Reversalism and Hedging Strategies

It seems there are many camps when it comes to our energy future. Some don’t think there’s a problem. Some think we’ll not only solve our problems, but produce even more energy more cleanly. Some think we’re doomed and have no chance of anything other than catastrophe. Some think we’re in for a long, slow decline in energy and living standards. Who’s right? Across several previous posts I’ve tried to articulate different aspects of this, but haven’t tried to really spell it out directly.  In large part that’s because I don’t know, and am skeptical of those who claim to know with certainty.  More than asking who’s right, the question I’m interested in is this one: what should we do?

Here I’d like to take a shot at thinking about this in a different way: as a hedging strategy. That is, what investments do we need to make to offset the risk posed by adverse outcomes? To figure that out, we first need to estimate the risk (likelihood and impact) of the various possible outcomes.

Let’s consider the four possible scenarios for our energy future I mentioned above.  I should mention none of these are mutually exclusive: they might happen in different regions of the world at the same time.  Here’s a bit about each:

Techno-utopia. Kurzweil and other technological utopians are right: solar power development proceeds at a pace far beyond what most believe is possible today and by the mid 2020s we power the whole world with solar energy. We also figure out a way around the non-substitutability of electricity with liquid fuels by both building a new transportation infrastructure that runs on electricity—electric trains and cars—and by developing efficient algae fuel production for legacy vehicles. In doing so, we also completely stop greenhouse emissions. These developments remove a huge drag from the global economic system and end climate change.

Business as usual. Global fossil fuel production doesn’t increase or decrease, and a multi-decade shift to alternatives takes place. High oil prices prove to be a mild drag on industrial economies, which oscillate between slow growth and recession. The shift away from fossil fuels happens too slowly to avert dangerous climate change.

Slow reversal. Global fossil fuel production declines slowly, beginning with liquid fuels around 2015 and followed by natural gas and coal in the 2020s. High oil prices prove to be a significant drag on industrial economies, which oscillate between severe recession and partial recovery. The economic contraction, combined with the energy trap, prevent a serious, rapid transition to alternatives, and the decline proceeds for a couple decades before a temporary reprieve at a lower economic and energy level.  Climate change worsens and has major effects, but not to the extent that it causes runaway warming.

Collapse. Global fossil fuel production declines moderately quickly, and geopolitical and financial dynamics create interacting positive feedbacks to the downside that cause a rapid disintegration of various nations around the world over the course of a decade or two. Global commerce and finance, industrial agriculture, and other complex systems grind to a halt.

How likely is each of these outcomes? Below I list what I think is the “conventional” estimate for the likelihood of each outcome vs. what I think is a more realistic estimate.

Future Outcome Conventional Estimate Realistic Estimate
Techno-utopia 1/8 1/8
Business as usual 3/4 1/4
Slow reversal 0 1/2
Collapse 1/8 1/8

As you might expect, the conventional expectation is for business as usual. If anything else is considered, it’s either the techno-utopia or collapse scenarios, which are the two extremes that are deemed possible but not likely. (As Greer has pointed out, there’s a tendency among many folks to jump either to cornucopia or apocalypse, other than business-as-usual, rather than to consider something less extreme.)

It’s a bit worrying that a quite likely possibility—slow reversal—is not only not considered possible, but it’s not even discussed as a possibility. Given Hirsch’s estimates (among others) indicating that declining liquid fuels production will result in a proportionate decline in global GDP, and given the likelihood of a near-term decline in liquid fuels production, it seems quite likely that we’ll experience at least a decade or two of economic decline (and after that, who knows).  While the Limits to Growth scenarios were just that—scenarios, not predictions—we might describe their base scenario (Scenario 1) as a slow reversal.  (Oddly, their Scenario 2, which is much like the business as usual scenario above, also results in a decline as the effects of pollution—in this case greenhouse gases—eventually have a major impact, but it happens several decades later than in Scenario 1.)

Others have done similar analyses and broken it down a bit differently, but the basic idea is the same (see Sharon Astyk’s take on this—she has a different category that I’d place in between slow reversal and collapse that she thinks is most likely).  I don’t think either techno-utopia or collapse are likely, but I can’t rule them out despite my best efforts at reasoning about them.  On one hand, I suppose it’s possible that technological developments will surprise us, and present a solution out of nowhere.  On the other hand, maybe through unwise geopolitical / military actions or unprecedented financial chaos, global systems become fundamentally unstable and come apart at the seams beyond the ability of nations to repair them.

A hedging strategy requires some understanding of the possible impact of each possible outcome. Since it’s difficult to assign values here, we might just make the simplifying assumption that the “cost” of missing out on the upside of techno-utopia is equal to that of the downside of collapse; same for business as usual and slow reversal.

Whether or not these estimates are even roughly right, they present a reasonable strategy for both individuals and communities, businesses and nations: invest in what you’ll need for each scenario in proportion to its likelihood.  That is, 1/8 of your resources and effort in expectation of techno-utopia, 1/4 for business as usual, 1/2 for slow reversal, and 1/8 for collapse. For example, in the context of a nation that means that 1/8 of the government’s investments would be in far out technologies (fusion, space-based solar, nanotechnology, etc.), 1/4 would be in things they’re funding today or could be funding today (conventional alternatives, 100% carbon tax and dividend, etc.), 1/2 would be in low-tech, low-cost, or more sustainable solutions (DIY solar/wind, microhydro, wood-gas, vehicle conversion, electric freight/passenger rail, small-scale organic agriculture, etc.), and 1/8 would be in failsafe systems (a new distributed SPR, distributed food reserves, medical supply reserves, backup communication networks, etc.).

I think such a strategy has two benefits, one practical and one psychological.  First, by not putting one’s eggs in a single basket—expecting only a single outcome—it’s possible to avoid serious problems if that scenario doesn’t come to pass.  Second, it’s easier to start planning and preparing for these possible scenarios if you know you don’t have to have an exact idea of what is going to happen.  If you disagree with the values I assigned, assign your own and start hedging!  (I’d also be interested to hear about other possible future scenarios and/or their likelihoods.)

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Responses to “Reversalism and Hedging Strategies”

  1. This is interesting analysis. You rightly point out that these could play out differently in different regions.
    David Holmgrem has done a similar analysis too: http://www.futurescenarios.org/content/view/16/31/

    Personally, I think the chance of a techno-utopia is close to 0.

  2. Saurabh –

    Definitely – Holmgren’s analysis was influential in my thinking, though I think he’s thinking a bit longer term than I am and I’m focusing more on economic impacts than he is.

    I don’t think techno-utopia is very likely either, but since I couldn’t find a way to dismiss it outright, I had to admit that there is some small possibility of it happening.

  3. It is really lovely surprise for me to find this web. I study philosophy in Czech Republic and I am interested in the issue of decision making facing the challenge of peak oil and fossil fuels depletion. Have read Greer, Heinberg, Holmgren, Mollison, Carol Deppe, Vaclav Smil, Sharon Astyk…, practicing permaculture, actively gardening and trying to grasp all this philosophically:-)