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.
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.
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.
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.
For a long time, EV charging infrastructure has been seen as something in the domain of public goods and should be driven by the government. The challenge on the government side is the question of whether it makes sense for them to invest ahead of EV adoption. Investors are nervous about it because EV chargers seem to them like something, which can pop up pretty much anywhere, and there’s no ‘moat’ to support stable revenues even if they serve as an infrastructure practically. Without proper government-regulated structure, it is difficult for investors to put capital into infrastructure in a place where there’s going to be limited utilisation.
Contrast this with petrol kiosk franchises – they are well-established and have demonstrable cash flow, with strong support from the oil & gas companies backing them. Electricity companies are sometimes backing EV charging point networks in order to increase electricity retail but the truth is that electricity distribution works on an entirely different business model from fuel distribution. A lot of investors believe that the petrol kiosks will themselves be the best location for very fast or ultra-fast chargers (usually 10-20 minutes for a full charge). The other fast chargers (1.5-4 hours for a full charge) will likely be in destinations like shopping malls or other commercial buildings.
Yet EV charging infrastructure is so important as a basis to increase EV uptake which the energy transition desperately needs. Electrification of energy needs from transport enables an easier decarbonisation as we can focus on renewable energy in the power sector while transport and other sectors just have to focus on electrification (which of course, can be quite a pain for some sectors – that’s for another day). So how do we increase and improve EV charging infrastructure? Where can we align the incentives? What role should the government play, if at all? And what if it becomes an extremely profitable business down the line?
I keep thinking about the role hydrogen would play in the netzero energy system. It is important because most specialists in the field think it will be incredibly important. But I’m afraid some of them think of the importance not from an energy or thermodynamics perspective but from a technological, socio-economic perspective. I think that is misguided for something that is so nascent and imature.
The solar and battery learning curves cannot be used to project what happens to hydrogen because it is fundamentally a more complex type of project. A lot less plug-and-play compared to solar panels or batteries. For solar panels, the technology takes in light and transform it into power, which in essence is the flow of electrons. There is of course the issue of DC power versus AC power but the inverters will deal with that translation; and you can plug directly to existing electricity grids. Of course, when you have a lot of them the grid must start shifting but at least you get a shot at getting started. And after that you’ve got batteries coming in, again almost ready to work with the existing electrical infrastructure.
Green hydrogen production integrates with the electricity system fine as well; it takes in power, feeds the electrolyser which separates pure water into oxygen and hydrogen, storing away the gas as it is being produced. However, the most valuable output in the process, the hydrogen, needs to be properly stored and transported to where it is needed. And all of these infrastructure do not yet exists! The largest part of the revenue generation problem has not been sorted!
This is why it is so difficult to get hydrogen started, and so expensive to do so even when the technology seem more and more established. The challenge is that a lot of that infrastructure would also serve some of the current fossil gas interests. There are issues of couse with the risks of interest conflicts when the fossil industry push for hydrogen.
The fact that hydrogen is not so plug-and-play to our current system means more evolution is needed before we are ready. Instead of putting direct incentives into hydrogen production, we should be using our resources to solve the problems along the journey to the hydrogen future. A lot of these problems involves collective action, coordination of choices and displacement of swarthe of economic activities that requires proper thought about restructuring.
There is really much more work to do than administering incentives. And this is definitely not an area the government can easily rely on market incentives to accomplish.
There is some kind of rational order to the energy transition. It depends on the maturity of the system, the current technologies deployed, the infrastructure in place, and also our views on the technologies ahead. This order will not occur naturally, nor will the economics of it follow naturally. Instead, it is an approach that requires coordination across the energy system, regulatory framework, and the markets to ensure that order proceeds as it should. There is no single right answer, which means there can be some variation but by and large, there are clearly right directions to move forward on.
It is critical to sharply focus on the objective of decarbonisation and organise other matters around it first. Presently, most of the global discussions, and the market narratives are clouded by issues around cost concerns, job losses, stranded assets and lots of doom and gloom around those. Worrying about them is putting the cart before the horse because we need to properly envision a future before we decide whether the sacrifices are worth and how to deal with those secondary problems derived from them. After all, you don’t choose your destination based on the public transport time table.
