Endgame with Gita Wirjawan - Ely Sandler: Is a Benevolent Dictator the Hope for the Climate Crisis?

Episode Date: August 1, 2024

Thank you to The Belfer Center for Science and International Affairs at Harvard Kennedy School for supporting this episode. Visit the link below to learn more about research, ideas, and leadership programs for a more peaceful world: https://www.belfercenter.org/ -------------------- Among the myriad trials that besiege humanity, one stands as the most urgent: the climate crisis. This dilemma, unlike any other, comes with a stringent deadline (literally). Should our efforts falter, the repercussions could be catastrophic, imperiling the lives of billions. Yet, in the realm of discourse, a significant debate unfolds around ideology. The sentiment echoes, "The climate conundrum demands a democratic solution." Such a stance, while noble, entails a temporal compromise, for democracy is a process that thrives on deliberation. So, where do we find the confluence? In this dialogue, Ely Sandler poses a profound question, one that compels us to reflect deeply: must we set aside the ego of democracy to save ourselves from the existential threat of climate change? #Endgame #GitaWirjawan #ElySandler ------------------- About the Narrator: Ely Sandler is a Fellow at the Harvard Kennedy School and a partner at the Article Six Group, advising governments on climate policy and developing large-scale clean energy infrastructure. In 2022, he co-authored and presented a paper at COP27, proposing a new model for cross-border investment based on Article 6 of the Paris Agreement. Following this, Ely was asked to lead a World Bank workstream to study and implement this new approach, and he is now collaborating with governments, investors, and international organizations to design large-scale pilot projects as part of the COP28 agenda. About the Host: Gita Wirjawan is an Indonesian entrepreneur, educator, and Honorary Professor of Politics and International Relations at the School of Politics and International Relations, University of Nottingham. He is also a visiting scholar at The Shorenstein Asia-Pacific Research Center (APARC) at Stanford University (2022—2024) and a fellow at Harvard Kennedy School's Belfer Center for Science and International Affairs. ------------------- Notes from this episode: https://sgpp.me/eps191notes ------------------- Earn a Master of Public Policy degree and be Indonesia's future narrator. More info: [e-mail] https://admissions.sgpp.ac.id | https://wa.me/628111522504 Visit and subscribe: @SGPPIndonesia | @Endgame_Clips

There are trade-offs. Would it be possible if you had a benevolent dictator to snap your fingers and put the world onto a path to be well below two degrees? Probably, actually. Eli Sandler. Eli Sandler. He's a fellow at Harvard Kennedy School. And I'm now doing research at the intersection of public policy, finance and the energy transition. At COP 27, we presented our report, financing the energy transition through cross-border investment. This was co-written by myself, a professor, How do we transform the entire economy of the world in a way that is maximally beneficial to human flourishing? Why is that good? How is that a promise? There's not an easy answer to this question. Are you optimistic about this? Life is not actually a chess game. Life is much more complicated than that. Hi friends, I want to take this opportunity to thank you for being with us ever since we started endgame some years ago. The conversations have been invariably elevating and

animating, at least from my personal point of view, it's been a tremendously rewarding experience. And I'm hopeful that you could be further supportive of us by way of clicking on the subscribe button, watching every episode as much as possible, if not as fully as possible, and also joining us as a member of the Endgame channel. I can only promise you that whatever we're going to be doing going forward, we'll try to make endgame a better experience for all of you. Thank you. Hi, today we're honored to have Eli Sandler, who is a fellow at the Belfare Center at the Kennedy School of Government Harvard University. Eli, thank you so much. It's such a pleasure to be here.

Tell us where you grew up and how you grew up and how you became so intellectually curious about lots of things. It's a big question. I was born in a kibbutz, which is a small, theoretically socialist commune in Israel, near the border with Jordan on the Dead Sea. It's called Ngetti. My father is Israeli and my mother is American. I was there for the first part of my childhood, but I moved around a lot. My mother was a professor. So we lived in Oxford in England, also in the United States, in Miami, in New York, ended up going to Oxford for university. So yeah, it. I got the privilege of seeing a lot of the world as a kid. Would you study at Oxford? At Oxford, I studied politics, philosophy, and economics. Most of the time, I really loved philosophy. So I did a lot of work.

I think in some ways, the idea of politics, philosophy, and economics, which is this big degree at Oxford, is to give you three different lenses to understand the world. How does the economy work? How does politics work? And then the philosophy is sort of what does that all mean? And I love doing philosophy. I think it's what I said most of my time about Oxford doing.

Who would have been more influential in your family, your mom or your dad, and shaping your intellectual journey? My mother taught international law at Oxford. She taught international environmental law. And in particular, she worked a lot on the relationship of Israel with Jordan and with Syria in the Jordan Valley, in the Jordan River. I think as a kid, this must have somehow soaked into me by osmosis. Because I think, like a lot of kids, I thought, no, I'm not interested in what my parents do. I went off and did my own thing. And then by the time I was 25, I was working on the Jordan Valley and working on environmental cooperation between Jordan and Israel and a lot of different places.

I think she influenced me a lot. And your dad, what was he doing? My dad, for most of my childhood, he lived in sort of we crisscrossed the globe, but he lived in different continents for me. So he spent a lot of time in America while I was in the UK and he was in Israel. He had a very different life to me. He was born roughly at the time of the founding of the state of Israel, about 1948. a few days before the founding of the state. And he grew up as a kid on a farm.

And he helped found the kibbutz, this farming village I was born in. And he was 19 in 1967 in the six-day war. And then spent a lot of time with him as a kid, but it's interesting to have this huge contrast in both your parents. You see very different ways. They grew up to how you grew up. And then that makes you think about what's going to happen in the next generation. So I think it's a more philosophical way of looking at life. Play a lot of chess.

I do play a lot of chess. Why? It's a great sport. It's a great sport. I was not good at any other sports, so I think maybe it was kind of forced upon me. I used to play on the phone with my father when he was somewhere else. It's actually, I think this is one of the great things about chess is it can be overtime and space. So I can't remember if I mentioned to you, an old friend of mine, my former housemate, he's a Wall Street Journal reporter.

