Author Archives: Kevin L

Carbon pricing

I’ve written about carbon credits (here and here); but I never really quite considered them from the perspective of carbon tax, because I generally thought of it as just another instrument that is used to price carbon. In reality, the different mechanisms actually work differently. And even for ‘carbon markets’, where you allow trading (which can take the form of credits or allowances, again slightly different conceptually), the carbon price can take on different meanings depending on the underlying instrument in question.

Singapore’s carbon tax system introduced the idea of allowing carbon credits to ‘offset’ these taxes. And the carbon credits are essentially international carbon credits generated from projects that removes or mitigates emissions in one way or another. This is not new as some other markets have allowed the use of offsets to reduce ETS liabilities (eg. Korea). In Singapore, companies who wish to do so can only have 5% of their carbon tax exposure offset using eligible carbon credits; and there are clear specifications of what works and what doesn’t.

This marriage of carbon taxes and pricing with the generation of quality international carbon credits is something critical to bring the next step of carbon pricing to maturity. Global ‘carbon resources’ in the form of means of removal and sequestration is not uniform, even when we are all sharing the same atmosphere. It is therefore necessary to be able to trade carbon. Technically, because there is negligible transport cost when you ‘trade’ carbon, global pricing of carbon should eventually converge to the same levels. It is potentially as close as it gets to a good that can be pure commodity. Yet because of the whole issue around measurement integrity and the lack of consensus around some of the dodgier types of carbon credit methods, it is going to be very difficult for pricing to converge any time soon. The variations globally in regulating carbon emissions and putting a price on carbon emissions would also serve to slow down global carbon trade.

At the end of the day, there are wider geopolitical and economic considerations blocking stronger climate action. Working along these forces will be necessary since fighting them is rarely an option.

Gas Transition

Natural gas seem to be the fossil fuel which was supposed to be a transition fuel that overstayed its welcome. In fact, it seem to have failed at its job at properly displacing coal and yet today, it is seen as a dirty fuel to be transited away from rather than towards.

That is actually a very anglo-saxon view of the energy transition and if you go around Asia, to some of the fast growing economies you’d realise that notion is somewhat deluded. Natural gas is still growing and providing more energy to more businesses, households and people not because of the gas lobby or some kind of oil & gas conspiracy but that plans laid down in the past to move towards gas are just cranking on and moving forward. Sure, things are not moving as fast as we would like them to, but it is incredibly challenging to keep trying to drive people off gas towards renewable electricity when we have not properly dealt with or created a realistic pathway out of coal power.

A premature transition out of gas, especially for currently non-electrified uses, could be expensive. And electrifying heavy industrial loads when a power system is still dominated by coal, is certainly emissions-blind.

SAF and fuel mandates

I wrote about the trickiness of cutting subsidies which raises the cost to various groups in the society. This is effectively changing the underlying dynamics of wealth transfer in the society. Another thing that could alter the dynamics is putting some kind of regulation into the system. This tends to be less controversial when people are in agreement that the regulation is necessary. For example, getting companies to increase climate disclosure or just improve packaging labels etc would raise prices for customers as companies need to bear these costs in order to comply.

One could argue the consumers benefit from those regulations so it is fair for them to pay the price. What about when passing environmental regulations? Essentially when you first pass them, it creates benefits for parties going beyond the consumers themselves. Take the case of putting pollution control regulations on a manufacturing plant; eventually the consumers of the product of that plant is paying the cost but the ones who benefit from the regulation are the ones living near the manufacturing plant. That is when you evoke the ‘polluter pays’ principle because in this case, you are regulating away a ‘cost’ that existed in the system rather than creating a new benefit.

That brings us to the issue of climate change and greenhouse gas emissions. I work in the field of energy transition and this is intimate linked to those problems. For one, my day job is focused on solving these issues. What I’m wondering, as the CORSIA regulations kick in to push aviation industry to decarbonise, is whether national governments will choose to spend time going out to set up agreement to enable carbon credit trade which involves corresponding adjustments, or put in fuel blending mandates for Sustainable Aviation Fuel (SAF) which can play a role in airlines meeting CORSIA obligations.

