Green Economics
As I write this column on the 39th anniversary of the founding of Earth Day, I am reminded of the words of Kermit the Frog. One of the late Jim Henson’s original Muppet characters for the Sesame Street television show, Kermit often proclaimed, “It ain’t easy being green.”
Of course, the green he was talking about was his color, which came from a coat Henson’s mother had tossed away and two ping pong balls that served as eyes. Today, being green has a new connotation and is often considered synonymous with ways to save planet earth.
The first Earth Day, held on April 22, 1970, was one of the early milestones of the modern environmental movement. Initially created to enhance awareness of the earth’s environment, it involved mostly Americans. This week, the special day attracted the attention of more than a billion people residing in some 180 nations around the world.
Earth Day and the general environmental movement have served as the motivational foundation for the development of myriad procedures and practices to increase the efficiency and effectiveness of non-polluting operating systems. Over the years, businesses have rethought their practices with the goal of creating a friendlier environment that will be conducive to the wellbeing of their employees, their communities, and society as a whole.
Nowadays, being green is fashionable; yet as Kermit noted, it still ain’t easy to do so—and in many cases it calls for a major short-term investment with the payoff expected to be years down the road. In fact, the cost associated with going green sometimes prevents businesses and organizations from just that, even though the overall value is easily recognizable and generally accepted. After all, why would you want to harm the planet on which you live?
Corporate social responsibility is on the rise as more collaborative frameworks are created to take advantage of various synergies. The goal, of course, is to consume fewer resources, improve business operations, and increase revenues. Potential customers are often swayed by these practices, preferring to purchase goods and services from green companies. In fact, they often pay a premium to do so. This willingness sends a signal to the marketplace that green investments may be worthwhile and even critical to maintaining or expanding sales volume.
Striving to go green is not only environmentally healthy, but it often benefits specific industrial sectors. For example, the creation of environmentally-friendly products requires the services of the manufacturing sector, and the building of green homes and businesses along with the installation of the essentials, benefiting the construction and allied industries. The creation of “green jobs” is a centerpiece to many current economic stimulus strategies.
Various procedures for creating clean energy have been up and running for quite some time. In the future, new technologies, especially nanotechnology, will push the envelope in developing structures and systems that possess even greater economic viability. In Texas, billions have been invested in wind farms and other sources of renewable energy, bringing an important economic stimulus to the affected areas and providing clean energy for the future.
Over the past few years, the transportation industry has undergone significant changes, specifically the addition of more fuel efficient engines, lighter-weight materials, and even hybrid vehicles. Utilization of web conferencing and work-at-home programs have reduced travel requirements and thus decreased energy-related emissions.
Major companies and corporations are going green by improving their eco-friendly operations, introducing broader recycling programs, redesigning products, using more renewable energy sources, transforming packaging requirements, implementing safer disposal practices, and using more biodegradable products, to name just a few.
The green products market has grown over the past several years to reach a multibillion dollar level. Although the current recession has caused numerous Americans to curtail spending on major eco-friendly items, many are still willing to purchase less expensive products in this category. Organic foods, for example, used to be available almost exclusively at specialty stores, but are increasingly finding their way into major chains, discount stores, and other outlets.
The growing “going green” movement has led many investors to put their resources into companies with more modern environmental standards and energy-and-cost-saving commitments. As operational costs decrease, greater opportunities arise for increased profits. Making money and saving the earth are going hand in hand.
Earth Day began nearly four decades ago as a social experiment. Since that time, the green movement has gone “mainstream,” involving multi-billion dollar markets for products and services in a wide variety of businesses around the world.
The clarion call to companies and organizations to become more socially accountable by going green has been heard—from rural to urban communities. Although Kermit the Frog noted that being green wasn’t easy, he undoubtedly would approve of the current movement to go green because of the vast potential for environmental and economic benefits it affords.
posted @ 08:03 AM CST [link]
Friday, April 17, 2009
Piracy
In the library at my home is a large document written in four languages. It was carried by the captain of the schooner Fox and declared that his was an unarmed merchant ship that should not be attacked. It was signed in 1805 (the same year that Master and Commander told of treachery on the high seas) by Thomas Jefferson as President and James Madison as Secretary of State. If you thought those days were gone, think again.