He's called Evan Gershtovich. And he's currently in prison in Russia. He was falsely accused of being a spy. And you can write letters to him in prison. They arrive very, very slowly. And in our letters, we've discussed chess, and I know he's playing a long-distance game with his father. So I think one thing that's great about chess, it's sort of like an exciting game, but you can draw it out over a distance and over years.

And also, it's got this amazing mix of tactics and strategy. So you read chess theory, and this makes you better, and you learn from historic games. But if you and I were to play a game of chess right, now. Maybe you would win, maybe I'd win. And then we'd play again. Maybe you'd win, maybe I'd win. And we could play 10 games of chess and there's no, there's no random element in it. There's no rolling of the dice, there's no kind of adrenaline you do something different. But somehow really quickly, those 10 games of chess would become different, really, really, really instantly. And it's hard to know why. And so it shows a sort of like random element of tactics and a strategy that

model out into life as well. What do you think of the Alpha Go? Alpha Go. So I think I mentioned that, yeah, I wrote to Evan, my housemate in prison. And one of the things I wanted to tell him about was how AI, you know, this is part of what else ago is, has changed games of chess. Because he was, he was falsely imprisoned basically at the beginning of chat GPT. So he's missed all of what's going on. Wow. And there's a few really big-

It would have been end of 2022? Yeah, it was beginning of 2020, March. Okay. And I wanted to explain to him like, you know, there's lots of things going on. people tell them about the news, but AI has really changed how we play chess. And I think maybe we'll talk later. There's an analogy for how it might change the world. And humans are learning from AI how to be better at chess.

And the way AI learns how to play chess is we don't program in strategy, we don't tell about historical games, it just plays itself again and again and again. And the first thing is that what's kind of surprising is a lot of the openings that AI plays, they look a lot like human openings. So actually, we figured out that, you know, the King's Gambit or Queen's Gambit, or king porn openings. These actually are the ideal way to play chess, and the AI agrees. But then what's really fascinating is that the AI has discovered things that humans didn't

know, and grandmasters now in professional chess games are playing a little bit more like AI. Wow. They're castling less, they're pushing up pawns on the side, they're being a little bit more aggressive in swaps and gambits. And this is like a way that it's still the human playing it, but just by watching how AI thinks is the right word, we can know things about our own world. Do you think humans will be able to play like an awesome? in a sense that they don't have to actually be too experienced and they don't have to

actually be aware of pre-existing strategies right I mean you know for for a grandmaster he or she would have probably had to be you know be playing chess for years right I mean alpha go just yeah fly you know never learning you know how Fisher would have played how yeah you know all the other great you know chess players would have played but they would just learn on to go. Basically my answer is no. I don't think we can do that. It reminds me of I had a really good friend once and she was absolutely brilliant. She's now teaching at Stanford and we used to play a lot of chess and I was much better than her. I played a lot of the kid. She was way smarter than me, but I would incredibly easily beat her because I'd played so much it was like muscle memory. I knew all the strategy and in the back of my mind I knew that if she does this, I do this. I could beat her without thinking and she suggested that you know in chess you have each, you know, each player has the ponds and they're behind it of the pieces. And she suggested we swap around all the pieces behind the ponds.

So he swapped the king and the queen, and you swap the knight and the rook, and you sought the bishop. And so it's still the same game of chess. It's just the opening position is different. And so all of your pre-existing strategies don't work. And then we played chess and she'd be me. Because I didn't have any of this ingrained strategy. And so I'd always thought of myself, you know, prodigy.

I was so good at chess. But actually, no, just learn behavior. And I think it's really hard for humans to have the same level of adaption that that an AI can. We have different skills. We have kind of wisdom and there's things we get from experience that are useful, but there's a difference in how AILEN. I want to take you back to philosophy.

You spend a lot of time learning and studying philosophy. Do you sense that nowadays people at the universities are not too interested in philosophy as much as we would have seen them a while ago or a long time ago? there's a sense that people are not keen on reinvestigating existing actions or truths or whatever. I think it's really easy to look back on previous generations that were really seeped in this kind of canon of knowledge. So if you went to Harvard or Oxford 100 years ago, you probably knew Latin and Greek and you probably had studied Shakespeare and you could quote poets at will. And I think the one natural conclusion from this is to think we must know less stuff.

Like the fact that an undergraduate today can't quote Cicero and they could 100 years ago, maybe they don't even know who Cicero means that they're not interested in philosophy or not interested in exploring the world. But I think in another way, there's just so much more content. And so I'm really hesitant to say people are less interested in philosophy because whatever they're learning, they're doing the same thing that you do if you read Cicero or if you read Marcus Aradius, you're interacting with content with stimulus, and you're trying to sift through it. And actually, people are now sifting through so much more content.

And in some ways, I think that makes it even more impressive that we're still able to function, because the canon of what we are looking through has gotten so much bigger. You can now access the entire body of human knowledge on the internet, and actually you can access it by talking to chat GPT, because it's read everything. So I don't think people are less interested in philosophy. I think they're just taking many, many different paths to arrive at interesting ideas that aren't the canon. And in a way, that's good because actually the canon came from a very small number of thinkers. And they have really, really interesting things to say, I loved studying philosophy, studying Aristotle, studying Rickenstein. But there's a lot out there I don't know.

And actually, I think the way of accessing it through new tools is great. What's great about Aristotle? That's great about Aristotle. Okay, I'll give you two answers. One is Aristotle is the most famous student of Plato. And Plato is the most famous student of Socrates. And Aristotle's most famous student was Alexander the Great. And so just as a person, he fits into this amazing lineage of like really disparate ways of thinking about the world.

And again, there's something really romantic about knowing that there was this time when all these people that were connected to each other, sort of like the golden age in Paris or in whatever. So I think there's something really interesting historically about knowing what a guy that taught Alexander the Great and that learned from Plato thought about the world. Because his writings are just kind of his musings. So that's kind of an interesting historical thing. And then there's lots of interesting ideas he puts forth. I'll give you one example. In the first lecture in my class at the Harvard Kennedy School, I'm telling them that I'm going to be teaching them about climate finance. And I hope we're going to get on to climate finance.

