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Friday, June 20, 2008

Ecology & Economics Part II: True Cost Pricing

Enviro-Retrofitting gets a bad rap as too expensive, and that’s something we have to change. But, in broader terms, our markets are structured in such a way that we don’t do a very good job of assessing the real and complete costs for much of what we buy or produce.

True Cost Pricing takes a more comprehensive look at what a product or service costs, taking into account not just the Economic Capital gained or lost, but the impact on Natural Capital and Social Capital as well.

It can be argued, for example, that coal is a cheap and plentiful source of energy. As a purely economic matter, that’s true. But what is the impact of coal on Natural and Social Capital? When you remove a mountain top, sending toxic runoff into rivers and streams, for the sake of argument, let’s call that bad for the environment. Let’s stipulate as well that increased rates of kidney disease, lung disease, and high blood pressure associated with the mining and burning of coal are also bad.

Whatever moral weight we give these impacts, they have real economic costs. As the purchasers of “cheaper” electricity, however, we don’t see the downsides—or we see them but the connections are obscured.

We pay $1 for a lump of coal, which looks cheaper than paying $2 for a cup of sunshine. But the following year, for each lump, we pay another $1 in increased Medicare premiums; ten years later our children pay $1.50 for each faint spray of brackish bottled water they can find, cuz it don’t come from the stream no more, cuz there ain’t no stream.

This is standard business practice: privatize the profits and socialize the losses. Businesses turn potential losses into externalities, or “externalized costs.” This is ethically and morally problematic, and something I am apt to occasionally spit, sputter, and spew about—often inappropriately in social contexts (where should one spew? here, I guess)—but in the end business is business.

“I stung you because that’s my nature,” the scorpion says to the frog, midstream, as they both drown. And that’s the rationale for regulation and oversight. Businesses are going to do pretty much anything they can, and the market is often going to push them further and faster in the wrong direction.

The Collective We—that would be The Gummint, but keep this quiet or we’ll scare the Republicrats—need to get together and act as a counterweight. Not because we are anti-business or anti-progress or antediluvian, but because we have an interest in the future that BizCo often can’t afford to indulge unless forced—that’s right Boss, the future actually extends beyond the end of this fiscal quarter. . . yes, really.

Three quick automotive examples related to True Cost Pricing:

1. Hybrid cars (mine included) don’t always look good when you add up all of the energy costs. There’s wiggle room in the math, but some people argue that the energy and disposal costs of the batteries outweigh the gas mileage savings.

2. Autoblog Green notes that, “EU [European Union] Directive 2005/64/EC states that after December 2008 all vehicle manufacturers will have to provide evidence of recyclability when they apply for type-approval of new vehicles. The minimum that new vehicles under the directive must be reusable and/or recyclable is 85 percent and at least 95 percent by mass must be reusable and/or recoverable.” The end-of-life costs of European cars, rather than just the costs of manufacture, are embedded in the purchase price—and the manufacturer has an incentive to keep all of the costs as low as possible.

рей. According to Green Car Congress, British automakers cut manufacturing energy use, waste, and CO2 emissions in half between 2001 and 2005. Good for them, good for us.

When I’m not spitting, sputtering, or spewing, I tend to be fretting. Tommy Rob Malthus is looking fashionable and prescient again (never mind Garrett Hardin) and my faith in tomorrow is always on the shaky side.

Still, we ought to structure our economy and our regulatory apparatus on the optimistic premise that we have a future.

Tuesday, June 17, 2008

Ecology & Economics Part I: The Benefits of Retrofitting

If every structure we built, from tomorrow on, were zero-carbon, that would be a good step in the direction of building a sustainable future. What is it reasonable to require as a matter of building codes? Personally, I’d like to see the end of roof shingles as we know them, replacing them all with photovoltaic tiles (every roof a clean, quiet generating station). I’d like to see every new building a zero-energy structure—something that might be facilitated by a credit trading regime. If you could only get to 85% of your building’s requirements and I was producing 115% (in a building of similar size), I could sell you what you needed. Lights to appliances to building materials and practices, Energy Star shouldn’t be the gold standard; it should just be the standard.

