In September 2008, Vinod Khosla spoke with McKinsey’s Rik Kirkland about climate change.

What will it take to change our current energy mix?
The most important thing we need is new technologies that change the assumptions around what low-carbon technologies cost. If we have cheaper low-carbon alternatives to coal, oil, cement, and steel, we’re done with the carbon problem. And I think that’s a question of technology.

The conventional wisdom is that alternative technologies will be more expensive. I believe they will be cheaper. The only reason they are more expensive today is that not enough research has been done, not enough entrepreneurial energy has been focused on the problem.

How should policy makers approach this issue, given what you’ve just said?
A couple of things are important. Creating markets, for one. The renewable-fuel standard, for example, actually encourages entrepreneurs because they get some assurance that if they produce a great product, the market will be there. So markets are important. I suspect subsidies are a little less important. They may be required early on during the first five to seven—maybe ten—years of a new technology but never beyond that.

From a policy perspective, we also need to increase the number of options. If the electric-car guys can compete with the biofuels guys and they both compete for inexpensive low carbon, that sort of competition is a good thing.

Also, increasing our capacity for carbon reduction is far more important than simply absolute carbon reduction. Therefore, building capacity for dramatic improvements is essential. Low-carbon technologies that can be in our industrial capital stock in the future are far more important than going back and retrofitting old facilities and doing small reductions.

You’ve also mentioned a distinction between focusing on what you call main tech versus green tech. Could you elaborate on that?
This issue of scale is critical. When people talk about green-tech or clean-tech investing, they’re talking about ethanol. They’re talking wind or hybrids. Those are fringe activities, and they’re very valuable and very important. They can replace 5 to maybe 10 percent of fossil fuel usage. But we need a replacement of at least 80 percent. So scale matters. You have to compete with coal’s base-load power generation capability. You have to replace oil in cars and trucks.

How would you achieve that, and how long will it take?
I think one can define the direction. Today I would guess that liquid fuels will be very important for the next 20 or 25 years. So, some low-carbon liquid fuel or biofuel will replace oil. It won’t be traditional vegetable oil–based biodiesel. It could be a biocrude. We’re working on all of these.

I think there will be a technology race between biofuels and batteries. I have no doubt that in 50 years, we’ll more likely be electric powered than biofuel powered. In 25 years, however, I suspect we will be powered principally by biofuels or oil. My hope is for biofuels.

The challenges are daunting. We’re racing against time and facing tremendous uncertainty. The stakes are high—are you optimistic?
I am. It seems like a daunting challenge. But today’s unimaginable becomes tomorrow’s conventional wisdom because of technology shifts. I’m almost certain we will find the technologies we need to beat fossil fuels on their economics. And if that happens, it’ll spread like wildfire, and change will happen very quickly.

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