30 May 2012

Green oxymorons

Green products (recycling, solar power, hybrid cars, etc.) are more about consumption than production, since people are willing to pay/subsidize them to "feel good."

In the same way, green jobs (carbon adviser, sustainability director, etc.) are less productive than "brown jobs" because they must be subsidized before people will speak to workers...

In these senses, both are oxymorons: they are called "productive" but they are actually consumptive.

Please comment?


Eric said...

I think that the landscape is more complex than this.

Companies tried to make money not through straight competition but through subsidy funded competition. The subsidies, in many places, are going away.

Feel good buying does not seem to be widespread enough to support big companies and to accomplish the carbon saving goals of the Gigaton Throwdown.

Subsidies aren't going to last forever.

On the other hand, 'you can tell the pioneers by the arrows in their backs.'

My hope, and what my companies are working toward, is green products that do not need subsidies for us to make a profit and that feel good while at the same time being cost competitive.

There seem to be many companies, large and small, with the same vision that we have. Some of them will succeed.

Feel good and subsidies seem to have catalyzed the growth of these second generation companies.

David said...

OK, David, I'll bite.

"Green" products are those things positioned to make the buyer "feel good." All products are. They can be priced at a premium, so they generally are. I don't see how they are different from other products, unless you feel that the "green" label drifts close to deceptive advertising. If there is an oxymoron in any of this, it is how "brown" many of these items can be- either directly (think about what is in an electric car's battery), or (like many products that command a premium) how they subsidize other less "green" production processes.

"Green" jobs are a silly category. I don't know what they are, or why we should care about labeling them as such (if they do exist). If you mean that, in practice, most EHS, sustainability, or similar jobs are cost centers, you are correct. Very few "jobs" are not. I guess sales people are an exception. As are traders (note that they also sell things). So, like most cost centers, they are a joint cost of producing something. They should be managed to be as efficient as possible, but this does not mean that do not add value. It's added at an enterprise level, not at an office or position level.

As Eric notes, one can see these things as a response to rent-seeking becoming more difficult (at least for some). Unfortunately, and this might be your point, that response might be a smoke-and-mirrors marketing exercise to replace rent with consumer dollars. My concern is that consumers are being misled- much of what is labeled as green is pure hokum. Rent may be being replaced with fraud.

What do others think?

Jay said...

Our quality of life depends on efficiency, doing more with fewer resources - whether those are natural resources, capital, labor, management, intelectual capital, etc.

Any products or services that don't displace less efficient products or servies, and any jobs that don't reduce the labor component of the product or service can only create psychic, or feel good, results.

Subsidies, by their nature, indicate more resources are being consumed, otherwise the process would already be cheaper than the existing process and could compete on price and performance.

I can't think of many examples where subsidies "primed the pump" and were later eliminated as the new processes became more efficient than the old processes. Maybe some other commenters can share examples that are counter to our experience with corn ethanol and nuclear power.

David said...

OK David, I'll bite.

"Green" products are purchased by people that value (among other things) claims of "green-ness." These products are positioned to appeal to a market that can and will (often) pay a premium for what is on offer. The buyer extracts more value than they held for the cash they're exchanging. I don't see how this is different from other products. You're right that it's about consumption, but what product isn't about consumption?

My concern about "green" products is that people are buying claims of "green" (whatever than means) instead of purchasing a better planet (less pollution, cleaner air, more fish or what have you). Many things positioned as green either have a lot of "brown" in them (think about the batteries in electric cars) or are priced at such a premium that they subsidize damaging actions elsewhere in the producers' operations.

Labeling jobs as "green" is just silly, in my view. Virtually all jobs are costs, organized into cost centers. The exception might be sales and trading jobs- those that close some deal to bring in revenue. But even those jobs don't create the revenue, they just close the deal. Like most costs, these are joint costs, and trying to sort out some precise value-add can be like counting angels on the head of a pin. The trick with cost centers is to make them as efficient as possible. Just as the "green" label is a silly modifier for "jobs", so is "brown." And debating the productivity split is a job for the circumlocution office. (apologies to Dickens)

Eric is likely right in that the rise of these categories may be due to the increased difficulty of rent-seeking by polluting, regulatory arbitrage or public subsidies. Your point might be that consumers are being asked to offset the revenue previously obtained by rent-seeking. My concern is that these rents may be replaced by misleading and somewhat deceptive claims of "green."

What do others think?

(ps- to Jay's question: how about land grants to railroads in the 19th century in the US? or the semi-conductor industry which emerged as a result of the space program in the 1960s, or the development of radar or digital computers or jet engines during WWII?)

Jay said...

@ David

Good examples.

I think the recent R&D expenditures were different than subsidies for specific products and companies. The commercial value is quite evident for the technologies you mention. I'll add GPS to your list.

In all of these cases I think there were military advantages of buying new technology. These examples were less about trying to pick (and support) winners, and more about meeting real near-term needs.

The new military technologies also had commercial uses. The positive externalities generated by R&D can be stunning.

A recent governmental R&D example is the DARPA Urban Challenge that lead pretty directly to the Google car. No government program is subsidizing autonomous vehcles, in fact I expect there will be institutionl barriers to the adoption of autonomous vehicles. None the less, adoption of autonomous vehicles and aircraft will increase safety and efficiency.

Alex Trembath said...

Let's not forget about the shale gas revolution. Shale gas has become the fastest growing input into our energy portfolio, at close to 30% of US natural gas production, up from 2% in 2000. The shale revolution has pushed unsubsidized natural gas prices to record lows, so much so that coal went from 45% of our electricity supply to 35% in ONE YEAR. As we documented in our investigation, the shale gas revolution would not have occurred without federal R&D, publicly financed demonstration projects, cost-sharing with private companies, and a 22-year production tax credit for unconventional gas.

