Saturday, February 10, 2007

Acting Locally To Affect the Environment Globally

Disclosing the Total Carbon Emitted in Producing Consumer Products

What if every consumer product had a label which stated how much carbon had been emitted in producing it? … like food products that have labels disclosing their ingredients. In the same way that I may want to know how much fat I am eating with my diet yogurt, I may also want to know how much carbon went into the environment to make the yogurt. If I am buying a Dell laptop, I want to know how much smoke Dell put up in the air to manufacture it – the direct emissions – and I also want to know the total amount of carbon that was put into the atmosphere to make each of the components Dell bought from each of its suppliers all over the world – the indirect emissions. I really want to know the Total Carbon Emitted (TCEs) in making all the parts in my computer, including the shipping.

By demanding that all products and services disclose the total carbon emitted in producing them, we could be laying the foundation for a real market based ecosystem to control carbon emissions world wide. We would be pushing power away from the government and politicians, towards the consumers and voters, giving individuals incredible leverage to act locally and affect change globally.

Power to the Consumer

Why have so many people bought the hip and hybrid Toyota Prius? Surely, to help conserve energy by using less gas. But also because it is a statement that they care about the environment – a small palatable step we can all take to try and make a difference. The popularity of the Prius shows that consumers do want to make this statement publicly. The problem is that there aren’t that many things consumers can do to make a difference to the environment, yet cost little enough to be doable, while having a large ‘feel good’ factor.

Total Carbon Emitted (TCE) disclosures mean that many more of us – the majority who want to make a statement with a ‘feel good’ factor, without incurring large costs - can make small choices every day that make a difference. We could buy the diet yogurt that took less carbon to produce because of its packaging materials. We could use the overnight mail service that emits less carbon per package delivered. And so on and so forth…

Leave It to the Marketers

Total Carbon Emitted (TCE) Disclosures on products would allow the increasing number of mainstream environmentally conscious consumers to exercise choice and affect the markets. In turn, this allows companies that emit less carbon in manufacturing their products to advertise this fact, and try to offer more differentiated products to this market segment. They would invest in raising awareness, and in educating the market so as to expand their market segment. In other words, they would create marketing programs that try to increase the number of people who buy products based on their Total Carbon Emitted Disclosures – that is, people who are concerned about the environment.

As an aside, imagine this TV ad for example: Black smoke gushes out of a coal fired power plant in China. Newly manufactured Toyota cars roll out of an adjacent building. A voice says that it would take twice the level of emissions to manufacture a Toyota than the new Chevy hybrid (or whatever – I am making this up obviously)… Pan to a scene of peaceful wilderness around a GM plant and a ‘clean’ hybrid Chevy glides by. “It’s not just the gas you consume – it’s also what went into making the car you drive.”
It would be nice to have companies compete on this issue!

Acting Locally to Affect Carbon Emissions Globally

And in the same way that Hollywood and Silicon Valley trend setters started buying Toyota Prius cars, such trend setters may decide to buy other products with lower TCEs, and start to create a trend. TCE’s would allow Gladwell’s market mavens, connectors and salesmen to do their work. And if consumers pick up on this trend and make more and more choices based on TCEs, companies would then start to factor in TCEs in the choices they make, beyond marketing – in building a new manufacturing plant next to an eco-friendly power source for example, or by choosing suppliers that emit less carbon to produce their goods... Given enough momentum, and a little time, some province in China is going to decide that they are going to scrap their next coal fired power plant project and try to cater to manufacturers that address this market segment by building a more eco-friendly power plant, or at least invest in making the coal plant cleaner by using technologies like “carbon capture and sequestration”.

In other words, the chain of events led by consumer choice can have far reaching effects on decisions made all around the world in a way that a globally negotiated agreement like Kyoto never could. The top-down centrally controlled regulations are just not efficient enough. Yet, given an ecosystem of disclosures, information and marketing, consumer’s power to choose can set in motion a chain of events that create a social and business ‘epidemic’, enabling thousands of micro-level decisions to invest in cleaner technologies.