It used to be that the word “pirate” was so removed from our daily lives that it conjured in our imaginations men with eye patches, peg legs, and parrots on their shoulders searching for treasure chests filled with gold and precious stones. Avarice served as the motivation for their actions (some things never change).
There are, of course, all kinds of piracy, ranging from copyright infringement to digital theft. However, the one that stands out in our minds today, especially in light of the rescue this week of the American cargo ship captain being held hostage by well-armed Somali teenagers, is the maritime piracy from days of yore updated to include modern weaponry and global positioning technology.
For more than a decade, ships at sea around the world have been facing unusual dangers from marauding bandits who have been lured into their scandalous actions by the desire for riches. The vast majority of global trade depends on transportation by ship, and almost half of all trade routes go through or near the pirate-infested waters around parts of Asia.
The growing maritime piracy problem has forced numerous nations into a pact to patrol certain waterways in hopes of preventing new attacks. This flotilla of ships has undoubtedly prevented some issues, but the size of the area being patrolled is so massive that it’s highly unlikely that all the navies of the world could oversee it sufficiently to successfully thwart all piracy. As a result, trade ships remain vulnerable to determined individuals seeking riches at the expense of others.
Maritime piracy has become an important international security matter and is posing danger to personnel and trade routes. Furthermore, it is becoming a growing thorn in the side of the global economy and causing an increase in the cost of numerous products and services. Next week in Berlin, a special conference is scheduled to discuss the economics of maritime piracy. Topics of presentations will focus in large part on the law and legal peculiarities of piracy, security measures, and the costs and consequences for commercial shipping.
The cost of piracy continues to grow in proportion to the ongoing daring bandit raids. The success the captors have had in forcing commercial vessel owners to pay ransom has encouraged an ever growing number of people to engage in this practice in an effort to improve their economic conditions.
The threats that piracy poses to global trade are considerable. Within 24 hours of the rescue of Captain Richard Phillips and subsequent warning by President Obama that the US would be doing more to eliminate piracy, Somali pirates brazenly attacked four other ships in the Gulf of Aden, including two major cargo carriers. So far this year, there have been about 77 pirate attacks with 18 ships hijacked. Two have been released after ransom payments were made, and the other 16 ships and their 285 crew members await results of continuing negotiations for money.
If the piracy problem near Somalia and other Southeast Asian trade routes continues to grow (and from all indications it certainly isn’t slowing down), higher insurance payments will probably result. If shipowners are unable to meet those rising costs or find insurance carriers willing to provide coverage, an even greater detrimental effect could occur as ships will have to travel further distances to reach their ports to deliver goods, thereby causing prices of those products to escalate.
Economics is the driving force behind pirates who take to the seas for the purpose of hijacking. Denying pirates the financial gain achieved from their illicit activities is vital to securing global trade routes. Stabilizing the weak Somali government and providing options beyond paying the ransom of cargo ships and their crews will probably go a long way toward reaching that objective.
Eliminating piracy, especially that emanating from the area around Somalia, will require a variety of approaches, ranging from military to political, as well as humanitarian endeavors to improve the lives of the people of that war-torn country. Stopping pirates who are operating in other waters around the world will also require a combination of efforts.
Many of these measures are undoubtedly now on the agendas of various government study groups in numerous nations. The degree of success achieved in the implementation of their adopted recommendations can make a significant difference in helping to end the threat of piracy and play an important role in strengthening the global economy, which today is so dependant on freedom of the seas.
posted @ 07:59 AM CST [link]
Friday, April 10, 2009
New Steps
It’s been almost 40 years since Neil Armstrong took his historic steps as the first human on the moon (July 21, 1969). The words he spoke on that occasion are recorded in the psyches of those who heard his famous comments and will remain forever in our memories when we speak of giant steps for mankind.
