Climate Inc.

Note by David Levy, Climate Inc. editor: I’m posting this introduction to a new book, Upsetting the Offset by my academic colleagues Steffen Böhm and Sidhartha Dabhi because it presents an important and well-argued series of critiques of the carbon markets. Some readers might find that they disagree with the analysis in the book, but it’s important to engage in these debates if we are to trust governance of the climate system to market mechanisms.

An introduction to the new book ‘Upsetting the Offset: The Political Economy of Carbon Markets’, edited by Steffen Böhm and Sidhartha Dabhi (MayFlyBooks, December 2009), by the authors. The book can be ordered or downloaded free here.

Dr. Steffen Böhm is Lecturer in Management and PhD Director at the University of Essex, UK. Siddhartha Dabhi is a researcher at Essex Business School, University of Essex, UK.

December 2009 saw world leaders come together in Copenhagen to try to agree on a post-Kyoto deal to save the planet from global warming. But the attempts to hammer out a new deal met with an apparent failure. But was it a failure? Many commentators would argue that the apparent failure can be seen as a welcome breathing space to question the underlying mechanisms that are supposed to help us fight climate change. In this way, Upsetting the Offset is a very timely book, as it critically engages with the political economy of carbon markets, which have emerged as the dominant instrument to mitigate climate change.

This book argues that carbon markets are one of the most ambitious projects of neo-liberal capitalism, in its attempt to create a business opportunity out of what many would label as the most important issue mankind is currently facing: climate change. The underlying ideology of carbon markets is to internalize and reduce the risk of climate change by putting a price tag on carbon emissions. The core assumption is that the power of a self-regulating market will achieve maximum possible reductions of carbon emissions at the lowest possible cost. The book, which comprises 30 chapters written by some of the world’s most renowned critics of carbon markets, shows that this efficient market is a myth. All the evidence collected so far about the actual workings of carbon markets points to the alarming conclusion that carbon markets, instead of reducing carbon emissions, provide perverse incentives for the increase of carbon emissions, while also having detrimental social and environmental impacts on local communities in many so-called developing countries of the Global South.

Part I of the book introduces carbon markets, focusing specifically on the logic of the Clean Development Mechanism (CDM), one of the most prominent carbon markets administered and controlled by the United Nations. The first introductory chapter by Steffen Böhm and Siddhartha Dabhi gives a broad overview of the most recent climate change science and the political steps taken so far towards its mitigation. The main aim of this chapter is to form a premise for why the authors of this book might want to ‘Upset the Offset’ and engage in a critique of carbon markets. The second introductory chapter by Larry Lohmann talks about the formation of carbon markets through the commodification of the atmosphere. In this chapter Lohmann illustrates in detail how carbon emissions are converted into an abstract, quantifiable commodity, thus opening up endless avenues for creative accounting, a huge trading market, and leading to financialization and securitization of a “fictitious commodity”, to use Polanyi’s term.

Part II of the book comprises a range of case studies from Thailand to Chile, from Uruguay to India, presenting rich details of the often negative effects of CDM and voluntary offset projects on local communities in the Global South. The CDM has been packaged as a ‘win-win’ strategy where technology transfer takes place bringing emissions reductions and sustainable development to the South. But on the ground, it turns out that what the rich North pays the poorer South for is continued pollution and fostering inequalities between the masses and the elites. With its rich empirical detail, this section of the book shatters the false  illusions created by carbon market proponents, who have been promising a green capitalism where profit maximization is possible in an environmentally sustainable and socially just way. While tree planting, biomass electricity generation and wind power may sound green and ethical, it turns out that they often are too good to be true.    (more…)

Smart cities need smart buildings connected to a smart grid. The business opportunities associated with Demand Response, smart buildings, and smart grid have been gaining a lot of attention recently, with articles just last week in The Economist and Barron’s. Last summer a Cisco executive caused some ripples by forecasting that the convergence of IT and power systems would present a bigger opportunity for the company than the internet. Barclays Capital recently forecast that smart grid revenues from metering, monitoring devices and communications technology could reach $40 billion a year by 2015, compared with less than $10 billion today. Smart grid ought to yield substantial carbon reductions at negative cost, i.e. the investments pay for themselves with a relatively high IRR.

Yet there are substantial behavioral, institutional, and financial barriers. As I’ve discussed in this blog post, there may well be free lunches available, but they are hidden away behind misaligned incentives, inertia, and market barriers. Consumers are often unaware of the potential cost savings, cannot afford the upfront costs, or fear that home efficiency upgrades will not add much to the market value of a home. For renters, new construction, and commercial property, the people who pay energy bills are often not the same people as those who design buildings or invest in efficiency. At our university, capital budgets for buildings and operating costs come from two separate pockets that don’t necessarily communicate. In the corporate world, few have traditionally paid much attention to potential energy savings because nobody was paid to do so.

Demand response systems raise some particular issues relating to fears regarding privacy and corporate intrusiveness. The Economist article highlights a survey by Parks Associates, a Texas-based market-research company, that indicates that only 15-20% of US consumers would be willing to sign up for DR programs that enable utilities to control their thermostats. Yet the survey also shows that over 80% of households would pay up to $100 for cost-saving equipment if it chopped at least 10% off their monthly electricity bills. Utilities, however, are still in the business of selling electrons, and incentives for energy efficiency, such as California-style rate decoupling, is only making slow progress toward adoption in other states.