Wake Up and Smell the Carbon

Such a chain of events may seem like pure fantasy, until you think about the extent of the problem. As I previously discovered, over the next few years, the carbon emissions from new coal plants in China will be so much that they would far overwhelm many of the efforts at cutting local emissions in the US. (Another data point is that by 2015, China will be emitting more carbon than the US, roughly doubling its emissions from 2003, while the US's emissions will only grow by 15% during the same period.)

Yet, we (here in US) are the ones importing and consuming many of the products that are made using energy from those coal plants in China. I made a back of the envelope calculation which guesstimated that the carbon emissions associated with all the goods we import into the United States represents around a quarter of ALL carbon emissions within the US! That means that the carbon that was put into the atmosphere to produce all the things we import is roughly equal to all the carbon emitted by ALL transportation in the US.

Now compare the amount of environmental activism regarding cutting emissions on imported goods versus the activity regarding emissions from cars and trucks. May be, because it is difficult to impose global regulations or caps, we have given up on doing anything about it. We can lobby our government to regulate car emissions in the United States, but how can we ask the government of China to regulate the carbon emitted by power plants there? Well, the lesson from Prius is that we don’t have to use regulations and international protocols! Government initiatives may have helped – but they did not create the Prius phenomena. Consumer marketing did.

All (Environmental) Politics is Local

Of course, that doesn’t mean that there is no role for regulations and politicians. What if a state like California passed a law to force every company selling more than, say, $1 billion of goods in the state to disclose the TCE on each product? Not only would such a move gain popularity among the pro-environment residents of the state, it could also set in motion another powerful chain of events. If companies were forced to invest in calculating and disclosing the TCE of their products in one state, it would be very easy for them to disclose it in other states. Once they decide to partially market their products based on TCEs, they can address other ‘pro-environment’ groups all around the world, and not just California. Such a move may make it easier for other states and countries to pass laws requiring TCE disclosures. It would also prompt other companies competing in other markets to disclose TCEs to compete on this ground. The momentum could be significant.

But Can We Measure TCEs?

Of course, skeptics would say that TCEs are difficult, nay impossible to measure. But companies like Goldman Sachs and Virgin, which have stated they want to reduce their emissions, must be calculating their direct emissions already. And various web sites allow you to estimate your own personal carbon emissions and help reduce it to zero. So standard ways of measuring emissions are becoming common place. Obviously, precisely calculating the amount of carbon put into the atmosphere by all of a company’s suppliers all over the world seems a little more complicated. But in the same way that the ‘personal carbon calculators’ are far from precise, the TCE calculations can also be estimated based on rules and standards that can be set up by the companies themselves to begin with, and by self-regulated private sector institutions (with help from organizations like the United Nations and the World Bank) over time.

In fact, the best model to follow is the one which is currently working for our own financial system. Privately funded accounting industry organizations (like the AICPA and the IASB) try to set the standards for measuring and yes, often estimating financials. Even governmental tax rules allow for estimating expenses by creating rules like the dollar expense per mile driven on a car. Why can't the same kinds of rules for estimating TCE’s be instituted with the goal of making them more and more accurate over time?

Financial Accounting rules and regulations have provided a foundation for creating our global financial markets. Governments, at their own peril, have often used regulations to ‘Cap and Trade’ this or that industry or limit this or that investment vehicle. Thankfully, they have never dared to sit down and prescribe, by decree, how much wealth each country is allowed to produce. And yet, these are the kinds of schemes that are being called for to regulate carbon emissions world wide. Effectively, (as per my previous rant), many environmental regulatory schemes give governments and not-for-profit institutions control over how much Power should be consumed (ie how much carbon should be emitted); and they leave consumers with little power to do anything. It would seem more logical for large not-for-profit institutions to regulate disclosures, for consumers to decide what to consume and how much, and for governments to make sure nobody is cheating, and… well they could have one other role...

If You Can Measure It, They Can Tax It…

The problem with purely local carbon emissions taxes is that they create a competitive disadvantage. If California taxes carbon emissions, then manufacturers can get up and go set up shop somewhere else. Some have suggested a ‘synchronized’ global carbon tax to overcome such problems. (A brief discussion from Davos here in part 6). But such a tax is recognized as being too difficult to realistically coordinate among nations. The source of the problem with such tax schemes is that they try to tax the emissions of carbon at the point of production or emission, rather than the point of consumption.