And the class is called financing the clean energy transition. And the really big goal of the class is to say we have 100 people in this class going out to many, many countries all over the world. And I'd like them to learn a little bit about how they can help their national government, the private sector institution. They're working in finance the energy transition, finance clean energy. And I put a big photo of Aristotle on the screen for my first slide. And I say that in English, we have one word for knowledge. I know this, I know that. In some languages I know you have more.

In French, you have kind of knowing people, the knowing people. facts. But Aristotle in the ethics talks about three types of knowledge. The first is episteme. It's where we get the word epistemic from. And it's pretty simple to understand. It's knowledge of facts. I know your background. I've read it in a slide. I know that you can do a calculation and say the world is missing $5 trillion of investment per year for the energy transition. Epistemic knowledge. If you're driving a car, you might know how the engine works. You might know that if you put your foot on the accelerator, it'll go forward. The next type of knowledge is technique, technical knowledge.

This is not knowing in abstract that if you put your foot on the accelerator, the car will go, but it's having the experience of doing it. It's getting into the car. There's something very, very different about technical skills from epistemic knowledge. So the second type of knowledge is technique. And there's a third one, and this is why I think Aristotle is brilliant, which is called phrenesis. And the metaphor I use is you can pass your driving theory,

you can pass your driving test. And then at that moment, you basically have all the epistemae and all the technet. You need to drive a car. But I would much rather get in a car with someone that's been driving for 10 years than someone that just passed a test. But if anything, someone that's been driving for 10 years probably knows a little bit less about the highway code, a little bit less episteme. They might also have forgotten how the windshield wipers work and they've probably forgotten a little bit of technique. But they have this other thing, which is called phrenesis. And we translate that as practical wisdom.

And so what I was saying to my class is, you're at the Harvard Kennedy School. You are going to learn some really interesting facts here, some impestime. I'm not sure about what, maybe about history. You can learn some really interesting technique, maybe financial modeling. I teach a bit of that, maybe negotiations. But what we really want them to take away as policymakers is this idea of Phrenesis. They can come to a situation and they can have an instinct of how to react. It's not quite a type of knowledge that we know.

It's not epistemic knowledge. It's not technical knowledge. It's a wisdom that lets you respond better. you in a given situation. And actually to go back to your first question of why I said, no, humans are not going to learn how to play chess like AlphaGo. Because AlphaGo doesn't have phrenesis. AlphaGo has some really good other things. And maybe we need a new Greek word to describe what AlphaGo has. And like, maybe we should create one. But it doesn't have phrenesis because it hasn't actually done this a million times. It's seen others do it. And I'm really anthropomorphizing a large

language model. But kind of you have to understand like really deeply how they work at kind of an emotional level. And that's what I think that we want to teach policymakers at Harvard and maybe hopefully why AI and humans will need to work in tandem, because we have the practical wisdom and they have other skills. But AlphaGo is sort of like the counter, right, to the thinking that you can actually be good, you can only be good if you have practical wisdom. But AlphaGo doesn't have a lot of practical wisdom. Yeah, I guess it's a question then of what is good. Life is not actually a chess game. A chess game has really defined limits, really defined rules. an actual negotiation between policymakers at, let's say, an international summit, you don't have the defined rules.

You can't play the game again and again and again and see what works and see what doesn't work. There's no rules of the road. We can change any of them. It's actually not a large end study where we can test out what works and figure out the regression of what is the right answer. Life is much more complicated than that. So yes, AlphaGo is better at chess. And actually, I think what's funny is in many ways, and again, we're at such early stages of AI. It's kind of ludicrous for me to say any prediction.

But they seem to be really, really creative. Like they're not so good at maths, large language models. Very, very creative. They can make amazing art. And that's really, really interesting. So again, I think maybe we need a new word for a type of knowledge that's coming from these models. You know, I've been saying a few times that, you know, the way AI is being pushed, it just doesn't seem to be adequately multidisciplinary.

There's a bit too much technical. technological hubris. What do you mean by that? The guys that are pushing the narrative are not talking to the philosophers enough. They're not talking to the sociologists. They're not talking to the moralists. They're not talking to the environmentalists. They have this idea of what the environment ought to be like.

They have this idea of what morality should be like, what spirituality should be like, what philosophy should be like. I mean, it's a hallucination that's being influenced, right? influenced right by hypnosis and if done right then there should be enough hypnosis coming from all kinds of disciplines but the hypnosis is not coming from all these multidisciplines in in a proportionate manner I am my layman's observation yeah no I so instinctively agree with you and I'm trying to think what would a similar

point look like at the beginning of the internet? And would it be valid? Or what would a similar point look like at the dawn of the industrial revolution? And would it be valid? And actually, I think what you see is that the original designs of phenomenal tools that get put out into the world very rarely look like how these tools end up actually influencing society. So I think, yeah, the current crop of large language models, and we're talking about three

or four models that are developed by really big tech companies are designed by people with really homogenous users of the world. They're all in Silicon Valley. But I think we're too early to say if that matters, what that's going to mean, because we have no idea. I think the early days of the internet, a critique you can make of it, I think would be so unvalid now. Same for unfortunately the hope of the early internet.

And so I think what we can definitely comment on is what our experience of interacting with these models is like, because it's really exciting. And obviously we need to make policy to figure out ways to use them safely. But I don't yet know if we can say what the values of the engineers is encoded into the models, because we haven't really seen what they're going to do in the world. Special thanks to the Belfour Center for Science and International Affairs at Harvard Kennedy School for providing support for this episode. Check out links in a description to know more about research, ideas, and leadership programs for a more peaceful world.

Okay, man. Let's talk about the climate. Please. What's your take? Is enough being done on climate change? So I think the baseline answer is no. Yeah. We know our goal. Our goal is to limit warming to well below two degrees, and if possible, below 1.5 degrees.

