incentives Archives

Carbon credits 101

Earlier this year, Guardian released an expose about forest carbon offsets, in particular about a handful of projects and brought a bit of an uproar in the industry. While it created more awareness about carbon credits and concerns around the quality, methodology around calculation of the emissions reductions or how the “offsets” can really be quantified, there seem to be a lot of misconception remaining around carbon markets and how they work.

First, we need to recognise that there are compliance markets and voluntary markets for carbon. And while we may sometimes call them all ‘carbon credits’, the concepts are vastly different. In compliance settings such as the EU Emissions Trading System (EU ETS), the object that is traded are actually permits or allowances. These are regulatory objects that are created arbitrarily by regulators. Basically, when the regulator says the industry is allowed to emit 100 tonnes of carbon dioxide equivalent, this 100 units becomes permits or allowances. Each unit represents the permission to emit a unit of carbon dioxide linked to a time period based on regulation.

On the other hand, there are voluntary markets; and these are where the majority of carbon credits that can constitute conceptually ‘offsets’. Putting that notion aside first, we need to recognise that those ‘credits’ are conceptually different from emission allowances. In reality, those are supposed to be like merit points awarded for good behaviour – of not emitting carbon dioxide. They are given to projects that protects rainforests, improve efficiency, manage waste more carefully, switch fuel from fossil to low-carbon ones and so on.

The manner for calculating these merit points are complex and set by various standard bodies that are structured as non-profits. In and of themselves, the credits when valued in the market encourages more of the activities that generate them. And because they inevitably entail some kind of emission reduction or even carbon removal (through some sort of sequestration), when companies buy and then retire them, they are basically trying to ‘offset’ their own emissions. The calculation of the amount of merit points was essentially what the Guardian article referenced was really criticising.

The projects in and of themselves are voluntary; and those buying the credits are not really forced to buy them by any regulators. That said, companies have been buying them in order to ‘offset’ their actual emissions and then gain the ability to pass of their products as ‘carbon neutral’ – not because they rejigged the supply chains to no longer emit carbon but because they used the credits/merit points off those projects to neutralise the demerit points they had from emitting carbon. The problem is when this is the value of the carbon emission reduction – so that companies have the ability to emit more, we really wonder if that is worthwhile.

Using the market mechanisms to spur production of something tends to be quite easy but to reduce it might be harder. This is why we have the government, public services such as the police and defence force and not leave these things to the market. Otherwise, the police could just offer bounties for anyone to catch the criminals and so on. Carbon markets are interesting but further regulation and a proper understanding of how we want to value emission reductions and count them is vital.

Convenience and waste

Our convenience in this day and age is built upon waste. Lots of it. When we order delivery, we compel an additional person in the society to actually go to the shop to fetch the food for us, bringing it to us before going about his or her way. This creates 3-4 journeys instead of two. It generates more packaging waste and potentially more transactions: between you and the platform, the platform and the deliveryman as well as the platform and the food outlet.

Yet our economy is built upon such foundations, that we generate more activities, monetise and measure it, and consider that an uptick in our growth and economy. Sure, maybe the ability to pay for the service and choice to take it up means you are able to spend that time more productively, at something where you can make a higher level of contribution to society. Indeed, if that is the case and the basic parameter of decision-making, then the economy and society becomes more efficient, not more wasteful. But that is unlikely to be a real decision parameter.

Convenience is something more about psychology, behaviours and motivation than with the cold-calculus of cost and benefits. Besides, the weighting of cost-benefit across time is not as simple as imputing an interest rate or discount factor the way we analyse it in economics. The discount factor adjusts due to the manner our psyche responds to context and situations.

The question then is whether we want to make that short term gain in our economy, giving in to our impulses or to generate the long term sustainability in our world and fulfill a greater meaning for our lives on earth?

Conflicts of interest in professional services

One of the interesting arguments coming out of Mariana Mazzucato’s The Big Con is that because consulting firms are reliant on a continued stream of business from their clients, there is a conflict of interest as they would not be interested to help clients build the capability to solve problems by themselves.

I’m concerned about this argument because that argument can be made in many other situation such as a lawyer not wanting to help client get out of legal trouble or doctor not desiring his patients to recover, etc. It opens a whole can of worms and at the end of the day, boils down to a matter of professional ethics and the standards we need to uphold within the industry and sector.

I’ve an episode in Mondo Gondo about the financial advisory industry’s conflict of interest. Interestingly, Christopher Tan from Providend revisited this topic again recently. This matter of commission-induced conflict of interest underlies his motivation in founding of his firm. Yet he still struggles with the inherent tension across:

the need to make money,
the need to motivate and retain his good employees as well as
to uphold the interest of his client base.

