Inc.com – Bill Gates Says This Simple Formula Tells You Exactly How to Invest in Green EnergyEstimated Reading Time: just 3 min

Looking for a new investment or a lucrative industry for your new startup? Look no further than green energy. With world leaders, including a new administration and Congress, fully aware of the severity of the climate crisis, any company or technology that helps reduce greenhouse gases might seem like a good bet. But, according to Bill Gates some are more worthwhile, and have a bigger impact than others, and there’s a simple way to tell which is which. To be most effective against climate change — and most financially successful — look for companies and technologies that reduce or eliminate the “green premium.”

The green premium is the difference in cost between something that makes climate change worse and something that doesn’t, Gates explains in a book excerpt published by Time. The green premium comes about because the cost of most products does not reflect their impact on the environment. Take jet fuel. “The average retail price for a gallon of jet fuel in the U.S. over the past few years is $2.22,” Gates writes. “Advanced biofuels for jets, to the extent they’re available, cost on average $5.35 per gallon.” Thus, the green premium for those zero-carbon jet fuels is $3.13 per gallon, a premium of more than 140 percent. 

Are airlines likely to pay that? Unless there’s a government incentive to do so, such as a carbon tax, the answer is certainly no in an industry that competes almost solely on ticket price and that has been badly battered by the pandemic. So a company trying to sell today’s biofuels to the airline industry isn’t likely to get very far. On the other hand, one that can find a way to bring the cost of biofuel in line with traditional jet fuel would likely do very well. This is why, Gates writes, “During every conversation I have about climate change, green premiums are in the back of my mind.”

Fighting climate change isn’t just for do-gooders, it’s also for entrepreneurs and investors who want to be seriously rich, according to Chamath Palihapitiya Palihapitiya, billionaire VC and founder of Social Capital. Palihapitiya says it should surprise no one that Elon Musk is the world’s richest man, because Tesla is a company addressing climate change head-on. 

Though he may not use the term, Musk is well aware of the green premium, and he’s made eliminating it a major focus at Tesla. The company may have started out with the $100,000 Roadster, but it’s worked hard to bring the price of its cars down ever since, and now offers the Model 3 at a starting price of about $38,000. 

What industries offer opportunities with low or no green premiums? Producing electricity in both the U.S. and Europe is a good example, Gates writes. “Changing the entire U.S. electricity system to zero-carbon sources would cost roughly 15 percent more than what most people pay now. That adds up to a relatively low Green Premium of $18 a month for the average home.” Which is why the area is ripe for investment, and why the coal industry may be in trouble.

But while non-fossil-fuel electricity and electric vehicles capture a lot of the public’s attention, they’re not the biggest solutions to the climate crisis. Gates notes that the biggest source of greenhouse gases is manufacturing, which accounts for 31 percent of them. Electricity production is a close second at 27 percent, followed by agriculture. Transportation comes in fourth at 16 percent, followed by heating and cooling buildings. We have to address all these industries, Gates writes, or else, “you’re not going to solve the problem.”

In other words, this area is not only ripe for innovation but there are billionaire investors eager to back ideas that can lower emissions with a low green premium across a wide range of industries. That’s why Gates invested in Heliogen, which is working to make solar energy viable for manufacturing, and why Palihapitiya recently led a big investment in Sunlight Financial, a fintech company that facilitates financing for for residential solar installations.

That could provide some inspiration for your own next venture or investment. Just make sure you keep the green premium in mind.