And we know that the current trajectory of what stated policies look like, is very, very unlikely to get us there. Yeah. Now, I want to put in a caveat that this relies on economic modeling, relies on climate modeling. So there's a lot of uncertainty. But we know that the stated policies of most countries and most corporations are not going to get anywhere near that goal. And we also know actually that the announced pledges. So even what people say they intend to do, even if they haven't begun to put in the policy, are also very unlikely to get us there. And there's a whole host of things we need. We need finance, which is what I focus on. More money. for clean energy infrastructure. Things like carbon pricing, behavioral change.

So in one sense, the answer is if we have a goal, and the goal is really, really important, and I'm not a client scientist, and I'm sure you've talked to climate scientists, but I think we know that by now. And the best models we have tell us that we're not going to make that goal, and no, we're not doing enough.

I think that there is maybe a whole set of deeper questions that we can get into of like, there are trade-offs. So would it be possible if you had a benevolent dictator to snap your fingers and put the world onto a path to be well below two degrees,

probably, actually. And you can make an analogy to how rapidly economies transformed during World War II. The thing is that I'm actually not sure that that dictator is super benevolent because the amount of change needed for the economy during World War II

was horrific. In order to do it, the United States massively appropriated assets, It destroyed parts of the country that were not to do with war manufacturing in order to suppress political absent. It interred hundreds of thousands of Japanese Americans. Like, actually, we probably could go to war footing, but I'm not sure we wanted to. And so there are tradeoffs.

I spend almost all of my professional career working on climate change. I really, really, really want to limit climate change. And the avenue through which I want to do that is finance. And I hope we'll talk about it. But there are many other things that we have to spend money on. And there are reasons we use oil and gas. Oil and gas, phenomenal for creating energy. Energy, really good for lifting people out of poverty.

And so the question is not just do we have the political will to reach our goals, but also how do we transform the entire economy of the world in a way that is maximally beneficial to human flourishing? You know, the world is becoming a lot more multipolar. and intuitively, by way of this higher degree of multipolarity, there's higher proliferation of risk, which could be with regards to climate change, cyber, nuclear, whatever, right? Don't you think it's much more difficult right now to get everybody on the planet to agree on some sort of a framework that would help remedy?

A couple thoughts, sir. Yeah. I'll get to the finance part, but I want to draw the picture first. I just want to think a little bit about the world being multipolar. Because the way in which that's true, I think, is really obvious. We're not living in the 90s anymore. America is not the world's superpower. But something I've been thinking a lot about is, okay, so what are the other polls?

Maybe there's China, maybe there's sort of a Russian access, maybe there's Iran and North Korea. There are other polls, there are challenges to American power. But if I were to say to you that an executive in an American tech company would actually be spying for the Chinese Communist Party, or that a high-level official in the U.S. Treasury passed secrets to the Russians, I do not think your instinct would be to say it's because of ideological reasons. You'd say maybe they were blackmail, maybe they were bribed. It's probably not that the American or the European believes in the mode of government

of Russia or of China. And so I think that the world is more multipolar in that the United States is less able to force its will on other countries, and that's when I will answer your question. But I think there is a really key way in which we shouldn't overdo making fun of Francis Rukuyama and his thesis that, you know, we've changed and liberal democracy has gone, because really, like, I do not think that there are ideological currents

that go against what the United States is trying to do with, at least in theory, if not in practice, a liberal democracy. Just my thoughts on multipolarity. On coordination and now that the United States can't, yeah, force its full on other countries, I think people really want the solution to climate change to be a big bang international moment like the Bretton Wood system at the end of the Second World War in the 1940s. Because every year we have these cops, these conferences of the parties. Last year it was in Dubai. Before that, it was in Sharma al-Sheikh in Egypt. It's going to be an Azerbaijan. And there's a really compelling narrative, which is the leaders of the world get together

and they have two years to make an agreement and that agreement is going to solve climate change. But actually, the way to reduce emissions is not an international agreement. It's not a new treaty. It's lots of individual countries and then lots of individual municipalities, slowly, slowly, changing their energy system. And there's very little we can actually do at the level of international governance to do that. We can help with money, so money is a big one, and we can help finance the transition, particularly in emerging markets. But what actually needs to happen is that national countries need to go and make policies that subsidize clean energy and penalize dirty energy.

And that's not so much an international coordination question. Part of it is you need trade and you need solar panels to go from one country to another, or maybe we need cross-border agreements on electricity because it helps us balance grids and that lets us increase renewable energy penetration. But this is kind of at the margins. Actually, I think the question is ambition of now. national policies and whether or not policymakers are willing to take the trade-offs in China, because there's going to be a development impact, or in Indonesia, in Chile or in America.

And actually, I think in some ways, the fragmentation of the global system can be helpful. So if you look at during the Cold War, the peaks of foreign direct investment and the peaks of investment in really big moonshot projects, literally moonshot, going to the moon, those were spurred by competition. Those were spurred by competition between the United States and Soviet Union. They were trying to win the hearts and minds of the third world, the online world. They were trying to demonstrate prowess and science. And actually, competition is really good for increasing ambition. So it is true that maybe the United States and China would play better with each other

if we didn't have this kind of tension. And maybe that would mean we would get more ambitious cop agreements and maybe that would mean we would get more ambitious targets. But in terms of the United States implementing the inflation reduction act, which is an industrial policy meant to spur green energy in the US, that is, I think, in large part caused by competition with China. Right. And actually, that's a good thing.

The US DFC, the developer finance corporation, the development bank, being expanded. Scott Nathan is an alum from the Kennedy School. He talks about the fact that one of the main motivators for the DFC ramping up its spending is because they're trying to combat the Chinese Belt Road Initiative. These are actually all things that can be channeled towards investment in climate change. So, yes, there is a downside. There's less summitry and there's less pageantry.

But I do think competition can be good for the specific things. we need to do. Industrial policy. I'm with you. I think a lot of these climate summaries, they tend to be a bit more political statements that are coming out. And not to mention that the guys that are making the statements are shackled by political cycles, which could be every four years or five years, right? The short-termism is not going to help the long-term problem of climate change. And I'm also with you in a sense that I think there's a better chance of doing it at a less multilateral level. And I want to take you to the developing economies there.

