Tag Archives: Externalities

Internalizing Externalities: How to clean up the BP oil spill the right way

The Environmental Economics blog has been covering the oil spill really well, so I suggest heading to their blog and keeping up with it. They just posted a video on a way to help soak up the oil in the gulf:

How cost effective would this be?

Just from eyeballing the video, let’s say a pound of hay and can soak up a pound of oil.   How many pounds of oil is being spewed by BP’s mishap?  According to the NYtimes, 5,000 barrels per day seems to be the rate.  At 5,000 barrels per day, that amounts to 210,000 gallons of oil.  At 7 pounds of crude per gallon, (give or take) your looking at  1.47 million pounds of oil being dumped per day.  Now, price of hay varies depending on amount, type and time of year.  Given some googling on the internet, hay can run from $0.02 to $0.10 dollars per pound.    Let’s say it can get as a bad as $0.50 per pound.  In that case, it would cost around $29,400 to $147,000 to $735,000 pounds, given the price of hay.  Add in the labor that would be needed to disperse the hay and then clean it up plus the equipment and manufacturing and you would have a pretty pricey cleanup.  But compared to the alternative, some say the clean-up will total $12.5 billion for BP.  In addition, using hay is more enviromentally friendly than the alternative AND it can be implemented now.

So, what would be the total cost if the hay solution was implemented? Assume it would take a month tops to absorb all the oil. Note once the oil is absorbed in the hay, environmental damage is limited – basically because oil doesn’t have to be cleaned from anything else.  Note that the alternative chemical dispersant not being used won’t have to harm the environment.  Note that the oily hay can be retrieved and then either burned for energy or maybe even refined so that the oil is turned back into a usable source.  Not counting capital and labor, the input prices would cost: $882,000 to $4.41 million to $22 million per month. That’s it.

Worst case for the year: $264 million < $12.5 billion

How much more could the thousands of shrimp boats cost to implement it and the seaweed rakes to clean the stuff up on the beach? Certainly not more than what many have projected, even if a traditional, yet smaller clean-up will be implemented.   Even if the $12.5 billion figure is taking into account ALL costs such as the lost product and actual equipment cleanup, variably hay would be cheaper and much easier to implement given community wide mobilization.

Yes, I know this analysis is too generalized and is not taking into consideration many factors such as… blah, blah, blah.  The point is this: If BP or the government won’t stand up, then the local community will, dat’s who!*

*Apologies for the very terrible impression of how Cajun people act.  For more information, please visit stuffcajunpeoplelike.com.


The End of Cheap Coal

One of the reasons why the push for Cap and Trade was a good idea was it would not only internalize the cost of carbon emissions, but it would also raise the price of energy created from coal.   With higher prices for kilowatt per hour from coal energy, cleaner energy sources would become competitive.  Currently, cleaner energy sources can barely compete with coal, with exceptions of course.  But if legislation wasn’t going to push up the price of burning coal, then in the long-term, rising international demand would.  That time is now.

In 2009, China has ceased to export coal and has now began to import it.  According to the financial times, in 1993 the same happened to oil.  China’s oil imports exceeded what was being imported and the consequence was a climb in the average oil price, all too well known thanks to oil spiking at $150 a barrel in 2008.  China had been using more oil than it could produce in order to fuel its large amount of economic growth, and oil wasn’t the only commodity.

China isn’t the only player.  India as well as the emerging markets have offered its heavy share of the demand, tipping trade balances toward imports and helping to drive up commodity prices for oil and building materials.   The same is expected for coal.

This is good news for America, which contains the largest coal reserves in the world.  This is also good news for the coal industry, as it will be able to profit from an uptick in prices.

This is not so good for the coal power industry, especially in America.  While the coal industry will benefit in developing nations who have already increased the capacity to burn coal for energy and produce steel from coke, the developed world already faces pressures for pursuing greener technologies instead of burning coal.  And the coal power industry should be scared: the only thing keeping them from not succumbing to the powers of green energy is price, which is now soon to change.  With coal prices higher translating into higher per kilowatt hour energy costs that begin to be on par with greener technologies, the coal power industry will have a tough fight.

Green technologies already have the leg up of being green and renewable.  Obama’s recent moves to push for nuclear energy, which would already be competitive given Obama’s plan, and the ARRA’s subsidizing of renewable resources like wind and solar significantly put the government against the coal power industry.

The government’s backing of renewable energy certainly distorts what the market wants when providing energy, but a needed distortion nonetheless.  The only hope for the coal industry is to level the playing field by either removing green energy subsidies (not likely) or becoming green it self.  The industry’s only hope is going for clean coal. And now, it doesn’t have the luxury of waiting anymore.

