Unmanaged Climate Risks Undercut AI’s Investment Thesis
Forbes 15/10/2024
"(...) AI proponents highlight the promise of new grid management and other decarbonization tools. However, at the moment, the AI industry’s most significant impact on the climate has been for the resource-intensive segment of the industry–generative AI–to unleash new fossil fuel power generation and associated increases in greenhouse gas emissions. This worsens the risk of a climate change-spurred economic crash that would dash the AI industry’s hopes of building a strong customer base and achieving profitability.
Action is needed by tech and utility industry leaders, investors, regulators, and policy makers to ensure that AI’s buildout is powered by clean energy sources. This will not only limit climate-related damage to the global economy, it will help the AI industry help itself. (...)
AI’s Unmanaged Climate Risks
(...) Unless a new path is chosen, this resurgence of fossil fuel power could represent a major setback to the energy transition and efforts to prevent climate breakdown. (...)
Avoiding New Fossil Fuel Infrastructure This Decade
Tech industry leaders are pledging to address these climate risks, but mostly with investments that will bear fruit in the 2030s and beyond, outside the time period in which scientists say aggressive emissions reductions are most essential. For example, last month Microsoft pledged to bring online power from a restarted Three Mile Island nuclear facility owned by Constellation Energy, and this week Google announced plans to purchase power from small modular reactors to be developed by the startup Kairos Power.
Inflation Reduction Act (IRA) production tax credits are key to making these projects financially viable. Assuming nuclear waste challenges are addressed, they could represent important IRA successes in driving the decarbonization of the U.S. electricity system. But they would do nothing to prevent climate damage from new fossil fuel infrastructure built this decade. Fires, floods, and other disasters linked to greenhouse gas emissions are already escalating rapidly, and production from existing fossil fuel projects already exceeds Paris-aligned consumption levels.
The tech and utility industries must together aggressively curtail the gas plant buildout, proceed with scheduled coal plant retirements, and accelerate efforts to deploy renewable energy and energy storage. This would make a meaningful dent in systemic climate risks and help the U.S. meet its Paris Agreement commitments.
Investors Must Grapple With Climate Science To Fulfill Their Fiduciary Duties
Heading off the AI-fueled spike in emissions requires countering the myth that climate change is solely the responsibility of governments. Institutional investors have a fiduciary duty to ensure that companies address systemic climate-related financial risks. This is especially true of the many investors with diversified portfolios that are heavily exposed to economy-wide climate shocks.
Climate change particularly jeopardizes AI profitability. Unlike other new technologies, to become profitable AI must bring in revenues sufficient to offset large annual capital expenditures. Key AI industry observers, such as Jim Covello, Goldman Sachs’ stock research head, question whether, with the reliability challenges that limit its usefulness, AI will ever secure these revenues. (...)
Addressing the risks of a potential climate change-induced crash of the economy on AI’s customer base is now a business imperative for the nation’s largest companies and their investors.
How much attention to the risks of a climate-related crash is warranted? At a minimum, investors must be attuned to emerging climate science and its implications. According to an October 2024 analysis from the EDHEC Risk Climate Impact Institute, global equity valuations could drop as much as 40% if emissions reductions do not accelerate. This projection does not factor in tipping points, such as the collapse of the West Antarctic glacier and the thawing of methane-rich Arctic permafrost, that if reached would further destabilize the economy.
Proposals For An AI-Focused Carbon Price
Tech industry analyst Robert Wright argues that OpenAI CEO Sam Altman has put us on a dangerous course by promoting “the idea that, when it comes to technological change, and progress in AI in particular, faster is better.” He proposes that governments refrain from subsidizing AI buildout until its climate and safety risks are addressed, and instead impose a special tax on power consumed by AI data centers to help temper these risks. (...)."
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Operating from campuses in Lille, Nice, Paris, London and Singapore, EDHEC is one of the world’s top 15 business schools. Fully international and directly connected to the business world, EDHEC commands a strong reputation for research excellence and the ability to train entrepreneurs and managers capable of breaking new ground. EDHEC functions as a genuine laboratory of ideas and produces innovative solutions valued by businesses. The School’s teaching is inspired by its research work and a focus on “learning by doing”, all with the aim of equipping people with the skills to succeed in business.