I'm a lot less worried about what the developed economies have to do. They've got a lot more money. They've got a lot better technology. And I think they can solve climate change issues much more easily. But the developing economies, which unfortunately or fortunately make up 84% of the people on the planet, they have issues, right? Because they're not as well as just.

as those in the developed economies, they're not as well blessed with liquidity. Like, you know, they're friends in the developed economy. So how do you deal with that? I'll probably give you, you know, a little bit of the specifics of Southeast Asia. Southeast Asia is not a modern region, right? And I've talked to you about this

in terms of how modernity ought to be defined. It ought to be defined at about 6,000 kilowatt-hour per capita. If we agree on that, we're going to need $2 trillion for most parts of Southeast Asia to be modernized in terms of electrification. We don't have that kind of money. We don't have the kind of technology that the U.S., the Europeans, and the Chinese and the Japanese would have. So somebody's got to be telling the stories about Southeast Asia to these guys that have the technology and the money. Yep. I think this is great. I think you said one thing that I completely agree with, and one thing I disagree with a little bit. Between these two things, I think we can tease out an interesting answer, which is that someone has to tell the story is really important. Because what you need this $2 trillion, $3 trillion, $4 trillion, to reach a level of energy that creates development and is made from renewables, not social tools. You need investment. And then, you need investment. And then, you know,

What I disagree with you is thinking of this is expensive. No, I didn't say that. We just don't have it. We don't have it. We have to get it from the G7 countries. I think that the kind of the thing I picked up on them, maybe it's just I was sort of primed to, it's a thing I get mad at a lot,

is we're not really spending money on the energy transition. This is really important. We're investing money. I'm with you. It's not, it's not the, we're giving money away like in healthcare. Yeah, you could maybe think of healthcare as an investment in the long-term growth of the country or something like this, but fundamentally you're spending money.

Yeah. You're from an accounting perspective, you're, it's a loss, the straight loss. The energy transition is not that. The energy transition is investment in actually future growth and assets that could have really good returns. Yeah. So we can break down that two trillion dollars. Just to be clear, I didn't say it was on the fence.

Sorry. Yeah. Yeah, it's something that I'm so used to pouncing on. So we read on two points. No, you're right. In that case, why are we here at this podcast? Let's say it's $2 trillion. What are we spending that money on?

At the moment, the biggest part is probably energy generation. Any generation, pretty good business. You're creating electricity, someone is going to buy it. Very, very stable returns, especially if you have a kind of an agreement where you know the price and the amount of electricity you're going to sell. A lot of it's going to be in manufacturing of electric vehicles. Again, people need vehicles. People like driving.

As Asia gets richer, there's going to be more demand for vehicles. This is a big opportunity. A lot of it is things that are a little bit harder from a business perspective, something like a grid. The way electricity grids make money varies from country to country. In the West, typically they can charge for electricity running along the line, almost like a toll road for electricity, for electrons. developing countries that are normally owned by the government, so it comes out of the government balance sheet.

But when you build a grid, you can then connect more homes to the electricity network, and those homes will use electricity, and then they'll pay money. And so these are actually really well correlated with development in Asia. And it's a virtuous circle. The more we do what in the UN we call climate change mitigation, i.e. making sure there aren't future molecules of CO2 in the atmosphere. What you're actually doing is creating energy without creating CO2. So you're increasing the number to get to that 6,000 kilowatts of electricity a year. And so I think the storytelling narrative you're talking about is really important, because we need to get pools of international capital.

And it's very easy to talk about this in generality, so maybe we can get a little bit more specific, into investment opportunities, specific projects, financing policies, aggregating SMEs, small, medium enterprises. Because actually, it's not just charity, and it shouldn't be charity. It's convincing people that the risk of investing in Indonesia, is actually can measure it with the incredible return because it's going to be one of the largest economies on Earth.

And then I think it's people like you that are really good at doing the storytelling. I work on financial mechanics. I work on building a financial model. It's numbers. But you can build your model and you can put in your cash flow and your income statement.

But ultimately, this is going to come down to the future growth of the country. And that's when you need to not only tell a story, but act it out. You're a politician. You need to build a country in a way the growth. Used to be. You're doing a sort of politics now.

Draw the picture. You've got a technology that can be availed at 15 cents per kilowatt. You've got a developing economy that can only afford five cents. This thing should go up to 6, 7, 8, 9. This thing should come down to 14, 13. Until such time, the two of them will intersect. What sort of a product can you come up with that will make everybody happy? Yeah, this is a great question.

So in my, I mentioned to you that I, yesterday I taught my last class of the semester at the Harvard Kennedy School, which is financing the clean energy transition. And the structure of the class is we basically start with the financial model of a solar field. And it's a terrible project. The return is, let alone 15, 16 percent that I don't invest in a need, the return is negative. It doesn't have enough cash. Indonesia, much better shape than the project my students get in the beginning. And then we design policies. we look at the model and we say, could we give a subsidy here, and I'll get into what some of these policies are, could we give it a loan, reduce the interest rate, but eventually by the end of the semester, we've got a fully working project that the private sector would invest in. So it's your question. Let's take it directly. Let's say that the capacity for your average person in Indonesia to pay is seven cents a kilowatt hour. And five cents. Five cents. And with the cost of transmission and the cost of generation, actually to be economically viable for your investment, you need 15 cents a kilowatt hour.

Well, first of all, people can pay differential things. So very, very commonly, you have cross-subsilization. So you get businesses in Indonesia that actually have the capacity to pay more. Their electricity costs are probably a much smaller proportion of their expenditure. They can pay more and they can subsidize consumers. And that is actually good for the economy because it means that the consumers then will have more money, more purchasing power. They're going to go back and reinvest in the economy and it grows.