Before one says that clean coal isn’t viable, I disagree.  It is possible, given recent developments in innvoation.  I blogged recently about Thomas Friedman’s catch about clean coal:

If you combine CO2 with seawater, or any kind of briny water, you produce CaCO3, calcium carbonate. That is not only the stuff of corals. It is also the same white, pasty goop that appears on your shower head from hard (calcium-rich) water. At its demonstration plant near Santa Cruz, Calif., Calera has developed a process that takes CO2 emissions from a coal- or gas-fired power plant and sprays seawater into it and naturally converts most of the CO2 into calcium carbonate, which is then spray-dried into cement or shaped into little pellets that can be used as concrete aggregates for building walls or highways — instead of letting the CO2 emissions go into the atmosphere and produce climate change.

If this can scale, it would eliminate the need for expensive carbon-sequestration facilities planned to be built alongside coal-fired power plants — and it might actually make the heretofore specious notion of “clean coal” a possibility.

With coal prices expected to rise, you can bet this will scale. With clean coal on the horizon, subsidizing greener technologies won’t be needed anymore or vice versa, coal won’t be dirty anymore. Either way, whether a Cap and Trade bill , favorable legislation towards green technologies or the sheer power of the market was going to force it, switching towards less CO2 intensive energy was inevitable. Now, about those mountain tops…

Waste products aftermarket: part II

Production line at Total Reclaim

Production line at Total Reclaim

After reading an article from Oregon Live, (here) I have become really excited about my belief in a future market that I have entitled as a “Waste products aftermarket.”  For a more detailed account, please see my recent posts on a theoretical framework and part I.

The article details the efforts of a recycling business called Total Reclaim located in Alaska, Oregon and Washington.    The primary business of Total Reclaim is through the recycling of e-waste products such as TVs and computer monitors.  Among other services, they recycle other durables that have been thrown away including refrigerators and HVACs.

A video here explains their production process in detail:

Notice towards the end of the video the on-site production process of plastic pellets.  Not only is this a finished product that can go back into new electronics, it adds value to something that otherwise would have gone into a landfill.  There is money to be made there.  Your taking a product worth nothing and processing it into a product worth something.

The primary driver for their business in e-waste is thanks to support from state legislatures.  In all three states that Total Reclaim operates, it is illegal to throw away your e-waste in traditional land fills. (i.e. throw them out onto the curb for trash pickup)  The only legal way to discard e-waste in these states is to bring them to a licensed recycling center such as Total  Reclaim.  For a fee that varies depending on what you bring in, they will recycle your e-waste.

The fee is an important factor to consider.  If there was no ban on curbside e-waste, what would the price be then? Right now, the cost to recycle e-waste can average (give or take) $50.  The ban obviously forces people to demand Total Reclaim services (explains their 30% growth) which can push the price for recycling down.  Thanks to the legislation, the price for e-waste recycling has fallen.  In addition, legislators are looking to eliminate the deferred cost of waste management and instead make the cost upfront by forcing manufacturers to offer a rebate so that the cost of recycling of the device is already factored in the purchase price.  This will lead to more downward pressures on the price of recycling.

Already you can see a viable business opportunity and a large amount of growth given the partnership that Total Reclaim has with the public.   Akin to the beginnings of the railroad and telephone industry, with waste product aftermarkets in its infancy, government support should help nurture growth.  Continued public support, (like the manufacture rebate program) expanding coverage to outer areas of the state, (or even lobbying to change legislation in other states…or better, federally) and the discovering and implementation of new technologies in order to offer more products and services could mean that Total Reclaim is one of the leading companies that could make this into a viable and profitable opportunity that is focused on sustainable business practices and providing value for environmental safety and conservation.

Waste products aftermarket: theoretical framework

This is starting to become a serious interest of mine. Previously, I did a post on bio-diesel made from chicken fat (here) and how it may mark the beginning of a waste product aftermarket within green economies.   I will also write a piece on a company I am currently reading up on, Total Reclaim. (here) Although the idea itself is nothing new, I feel I need to make a theoretical framework for this.

Essentially, for our 21st-century economy, a new economy, the “green economy,” going green is expected to be the next big thing.  This proposition has been made solely on the popular value judgment that there is a rising demand for eco-friendly products.    There is nothing new about this.  We can already see this with products ranging from toilet paper made from recycled paper to cell phones made from recycled materials.

There is nothing new about recycled products or aftermarkets either.  If businesses are able to find ways to cut down and recoup costs by either adding value on site through production or from scrap, most are going to do so.  (see auto aftermarkets as a popular example) Marketing products as green helps signal to eco-conscious consumers that these particular products (such as the cell phone linked above) will lower ones environmental footprint.

