A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Wednesday, October 3, 2007

How to create a market for planetary survival

Public policy can establish markets for specific products and unlock the economics of innovation

The market in environmental poisons is booming. Oil is over $80 a barrel.

Approximately zero dollars of that eighty finances mitigation of or adaptation to the direct results of using that oil.

Why no accounting? The cost of the rapid deterioration of the planet as a habitation for people must have some dollar value. This is a puzzle free market apologists don't like. Global warming, they say, is something called an "externality." External to what? Long after the plastic toy is discarded, the gasoline burned and the automobile crushed to scrap, these greenhouse gases will continue to entertain us.

The environmental effects and their costs are external only to the purchase-sale transaction. This transaction is effective extent of the market into the real world. This market failure has driven governments to construct the highly imperfect remedies of carbon trading and carbon taxes, clumsy attempts to have the price include at least a fraction of the cost. It hasn't worked.

The right way to make a market for planetary survival was outlined recently by Dr. Jonathan "Jack" Frost of British fuel cell developer Johnson-Matthey. He spoke at a recent Tyndall Center conference on environmental finance.

In a completely unassuming manner, in twenty minutes of presentation and ten minutes of Q&A, Frost nailed the principles of an economics of innovation to the wall and pointed to it as the way to engage industry in innovation rather than obstruction.

The illustration that convinces is the historic clearing of the smog from the atmosphere, which was sponsored by California's emission-reduction mandates. Cut emissions by half? Technically impossible at any by the most ludicrous price. Can't be done. Then came the catalytic converter. A catalyst on a consumer device was almost unthinkable. But the catalytic converter, a subsequent modification to it, and other technology now leave emissions at .001 (one one-thousandth) of their former level. Normalizing for all factors, its cost in the price of a new car is zero.

Better to listen to the podcast with this link. (The Tyndall Center has a link to a videocast.)

Public policy acting for the public good can create the purchase-sale condition for products of all kinds, not just the power plants and vehicles. The major problem is not the politics. It doesn't cost a fraction of the subsidy programs currently favored. The problem is identifying what we want and enforcing it while being sensitive or at least aware of the supply chains of an industry.

We're getting it together to put up a more extensive discussion of the economics of innovation as outlined by Frost on the web site (demandside.net). Dr. Frost kindly provided some links to research when we prodded him after the conference. None of it is as cogent as the Tyndall presentation.


  1. "This market failure has driven governments to construct the highly imperfect remedies of carbon trading and carbon taxes, clumsy attempts to have the price include at least a fraction of the cost. It hasn't worked."

    From what I've seen, carbon trading and such things have worked in various places in the US. But the biggest and most visible carbon trading program, the one in Europe, has so far failed in its early stages.

    But the reason it failed seems to be that it was so lenient, so cautious, that the number of carbon credits allowed were enough to allow just as much carbon output as there had been without any carbon trading. So there was no scarcity, no costs to producing carbon, and therefore no cost benefits to be had by reducing emissions. That's easily fixed by being more aggressive with the target carbon reductions.

    On a side note, the link to this blog post found in the "previous" links at the top right was pointing to the wrong blog post.

  2. Your point is well taken. Price is necessary, but is it sufficient?

    And as we reduce lenience we approach the regulation that is more effective. The final question in the Q&A following Frost's presentation at the Beyond Stern conference came from a carbon trading advocate who made the point you are making.

    Frost's response was that as we get close to an actual cap, we are getting close to the regulation that says we're only buying low carbon plant and equipment. So the two points converge.

    Thanks for the side note as well.