The government can also play a role. So the government can come in and say, we will guarantee it's called a feed-in tariff. It's basically saying you can sell in your electricity to the grid at the 15 cents a kilowatt hour you need. That's just going to cost the government some money. So the government's going to have to shoulder that burden. Where does that money come from? Well, it comes from tax. It comes from raising money. But maybe because, again, individuals can now afford electricity, they can start a business. They can grow the economy. They're going to have more money. They're going to spend. Consumption's going to go up. And so actually this is,

even though you're actually, in this case, you are paying energy energy is an expense. Again, you're investing in the future productive capacity of the economy. These are sort of domestic policies. There are other things you can do domestically. We talked a little bit about the fact that if you look between different developing countries, even in Asia, in my mind, one of the biggest things that's understudied is development of the banking system. So actually, if you have a really robust banking system, and in one sentence to sum up a huge literature, what banking does is it takes individual savings, which are various and they have different risk tolerances,

and it channeles it into productive investments. If you have a really developed banking system, they can use the fact that all these risks are not correlated to create more and more leverage, which creates more and more credit, which creates more and more and more loans, which creates more and more economic activity. So banking policy, really, really important.

And then finally, and this is where the international finance comes in, there is a role for maybe international investors looking for a commercial return, maybe someone like the World Bank or development finance institutions. They can come in and they can maybe support the government on that feed and tariffs. Or they can offer a cheap loan and they can say, actually, because your cost of financing has gone down, you've saved money you're paying on your debt and you can use those savings to say, actually, we don't need to reach 15 cents,

we need to reach 13 cents because we've saved so much money on the cost of financing. Or you can change your trade policy and maybe the cost of your solar panels goes down because you've reduced tariffs. So instead of reaching 13 cents, we now have to reach 10 cents. And you can do that thing. I think some people are listening on audio so you can't see. We'd be moving our hands closer and closer together to the point where then, And now you don't even have to do policies anymore. You get a thriving solar sector. And this is what's happened in the United States.

Massive policy is very expensive for a very long time. Now, 80% of new energy coming online in the United States is renewable. It's going to take a very long time to cycle out the old stuff. And maybe getting to 100% is going to need massive subsidization again. But 80% of new U.S. electricity generation renewable. And that's not because it's sunnier in the United States and Indonesia. No, it's because of government policy and the cost of capital. Plus the U.S. has got a lot more money.

Yeah. I mean, it's not that we've not been subsidizing. The government has taken a view on this. You know, they've been basically creating that buffer that you were alluding to. But Indonesia is not unique in the sense that it represents the pulse of many developing economies with very limited fiscal space. If you take a look at Southeast Asia, just the tax ratio, the ratio of tax revenues to GDP, they're only from 9.5% to 16%.

The typical OECD country is at 33%, right? So you've got a structural fiscal space limitation. You were making reference to the banking system. As much as, you know, I would like to see a much more robust banking regulatory framework, but most countries in Southeast Asia have limited money supply to GDP ratio, limited banking asset to GDP ratios. Indonesia is at about 45%. to you know as a ratio to the GDP so I can only think of money coming from

outside which we call FDI yeah and and I can only think of a scenario where I think more and more Southeast Asians and members of the developing economies being able to knock on the doors of the black rocks of the world the black stones of the world the vanguards of the world I don't think that's being done enough. And I don't think there's enough representation in many of these institutions that would like to participate in climate story. Or understand the developing economy's pulse. Is that something that maybe, you know, workable? So I think there, the first thing to say is that there's not an easy answer. You know, like you can, when you're playing chess, you can check with the AI

engine and it'll tell you that actually should have moved your night here. There's not an easy answer this question. So we're going back and forth and I work in finance, really, not in economics. But there's a whole host of policies that make countries more what we would call bankable, make Black Rock and Vanguard more interested in investing. But if there are some specific things we can talk about that's more tangible than this story, because you're definitely right, and you're the storyteller. And so this is, you need to change, for one of the better phrase, the vibe in the international system. But there are specific things. So let's talk about the process of what it means for an international.

international investor to invest in a country. First of all, you have to find a project. And actually, if I were to go to Indonesia, I don't know where I would find myself a project. Let's say I'm the CEO of BlackRock. I'm Larry Figg. Larry Fing actually probably does know where to find a project in Indonesia. But you need, first of all, a domestic way of making more projects that are internationally investable.

And you have to understand that the investors have to put in time to understand the credit risk. And so if I'm evaluating a project in Texas, or I'm evaluating a project in Indonesia, there is, again, you could taking phrases from kind of economic fit-tritcher, there is a really high transaction cost, barrier to entry, shoe leather costs of doing business. Because you have to go and get on the ground

and figure out what the risks are so you can accurately model them so you can figure out how do you mitigate those risks? What kind of return do you need for this to be a good deal? And so you need to know that actually, in order for it to be worth doing that, the opportunity is massive. That's both the opportunity in terms of return

and opportunity in terms of the size of investment. And so there are some tangible things that I think developing countries can do to attract international capital. Some of them are what people call aggregation. So saying maybe someone like the World Bank can help us put together a lot of different projects that create really large-scale investment opportunities.

This theoretically was what some of the Just Energy Transition Partnerships, the JEPs, we're going to do. Something I think gets criticized a lot is the JetPs and, I mean, I think knowing your podcast, your listeners will actually know what these are, they were going to invest, is it $20 billion? 20 billion in Indonesia, of which half is commercial level financing. And I think when you first hear that, you say, okay, there's been this amazing international agreement that half of it is going to be at the market level, it's a commercial rates.

And you think to yourself, like, why is that good? How is that a promise? To say you're going to invest at the rate that the market would give me is, is ludicrous. It's not really doing anything. But actually, the jet peas were saying, we're going to implement policies that will allow people to invest in the market rate. It's not that the market rate is too high in most projects. There isn't a market rate because people don't know what the projects are. They're not investable. They haven't been exposed to international investors. We don't know what the opportunities are. There's actually a lot of domestic

policy you can do to create opportunities for investment. You know, that thing was announced in November of 2022. wish there would have been a lot more granularity on that proposition. You know, as much as I believe in G2G type of initiative that would be good for the climate, the real money is really in a private sector, right? So somebody's got to be thinking about creating a product that works for the private sector. I think about this a lot and I kind of go back and forth on what is the value of these big JetP type initiatives.

