Bill Gates: How 'green premiums' can help us solve climate change

This article is part of Fortune‘s Blueprint for a climate breakthrough package, guest edited by Bill Gates.

When I worked at Microsoft, my colleagues and I would pore over data about our business. We knew the numbers on our sales, our customers, and our competitors inside and out. We weren’t alone, of course—every good business leader does the same thing. The only way to know whether you’ll meet your goals is to measure where you stand at the moment.

But when it comes to climate change, the important metrics aren’t nearly as clear. I think this vacuum helps explain why the debate over what to do about climate change is so fraught. Just about everyone agrees that rising temperatures are an urgent problem, but we haven’t had a clear way to measure how far we are from solving it. Do we possess all the tools we need to stop emitting greenhouse gases, or just some of them? And if we need to invent new tools, which ideas deserve the lion’s share of our funding and our inventors’ IQ?

While I was writing How to Avoid a Climate Disaster, my new book about tackling greenhouse gas emissions, I landed on a concept that, I believe, answers these questions. I call it the Green Premium. Although it’s simple enough to explain, it turns out to be a powerful idea that can guide every business leader who wants to help solve climate change.

The Green Premium is simply the difference in cost between doing something in a way that produces greenhouse gases and doing the same thing without the emissions. For example, if you run an airplane on jet fuel, you’ll pay about $2.22 per gallon. If you buy clean biofuels instead, you’ll pay about $5.35 a gallon. The difference between these two—about 140%—is the Green Premium for jet fuel. In other words, if you want to get rid of your emissions from flying a jumbo jet right now, it’ll cost you 140% more.

Admittedly, figuring out Green Premiums isn’t an exact science. It depends on various assumptions, and reasonable people can disagree about the particulars. But here’s why the concept is so powerful: When you calculate Green Premiums for all the different activities that cause greenhouse gas emissions—manufacturing, making electricity, agriculture, transportation, and heating and cooling buildings—you can see where we have workable solutions now, where we have to do some inventing, and which breakthroughs deserve the most focus.

Some Green Premiums are reasonably low. For example, I found that converting America’s electric grid to all clean sources (including wind, solar, hydropower, and nuclear) would add about 15% to the average residential customer’s electric bill—roughly $18 a month. And Europe, which has plentiful supplies of wind and solar, is in the same boat. And in a few cases, the Green Premium can be negative—for example, there are cities in the U.S. where you’ll save money over the long run if you replace your electric air conditioner and gas furnace with an electric heat pump. So we should be doing everything we can to deploy renewables where it makes sense, while making sure that low-income people aren’t burdened by the modest premiums involved.

But in most other areas—a large majority of the activities responsible for greenhouse gas emissions—the Green Premiums are far higher. In fact, the cost of using today’s technology to eliminate greenhouse gas emissions from every sector of the economy would run into the trillions, year after year.

That’s a daunting figure, but it also gives us a clear plan of action. Our priority should be to eliminate these high Green Premiums. The premiums need to be so low that even developing countries with growing energy needs and relatively scant financial resources will adopt zero-carbon ways of doing everything from making steel and cement to generating electricity.

To accomplish that will take a great deal of innovation, in both technology and policies. And the private sector will need to play a leading role. For example, lenders will need to be willing to finance innovative ideas—with low-cost capital and other financial concessions—that could make clean solutions cheaper. They’ll need to adopt a different risk profile, and they may need to accept lower returns too.

Companies that already work on clean-energy products—whether it’s hydrogen fuels, electric vehicles, or plant-based burgers—can double down on research and development aimed at reducing the cost of their products. Others can help create demand by revamping their procurement policies, committing to buying these products even though they’re more expensive. The increased demand will draw in more innovators and help close the cost gap between fossil fuels and clean alternatives.

Finally, because companies obviously can’t transform the entire physical economy of the world by themselves, every business leader should raise the topic of Green Premiums with politicians and policymakers. Governments need to make a dramatic increase in funding for the clean-energy R&D that will lead to innovative new products from the private sector. (A fivefold expansion would put energy on par with the health research that has underpinned amazing advances like vaccines and cancer treatments.) They should also level the playing field by doing things like requiring certain amounts of electricity or fuels to be clean, or by putting a price on carbon emissions so that the cost of fossil fuels reflects the damage they cause to humans and the environment. In other words, we can reduce the Green Premium by making fossil fuels more expensive as well as by making the alternatives cheaper.

Each of the steps I’ve suggested comes with some risk or added cost. But they are short-term costs that will drive long-term benefits for everyone. And all the investors, board members, and executives who have the courage to take these risks will be able to say they’re doing things that matter in the effort to avoid a climate disaster.

I’ve seen something like the Green Premium work before. When Melinda and I first got involved in global health, we saw horrifying statistics on the huge numbers of children in low-income countries who died before their fifth birthday. Even worse, no one could tell us what they were dying of. That made it impossible to help.

So we started funding large-scale studies that revealed the causes of these deaths. Armed with that new understanding, underpinned by detailed information, we funded brilliant scientists to work on solutions. For example, when the data revealed that a high percentage of children were dying from pneumonia, we backed work on a pneumococcal vaccine. It is now in use, and the mortality numbers are dropping dramatically.

The Green Premiums can do something similar for climate change. They show definitively that the tools we have today, like solar and wind, should be deployed wherever they’re economical. Where the premiums are much higher, we’ve got a much tougher problem, and that’s where we need to focus our brightest minds and our research funding.

If you want to know how you can help fight climate change, the answer really is this straightforward: Take whatever action you can, big or small, to reduce the Green Premiums.

Bill Gates is the cochair of the Bill & Melinda Gates Foundation and founder of Breakthrough Energy.