Why Carbon trading is garbage and the moral imperative

Green Wombat has an interesting blog post on the validity of carbon offsets.

Here’s an excerpt:

Carbon offsetting is controversial, slammed by some as a “papal indulgence” that allows consumers to ease their conscience for a pittance without actually changing their behavior. For their part, corporations get to look green without directly reducing their greenhouse gas emissions.

This is an interesting perspective on carbon trading. While I understand the economics behind carbon trading, it fundamentally never made sense to me. It leads to no usable endgame.

The theory is that these carbon credits will help fund renewable, carbon-free technologies. What doesn’t make sense is that this should eventually be a declining market.

The real failure, then, is the claim that the renewable projects actually reduce carbon emissions. They don’t. No where in this equation are we shutting down coal plants and using less gasoline (the primary causes of CO2 emissions). Adding a wind mill and a solar panel just means we’re producing more power – not stopping carbon emission. They’re claiming an off set when in reality it’s just an addition of electrical supply.

This is perfectly fine, but it doesn’t make more sense than say, creating a market for reducing emissions. My take on the matter (as I said in my previous post) is to fine companies for polluting – with the eventuality of banning it entirely. This is how we handle all other environmental impact measures. Why should this be different? It creates a financial incentive – effectively increasing the cost of using a particular technology like gasoline or coal burning.

More so it places the burden of the social cost of CO2 pollution on the polluters themselves. That’s a completely financially fair way of managing the impact of this. It keeps the cost of the crime at the point of impact – at the polluter – instead of putting it through a program like carbon trading (i.e. inserting inherent organizational friction). Further, if you believe that the overall cost impact of carbon in the future is higher than it is today, then carbon trading allows you to pollute today at today’s carbon prices instead of future carbon prices – the price at which the so-called carbon mitigating project is implemented in the future.

I’m not a genius or anything, but that sounds like Wimpy economics (“I’ll gladly pay you tomorrow for a hamburger today”).

The moral imperative: Carbon guilt
I sound too harsh. My real feelings on the matter are: whatever. Try something. But I have a bigger issue with carbon trading services in general. Fundamentally, they’re based on guilt mitigation from customers. This VirginBlue carbon credit, TerraPass, and others are predicated on guilt.

Guilt? We don’t buy any other product based on guilt. We buy them on their inherent value. CF light bulbs save me money. That’s why I use them. I drive less because gas in California is ridiculously expensive. But why would I pay TerraPass to build a wind mill some where instead of just try to drive less. Driving less would save way more CO2 and way more than $30. So whats’ the deal?

The guilt gives us an excuse to not have to change our lifestyle. And that, is the fundamental key in this whole debate about CO2 emissions. We know it’s our fault, but we don’t want to change. It’s too costly, too invasive, too expensive. It’s also too important to ignore. And we know it.

Look, we know how this story is going to unfold. Figuring out that CO2 is causing global warming was like when Luke Skywalker found out Darth Vader was his father. It’s plainly obvious that Luke has to kill his father, but not without some personal reconciliation first. Carbon trading is not that reconciliation. At some point, we have to admit that we can’t emit CO2 anymore and have to shut down / convert all of our emitting sources. Carbon trading serves more as a distraction to this process. As a society we need to come to that realization sooner rather than later. We’re almost there.

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The ethanol transportation issue

The Financial Times has an interesting article on the transportation issues regarding ethanol.

Here is an excerpts:

All this would take considerable investment: “Building a dedicated ethanol pipeline system from the Midwest to the coasts over such along distances would be prohibitively expensive.”

Environmentalists are, nonetheless, eager for such a pipeline to establish a system for when cellulose ethanol will, it is hoped, be developed. Until then, the problem will be finding investors to build it.