And I think about it like an economist, so you think there's different channels. So the most obvious channel is they're going to give money to Indonesia, the clearest channel. They're in theory going to give $10 billion to Indonesia. So direct financing channel. 20, man. Then the other 10 comes from this other kind of policy reform channel where they say we're going to put in place policies and this is going to catalyze investment. That's the other 10 billion. But I think there is a third channel, which is that everyone in the financial sector is talking about the jet piece. Right.

And it would be really easy to criticize that. Exactly. It would be easy to criticize that as just talk. But it's doing exactly the thing you said you need to do. This is the storytelling. And I think that when you're, you know, I was not involved in making the jet piece. And so you don't want to say we're doing this so that people talk about it so that we talk about it more. You want to say this is action.

This is steel in the ground. This is dollars in the bank account. But actually, once people here, there is about to be $20 billion invested in Indonesia. They get interested in Indonesia. And these have, to some extent, a self-suffling prophecy. Now, I don't want to over-relileigh on that because, obviously, actually, we do need to transfer the $10 billion, and we do need to change the policy that's going to make it easy to invest. But I don't want to be too skeptical of the talk that happens at international summits because they do do things. This is the storytelling.

This is what the storytelling looks like. No, getting people like you on our platform to say whatever you think is right, whatever you think is wrong, whatever you think could be done better, I think is. is useful for many of us in the developing world. What is Article 6 credit? If you've expressed, you know, views about it and talk about that. So what I hope is that Article 6 credit is the opposite of the JetPee. It's not the huge announcement that takes a really long time to get off the ground. Article 6, at least in the way I'm working about it, and I'll explain what it is,

is saying let's do the opposite. Let's start with a couple projects that don't need huge international agreements, and let's build something. And then let's use this mechanism that I'll explain in a sec to build a transmission line here, some renewable energy here, and actually begin to create a project that then a private sector model can emulate. So Article 6 is the sixth article of the Paris Agreement. Paris Agreement was signed in 2015.

It's one of these international summits. You and I just marked. Xi Jinping and Barack Obama flew to Paris. They ended up concluding the agreement. few really big parts of the Paris Agreement. One of them is called the nationally determined contributions. And so every country that's a signatory to the Paris Agreement, which is basically every country, voluntarily chose to reduce their carbon emissions by a certain amount. In the US now, it's about a 50% reduction by 2030. Indonesia has its own target. The UK has the same target.

Vietnam has the own target. China. Article 6 was meant to be what the Paris Agreement called collaborative approaches. And it says that Let's say that Indonesia has a target of emissions reductions and America has a target of emissions reductions. Now, it's actually more expensive in certain ways to abate a ton of CO2 in America than it is in Indonesia. Maybe because if you're replacing electricity on the grid in the United States, you're probably replacing gas. And if you're replacing electricity on the grid in Indonesia, replacing coal. And so the impact is greater. The same thing, you know, a lot of what people call the low-hanging fruits of decarbonization. They've already been.

been picked in America. And carbon mitigation in developing countries also have huge sustainable development benefits. We're talking about new green energy. And so Article 6 says, actually, if America could in part meet its obligations under the Paris Agreement by financing emissions reductions in Indonesia, overall, one ton of carbon not emitted in America is the same of one ton of carbon not emitted in Indonesia. So overall, the climate is the same. And actually, there's part of article 6 that says, you need to emit less on net. So actually, like, there's a net positive. So overall, less CO2 emissions.

Because the US knows that it can reach some of the low-hanging fruit in Indonesia, maybe it can have even more ambitious targets, because it's really technologically difficult to abate in the US. And then for Indonesia, you get money. So this is sort of a win-win-win. It's a win for the climate. It's a win for US ambitions, and it's win for Indonesia because it gets money in. Great in theory.

in theory, it's sort of like carbon trading at the international level. The problem is that the Paris Agreement was signed in 2015, and by 2020, not a single dollar of Article 6 financing had cross borders. Now, there's a lot of reasons to this. It takes time to set up new international systems. We don't really need to get into it, but the Article 6 replaces part of what was the predecessor to the Paris Agreement, which was called the Kyoto Protocols, and they had a couple mechanisms that didn't work so well. One is called the CDM, Clean Development Mechanism, Joint implementation and people were a little bit skeptical, but still after seven years, no one had really done any deals. Now they're beginning to take off. And one of the things I started

thinking about was the way Article 6 transactions work in theory is what the World Bank calls results-based carbon finance. And I think a lot of people in Indonesia will be familiar with carbon credits. Basically, you come in and you preserve a forest or you build some infrastructure. Pied lands. Yeah, precisely. Mangrove is a big one, maybe protecting palm. And you put in your capital, you invest your capital, and then once you've proven that those emissions reductions have occurred, you can sell them. You sell them to the United States for its target, maybe sell them to a company that wants to offset its emissions, maybe sell them to some of it's interesting about Article 6. You can maybe sell them to a company that they can

use to pay their carbon taxes. 30% of the world is now covered by a carbon tax. In theory, Article 6 credits might be sort of eligible if you get your hands on one. You can submit that instead of paying taxes. The problem is, while this kind of works for, let's say, mangroves, if you want to do big things, if you want to reconfigure Indonesia's energy system, you can't get the money after you've reconfigured it. The trillions of dollars you're talking about, they have to be invested before the emissions reductions are generated.

And so you have this timing mismatch. Carbon finance, Article 6, voluntary carbon markets, you get the money once you verify the emissions reductions. This is in some ways really good because you've verified the emissions reductions. You know what's happened. It can be really good for what people call environmental integrity. But it creates a timing mismatch in financing. So this is a financial problem.

And so I thought a lot about this. And in 2022, I wrote a paper from the Belfour Center where we're both fellows, saying what we should do is we should be using Article 6, this framework that the Paris Agreement gave us, to provide upfront cheap loans for projects in emerging markets that abate carbon. So instead of buying the credits from your new solar field in Indonesia, five years, after I invested the money, I would give you a grant. Totally. Or I would give you a loan with an interest rate that's way below the market.

