The age of ‘slow, indirect, and unsatisfactory’ political action on industrial emissions may be drawing to a close, according to two partners at Capricorn Investment Group, one of the world’s most successful impact investment firms. Instead, this year’s ‘genius’ Inflation Reduction Act should spark ‘a global arms race on subsidies for climate tech.’
The latest episode of Cleaning Up saw Michael Liebreich host Ion Yadigaroglu and Dipender Saluja, Partners at Capricorn Investment Group. Capricorn, based out of Palo Alto, California, found success as an early backer of Tesla, QuantumScape and JobyAviation.
Below are edited highlights of the discussion, condensed for brevity.
Michael Liebreich Dipender, what was your trajectory to end up applying this sort of capital to this particular set of problems?
Dipender Saluja I’ve just completed 35 years here in Silicon Valley, and the first half of my years here was spent in the semiconductor industry. We had spent a lot of time having fun, building technology companies, and one thing that was glaringly obvious was the gap between Silicon Valley and some of the big, heavy industries. When Ion and I put our heads together, this idea of investing in companies in energy, in transportation, and marrying those ideas with semiconductors, with the whole gamut of technology that we had developed for years in Silicon Valley, was clearly a big opportunity; coming at it from a technology-centric point of view was the approach. 20 years ago, if you go back and say, the world needs a completely new car company, very few people would have told you that would happen in Silicon Valley. To us, that was kind of obvious. We spent a lot of time on the plane those years; we made many trips to the automotive centres of Europe, America, Japan, and met with a lot of the senior leadership at the incumbent companies at that time. When we talked about what we were thinking of building, they said, we build cars, we don't build computers. They all said it was a good idea, but you could tell they had no intention of doing it. And so, it was Silicon Valley that had nothing to lose by turning that status quo of automotive upside down.
ML Ion, on our earlier show, I promised I'd get back to you to talk about whether ESG is a sufficiently powerful tool to get that whole capital stack realigned around the solutions that we discussed.
Ion Yadigaroglu Well, of course not. The effectiveness of big, amorphous frameworks like ESG ideas to actually result in a coal plant getting shut down, is slow, indirect, and very unsatisfactory. We've been much more excited about more direct mechanisms to get stuff done. The world needs to do tens of trillions of infrastructure with this new tech, and needs to do it within 20 years. That’s never been done before. A big chunk of all the money available in the world has to be deployed in a very short amount of time to build new, clean and green infrastructure. The key people behind net zero are all in the end coming from the financial management of either banks or large sovereign funds, and it's really a framework designed to deflect from the need for regulation; it’s designed to be a voluntary framework, so we don't have to get more serious about things that might be harder hitting. And it's very deliberate, in that it has no impact on money, and a lot of CEOs that I meet are pretty irate. They're the ones that have 100,000 jobs each, operating on 3% margins, and they have to somehow magically decarbonize. Net zero does not result in them getting access to cheaper capital, or free technology; it's just all supposed to happen magically.
ML So, you're now going to tell us why the Inflation Reduction Act breaks this deadlock? Every economist will tell you the answer is a carbon price. Why are you excited about the IRA, but you're not mourning the fact that you don't have a carbon price?
IY Because you and I are nerds, we think with our brainy heads, what should it be, as opposed to what actually works. And we've known that the carbon price has been a really difficult sell everywhere, and for a very long time. When something isn't working for human reasons, political reasons, well? Move on - let's do stuff that actually works. That's where the genius of the IRA has come in; to say, look, we just have to tie it to jobs. They have to be real jobs, blue collar manufacturing kind of jobs. And then we're going to tie all of that flow of money to that, and that is what makes it acceptable and appealing. And even more extraordinary, it's the only chance we have of tackling the cross-border version of all this, because most of those tens of trillions today are in places like America, Europe, in Japan, and it mostly needs to end up in places like Indonesia and Nigeria. And if you thought it was hard enough to come up with climate finance solutions in our own countries, it's beyond depressing when you think about how to do that, between, let's say, America and Nigeria. And so, the extraordinary thing about the IRA, is you can just turn around and ship that battery to Nigeria, no problem; you get the money either way, as long as the jobs in America and the supply chain that fed up to that factory is increasingly American. So, this is going to become the largest cross-border financing mechanism ever.
ML Dipender, you work closely with your portfolio companies, what has been their response?
DS First reaction pretty much across the board is, how do we accelerate building? Almost always the biggest risk of any of these new companies being able to progress to the next stage was financing, and so it's having that desired effect, which is all of these companies are accelerating their plans to manufacture the product, as opposed to waiting for years when the world is ready for the product at scale. The executives and the companies are putting their heads together and saying, how do we deploy faster than we had planned, because the long pole in that tent, of capital, availability to manufacture, may now be available better and faster and frankly, cheaper.
ML There is some pushback though in Europe, saying that some of these are just consumer subsidies, that they infringe WTO rules.
IY The regulatory approach, the cajoling of big companies is just not working in Europe. And on top of that, you have high labour costs, exploding energy costs, all the disruption due to Ukraine. Europe needs to create mechanisms like the Manufacturing PTC in the IRA that guarantees a price for batteries and solar cells - it can't be this constant horse trading between nations. Now, there are for sure dangers with the IRA. I mean, some of the incentive levels are so high that they're very distortive; hydrogen at three dollars is really too large. And certainly, keeping it there for ten years is downright insanity. But look, I'll take that over nothing. We’re hoping that this ignites a global arms race on subsidies for climate tech. This is the only way that we're going to get tens of trillions shipped in this strange, indirect way to places like Indonesia and Nigeria, because it's coming with a European job, or an American job or an Asian job. You cannot underestimate how there's been no answer when it comes to cross-border climate finance. Imagine shipping a billion dollars to a place like Bangladesh - it has to be almost free money. People brag about making 11% in a wind project; if it's compounding at that rate of return for 10 years, that means I'm getting three times my money back - do we really think we're helping Bangladesh by doing that? So, we have to find ways to not just ship trillions into places like Bangladesh, but we have to do it with essentially free money.
ML I've been doing this for 20 years, and I've seen trade wars between China and the US, China and Europe, things that really stop companies from succeeding….
IY For sure, there are huge risks and pitfalls. And that's why we need fantastic leadership. But it is worth it. I think it will end up costing trillions of dollars, and America can afford that, and those trillions are largely going to get shipped to countries that need those products. And it's going to create millions of jobs in America, which is what we need here. Does the IRA bias that towards American? Yes, it does. The anti-China aspect of this bill, that's obviously the biggest risk. But there's also deep, deep alignment between the countries on what needs to get done, and China wasn't exactly playing fair until now. They have huge advantages to bring to this. Americans are not immediately going to eat the lunch of every Chinese company as a result.