Will the same be true for the steps taken during the recent G-20 meeting, commonly known as the London Summit? Will the actions approved by the heads of state of the world’s top 20 countries positively impact the global economies in the same fashion as Armstrong’s actions provided a boost to our fascination with science and technology? Only time will tell, but as a result of this historic gathering, at least a few more wheels have been put in motion to solve the greatest economic crisis the world has experienced in recent times.
The G-20, or the Group of Twenty Finance Ministers and Central Bank Governors, was formally established in September 1999, superseding several previous groups of this nature. The organization includes representatives from the major industrialized and emerging economies of the world. Twice over the past decade, the event has been attended by heads of government—in November 2008 and last week. That fact alone speaks to the magnitude of the current situation.
The nations involved account for about two-thirds of the world population as well as approximately 80% of world trade and 90% of global gross national product.
The purpose of the organization is to provide a forum for cooperation and consultation on financial matters affecting the various countries as well as the world in general. Broad areas of concern include ways and means for building and sustaining prosperity, global energy, reforms of financial systems, and coping with demographic changes being caused by an aging population.
Sometimes when events such as these were held by national leaders, the decisions reached were less than stellar and were often overshadowed by the pomp and circumstance associated with so many heads of state meeting. The final communiqués and agreements are often negotiated and drafted prior to the formal event, although the face-to-face conversations have produced the occasional (typically modest) surprise. Again, the stakes are a little higher this time around.
Since its creation, the G-20 has attempted to develop and strengthen international financial architecture. However, the circumstances that brought so many world leaders to conference tables last week were definitely different than at previous meetings due to the extent and depth of the financial crisis that is impacting the lives of individuals and institutional operations in every country in the world.
The G-20 leaders recognized early on that today’s extremely critical economic times were going to require historic and Herculean attempts toward resolution. They also realized that steps had to be taken together in order for the decisions to have any lasting effect toward curing the economic ills infecting the world economies.
Often in the past, European nations have been at the helm in proffering methods designed to stem global economic leakage. More recently, as the world has faced such severe financial crises, the US has taken the lead and has developed myriad stimulus action plans. At the same time, America has attempted to encourage the world to join in the pilgrimages designed to secure greater prosperity.
During the sessions of the London Summit, the question that seemed to be on the minds of many people was whether other leading nations would match US efforts—not in the amounts of money made available, but certainly in determination and willingness to take the steps required to move forward in solving the situation, particularly because of the magnitude of the problem.
That question was clearly and positively answered by the G-20’s unprecedented efforts to stem the decline and reverse the direction of global economic markets. Included among the many commitments made by these heads of government were reforms relating to international financial institutions, programs designed to promote world trade and engage emerging markets, plans to improve consistency and cooperation between countries, and the creation of new boards to oversee and reshape regulatory systems.
The overall objective of the summit was to restore confidence, fund and reform international financial institutions, create jobs, enhance lending programs, and underpin general prosperity around the world. The steps they took to do so were designed to ultimately reverse the global recession and prevent the reoccurrence of this kind of crisis in the future. There was far from unanimous consent of specific efforts, and we didn’t come away with our entire agenda being adopted (nor did we expect to), but the overall tenor was clearly positive.
Will the end result be the giant steps required to put us back on the path to future prosperity? Perhaps. At least they are substantive and significant steps on the journey toward securing the long-term economic future of our nation as well as countries around the world.
posted @ 08:10 AM CST [link]
Friday, April 3, 2009
Changing the Rules
Since the introduction of consumer choice in the retail segment of the electric power market some 10 years ago, my firm has been examining the effects of competition in that market on Texans and the Texas economy. In a series of studies throughout that timeframe, we’ve seen the quantified benefits grow substantially. In fact, we are in the midst of compiling the latest estimate of the gains in business activity stemming from competition, but that’s a subject for another day. For now, let’s just say the numbers are impressive.
Even with the clear advantages competition has brought to the state compared to where we’d be if we were still under a regulated environment, proposals to change key aspects of the competitive framework usually surface each time the Texas Legislature is in session. While almost every regulatory framework has the potential to be tweaked a bit as things change over time, bills recently introduced in both the Texas House and Texas Senate stand to harm the system and investment incentives for much-needed future power resources in substantive ways. They also limit consumer choice, which is the very essence of competition. Moreover, their only apparent function is to solve problems that don’t exist. By now, you should be getting the picture.
