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Why Can’t Tom Friedman Find Cleantech?

Thomas Friedman, one of my favorite authors, had an editorial this week entitled, “America must lead in energy technology“. As with most of his recent writings and speeches, it’s targeted around the thesis of his Hot, Flat and Crowded book, which basically argues that a combination of climate change, globalization, and population growth are creating a crisis point in energy and resource use that must be dealt with by utilizing a shift of technologies to cleaner and more sustainable economic practices (some of us call that cleantech). Not a new idea, but as usual Tom Friedman articulates it well.

So for those of us who work in the trenches of cleantech, I found the language he used quite delightfully flighty.

Number one, when it comes to actually doing something about climate change, Friedman can’t seem to get beyond the idealists idea of a carbon tax.

In his article he mentions

cap-and-trade/carbon tax
tax on carbon
long term price on carbon

But not one mention of carbon trading or Kyoto, or CDM, ETS or any of the carbon trading work ($125 Billion in 2008) that makes up the vast majority of the current global response to climate change in process now.

The basic idea here is that the theoretically most efficient way to “put a price on carbon” is to tax carbon. Of course this ignores the reality on the ground that we are really, really bad at making efficient taxes, and the best real world that we absolutely have to have involved to succeed (read India and China) is even worse. So carbon tax basically means carbon trade war if you’re not careful. In the real world, a global response of cap and trade ends up being more efficient as it allows the melding of international trade schemes better, lets industry find the least cost path to comply, and also actually means compliance can be assured. And carbon tax ignores that fact that any economist worth their salt knows full well that a tax ensures some level of revenues to the taxing goverment, but does not necessarily mean you hit your abatement targets (some people just pay the tax). And didn’t we say it’s all about hitting the abatement targets? In the real world we’d actually like to do that with as LOW a carbon price as possible, as long as we hit the critical abatement levels. Unless you don’t like your current standard of living, in which case the fastest way to fight climate change is just take it out of GDP.

We as a globe entered into cap and trade and carbon trading as the best alternative that would 1) ensure we actually reduced GHG emissions enough (a tax doesn’t even pretend to do that) and 2) do it in the least cost path with the least economic collateral damage.

I heard him speak, so I’m pretty sure he knows how this works. But Friedman seems blissfully uninterested in diving down into the details on “how”, prefering to stay only in the “why” realm. Maybe because the how is actually hard. Unfortunately, when it comes to climate change action, the devil is ALL in the details of the how.

Number two, Friedman must really, really hate the term cleantech. He uses everything else he can think of.

clean power 2 mentions
clean-energy hawk 1 mention
green hawk 1 mention
E.T. 3 mentions
energy technology 3 mentions
green-tech 1 mention
clean energy 3 mention

but not a single mention of the word cleantech or clean tech. Now do a google search and see how those terms compare. It’s not like cleantech is one of the top segments of the venture capital world. And it’s not like cleantech investment isn’t anchoring billions upon billions of market and policy dollars. Oh wait, yes it is.

I guess my only request is this, Tom, please come back to the real world, and give the guys in the cleantech and carbon trading trenches their due. They’ve been working hard for years on the topics you are just now discovering. And yes, I have a vested interest. That’s because I’m actually working in the trenches.

Neal Dikeman is the founder of Cleantech Blog, and the Chairman of Cleantech.org, and Carbonflow, and a partner at Jane Capital Partners LLC.

Cap-and-Trade: How it works and why it’s the been the option of choice

In the run up to Copenhagen and the debate over Waxman-Markey, I think it’s worth laying out some of the key debating points on how cap and trade works and why it’s been our weapon of choice to date in the climate change fight.

I like to think of our carbon and energy problem as follows. We built the first industrial economies and long term economic growth model in all of human history in the last 200 years on a cheap, available energy base, in part by effectively running down our existing inventories of energy stocks from the least cost to the most expensive. We now need a lot more inventory each year (since we’ve been successful and are a lot bigger), and we’re into the expensive layer of our inventory, so it’s hitting our global cost of goods heavier than before. And we know we need to find more sources to replenish inventories, and we know that if we move immediately to higher cost sources we’ll pay the price in GDP.