But is there necessarily a market for it?  I believe that currently, there is, but it is fractured and not on par with the types of commodity markets we have today.  Most business decisions regarding recycled products are not core competencies, but are more along the lines of reducing the marginal unit cost of particular products and their waste. These are the questions I want to continue to ask as more and more examples show up throughout the U.S. (and the world) on how businesses start to shift to waste products as a revenue source rather than efficiency measures.

How do I believe this change will happen?  Remember, most of the important part of the surge in the waste product aftermarket is the demand to go green.  Businesses have incentives to offer value for eco-friendly consumers as the demand to go green becomes even more popular.  But how far will it go? As businesses start to take advantage of utilizing new technologies and implementing cost effective production techniques, cost for recycling will severely plummet.  As profitability ensues, businesses will be able to acquire capital in order for them to grow.  Then industry consolidation should be in order as businesses begin to attain economies of scale.  By then, these companies will be able to sell their products on an open market commodities exchange, much like what we do with many natural resources available today.   And the incentive for doing this? Commodities will be facing a long-term supply shortage as more and more countries begin to develop, demanding more resources and putting a strain on what is currently available.  These forces will drive up the price of commodities, (a long-term trend we have currently experienced via China and other nations) making recycled materials an economic reality.  And the best part is that it won’t be dependent upon the demand for green products anymore, but a means for making our industrial ecology more efficient.

This is the value proposition I am making for the future of our world economy.  Technologies continue to be developed that make the production and reduction of physical goods not only a scientific reality, but an economic one.  As more and more technological breakthroughs make it through the news, I will be there to comment on it. (here)  As more and more environmental policy creates a more economic reality, I will be there to comment on it. (here) As more and more unexpected impacts from economic decisions influence the way we produce and consume products, I will be there to comment on it. (here)

I will continue my posts for waste product aftermarkets in parts as more and more real world cases come to light, charting the progress of this future.  I believe that this is the most realistic avenue that our world can move in, not only for the betterment of the world, but to push possibilities farther then we have ever imagined.

Put climate change where your mouth is

Via MR, a really good NYT article written by John Tierny with a proposal that will put climate change skeptics and proponents beliefs to the test: tie the amount of carbon taxed/capped to the rise in temperature on earth.  Why is this great? If skeptics are right, we don’t pay anything.  If global warming proponents are right, we will have the safe guards installed to make sure that when temperatures do rise, we are able to internalize the actual cost of carbon, thereby limiting the amount we emit into the future.

Of course there will be needed discussion on just how the temperature should be measured, but the idea is foolproof nonetheless: the only judge of how much damage we are really doing to our earth will be from the earth itself.  No arguing over fudged forecasts or ulterior motives, this plan would take all of the political risk out of future changes to the climate and create a more forward looking plan; a plan that everyone will now have a stake in, including private investors – if they want to make sure that they hedge against higher costs in the future.

The problem with politics now would be how to implement it. Cap and trade or carbon tax?  The article suggests:

[…] it would be even better, Dr. McKitrick says, to use the temperature readings as the basis for a carbon tax instead of a cap-and-trade system. Like many economists and environmentalists, he argues that the carbon tax would be more effective at reducing emissions because it is simpler, more transparent, easier to enforce and less vulnerable to accounting tricks and political favoritism.

It is certainly true that a carbon tax would make things easier, but does it provide the efficiency that cap and trade would provide? One of the benefits of cap and trade is to allocate carbon credits to those who need to pollute the most, providing incentive for others to focus on creating more efficient and cleaner ways of lessening their carbon footprint. Just because a carbon tax may be easier, it still doesn’t yield the benefit of the gains from trade that could happen if carbon is able to be capped. In this case, only true polluters would bear the brunt of the costs, which could in turn, offset end costs to consumers. (Which is the driving point for cap and trade)

How much food do Americans waste?

From the Economist:

[Kevin Hall and his colleagues at the National Institute of Diabetes and Digestive and Kidney Diseases] found that the average American wastes 1,400 kilocalories a day. That amounts to 150 trillion kilocalories a year for the country as a whole—about 40% of its food supply, up from 28% in 1974. Producing these wasted calories accounts for more than one-quarter of America’s consumption of freshwater, and also uses about 300m barrels of oil a year. On top of that, a lot of methane (a far more potent greenhouse gas than carbon dioxide) emerges when all this food rots.

Not only is that a huge amount of wasted food, but so much of our water as well as other resources is wasted to produce and transport it. What is interesting is which particular ones account for the waste. Oil and water, both incredibly cheap in the U.S., help point out the contributor to why we can waste so much food: it’s cheap.