This is a bit of an understated issue with ethanol. There are a few core technical reasons why ethanol can’t be used in pipelines. Mostly its corrosive and it absorbs water. Those are bad news. Building a new pipeline would require higher quality steel (stainless) and that’s costly – even at ‘Chinese dumping’ prices. So the point made in the article is certainly a valid one.
I personally believe this reason alone should make ethanol a no-go. While I’m sure the railroads would love the business, they’re not really capable of handling the loads. We have supply issues now with only 6Billion+ gallons of ethanol. If we double this amount (and then double it again) in the coming years, our rail system may not be able to keep up.

So what should be done?
But all else being equal, the easiest way to roll-out a new fuel base is to use the current pipelines. They’re already there. They’re paid for. And we have a lot of intellectual knowledge on how to use them. So the problem in my mind is with ethanol, not the distribution infrastructure.

Butanol and synthetic diesel (from coal to liquids) could be placed in the existing pipelines making them better long-term solutions. Biodiesel can also be transported by pipeline, although it has its own set of issues. The implications, however, is what is to happen with all of the ethanol plants. We have made a big bet on an inferior product. That by itself isn’t so much a problem as where to go from here.

The hope is that if the oil industry adopts a fuel other than ethanol (even ethanol producers think butanol is a good choice), then can existing facilities be adapted to make butanol? That’s a bit of a question now. All the standard biofuels questions apply – feedstock, location, process technologies, etc. I always believe the engineering can be done as long as the technology is sound. So changing over processes might not be any more painful than, say, making a transition from corn to cellulosic ethanol.

But that is a critical part of this dilemma. If butanol, for example, becomes the end-game choice (and let’s even say that everybody, including corn farmers are happy about it and get a piece of the action), then at what point will we have spent too much on ethanol? If butanol commercialization is 10 years away, then should we not build out more than, say, 10 Billion gallons of ethanol capacity? At some point, the transitional cost for the industry becomes prohibitively high – just as it has become with our pipelines. A transition, at some scale of the ethanol industry, may not be economically feasible.

That’s a risk factor that ethanol producers will ultimately have to face. I think the real market leaders will be those that are able to incorporate these risks into their business plan. ADM, POET, and others seem as though they’re fairly knowledgable and capable companies. Some startups like Mascoma and Verenium seem pretty level-headed as well. So barring a disaster, I’d bet that the leaders of this market will be able to manage through the turbulence.

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GMC Yukon Hybrid looking good

The San Jose Mercury News reported a successful test drive of the 2008 GMC Yukon (Chevy Tahoe) Hybrid. A Hybrid SUV might sound like an oxymoron, but it will probably have a much bigger impact on reducing gasoline demand than smaller vehicles. It’s important to note that while SUVs seem gratuitous, there are people who get a lot of benefit out of them. So a successful big SUV Hybrid

If anything, the driving experience of the GMC Yukon 2-mode hybrid was even more seamless than in other hybrids I’ve driven. It’s all pretty complex, considering that the vehicle also includes GM’s Active Fuel Management (AFM) system that cuts out half of the V-8’s cylinders when they’re not needed.

This report gives me some updated data to add to high level comparison of hybrid cars a few weeks back. In particular, some mileage and pricing data should be helpful. The article notes:

The 2008 2WD GMC Yukon with a 5.3-liter V-8 gets 14 mpg in the city and 20 mpg on the highway, according to the government’s www.fueleconomy.gov Web site. Using Bly’s numbers, that means the hybrid (which uses a 6.0-liter V-8 for better low-end torque) ought to get 19 to 20 mpg in the city and 21 or 22 mpg on the highway. The vehicle is undergoing certification right now, he says.

and goes on to say:

Prices haven’t been announced, but expect the hybrid versions of the Chevy Tahoe and GMC Yukon to be similar to those of its top-line gasoline trim levels. For Chevy, that’s the Tahoe LTZ at $45,680. For GMC, that’s somewhere between the $39,890 Yukon SLT and the $49,910 Yukon Denali.

