and natural capital — not just TCFD disclosures. Where to look: SEEA national accounts, CSRD, TNFD, SBTi, Doughnut dashboards 5 Just Transition Embedded in Design Every energy transition creates winners and losers. Successful transitions compensate displaced workers, provide affordable clean energy to low-income communities, and extend climate finance to vulnerable nations — or face political reversal. Where to look: IRA wage requirements, EU Just Transition Fund, climate finance architecture

Companies That Have Redesigned Around This Framework Not ESG box-ticking — fundamental restructuring of strategy, capital allocation, and measurement Microsoft Tech Carbon negative by 2030, remove all historical emissions by 2050. Internal carbon price at $15/ton applied to all business units. $1B Climate Innovation Fund. ▸ Internal carbon pricing changes business unit behavior without regulation. Ørsted Energy Divested oil & gas 2017, became world's largest offshore wind developer. Market cap tripled despite shedding 'profitable' fossil assets. Full business model transformation. ▸ Full transition beats hybrid strategy. Commitment unlocks capital and talent. Interface Manufacturing Carpet manufacturer went climate neutral 20 years before industry. Developed Mission Zero, then Climate Take Back. Reduced GHG 96% while growing revenue. ▸ Long-horizon commitment changes innovation pipeline and supplier relationships. Patagonia Retail Transferred ownership to Earth (via nonprofit) — profits fund climate activism. Repair & reuse program reduces new unit sales. Most trusted outdoor brand globally. ▸ Radical authenticity beats green marketing. Circular models build loyalty at scale. Breakthrough Energy Finance Gates / Bezos: patient capital fund focused on Valley of Death tech. 20-year investment horizon, accepts below-market returns for system-level impact. 95+ portfolio companies. ▸ New capital structures, not just more capital — patience is the scarcest resource. KBI GI Finance International $9B fund focusing on natural resources and surrounding infrastructure. Focus on long term investment time horizons through building fund out of institutional investors. ▸ New capital structures, not just more capital — patience is the scarcest resource.

For Your Career Finance / Investment › Demand climate-adjusted discount rates in DCF models › Push for stranded asset scenario analysis in due diligence › Advocate for natural capital on balance sheets › Explore catalytic capital & blended finance structures Strategy / Operations › Run shadow carbon pricing on all capital projects › Build externality costs into supplier selection criteria › Set science-based targets (SBTi) — not aspirational pledges › Map Scope 3 emissions Product / Technology › Design for longevity, repairability, and circularity › Life cycle assessment (LCA) before launch — not after › Prioritize dematerialization in digital products › Build data infrastructure for real-time emissions measurement Policy / Public Sector › Advocate for carbon prices that escalate predictably › Design green procurement rules that de-risk first movers › Build natural capital accounting into national statistics › Use AI enforcement to close the greenwashing gap

Markets Work. The argument here is not against markets. It is for better-designed ones. What free markets do exceptionally well ⚡ Price Discovery at Scale No central planner can process the information embedded in billions of simultaneous transactions. Prices aggregate dispersed knowledge about scarcity, preference, and opportunity faster and more accurately than any known alternative.  Innovation Under Competition Profit motive drives experimentation, risk-taking, and iteration faster than public institutions. The cost curves for solar, wind, batteries, and LEDs — all driven by market competition — are among the most dramatic in economic history.  Resource Allocation Efficiency Capital flows toward its most productive use without requiring anyone to design the system. Markets route resources through emergent coordination — a genuine achievement that command systems consistently fail to replicate.  Wealth Creation & Poverty Reduction Market-oriented economies lifted ~1.2 billion people out of extreme poverty between 1990 and 2015 — the fastest poverty reduction in human history. The correlation between economic freedom and living standards is robust across datasets. What goes wrong when prices are incomplete  Externalities Are Market Failure When a transaction imposes costs on parties who never consented, the price signal is wrong. The market is not free — it is subsidized by involuntary third parties. This is not a feature of markets; it is a defect in market design.  Public Goods Are Underproduced Clean air, stable climate, biodiversity, basic research — all goods where markets chronically underinvest because no one can exclude free riders. Left entirely to markets, these goods approach zero. ⏳ Short Horizons Misallocate Capital When discount rates price future people near zero, markets systematically underprice long-run investments and overprice short-term extraction. This is not rational preference — it is a structural artifact of how financial markets are organized.  Information Asymmetry Enables Greenwash Markets allocate well only when buyers have accurate information. Opaque supply chains, unverified emissions claims, and voluntary disclosure create systematic information failures that subvert price discovery itself. The evidence supports markets as the best coordination mechanism we have — and supports intervention precisely to make them work correctly, not to replace them.