We also know that producing and using those inventories had a non zero (and we argue about the level) cost to our environment that we have not measured well, but have been working on reducing for the last three decades. But we’ve now run into a new part of that cost with carbon or GHGs that’s very large, and is going to take a much larger and bigger hit to take care of, and depending on your view, has an aggressive time fuse on it. Essentially this means pricing carbon into our economy – which will basically add a whole new cost in all of our supply chains, a cost that varies from country to country and industry to industry, and will shake up comparative advantage in trade. And because it’s global, as far as the environment is concerned, for carbon, unlike most environmental pollutants, it doesn’t matter where in the world it’s emitted or reduced. So our problem is China’s problem is Europe’s problem is our problem.

So we start with a first climate change goal: to reduce the carbon emissions levels in the economy, by a level that we all debate by a point in time that we all debate. But we have to realize that while we do this, we do need to replace those energy supply inventories to both keep us where we are in GDP, and find new ones to sustain growth, or we’ll solve our GHG problem simply by being really poor. And we have to remember that adding costs has to be paid for, and it isn’t “business” that pays for it, it’s us, with business as our proxy.

So my corollary is the goal should be to squeeze carbon emissions out of the global economy in the fastest, least cost path, and as fairly as possible. Sorting out what that means and how to do so is the rub. But part of fair should mean a “do no harm” principal for the economy as well as the environment – meaning that when we start, as far as possible no country or group or industry or company within industries gets penalized out of the gate without either compensation or enough time to adjust. Think of it like eminent domain. If we give something up to the greater good, we deserve to get paid for it.

We have two main ways to go about it, place a tax or penalty on the emissions, or constrain the emissions factors (like power generation, driving, etc.) Cap and trade is essentially a hybrid of the two. The cost of such carbon reduction, because of the ubiquitous nature of carbon, and typically inelastic demand curves for most energy and carbon intensive products, is spread across all consumers in any scenario, but depending on system design can be borne disproportionately by some groups, industries or countries. Our special challenge is because of that global nature, we literally HAVE to have a solution that can engage and work in every country. Unlike cleaning up a local toxic spill, where we can fix ours without our trading partners, in carbon, if China fails, we fail. So if we try and succeed, and China does not try, the environment loses, and we lose worse.

Carbon Tax – Basically with carbon tax the government picks a series of carbon intensive industries or products, assigns a carbon value to them by one of a number of methods, and levies a tax on them. It’s often touted by economists as theoretically the cheapest method, and generally an industry favorite because they know how much they’ll have to pay and can plan.

But carbon taxes have big drawbacks. You can’t be sure you’ll actually get the level of reductions you want, because the tax fixes price, not volume. Worse, carbon is a global problem, and getting global tax codes to mesh together is virtually impossible (we can’t even do it inside the US), which means we may end up with everybody paying a different price of carbon and a complete mess. That certainly would throw the efficiency argument out the window. The next big disadvantage is that if you don’t get the tax level and structure exactly right, businesses and consumers get hurt in unpredictable ways, and have little room to adjust if we get it wrong. So while theoretically better, it’s not a very “fault tolerant” plan.

Main advantage is that you have a known cost to industry (which is why most industry prefers tax to trade or command and control). Next main advantage is that the the government gets lots and lots of revenue, which is why many politicians favor it.

The second option is classic environmental “command and control”, if you’ll excuse the perjorative sounding nature of that term. Esstentially the EPA or equivalent simply regulates every one who produces GHGs, and tells them how much they can produce through a permitting process.

The advantage is that you know exactly how much emissions reduction you are going to get. The disadvantage is that you may pay much more than you thought, and sink your economy, especially if your trading partners are more lax on either regulation or enforcement, and you let the EPA pick the winners and losers. The other disadvantage is that there is no upside. Under no circumstances will you ever get more reductions than you thought, unlike cap and trade, where done right, you may.

Cap and trade is the middle ground (which is why it keeps coming up). With cap and trade, the system operator (UN, EU, EPA, CARB etc) designates how many credits can enter the system, and prints, them like money. It then designates how many credits a company must turn in each year or period per unit of production (ie 0.5 tons/MWH of power produced), and penalizes or shuts down the company if they don’t turn in enough to meet their obligation. So no more emissions from a regulated sector will occur than credits (often called allowances) exist.

