Environ. Sci. Technol.
2010, 44, 9134–9142
Future Sustainability Forecasting by
Exchange Markets: Basic Theory
and an Application
NATALIYA MALYSHKINA* AND
DEB NIEMEIER*
University of California, Davis, The Department of Civil and
Environmental Engineering, One Shields Avenue, Davis,
California 95616, United States
Received March 5, 2010. Revised manuscript received
August 26, 2010. Accepted October 8, 2010.
Setting sustainability targets and evaluating systems progress
are of great importance nowadays due to threats to the
human society, to economic development and to ecosystems,
posed by unsustainable human activities. This research
establishes a probabilistic theoretical approach based on
market expectations reflected in prices of publicly traded
securities to estimate the time horizon until the appearance of
new technologies related to replacement of nonrenewable
resources, for example, crude oil and oil products. To assess
time T when technological innovations are likely to appear, we
apply advanced pricing equations, based on a stochastic
discount factor to those traded securities whose future cash
flows critically depend on appearance of such innovations. In a
simple approximation of the proposed approach applied to
replacement of crude oil and oil products, we obtain
0 /C0) · ln (∆ · P0 /P0 ), where P0 and P0 are the current
T ≈ (Poil oil alt oil alt
aggregate market capitalizations of oil and alternative-
energy companies, C0 is the annual aggregate dividends that
oil companies pay to their shareholders at the present, and ∆ is
the fraction of the oil (oil products) replaced at time T. This
formula gives T ≈ 131 years for replacement of gasoline and
diesel. The proposed market-expectations approach may allow
policymakers to effectively develop policies and plan for long-
term changes.
Introduction
Perhaps the most commonly recognized definition of sus-
tainability is that recommended by The World Commission
on Environment and Development: “[sustainable develop-
ment that] meets the needs of the present without com-
promising the ability of future generations to meet their own
needs”. Putting this definition into practice, however, has
proven to be problematic primarily because it is very difficult
to predict the needs of future generations, which would
require at the minimum forecasting the availability of future
technological innovations (new effective technologies). In
fact, we argue that this problem of forecasting the availability
of new technology for practicable industrial activities (as
opposed to purely scientific discoveries) is of the utmost
importance, because it directly impacts our ability to assess
current levels of sustainability. In this paper, we describe a
general theoretical framework for a proposed market-
expectations-based approach to estimation of the time
* Address correspondence to either author. E-mail: nmalyshk@
gmail.com (N.M.); dniemeier@ucdavis.edu.
9134 9 ENVIRONMENTAL SCIENCE & TECHNOLOGY / VOL. 44, NO. 23, 2010
horizon T until the appearance and adoption of new
technologies related to important sustainability problems.
Our framework can be used to extend many recently
developed quantitative measures of sustainability (1, 2). For
example, the Graedel and Klee’s sustainable emissions and
resource usage model involves comparison of the maximum
sustainable rate to the current annual consumption rate of
a resource (3). One critical (and debatable) assumption in
this comparison is that the number of years T that the resource
is expected to last before an alternative means of fulfilling
that consumption is available, is equal to the time period of
roughly two human reproductive generations, or 50 years.
Our proposed method provides a means for directly esti-
mating T in Graedel and Klee’s model using market expecta-
tions. There are other application examples: T could be used
to adjust the relative weights for the Environmental Perfor-
mance Index indicators, or to define the stability of sus-
tainability for specific systems (4), or to estimate long-term
financial, social, and environmental impacts in company
performance (5). Even estimating the number of Earths in
constructing ecological footprints requires some assessment
of the introduction of new technology (6): the number of Earths
needed to indefinitely support the current rate of consumption
of a nonrenewable resource would formally be equal to infinity,
unless a replacement of this resource is taken into account and
time T is estimated. Finally, throughout much of the life cycle
analysis applications (e.g., see ref 7), the various determinations
of environmental impacts due to production, transportation
and consumption of a product/service crucially depends on
time T until the appearance of new technologies for the product/
service manufacture and disposal.
It is clear that for both the theory and the practice of
setting sustainability targets and evaluating system progress
at any scale, a theoretical framework for estimating the time
T until appearance of new technologies is critically important.
But estimating T is difficult because it must be based on an
unknown future (8). Prior studies that considered forecasting
and effects of future technologies, mainly in the energy and
transportation sectors (9-13), and many of them based on
(socio)economic and/or system dynamics models (9,
11-13), required that a number of (questionable) assump-
tions about future demand, supply, production and innova-
tion functions be made. Other studies primarily rely on polling
of futurists, forecasters and technical experts (e.g., ref 10),
with the possibility of biased results being a disadvantage.
We propose instead an approach that utilizes market
expectations to estimate T. That is, we use the prices of market
traded securities to forecast the time T until the appearance
and adoption of new technologies.
The theoretical basis for this approach is grounded in the
fact that average prices of market-traded securities must,
and do reflect the current expectations of investors about
probabilities and timing of potential technological innova-
tions because in the future these innovations will lead to
significant changes and redistributions in cash flows paid to
investors. Sophisticated investors tend to put considerable
effort into collecting, processing and understanding infor-
mation relevant to the future cash flows paid by securities,
and as result, market forecasts of future events tend to be
relatively accurate (14-16). For example, in the past market-
expectations-based forecasts have been successfully used
for predicting the probabilities of future events not only in
finance and business (17), but also in politics (18) and sports
(19). Another important advantage of market predictions is
that, being consensus predictions by a large number of
investors, they are politically and ideologically unbiased (20).
10.1021/es100730q  2010 American Chemical Society
Published on Web 11/08/2010
 In short, in spite of considerable day-to-day volatility of
market conditions, the advantages of long-term market
forecasts are substantial. Long-term investors are both
cognizant of and savvy to different adaptations to markets
that involve new research and technology. In this paper, we
outline a theoretical approach for estimating time T until
appearance of sustainability-related technological innova-
tions using market pricing data, which reflects all (or nearly
all) of the currently available information on progress in
