Climate Inc.

Business and Climate Change in the Post-Copenhagen Era

By David L. Levy

(This is an updated version of an earlier posting)

President Obama’s decision to speak at the COP-15 climate summit in Copenhagen in December 2009 cannot have been easy. Obama surely did not want to invest his shrinking political capital in backing the doomed international conference, but at the same time wanted to reassert US leadership after decades of denial and obstruction have cost it dearly in international credibility and influence. President Obama announced his decision to attend Copenhagen just as I was leaving the city after attending a conference on business education and climate change. Perhaps the President was inspired by our effort at Copenhagen Business School to infuse climate change into the business school curriculum, but I surmise that he had other strategic calculations.

Copenhagen was rebranded from a somewhat sleepy European capital to Hopenhagen,  the shiny new star on the global climate stage, showing off its clean tech sector with Vestas ads on every metro train. The conference I attended was, of course, also timed to cash in on the climate cachet of the city. I met a staff person from Copenhagen Capacity, whose organization is trying to attract clean tech investment to the region, and hoping for a boost from the media-grabbing climate conference. The city’s green credentials do not just rest on high tech renewables but on decidedly low-tech bicycles – Copenhagen is the biking capital of the Western world, with nearly 40% of commuters, many dressed in suits, pedaling to work through cold and rain. Whether they are motivated by environmental enthusiasm or the 200% tax on cars is hard to say.

Unfortunately, the Copenhagen brand is looking tarnished and, as the talks collapsed, many observers quickly renamed it Brokenhagen. The estimated 40,000 delegates, observers, and assorted groupies who descended on Copenhagen were unable to produce a binding treaty, despite the cost of more than $62 million borne by the Danish government, according to the Guardian in a special 10-page Copenhagen supplement. The Guardian noted that the delegates would emit more than 40,000 tons of CO2 during their travels and travails, which now looks like a rather bleak investment from a climate perspective. At least it must have been boom times for the retail carbon offset business.

Despite last minute by Obama and Chinese premier Wen Jiabao, the conference only generated a vague declaration of principles the Copenhagen Accord, which sets a goal of limiting global temperature rise to 2°C and recognizes that all nations need to work to that goal. A key part of the draft, a pledge to cut carbon emissions by 50% by 2050, was removed at the last minute, apparently under pressure from China. Yet even this watered down accord didn’t win broad endorsement (Click here for a Dr. Seuss-style satirical summary from the BBC).          (more…)

Some clean techsectors are overhyped, while others have unrecognized potential

by David L. Levy

When most people think about clean energy, solar and wind are the first things that spring to mind. Markets for these renewable energy sources have exhibited rapid growth of about 25-30% annually, and these sectors have attracted the lion’s share of venture capital funding and investor interest. They also tend to dominate the various Exchange Traded Funds (ETFs) that track clean energy. Yet the clean energy economy extends far beyond renewable energy technologies, including everything from power controls and storage, carbon software and trading, and energy efficiency. In transportation, while auto companies chase expensive dreams of electric cars, more economically viable opportunities lie in mass transit, bicycles, and innovative car rental services such as Zipcar. Clean energy is also generating a vast range of engineering, professional, and financial services. The transition to a clean energy economy will therefore change the employment landscape (see Green Jobs Booming and Training the “Green and White” Collar Workforce). At the same time, it’s creating new investment opportunities to rival electronics and biotech. The best investment opportunities are the unsung heroes that lie in the more cloistered parts of the evolving cleantech economy.

There are two core principles involved in understanding which green sectors have the most potential and which are overhyped. The first is that successful investing requires better insights than the average market investor. Share prices for many cleantech companies already reflect the expectation of rapid growth – companies (or sectors) have to outperform these expectations to generate significant returns. Second, the market is not rational – the efficient market thesis does not hold. This means that share prices do not accurately reflect all the information out there. To complicate matters, these two principles are somewhat contradictory: What is the point of better knowledge, if the market is arbitrary?

Well, the market is not completely arbitrary – to some degree, it’s Predictably Irrational, to use the title of Dan Ariely’s book. Investors exhibit herd behavior, leading to macro market distortions – share prices (and P/E ratios) can expand in frothy bubbles or become mired in gloom, with prices detached from underlying profits and cash flows. There are similar distortions at the sector and individual company level. When a new sector is fashionable, investors pile in, the media provides glossy rationalizations, and even policymakers can jump to support the ‘next big thing’. Many investors don’t care about underlying value and try to ride these waves of momentum, but this market-timing strategy requires nerves of steel and considerable luck.

