Monday, May 18, 2009

Measurement - Where we are

To hammer this point home: you can’t act to slow global warming effectively without measurement.

Measurement of the economic world is hard. And the best and hardest data is real time data. And how to get that data is the key to know whether you’re having success both (a) in your market, and (b) in your environmental goals. What data to have, how can you get it, how to sift and filter the data, how much does it cost in treasure, mental energy, and time to aggregate it, and the question of "will that number get on your desk in time to act prudently?"

For example, there are undoubtedly thousands, hundreds of thousands of people in the good ol USA thinking about ways to change the energy equation, with varying degrees of dedication, funding, information, and passion. And, positioning yourself as a business within that vortex is hard. As Don Rumsfeld once said: there are known knowns, unknown knowns, and unknown unknowns. In trying to seize opportunity in the carbon space, we are in the space of the third.

The role of government is to aggregate information. That’s the role of the Energy Information Administration in the Department of Energy. But government is necessarily slower than industry – its agents have less personally at stake. That’s how our government is intended to operate – cool-headed, delayed, and slower than the passions of enterprise. But where does that leave us in both making money and getting our 2050 goals done? The sum is that the DoE takes snapshots a bit behind the real world.

There are three interlocking movements here: the legislative and executive action, and the following regulatory risk, the ever-two-steps-behind reams of statistics coming from the EIA and -finally - the unknown unknown of who is working in this space, and how do all those puzzle pieces it fit together in the plan to alter our energy economy.

The first two we can know through the medium of the press and the internet. The last is unknowable, and the only way we can measure it is in bets placed on the table – that is, capital allocated to make ventures happen. And even that information is often private and limited.

A last point: imagine how hard it was to understand the credit default swap or derivatives markets. People understood these markets individually, no doubt. But it was extraordinarily hard to see the systemic risk and to act and hedge against it. The systemic risks for the financial world are the regulatory risks for carbon.

Thursday, May 14, 2009

Economic Shift - Profit from Carbon

"If men were angels, no government would be necessary." - James Madison, Federalist No. 51

The issue right now for venture capitalists and entrepreneurs is make carbon pay money – in business parlance, to monetize it. Carbon dioxide emissions are, almost literally, everywhere around us. Thus, to change our system we have to make people earn money or save when they stop those carbon emissions. To ensure environmental integrity of the system, it will be necessary to find a way to measure successful incentive adoption – a difficult problem in and of itself. We must mobilize the entire vigor of the American economy and capitalist system.

This means we must help capital flow to two types of projects. The first is those projects that supply our economy with energy – transportation and electricity – and to ensure that investors gain a return on that investment –and- to ensure that those projects emit little, or no “greenhouse gases” – the compounds of carbon dioxide and their ilk. The second types of projects are retrofits that reduce energy consumed or wasted or projects that absorb, avoid, or reconsume these gases – rebuilding your skyscraper, growing new forests, and storing carbon deep underground, for example.

Capital won’t flow if consumers won’t buy. So the back end of this is the monetization – the revenue streams that make investors preferentially decide to invest in (a) low-carbon energy as opposed to high-carbon, or (b) carbon avoidance or sequestration projects. This requires “offset” supply and sale under a carbon trading system. Other revenue streams – such as renewable energy certificates or controlled mandates, might exist, and without these reliable streams of revenue to businesses “clean energy” is not feasible. And, to be stark, without clean energy, there will be severe economic costs in the long term.

This change in our system naturally requires both government intervention and private will. This expresses the overlapping, and occasionally contradictory, intersection of public and private interests. The public interest is long-term avoidance of costs under the strain global warming will cause. The private corporate interests are to maximize short-term revenues and thus shareholder value. The consumer’s private interest in the cheapest electricity and gas he or she can possibly get.

The government imposes the public interest on the private. But private vigor is just as necessary as government intervention. The problem is one of coordination without stifling innovation.

The point of this blog is to help companies position themselves strategically in the new energy world. It is also to discuss how we can ensure that in fifty years we will have achieved our public interest objectives – a vigorous economic world with a stable climate.