development of the innovations and all other relevant factors
(such as government regulations, policies, and taxes, and
the currently estimated likelihoods of their future changes).
As both a matter of practical importance as well as
providing an interesting application, we use the replacement
of crude oil and oil products by viable substitute(s) to
demonstrate our theoretical framework. Crude oil is a widely
used nonrenewable fuel and energy source and a vital
component in the chemical industry. The current global
reserves of crude oil are estimated to be at about 1.3 trillion
barrels, whereas annual oil consumption is around 31 billion
barrels (21). There is near universal agreement that in the
future crude oil will need to be replaced by substitutes (22, 23),
which makes the estimation of the time until such substitu-
tion might occur due to development of new technologies
of clear importance for policymakers and scientists. In making
inference on market expectations about time T until ap-
pearance of an oil substitute, we consider stock shares of oil
companies and alternative-energy companies. Future cash
flows of these companies directly depend on the arrival of
the oil substitute and their current market prices reflect
investor sentiment about the timing of such an event.
General Theoretical Framework. Markets are strongly
influenced by the laws of supply and demand, and, over the
long-term, market forecasts are effective in pricing traded
securities (14, 17, 24). The time-zero (today’s) price P0n of
security n that is a claim to a stream of future cash flows Cnt ,
paid at time periods t ) 1,2,3, ..., can be generally expressed
as (17, 25),
∞ are considered by the market to directly benefit from
Pn0 ) ∑ E[S C |I ]
n
t t 0 (1)
t)1
Here St > 0 is the stochastic discount factor for the cash flow
paid at a future time t, and the expectation is conditional on
the information set I0, which includes all the information
available to investors at time zero (today). The future cash
flows Cnt are usually random variables, which are unknown
at the present time and become revealed only at future time
t (for example, future dividends depend on performance of
companies in the future). The stochastic discount factor St
is taken to be also random, with the purpose of accounting
for investment risk associated with uncertainty of the future
cash flows. It is important that St is the same for any security
freely traded in an efficient market (i.e., St does not depend
on the security index n), and also S0 ) 1 (present cash flows
are as good as cash). Note that the current price Pn0 is observed
from the market trading data and is known today (at time
t ) 0). A practical application of eq 1 has to include a
specification for the stochastic discount factor St.
The conceptual framework behind our market-expecta-
tions-based approach is straightforward: we apply the pricing
eq 1 to those traded securities whose future cash flows depend
on appearance of technological innovations related to
important sustainability issues. Our goal is to use this
equation and the pricing data to expose current market beliefs
about when these innovations are likely to appear. We follow
three steps in the market-expectations-based estimation of
time T until an appearance of a technological innovation:
I. Identify traded securities, whose future cash flows
strongly depend on the appearance of a new technology of
interest (e.g., a viable replacement of crude oil, or a technology
for reducing CO2 emissions).
II. Specify a model for pricing these securities using eq
1. The model design must include specifications for the
stochastic discount factor and for the future cash flows paid
by the securities. The dependence of the future cash flows
on time T should be accounted for by the model design
(T is one of the model’s free estimable parameters).
III. Collect historical and current market data on the
securities (e.g., share prices, number of shares outstanding,
dividends paid, etc.). Using these data, estimate the values
of all estimable parameters of the pricing model, including
time T until the appearance of the new technology. The
estimated time will reflect the current expectations and beliefs
of market investors.
The pricing formulation given in eq 1 is very general and
can be used for most market-traded securities and contracts
(provided the market “frictions”, such as transaction costs
and lack of liquidity are negligible). Since, one way or another,
almost any innovation will considerably influence future
payoffs by some market-traded securities and contracts, the
proposed three-step market-expectations-based approach
can be used for a wide scope of applications that are under-
pinned by the estimation of time until appearance of many
important sustainability-related technological innovations.
Data Description. To estimate our model, we take
advantage of market data on major oil and oil-refining
companies, as well as on major alternative-energy companies
that carry out research on oil and oil product substitutes and
can potentially discover new technologies to replace oil and
oil products in the future. We used publicly traded securities
whose cash flows directly depend on appearance of an oil
substitute. These are stock shares of oil/oil-refining com-
panies and alternative-energy companies. The oil/oil-refining
companies are in the business of oil extraction, refinement,
and supply, therefore, their business crucially depends on
demand for oil and oil products. The alternative-energy
companies develop substitutes for oil and oil products, and
appearance of these substitutes.
To collect data, we relied on major financial information
and news sources including the U.S. Securities and Exchange
Commission database (www.sec.gov), Google Finance (www.
google.com/finance), and Yahoo Finance (www.finance.
yahoo.com). We limited our analysis to including only those
major companies publicly traded on U.S., European and
Australian stock exchanges (NYSE, NASDAQ, AMEX, LON, BIT,
ASX, etc.). We chose 17 oil and 8 oil-refining companies with
market capitalization (the total dollar value of all outstanding
shares) above 10 billion dollars for oil companies and above 1
billion dollars for oil-refining companies, these companies are
listed in Table 1. While we do not include several large oil
companies that are not traded on U.S./European/Australian
exchanges, such as Saudi Aramco (Saudi Arabia), Statoil ASA
(Norway), and Rosneft (Russia), we show that our results are
not sensitive to such omissions. For the alternative-energy
companies, we chose only those companies pursuing develop-
ment of new technologies intended to substitute for oil and/or
oil products (such as gasoline and diesel) and for which current
earnings are relatively small. Specifically, we chose companies
that work in the areas of production of ethanol, biodiesel, biofuel,
hydrogen, and development of fuel cells, batteries, and propul-
sion systems for “clean” vehicles. In each of these areas, we
considered the largest alternative-energy companies, which
together occupy about 99% of the market share in the respective
area. In total, we collected data for 44 alternative-energy
companies, which are listed in Table 1. We do not consider
alternative-energy companies working in the areas of geother-
mal, wind, and solar energy, because their research is mostly
VOL. 44, NO. 23, 2010 / ENVIRONMENTAL SCIENCE & TECHNOLOGY 9 9135
9136
TABLE 1. Financial Data for Major Oil and Alternative-Energy Companies (2008 Only)