Eventually, reality catches up and capital move on. Interest in fuel cell powered vehicles, for example, has collapsed while biofuels are on the wane. But distinguishing ‘reality’ from conventional wisdom is a considerable challenge, even within the expert community. Ford and GM’s disastrous experiments with electric vehicles in the 1980s and 1990s created a firm belief in the US auto industry there was no future for electric vehicles of any kind, even hybrids. The institutionalization of this view led US car manufacturers to scoff at the prospect of Toyota and Honda introducing hybrids (HEVs) in the late 1990s, and now the hobbled US companies trail far behind (see my 2002 paper on the auto industry and climate change). Similarly, the failure of concentrating solar thermal pioneer Luz in 1991 put the sector in the freezer for over a decade. For HEVs,  the technologies were premature for commercialization, but CST suffered from capricious public policy and the association with low-tech solar hot water (hard to patent the technology) in comparison with high-tech solar PV.    (more…)

Israel is a small country of 7.5 million people with an oversized political and media footprint. It also has a growing carbon footprint problem on its current development path, as noted in the November 2009 McKinsey report on Greenhouse Gas Reduction Potential in Israel (the 5-page summary is in English, click here for full Hebrew version). At the same time, Israel has a very strong clean tech sector, with the potential to make a huge contribution to reducing global emissions.

The country faces a serious long-term strategic threat from climate change. The largest population centers are along the coastal plain, just a few meters above sea level, and regional projections point to a decline in winter precipitation of 10-20%, increasing the likelihood of severe droughts. Although more than half the population considers climate change to be a serious threat, there has been little governmental attention to emissions until recently, and even the McKinsey report neglects the potential physical impacts of climate change.

During my visit to Israel in December 2009, I gave a talk at the Hebrew University, Jerusalem, on climate governance (drawing from A Tale of Two Meltdowns), and my Israeli colleague from the university organized a meeting with the Minister of Environmental Protection, Gilad Erdan, and several of his staff, to talk about Israel’s plans for reducing GHG emissions and ways of engaging Israeli industry. Historically, environmental protection has been a relatively low priority in Israel, in light of more pressing security and economic development concerns. Israel has a standard of living approaching European levels, yet because it’s still classified as a developing country in the climate regime, it did not have binding obligations under the Kyoto process. Nevertheless, Erdan has been pushing for the country to adopt aggressive emissions targets, and is seeking ways to get the government as well as industry on board.

The key to advancing the climate agenda in this particular environment is to link it to other national priorities, in order to elevate its strategic significance and build the political coalition needed for action and investment. The Environment ministry recognizes this, and the McKinsey report notes four benefits that would accompany climate action:

An important motive for Israel’s ambitious GHG goals is to graduate from developing to developed country status, with a view to joining the OECD. This would offer broader economic benefits through trade and investment as well as improved international legitimacy. Israel’s active engagement in promoting clean development regionally and supplying critical technologies for global emissions reductions would also bolster its international status, enhance exports, and potentially provide a source of carbon credits.             (more…)

This is a reposting of a recent piece by Marie Shields, editor of the online magazine Power and Energy. The article includes a few comments of mine.

Generating more energy from renewable sources will be crucial to our survival: not just as individual countries, but as a planet. With this in mind, Marie Shields takes a look at the current state of the renewables sector in two key regions: the US and Europe.

Europe and the United States: both Western, developed economic powerhouses, and by extension, voracious consumers of energy. Both also chasing ambitious targets for generating a portion of this energy from renewable sources: in the US, 10 percent by 2012, rising to 25 percent by 2025; and in Europe, 12 percent by 2010 and 20 percent by 2020.

What are the differences that lie under these surface similarities? Below, we take a look at the unique challenges faced by each region in its quest to safeguard our energy future.

Current status

Known primarily as Kyoto foot-draggers under the Bush Administration, the US government is once again a friend of the environment thanks to the election of President Obama last year. The Bush government gave $72 billion in subsidies to fossil fuels between 2002 and 2008, with renewables receiving $29 billion in the same period. Obama and his team must now try to redress this imbalance, starting with the $6 billion earmarked for renewable energy and electric transmission technologies loan guarantees in the American Recovery and Reinvestment Act

The countries of the European Union, regarded by many as the global leaders in renewable energy development, have a longer track record of environmental consciousness. As long ago as 1997, the EU set a target of working toward 12 percent of energy from renewables by 2010.