There may be inherently some industries that are better off for the customers if they were not subject to complete free market type conditions.

Perhaps consulting firms should all continue to stay in the form of partnerships and not allowed to get too big. Likewise, financial advisory might be better off as an industry of freelancing individuals. They can be subject to strict industry and professional body standards rather than be firms operating with huge overheads.

Sales or professional service

Whether you’re in a law firm, accounting firm or consulting firm, as you rise up to Partner status, your major contribution to the company is deemed as sales. Nevermind you’ve accumulated lots of experience and is able to solve very tricky issues for clients, if you fail to bring business in, you have failed at your role. This is a challenging thought and it made me wonder whether the end point of growth in professional service and being able to serve clients well is just sales? Or is that all a false dichotomy to begin with?

How can we set up sales situations such that it is less adversarial, where we can be really win-win rather than see it as a zero-sum game. In some sense, it is true that a client can still get some kind of service from another firm, a competitor whereas when they walk away from you, your firm gets nothing. So it is very easy to see it as a win-lose kind of deal. And moreover, the client will be putting in process and structure to try and get the best deal out of their vendor. That is simply the way the mature market economy is set up. Can there be really different rules and different ways of working to contextualize situations in ways that are less tense and difficult?

Can sales be driven by the desire to serve and not to profit from the client? How can sales be set up such that the joy of service pays and profit is just a byproduct? I think the missing piece in the puzzle is really around the purpose and the conviction of the service to be rendered. When one is truly able to deliver superior service and product, with a strong faith that it will satisfy the clients’ needs, then the sales situation will be more of a win-win deal. The client loses out by walking out because you are the one who is able to bring the solution to the client.

The question is how do you know? Perhaps that is for another day.

Demand for energy is growing

We’ve been seeing on the news that 2023 will probably go down in history as the year oil majors backtracked on their promises towards the climate transition, and continued their trajectory of emissions as the demand for fossil fuels continue to grow.

This is exactly the kind of behaviour that makes it easy for people to keep painting them as the enemy. As a matter of fact, they risk painting themselves out of the low carbon future when they allow their “core” fossil fuel business to continue cannibalising their renewables business. Yes you heard me right; in refusing to see their core business as that of providing the world with sustainable energy, they are rapidly destroying a market they want to be part of.

Instead of seeing it as demand for fossil fuels, the oil majors need to recognise that there’s demand for energy – and it is growing. The opportunity to convert their customers to green users, energy users of the future rather than keeping them in the past. Their behaviour will at some point push the authorities to act even more aggressively against fossil fuels. The trouble right now is that they think the world needs them to go on spinning.

Specific thinking

I wrote about the holistic thinking that was characterised by western researchers of Asian’s approach towards persuasion as contextualised by Erin Meyer. I had the chance to reflect a bit more on specific thinking as I begin to observe it more and more at work in western workplaces and cultures. There are no right or wrong and the good and bads can only be appreciated from particular perspectives or lenses.

Specific thinking parcels out bits of work and various tasks, having more of a tendency to operate in silos even when coordination is excellent. This can make things difficult to change and also individuals becomes less sensitive to the overall workings of the system they are part of. It can be good in that it reduces the anxiety around being unable to bring about the intended collective outcome because one can just focus on delivering one’s part and leaving the rest to others. Being specific in thinking also encourages focus on the smaller specific outcome that is within one’s control.

However, specific thinking may mean that there’s less ability to navigate situations that are far more complex where clarity does not come instantly. For example, during a business development meeting, one may not yet figure out if there’s chance of collaborating or working with the prospect when we are still in discovery phase. Specific thinking can lead one to try and force a result and be counterproductive, or to give up too early.

Specific thinking may also render us unable to genuinely celebrate collective wins as one becomes overly focused on the parts they are ascribing to themselves to the extent they ignore other parts of the system they are part of.

Just some observations and muses on my part.

Extracting surpluses

I spent many years focused on infrastructure development, particularly working on getting private sector involvement into infrastructure investments, executing the projects, operating and maintaining them for government. The advantage, as we would often tout, has a lot to do with the efficiency of getting private sector with experience to do it. At the same time, it reduces need to use direct state budget for financing such projects, and reduce the need for government to get involved in the complexities of hiring specialists, working on those technical subjects that will not support other areas of government work.

We called these infrastructure projects public-private partnerships or PPPs. It has somehow unlocked lots of private sector financing into the market and supported infrastructure investments. That is all good but it made me wonder whether marketization infrastructure is necessarily a good thing. For one, collecting fees on a piece of infrastructure in order to maintain it sounds right; and that fee will somehow have to be regulated since the private sector party would try to extract all the surplus with its monopoly position. So what should the regulator allow? Average cost pricing or marginal cost pricing? There is a ‘right answer’ in economics but in practice it is always hard to really work out what is the long run marginal cost involved. Particularly if the amount of service you render in each time period varies with demand.