9
market cap, number of share dividends dividends, P/D net income net income,
company name (ticker symbol) area 106 $ shares price, $ per share, $ 106 $ ratio per share, $ 106 $ P/E ratio
Oil and Oil-Refining Companies
Exxon Mobil Corp. (XOM) oil 425 766 5 149 000 000 82.69 1.55 7981 53.35 8.69 44 745 9.52
PetroChina Company Ltd. (PTR)a oil 223 088 183 020 977 818 1.22 0.02 4153 53.72 0.09 16 352 13.64
Petroleo Brasileiro SA (PBR)a oil 214 071 8 774 076 740 24.40 0.47 4124 51.91 2.15 18 864 11.35
Royal Dutch Shell plc (RDS.A)a oil 209 462 6 171 489 652 33.94 1.60 9874 21.21 4.26 26 291 7.97
BP plc (BP)a oil 188 702 18 963 000 000 9.95 0.55 10 439 18.08 1.12 21 155 8.92
Chevron (CVX) oil 172 853 2 037 000 000 84.86 2.53 5154 33.54 11.67 23 772 7.27
Total S.A (TOT)a oil 157 996 2 246 700 000 70.32 2.53 5684 27.80 9.11 20 467 7.72
ENI (E)a oil 115 141 3 639 000 000 31.64 1.91 6954 16.56 3.57 12 999 8.86
ConocoPhillips (COP) oil 110 626 1 480 240 553 74.73 1.88 2783 39.75 -11.60 -17 171 -6.44
Occidental Petrolum (OXY) oil 58 788 817 635 000 71.90 1.21 989 59.42 8.35 6827 8.61
Repsol YPF SA (REP)a oil 43 447 1 220 863 463 35.59 1.27 1544 28.13 3.28 4005 10.85
Suncor Energy Inc. (SU) oil 42 856 935 524 213 45.81 0.20 187 229.05 2.26 2114 20.27
Imperial Oil Limited (IMO) oil 41 580 882 604 000 47.11 0.38 335 123.98 4.36 3848 10.81
Marathon Oil Corp. (MRO) oil 30 590 713 000 000 42.90 0.96 684 44.69 4.95 3529 8.67
Hess corp. (HES) oil 29 111 325 800 000 89.35 1.20 391 74.46 7.24 2359 12.34
Valero Energy Corp. (VLO) oil-ref. 20 547 524 000 000 39.21 0.57 299 68.79 -2.16 -1132 -18.15
Petro-Canada (PCZ) oil 20 172 484 597 467 41.63 0.66 320 63.07 6.43 3116 6.47
YPF- SA (YPF)a oil 17 759 393 312 793 45.15 7.42 2920 6.08 2.91 1144 15.52

