Normative Narratives


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Green News: Competition in the Waste-to-Fuel / Energy Industry

(Everyone is sick of hearing about this government shutdown anyways right??)

The potential of the waste-to-energy industry is a recurring topic here at NN. To quote a NYT article on the subject, “THERE is an indisputable elegance to the idea of transforming garbage into fuel, of turning icky, smelly detritus into something valuable.” It seems that energy producers and waste management companies agree, as there has been a strong push in the past decades to turn energy based waste / fuel into commercially viable alternative power source. Most articles I have reviewed so far have referred to the gasification of garbage in specially designed power plants. A new concept proposes to capture the methane released from garbage already in landfills and turning it into energy/fuel:

Clean Energy Fuels will announce on Thursday that it has started selling a fuel made of methane from landfills and other waste sources at its more than 40 filling stations in California. The company, which is backed by T. Boone Pickens, is developing a nationwide network of natural gas pumps and plans to introduce the fuel elsewhere as well.

The company expects to sell 15 million gallons of the fuel in California this year, more than double the amount of similar fuels the Environmental Protection Agency projected would be produced nationwide.

To many in the industry, the pace of the fuel’s development has been something of a surprise.

“Though California and others have been investing in the development of this fuel, I don’t think people were expecting there to be a significant public supply or access this soon — maybe not even this decade,” said Tim Carmichael, who leads the California Natural Gas Vehicle Coalition, a trade group.

A big factor in methane’s rise is the surge in natural gas production from shale drilling, which had already nudged the transportation industry to begin shifting to vehicles that can run on the cleaner-burning fuel, making it easier to meet emissions standards.

Another reason is powerful government incentives, especially in California, that have imposed strict regulations intended to help reduce carbon emissions to 1990 levels by 2020. Under the program, suppliers that reduce emissions during the production, transportation and use of the fuel are awarded tradable credits.

These and similar federal incentives are allowing Clean Energy to sell the fuel, which is called Redeem, at the same price as its conventional natural gas fuel even though it is more expensive to produce.

But because of its source, the fuel counts as renewable and takes less energy to extract and process, making it more attractive to companies seeking to burnish their green credentials

The fuel’s environmental benefits also include capturing the methane before it is released into the atmosphere. When the methane-derived fuel is burned, it is far less harmful to the atmosphere than petroleum fuels. But the methane that escapes directly from decomposing waste is more potent as a heat-trapping gas than carbon.

For this reason, many large-scale farms, wastewater treatment companies and garbage companies have developed systems to capture escaping methane — known as biogas — for both transportation and electricity, and several start-up companies are working on systems of their own. There are projects in Europe as well, where biogas for transport is more common.

Beyond the bottom line, customers are increasingly interested in how clean the fuel is, said Andrew J. Littlefair, the chief executive of Clean Energy, adding that Redeem can burn 90 percent cleaner than diesel. “We’re seeing from these heavy-duty trucking fleets, and these shippers that hire these trucking fleets, they’re really interested in sustainability,” he said. “It’s gotten to be a very important part of the sale.”

John Simourian, chief executive of Lily Transportation, which uses a nationwide network of trucks to move a range of products, including construction materials and groceries, said that only a small portion of his fleet ran on natural gas but that the company was shifting over.

Not only is the fuel less expensive, but it gives the company a competitive advantage with customers on price and environmental concerns. “It’s just a win all around,” he said.

It is interesting to note all the different avenues being explored when it comes to turning waste into something valuable and environmentally friendly–and why not? According to Sharon E. Burke, the assistant secretary of defense for operational efficiency plans and programs “Waste is a problem, so if we could dispose of waste and create energy at the same time, that would be a silver bullet.” But you don’t need to be en expert to know that trash is a problem, especially in densely populated areas (such as major cities) which produce a lot of trash; it stinks, it takes up room, and it costs money to get rid of. It is safe to say that, with the current trash disposal system, we have a “surplus of trash”.

Now imagine a world where not only is trash not a liability, but there are actually companies biding for trash (both intra-industry and inter-industry; some want it for landfill methane extraction, others to gasify the garbage directly into energy)–a trash shortage! A stream of revenue could open up for large municipalities, instead of a large bill for waste management. It is true that eventually waste-to-trash will have to get off subsidies to become truly commercially viable. However, if as a society we are unwilling to reward waste-to-energy for it’s positive externalities (such as less emissions and less garbage around), we can still hold “dirty” energy producers accountable for their negative externalities via carbon tax / cap and trade. As waste-to-energy matures and becomes more efficient, and emissions prices stabilize due to a more complete global market, the industry should eventually be able to compete without subsidies. It would appear this world is not so unimaginable or far-off as one may think.

