Wednesday, December 31, 2008

Green Economics

Where does this new green economy fit in the economic mess that we have going on in the world today? What will be its driving force?

“Private funds” is a possibility but most private money is scarred money at the moment and will be for some time. So equity-raising will be difficult. Debt is a possibility as the interest rates have come to a dangerously low level and will probably go to zero. That won’t make money any easier to borrow for the time being as banks have tightened lending practices. So even with the lower interest rates, the banks will just raise their premiums to offset the increase “risk of default”. That makes the real ability to borrow money no better than it was in the past, in fact, it will be harder in a low interest rate environment to borrow funds. This green economy idea doesn’t seem to have a hope with these conditions.

Further the assets that most banks have are still quite dangerous. With over 700 trillion dollars of derivate products that are yet to be re-priced at a fraction of their current value, the banking sector is looking pretty dismal, as is that very important arm of the debt issuance side of the economy.

Depending on which country you live in, the government isn’t in great shape, with the most powerful one being in arguably the worst shape. The US government owes an astonishing amount of money. We’re talking levels that are around the total GDP of the country. The Europeans are in better shape and so is most of the rest of the world. Either way it suffices to say that the US government will have trouble being a leader in this area without adding vast amounts of debt to the total they already have.

This whole theory of green revolution seems pretty dim when you think about it in that light, but I am still a believer in it. The US economy had the right theory when they wanted to spend their way out of a mild recession in 2001, but the target of the spending was the major flaw in the equation.

Keynesian economics was the right theory with the wrong application. The American people were already stretched to the limit. They ended up using there houses as an ATM machine through the easy credit of a refinancing or a zero money down first mortgage. Further they were trying to expand a sector of the economy that was already maxed out, the consumer. What should have been done is spending on value-add parts of the economy, such as infrastructure.

The spending that was and is needed is in expanding the economy with supply that can be grown into. Greater supply of refineries and other such things is futile as their useful life is only as long as the supply of the rather dwindled natural resources, oil. There is also the factor that we as a society are assigning a higher value to our health than pollution which has conventionally been synonymous with growth. That is changing and will be the key driver.

With a lower value being given to oil based growth, a higher value is being given to greenhouse gas neutrality. That means that the public in general is placing a higher value on a Megawatt produced from a solar panel or a biomass plant than a coal fired or diesel fired plant.

Even with a nearly tapped out economy the best bet would be to open the printing presses, and let the interest rates run up. What we would get is the government would have to do the spending to build things like wind farms and geothermal plants and the higher interest rates would be on new spending, so that the general public would not be tempted to debt spend unless they absolutely needed to and could use any excess income to pay off current debt. Big business could be given a break in the interest rates if borrowing for green projects.

The effect here would be a depressed consumer spending sector and a booming infrastructure developing sector. This will probably still produce a contracting or stagnant economy but it would be better than the alternative.

I would suspect some of this will occur. Most of it is not palatable to the general public. Taking away the ability to spend more than you have is almost unconstitutional in the USA. The oil business is still big business with even bigger interests that will be hard to break through. That being said I see this scenario as one of the few that could actually work.

More About Marginal Abatement Cost (MAC)

To elaborate on the Marginal Cost Curve and the Marginal Damage curve, there is an underlying theory that says that there is a direct relationship between growth, or rather productivity, and pollution. So that being said it is doctrine, productivity = pollution, therefore you have to pollute to grow. This is true, we have entire economic text books that go on at lengths about it. The reason for that is that our entire existence is based on pollution. Electricity is derived from coal, cars run on petroleum, we over package everything. There is really no getting around it.

Is it possible to say that the relationship described above can be inverted? That is to say, growth = green? Sure! All you have to do is rewire the infrastructure to do that. If all electricity was hydroelectric or derived from biomass, it would be a near zero emissions situation. Introduce a coal-fired plant and therefore pollution and we have air quality problems, deforestation and all the goodness of non renewable energy sources. Some of the added costs are health bills, land reclamation and more. Similarly with cars, if they all ran on batteries and you had most fuel stations with chargers and only a few petrol cars, your economic incentive would be to conform to the status quo. That is why pollution = productivity, because everyone else is doing it too.

Currently, it costs more to be green and therefore it is unproductive, but there will come a point where the infrastructure will be suited to make green technology the productive one.

This will rewrite economic textbooks for sure!