ENVIRONMENTAL SCIENCE & TECHNOLOGY / VOL. 44, NO. 23, 2010

Sunoco, Inc. (SUN) oil-ref. 5255 117 100 000 44.88 1.18 138 38.20 6.63 776 6.77
Polski Koncern Naftowy (PSKZF) oil-ref. 4614 427 709 061 10.79 0.00 0 -1.45 -619 -7.45
Caltex Australia Ltd. (CTX) oil-ref. 3299 270 000 000 12.22 0.33 89 37.03 0.13 35 93.99
Tesoro Corporation (TSO) oil-ref. 3084 139 200 000 22.16 0.40 56 55.39 2.00 278 11.08
Sinopec Shanghai Petrochemical Company Ltd. (SHI) oil-ref. 2438 7 200 000 000 0.34 0.00 0 0.12 888 2.74
Frontier Oil Corporation (FTO) oil-ref. 2369 103 904 472 22.80 0.23 24 99.12 0.77 80 29.61
ERG SpA (ERG) oil-ref. 1803 148 308 882 12.16 0.59 87 20.67 6.41 950 1.90

Alternative-Energy Companies
Cosan Ltd. (CZZ) ethanol 1773 174 893 145 10.14 0.00 0.09 112.65
Gushan Environmental Energy Ltd. (GU) biodiesel 758 166 831 943 4.55 0.06 77.04 0.23 19.62
Exide Technologies (XIDE) batteries 728 69 284 000 10.51 0.00 0.46 22.84
AE Biofuels Inc. (AEBF) biofuel 553 84 641 642 6.53 0.00 -0.19 -34.38
Ener1 (HEV) batteries 536 103 382 000 5.19 0.00 -0.42 -12.35
FuelCell Energy Inc. (FCEL) fuel cell 471 68 571 000 6.87 0.00 -1.41 -4.87
Saft Groupe SA (SAFT) batteries 467 18 471 782 25.27 0.00 2.79 9.05
Valence Technology Inc. (VLNC) batteries 341 111 593 000 3.06 0.00 -0.18 -16.98
Ballard Power Systems Inc. (BLDP) fuel cell 321 85 763 207 3.75 0.00 -0.40 -9.37
Westport Innovations Inc. (WPT) clean vehicle 306 88 087 882 3.47 0.00 -0.12 -28.48
GreenHunter Energy Inc. (GRH) biofuel 304 20 216 032 15.05 0.00 -4.08 -3.69
Rentech Inc. (RTK) biofuel 224 165 480 000 1.35 0.00 -0.38 -3.55
Medis Technologies Ltd. (MDTL) fuel cell 218 40 693 544 5.37 0.00 -3.75 -1.43
Plug power Inc. (PLUG) fuel cell 208 89 383 000 2.33 0.00 -1.36 -1.71
Altair Nanotechnologies Inc. (ALTI) batteries 195 85 903 712 2.27 0.00 -0.34 -6.68
Verenium Corp. (VRNM) ethanol 147 64 134 000 2.29 0.00 -2.89 -0.79
Pacific Ethanol Inc. (PEIX) ethanol 145 50 147 000 2.90 0.00 -3.02 -0.96
Nova Biosource Fuels Inc. (NBFAQ) biodiesel 138 110 199 966 1.25 0.00 -0.38 -3.30
 TABLE 1. Continued
market cap, number of share dividends dividends, P/D net income net income,
company name (ticker symbol) area 106 $ shares price, $ per share, $ 106 $ ratio per share, $ 106 $ P/E ratio
Beacon Energy Holdings Inc. (BCOE) biofuel 131 30 556 011 4.27 0.00 -0.33 -12.95
Ceramic Fuel Cells Limited (CFU) fuel cell 120 314 717 091 0.38 0.00 -0.08 -5.07
Hoku Scientific Inc. (HOKU) fuel cell 110 16 656 000 6.61 0.00 -0.26 -25.42
Quantum Fuel Systems Technologies (QTWW) clean vehicle 100 76 791 000 1.30 0.00 -1.11 -1.17
Green Plains Renewable Energy Inc. (GPRE) ethanol 87 12 366 000 7.08 0.00 -0.56 -12.64
DynaMotive Energy Systems (DYMTF) biofuel 86 210 987 688 0.41 0.00 -0.03 -13.63
Bluefire Ethanol Fuels Inc. (BFRE) ethanol 83 28 064 572 2.96 0.00 -0.51 -5.79
New Generation Biofuels Holdings, Inc. (NGBF) biofuel 79 18 725 312 4.24 0.00 -0.92 -4.61
Hydrogenics Corp. (HYGS) fuel cell 75 92 406 666 0.81 0.00 -0.02 -40.38
Azure Dynamics Corp. (AZD) clean vehicle 69 313 802 407 0.22 0.00 -0.12 -1.82
Enova Systems Inc. (ENA) fuel cell 59 19 660 000 2.99 0.00 -0.66 -4.53
Lithium Technology Corp. (LTHU) batteries 58 1 593 027 896 0.04 0.00 -0.00 -9.03
UQM Technologies Inc. (UQM) clean vehicle 55 26 196 278 2.09 0.00 -0.18 -11.61
ITM Power Plc. (ITM) hydrogen 53 102 079 609 0.51 0.00 -0.06 -8.98
BDI - BioDiesel International AG (D7I) biodiesel 50 3 800 000 13.08 0.00 1.79 7.30
ADA-ES (ADES) ethanol 49 6 100 000 8.00 0.00 -0.67 -11.95
Hong Kong Highpower Tech. Inc. (HPJ) batteries 48 13 233 353 3.59 0.00 0.15 23.95
BioFuel Energy Corp. (BIOF) ethanol 45 15 419 000 2.92 0.00 -2.65 -1.10
D1 Oils plc. (DOO) biofuel 43 108 840 317 0.39 0.00 -0.45 -0.86
Axion Power International (AXPW) batteries 38 22 826 187 1.64 0.00 -0.46 -3.58
Hy-Drive Technologies Ltd. (HGS) hydrogen 29 61 244 815 0.47 0.00 -0.10 -4.68
Renegy Holdings, Inc. (RGYH) biofuel 20 6 208 000 3.20 0.00 -1.97 -1.63
Ecotality, Inc. (ETLY) clean vehicles 17 125 673 412 0.13 0.00 -0.06 -2.19
Dyadic International Inc. (DYAI) ethanol 10 29 940 000 0.32
AFC Energy plc. (AFC) fuel cell 9 105 545 868 0.09 0.00 -0.04 -2.42
Power Air Corp. (PWAC) fuel cell 9 66 453 675 0.13 0.00 -0.02 -6.56
a
American Depositary Receipt (ADR), a negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a
U.S. exchange.