Setting up fuel blending mandates will cost the airlines, who will then pass on the cost to the passengers. And perhaps that will reduce the tourism to the country, or perhaps it could increase the cost of doing business and hence make it less attractive for inbound investments. All of that factor causes it to be unclear who is paying the cost for the environmentalism and whether it ends up hurting the country more. Fuel blending mandate could nevertheless bring about new manufacturing jobs and opportunities that offset the job losses. And at the same time, you might attract relevant, future ready technologies to be based in your country.

Looking at the situation now, it is unlikely for SAF or other green fuels to get into the market through a supply push. The fact is that without a proper, transparent and accepted carbon price, there is no incentive to use a greener fuel that would cost more expensive. And this are green fuel that still ends up emitting carbon dioxide albeit in the short-cycle and hence considered to have zero greenhouse warming potential. Government should take the stance that they will have to mandate the blending and then manage the impact of the costs later. In this case, the ‘polluter pays’ principle could be evoked as a foundation but then various other instruments and tools can be used to cushion the impact for various groups to continue achieving economic objectives.

Cutting subsidies

So having ranted incorrectly about energy subsidies, I saw this article about Malaysia and was reminded of this set of principles I suggested to one of the officials at the Single Buyer of Peninsular Malaysia while working with them on a project. These are ideas on how to move towards a regime where subsidies are reduced and does not apply to everyone:

1. Make them transparent: Start by making clear where there is a subsidy; even when there is a blanket subsidy, make sure that the amount of subsidy is clearly shown to those receiving the subsidy, and that the burden of the subsidy is properly attributed, reported, even publicly. Where price controls are used, the implicit subsidy needs to be made explicit.

2. Share a cross-section of the beneficiaries: Often, fuel subsidies are meant to help manage the cost of living for the lower income. But when it is implemented through price controls or blanket subsidies, it disproportionately benefits the largest energy users. By publicising who are the beneficiaries of the subsidy and how much who gets, you can start considering how to reduce the subsidy for select groups of beneficiary that will be impacted the least.

3. Reduce subsidy for beneficiaries not aligned with policy intents: unless the state policy intention is to benefit the fossil fuel industry, there are always some groups benefiting from a blanket subsidy whose profile doesn’t align with the target group you are trying to help.

4. Keep the subsidy only for groups targeted: once the policy intents are clearer and there is social consensus of who the target groups should be, the subsidies can be pared back to be given only to those who need them. This means that subsidies need to shift from producer-side towards consumer-side. This should be aided by improvements in technology, government data-collection, and new channels for disbursing benefits.

The truth is that economics of renewables have improved and could match fossil energy in some cases. Cutting subsidies for fossil fuel will not just help reduce the reliance on them but free up more government resources to accelerate the transition. We should not allow subsidies to stand in the way of the transition.

Energy subsidies

I don’t really remember the last time I dealt with the topic of subsidies. There are huge transfers that takes place in the economy as a result of government interventions through a combination of taxes and subsidies. It is hard to see what the real effects are because the result is always nett of a combination of different forces and programmes. As a result, it is hard to see whether the end result was intentional or not. Often, the end result can be intentional but brought about through a combination of transfers or policies with differing stated intents.

Take for example the whole issue of fuel and energy subsidies. There are explicit and implicit subsidies and they are applied at different levels, to different parts of the value chain, captured by different parties. Of course, the result is to some extent lower cost of energy, but it is also more energy used than otherwise would be. Well, why would you favour wasting energy? Often, it’s because it can help to divert perhaps certain industrial activities that could have downstream impacts such as helping to alleviate poverty, create employment, strengthen social cohesiveness and the list goes on.

After a while, you realised that in the sphere of politics and governance, economics only holds to a certain extent. And competition often can be defined within a single dimension but actually practised over that. What this means is that if you think you’re working hard for school grades, you’d be outcompeted by someone who recognizes that his grades mean little if it is not directed towards getting to a good school or a good job. There is always a greater arena that you are actually competing within.

What this means for renewable energy is that they are not just competing with fossil fuel in terms of adoption and capital for deployment but also consumption and subsidies. Of course there is lots of subsidies going around – for example, for hydrogen. The question is whether it is worthwhile pouring subsidy into that or a more mature energy vector that has the potential to decarbonise (for example, biomethane). However, there are limitations to biomethane or bioenergy because of feedstock limitations, because of the dispersed nature of the feedstock, and the difficulties associated with deployment.