These numbers are slightly worse than anticipated, but are still quite respectable. So its comparison to the entry-level standard models should look something like this:

I should re-iterate that these numbers aren’t terribly rigorous. They’re merely a way of looking at two variables (mileage and up front cost) to see if hybrids deliver some additional inherent values. While most do just fine, the ones that struggle are the ones that give insight (the Honda Accord Hybrid most notably).

The Yukon/Tahoe’s numbers look okay. The additional price could stand to be a little cheaper. But for the narrow perspective of this analysis, it’s a good entry for this size SUV.

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Jim Cramer comments on the Ag industry

Jim Cramer has critical words about the condition of the agriculture industry.

Click to view video.

And as all things Jim Cramer, you need to hear it direct from his mouth.

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Energy Essay 2: Proposal and Ramifications

So if fixing the global climate issue was a McKinsey assignment, what would they do? Well, it turns out they’ve thought a lot about this issue and have done research on it. (Amory Lovins refers to this research in a series of lectures he gives to Stanford University last Spring).

My own solution is a little simpler (and perhaps a bit on the stupid side): fine polluters.

No, not carbon trading. Not REC purchasing. Stop emitting CO2. Period. No fine print. No details. Ban it. Like steroids in baseball and dodgeball in elementary school.

I’m sure my professors at Stanford are having heart attacks at this very moment. But hear me out.

Why?
The short answer: the social costs are too high and have grave impacts to the future of the world economy (economy in the context of individuals able to create access to necessities to live – not in the context of having the opportunity to make money).

Government policy is supposedly supposed to constructed in the best interest of the people of a particular country/state. Well, this particular climate change issue has really skirted what has been done in the past with similar issues. The U.S. has a long history of companies polluting communities and having to pay to clean them up. There are fines and permitting in place to manage these issues. We’ve done what I’m suggesting before – but we’re not beating on this drum this time. And there’s a reason for it.

We’ve done it before
CO2 emissions have an extreme social cost. It has shown real effects on our planet (that we are measuring today, not sometime in the future). It has serious health effects (if you have any doubt of the potential severity, visit Beijing or Shanghai). These were the same reasons to tackle acid rain, ozone depletion, MTBE, and even child labor. These are all instances when there were non-market, government-related sanctions put in place that addressed these problems. In fact, these are considered big successes in regulatory affairs. And I don’t know anyone has noticed that we don’t use CFCs anymore. I don’t know anyone who isn’t happy that we don’t create acid rain (SO3 pollution). And most Americans are hopping mad about children actually working anywhere in the world. And lest we forget that we fought our bloodiest war over slavery – primarily over its moral and economic implications to our society.

So what’s the problem with CO2 emissions? Why is there such a lack of energy policy for such a critical issue? We’ve banned things like this before. What’s the deal?

There’s a lot to say on this point, but let’s just sum it up with the word “politics”. Or perhaps, the lack of politics. The government is still supposed to reflect the will of the people. And I’m pretty sure the people of the United States (I’m sure any other country can insert their name here) don’t want to destroy the environment and create severe health effects. But there are two issues complicating the matter:
1) CO2 pollution is a by product of energy production which is directly correlated with economic growth
2) Industries that pollute (oil & gas, power producers) have a huge vested interest in maintaining the status quo and have strong influence on political representatives

The details of these two realities are that (1) is predicated on the notion that energy use requires pollution (it doesn’t really; it’s a technological choice) and (2) No company is above the law such that it ought to be legally able to knowingly destroy citizens’ environment.

Am I being too radical?
Probably. Fining CO2 emitters could be chaotic. I mean, we really don’t have many alternatives. But I’m not much of a doomsdayer. I think we’d all live through it and be better for it.

We’re already seeing policy movements towards this end. In April, the U.S. Supreme Court gave the EPA the legal leyway to regulate auto emissions. This was rather underreported by the press (compared to the coverage the iPhone got anyways) and could have far-reaching ends in the hands of a more progressive administration.

In June, the California Energy Commission effectively banned any new power developments that burned coal and emitted CO2 (essentially endorsing a coal-fired gasification process for generating power). That not withstanding we’ve seen designs from SoCal Edison and BP for similar power-producing designs through gasification of hydrocarbons.