VOL. 44, NO. 23, 2010 / ENVIRONMENTAL SCIENCE & TECHNOLOGY

9 9137
TABLE 2. Aggregated Financial Data for Oil and Alternative-Energy Companies (T and T2009 are Calculated from Eq 7 for ∆ =
0.634) (1999-2008)
total market capitalization total market capitalization total dividends paid by
year of oil companies P0oil, 106 $ of alternative-energy companies P0alt, 106 $ oil companies C0, 106 $ γ T T2009
1999 662 881 4116 18 019 0.974 170 160
2000 748 000 14 026 24 409 0.969 108 99
2001 750 723 7399 28 985 0.963 108 100
2002 684 351 4474 27 802 0.961 113 106
2003 701 544 3707 33 637 0.954 100 94
2004 1 099 666 5362 45 464 0.960 118 113
2005 1 521 193 5456 52 841 0.967 149 145
2006 1 920 055 8748 58 277 0.971 163 160
2007 2 250 523 10 137 62 573 0.973 178 176
2008 2 145 416 9362 65 210 0.971 164 163
average value 0.966 137 131
median value 0.968 133 129
standard deviation 0.006 30 32

related to base-load electricity production and cannot replace
fuels and oil-related chemical products.
For each of the oil and alternative-energy companies
chosen, we collect fundamental financial data including the
market capitalization (in millions of dollars), number of shares
outstanding, company average annual share price, annual
dividends paid per share, total annual dividends paid (in
millions of dollars), P/D ratio (price-to-dividends ratio is equal
to the ratio of the share price and the dividends paid per
share), company’s annual net income per share, total annual
net income (in millions of dollars), and P/E ratio (price-to-
earnings ratio is equal to the ratio of the share price and the
net income per share). The number of shares outstanding,
the net income per share and the dividends per share were
collected from annual fillings that companies submit to the
U.S. Securities and Exchange Commission in forms K-10,
20-F, 40-F, and 10KSB. The share price was averaged over
daily (or, in some cases, weekly) historical prices obtained
from the Google Finance and Yahoo Finance electronic
resources.
Note that while oil companies generally have considerable
annual incomes and usually pay significant dividends, the
alternative-energy companies typically lose money and pay
no dividends. For example, the aggregate P/E and P/D ratios,
averaged over years 1999-2008, are about 9.82 and 29.9 for
oil companies and about -10.7 and 674 for alternative-energy
companies. The oil companies belong to the “value stocks”
category; that is, investors buy their shares because oil
companies currently make profits and pay dividends. In
contrast, alternative-energy companies belong to the “growth
stock shares, we apply eq 1 to price aggregate stock shares.
To do this, we make a few simplifying assumptions, similar
to the Gordon growth model (24, 26). We use annual time
periods, thus t ) 0 is the current year and t ) 1,2,3, ... are the
future years in eq 1. We assume that the aggregate cash flows
paid by the oil companies to investors are deterministic and
grow with a constant risk-adjusted annual rate G > 1 until
year T when a viable oil substitute appears. This is a good
approximation because an exponential fit to the aggregate
dividends paid by the oil companies has high coefficient of
determination R2 ) 0.96. We further assume that starting at
year T + 1, due to appearance of the oil substitute, the oil
business will lose a fraction, ∆, of their market niche, while
the alternative-energy companies will gain this market
fraction. In reality, market diffusion takes time, and oil will
be gradually substituted. In the next section we account for
this effect and show that it normally does not significantly
change the answer for T.
Thus, starting at year T + 1, the oil and alternative-energy
companies will respectively pay investors 1 - ∆ and ∆
fractions of the cash flows that the oil companies would pay
if the substitution did not happen. In other words, the cash
flows Coil alt
t and Ct of oil and alternative-energy companies
are
Coil t
t ) C0G · {1, t ) 1, 2, ..., T
1 - ∆, t ) T + 1, T + 2, ...
Calt
t ) C0G ·
t
{
0, t ) 1, 2, ..., T
∆, t ) T + 1, T + 2, ...
(2)

stocks” category, investors buy their stock only because they Here we neglect cash flows generated by the alternative-
believe that these companies can potentially make money energy companies before year T + 1, which is a reasonable
in the future (after discovery of technological innovations). assumption because alternative-energy companies are cat-
Even though many oil companies also conduct research on egorized as growth stocks and have little current earnings.
alternative-energy technologies, we can neglect this because Cash flow C0 is equal to the aggregate amount paid by the
share prices of the oil companies are determined mostly by oil companies to investors at the current year t ) 0.
their current earnings. Substituting eqs 2 into eq 1, we find formulas for the aggregate
It is worth acknowledging that markets are volatile and market capitalizations P0oil and P0alt of the oil and alternative-
investors can be either too optimistic or too pessimistic. In energy companies
order to reduce uncertainty and increase the reliability of ∞ T ∞
Gt t
our analysis, we collect and use financial data aggregated
over individual companies, to eliminate idiosyncratic volatil-
Poil
0 ) ∑
t)1
Coil
t E[St |I0] ) ∑
t)1
C0
(Rt)t
+ ∑ (1 - ∆)C (RG )
t)T+1
0
t
t
)
ity, and we average our results over a 10-year period T+1
γ - ∆γ
1999-2008, to smooth over time variations of investor C0 (3)
1-γ
sentiment within a business cycle, which is about 8-10 years
(according to the International Monetary Fund). Note that ∞ ∞ t
∆γT+1
only 2008 data for individual companies is given in Table 1.
The aggregate data (summed over the companies) on market
Palt
0 ) ∑C
t)1
alt
t E[St |I0] ) ∑ ∆C (RG )
t)T+1
0
t
t
) C0
1-γ
(4)

capitalization and dividends paid is provided in Table 2.