If we can find a standard way to estimate TCEs, a tax on the consumption of TCEs would have none of the issues above. (Such a tax could be like a sales tax, levied when a product is sold to consumers, based on the amount of total amount of carbon emitted worldwide in producing that product.) In fact, even if levied in just one state like California, such a tax could have global implications, re-enforcing the chain of events I described above to affect decisions about clean energy through out the world. Note that this tax could also be made income neutral to the state – meaning that it would be accompanied by tax cuts in other areas. And so, not only would it not hurt production at home, it might spur investments by companies in and out of the state to market ‘cleaner’ products in California.

What Am I Missing?

I am no expert in the environment, or in economics for that matter, but as I have started to read about carbon emissions, I can’t help but think that there must be better market-oriented ways to address the potential problem we all face. TCE disclosure is one way of tackling the issue, with the advantage that it could garner the support of so many different groups that have heretofore been opposed to environmental initiatives for various reasons:
  • Local industries are not disadvantaged by TCE disclosures because their carbon emissions are disclosed (or taxed) in the same way as those of a manufacturing plant outside of the country. If anything, in the short term, such a scheme would give a large advantage to manufacturing in advanced economies.
  • For the same reasons, labor unions can also be supportive of TCEs. (Traditionally they have been the losers of proposed local regulations which push manufacturing jobs out.)
  • Libertarians and free-market ideologues can support environmental regulations which do not directly interfere with market mechanisms. (It would be hard to argue against disclosures.)
I have drunk my own cool-aid and don’t see the downside to this. But I would love to hear where the thinking is flawed.

Sunday, February 04, 2007

The Carbon Emitted in Producing the Goods We Import from Abroad

Many environmental initiatives focus on controlling emissions at the source – that is, they try to impose limits at the point which carbon is put in the air, whether it is coming from a coal fired power plant or a car’s engine. But as I see it, when we use a product made in China, we also become responsible for the carbon emissions related to its manufacturing – in China. My question is: Is this a significant number? How much carbon was out into the air to manufacture all the other products that we consume here in the United States.

I used 2 different “back of the envelope” calculations yielding similar results – that the carbon emitted in the atmosphere in producing the goods we import in the United States is equivalent to around one quarter of the carbon emitted from ALL domestic activities in the US. As the chart below shows, this means that environmental activists who are worried about carbon emissions from transportation in the US, should be as worried about the carbon emitted from the goods they buy which are “Made in China”.

Here is how I came up with the calculations.

Method A: My back of the envelope

We can figure out the dollar value of all the goods produced in the US (Row 3), and we know the total amount of imports of goods into the US (Row 4). We know the amount of CO2 equivalents emitted to produce those goods (Row 6), so if we assume that it takes as much CO2 emissions to produce goods in the US as outside the US, we can calculate an estimate of how much carbon was used to create those goods. However, I imagine that the US has better environmental standards than some of its major trading partners like China, so one could also assume that this is a pretty conservative estimate.

Method B: My back of the envelope based on some real research found on the net

Looking around the internet, I came across references to a study by Shui Bin and who had calculated the following:
“The United States, because of its trade with Canada and Mexico, was responsible for 92 million metric tons of carbon dioxide in addition to what it emitted within its own borders. That's an amount equivalent to 2% of total U.S. emissions that year… The researchers next turned to trade with China. They looked at the period from 1997 to 2003, posing a hypothetical question: if the United States had manufactured the products it imported from China, how would that have affected each nation's CO2 emissions? Their conclusion: American emissions of CO2 would have been 3% higher in 1997, and 6% higher in 2003, if the United States had been manufacturing products that it imported from China.
Unfortunately, I couldn’t find any data regarding the carbon emissions related to ALL imports, but given that Canada, Mexico and China are the US’s top 3 trading partners and responsible for almost 42% of all imports to the US, I thought one could extrapolate based on the amount of trade they do with the US. The chart below shows radically different results, if one extrapolates from Canada and Mexico rather than from China. But if we assume that the discrepancy is due to the kind of goods we import from those countries, and we further assume that the imports from the 3 nations together are representative of the types of goods we import from all countries, then it would be fair to average the two numbers – leading to an estimate of 28%, close to the average used in my calculations.