Big bad PG&E – the faceless, monolithic villain of the movie Erin Brochovich – is winning awards for its clean energy development programs (well deserved I think).

So although we probably don’t have enough political will to demand that corporations that pollute, there is enough rationale for corporations to stop emitting of their own volition. Fining would just dramatically tip the scales, I think. If that happened, we’d see a real explosion in the adoption of clean tech – not just these small science projects that get so much press.

If the market is moving on this why regulate it through Doug’s crazy fines?

There are a couple reasons:

(1) You could argue that the fines are really a right-pricing measure. Essentially the dialogue about global warming/climate change has ramification on the pricing of how much we pay for these resources. So now days we pay for both health effects and electricity. But we don’t want to pay for the health effects (and you get into dubious arguments about causation). But the fines would essentially be a form of “right-pricing” these impacts on the environment. Producing electricity without polluting, then, would be a money saver for all involved.

(2) Private industry only has a mild reason – mostly PR – to embrace so-called green technologies. A fine would make it real. “Go clean or go out of business, signed The U.S. Citizens”. Any shareholder could respect that. And some are already requiring it. At the moment, we’re only tiptoeing down this road. I would argue that we could make more money faster if there were more urgent reasons to develop and adopt new technologies.

(3) Some companies don’t really believe global warming is a problem. Neither do many politicians (I can name some if you’re interested but I’m not into putting people on blast in my blog). And that’s the real insidiousness to all of this. Companies are claiming they’re going “green” when they’re really not. They’re trying to weather bad publicity with adopting facades of green adoption. But much like the Wizard of Oz, they will be uncovered in the long run. My fining strategy would serve mostly to uncover these organizations and expose them. And hopefully put them out of business.

The caveat: The problem is a game of chicken. You can just go shutting down power producers – we need the electricity. But in the end, I’m pretty sure that corporations would back down to politicians. The question is weather or not we have brave enough politicians (I wouldn’t be on that at the moment).

Where should the money go?

Down a hole for all I care. The market will make the investments it needs to in order to deal with the imposed fines (or generally high prices or customer outrage). So I don’t think it needs to go into energy research programs. There’s really enough money floating around r
ight now to do all the development we need (we have $billion hedge fund managers – that’s easily evidence that we have too much money). So the government need not necessarily use funds from a funding a program for that. But it could – it wouldn’t be a bad thing.

I would endorse putting it in the hands of the communities served by individual polluting facilities. That would seem to re-appropriate the costs to those most directly affected by pollution.

But mostly, however, we should probably put it into schools. Our national curriculum hasn’t gotten an upgrade lately. And there’s some schools that could really use it. So give it to the kids.

I should also note that fines need not be monetary. In this sense, you could also revoke operating licenses or put in severe compliance restrictions. So the need to collect money need not be a driving force, rather than politically stop polluting.

So I know this is all crazy, but I think it could work. It’s elegant and addresses the issue directly. The strong will survive. Although it sounds anti-capitalistic (and it is), I think it would help preserve the capitalist playing field we have developed. Like ejecting basketball players for flagrant fouls. It will make way for some really great things to happen around the world. We’re only 150 years into the industrial age and we’ve almost destroyed the planet. That’s stupid. We should stop polluting when we know about it and get on with our business. We have at least 10,000 more years of money-grubbing to do. We shouldn’t let pollution get in the way.

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NBB CEO on Jay Leno’s Garage

Interesting video of NBB CEO Joe Jobe on Jay Leno’s Garage:

http://www.jaylenosgarage.com/video/index.shtml?vidID=137222

This interview gives very basic information about biodiesel. What’s most interesting to me in this video is that Jay doesn’t seem very excited to talk to this guy. I guess he only turns on when there’s a large audience and lots of lights.

Nice tractor though.

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Dow and Crystalsev to build PE plant

Dow and Brazilian sugarcane ethanol producer Crystalev are to build a plant to produce polyethylene from sugarcane.