Time until Appearance of a Viable Substitute. To specify Here we introduce the annual gross interest rates Rt )
the pricing models for the oil and alternative-energy company E[St|I0]-1/t > 1, for simplicity, assume a flat term structure of

9138 9 ENVIRONMENTAL SCIENCE & TECHNOLOGY / VOL. 44, NO. 23, 2010
interest rates, Rt ) R ) const >1, and define a nonstochastic
discount factor γ ≡ G/R. The assumption Rt ) const is
reasonable because the values of long-term interest rates
are typically similar, and, when the ratio G/R < 1 is close to
unity (which holds), the sums in eqs 1, 3 and 4 are dominated
by long-term cash flows (which are paid at t ≈ (1 - G/R)-1
> > 1). Substituting γT+1 from eq 4, we can easily solve eq 3
for γ,
γ ) (Poil alt oil alt
0 + P0 )/(P0 + P0 + C0) (5)
Next, substituting this result into eq 4, we obtain
ln[∆ · (Poil alt alt
0 + P0 )/P0 ]
T)
ln[(Poil
0 + Palt oil alt
0 + C0)/(P0 + P0 )]
Poil
0 + Palt
0 are Ct ) C0G and Calt
≈ · ln[∆ · (1 + Poil alt
0 /P0 )] (6)
C0
where, to obtain the final expression, we apply the Taylor
expansion for the logarithmic function (ln [1 + x] ≈ x when
x < < 1), and we use condition C0 < < (P0oil + P0alt), which is
easily satisfied in practice. That is, the cash flow is going to
generally be much less than the total market capitalization.
If we assume condition P0alt < < P0oil, which is also normally
satisfied (again, that the market capitalization of alternative
energy companies is much less than the capitalization of the
oil companies), we can further simplify eq 6 to
T ≈ (Poil oil alt
0 /C0) · ln(∆ · P0 /P0 ) (7)
Equation 7 is a straightforward formula for applying the
market-expectations-based approach to estimating time T
(in years) until the appearance of an oil substitute. Note also
that C0/P0oil is the current annual aggregate dividend yield
(dividend-price ratio) for the oil companies, and, therefore
its value is not sensitive to omissions of oil companies from
our data sample as long as the companies that we include
into the sample are representative of the whole oil industry.
In addition, factor ln (∆ · P0oil/P0alt) is not sensitive to the
aggregate market capitalization values P0oil and P0alt and to the
value of ∆ because normally ∆ · P0oil/P0alt . 1 and ln (x) is a
slow varying function of x when x . 1. Thus, our estimation
result for T is not sensitive to incompleteness of the data
sample and to the value of ∆. Of course, if ∆ is very small,
this is not particularly interesting from a sustainability point
of view because only a small fraction of oil would be replaced.
The last step in our method involves collecting sufficient
market data on the oil and alternative-energy companies to
find the values of P0oil, P0alt and C0, and then using these data,
to estimate T from eq 7. In Table 2, the total market
capitalization of oil companies, P0oil, (or alternative-energy
companies, P0alt) for a given year is equal to the sum of market
capitalizations of individual oil (or alternative-energy) com-
panies for that year. Similarly, the total annual cash flow C0
paid to investors by all oil companies is the sum of annual
dividends paid by individual oil companies. From Table 2
we see that conditions C0 < < (P0oil + P0alt) and P0alt , P0oil are
well satisfied. Focusing on the replacement of oil used for
motor fuels, we take ∆ ) 0.634, equal to the fraction of oil
used for gasoline and diesel (according to the U.S. Energy
Information Administration, 63.4% of oil is used for gasoline
and diesel, 8.6% for jet fuel, about 19.7% for chemical industry
feedstock, and 8.3% is mostly used as heating oil). Using eqs
5 and 7, we compute the values of γ and T, which have been
reported in Table 2. Note that here, T is the estimated number
of years beginning with the year given in the far left column.
To normalize the results to the same year, T2009 has been
benchmarked at 2009 (last column, Table 2). We estimate
that the average time period between 2009 and the time when
an effective oil-replacement technology may appear, based
on market expectations, to be approximately 131 years
(computed from eq 6, T2009 ≈ 135 years, which is close, as we
would expect). We postpone a discussion of these results
until the last section.
Effects of Market Diffusion. In the previous section we
assumed that an oil substitute discovered in year T will replace
the fraction of market share, ∆, of oil (oil products) starting
the very next year T + 1. In reality, the replacement is not
likely to instantaneously happen because the process of
adopting of a new technology or a product by the market,
that is, market diffusion, takes some time. In this section, we
examine the effects of including market diffusion in the
estimation of time T.
Under conditions of gradual market diffusion, the cash
flows Coil alt
t and Ct of the oil and alternative-energy companies
oil t
t ) 0 until year T, and Ct ) C0G · (1
oil t
- ∆ · mt) and Calt
t ) C0G · ∆ · mt starting at year T + 1 (compare
t
to eqs 2). Here ∆ · mt is the fraction of the oil (oil products)
market niche that is occupied by the alternative companies
after year T; this market fraction eventually goes to ∆ when
the market diffusion process is complete. Note that the oil
companies will occupy 1 - ∆ · mt fraction of the market at
t > T. Equations 3 and 4 now become
T ∞
Poil
0 ) C0 · ∑γ
t)1
t
+ C0 · ∑ (1 - ∆ · m ) · γ
t)T+1
t
t
(8)
∞
Palt
0 ) C0 · ∑ ∆·m ·γ
t)T+1
t
t
(9)
Summing eqs 8 and 9, we obtain P0oil + P0alt ) C0 · ∑t∞) 1γt )
C0 · γ/(1 - γ). Here, we can see that the discount factor γ is
given by eq 5 and is independent of ∆ and function mt (that
is, in the present model discounting of future cash flows
does not depend on how these cash flows are distributed
between oil and alternative companies).
From the Bass market diffusion model (27), the fraction
of the market niche occupied by a new product/technology
evolves according to differential equation dmt/dt )(1 - mt) · (p
+ q · mt), where p is the coefficient of innovation (coefficient
of external influence), and q is the coefficient of imitation
(coefficient of internal influence). The solution to the
equation is (27)
1 - e-(t-T)/τ
mt ) , tgT (10)
1 + ξ · e-(t-T)/τ
where τ ≡ 1/(p + q) and ξ ≡ q/p. Here, 1/τ is the annual rate
of market diffusion and when τ f 0, diffusion occurs
instantaneously and the equations we’ve discussed thus far,
reduce to the corresponding equations outlined in the
previous section. Conversely, when τ is very large, market
diffusion becomes very slow and it takes many years between
the appearance of an oil substitute at time T and the time
when this substitute is fully integrated into the market. As
a result, the time of interest is not T, but the time T* when
the oil alternative has penetrated the market by 50% and the
alternative companies occupy ∆/2 fraction of the market
niche. Setting mt ) 1/2 in eq 10, we obtain
T* ) T + τ · ln(ξ + 2) (11)
Note that T* weakly depends on parameter ξ because this
dependence is logarithmic.
We can solve eqs 8-10 analytically and find explicit
formulas for T and T* in the special case when ξ ) 0. In this
case, mt ) 1 - e-(t-T)/τ, and from eq 9 we obtain
VOL. 44, NO. 23, 2010 / ENVIRONMENTAL SCIENCE & TECHNOLOGY 9 9139
 Palt
∞ ∞ and 13; for τ ) 0, the values exactly coincide with those given
0
C0
) ∆· ∑ γt - ∆ · eT/τ · ∑ (γ · e -1/τ t
) by eq 6 (which are slightly higher than those given by eq 7
t)T+1 t)T+1 and reported in Table 2). Note that T *2009 weakly depends on
T+1
γ e1/τ - 1 τ and ξ, and it is approximately given by the simple model
) ∆· · 1/τ (12)
1-γ e -γ eqs 6 and 7, unless τ and ξ are large. From the numerical
solution we find that the simple model gives an reasonable
where γ is given by eq 5. Solving eq 12 for T, we obtain estimate of T *2009 when τ · ln (2 + ξ)jP0oil/C0 ≈ 30 years and
underestimates T *2009 otherwise.

