Topic: Cap and Trade
Today, listening to NPR was really enlightening. Terry Gross was talking to Mark Schapiro about Cap and Trade and the Carbon economy. The work done by Mark is incredible. Basically, Cap and Trade is a program that has two parts - set the emission caps and trade the over the cap emissions. The system is amazingly speculative and according to this documentary, $150 billion is involved per year. So, here is the run down.
First the demand side:
Lets imagine a utility company being regulated in Europe has a carbon emission limit of 100 million tonnes. However, with the technology investments in place, they can only come to 120 million tonnes. So, the company will need to buy 20 million tonnes to satisfy the 100 million tonnes cap. The deal is that if you create it, someone else offsets it. For an airline, a DC-10 may be highly inefficient but they want to use it as it is paid for. The emissions for this plane may be twice that of a Boeing and when, in total, they exceed for a certain year, then the company has to go to commodities market to buy it.
Then the Supply side:
There are three ways for the company to offset the extra pollution -
This is the most interesting part of the trade. US is a non-signatory to the Cap and Trade agreement. About 37 countries included in the Kyoto protocol signed it. So, guess where the business of carbon credits is centered - London. Most big investment banks (the remaining ones!) have set up a shop there. They deal in carbon credits. They buy the carbon credits from across the globe and create bundles and sell them to the companies which exceeded their cap. They take deep cuts in the money and it keeps their fat wallets growing.
The Moral Dilemma:
There are several very disturbing things in this system:
It almost seems like a fictitious market in existence. A bubble waiting to burst! Mr. Bernake, will u be there?
This year brings in new perspectives for all of us. I went to office one Sunday night to pick up an item on my way to airport. Our office is very conscious on resource wastage, so, I always thought there was nothing to worry about from the conservation perspective. However, that evening opened my eyes. There was not a single person in the office and lights and most airconditioning was off. It was evening time but the entire floor was lit up with the light from the monitors. Being an IT office, everyone gets two monitors. We use these only 40 -50 hours a week and they are switched on most of the time - about 168 hours in a week. It seems that we use only 25% of their uptime and waste the rest of it.
I would think that this happens in IT offices of most companies. It does not just put extra pressure on the power supply, it also takes the airconditioning to keep these devices cool. I think we all owe a moral responsibility to shutdown the computers and monitors that we dont use at work.
I know I am not saying something new but it is so old that it gets ignored. Sometimes we just need to go back to basics ...
I recently read in the news that Berkeley's plan for financing the Solar panels is being adopted at a national level. Overall, it is a great start for a nation with the rising energy prices and towering unemployment. But this has the drawback that was typically seen in the nation's telecom infrastructure. Consumers have little incentive to go solar since the prices of the solar or Wind tech still remains very high compared to a montly bill. The administration should make an effort to make it a phased adoption because the early adoptors of this plan will likely see their investment wash out in 5-7 years since the mass production will bring the solar panel prices down drastically. Secondly, the solar panels should be produced indigenously in order to make a real impact on the economy. The solar panels being associated with a home value also makes it difficult to sell the home and reduce options for the purchaser who may want to try newer panels for the new home. Anyway, as the details of the plan become clear, it will be interesting to see how administration makes the policies.
There has been some recent buzz around the development of solar powered rickshaws. They will particularly help the rickshaw pullers in the south asian nations where they barely make a living after putting in entire day of hard physical labour. The biggest challenge with the adoption of solar technology for low end applications is the high entry level price. Most examples on the internet regarding the economics of such applications start with a solution and then try to make sense of the cost. My belief is that such a solution has to start with the economics of the problem first.
In India, there are at least a million rickshaw pullers. A typical rickshaw costs about $100 and a typical rickshaw puller makes $6 - $8 on a good day. Most of these are male adults between 18 - 60 years of age and there are some older ones too, but they dont make as much money. They are day workers and work all days. So, basically, in a typical month they make $ 150 - $200. This number is much lower in many impoverished areas.
For a technology that can benefit them, it has to bring a productivity increase at least equivalent to the cost of the technology. If we thought of upgrading the vehicle to a new one, it will be out of reach of most, since the vehicle will cost over USD 1500. It will give them more leverage to charge higher prices, but it will be hard to justify the cost.
I believe that they would be more willing to buy a kit instead that puts up a solar panel on the passenger roof and fits an electric motor in the rear panel to provide the assistance while pulling. Any battery would add to the cost and weight and should be considered optional.