 

 

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Conflict Watch: Oil Sand and Renewable Energy, a New Case for a Carbon Tax / Cap and Trade

An interesting piece in the NYT about how a less incentive-laden renewable energy sector in Europe is actually helping the industry grow “sustainably”:

“Europe used to be nirvana for companies in the clean-energy business, but in the past couple of years it has become a much tougher place. With economies anemic, electricity demand is down; and, not surprisingly, once-generous subsidies that encouraged installing swaths of solar collectors in sun-poor Germany or wind farms in relatively calm areas of France are either being reduced or look as if they could be.

But for some people and companies, the harsher environment is fostering a tough-minded approach that may be healthy for the effort in the years ahead to curb the greenhouse gases that are blamed for global warming.

Europe’s struggles, for instance, pushed Enel Green Power, one of the world’s largest electricity generators from renewable sources like wind and solar, to explore markets like Brazil, Chile and Mexico, that may turn out to be a lot more promising than Europe.”

“Contrary to the practice in much of Europe, where subsidies are used as a lure for renewables projects, developing countries like Brazil often award contracts to build new power capacity through competitions that sometimes pit clean energy against fossil fuels like natural gas and diesel. For instance, Enel Green Power recently won wind power deals in Brazil in bake-offs that included proposals for natural gas-fired stations.

‘There was a competitive approach to renewables that we liked a lot,’ said Francesco Starace, the company’s chief executive'”

“Mr. Starace especially likes long-term deals like the ones he has worked out in Mexico with Nissan and Nestlé to build wind farms to supply factories with power. He hopes to replicate this sort of arrangement across emerging markets, including east Africa. These private, one-on-one arrangements are more sustainable, he figures.

You don’t run the risk of a regulator or a state coming back at you and saying, ‘Guys, the good days are over, now we have to talk about reducing this and that,’ he said.”

“The goal of the renewables business, Mr. Murley said, should be to be competitive eventually on costs with other energy sources and not to rely on subsidies. He also believes in building businesses like his clusters of Swedish wind farms that have the scale to engage a team of managers and the clout to cut better deals with suppliers. His organization tries to buy turbines and other equipment that are reliable rather than cheap and does not skimp on spending money on maintenance.

The closer you are to the wholesale price of power, the less you are at risk,’ he [Tom Murley of HgCapital] said. He is also investing in onshore wind projects in Ireland, where the operating environment resembles that of Sweden.”

Talking about the “sustainability” of the renewable energy sector may be an interesting choice of words, but how the renewable energy sector matures is yet to be decided. Perhaps a rethinking of the subsidy approach to developing renewable energy would be a good think, if a more efficient complimentary / substitute path is proposed. Subsidies distort markets, so governments must have a credible threat that they will stop providing subsidy support if companies in the industry do not mature as they are  supposed to. But pulling the plug on subsidy programs is a bad move politically–it is always difficult to find politicians that are willing to let jobs leave their municipality.

What you get is subsidies and tax-breaks that are not at all linked to any real C-B analysis or long term commitment from companies (Another reason that making MNC themselves finance sustainable energy infrastructure makes sense as it locks the company into a longer term commitment–the cost of closing up shop is greater).  Some tax breaks and subsidies are good ideas, but they should be based on adequate C-B analysis and should contain long-term legally binding commitments. Additionally, tax breaks and subsidies for “dirty-energy” have to go, so that these two competing industries can actually compete on common ground. If we are considering an approach to scale back subsidies for an “infant industry”, removing subsides for a more mature competing industry must be part of that approach.

Ending tax breaks for “dirty energy” brings us to the next point of this article, which is the argument for some sort of carbon-tax or cap-and-trade system. If we are not going to reward the renewable energy industry for its implicit positive externalities, we should make dirtier forms of energy pay for their negative externalities. An article about “petroleum coke” highlights the need for something to keep emissions in check:

“Assumption Park gives residents of this city lovely views of the Ambassador Bridge and the Detroit skyline. Lately they’ve been treated to another sight: a three-story pile of petroleum coke covering an entire city block on the other side of the Detroit River.

Detroit’s ever-growing black mountain is the unloved, unwanted and long overlooked byproduct of Canada’s oil sands boom.

And no one knows quite what to do about it, except Koch Carbon, which owns it.

