The Essential Role of Private Enterprise
After a great deal of hype and hope, the Copenhagen climate summit produced no more than a vague promise to continue to work together. The only real point of consensus was to agree to meet again in November to continue the discussions in Mexico.
Last month, we noted the lack of measurable progress by developed countries in reducing carbon dioxide emissions under the Kyoto Protocol. That accord among governments was intended to reduce emissions. In fact, carbon dioxide emissions actually increased 20% during the period of Kyoto. We expressed doubt that the Copenhagen conference of December 2009 would be any more effective than Kyoto, even if governments were able to reach an agreement before leaving Copenhagen.
Some people saw that editorial as an indictment of governments for failing to take action. On the contrary, government action has been extremely valuable in starting the process of renewing the energy industry.
Our message is that government mandates alone will not provide solutions for the energy challenges facing the world. Government action has been extremely important, as we will point out in the next article. However, change will require more effort than governments alone can possibly provide.
With the present cost differential over conventional energy, imposing alternative energy mandates remains unpopular for governments. Few governments have the political backing, nor the courage, to impose the measures that would make a meaningful difference. For example, Germany and Denmark have significantly reduced reliance on carbon-based fuels by implementing feed-in tariffs that support alternative energy. In addition, both countries have developed substantial wind power manufacturing and installation industries, and Germany is now the world’s leader in solar cells.
In order to achieve a concerted effort, the cost of alternative energy must come down. That is happening, and on an accelerating path. Yet, a great deal more work is required. To that end, it is vital that private enterprise mobilizes capital toward the innovation, research, and development that will further reduce the costs of clean energy.
As the cost differential between conventional energy and green energy narrows, governments will be emboldened to take the strong steps needed. Ultimately, alternative energy costs will be competitive with carbon-based fuels. It will take years, but work in that direction is worthwhile as the goal is achievable. After all, wind, solar, hydro, geothermal and other forms of energy are effectively free once the facilities are in place. Improvements to operating efficiencies and reduced capital costs will one day make these free energy forms more attractive than mining, transporting and then burning coal. Without a cost differential, the only opposition to clean energy would be the established interests. That is a concern not to be taken lightly.
In the wake of Copenhagen, this is a good time to look at what governments in some countries have achieved. As we will point out in the next article, that progress should serve as a guiding light to other countries that are still dithering over the appropriate way to deal with the energy challenge. In that article, we will also look back at earlier challenges faced by industry and governments and review the efforts of the established industries to stifle government policies intended to deal with those challenges.
While much of the attention is focused on cleaner ways of producing energy, let’s not forget the importance of conservation. Using less energy results in immediate economic benefits. Those benefits are amplified when you factor in all the inefficiencies in the production and distribution of energy. Turning off a light bulb for one hour saves more than the 100 watt-hours that would be used by the bulb. It actually results in 3 times that much energy remaining unburned at the coal-fired power plant! (See September-October 2009-1 Issue.)
Europe is years ahead of the rest of the world in terms of clean energy production and conservation. Yet, the economies of Europe have not suffered as a result of implementing measures to produce green energy and to cut energy waste. In fact, some areas have enjoyed major benefits.
A key member of the GreenTech Opportunities team spent several years studying and working in the sustainable development field in Europe. That experience brings important insights and perspectives that can help people in North America see the energy future.
Those improvements in Europe are the direct result of governments making bold changes. It was particularly courageous for European nations to move in the green direction while the United States, a major trading partner and competitor, resisted change. Some of the early steps were unpopular, but over a few years European companies have become world leaders in this field, while the US industry has been largely left out in the cold.
As the United States government continued to dance to the tune of the big oil companies, Europe developed world leading technology in wind and solar energy, which is now being exported around the world. European carmakers developed fuel efficient cars while American automakers continue to flog gas guzzlers. General Motors and Chrysler went bankrupt because they refused to adapt to the new reality. Americans continue to drive their big cars, forgetting that their carmakers are only in business because of massive government handouts of taxpayer money.
The way forward must involve coordinated efforts among governments. An even more important element will be the innovators and entrepreneurs who will continue to improve the way the world produces and uses energy. In this publication, we will continue to search out and evaluate those companies that can make a difference in the future energy industry and also make gains for investors.
An Agreement to Continue Talks Toward An Agreement
The Copenhagen climate summit, after 12 days of posturing and bickering, resulted in no more than a non-binding accord with no real targets.
US President Barack Obama told an interviewer with PBS Newshour that "I think that people are justified in being disappointed about the outcome in Copenhagen." British Prime Minister Gordon Brown was more blunt, describing the summit as "at best flawed and at worst chaotic."
