Thursday, September 10, 2009

Policy and the 'Carbon' Business

Normally DC and US business live in comfortable symbiosis. At its best, policymakers defer to the business judgment of the economic actors. Which implies that business knows what it’s doing.

The problem with starting the “carbon business” is that entrepreneurs don’t yet know what they’re doing. What happens with many of the businesses that will emerge? They don’t exist yet! Potential entrepreneurs are just figuring out how they could make money in these areas but they can’t make money without stable government action. But government won’t know how to act until it can see how the business will work. It’s a chicken-and-the-egg problem.

Take carbon storage, for example. Power plant developers don’t have a motivation to start carbon storage, because it cuts into their profits, and they have a duty to maximize their shareholder wealth. It’s essentially left to idealists, and to the central government. But the mechanics of making it happen will be dependent upon people venturing into spaces that don’t exist yet.

To make financiers go in there, you have to assure investors they’ll receive their money back. Their cash flows will come from the creation of carbon offsets that will fundamentally be dependent upon government action. Now let’s not back away from this scared- paper money is also dependent upon the backing of the government, and we’ve had thousands of fights in our history about this in the past. But it is now an accepted part of our economy.

Offsets, in my opinion, could become such an accepted part of the economy, and then we’ll start to see motion in other areas. But regulators will have to make a careful dance with the entrepreneurs trying to make these businesses work, which no one really knows how to do right now.

Wednesday, June 10, 2009

What stops private ambition (part 1)

To achieve our 2050 goals, we have to spark as much human energy as we can, while diminishing coordination and duplication costs across the economy.

Inspiring economic acitivity requires both incentive and purpose. The economy is a fundamentally purposeless activity - we place meaning on our exchanges, like Babbit fantasizing business to war, or traders analogizing profit-taking to mathematical precision, or co-workers laughing and mock-fighting over boring work. It underscores that humans work for meaning.

To inspire ourselves and our economic acts, we must place meaning on the simple short-term rush to survive and to flourish. Meaning creates the performance and results that are unusual and make some companies great. We cast the struggle in a heroic narrative. By doing so, we take the famous "wedge game" and breathe life into the dreams of the academy - energy efficiency, carbon trading, carbon storage, renewables, and nuclear in their proper times and places.

But inspiration alone is not enough. Political leaders have tried to simply inspire since our first knowledge of global warming. But still, 65% of our electricity, for example is carbon-based. The first initiatives to slow global warming began under Nixon but no Congressional policy truly started until the "No Regrets" policy of George Bush Sr. in 1992.

So why isn't the shift working, and what can we do? We must first understand why the shift has not happened.

The quandary is from six basic factors: strategic clarity, appropriate human skills (and the allocation of those skills), an existing market, capital to ramp up and fund projects (and proper allocation of capital), skills in the management teams to execute the visions, and the power to maintain a business's working capital or liquidity

Strategic Clarity

You can't play the game if you don't see the field. The makeup of the field is due to several components. There is a necessary dependence on government, as I'll talk about in the next post, the strangeness of carbon. It's also dependent upon competition. Competition is usually great as it spurs us to higher goals, but it also can be destructive to coordination.

Government's role in encouraging strategy requires, as an aside, a lack of dogmatism. There isn't any silver bullet - solar, wind, carbon storage, etc. The only two requirements for a valid project or technology is (a) does it make power and (b) is it the lowest cost solution under all incentives, and (c) is it low-carbon.

Strategic clarity is lacking now because of high regulatory risk combined with market uncertainty. To make it clear, government has to set up a stable system and people pressing forward with their own bets in this space must be flexible in their goals and ambitions.

Human skills

Creativity is the most important. This skill allows us to change human habits. We also need business management skills, engineering skills in materials, systems engineering, information technology and numerous other fields. To a limited extent, these engineering skills are being created and allocated by research grants in universities. The universities are inspiring and training engineers that have the interest to solve the technical issues. Also don't mess with it by sending valid scientists who want to study here elsewhere!

We also need attorneys and financiers who know the economics an intersection between public strategy and private strategy. Allocators of capital have to be clear-headed enough to see the best bets and find the right teams. It also requires leadership skills, the ability to inspire, motivate, and guide teams to produce results. And because of the regulatory dependence, it requires people that understand government and its ways.

Finally, it requires business leaders who are idealistic, but more prudent than idealistic.

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.