The company is controlled by Charles and David Koch, wealthy industrialists who back a number of conservative and libertarian causes including activist groups that challenge the science behind climate change. The company sells the high-sulfur, high-carbon waste, usually overseas, where it is burned as fuel.”

““What is really, really disturbing to me is how some companies treat the city of Detroit as a dumping ground,” said Rashida Tlaib, the Michigan state representative for that part of Detroit. “Nobody knew this was going to happen.” Almost 56 percent of Canada’s oil production is from the petroleum-soaked oil sands of northern Alberta, more than 2,000 miles north.”

“Detroit’s pile will not be the only one. Canada’s efforts to sell more products derived from oil sands to the United States, which include transporting it through the proposed Keystone XL pipeline, have pulled more coking south to American refineries, creating more waste product here.”

“And what about the leftover coke? The Environmental Protection Agency will no longer allow any new licenses permitting the burning of petroleum coke in the United States. But D. Mark Routt, a staff energy consultant at KBC Advanced Technologies in Houston, said that overseas companies saw it as a cheap alternative to low-grade coal. In China, it is used to generate electricity, adding to that country’s air-quality problems. There is also strong demand from India and Latin America for American petroleum coke, where it mainly fuels cement-making kilns.

“I’m not making a value statement, but it comes down to emission controls,” Mr. Routt said. “Other people don’t seem to have a problem, which is why it is going to Mexico, which is why it is going to China.”

“It is worse than a byproduct,” Ms. Satterthwaite said.“It’s a waste byproduct that is costly and inconvenient to store, but effectively costs nothing to produce.””

“Lorne Stockman, who recently published a study on petroleum coke for the environmental group Oil Change International, says, “It’s really the dirtiest residue from the dirtiest oil on earth,” he said.”

–Here we have an example of billionaire industrialists selling oil and shipping the dirty byproduct around the world to be burned, releasing even more emissions. And how much does all this profit-generating business pay for it’s emissions? Essentially zero. Oil sand creates 3rd degree pollution (burning of the oil, transportation of petro-coke, and burning of the petro-coke), and because of their lobbying power, industrialists are able to shift the cost onto future generations.

It is appalling our government, and other governments, let companies do this without paying anything for the emissions they produce.  Companies claim they cannot deal with a carbon-tax or cap and trade, while posting billion dollar profit margins. At the end of the day, a carbon tax is a small blip on the companies cost-function. Cap and Trade would initially not even make emissions more expensive, as the market is depressed (due to lower energy demand following the Great Recession) and swamped with low-price / free vouchers. For these reasons, a carbon tax would likely be more effective in the short-run, but having either system in place would be better than what we have now (which is essentially having no system in place to check emissions).

Corporate interests will always claim the sky is falling, and that any additional cost will bring that industry to it’s knees, forcing  them to outsource jobs and close operations. What we would see , I imagine, is that if you call this bluff, often companies will decide the cost and uncertainty of relocation is not worth the small price of paying for emissions (especially if that company had to install, say, a wind-farm when it started operations). If companies want access to developed countries markets, they should have to pay for their emissions. If America and Europe came up with a strong carbon-market (perhaps part of a larger U.S.-Europe FTA?), the rest of the world would join in. The ultimate goal would be a global carbon-market, which would eliminate the threat of companies to move operations to a lower regulation  area.

A double sided approach–ending subsidies / tax-breaks for both renewables and “dirty-energy”, combined with a carbon-tax / cap-and-trade system, could allow market forces to help renewable energy prices converge towards the price of more traditional forms of energy. It would do so while creating a more resilient renewable-energy industry, create a cleaner environment, and open up fiscal space for spending on important social programs.

This approach is different, and theoretically sound–it would be very interesting to see how effective a pilot version of this program could be.

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Transparency Thursday: Wal-Mart, a Microcosm of the U.S. Economy

Walmart is the nation’s largest retail employer. Walmart’s competitive advantage is no secret; by providing goods at prices lower than competitors, it has been able to capture market share by driving competitors out of business. This translates into savings for customers. But looking further into the specifics of how Walmart keeps its costs down, it may also translate into higher costs for consumers in the long run. As is often the case, the “devil is in the details”.

Take, for example, the fact that Wal-Mart systematically underpays their employees. The average Walmart associate makes $15,500 per year ($8.81 per hour). Walmart’s CEO Mike Duke will bring home over $23 million in salary and performance based benefits in 2012, a whopping 1034:1 CEO to employee pay ratio (by far the highest, the next being Target at 597:1, also this figure is based on a median Wal-Mart salary of $22,400, so based on which figure you use the ratio could be much higher). It is estimated that it would cost Wal-Mart shoppers on average another $0.46 per visit to if the company offered a minimum wage of $12 / hour.