Well, there are also budget limits and land limits. It is strange how people prefer to invest in areas that have more unknowns and uncertainties rather than areas where limits are more ‘known’, but the market could still be sizable. In Australia especially, I think there is incredible upside to taking the long-term view in things because it is a market where sensibilities do tend to eventually prevail.

Originally the intent was to rant about fossil energy subsidies but look where that got me.

What stays the same

Interesting how just when I was thinking about pivot points for change, I chanced upon this Farnam Street article on Bezos and Buffett’s thinking on the impacts of the new on the financial markets. The focus is not so much what will change but what stays the same.

Governments around the world would benefit from the same way of approaching problems – not so much by considering what will change but rather, what is going to stay the same. It is more important to consider what are the new elements that can build upon the existing than to go wild with considering what could throw things off the current course (why, everything and anything, of course!)

Single pivot point

To make a change, we need a single pivot point each time. The pivot point is where things are fixed in place and do not change, and all the other changes hinge on it. And then when we make the next change, we can have another pivot point. But with any one change, we need to select a point of invariance to ensure some kind of order for the change.

In our climate transition today, too many people are trying to change things without a pivot point, thinking that the whole world has to transform. Determining what can be kept constant first is probably a good way to use consensus to drive actions. Then you’ll begin to realise what you are trying to keep the same can have far reaching consequences. For example, if you want to keep energy demand constant and start switching out existing demand into renewables, then you’re making it difficult for economic activities to expand. If you want to keep energy cost constant, then you risk keeping things to status quo and banishing adoption of costlier but greener technologies.

Laying out the trade-offs matter but one can consider how we fix certain parameters and move others first before coming back to revisit these. Take energy costs for example; given the cost of living issues and challenges, governments might want to focus on expanding proven, existing low cost green energy sources and pushing through all manner of regulations, and coordination necessary. Capture of landfill gas to be upgraded into biomethane and upgrading the biogas produced in wastewater treatment plants are low-cost sources of renewable gas that can be plugged into the existing system to displace fossil fuels. Malabar’s biomethane injection plant has just received the Greenpower certification and is the first biomethane plant in Australia to do so, ushering in what we hope to see as an era of using market mechanisms to drive renewable gas and fuel growth as it had done so for renewable electricity in the past decade in Australia.

Some may argue that prolongs the life of fossil infrastructure but we are calling them fossil infrastructure only because they are majority driven by fossil fuels as a result of legacy. One day, those infrastructure could be 100% driving renewable fuels.

Exploring sustainability

I first learnt about Hannah Ritchie‘s book, Not the end of the world, from Bill Gates. Guardian recently published another review of it as the book had just come into the market.

As Bill Gates pointed out, the interesting perspective that Hannah brings is that humans have not quite achieved the notion of ‘sustainability before. The UN notion of sustainability is “meeting the needs of the present without compromising the ability of future generations to meet their own needs”. We were not ‘more sustainable’ in the past as living standards were not great and life was pretty savage; ie. the needs of ‘the present’ wasn’t achieved in the past.

In a sense, it was as though nature had been too harsh to us and we somehow tried to survive that – mostly by ‘conquering’ and ‘reclaiming’ nature. Of course, that somehow begins to push the frontier of the planetary boundaries, and we end up breaching some of them. So the result is that the future needs become somewhat compromised.

Another important aspect of Hannah’s contribution to the book is to encourage people to look into the science and the facts. There had been so much bad press about palm oil and a very sustained assault by Western media on the crop that the productivity of the crop was overlooked. Turning to oilseed alternatives could result in more, rather than less deforestation and hence environmental destruction. Agriculture in the modern times for most part is more about taste and preferences as well as the sway that narratives have – as opposed to optimising agriculture for environment and the world.

Ultimately, we realise from Hannah’s fact-based approach that a lot of the challenges and problems do already have some kind of solution. It is all about adoption, and integrating new narratives in the way we live, and consider what is success for ourselves. Dietary choices are largely a matter of culture and what diet people aspire towards. People’s preferences can be shaped (and hence economics’ attempt at distinguishing exogenous variables from endogenous ones are somewhat moot).

