Episode 10: Finance with Kevin Bayuk

One of the special things about Drawdown’s ranked solutions is that they are practically and financially viable. In this interview with Drawdown Senior Fellow in finance modelling Kevin Bayuk we get into the nuts and bolts of the financial modelling underpinning the research.

Kevin reminds us that financial viability was a key stipulation for the solutions, so that most of them accrue huge savings in relatively short payback periods. As with greenhouse gas emissions, the financial approach takes a global view that doesn’t allow for differences at the regional level. As such, the numbers main benefit lie in allowing for a financial comparison between different solutions that demonstrate which ones are most cost effective. As with everything in Drawdown, the numbers tend to be on the conservative side, so that the team expects implementation costs to be lower and the return on investment higher.

Kevin takes us through the “sausage-making” involved in amalgamating financial data from different parts of the world and the different assumptions and models that underpin how net savings have been calculated. It is worth noting that not all the solutions are financially viable so that some come at a net cost to humanity, such as refrigerant management, whereas others couldn’t be calculated for ethical reasons. However, the financial aspect is a crucial albeit narrow factor as most of the solutions are “no regrets” with incalculable cascading social benefits for everyone on earth to enjoy, as ultimately we all share the same atmosphere. Kevin also gives us some general observations about challenges within the financial system, particularly in mobilising capital. He stresses how the emphasis on short-term, high-return investments is a stumbling block given that climate solutions often require long-term “patient” capital. As such, innovation is required to help finance the transition to a low-carbon economy and he touches on some possibilities particularly in the banking sector.

Kevin works at the intersection of ecology and economy. He is a partner with LIFT Economy, an impact consulting firm that aims to accelerate social enterprises and facilitate investment into highly beneficial impact organizations. His clients include industry leaders and start-ups in conservation hydrology landscape stewardship, bioplastics, compost, urban planning, diversified renewable energy, energy efficiency, and early-stage impact investment. He loves spreadsheets, digging into operating models and reminding people that we too are nature.

This is quite a technical interview and so we’ve included a breakdown of some of the key technical language below:

Cumulative first cost: the initial cost of implementing a solution. e.g. the cost of building a wind-farm

Lifetime savings: the savings accrued by a technology over the course of its life. This is compared with the costs of having implemented an alternative solution. e.g. implementing improved agricultural practices may lead to an increased yield which would accrue savings compared with business-as-usual practices.

Marginal cost: the change in the opportunity cost that arises when the quantity produced is incremented by one unit, that is, it is the cost of producing one more unit of a good. e.g. renewable energy has a low marginal cost as once installed the cost of inputs to make energy (sunlight, wind) is practically free

Net-operating savings: the total savings made from an investment minus the maintenance costs associated with it. e.g. the savings a wind-farm would accrue compared with a coal power plant minus the costs of maintaining it.

Net present value: the total value an asset has today, compared with what its value might be in the future. This is underpinned by the premise that a dollar now is worth more than it will be in ten years.

 Replacement Costs: the cost of replacing an asset with an alternative. e.g. the cost of replacing a coal fired power plant with a wind-farm.