Tag Archives: environment

Markets and distribution

One of the things we learnt early on in economics is that allocative efficiency which the perfect competitive market seem to move towards is efficient in terms of maximising social welfare even if distributionally it is skewed. In other words, by using the ability to pay as the final arbiter for who gets the goods and services, the society moves towards high levels of efficiency about what gets produced and who gets what goods/services without questioning whether things are really ‘fair’ or if in the first place, the ability to pay is properly distributed.

This is a problem that we seem to ignore because it is convenient to think we are already in the best of worlds. The idea of Pareto optimal is powerful – that you stop moving things around as long as you cannot make someone better off without having to make someone worse off even if the one who is slightly worse off is not much more worse than the amount of betterment you can create in another. That comparison isn’t objectively possible anyways.

But by sweeping it under the carpet, economics close itself off to a lot of interesting philosophical debate that really matters and tries to consign itself to an amoral science. Yet championing for markets is not exactly amoral, it is taking the stance that the market approach is morally superior and already deferring to the market in the work of economic justice. Michael Sandel writes and lectures extensively on this and as we ponder over how we marketize various things from infrastructure to healthcare, we can go back to consider those ideas.

Creating a market

We might not realise it but governments have a huge role in creating markets. This is because markets do not spontaneously emerge out of nowhere especially in highly developed economies. One of the reasons is that markets actually requires structures, institutions and frameworks such as rules and regulation can encourage players to step forward more boldly and grow the market.

Today, in Australia, despite the multi-dimensional benefits that bioenergy brings, and synergises with the traditional economy, there’s still little recognition of the low-carbon identity of bioenergy. And it is a shame that methane produced from biological processes are still seen as not too different from natural gas that is extracted from the ground. There is no forward direction by the government to stake the space and define the standards for biogas production, upgrading into biomethane and regulations around treatment and handling of the digestate, which itself is a by-product of the process that can be made useful.

There is perhaps a clear path to create a market not just through regulatory clarity but also enforcing demand. Market for audit, market for inspections, even market for many public services are created by regulations. Sure, there’s a need and the market contributes positively to society and so regulations support that. Why can’t we do the same with clean energy? One that displaces directly the fossil fuels in our system?

Power to liquid fuels

I’m not sure if I’m yet in position to criticise McKinsey – but Mariana Mazzucato did and probably so did some media somewhere somehow that I feel sufficiently assured that I could.

The report they published last year about power-to-liquids for Sustainable Aviation Fuels is honestly trying to popularise something potentially risky and have questionable sustainability credentials. First, the process of producing green hydrogen and then recombining it with carbon dioxide only for the compound to be combusted to release that carbon dioxide sounds really strange given that we are trying to reduce carbon emissions.

Second, the idea of using industrial carbon dioxide for producing power-to-liquid fuel is misguided especially when that carbon dioxide is potentially anthropogenic emissions. By taking that and putting it into jet fuel, one is simply delaying the release of the carbon into the atmosphere by 1 cycle, not preventing it.

Third, using direct air capture carbon dioxide to produce fuel that would then release the carbon dioxide back into the atmosphere does not make that much sense from a thermodynamics perspective. So what exactly is McKinsey up to? Why do they insist that power-to-liquids are not constrained by feedstocks?

Building solar developments in sparsely populated, nonarable regions on just 1 to 2 percent of desert land would provide enough PtL fuel to decarbonize the entire aviation sector by 2030.

What about the pure water needed for the electrolysis of water to produce green hydrogen? Where is that going to come from? Where will the relevant carbon dioxide come from? How are the recommendations or “strategies” really helping to decarbonise the aviation sector? What is McKinsey trying to ‘solve’ or be strategic about when they consider power-to-liquids as a solution for decarbonising aviation? Are they just trying to diversify their positions to take so that they can gain more business from more people? Where is their conviction?

Biofuels vs E-fuels

I wrote about the conversation I had around biofuels and e-fuels that are produced through power-to-fuel approaches. They have rather different chemical pathways, costs and constraints. I’d really like to see someone consider the resource intensity of these different approaches. The challenge for most studies is that they consider biofuels from a standpoint of resource potential as though the agriculture activities are inert. Of course there’s the whole question of whether land should be used for cultivation of food or energy. I won’t get into that.