From the press release:

The new facility will use ethanol derived from sugar cane, an annually renewable resource, to produce ethylene – the raw material required to make polyethylene, the world’s most widely-used plastic. Ethylene is traditionally produced using either naphtha or natural gas liquids, both of which are petroleum products. It is estimated that the new process will produce significantly less CO2 compared to the traditional polyethylene manufacturing process.

“This joint venture will provide Crystalsev with an excellent opportunity to diversify its businesses through the development of value-added products made from ethanol as part of an environmentally sustainable project,” said Rui Lacerda Ferraz, president of Crystalsev. “This project will bring the optimization of synergies and the creation of new and professional growth opportunities. For such an important enterprise, we could not have found a better partner than Dow, the global leader in the polyethylene market and a company that works with state-of-the-art technology.”

This is a significant for a few reasons.

First, Dow isn’t the only big chemical company that is looking for alternative feedstocks for its products. DuPont has also been looking for sustainably-developed products to replace its petroleum-based counterparts. The underlying cause of these developments are the high price of oil. The harbinger of this trend was the sale of GE Plastics. GE’s matra has long been that it would not compete in industries where it can be #1 or #2. One could argue that this is a referendum on the profitability of the chemical industry with high oil prices.

Second, it’s telling that Dow chose a Brazilian company to partner with. From a cost perspective it’s not – Brazilian sugar cane is significantly cheaper than U.S. Corn. But this moves underscores the value of the investment opportunities by developing a low-cost bio-based alternative to food-based products. If this venture is successful, it could mitigate Dow’s revenue risk away from the price of oil. That could have some great benefits in the future.

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Ford fuel cell vehicle breaks land speed record

Ford broke a land speed record this past week. The vehicle was based on the Ford Fusion model and utilized an advanced hydrogen fuel cell and a 700+ hp motor to reach 200+ mph.

Here’s a video of the car:

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Good Technology

Cheap catalytic biofuels reactors
Researchers at the University of Minnesota have developed that will gasify biomass into syngas much more efficiently. Essentially, you can use a reactor 1/10th the size in order to get a given amount of syngas. This could have a great impact on the amount of capital investment required to push this technology. Biomass gasification, in my own humble opinion, has a better opportunity to scale and get adopted then using enzyme-based chemistry. While they both can coexist, this technology could put the probability of uptake and success in its favor.

Technology Review Article

Silicon gets a step-up
NREL has discovered a configuration of silicon that drastically improves the potential efficiency of solar cells. Essentially, the crystalline nanostructure will generate two electrons for every photon of light. Current silicon technologies only generate 1. This would extend the thermodynamic limit from 30% efficiency to around 60% efficiency. Further, it should be easy to manufacture, keeping the impact on pricing low. That’s a huge impact to this technology and could be a complete game changer on the solar business model. Now, if we could find cheaper ways to install them….

Technology Review Article


Getting closer to hydrogen
Researchers at Penn State have developed a Ti-Fe-O material that facilitates the production of hydrogen from water and light.

GreenCarCongress post
Penn State article

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Cosan updates its IPO

Cosan is planning to raise $2 Billion in its NYSE IPO.

From AP article:

Assuming an offering price of $17.04, Cosan expects net proceeds of about $1.62 billion, or $1.86 billion if the underwriters’ overallotment option is exercised in full.

The company expects to use the proceeds for an ethanol greenfield project, for the expansion of existing facilities, to purchase equipment and machinery, and for general corporate purposes, including future acquisitions and investments in technology, infrastructure and logistics.

This is a great opportunity for Cosan as it appears to be a big play on this industry. They’re already cited to be the second largest ethanol producer in the world (which sounds strange given that ADM and POET claim to have nearly identical capacities – so I’d concede a 3-way tie). But Cosan seems to be trying to be world-wide player ahead of its U.S. counterparts. $2 Billion will certainly help.

Cosan will trade with the symbol CZZ.

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