The accord produced at Copenhagen is not legally binding and does not contain targets for greenhouse emissions. Attending nations agreed that global warming must be limited to no more than 2OC, however details on how that is to be achieved are yet to be resolved. An agreement was signed for developed nations to contribute US$100b annually to developing nations from 2020 onwards to help mitigate the impacts of actions of the wealthier nations. Over the next three years, $30 billion of that amount will flow to poorer nations.
Yvo de Boer, head of the U.N. Climate Change Secretariat, described the accord as “basically a letter of intent...the ingredients of an architecture that can respond to the long-term challenge of climate change, but not in precise legal terms. That means we have a lot of work to do on the long road to Mexico [in November 2010]".
Under the present conditions, any government mandate to reduce emissions would have a near-term cost. As a result, those measures would be unpopular.
Europe was prepared to accept binding emissions standards, but was the only region that took that position. Europe's unique position at Copenhagen stems from their experience with regard to emission cuts. They have seen that action can be effective. More importantly, they have seen the initial costs of their earlier mandates turning into benefits. We will come back to that important point later.
The other nations of the world faced obstacles that prevent them taking any sort of decisive action. President Obama lacks the political backing to take another move that will be unpopular in the near term. China, now the world's largest polluter, is in the midst of the biggest industrialization in history. They see it as unfair that developed nations are pushing them to lock into their current emission levels, when their per capita energy use at present is less than a tenth of America's.
The poorer nations of the world simply do not have the means to implement changes. Much of their attention at the meeting was finding the funding to implement any sort of change.
In a way, it may be beneficial that public attention will now be diverted away from governments. It is time for more attention to be devoted to the private sector as a vital component in developing meaningful energy solutions.
An Example of What Can Be Achieved
The price of gasoline in Europe would be shocking to nearly any American. Yet, the amount paid for gas over a year by the average European is no more than an American would pay. Cars in Europe are smaller and far more fuel-efficient. Furthermore, alternatives to driving are readily available throughout Europe, so that many people are quite happy to leave their cars
at home or do without an auto completely.
Higher prices for electricity and other energy forms have led to Europeans taking meaningful action to cut energy use in every aspect of their lives. They use energy efficient appliances; homes, offices and factories are well-insulated and otherwise energy efficient; public transit is efficient and popular. Industry has played a huge part in the greening of Europe. The net result is that carbon dioxide emissions per capita are 50% lower than in America.
As a result of policies over the past few years, Europe is far less dependent on imported oil than America. That has enormous economic and political implications. In spite of massive expenditures to reduce carbon emissions, the GDP per capita in most of Europe is equivalent to America. Germany, in spite of high labour costs, remains the world's second biggest exporting nation, exceeded only by China. Europe in total spends far less per capita on energy than America. One could argue the specifics of cause and effect, but it is worth noting that the dollar has lost roughly 50% of its value relative to the euro over the past few years.
The evolution to a more energy efficient Europe has not hurt the economy there even during the transition stage. Now, with substantial green energy production facilities in place and the economy overall far more energy efficient, the European economy will gain further benefits in the future by paying less for imported energy. Equally important, the industries that were nurtured during Europe's build out of a greener economy are now exporting goods and expertise around the world, resulting in a substantial benefit to the European economies.
Why America Has Fallen Behind
Instead of instituting policy changes that would lead to progress, governments in the United States and Canada have bowed to warnings that addressing climate change will lead to the destruction of the US and Canadian economies.
It is taken as conventional wisdom in North America among government policy makers and some economists that efforts to revamp the energy industry will hurt the economy. That belief persists in spite of the clear example of Europe to the contrary. In trying to understand that inertia, let’s look back.
After the 1973 oil embargo, motorists lined up at the fuel pumps and literally fought over scarce gas supplies. The government of the time pledged action to cut America's dependence on oil. There was an enormous amount of talk and some progress was actually made over the next few years before interest waned. Then oil prices tripled in 1979, and the call for energy independence was renewed. The flow of promises and rhetoric was soon surpassed by a rapidly increasing flow of oil.
Over the past couple of decades, in spite of government promises to reduce imports of crude oil, consumption in the US has continued to climb. Clearly, the oil companies, which are among the largest corporations in the world, have had an enormous impact on shaping government policy and public opinion.
Industry lobbies in the United States exert far more influence than most people within the country are willing to admit. As one blatant example, last month we reminded readers that it took decades for the government to break free from the tobacco lobby and impose restrictions on tobacco use.