But I’d be curious to see if people who can organise the supply chain across the land, the supply of food alongside the supply of feedstock towards the bioenergy plants had done their analysis on resource intensity. A good comparison of the resource intensity from the water-intensity, output logistics standpoint would be really good. It doesn’t have to be a full-fledged lifecycle assessment – back of envelope calculation would be helpful.

There is a view that bioresources are limited by the amount of feedstocks available. There is only this much used cooking oils (UCO) that you can convert to hydrotreated vegetable oils (HVOs) or into biojet fuel (typically via the Hydrotreated Esters and Fatty Acids (HEFA) pathway). And that power-to-liquid is theoretically not limited in terms of resource potential. That is not exactly true because we are still limited in our green options for power generation and green power itself can eat into resources required by other sectors. The conversion process to fuel also requires carbon dioxide feedstock of suitable concentration as well as pure water to be electrolysed to produce hydrogen.

It’s strange to think that we can have unlimited power or that we can easily power the world – remember those times when people actually calculated the amount of solar panels and space on land that is needed to power all the earth? The investment to be made in terms of building lines to distribute power, and the factories to take that power and convert them into the fuel needed would multiply the complexity problem of supplying the world’s energy needs.

Unintentional greenwashing

In this whole green wave there’s lots of hype and one of the dangers that corporates put themselves is being cast as greenwashers. The challenge is that some corporates might just be doing it unintentionally, without having realised the hypocrisy surrounding their brandishing of green credentials because they did not realise how much harm their business activities have been bringing to the environment.

The initial audit of the business is important from the ESG perspective but it doesn’t stop at just reporting because if the initial audit is all it takes to establish green claims and then allow businesses to carry on, it would have been a waste of opportunity. Corporate leaders need to recognise that subjecting themselves to these audits and scrutiny should not earn them any kudos. So they should not be patting themselves on the back if those reporting metric turns out stellar. Rather, they should be thinking about what approach they have taken to their businesses that enabled that.

And then they should be considering if there are blindspots or areas of their businesses where the right philosophy hasn’t been applied. The hypocrisy can often stem from the fact that executives are too busy gaming the reporting metrics as opposed to genuinely thinking through business processes and activities. That can still be unintentional but they can start making sure that their activities to gear the company towards green can be more intentional.

Green race II

There’s going to be a new kind of entrepreneurship; not necessarily one that is building businesses with an established revenue stream or for a current market need, but one that bets on the needs of a future that the world wants to be creating. And the upcoming green race might unleash this new breed of entrepreneur more strongly than before. In the post-pandemic era where people might have got sick of government stimulus allowing billions of capital to slosh around the system, risking inflation and simply making the richer rich, fiscal policy might be returning to the center-stage as the new means of keeping the public voting base satisfied.

The green race is going to drive new winners in the economy as entrepreneurs who have positioned themselves to make the critical investments needed for the economy. Especially the ones that going to create the very jobs that politicians plan to trumpet about. Being able to think ahead and consider the kinds of businesses desired both by the public sector in an economy that is highly pro-market will be rewarded. The risk is that the public sector decides to take on the direct investments themselves rather than to ‘incentivise’ the businesses to do so. This is why the pro-market orientation of the government is important.

For the markets where the government have the tendency to perform direct intervention or deem infrastructure investments way too strategic to be left to private sector, the green race may take those economy in a different direction. They may choose to create new state-owned and managed entities to make new direct investments or to use the existing ones. And the green jobs will be created within state-linked enterprises. Civil servants who are savvy in these areas will tend to gain within such systems.

Either way, there are going to be new ways smart people will be gaming the system.

Green race

The beauty of the market system emerges when there’s competition along the right dimensions just when we all need them. But competition doesn’t always require a market economy – there’s always limited resources, time and other constraints that requires us to somehow compete. There’s also reputation, attention of people and recognition that drives us to compete. In the 20th century, the space race during the cold war led to phenomenal technical and technological advances which powered the growth over the 21st century.