Now, I imagine that the fact that the results are so close is more coincidental than anything. These are ‘back of the envelope’ calculations. But nonetheless, given that the total value of goods imported into the US is more than 2/3rds of the goods we produce here, there is little doubt that significant amounts of carbon were put into the atmosphere to produce the goods we use here!

[BTW - I am using carbon here to denote all greeen house gases, or carbon equivalents.]

Friday, February 02, 2007

Thinking about Global Warming: Part III

Why should we do anything to limit carbon emissions?

Continuing my loud thinking criticizing the various efforts to limit carbon emissions, here is a follow up on why it might actually make sense to pursue those efforts (like city wide carbon emissions regulations, and Cap and Trade schemes etc), however flawed they may be:

1. Desperation

It is becoming more and more accepted that we (ie humans) are affecting the environment, and creating potentially huge problems for the planet in the future. The nature of the problem, though, makes it very very difficult to do anything very effective about the problem. Critics would say that we might as well do nothing at all! But, it’s almost like we are so desperate for any solution that the ‘perfect’ solution could be the enemy of a ‘good’ or even less than good solution, specially if we learn how to make those solutions better...

2. Education

After all, we can only learn by experimenting. For example, Europe’s ETS led the effort (as discussed previously in Cap and Trade schemes. However ineffective it may have been in the short run, it provided valuable lessons for future schemes.

So what if some companies get some windfall profits, if our reward is to have created the infrastructure to limit carbon emissions in the future, raised the public consciousness about the importance of limiting carbon emissions, and encouraged social and financial investments that could allow us to move slowly towards better solutions in the future!

3. Momentum

It is very difficult to affect major changes in one try. And certainly, doing anything meaningful about carbon emissions, will need some major changes… in our regulations, our behavior, our investments, our taxes, etc etc. So small steps can set an example, and allow others to follow.

By taking a leadership role in cutting carbon emissions, California would hope to spur other states to do the same, or at the very least, raise the consciousness of other states and countries to follow suit. Without the Burlingtons and Californias of the world setting the example, we would all be less aware of the issues around the environment, and have fewer models to build on.

4. Raising Passions

In fact, given how imperfect the current solutions to cutting carbon emissions are, it is quite surprising that such a momentum has gathered any steam at all. I suppose it took Iraq, $70 oil, many local politicians in places like California and Vermont, years of scientific research to overcome obfuscation of facts and theories, and the PR of Vinod Khosla, Richard Branson, Al Gore and others to get some emotional momentum behind the clean technology movement in the US.

How ironic is that: the wooden Gore of 2000 is now the main cheerleader, the market maven and chief salesman carrying the message about our environment!!

Incidentally, I caught a quote from his inspirational film, that I think illustrates the problem of how difficult it has been to raise passions and create active political momentum. Here is Gore towards the end of his film:

“We have the ability to do this. Each one of us is a cause of global warming, but each one of us can make choices to change that... with the things we buy, the electricity we use, the cars we buy... We can make choices to bring our individual carbon emissions to zero. The solutions are in our hands. We just have to have the determination to make them happen. ”
Here he is inspiring his audience to affect change and “to make a difference” – a paragraph worthy of the greatest inspirational speaker to make people moving, to get them to… well, what does he say next? He shows a slide with a list of countries and says:
“Are we going to be left behind as the rest of the world moves forward? All of these nations have ratified Kyoto. There are only two advanced nations in the world that have not ratified Kyoto, and we are one of them.”
So that’s the plan: Inspire the population to do something about the environment by going out and convincing their politicians to ratify the Kyoto treaty and hand over power to all the regulators and politicians of the world to negotiate a global agreement which is flawed in many ways…!!

How uninspiring is that!

If anything, what is incredible to me is the amount of momentum the environmental movement has actually gained despite all the inadequacies in creating efficient solutions to the problem…

That passion, held by more and more people, regarding the need to do something about the environment – that is a real asset!