On the flip side of this, it costs the nation an estimated $1 billion a year in social safety net use. Essentially, the U.S. taxpayer is subsidizing Walmart’s  low wages, which systematically produce full-time workers living below the poverty line.

Next, consider environmental degradation. One common way to keep costs down is through “supply chain fractionalization”, producing certain products in low wage countries. This leads to increased greenhouse gas emissions, as goods are transported all over the world; without a system of taxing carbon, nobody pays for these emissions. “In the U.S. Walmart’s reported emissions grew by roughly 7% between 2005-2009. In Asia, its greenhouse gas emissions have doubled. The company expects 13 million metric tons of cumulative growth in emissions by 2015”. For all the lip service Walmart pays to environmental sustainability, this amounts to little more than a PR move.

Supply chain fractionalization—or outsourcing—has cost the U.S. an estimated 196,000 jobs from 2001-2006 due to Chinese Imports. This number has probably continued to grow, and represents jobs lost to production in other countries (outsourcing), and smaller domestic firms who were priced out of the market by Walmart’s business practices.

How is Walmart a microcosm of the current U.S. economy? This issue is highlighted in a recent New York Times article. According to the article, “Walmart, the nation’s largest retailer and grocer, has cut so many employees that it no longer has enough workers to stock its shelves properly, according to some employees and industry analysts.”

“Labor groups and some employees say the low staffing levels are hurting the in-store experience.”

Like America in general, Walmart appears to be producing under capacity because of it’s reluctance to hire workers.

In an attempt to save money, Walmart has undermined consumer confidence in its produce—one of the bulwarks of Walmart’s profitability (“Grocery made up 55 percent of Walmart’s United States sales in 2012”). Does the concept of low consumer confidence sound familiar? It should, it is one of the things depressing aggregate demand and is related to stagnant wages, unemployment, and general pessimism of peoples belief in the economy.

“Before the recession, at the start of 2007, Walmart had an average of 338 employees per store at its United States stores and Sam’s Club locations. Now, it has 281 per store, having cut the number of United States employees while adding hundreds of stores.”

Walmart has undermined its consumer confidence, which threatens to hurt its bottom line in the long run (it has not in the short run, which I will address shortly). However, when questioned about the possibility of hiring more workers, “Ms. Scott [a manager at a Los Angeles Walmart] says she has pushed for additional staff or for more hours for existing staff, ‘and the answer that I receive is they want to focus on productivity with the workers that we do have.’”

Does this sound eerily familiar to an overall justification for stubbornly high unemployment in the U.S.? It should. Corporations (including Walmart) are sitting on record profits, yet have not increased hiring to post recession levels. Compounding the issue is that employee productivity and wages have diverged greatly. Employers, Walmart being the largest, are systematically relying on higher worker productivity to make up for a smaller labor force, with no inclination that the higher productivity they seek will result in higher wages.

Walmart, like many other large corporations, is answerable to its stockholders and high level executives. Executive pay is incredibly high, profit’s continue to rise, and stock prices are now well above their pre-recession levels. With all this positive reinforcement, why would Walmart change its practices?

Ultimately, market forces determine the success of a business. No-one is forcing people to shop at Walmart, they go there for low prices and good selection. However, there are systematic issues with how Walmart keeps its costs down—most notably paying low wages and increasingly relying on practices which damage the environment.

Some of these issues, such as minimum wage and environmental regulation, need to be addressed by government policy. People need to be aware of the facts, so they can vote for policies that hold large corporations responsible for the negative externalities they cause. More immediately, people can vote with their wallets, by shopping at Wal-Mart’s competitors (which, based on the breadth of their operations, can include almost all retailers).

If Walmart can post hundred-billion dollar profit margins, and pay its CEO over 1000x the median employee salary, it can afford a more sustainable and egalitarian business model. Walmart’s primary competitive advantage is taking advantage of economies of scale—there is nothing wrong with this. However, cutting corners in other ways unfairly shifts the burden of Walmart’s costs onto taxpayers and the environment. If Walmart’s profits begin to fall, they will rethink their corporate strategy. Until then, we can expect business as usual.

For the sake of it’s own profitability and the U.S. economy, Walmart should hire more workers at more livable wages.

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