There was an alignment of political, and public interest. The economic interest was not entirely foreseen and only realised much later. But it seemed that entire economies of Europe, US and Soviet Union were engaged in this mission. It seemed like a conflict and perhaps competition of egos but eventually worked for the good of mankind.

Today we need to shift this mission for space to a mission for mankind on our planet. Developing a green race probably takes a good alignment of the public and political interest, as well as some kind of competitive tensions. We are beginning to observe this with first sound of the trumpet from US with its IRA focus on Clean Energy and climate transition last year; and then Canada followed with its own programme to fund indigenous clean energy projects. Australia’s announcement last week with a highly targeted programme focusing on hydrogen reflects the same sort of tension around the competition to attract the competent hydrogen players to develop required projects in their backyard.

As an energy transition consultant, I welcome this. As much as we might think the competition can result in duplicative efforts and inefficiency, it is what we need to align the incentives in the market with the interest of the overall society. Moreover, harnessing the public interest and pressure upon this topic through directing the workforce and human capital towards the low-carbon economy is much needed. The green race should hopefully create the necessary ecosystem we need to drive further changes and ensure the climate transition.

Planet, people and profits

Open dialogues with investors are needed by management of companies emitting lots of carbon dioxide. The investors are pushing for companies to decarbonise, disclose their emissions, create long term roadmaps for decarbonising their businesses. But what about making sure executive compensation is aligned with those goals?

What about the amount of returns they are willing to sacrifice in the short term to build greener supply chains? Must it be quantified in terms of reputational risks and climated-related financial risks? Are we overemphasizing the financial KPIs at the expense of the environmental values we should truly be caring about. Is our people and planet really put before profits? After all, businesses would claim that profits keep them alive to drive the goals of people and planet?

Maybe it is about agreeing on a minimum viable return or profit to keep investors there. Perhaps anything beyond that minimum viable return should be directed towards greater climate ambitions. If we truly believe that the future unit of competition is making a contribution to green rather than profits, we need to start acting as such.

Superconnections in organisations

Organisations work in silos and we often talk about breaking silos because it is a real problem. What is interesting is how silos form naturally and what keeps them functioning and feeds the way human behaves. The truth is that majority of people connect well only with a handful of people around them. It’s all they need to survive and even thrive. Organisations are set up for people to do their best work each day rather than over a long time horizon, and rightly so. Silos are natural tendency and efforts to resist them will be inefficient in short term.

The real solution to breaking silos is having superconnectors, being able to identify them in organisations and bring them into roles that allows them to help arbitrate across silos. They ought to be put in charge of coordination problems and given the authority to enable those connections. These people could also take the form of external consultants who have no stakes within the organisation.

Mathematically, clustering is just a natural population, psychological phenomena amongst people. Yet with just a handful of “super nodes” that connects across clusters, the other nodes within clusters can be quickly brought together and average degrees of separation reduced dramatically and really quickly.

Organisations need to recognise the role of these superconnectors that enable silos to continue working alongside in ways that are productive and non-duplicative. They allow everyone to remain efficient even as they ensure that the organisation overall operates strategically in the right direction.

Credit matters differently

More than 10 years ago, I took a course in microfinance and then spent some time in a village in Ghana’s Central region designing a village savings scheme for the villagers to pool capital in a manner that allowed them to access the mainstream banking system and also to invest in machines that the farmers could share in, and enhance productivity. It was microfinance but applied differently, a model the team created after consulting the people in the village and concerns around creation of debt.

Microfinance was quite popular then and the common belief was that there were productive people with the opportunities to put capital into productive use but did not have access to credit to allow them to do so because traditional finance were not accessible by these folks.

What was missing from the picture was that these people had struggled to save as well because they did not have places to safekeep cash or other asset instruments they had. This could be why the pre-paid mobile credits were popular and important economic enablers in some of these environments. Credit and savings are different sides of a coin and the way these services are valued works differently in different cultural contexts and markets.

The next generation of retail finance will have to start examining these cultures more to develop stronger value propositions. Central banks paying attention to consumer credit and savings behaviour would be wise to appreciate these elements too.