A very basic Solar Panel BSP10 comes for 140 USD and I believe it can be further brought down to USD 100 for mass production. It is not the best in energy capabilities and can add 25% to the productivity of the puller when coupled with a small electric motor which will cost about 50 USD. An installation cost of USD 10 - 20 is reasonable if the installation is simple enough. After adding other overheads, a solution can be devised for USD 200 including installation.
Such an amount can be microfinanced from the several microfinance websites in play on easy terms. Lets say that this has a potential to increase the earnings of this person by 20%, so, he makes an additional USD 40 per month. Then he should be able to pay the loan within six months including interest from additional income. This is of course assuming that he will be taking the market away a little bit from competition.
I am willing to invest some time in thinking through and investing my time in this, if it turns out to help the mankind.
America's Oil industry well realizes that its best days are gone. Soon the oil friendly administration will go. America's oil industry is like the CEO of a big company seeing retirement. This industry has milked every single person alike and at the same time, has reaped windfall profits. Hats off to their strategists for that. However, in the process they have made less friends - more enemies than friends. Biggest of all, they have made their consumers enemies of themselves. This is not a happy situation for any company.
These companies have the best cash positions in the entire industry and so, they will probably never feel any major problems related to sustainability. Their major issue will come from people's love of environment. The engine efficiency initiatives, which are emerging from Automakers desperation to get customers will keep driving the fuel demand lower for upcoming years, will keep the oil company profits linear. Ultimately, oil companies will need to make friends and the consumers will win!
There is a predictable pattern happening in oil prices. Some four years back, around the election time, the oil prices bucked the trend and went significantly down. I am not a big believer in the conspiracy theories but I am seeing the same pattern this year. The oil prices went to historical highs and now are coming back on track. The oil industry is saying that the forces of American demand are bringing the price low. Ok, that's not how I understand the industry. The last time I checked, this industry does not care for demand growth as the supply is controllable at a short notice. OPEC can shut off a few oil wells and the supply and demand will be in an upside down situation again.
I believe that the gas prices going down has more political reasons that any mathematical reasons provided by industry analysts. Did someone go tell the OPEC that this is an election year, so, don't mess with the prices? Do you smell a smoking gun?
On the other side, I am happy about the demand going lower. This will improve US lead on the alternative technology landscape. I have also read the reports from AAA saying that we have driven zillions of less miles for our vacations. But I can't help noticing that many people are driving high mileage cars. Overall, this trend will help reduce the demand of gas. But there is still a lot of ground to cover when it comes to the alternative fuel technologies.They are still not making the solar charged air planes as yet:-)
I am in Red Sox land (Boston) today. While turning the pages of skymall catalog on my long coast to coast flight, I found that the green products are slowing penetrating the product catalogs. But here is the reality, every single product charges a much higher premium for using alternative energy. Many products are over half more expensive than their traditional energy counterparts. Moreover, the energy savings from these products is a hogwash. Most replacement products use such a low amount of energy that the effective savings are perhaps negative. Many of these products last less than 2 years increasing the cost of overall ownership for the buyers. A typical solar powered device has a battery in it making it very hard to decompose. The manufacturers are cashing in the mad rush for green at the expense of your want for eco-friendly products.
In my opinion, a three point standard should evolve for measuring the eco-friendliness of a product and the entire company. The standard should define the three key measurements -
1. Power used to manufacture the device
2. Power consumed by the device operationally if it was not powered by Alternative technology
3. Eco-friendliness of the device's by-products when sent for disposal
This will help consumers to decide the merit of the green products and services.This will also raise the stakes for manufacturers so they would not just rush for manufacturing products which are not actually eco-friendly.
Honda is doing some wonders. They announced today a long anticipated news. They are launching a competition to Prius and it has the name of their famous hybrid Insight. It will likely be priced at $19K, a notch below prius but will defintely command a premium. The expected fuel efficiency is unknown but my best guess is that it will be 60 something. They have experimented with the same chassis for FCX Clarity concept car and now, launching it as competition to Prius. Honestly, it looks cooler than Prius. This will be first of the several under $20K hybrids Honda is launching this year.
It is actually nice to see the Hybrid market getting hotter. It will drive the price premiums down and make the cars more affordable to normal people, not just early adopters. The HOV lane stickers are all exhausted, so, they dont save the commute time anymore. But with gas prices nearly doubling in past three years, buying a hybrid still helps the wallet.