Then the regulator decides whether to sell the credits to the industry that needs them, or to simply allocate them (often based on some measure of current production). Both methods have pros and cons, and in practice have nothing to do with environmental protection or the price of carbon (the total level of credits and the relative level of credits to demand sets that) and more with subsidizing one industry vs another, or collecting revenue for the government.

Finally, the regulator can let offset credits be produced from the remaining unregulated sectors (or from inside a regulated or “capped” sector if appropriate adjustments are made), and sold to the emitters (it simply adjusts the cap so that the total level is where we want it to be). The advantage of this is that the regulations can be phased in easier, and we get a more equal price of carbon.

And what happens is that in unregulated sectors any time potential reductions exist (eg, a very inefficient emitter that could be shut down or run more efficiently), carbon developers pay up for the rights to the reduction, and that emitter finds it’s more profitable to do the right thing. The downside is that it looks like emitters are getting a profit off emissions. In reality, they are getting paid to reduce emissions for you and I, at just the right price.

Then emitters and financial parties buy and sell these credits from the government or each other or develop offset credits in a race to pay the least. And since the regulator starts reducing the number of credits it puts into the system, it’s kind of like musical chairs, the slowest, most carbon inefficient company gets left out and has to shut down, or shifts to a lower carbon production in order to stay in business.

The main advantages of cap and trade – 1) it assures us that we will meet our target goals like command and control 2) but it allows industry the flexibility to figure how to meet them cheapest (which is good for all of us), 3) it tells us what the real price (or cost) of carbon actually is, 4) and it’s better at equalizing the price of carbon so everyone pays the same across different industries and geographies, 5) in practice it costs less, and is easier to implement in a multicountry environment than command and control or tax.

Main disadvantages, it takes some time to get up and running, and makes it look like (not really true), that emitters are making money off it. Trust me, if they thought it was a profit center, they’d be all over it. The final disadvantage is it depends on the government operator to manage a market, something where we’ve had some good success (like NOX and SOX trading and up until recently the Fed), but can be susceptible to politics as usual.

In essence, you can think of cap and trade as a carbon tax with a tax rate that varies with the market (going up if industry is worse at producing carbon reductions than the government thought and down if they are better, and similiarly going down when the economy is bad and we can’t afford it and up when the economy is strong) and a tax base that is higher for emitters and emissions intensive industries than for those more efficient.

In any case, all three options need a lot of money spent on new technology and good measurement and verification. All three options will be expensive, and will be paid for by you and I at somepoint. And in practice, we are doing all three options to varying degrees right now.

Neal

Here we go again . . .or not. Carbon trading vs taxes in economic dislocation

By Marc Stuart

One of my favorite quotes of all time I heard attributed to Barry Diller, the guy who worked for Rupert Murdoch long enough to get the Fox Network up and running, thereby kick starting The Simpson’s and many family moments of mirth in the Stuart household. At some point, Barry purportedly said “Anything worth doing is worth doing badly”. Which Fox undoubtedly proved at its outset. But what Barry meant is that you can spend all your time passing around memos and white papers and studies on what to do and bureaucratize something to death. Or you can just do it and figure things out on the fly.

I think a lot about that when I think about emissions trading and the way these first couple years have fared. We’re now in the 5th year of trading emissions in Europe and there is plenty of evidence that while “badly” may be a bit strong, there are at some serious ambiguities regarding its success. The first three year phase (2005-2007) saw the emissions commodity take a 99% price dive, from over €30 to less than 30 eurocents, in a period of a year or so. Clearly, if it only costs 30 cents to toss a ton of CO2 into the atmosphere – hey, my kids could do it with the spare change they find in the couch while watching The Simpsons.