If for example we want to look at the decarbonisation of power systems, there is first the displacement of fossil generation with wind and solar. So wind and solar must first be installed into the system and ‘traditional renewable power’ such as hydropower and even bioenergy boosted. As battery technologies are not rolling out as quickly, hydropower and even biogas plants can and should help with some of the smoothing of supply. Yet if they are not sufficient, batteries must be put into the system to enhance the reliability and reduce intermittency so that renewable power is able to displace fossil generation.
And only then, would the power system be able to start supporting electrification of other industries as a route to decarbonise. There is no point thinking that electrification is a route to decarbonisation if the power system itself is loaded with coal and gas plants, and increased demand is continually used to justify the continued fossil presence. And then only when the power system is properly decarbonised should we start considering and pushing for green hydrogen. Otherwise, having our renewable electricity capacities all caught up in green hydrogen production is definitely not a great idea for the industries looking at electrification to decarbonise – you’re pushing up the electricity cost on both sides, and then you end up complaining that green hydrogen is not cost-competitive.
If we believe that we want to pursue a route of hydrogen production that is based on highly efficient electrolysers then we may only be able to do so when batteries are really cheap. This is because highly efficient electrolysers can only have their costs justified through high utilisation. Yet renewable electricity is expensive when they are scarce which is probably the case for a system full of solar at night, so if you want to keep the electrolysers going 24/7, you need batteries to keep pushing electrons through them. Highly efficient electrolysers, combined with lots of batteries for maintaining high utilisation is a great formula for extremely expensive green hydrogen. Cheap but inefficient electrolysers might actually end up doing the work of pushing down cost of hydrogen earlier (see some ideas here).
Now all that only helps with the production cost of green hydrogen; there are other issues and cost barriers which needs to be overcome. More on them in my next post. But what I’m trying to show here is that there is a rational, orderly way to approach the problem of decarbonising our systems. And the way to consider it is not to load up the emissions problem with all of the other considerations upfront. Rather, we organise ourselves better by thinking first about the best route to decarbonise based on carbon intensity, then we identify the costs, figure out the trade-offs and see what is worth sacrificing.
I’ve written about hydrogen (here, here and here) before and I would like to write more about it. Hydrogen is fascinating. It is a sole proton with an electron around it. Well, that’s the element, but it typically doesn’t exist in that form. Instead, it exists primarily as 2 protons bound together by a covalent bond supported by the existence of the 2 electrons sharing their electron orbitals within the covalent bond cloud.
Many people today believe that hydrogen is one of the fuels that the world will eventually transition to in the net zero world. This is one of the main reasons people are excited about hydrogen projects and hydrogen production (‘this is the future’). Much of that is grounded on the elusive quest to find some monolithic solution for the carbon conundrum. Not that the world will universally converge upon a single solution but that all solutions that are ultimately low carbon will stem from hydrogen or find its linkages to it somewhat.
But is hydrogen the future? Sure, hydrogen cars are really quick and easy to refuel. And indeed, a lot of industrial heating process currently running on natural gas can be supported by combusting hydrogen. And even better, hydrogen combustion merely produces steam, a byproduct that can be used for other purposes. There’s something beautiful about the non-toxicity and purity of the byproduct, the elegance of the molecule and perhaps the fact hydrogen is used in different processes in petrochemical industry. Hydrogen will be part of the future, but will it be ‘the future’? I think a lot more other supporting elements needs to come in place. An orderly energy transition is about proper sequencing and targeted shifts rather than trying to leapfrog or take potshots.
Over the past decades of stability, we’ve allowed the whole idea of economic growth and making money to take centerstage in the lives of the most productive people in the world. With the climate challenge, it is getting important to channel that resource and capability towards the energy transition. I’ll write more on my vision for an orderly transition from here. And if we all can align on the mission, we can start evaluating and piecing together various different routes and work through breaking the barriers and blockers. More on that soon.
Bioenergy, in the form of biogas or liquid biofuels finds themselves in the nexus of many things. And as it turns out, nexus of unrelated fields tends to languish in obscurity for far too long because no one in powerful places is willing to take hold of it and champion it.
And no bioenergy isn’t the kind of thing that is shown in The Matrix. One Uber driver who picked me up on the way to a bioenergy conference in Queensland thought that was what I was referring to.