And who is to prevent the monopoly from trying to extract more surpluses by pushing the regulator to allow it to charge certain prices by gaming the criteria or the measurement methodologies that the public sector develops. So the cat and mouse game starts. Is this what we expect when we try to marketize infrastructure? And should we not expect it when we do go ahead to privatise infrastructure? Eventually the tax payers have to fund both the cat and the mouse – the regulator and the monopoly or the private shareholders’ profits. Does that really make sense in terms of overall economic efficiency?

And finally, can such a set up really deal with change? Especially with the energy and climate transition. A lot of infrastructure need to build in resilience, consider the climate impacts on not just their infrastructure but also their customers and the way their demand base will be evolving, whether that is going to impact existing business models. All that is not even accounting for the decarbonisation ambitions of their customers. Meanwhile, can these all become an excuse for extracting further surpluses?

Mission of energy transition

The market has a role to play in the energy transition but the market is not responsible for the transition. Technological improvements and our sense of purpose or mission does not come from the market – they are exogenous inputs. What is challenging about the market is that it does have a life of its own and there are always entrenched interests pushing against the direction of the mission that the world is on. It is not just about gaining buy-in to the mission but unraveling the interests vested in it.

That is a serious conundrum especially when we need to transition fast. The bigger the vessel, the harder it is to steer and change directions. So it is with the market economy. The most vested the market is with the status quo, the greater the reach of the tentacles of the market through the system across areas of life, the harder it is for change to happen. Or at least directed, meaningful change.

It is probably time to recognise that the market can help drive the demand for greener fuels and renewable energy if the incentives are put right. It is also critical to recognise that the economics around change can be arbitrary and a snapshot in time. Cracking the puzzle is not just about performing a cost-benefit analysis and saying whether to proceed with this or not. It is about identifying the pain-points, challenging the status quo, re-jigging incentives and rallying the champions.

We have done that before, with ushering more peace, with managing overpopulation, with feeding hunger, dealing with poverty. We can deal with the challenge of climate change and the transition of our economy. If we make it our mission to do so, rather than to wait for the market.

Holistic Thinking

I’ve been reading Erin Meyer’s Culture Map. And I even did her survey on her website that would cost you a bit to get some results. Anyways, I realised as a Singaporean that my results lacked 1 dimension, and it was on the persuading scale. It was only when I had results not benchmarked to my country’s norm that I realised there was a dimension missing!

Only then I realised from her book that she claims the East Asians tend towards a ‘holistic thinking approach’ where they focus on inter-connectedness and inter-dependencies. I found this pretty interesting being a Singaporean and essentially East Asian descent. I’m not exactly sure how this drags us out of that Persuading spectrum of ‘principles-first’ vs ‘applications-first’ because I do find myself on the scale as well and I’m inclined towards ‘principles-first’. I attribute it to my western upbringing but I also think that holistic thinking is more compatible with the ‘principles-first’ approach to reasoning.

East Asians are also logical; even if they might not have a standard structure of approach. The holistic thinking perhaps just cause us to reach out farther to consider more marginal connections to the core topic. This could mean that in using the ‘principles-first’ approach, holistic thinkers are drawing from even broader principles that may at first sight, have nothing to do with the topic at hand.

For example, I was recently having a conversation with a renowned East Asian expert in the bioenergy field and in talking about the advantages of biofuels over e-fuels, he started by considering the efficiency of electrolysing water, and then the fact that most locations rich in wind or solar power tend to be scarce in water supply, and eventually the land required to support the power generation that is required to produce just a small amount of renewable e-fuel. Then he went on to talk about growing crops on some of these land, how they might help the habitat, the robustness of particular crops. Finally, that the crop residues can be processed to produce biofuels; allowing the land to be used for multiple purpose of food and energy – especially if the right kind of crops are grown to ensure more cycles of harvest.

The point about biofuels being superior to e-fuels was made somewhat indirectly and through a detailed explanation about something way beyond the issue of energy – it was about resource-intensity in terms of land-use and perhaps water. So he was drawing from a principle about resource intensity to produce the required fuel essentially though the manner he had approached it starts with considering linkages between the subject and other concepts.

For me, I am relatively comfortable with that sort of conversations and being patient for the point to be made; and even if the point is not really made clearly, I often give benefit of doubt and draw the connections by myself. Perhaps being East Asian in heritage, I rarely have an issue drawing the actual connections that the speakers are getting at. Indeed, perhaps persuading an East Asian will require more appreciation of the importance of connections and inter-dependencies or relationship than a linear approach to logic.

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.