The lesson? Subsides and public investment in nascent technologies can work. Railroads, semiconductors, gas turbines, personal computers, Internet, GPS, shale gas.

David Zetland said...

@Alex -- nice try. As you know, success has many mothers, and that's the case with every technology you cite. In the end, it's supply and demand, not government "wisdom" that leads to innovations.

You should try to find a way to measure the ROI on government vs. non-government "investments."

But, besides that, I think we probably agree that gov't is better for R, industry for D. That's the pity about the move to D work @ universities. They are now subsidized divisions of corporations :(

Alex Trembath said...

Except in many cases, government creates the demand, either through subsidy (shale gas, wind, solar production tax credits) or through procurement (semiconductors, nuclear reactors, jet engines). In these cases, there's no clear path to commercialization without long-sighted government investments with the explicit intent of creating a market and driving down the cost. That's where "supply and demand" enter the game.

Government also often creates the supply. There's no reason to think that civilian nuclear power, the Internet, or shale fracturing technologies would have become commercial without federal government research AND development. Read the accounts from gas industry executives who told us how critical early federal investments were: http://thebreakthrough.org/blog/2012/05/where_the_shale_gas_revolution.shtml

All these technologies DO have "many mothers" — that's the point. Early federal investments in nascent technologies drive innovations and commercialization, enabling private sector entrepreneurs like George Mitchell and Steve Jobs to capitalize on the platform technologies (or, often, "general purpose" technologies.

As for ROI. let's look quickly at the numbers. Federal shale gas R&D was really a 1970-2000 gig if we're being generous; most of the R&D was done between 1975 and 1991. Now, if you aggregate total DOE fossil energy R&D spending (not just shale!) over 1961-2008, you get $26 billion in US$2005. Add to that the $10 billion from the Section 29 unconventional gas tax credit (1980-2002...also, not just shale gas!) and we have an extremely high estimate of $36 billion spent by the federal government on shale gas commercialization.

In 2009, the most recent year for which complete data is available, there was about 3.4 trillion cubic feet (TCF) of shale gas production in the United States. At an average price of around $8/mmBTU, gas industry revenues for 2009 were about $27.1 billion.

So. $36 billion over 45 years, the vast majority of which didn't go to shale, gets you $27.1 billion in production revenues in one year. Bear in mind 2009 was just the on-ramp to today's shale gas revolution.

Private gas companies played a significant role along the way — hence the "commercial" in "commercialization." But gas industry executives will tell you that shale reserves were not thought to be a viable target in the 1970s when the federal government initiated research AND development. George Mitchell, whose company ultimately developed the fracking technique credited with making shale drilling profitable, got the idea to drill in Texas from federally-funded fracking demonstration projects in Pennsylvania in the early 1980s. Since his company's innovations in the late 1990s, the federal government has been able to withdraw and leave the later-stage commercialization to the private sector.

Jay said...

@ Alex

You make interesting points but I have a few quibbles.

Comparing investments to revenues is misleading. Return on investment must measure profits, or in the case of societal investments we are looking for societal surpluses compared to the noninvestment alternative. (About a dozen years ago investors in Pets.com and other internet start-ups learned that revenues and predictions of profits are quite different than profits, and that buying such stocks was hardly an investment.)

Further, waiting 45 years for revenue, let alone for a surplus, indicates a very low or potentially a negative return. (Though I do belive the benefits will accrue for 100 years or more.)

I also question whether the past and continuing subsides for nuclear power have provided any benefit to society. Fifty years since the first US nuclear plant began operation the subsidies continue in the form of the limitation of liability that nuclear plants enjoy. In addition the money spent on developing a long-term depository for spent fuel continues, and we have no idea of the final costs. Nor do know what the costs will be for decommisioning the existing plants. So we are a long way from knowing what nuclear power costs.

Without knowing costs it's impossible to know if the benfits exceed costs.

Mr. Kurtz said...

There been some useful byproducts of military spending (after all, the monkey-typewriter theorem would dictate that after untold trillions have been spent, one or two good results must follow). But I can not conceive of a poorer set of folks to allocate investment capital than elected officials or their appointed factoti. We have the Buffets and Bains and Kleiner-Perkinses of this world, who a) have a good record at this and b) are spending their own money, or that given to them voluntarily by investors. Government is spending money they confiscate from the productive sector, borrow, or print in the basement. Not exactly what you'd call "skin in the game". We would be lucky if the least they did was waste money with their "investments". More often, Gresham's Law applies; bad money crowds out good.

Eric said...

@ Mr. Kurtz

I do not have a clear view of how to calculate ROI on government investment in new technology. It may make sense to calculate some differential ROI. For instance, if the government is going to spend $100,000,000 on some politically popular idea no matter what, then we might want to think about how to spend this money better than it is being spent at the moment. From the other side of the investment, a company might want to ask whether the company can be more successful by accepting government funds than by accepting funds from some other sources.

Is the above clear?

David Zetland said...

@Alex -- I think that Jay and Kurtz made good points. You need to take opportunity costs into account for ALL government spending, most of which is NOT for core-competencies and a good deal of which is pork (Chevy Volt, recently). You ALSO need to consider the whole portfolio of spending. For every "internet" you can give (and I will not accept that as an example, given how often the USG has tried to fuck it up), I can give an ISS, war in Iraq or Medicare program...

@Eirc -- You are saying that we need to find the "best" way to burn money, right? Since it's going to be burned anyway? On you 2nd question, I'd say that there are definitely differences (non fungibility) between different sources -- gov't rules and regs, for example...

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