T ) ln-1 1 +
( Poil
C0
alt
0 + P0
) ·
Discussion

[ ( )]
-1
∆ · (Poil alt
0 + P0 ) C0 /(Poil alt
0 + P0 + C0)
Our estimate T ≈ 131 years for the time until a replacement
ln · 1+ of gasoline and diesel (beginning at 2009) is about 2.6 times
Palt e 1/τ
-1

[ ]
0 larger than the time until “the development of alternative
Poil
0 + P0
alt
∆ · (Poil alt
0 + P0 ) 1 ways of meeting the needs that are served by resource
≈ · ln · consumption” that was assumed by Graedel and Klee (3).
C0 Palt + · oil alt
0 1 τ C0 /(P0 + P0 )
Also our estimate is significantly longer than the 20 to 50
(13)
years previously suggested by several energy experts for the
where the final expression is obtained under condition C0 , time horizon until a considerable fraction of oil is replaced
(P0oil + P0alt), which is satisfied. Under condition P0alt , P0oil, (e.g., refs 10, 11, 22, 28-30).
which is also satisfied, eq 13 further simplifies to There are a number of possible reasons for the large range.
For example, there are often subtle but persistent price signals

[ ]
Poil ∆ · Poil
0 0 1
T≈ · ln · (14)
C0 Palt 1 + τ · C0 /Poil
0 0
It is important to note that when τ < < (P0oil + P0alt)/C0 ≈ P0oil/C0
≈ 30 years, eqs 13 and 14 reduce to eqs 6 and 7, respectively.
In this case, (T* - T)/T )(τ/T) · ln (2) < < 1 (see eq 11 for ξ
) 0), which means T* ≈ T and, therefore, the effect of market
diffusion of the oil substitute is negligible. When τ ≈(P0oil +
0 )/C0 ≈ P0 /C0 ≈ 30 years, the market diffusion is somewhat
Palt oil
important but not very important because again T* ≈ T.
Finally, when τ > > (P0oil + P0alt)/C0 ≈ P0oil/C0 ≈ 30 years, the
market diffusion becomes critical because T* ≈ T(τ ) 0) +
τ · ln (2) ≈ τ · ln (2) > > T(τ ) 0), where T(τ ) 0) is given by eqs
6 and 7 (note that for very large τ time T becomes negative,
which means that the oil substitute has already been
discovered but takes a very long time to diffuse). From these
results we find that the estimate T*JT(τ ) 0) holds for any
value of τ. Therefore, eqs 6 and 7, which neglect market
penetration, produce an optimistic estimate of time when
oil is replaced by an alternative, and a very slow market
diffusion with τ > > P0oil/C0 ≈ 30 years would make matters
worse (in this case the relevant time would be T*, when the
oil substitute has penetrated the market by 50%).
In the case when ξ > 0, the analytical solution of eqs 8-10
cannot be expressed in terms of elementary mathematical
functions. In this case we use MATLAB computing language
to solve the equations numerically for different values of ∆,
τ and ξ; the results for T *2009, which indicate the number of
years between 2009 and 50% market penetration by an
alternative, are given in Table 3. For ξ ) 0, the values of T *2009
given in Table 3 exactly coincide with those given by eqs 11
embedded in long-term investment decisions and stock price
fluctuations. In 2008 the International Energy Agency (IEA)
reported that investment in renewable generation “fell
proportionately more than that in other types of generating
capacity” (31). In fact, the IEA predicted that for 2009,
renewable investment could drop by as much as one-fifth.
There are also examples in the past in which experts and
scientists were overly optimistic about the diffusion of new
technologies (8). In particular, a controlled thermonuclear
fusion for energy production was initially expected within
few decades from the first successful test of an H-bomb in
1952. However, despite more than 50 years of extensive
research, no commercial fusion reactor is expected until the
second half of the 21st century (32). Finally, differences in
estimates of T can emerge as a result of variations in values
assigned to the factors underpinning such estimates (e.g.,
the extent to which new technologies are expected to
penetrate the market).
In a recent article analyzing when renewable energy
companies might occupy significant market share, it was
pointed out that Exxon Mobil’s current market capitalization
was 28 times that of First Solar and 26 times that of Vesta
Wind Systems, both among the largest renewable companies.
Even for major corporations like General Electric, with a large
stake in wind power, stock prices are driven by other parts
of the company. Without a price on carbon, most analysts
suggest it could many decades before revenues and capi-
talization of alternative energy companies rival those pro-
ducing traditional fossil fuels (33).
Because of this, it is useful to also place our results in the
context of current reserves and consumption patterns. Proven
oil reserves have been estimated at approximately 1.332