The Real Ask: Complete the Price Signal. Externality pricing IS the free market — applied to all costs, not just the ones that were easy to measure in 1776. A SPECTRUM OF INTERVENTION — what makes the difference ✗ Substitutes market judgment Government picks winning technologies Command-and-control technology mandates Unconditional subsidies to incumbents Trade barriers that block competitive entry Distorts price signals. Suppresses innovation. Creates rent-seeking and misallocation. ✓ Corrects market failure Carbon price: market finds cheapest abatement Disclosure mandates: restore information symmetry Natural capital accounting: make costs visible EPR laws: internalize end-of-life costs in prices Completes the price signal. Markets now allocate correctly. Innovation is rewarded for genuine performance. Hayek: prices communicate information no central planner can access. The climate argument extends this — we need prices that communicate the full cost of our actions, including costs borne by people not yet born and ecosystems without legal standing.

The Argument, In One Slide 1 The physics is not negotiable. 1.5°C, tipping points, and irreversible damage are not externalities — they are constraints on every business model. 2 Current market prices are wrong by $11–21 trillion per year. Any strategy that ignores this is not conservative — it is systematically mispriced. 3 GDP is the wrong metric. GPI, IWI, SEEA and the Doughnut all reveal growth that liquidates natural balance sheets rather than creating durable value. 4 EROI decline means the physics of growth are changing. Fossil-led growth is structurally more expensive than it was. Renewable EROI offers a better long-run trajectory. 5 Tipping points make standard finance models incorrect. Fat-tailed, non-linear, irreversible risks break DCF, VaR, and scenario analysis as usually applied. 6 Short-termism is destroying value now. Stranded assets, regulatory exposure, and talent flight are materializing on balance sheets — not in 2050. 7 Successful solutions exist and are buildable. The bottleneck is not technology — it is capital structure, price signals, and institutional design.

OPENING EXERCISE · THE REVEAL Here's what was missing. CO₂ emissions — 450 tonnes @ $190/ton (US EPA Social Cost of Carbon, 2023) $85,500/mo Local NOₓ / particulate health damage ~$0.38/gal external health cost (Muller & Mendelsohn, 2012) $60,800/mo National security cost of oil imports DoD estimate: $0.03–0.07/gal of US fuel consumed $3,500/mo Groundwater contamination risk premium Actuarial avg. UST leak liability, EPA LUST data $1,200/mo Road infrastructure wear Heavy vehicle cost allocation studies (TRB, 2019) $800/mo Reported profit: +$12,000 / month Unpriced social costs: –$151,800 / month The business is profitable. Society is subsidizing it by $139,800 every month.

RETURN TO YOUR VOTES · EXERCISE C DEBRIEF Which company did you vote for? Here is what a new framework reveals about each one. A Cement manufacturer, SE Asia HIGH UNPRICED RISK EU Carbon Border Adjustment Mechanism (CBAM) applies from 2026. Carbon intensity estimated at ~850kg CO₂/ton vs EU benchmark of ~400kg. Implied tariff: $40–60/ton on EU-bound sales — erasing 25–35% of EBITDA margin. Not disclosed. Not in the multiple. B Regional US natural gas utility STRANDED ASSET RISK $2.1B in new gas distribution infrastructure (avg. 40-yr asset life) built 2019–2024. IEA net-zero pathway: no new gas connections after 2025. 12 US states already restricting new gas hookups. 60–70% of recent capex faces stranding risk. At Debt/EBITDA 3.8×, that matters. C Global fast-fashion retailer REGULATORY CLIFF AHEAD EU Digital Product Passport (2026–28) + Extended Producer Responsibility laws require full supply chain traceability and internalized end-of-life costs. Business model requires externalizing ~73% of product waste costs. ROIC of 28% partially reflects unpriced disposal and emissions costs being borne by others. D Utility-scale solar + storage STRONGEST RISK-ADJUSTED CASE High leverage (5.2× D/EBITDA) is standard project finance — matched to 20–25yr contracted cash flows. LCOE now beats all fossil fuels in both geographies. EROI of solar improving with scale; fossil EROI declining. 'Low ROIC' is an accounting artifact of accelerated depreciation on long-lived assets. IRA + Indian subsidies extend moat.