David Levy, Director of the Center for Sustainable Enterprise and Regional Competitiveness at the University of Massachusetts, Boston, and author of the blog Climate Inc., points out that while renewables have traditionally been lower on the radar in the US, Americans are also very good at pushing ahead with an idea once they latch on to it. “I think it’s true that there is some catching up going on,” he says. “There’s a huge amount of wind power that is now being installed in Texas; and California is leading in terms of really large grid scale solar thermal installations.

“It’s been hard to get financing. Renewables haven’t had the kind of sustained, predictable subsidies here in the US that Europe has had, and we lacked a mandatory cap-and trade-system. The European Trading System for carbon and national targets provided a clear signal for business to take renewables seriously. It has been slower here in the US.”         (more…)

UMass-Boston part of new international research project on corporate climate strategies

by David L. Levy

The transition to a global low-carbon economy will require the large-scale mobilization of financial, technological, and organizational resources. With government coffers depleted by the recession and bailouts, the vast majority of these resources will have to come from the private sector (see Beyond Copenhagen). Understanding the decision processes behind corporate strategy is therefore essential. We need to know the factors that lead some companies to invest billions of dollars to develop new low-carbon products and technologies and which sectors they are choosing. In light of current concerns about green jobs and regional competitiveness, it’s also important to know how companies choose where to invest.

The Harbor at UMass-Boston

The Center for Sustainable Enterprise and Regional Competitiveness at the University of Massachusetts, Boston, is part of a new international comparative study of corporate climate strategies in energy intense industries, a project designed to tackle these important questions. The research is a collaboration among Oxford University’s Smith School for Enterprise and Environment, the University of Western Sydney, and UMass-Boston, and is funded by a AUD300,000 3-year award from the Australian Research Council under the National Competitive Grants program. We’ll be examining corporate strategies in several energy-intense sectors, including oil, utilities, automobiles, chemicals, and metals, in the US, Germany, the UK, and Australia. We will also be looking at the influence of governmental policies and NGO strategies on corporate strategies.

The importance of corporate strategies was made clear this week with the news of Exxon’s $41 billion acquisition of XTO, a major player in the US gas industry with substantial interests in unconventional shale sources (see The Economist on Exxon’s long term strategy). Private decisions to allocate large chunks of capital to a particular technology or fuel source have a significant impact on the direction of energy development and the trajectory of carbon emissions. Burning natural gas to generate electricity creates only half the CO₂ emissions of coal, so offers the prospect of large-scale reductions in greenhouse gas emissions in countries where coal still accounts for a large share of power, such as Australia, China, and the US. There has been considerable uncertainty regarding the technical difficulties, the costs, and the environmental impacts of recovering shale gas. For Joe Romm, shale gas is a game changer that will make it easy for the US to meet a 20% emission reduction target (and see this NYT piece). The environmental impact of deep drilling and injection of chemicals near groundwater resources is giving cause for concern, however. Tom Konrad thinks shale gas has been somewhat over-hyped.

(more…)

By David L. Levy

The Financial Times reported some intriguing new McKinsey data this week on carbon mitigation costs across sectors and countries. The data indicate that there are substantial differences in costs, and predictably, that building efficiency, lighting, and HVAC are the low-hanging fruit available at negative cost. The implication is that US companies should look to efficiency measures at home before buying international offsets, though international offsets might be preferable to renewables in the US.

The surprise in the data is that mitigation costs for most efficiency measures in the US appear to be substantially below those in Europe, China, and India. The cost per (metric) tonne of CO2 saved approaches €50 (Euro) in the US for these efficiency measures, while in Europe the saving is about €25 Euro. In India and China, there is a positive cost to these measures. The exception is lighting, for which the cost saving in Europe, China, and India is €60-90/tonne. Even more surprising is McKinsey’s estimate of mitigation costs from cleaner vehicles (hybrids and pure electrics), at negative €79 in the US and about €35 in Europe (i.e. net savings).

The Financial Times does not give the basis for these calculations, and the estimates are projected for 2030. It’s unclear if McKinsey is estimating real resource costs, or the costs as viewed by consumers or manufacturers, taking subsidies and taxes into account. Perhaps McKinsey is factoring in much higher fuel prices and lower battery costs by 2030, but these values are highly speculative. I looked at buying hybrid Prius last year, which cost about $6000 more than the Mazda 6 I finally settled on. I would have to drive about 15,000 miles a year for 10 years, with fuel at $3/gallon, to break even (and that ignores discount rates for future savings). My actual mileage is only around 7,000 miles a year, which is why I don’t feel too bad about not buying a hybrid. It’s also unclear why the savings in the US, with it’s cheap gasoline, are more than double those in high-cost Europe. Perhaps its because Europeans are already driving lightweight high-efficiency diesels.   (more…)

How Much to Invest, Where, and the Risks

This is a second guest contribution by Tom Konrad Ph.D., CFA, an investment analyst and policy wonk specializing in clean energy.  This is an edited version of two articles that first appeared on AltEnergyStocks.com, where he blogs about investing.  He also writes about energy policy and economics on Clean Energy Wonk. It’s worth burrowing down into some of the links to find out more about prospects for specific sectors and companies.