TABLE 3. Number of Years Since 2009 until Time When the Oil Alternative Has Penetrated the Market by 50% (T *2009)
τ)3 τ ) 10 τ ) 30 τ ) 100
τ)0 ξ)0 ξ ) 10 ξ ) 100 ξ)0 ξ ) 10 ξ ) 100 ξ)0 ξ ) 10 ξ ) 100 ξ)0 ξ ) 10 ξ ) 100
∆ 1 149 148 149 149 147 151 154 149 170 189 175 297 443
0.9 145 145 146 146 144 148 150 146 166 186 171 294 439
0.8 142 142 142 143 141 144 147 142 163 183 168 291 434
0.7 138 138 138 139 137 140 143 138 159 179 164 287 428
0.6 133 133 134 134 132 136 138 134 154 174 159 282 420
0.5 128 127 128 129 127 130 133 128 149 169 154 277 411
0.4 121 121 121 122 120 123 126 122 142 162 147 270 397
0.3 112 112 113 113 111 115 117 113 133 153 138 261 379
0.2 100 100 101 101 99 103 105 101 121 141 126 248 349
0.1 79 79 80 80 78 82 84 80 100 118 105 220 290

9140 9 ENVIRONMENTAL SCIENCE & TECHNOLOGY / VOL. 44, NO. 23, 2010
trillion barrels in 2008, and oil consumption was ap-
proximately 85.22 million barrels per day in year 2007 (21).
Given a continued 1.3% annual growth of oil consumption
(31), the world’s proven oil reserves will be depleted in
approximately 2041. More optimistic estimates put the
theoretical, nonproven worldwide supply at 2.0 trillion
barrels, which for the same oil consumption growth rate of
1.3% gives us 2054 for oil depletion. The peak of oil production
is estimated to occur approximately between 2010 and 2030
(9, 34). All these dates are considerably earlier than our
estimate of the time until an alternative technology has
entered the market, which is around 2140 (131 years from
2009). Obviously, our results suggest that there is a potential
danger that crude oil will be depleted before it can be replaced
by viable substitutes.
We acknowledge that some of the difference between the
estimates for the time until oil replacement and the time
until oil depletion could be reduced in response to changes
over time. That is, as fossil fuel resources diminish, we would
expect both market and individual behavior to change. We
would expect that new reserves of conventional and un-
conventional oil may become available for exploration due
to geological exploration and advances in oil extraction
techniques or that extraction from less feasible oil fields
becomes more economically attractive. We would also expect
that oil consumption would decrease due to energy-saving
measures and/or due to responsiveness of demand to higher
oil prices. All of these factors would change our predicted
outcome.
Some of these factors should be incorporated in future
research. For example, our model could be improved by
accounting for risks to cash flows (i.e., stochastic cash flows
in eq 2) and by incorporating negative externalities of the oil
companies, both of which could potentially impact the
estimated value of T. We also think exploring the inclusion
of privately held companies and nonprofit/government
organizations (such as universities and government labo-
ratories), which are not traded on the market but carry out
an alternative-energy research, in the calculation of the
alternative-energy companies market capitalization would
be useful, although it is not entirely clear how the model
specification would be derived. Finally, it is noteworthy that
the estimate T ≈ 131 years, given by the pricing eq 1, is
conditional on the current information set I0 (note that any
forecast is always based on the information known in the
present). If new information becomes available and this set
changes in the future, then the estimate based on the updated
information will also change when the new information is
revealed (e.g., if policy interventions such as new major
investments in the alternative-energy sector are made, then
we would expect that the alternative-energy companies
market capitalization would likely increase, with the net effect
that the estimated value of T would decrease). This would
suggest that alternative types of model specifications (e.g.,
extended using integrated socioeconomic and financial
models) might be very useful.
Our approach is resource-specific (based on market
expectations about a replacement of a specific resource) and
can be applied to nonrenewable resources other than crude
oil if there are publically traded securities with cash flows
that depend on replacement of these resources or other
related innovations. As a result, the approach can be used
to address many important sustainability problems. We hope
that this study will provide a platform for integrating the
appearance of new technologies into sustainability concepts.
Acknowledgments
We thank Aaron Smith, Professor of Agricultural and Resource
Economics, for fruitful discussions. We also thank the
anonymous referees for useful comments and suggestions.
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