It would be interesting to see the distribution of price per calories for the particular foods that were measured.  I can postulate that not only is food cheap, but those that are cheaper per calorie (usually the stuff that is bad for you) makes up the majority of the food waste. These foods just happen to be made up of some of the food that is subsidized like corn and soy.  Not only do the inputs for production and transportation make the price of food cheap, but the price distortions caused by government subsidies do also.

Intuitively, it would make sense that most of the calories being wasted would be perishable items like fresh produce and meat.  However, I argue that such a huge difference in calories consumed and what is being purchased has to have a factor that skews the total amount of calories consumed in the direction of foods that are cheaper per calorie.   Fresh produce can easily be saved, (freezing, drying) and I don’t believe we eat enough of it to tip the scale against the large proportion of cheaper caloric foods .  Throw in the fact that produce isn’t subsidized, making it more expensive, and therefore, more inherently valuable. Meat (although subsidized to an extent) may be caloric-ally cheaper than produce, but perceptibly more valuable (it is everyone’s favorite isn’t it?) and easy to store as well. (freezing)

You would think that this doesn’t match the trend of rising obesity since more food wasted means less food eaten.  However…

Dr Hall and his colleagues suspect the wastage they have discovered and America’s rising levels of obesity are connected. They suggest what they call the “push effect” of increased food availability and marketing is responsible. The upshot is more food in the waste-bin, as well as more in the stomach.

I think it is safe to say that in order to reduce the waste of not only valuable food, but also of valuable resources, is to internalize the actual cost of what goes into producing the food, which would include increasing water prices for non-essential usage, tax oil, and of course, end corn and soy subsidies, or at least, shift them towards produce.* Not only do we efficiently handle our food supply and natural resources better, (foregone public revenues) but we may also help in trimming peoples waistlines which could in turn reduce healthcare costs.

*Changing buyer behavior, especially for those who are obese and low income, may not significantly change if subsidies were lifted as it is only a fraction for most caloric-ally cheap foods. Moving the subsidies to produce would be able to push prices lower, making incentives for buyers more real without imposing a regressive cost on caloric intake.

Breakthrough spotlight: Edible cottonseed, biodegradable chemicals and cyborgs!

I currently have a recurring “theme post” entitled “Internalizing Externalities.”  I have been trying to think about what other ways I could incorporate different stories I come across that happen to fall under the same theme of interest.  “Internalizing externalities” was a way of pointing out unintended consequences of particular actions – usually externalities such as pollution.

I believe I am going to begin another “theme post” entitled “Breakthrough Spotlight.”  Considering that this blog name is Pushing Possibilities, I would figure that illuminating different scientific and technological breakthroughs would be able to jump start the imagination and hopefully ignite optimism in our future.  So without further ado, I have three scientific and technological breakthroughs that I have come across that I believe are not only incredible, but practical, providing enormous amounts of added value to our economic future and hopefully make our world a better place.

The first breakthrough: Edible Cottonseed.

A Texas researcher has found a way to reduce toxin in cottonseed that until now could only be eaten by cattle. The bovines’ multiple stomachs gradually digested the poisonous substance called gossypol.

The new seeds can be eaten by pigs, chickens, fish and humans and could show up in protein bars, shakes, breads, cookies and other foods within about 10 years. The amount of cotton already grown worldwide contains enough protein to feed 500 million people per year, researchers said.

Besides the obvious economic benefits, it may also prove to have a significant health benefit. Raw soy has too much phytoestrogens, putting its hopes of being the usual suspect at the dinner table at the level of red meat. Therefore, this could be a healthier, long-standing alternative, especially for vegans and vegetarians.

The second breakthrough: A movable prosthetic that is controlled by the mind.

A robotic hand has been successfully connected to an amputee, allowing him to feel sensations in the artificial limb and control it with his thoughts…

The experiment lasted a month, and the scientists say it was the first time a patient has been able to make complex movements using his mind to control a biomechanic hand connected to his nervous system.

The future is here!

And last but not least, my favorite: A replacement for toxic industrial chemicals.

it’s a biodegradable, environment-neutral chemical that could be used in everyday materials, such as road salt and detergents, to replace harmful persistent petrochemicals and phosphates, which can last for centuries.

But wait, it gets better…

They’ve not only invented a chemical process using a computer-controlled reactor to make the product cheaply in large volumes, they’ve discovered a process that is adaptable and can produce other environment-friendly building block chemicals.

There is one more benefit I have to add: This is made from sugar so therefore this chemical isn’t dependent upon being made from oil. Make these guys national heroes for leading us one step forward to oil independence!