A reader of my article on asset allocation for green energy investors brought up an important point: we may have green opportunities in our own lives, such as improving the energy efficiency of our homes, which will return much safer and higher returns than green stocks, especially when the market as a whole is as overvalued as I currently believe it is.

Homeowners typically have a large number of high-return energy efficiency investments they can make.  Since energy efficiency reduces energy use, it both produces returns and is very green, since pollution from fossil fuels is reduced.  Even reducing the use of renewable energy is green, because all energy production has some impact on the environment and uses resources.  Furthermore, energy efficiency reduces financial risk, because you are less subject to fluctuating energy prices if you use less energy.

Assess Your Opportunities

An energy audit is a good way to discover your opportunities.  Many utilities have programs to give customers free or subsidized energy audits.

Check with your utility (gas and electric) first to see if they have such a program.  If not, and you are a do-it-yourselfer, visit a website dedicated to helping you improve your home’s efficiency, such as the EnergyStar site. If you’re not a do-it your selfer, look for a RESNET certified energy auditor and pay for an energy audit.  Prices for audits vary a lot, but I’ve heard that $200 – $300 is a good ballpark figure.

You will be amazed, or even shocked, at how many opportunities for savings you find, even in a brand-new home. The improvements you make usually qualify for federal tax credits, as well as (possibly) rebates from your utility or state tax credits.

Any energy efficiency or renewable energy measure with a payback of less than 10 years is likely to be a better investment than green stocks or funds, especially in today’s overvalued markets.  Here are ten that almost always have great financial returns, many of which are good enough to perform even if you rent and plan to stay in one place for a year or two.  (more…)

Stocks, Mutual Funds, or ETFs?

This is a guest contribution by Tom Konrad Ph.D., CFA, an investment analyst and policy wonk specializing in clean energy.  This article first appeared on AltEnergyStocks.com, where he blogs about investing.  He also writes about energy policy and economics on Clean Energy Wonk. I’ve found AltEnergyStocks.com to have some of the most insightful economic and financial analysis of clean energy sectors and specific companies.

Investing in green energy can be good for both the climate and your wallet.  How good depends on choosing the right investment vehicles (mutual funds, ETFs, or stocks) and sectors to invest in. This will get you started.

More and more investors are investing in green energy.  According to the Cleantech Group, the Cleantech sector is now the largest sector for venture capital investment.   Green Energy is not just for venture capitalists.  Small investors have done well in 2009.  Since the market bottomed at the start of March, the average green energy mutual fund topped the S&P 500 by 13%, while the average clean energy ETF beat the S&P 500 by 18%.

Knowledgeable investors will scoff at that last statistic because, of course, most green energy companies are riskier than the tried-and-true companies of the S&P500, and what out-performs in an up market will under-perform in a down market.  That is true, but only to a point.  When I investigated it this Spring, I found that green energy stocks had outperformed the rest of the market even on a risk-adjusted basis.

Nor are all green energy companies risky.  While the sector has more than its share of profitless startups, there are also established companies which have been making the planet a greener and safer place for a long time, but now have the opportunity to benefit from rising public awareness of the need to do something about climate change. By knowing what to look for, an investor can be green without taking on excessive risk.

Stocks, Exchange Traded Funds, or Mutual Funds

The small investor has three basic options:

1. Green Energy Mutual Funds,
2. Green Energy Exchange Traded Funds (ETFs), or
3. Individual Green Energy Stocks.   (more…)

By David L. Levy

Concerns about the future of the US clean energy sector were heightened last week when John Rudolf ran a New York Times article describing plans for a 600-megawatt $1.5 billion wind farm in West Texas. With construction set to begin in March 2010, the wind farm will use 240 2.5MW turbines manufactured by A-Power Energy Generation Systems in Shenyang, China, and the capital cost is mostly financed by Chinese banks. Though pitched as a “joint venture” among a consortium of Chinese and American companies, the US contribution is mostly limited to federal loan guarantees and cash subsidies from stimulus funds for about one-third of the total cost. The utility-scale wind farm will be operated by a Texan company, Cielo Wind Power, and the financing was arranged, in part, by the U.S. Renewable Energy Group, an American private equity company (see this Jan 2010 NYT update on China’s clean energy industry).