And because that interest rate is way below the market, it save you money on your interest rate, which means you have enough money to make the project viable. And so we propose this in a Harvard paper. We put it out at COP 27 and 2022. Then the World Bank got kind of interested in it, and I worked with them as a consultant, basically turning this Harvard academic paper into a policy paper. And then this is why I'm really excited. I started working with the private sector.

So I started working with a company called Seagrass. They're a subsidiary of Eon, which is a German utility, one of the largest energy companies in the world. And we designed a pilot. We designed a pilot in Rwanda to say, can we finance a transmission line, one of the core bits of the energy transition, talked about it earlier. I'm really hard to find financing for them because they're not a great business. Can we finance in part through an Article 6 loan? This is a loan at 2 or 3% interest rate that will drive down the cost of cash. and make it financially viable.

So we're working on that project in Rwanda, working on a project in Burundi to electrify a bunch of households. We're beginning to talk to a couple people in your part of the world, particularly about paying to decommission a coal plant and replace it with renewable energy, maybe build transmission. And this is not a big international agreement. This is just a couple parties coming together and say,

let's transfer some money, let's make a project economically viable, and then return that benefit to the investors. So it's kind of ticking along, if we you know it takes less time to build a new renewable energy field than it does to transform the global economic system but it still takes time and we're working on them and i hope once we've got a couple pilots up and running we can come to indonesia and try it there you're welcome man yeah you you got to visit us are you optimistic about this there's a lot of traction in burundi and rwanda i so i am i'm super optimistic about the um the the the projects i'm working on and i think

actually this could grow to billions of dollars or tens of billions of dollars of the market. And yeah, like we've got a lot of interest. It's an interesting financial model. We're working really hard with a lot of different people. And I think that we're going to do things. We're going to have steel in the ground. We're going to make a little bit of a difference to the energy transition. I think maybe zooming out, this is one thing.

And there are so many criticisms I can make and the other make of both Article 6 and of my approach to Article 6 and what we're doing. But we need a sort of, let's try lots and lots of different mechanisms. We talked about the JetP. It's annoying. It's not working, but maybe it's having a positive impact. We can talk about COP. I didn't solve it, but this is good. It's episodic.

I mean, I take the long view. I just want to say one more thing about optimism, which is, and maybe it goes to your first question about climate, which was like, how do I think we're doing? Is it going well? We're doing enough. The numbers are hard because they're not real, their models. But when the Rio summit happened in 1992, and we came together and we created the UNF-Triple-C, the United Nations Framework Convention on Climate Change, the best estimates of what path of warming we were on for were between 4 and 6 degrees.

Four and six degrees above pre-industrial levels. We get to the Paris Agreement, and it's looking like 3.5, way above our target. It's a terrible, terrible impact. Now, if you look at the best climate models, they say the... stated policies. So what is we're currently on track for, it's probably about three, announced pledges, what the world said it's going to do is 2.5, 2.2. And those are going to get more ambitious. And so actually, I am optimistic. Like, it's working. It needs to work faster. We need to do more things. But to have from 1992 to 2024, you know, it's in the time scale, not even of

geologic time, but of human industrialization, that's, that's a, a blitzelage. link to have cut warming from 4 to 6 degrees to 2 and a half, 3, and we're doing more. And the circle is virtuous. I think it's going pretty well. Amen. Last question. CBAM. What's your take on CBAM?

CBAM, I think by now probably a lot of your listeners know, it's the carbon border adjustment mechanism. It's the EU's incarnation of saying if you export a good into our market, you're going to have to pay a carbon tax. And what the Europeans say is the reason they're doing this is because in Europe you pay a carbon tax. And that drives up the cost of manufacturing goods in Europe. And that means actually it makes Europe less competitive versus China versus Indonesia. And so if an Indonesian aluminium producer is not paying a carbon tax and the German one is, Germany has made itself less competitive in its own market. It's like anti-industrial policy.

It's the opposite of what a lot of countries are trying to do. And so what they say is, look, we're actually going to create this level playing field. We're going to say if we're paying a carbon tax in Europe, if you want to sell us to Europe, you have to pay a carbon tax to the same level. It also has some other benefits. This is probably going to spur a lot of developing countries. They're going to have the choice. Do we pay a carbon tax to the Europeans or do we implement our own carbon tax and we take the revenue? That's the theory behind the CBAM.

It's going to create more and more jurisdictions with more and more carbon taxes. and the economics 101 will tell you this is a really effective way to spur decarbonization. So when I think about CBAM as an abstract idea proposed by economists, I think it's great. I understand why the Europeans are doing. I understand theoretically how this could flow through to decarbonization in developing countries. The problem is that actually decarmonization is really hard. And so the perfect model of, well then, Indonesian steel producers will switch from using coal to using renewable energy because it's going to save the money on their tax bill,

they just don't have the option. So they're just going to have to eat the cost. And so I think that CBAM just needs to have more applied to it. I think we need to say that actually we should be thinking of policies, and I've been writing about a few at the Belfa Center, that keep the core principle of CBAM for the Europeans, and they have every right to do this. They don't want to shoot themselves in the foot with industrial policy.

Keeps the positive benefit of creating some incentive that's a stick for developing countries. You have a stick. You're going to pay more if you don't decarbonize. But we need to think about ways to create carrots. The most obvious one would be to take the C-BAM revenues and directly invest them in decommunization projects in Indonesia, maybe through a fund. As it happened, in Europe, the commission rejected that option, so they're not going to be sending the revenues back. But there are lots of ways we can think about doing this. And actually, I think what's exciting is, and what I love talking to my students about, there are some areas of policy where we've been trying to solve these issues for decades.

People have been talking about social housing for decades since the 1800s. This is all new. And so actually like smart policy ideas, you go to the Europeans and you say, hey, I have a great idea on the CBAM. I know how it can maintain your policy goals and I can defend your core interests. And I know how it can actually help the Indonesians decarbonize. Those are going to get implemented. So it's the forefront of policy entrepreneurship. I think that's really exciting.

I've got some views about CBAM. I'm sure. But we'll talk about it some other time. Anything else, Eli? It's been a pleasure. We'll play chess sometime. Thank you so much for your time. Thank you, too.

That was Eli Sandler from Harvard. University. Thank you.