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

Monday, January 7, 2008

Climate Change from the Demand Side - podcast transcript

We have argued elsewhere the primacy of demand, there about keeping total output and employment at optimal levels. But nowhere is the effectiveness and utility of the demand side more evident than in an economic approach to reducing the causes of climate change.

I struggle with the best way to differentiate supply side solutions from demand side. Today we will try with examples: The deforestation of Indonesia, the development of new transportation technology, and the elimination of wasteful prison mattresses.


Illegal logging and deforestation around the globe is creating about twenty percent of the greenhouse gas problem. In Indonesia Chinese and Chinese-sponsored illegal logging accounts for a tragic loss of this valuable resource. The logs are taken illegally, shipped to China, manufactured into flooring and other wood products, and then sold on into the markets of Europe and America.

International pressure has come to bear on China for this practice, since its companies are obtaining and processing the illegal logs for profit. China counterclaims that the host country should be responsible for the crime on its own shores. Indonesia, however, is a weak state, and even if it were not, the incentives are all in the wrong direction. The logs would no doubt be brought out by bribery or bullying or other tactics even if government were much stronger in Indonesia.

The Demand Side answer is to ban the sale in the American and European market, coupling the ban with a tax on all imported finished wood products – a tariff, if you will. As soon as the possibility of final sale dries up, the entire market dries up. The wealthy countries have the wherewithal to monitor such things. A tariff or tax provides revenue for the monitoring, plus a convenient and easily proven crime with which to prosecute smugglers. That is, tax evasion is far easier to prove than the derivation of any particular product, or the complicity of the retailer in obtaining that product.

Reducing carbon emissions

The current favored mechanism for reducing carbon emissions is the Kyoto binding caps on emissions by country. The US is being dragged into the process kicking and screaming. China and India are opting out. So-called cap and trade schemes are the market-based solution preferred in the developed countries. These provide a value which can be bought and sold, and so pollution is allocated to the most inefficient. Carbon taxes are another idea along this line, attempting to bring the costs of so-called externalities into the price. This is a useful and noble exercise, but it is not enough to produce the needed technological revolution.

Be clear. The only way to internalize externalities is to bring the cost of a product’s use and disposal into the market, the purchase-sale event. But this is not sufficient.

This is not to say bring as many of the costs of a products use and disposal into the market, the purchase-sale event, is the only way to internalize the externalities of the market. But it has many problems.

For one thing, the ultimate costs can never be known until after the fact. If the cost of nonaction is the destruction of the planet, then there is no price too high. Another obstacle is the political bickering about what costs ought or ought not to be assigned to the purchase-sale event. This could produce arguments and litigation which would extend far beyond the deadline for action.

Finally, nudging the costs up, particularly if done in a half-hearted or inconsistent way, will never provide the impetus for the widespread innovation needed to reduce carbon production to one-fifth its current levels. Such an approach will tend to produce graduated adjustments to current technology, not new technology. Remember, we need to get to one-fifth our current carbon output by 2050, little more than forty years.

A better model for action was produced by the state of California. The Californian skies in the 1970s were a soup of pollutants: carbon monoxide, particulates, nitrous oxide. California chose not to provide incentives to suppliers to do the right thing or to generate public information campaigns to coax consumers. It simply issued the mandate that automobiles bought or used as of a certain date needed to have a highly reduced emission level. A simple regulation.

But a huge market for those who could innovate the solution and the loss of a huge market for those who could not. First, the state listened to a cacophony of complaints and dire predictions. Cutting emissions to the target could not be done, and even if it could be done, the cost would be prohibitive.

Thirty years later, as a result of that law and subsequent amendments, emissions have been reduced to one one-thousandth of their former level. Yes. Zero point zero zero one. We have the catalytic converter and a separate reduction reaction in the converter box (as I understand it) and a result that any chemist or engineer in 1980 would have ruled out of the question.

This is the magic of demand side. In terms of reducing carbon, we describe the resultant products in terms of their carbon footprints and let the market innovate to that result.

Jonathan Frost, director of Britain’s Johnson-Matthey fuel cells has argued persuasively that if there is a guaranteed market for a product with clear specifications, that is, a guaranteed sale if the product is produced, the private sector will generate the investment and energy to get there. In the case of California, there were millions of cars to sell. The investment by the state in the technology was zip.

Government procurement

This leads into a process that is familiar to defense contractors who are given specifications and asked to produce. The most outlandish weapons or surveillance or battlefield technology has been developed by this method. See at night, get a three ton missile to home in on a four foot square target. Spy from a thousand miles up.

If government guaranteed it would purchase ex number of no carbon buses, they would be produced within five years.

Frost gives the example of zero waste prison mattresses. British prisons dispose of hundreds of thousands of mattresses that cannot be burned or used as weapons, etc. The specs for these were twenty six years old when, as part of a demonstration project, Frost and his colleagues altered them to include the stipulation of zero waste. No waste prison mattresses. They put it out to bid.

The first thing they got was what California got. “Can’t be done,” “If it could be done, it would be exorbitantly expensive.” Next they received thirty-three proposals. Multi-nationals down to inventors in garages came up with innovations on how it could be done. Ultimately the zero waste prison mattress was produced at a net savings over previous costs when disposal is considered.

Oh that’s right. In California. The catalytic converter and subsequent technology reduced emissions by one hundred thousand percent on an adjusted cost here, too, of — zero.

So it can be done. The first step may be the hardest, to think about and describe exactly what the result is that you want. Resist the temptation to describe the processes to get to the result. The current ethanol situation substituting fuel for food comes to mind. Previously it was liquified natural gas. Just concentrate on the low-carbon, high-performance product and let the private sector do its own innovation. That’s what they do best.

It is simple and effective. It engages corporations in what they do best – innovation, production, technological advancement – and urges them away from what they do worst – manipulate demand and manipulate the political and regulatory processes.