More recently, DuPont warned prior to the 1989 Montreal Accord that phasing out CFCs would negatively impact the US economy. (CFCs, which were used as propellants in aerosol cans and in refrigeration systems, were shown to damage the protective ozone layer in the upper atmosphere.) DuPont was soon proved wrong. A punitive tax imposed after the Montreal Accord dramatically cut CFC usage, without impact to the American economy.
Electricity and coal companies spent tens of millions of dollars in lobbying efforts during the 1980s trying to halt acid rain legislation and the attendant sulphur dioxide cap-and-trade program. They argued it would be uneconomical to control coal-fed power plant emissions. The Acid Rain Program legislation passed in 1990 led to sulphur dioxide emissions being reduced by 43%, yet the coal industry powered ahead with steady profits.
US auto makers consistently, and effectively, lobbied to prevent the Federal Department of Transportation from raising vehicle fuel economy standards during the 1990s and much of the past decade. The American auto industry makes more profit per car selling big gas guzzlers then from small fuel-efficient cars. So, it is only natural that the auto industry, for more than half a century, worked night and day to lobby governments and also to convince consumers that they were nobodies unless their cars were at least as big as the car in the next driveway.
Lobbyists convinced governments that imposing fuel efficiency standards would destroy the US auto industry. With corporate fleet fuel efficiency standards in the US frozen at 25 miles per gallon since 1985, North America is now far behind Europe and Asia, where fuel efficiency standards are above 40 mpg and projected to rise to nearly 50 mpg by 2012. The U.S. auto industry, by relying on government protection and resisting change, planted the seeds of their own destruction.
Japanese auto makers doubled their annual sales in the US since 1980. Even before the collapse of General Motors, Toyota had become the number 1 car maker worldwide. US auto makers saw their sales reduced by 30% over that period. That figure is prior to the precipitous drop in annual US auto sales in 2009, from 16 million in 2007 to 10.5 million. Japanese and Korean manufacturers are within a couple of percentage points of holding a combined 50% market share in the US. That resistance to change protected quarterly profits for a time, but cost US auto manufacturers significant market share.
Watching from an international perspective, it was no surprise when General Motors, once the world's mightiest carmaker, went bust. If not for an enormous hand-out of taxpayer money, that former icon of American industry would have been broken up and sold piecemeal to international companies with more vision. Chrysler is now merely a division of an Italian automaker. The American auto industry is now so far behind technologically that it will never regain a dominant position in the world. Ford, the only American auto maker to avoid bankruptcy, foresaw the coming changes several years earlier and began to adapt. The company is implementing European technology, with its Fiesta and Focus models being designed and developed in Germany.
Over and over, American industry has warned of dire economic consequences in order to oppose progressive legislation that might impact near term profits. The above are merely a few examples of the huge impact that industry has on the American political agenda. That influence is exerted through a well orchestrated combination of direct lobbying and use of the media, which is dependent on advertising revenue from industry.
Clearly, the present challenge in the energy industry is bigger than any previous challenge faced by legislators and industry. Yet, the example of Europe should serve as an example that the cries of woe should be treated with scepticism, at best.
The recent American Supreme Court decision that upholds corporate spending for candidate elections will maintain the balance of power in US politics in favour of corporations over individuals. Entrenched industries such as oil and coal will continue to have their voices heard above those of consumers, as well as entrepreneurs and small companies in the fledgling renewable energy industry.
With the US political agenda dominated by the entrenched industries, there has not been a consistent level of government support for alternative energy. As a result, other areas in the world have taken the lead with regard to innovation in many aspects of the green energy field. For example, GE Wind is a leading manufacturer of wind turbines, but that business and the technology was acquired from a European company. There is a great deal of research being done in the US. However, with the alternative energy industry in the country slow to get established, that technology has not been advanced as quickly as it might have been in Europe, where the level of implementation is higher. Canada is quickly gaining prominence in this field.
Canada has long been a leader in technological innovation. The country does not get fair recognition for those achievements, as many of the innovations get rolled into big American companies at an early stage and thus drop out of public awareness. The one area where Canadian innovation is widely recognized is mineral exploration and development. Fully half of all spending worldwide in that realm has a Canadian component. That strength in innovation, and access to early stage venture capital is setting the stage for a growing green technology industry in Canada.
We will have more details on the Canadian regulatory and financial systems with regard to green energy research and development in the next issue.
We repeat our assertion from last month that “switching away from carbon fuels will almost certainly provide a positive economic benefit.” Europe has shown to be the case. The transition of the largest industry in the world will create enormous opportunities for entrepreneurs and investors.
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