Clean energy has been pushed as a “win-win” solution to reduce greenhouse gas emissions while simultaneously stimulating a high-growth technology-based sector with a broad range of employment opportunities. Yet while the proposed wind farm will generate plenty of clean power, it is expected to create only about 300 temporary and 30 permanent jobs. Reaction to the proposal has been harsh, judging by the comments mentioned in a follow up piece. One captured the mood saying: “Why are U.S. stimulus funds being used to subsidize manufacturing jobs in China?”

It’s important to disentangle the issues here, as government subsidies have at least three goals: short term demand stimulus, emissions reductions, and longer-term creation of a competitive clean energy cluster. As a short term Keynsian economic stimulus for the US economy, this is clearly not a good use of funds, considering how much of the spending is “leaking” internationally. On the other hand, US firms are in line to benefit from stimulus spending in other countries, so we need to be wary of protectionist “Buy American” constraints to stimulus spending. As a mechanism for reducing carbon emissions, wind farms are a relatively effective way to spend money, in terms of cost per ton of carbon, certainly more so than the “cash for clunkers” program, which has been estimated to cost more than $200 per ton. If we take a view as global citizens concerned about the climate, then the location of jobs does not matter. Indeed, finding the lowest cost source for blades ensures the maximum carbon reduction per dollar expenditure.   (more…)

But troubling outlook for manufacturing in the U.S.

by David L. Levy

Last week a student at our university sheepishly poked his head into my office and asked if I knew where the Center for Sustainable Enterprise and Regional Competitiveness (SERC) was located, as he was interested in the new University of Massachusetts clean energy programs he had heard about. Perhaps he  expected to find the SERC Global Headquarters in a shiny new steel and glass building, but for now my rather grungy office serves the purpose. The student, an African-American business major who grew up in the Roxbury area of Boston, is already interning at an energy efficiency organization serving the inner city. His enthusiasm for our plans for Clean Energy Workforce Training programs was palpable and infectious – he wanted to sign up right away. He didn’t just want a credential – he really understood how clean energy programs, by imparting relevant expertise and skills and connecting with regional businesses, will contribute to employment, economic development, and improved housing. We have the chance to create communities that are sustainable environmentally, economically, and socially.

I’ve spent months of reading about green jobs, building the new center, coordinating meetings, and writing grant proposals, but this was the moment that made it real. I had my first tangible sense of the people we could serve and the potential for our vision to connect with the needs of the community. Later the same day, I was at an event organized by the Energy Interest group of the MIT Enterprise Forum. Aside from the usual ensemble of clean energy businesspeople, venture capitalists, academics, graduate students, and assorted groupies, I was struck by how many people I met who were looking for a career transition into clean energy – accountants, salespeople,  engineers, product managers, lawyers, and others. Some had been laid off during the recession, but some were attracted by the prospect of greener pastures, greater professional opportunities, and aligning their personal values with their work in a fast growing sector. This helped to confirm the market logic behind our plans to offer shorter certificate programs for professionals.

Evidence for the boom in clean tech employment is more than anecdotal. This month Clean Edge launched a new report that provides detailed analysis of employment trends in the sector. They define clean-tech jobs as “those that are a direct result of the development, production, and/or deployment of technologies that harness renewable materials and energy sources; reduce the use of natural resources by using them more efficiently and productively; and cut or eliminate pollution and toxic wastes.” The CleanEdge report notes that the 770,000 clean tech jobs in the US in 2007 (per the June 2009 Pew report) is comparable with more mature US industries such as biotech at 200,000, telecommunications at 989,000, and traditional energy including utilities, coal mining and oil and gas extraction 1.3 million. The Pew report also found that clean-energy jobs are growing fast, increasing by 9.1% annually from 1998 to 2007 compared to 3.7% for all U.S. jobs over the same period.

Neglected in this and other “green jobs” reports is the rapid growth in the clean-tech related service sector. While the numbers are hard to estimate, I keep running into evidence of expansion in several areas. This year has seen an explosion of interest in carbon accounting and management software, with a number of independent firms being bought out by larger integrated corporate software providers such as CA and SAP. Many financial, legal, accounting, and consulting firms are building their capacity in the environmental area. One local consultancy, The Brattle Group, now lists 14 staff with expertise related to policy, economics, regulation, and planning.    (more…)