Typically, bioenergy takes some kind of organic material and makes uses of various processes (synthetic or biological) to convert them into hydrocarbons that are chemically identical to fossil fuels. As it turns out, the way in which the earth cooks up all the historical organic matter into fossil fuels is not the only way in which organic matter can be converted into fuels. There are natural processes that can return these organic matter to precursors, which can allow us to derive the hydrocarbons we could use as fuels. These products are what we call biofuels and collectively, the use of organic matter within the contemporary carbon cycle (or short carbon cycle) to produce energy is known as bioenergy.
As much as these fuel and products are chemically identical to fossil fuels and can utilise all of the oil & gas infrastructure we have built over the past century, their production is so radically different from fossil fuel processes that the oil & gas companies seem to struggle with them. Or at least they find it hard to wean themselves off traditional production and capture new demands using bioenergy. On the other hand, the smaller, emerging players who wants to start bioenergy businesses find themselves shut out of the larger infrastructure base that is used to distribute these fuels because they are firmly locked within the fossil fuel ecosystem. And fossil fuel is just way more competitive if it’s about economics. Regulation does not see a clear path for bioenergy to take hold because they perceive it as a fringe activity, and the fossil lobby could easily quashes those thoughts from emerging. Across the world, bioenergy only took hold because regulation stepped in with blending mandates or direct subsidies to encourage the integration of bioenergy into the existing fossil energy system.
So while there are huge advantages in bringing in bioenergy because it helps prevent those oil & gas infrastructure assets from being stranded, they find themselves in the crosshairs of those parties whom they could help partly because they are in the ‘green camp’. On the other hand, the green camp doesn’t want to adopt and champion the bioenergy cause as much as wind and solar because bioenergy could potentially cement the position of the big oil. In markets where regulations require blending, oil & gas players have gotten involved in the bioenergy value chain, probably reluctantly and not without grumbling. They just try to meet the basic standards while taking all the political credit for having made the change.
There is also another group that bioenergy serves, which ends up becoming their enemies as well. They are the agrifood processing facilities or other food value chain players generating lots of organic waste. In countries where disposal of these organic wastes is well-regulated, anaerobic digestion plants are used for waste treatment. The biogas produced were seen more as a waste gas to be flared than an energy source to be harnessed. To harness these energy, more investments have to be made on the part of these distributed networks of players who might not have the capital readily available. They may not have the decarbonization ambitions either. There are also concerns that once we start harnessing energy from these, there will be more demand for organic waste and even agricultural residues which were traditionally used as substitutes for organic fertilisers. At the end of the day, getting the agrifood value chain involved in bioenergy seemed to be more like a distraction from their core business without contributing significantly to their business. In fact, there is increasing opposition to bioenergy that is driven by the view that it would pit energy against food production, which would be detrimental to a more fundamental need of mankind.
Hence, even though I would argue bioenergy is the most important energy source to support the transition, while playing a significant role in the net-zero world, there’s still so much wanting in this space. There is still no clear space that is adopting and championing this enough to mainstream it.
We will really need to change the narrative on bioenergy. More on this soon.
As we move from 2023 into 2024, Goods & Services Tax (GST) in Singapore will rise by another 1%. Given the prevailing rate is 8%, the 1% rate increase is actually a 12.5% increase in the consumption tax. No doubt companies will try to convince you to buy stuff before 31 December 2023 to benefit from the lower GST, rather than wait till next year. And if we were to project this logic forward, knowing that GST might eventually be 10%, there is a question of whether we should bring forward some of our purchases even more.
This is more of a psychological trick than anything. Take for example, your interest in an iPhone that may cost you $1000. Buying it before end of the year will save you $10 at the most because of the 1% additional GST that you will need to pay next year. That is hardly a ‘discount’.
Let’s say you got 10% discount from a Black Friday sale instead. Would it compel you to change to a new model rather than stick to your old one? You might. But what if instead of using your existing phone for 1 additional year (eg. 3 years instead of 2 years). If your original phone was also costing $1000, you’d effectively get a discount of 33% just by using it for 1 additional year. Obviously, it goes down if your base time length is longer.
But you get my drift. The biggest discount is when you can use your goods for longer and get more life out of it. There is no point chasing after lower prices of new goods upfront if you keep replacing them quickly. This is an element where sustainability on the consumer end actually lines up with economics but the challenge is psychology.