RETURN TO YOUR POLL · EXERCISE D DEBRIEF How many hands would you raise now? 01 A company that consistently grows revenue and profit is creating value for society. Only if you count the full ledger. A gas station that earns $12K/month while imposing $152K in unpriced social costs is not creating value — it is transferring costs to people who didn't consent to pay them. The accounting system makes this invisible. The physics doesn't. 02 If a cost doesn't appear on a balance sheet, it's not the company's responsibility. This was the argument the tobacco industry made about health costs, and asbestos manufacturers made about cancer. Today, carbon litigation, CBAM, SEC disclosure rules, and nature-related financial disclosure frameworks are all converting 'not on the balance sheet' into 'on the balance sheet'. The question is whether you price it in before or after the lawsuit. 03 GDP growth is strong evidence citizens are becoming better off. US GPI has been flat since 1978 despite GDP doubling. The US spends on healthcare after a car accident — that goes into GDP. It spends on flood cleanup — GDP again. Cutting down a forest for lumber: GDP. Costa Rica's GPI per capita is 90% of the US figure at 21% of the income. GDP measures activity, not welfare. 04 Efficiency gains are sufficient to decouple growth from environmental harm. Jevons Paradox: every major efficiency gain in history has been accompanied by increased total consumption. UK energy intensity fell 60% 1970–2010; total energy use barely changed. Absolute decoupling — GDP growing while total resource use falls — has never been demonstrated at scale in a wealthy economy. Not once. 05 Markets will price in long-run climate risk as data improves. Markets are priced by agents with 5–7yr investment horizons discounting at 10%. A 5% chance of a $50T loss in 2070 has near-zero weight in most DCF models. The data has not been the bottleneck — information about tobacco risks was available in 1950. The bottleneck is discount rates, fiduciary duty, and the principal-agent problem. That is a structural failure, not an information failure.

⚡ FINAL INTUITION CHECK — Close the Loop Now that you have the full framework, answer these: 1 If carbon was priced at its social cost ($190/ton), would the valuation of your target sector go up or down? 2 Name one business model in your target industry implicitly dependent on carbon being unpriced. How does it change at $100/ton? 3 What is the single metric GDP is missing that would most change how you evaluate a country's investment attractiveness over 30 years? 4 What tipping point represents the largest unpriced risk in your industry's supply chain? Is it disclosed in any 10-K you have read? 5 Which of the six successful business models from today most directly applies to an industry you want to work in? There are no right answers — but there are now frameworks for finding better ones. That is what today was about.

Questions?

Bibliography & Data Sources All statistics cited in this presentation. Students are encouraged to read the primary sources. CLIMATE SCIENCE & PHYSICS IPCC AR6 (2022). Summary for Policymakers — wg1, wg2, wg3. ipcc.ch Lenton et al. (2018). 'Tipping elements in the Earth's climate system.' PNAS. Armstrong McKay et al. (2022). 'Exceeding 1.5°C could trigger multiple tipping points.' Science, 377. NOAA / Scripps. Keeling Curve CO₂ Data. scripps.ucsd.edu/programs/keelingcurve Swiss Re Institute (2021). 'The economics of climate change: no action not an option.' Hall, C. et al. (2014). 'EROI of different fuels and implications for society.' Energy Policy. ECOLOGICAL ECONOMICS & EROI Stern, N. (2006). Stern Review on the Economics of Climate Change. HM Treasury. Raworth, K. (2017). Doughnut Economics. Penguin Random House. Dasgupta, P. (2021). The Economics of Biodiversity: The Dasgupta Review. HM Treasury. UNEP (2021). Inclusive Wealth Report 2021. unep.org UN Statistical Division (2021). System of Environmental-Economic Accounting (SEEA). unstats.un.org Talberth et al. (2007). 'The Genuine Progress Indicator 2006.' Redefining Progress. Murphy, D. & Hall, C. (2010). 'Year in review — EROI or energy return on energy invested.' Annals of the NY Academy of Sciences. Costanza et al. (2014). 'Changes in the global value of ecosystem services.' Global Environmental Change. EXTERNALITIES, POLICY & MARKETS IMF (2023). 'Fossil Fuel Subsidies.' imf.org/en/Topics/climate-change/energy-subsidies Rhodium Group (2023). 'IRA: Clean Energy Investment Outlook.' BloombergNEF (2024). New Energy Outlook 2024. IEA (2025). World Energy Outlook 2025. iea.org UNEP (2024). Emissions Gap Report 2024. Project Drawdown (2020). Drawdown. Penguin Books. Carbon Disclosure Project (2024). CDP Global Report. cdp.net Guardian / CarbonPlan (2023). 'More than 90% of rainforest carbon offsets worthless.' Ellen MacArthur Foundation (2023). The Circular Economy: A New Economics. emf.org Additional: Climate Action Tracker (climateactiontracker.org) · SBTi (sciencebasedtargets.org) · TCFD (fsb-tcfd.org) · TNFD (tnfd.global) · CDP (cdp.net)