There is a “nanny state” issue here I know—although I think a credit trading system does something to add flexibility and address this objection—but the larger problem is the “installed base.” What we do “from now on” wouldn’t address the millions of homes, businesses, and industrial facilities already in use, decades (or centuries) old and inherently inefficient.

What Do We Mean by Cost?

There are logistical and aesthetic problems with retrofitting (re-plumbing, rewiring, or adding ductwork to an older building can be a nightmare), but the larger objection is often made on economic grounds: what we get in energy savings is said not to be worth what it costs in time and materials.

You can run an internal combustion engine (ICE) on hydrogen; a high school auto mechanics shop can do the conversion. (Daily Kos notes an HS student working on injecting hydrogen into an ICE as an energy booster.) You can change over an oil-fired, forced air heating system to work using a geothermal heat pump instead (you could also run such a system on recycled cooking oil). You can piggyback a solar hot water heater onto an existing system, either to pre-heat the water or do the whole job.

But you would do better to design and build efficient, sustainable, modern systems from the ground up: cars run on electricity from hydrogen fuel cells, HVAC systems that are “born green,” hot water (and gray water recycling) systems that link and make the most efficient use of a variety of a building’s resource inputs and outputs. That’s the cheaper way to go.

Part of the economic argument is indisputable. You can calculate the cost of a photovoltaic array against the average monthly electric bill, add the capital cost via a mortgage running anywhere from ten to thirty years and it would appear that you come out behind.

As always, those numbers are more than a little soft: there are federal, state, and local tax credit, rebate, and loan programs that can substantially reduce the out-of-pocket costs; we’ve seen the cost of gasoline in the US rise, in constant dollars, by a factor of four over the past ten years (sometimes feels more like, in the last few weeks); it’s also reasonable to assume that, as green tech scales up, the cost of renewables like solar and wind will come down substantially. Energy is going to cost more in the future (and the future is now); the technology is going to cost less.

You might also reasonably ask, What Price for the Greenland Ice Sheet? But let’s put all that aside for the moment.

Not New Math, Just Better Arithmetic

What economic ripple effects can we reasonably expect from retrofitting? Let’s stand trickle down economics on its head—or knock it on its ass—what happens if we support the bottom instead of the top, need instead of greed?

Given the almost complete abdication of leadership on the part of the Bush administration, state and local officials have stepped into the breach and started promoting green technologies as revenue and job creation vehicles for cities, counties, and states. For the most part, the focus has been on research and manufacturing, on the benefits that will accrue to the companies and the universities that develop new green technologies, on the regions that host these facilities, as well as the manufacturing plants that turn out the resultant products: white collar jobs become green collar jobs.

At the lower end, however, what about blue collar jobs, the building trades jobs that would be created if we looked to retrofit just about every building standing? How many more carpenters, plumbers, electricians, and roofers would we need? Would we not thereby be creating a wave of employment for working class high school grads (or non-grads) who have been hit hardest by job losses and wage compression over the past three decades (jobs that cannot be outsourced overseas)? Could we not reasonably anticipate a variety of positive knock-on economic effects from this: fewer people in need of government support and more people paying taxes at the top of the list?

We need to look at cost in a more nuanced way. It isn’t enough (it’s neither complete nor accurate) to simply ask, “How much will it cost me to retrofit my house?”

A better question set would be to ask several things, and to ask them as benefit (rather than cost) assessment questions:

“How much will I benefit economically by retrofitting my house?”

“How much would reducing my carbon footprint benefit the natural environment?”

“What are the economic benefits of retrofitting to the larger society?”

We are oriented toward thinking only about Economic Capital; we need to refocus to include Natural Capital, and Social Capital as well.