As the second Phase of the European market begins its second year, it’s starting to have the same familiar smell of Phase 1. Ok, today we’re not that far along – the European carbon allowance is down only some 65% from its peak, and what was €30 is now meandering under €10. What does it mean? Coal to gas switches will go the other way – buy cheap coal and cheap allowances and you’ve got an economic winner that doesn’t put money in Putin’s pocket. Wind development in Europe will finally slow. Carbon capture and storage plans are being shelved. Emission credits from developing countries – the kinds that EcoSecurities specialize in, have followed the same price trajectory. With the prices so low, people are reconsidering the financial viability of investments to lower emissions and in some cases, stopping projects altogether and tearing up contracts. Banks who bought forward emission rights at €15 are deeply underwater in yet another new and inexplicable market. The net result is that certain hydro projects in China are unlikely to get financed, smelter efficiency upgrades in South Africa will go back to the drawing board and landfills in Brazil will keep bleeding uncontrolled methane into the atmosphere.

Bottom line is if you want any kind of emissions mitigation in the developing world, you better hope for some kind of price recovery in the carbon market. And soon.“Cratering the Carbon Market – The Sequel “- will of course give critics of emission trading another opportunity to trot out their arguments that trading doesn’t work and the only way to control emissions properly is via a tax. I might give some credence to that argument – if the price crash in the two periods was created by remotely the same thing. Well, on a macro level, of course it was – imbalance of supply and demand – but here’s where it gets tricky. Phase 1 was caused by too much supply, when EU governments failed to set individual emission caps at the right level, having been convinced by their industries that “just a little more” wouldn’t hurt anybody. Conversely, the Phase 2 retreat has been caused by an unprecedented free fall in demand, when European industry followed Wall Street and the rest of the world into economic strangulation and basically went on vacation, just waiting for somebody, somewhere to order something. In latter 2008, steel production in Germany dropped 30%, thermal electricity in Spain more than 20%, auto production in the UK virtually ground to a halt. Hey, if China’s industrial production dropped double digits in response to the crisis, what the heck do you think Europe – not exactly known as the most cost effective place to do business in the first place – is going to do?

Same thing, some will say – it shows that the market that emissions trading can’t work, that it’s just a shell game foisted upon public policy by a financial sector always looking to create new markets and products. Carbon tax , they say, that’s far more transparent, fairer, effective, can’t be gamed. Just one problem – it simply doesn’t reduce emissions. Unless you get so draconian as to be politically suicidal – not a common condition among our elected leaders. Sweden has had $100 plus carbon taxes for nearly two decades and emissions are down just a tiny fraction in that time. Other carbon taxes in Europe at best have managed to halt emissions rise. And here in the US, you can consider the de facto carbon tax of $200 a ton we managed to layer into the gasoline supply system in 2007 and 2008 while oil climbed to nearly $150 bucks a barrel. Yep, a hundred gallons of gas emit a ton of CO2 – so when you move a gallon of gas a buck, it’s costing you another hundred dollars to emit a ton of CO2. And we barely moved the needle on consumption when all of a sudden we were paying $4-5 a gallon. If ExxonMobil is out there advocating a carbon tax – as they reportedly are – my bet is that their research shows that this is the best way to not impact their sales. Plus they know that in American politics, asking for a tax is about the best way to make sure that nothing happens If you want to reduce emissions, you simply have to cap emissions on as big a part of the economy as you can swallow, stick to the cap and keep ratcheting the cap down. Over decades, not years.

What the small EU experiment has shown – and yes, covering some 6% of global emissions means it’s small – is that there probably is a role for a central emissions bank to tweak emissions rights supply during extreme economic dislocation. Probably not quite as needed on the top end of the market (where emission credits and domestic abatement can mitigate price spikes), but there could be a role there as well, particularly if the Clean Development Mechanism (CDM) continues to underdeliver because of bureaucratic morass, even in bullish economic periods when emission reductions are highly valued.

Despite the initial snickering of being on Fox, The Simpson’s are now among both the longest running and most profitable shows in the history of global television. The network that Barry Diller started with entertainment equivalent of baling wire and scotch tape has gone from being a running joke to televising Super Bowls and having the highest rated shows on the air. Perseverance with emissions trading will similarly pay off in the end far better than any carbon tax. Doing it comparatively “badly” in a first half decade of experimentation has taught us well how to improve the system to achieve the necessary sustainable downward ratchet of carbon emissions over the next 100 years.

Marc Stuart is the Co-Founder and Director of New Business Development for EcoSecurities, a global carbon trading firm. The views expressed are his own and do not necessarily represent the view of EcoSecurities