One area of continued debate relates to municipal aggregation. Texas law already allows for “opt-in aggregation,” where political subdivisions can negotiate and purchase energy on behalf of their citizens when citizens request to be included in such groups. The new bills propose to allow “opt-out aggregation” where local governments could enter into contracts on behalf of all residents not already in a contract (a practice similar in principle to the “slamming” that occurred several years ago in the telecommunications industry and brought outcries from consumers). This option would change the competitive framework of the state as it essentially forces citizens to buy power from the company of the political subdivision’s choosing, unless the citizen specifically requests to be excluded. Such an approach is the exact opposite of consumer sovereignty; more than 80% of Texas customers have already made an observable choice, with many others likely electing to remain in their prior plan after evaluating alternatives.
This idea has been attempted in other areas, and the results have not been impressive. Like Texas, Ohio started the process towards electric competition in 1999 with municipal opt-out aggregation as a key aspect of the transition. While Texas consumers now have dozens of choices (including multiple retail electric providers offering a variety of options—up to 95 in my hometown of Odessa), no competitive retail electric service providers are currently enrolling customers in the Ohio market. Moreover, the attempts at aggregation there have been unsuccessful, with thousands of customers being dumped to other providers. California also attempted a broad price negotiation which resulted in extremely high prices.
Because Texas already has an opt-in option, the opt-out aggregation is unnecessary and carries consequences to the continuation of healthy competition. Besides reducing consumer choice, opt-out aggregation discourages retail providers from aggressively pursuing businesses in such areas, reducing price competition and innovations further. Opt-out aggregation can lead to sudden losses of customers to existing retail providers working under competition, decreasing incentives to invest and adversely affecting the entire power market for Texas residents and businesses.
While group purchases can theoretically result in lower prices for residents involved, the opt-in aggregation already allows for such negotiations at the citizens’ request, thus making opt-out aggregation in Texas unnecessary and counterproductive in the competitive market.
Another aspect of the proposed legislation changes provisions related to the amount of generation capacity a company can own. Currently, a power generating company cannot own and control more than 20% of the “installed capacity” located in, or capable of delivering electricity to, a power region. Given the way the power grid works, this essentially translates into virtually the entire state now open to competition.
The new proposals specify maximize capacity within any ERCOT (Electric Reliability Council of Texas) zonal boundary. By changing the capacity limits to a regional basis, these proposals introduce yet more uncertainty into the market which, as noted, affects investment levels and the return on investment and would compel divestitures on a massive scale. In particular, it harms firms that have already invested a large amount in generation capacity expansion, something that Texas desperately needs to keep up with a growing population and economy. Generation companies are already subject to oversight from the Public Utility Commission of Texas.
In a recent study, our firm quantified enormous success in fostering needed generation resources in Texas, with all of the risk being borne by the firms making the commitments. Given the current state of the capital and financial markets, it would be a huge mistake to deliberately debilitate this vital and essential aspect of the Texas economy. Moreover, the zones were created for engineering convenience and were not subject to any type of “market” delineation. Using any standard method employed by economists to determine the scope and extent of a market, generation in the entire ERCOT region qualifies.
As would be expected in a properly functioning market, the price responses to recent declines in fuel costs have been similar throughout the grid, irrespective of who owns the power plants in each zone. Forcing an annual random sale of assets that could easily be manipulated would bring chaos to an otherwise orderly and effective process.
The bottom line is that the current system is working well. Changes in policy can erode the competitive environment and create transfers of wealth not based on economic factors or corporate strategy, which limits legitimate growth of the market mechanism. Companies have entered the Texas market and made investments based on the established legislative framework. Arbitrary changes will disrupt the process, potentially making past decisions economically inappropriate and harming suppliers and customers alike.
A predictable regulatory framework is important to encourage investment in generating capacity and other infrastructure that will be needed now and in the future. Changing the rules without just cause results in needless harm to the economy and hardship to Texans
posted @ 08:01 AM CST [link]