For people to be more aware of the costs, and the challenges of the coordination problem, they must begin from this very fact-based approach that Hannah is leveraging in her optimistic storytelling about the history of human development. We may be struggling towards the solutions that we know (eg. putting a price on carbon and making people pay for it), but at the very least we can agree that this is how we need to move forward with and be aware of the costs and consequences. We need to get people to the bargaining table and work out who has how much to gain or lose. Without creating the transparency and acknowledging the financial, political costs, we end up being caught up in false arguments about technical solutions.

Abating the easy stuff

Electrification is often easy in many cases. It is just about changing appliances. Of course, it is also about lifestyle and way of life. I personally still prefer to cook over a gas stove. But I won’t stop cooking without one; I’ve used various electric stoves before as well and didn’t face any major issues.

I’ve lived in house that had gas heating and also one with electrical heating. Regardless, the level of thermal comfort tends to be a trade-off between use of energy and insulation rather than necessarily the equipment for heating though the efficiency of the appliances would play a part. Going on to bigger things, there’s the electrification of transport. For most part, this can be based off just taking public trains or trams instead of driving. It can also involve using electric bikes. Of course finally, there’s the transition to electric cars.

None of these really do reduce emissions in and of themselves assuming no particular changes in energy efficiency of the basic fuel used. It is the energy source that matters. Electrification must be paired with switching power generation to renewable sources such as wind, solar, hydropower and so on. It is meaningless to have electric vehicles on the road and heating of homes with heat pumps when you are generating the power. The challenge of the energy transition is that many things are taking place together and people are not able to really keep track of how much emissions are going to be or might be. Therefore, the direction and rate of change is perhaps more significant to give a sense of how much change can or will happen.

Abatement of emissions through increasing power generation through renewable energy combined with electrification remains the simplest and most effective way to decarbonise our economies. However, the complexity lies in the fact that power prices affects the economy broadly and in many countries, they are subsidised at least for some sectors of the economy. By increasing the demand for power through electrification, the plans for subsidies for certain sectors might be affected. If supply is not increasing fast enough, power prices may increase in a way that reduces the competitiveness of other sectors and the economy as a whole. At the same time, there is also a risk that renewable power supply that is coming online is much more expensive, leading the overall electricity prices to increase anyways even if the supply is keeping up with demand.

Governments are afraid of adversely affecting the power prices as it has very broad sweeping economic consequences. Additionally, power transmission and distribution investments will also have to accelerate to cope with the increased demand and supply for power. Unlike the older set of infrastructure invested over time and much longer ago, we are looking at a huge ramp-up during a short period which means the infrastructure cost will have to be passed on to customers during an intense period of change. So while electrification combined with renewable power generation is the easiest pathway to decarbonise, there are systematic and political challenges around the distribution of the cost of energy transition to consider. Overall, the players who are electrifying some of the previous energy uses actually pass on parts of their cost of transition to the overall system as their participation in the market raises the cost of power for everyone.

For the typical electricity consumer, they would expect their share of the energy transition cost to be converting their load to be drawn from renewable energy sources. However, they now have to pay a share of the heightened infrastructure cost from the increased load, as well as the increased energy cost due to competition for renewable electricity. These complexities are slowing down a process that needs to happen much more quickly.

Human resources and sustainability

The world is getting impatient. For results, for success. And corporate training for employees have become shorter; often so short it is non-existent. People and companies are pressing for results and when they do spend, they want the results immediately. And the quality of HR suffers; they are just trying to sift the market and find the talents to hire. Those with experience but are not capable will no longer be able to find work when they are planning to switch. That’s if they are not made redundant yet.

The ones who are inexperienced may find themselves somewhat discriminated against. But if they prove themselves to be capable, they’ll be able to move pretty fast in the private sector. The market will reward them richly; but rarely would companies incentivise them to help train up more people to be like them. Companies would just want to get them for their performance. And drive their results with better rewards and compensation.

Is this sustainable? I’m not sure. I personally don’t think it is going to work. Because the ones who are capable would rise and then eventually grow bigger than the organisations themselves. Or if they are actually keen on upskilling and developing people, they might move out and start businesses themselves because existing businesses out there are not really rewarding employees for developing others and fostering better work environments. Why so? Because collective results are hard to properly attribute to these champions. It is easier to attribute individual results; or allocate achievements to specific individuals.

Scientific management is showing its cracks. I’m not sure how long it will take to manifest in company valuations and the reputation of companies.