Real-time feedback to customers on the price and quantity of electricity they are using can help cut consumption, and new devices can give an analysis by appliance, illustrating the savings from cutting usage or running appliances on lower-cost night-time power. Google announced last year that it’s developing software package called Powermeter to provide real time information about home energy usage by communicating with household devices. But few appliances are ready for smart meters, standards don’t yet exist for Google or other smart meter devices (Google just released the API in early March 2010), and systems will cost several hundred dollars per home. Moreover, as The Economist points out, trying to run a home using this information could become a complex and time-consuming job.          (more…)

Four months is a long time in climate politics. Back in October 2009, the momentum toward a global carbon regime seemed ineluctable. President Obama held a super-majority in the US Senate, China appeared amenable to a deal, high-profile companies were defecting from the US Chamber of Commerce over its opposition to climate action, and a group of multinational companies including Coca Cola, GE, Microsoft, Cisco, DuPont, Johnson Controls and Nike came out in support of a binding emissions cap at Copenhagen. Now, as the grip of winter loosens, it seems that a new political climate is fragmenting the business coalition driving action on climate change.

Last week, the Financial Times reported that two large oil companies, BP and ConocoPhillips, along with Caterpillar, manufacturer of heavy industrial machinery, pulled out of the US Climate Action Partnership (USCAP). USCAP, which still has 23 members paying $100,000 a year for the privilege of membership, is the leading business organization promoting cap-and-trade legislation in the US, and many of its members have also been active on the international scene, advocating for a coordinated global approach to emissions reduction. BP’s action is particularly significant because it has long been an industry trendsetter – it was the first oil major to acknowledge climate change and to leave the Global Climate Coalition, and it was a founding member of USCAP in 2007.

Even as BP and Shell were retreating from renewables during 2009 and moving Back to Petroleum, the oil industry still appeared to be part of the grand Carbon Compromise, pursuing a strategy of “hydrocarbon neutrality.” The industry realized that it was not mortally threatened by a flexible carbon regime with low carbon prices; indeed, it could even prosper as demand for liquid fuels for transportation grows, especially in India, China, and Brazil. The industry is also repositioning itself with major investments in relatively low-carbon natural gas. A weak carbon regime would not threaten core business operations in the short-to-medium term, leaving adequate time and resources for longer-term strategic shifts as the climate issue plays out. The Carbon Compromise would also help industry avoid paying the political or public relations price of fighting emission controls, such as the embarrassment caused by CEI’s 2006 risible advertisement Carbon Dioxide: They Call it Pollution, We Call it Life.

Back in August 2009, the oil industry was fighting a rearguard effort against cap-and-trade legislation in the US. The industry front-group Energy Citizens contracted with a professional events management company to plan about 20 rallies, with a focus on energy producing southern states such as Texas and Louisiana. Member companies encouraged their employees to join in. Energy Citizens’ website proclaims that it is “a nationwide alliance of organizations and individuals formed to bring together people across America to remind Congress that energy is the backbone of our nation’s economy and our way of life.” In fact, Energy Citizens was set up and financed primarily by the American Petroleum Institute (API), the US oil industry association, with support from the National Association of Manufacturers and other groups. This project complements a massive increase in lobbying efforts by the fossil fuel industry in the last six months.      (more…)

This post is by my colleague Lucia Silva Gao, Assistant Professor of Finance, College of Management, University of Massachusetts, Boston. Her research focuses on the relationship between environmental and financial performance.

On January 27, 2010 the SEC voted to issue interpretive guidance on disclosure requirements of climate risks in SEC filings. The SEC stressed that the interpretive releases do not create new legal requirements but are intended to provide clarity and enhance consistency on existing requirements. Nonetheless, the issuance of guidance indicates the growing focus of the SEC on climate change disclosure and the need for companies to expand and improve their environmental disclosure.

Till now the SEC had not called for any specific disclosures regarding climate change nor provided interpretative guidance regarding the application of existing disclosure requirements for “material risks” to climate change-related matters. The SEC sent a signal that it was preparing for future action when in a briefing released July of 2009 it included “Environmental, Climate Change and Sustainability Disclosure” on the list of possible refinements of the disclosure regime for the Investor Advisory Committee.

As the SEC explains in its release, existing regulations require a company to disclose information related to risk factors and call for management discussion and analysis. The new guidance on those rules emphasizes that when assessing potential risks, companies should consider the impact of existing climate change legislation and regulation, international accords or treaties on climate change, indirect consequences of regulation or business trends, for example new risks for the company created by legal, technical, political and scientific developments, and the physical impacts of climate change. This appears to be an impressively comprehensive assessment of investor risk associated with climate change.

Ceres proclaimed this action to be the “the first economy-wide climate risk disclosure requirement in the world”. The guidance follows a petition sent to the SEC in 2007 by a group of investors, state agencies and environmental advocates, led by Ceres, urging the SEC to issue guidance on climate-related impacts. Ceres has long pursued a strategy of exerting leverage on companies by institutionalizing information disclosure of value to investors. Ceres initiated the Global Reporting Initiative and, more recently, the Investor Network on Climate Risk. The Carbon Disclosure Project (CDP) mechanism has become the most prominent mechanism for corporate carbon disclosure, though the value of the information to investors is unclear.     (more…)

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.

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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…)