The truth about imports and emissions

Back in April and May there were a lot of headlines about how the UK isn’t really reducing emissions at all – we’re just transferring emissions to the developing world by importing energy-intensive manufactured goods.  A report by a respected institution, the National Academy of Sciences of the USA, has been cited as solid evidence.  It is solid – but people are drawing the wrong conclusions.

The data does indeed show that when we look at consumption rather than production, emissions in the developed world have indeed grown rather than fallen – by 0.3% per year on average.  Moreover, the fact that global emissions continue to increase is undeniable.  However, we are not simply transferring our emissions to the developing world.  The authors state this – the emissions intensity of trade is actually falling, even as trade grows.   Since 1990, international trade has grown at more than twice the rate of the emissions embodied in that trade. The problem is that we continue to consume more, and we have failed to reduce the emissions of our consumption enough to compensate for our increased appetites.

The real question is this – what should we do about it?  There is a danger that, based on the headlines, policy-makers will conclude that reducing energy-intensive imports is the way forward.  In short, protectionism will become fashionable again.

Of course, as most mainstream economists will tell you, protectionism tends to lead to slower growth – good for emissions, but bad for jobs and wealth.  Fortunately, The Economist, a respected international news and opinion journal, throws cold water on the idea that tariffs could help.  It argues instead that green investment in the developing world is the way forward.

However, all commentators appear to neglect the point that stares at us out of the data – the big emissions opportunities that we in the developed world can tackle are from production destined for domestic consumption.  While it is very difficult to regulate emissions in other countries (tariffs are a very blunt and potentially divisive instrument), it is perfectly possible for countries to regulate the emissions from their own production, most of which is destined for internal markets.  Since this is the largest figure, and the one most conducive to management, it makes sense to focus attention here.

Of course, there is still a strong argument for measuring national emissions based on consumption, not production.  This gives us a more realistic picture of the environmental impacts of our national lifestyles.  Nevertheless, when it comes to making reductions, we should be looking at the big wins that come from production to meet our own needs – this is where we will have the biggest positive impact.

Is micro-generation a good business investment?

The UK government yesterday announced its strategy for microgeneration of renewable energy.  It is aimed at businesses and individuals who want to produce energy on their own property, rather than energy companies or investors.  In my 16^th May article I pointed out that small businesses may be able to invest in renewables profitably if they have an idle resource that can be turned into energy cost effectively.  Does the UK government’s strategy make this any easier?

It will.  The government has already put financial incentives in place to promote small scale renewables, most notably the Feed-In Tariffs (FiTs).   These incentives work, yet not every suitable business is installing solar panels on the roof or a wind turbine on vacant land.  Why not?  One major obstacle is the lack of knowledge, and uncertainty about whom to trust.  The government’s strategy will address this by taking a stronger lead in establishing standards, quality marks and the like, to give decision-makers more confidence in choosing systems and services.

Will this strategy overcome all the major obstacles to the development of microgeneration?  No – the missing piece of the puzzle remains planning permission.  Although the government’s strategy mentions the issue in relation to community energy projects, they describe it as essentially a work in progress.  However, approval rates do vary widely, as the National Audit Office has reported, with Scotland taking the strongest lead in application approval rates.

A longer term consequence of regional variations in micro-generation approvals will be that business decisions about new site location may be influenced in part by planning attitudes to renewable energy.   This will be particularly attractive to those firms in energy-intensive industries, or where carbon footprint is important to the buying decisions of their customers.

Of course, the difficulties in obtaining planning permission do not make renewable micro-generation less attractive in terms of financial returns.  Instead, these obstacles increase the business risk associated with considering renewables, as it becomes more likely that the management time and pre-planning investments will come to nothing.  Businesses are no strangers to this problem – tenders, pitches, and investments in unproven markets all suffer from this sort of risk.  The secret to managing them is to make these efforts many and small, so the firm can afford to fail with most of them.

 

Translating this to micro-generation, the approach should be similar.  Look at all resources that could be converted to energy.  Plan to put in applications for any renewable installations that have a positive financial value.  Do this over a period of time that does not put excessive burden on management.  Expect to lose most of them, unless your business is located within an authority that is friendly to renewables, so keep the up-front investments low unless there is good reason to think your application will succeed.  Use independent, specialist consultants to evaluate the business case and advise on planning.   Micro-generation can be profitable, and approaching it with the same attitude taken to any business investment will bring good financial returns, as well as environmental benefit.

Finally, keep an open mind about micro-generation opportunities, because government policies, carbon pricing, and fuel costs will continue to alter the landscape in which businesses have to make their choices.

The Anthropocene

We had got used to being insignificant.  Copernicus showed that we were not at the centre of the universe.  Darwin found an explanation for the variety of species that did not involve them being created for our benefit.  But just as we had got used to being unimportant, it turns out that things are changing.  The Economist is amongst the latest to note the view that we are living in the Anthropocene age – a geological time in which the development of life on earth is dominated by mankind.

This change of perspective reflects our increasing recognition of the impact we have on our planet.  As individuals, our impact is normally insignificant, but as the number of our species has grown and our individual impacts have increased, these multipliers have added up to an unimaginable impact on the planet’s ecosystems.

As we wait for legislation, the markets, or scientific innovators to solve the problem for us, the costs are beginning to mount.  Insurance costs are on the rise.  Speculators, investors and consumers drive up commodity prices in ways that are proving hard to predict.  It is difficult to know what to do in the face of such uncertainty and change.  However, standing still looks like a poor strategy.  Businesses need to be flexible, to learn and to adapt continually.

The traditional approach to learning is to rely on experts.  Unfortunately, in times of rapid change, experts have only a part of the picture.  What is most needed are experimenters – people who can combine thinking about what is known with speculation, turning it into testable hypotheses.  They will then run fast, inexpensive experiments to inform business decisions.  How do you know whether these experiments lead to success or failure?  As Columbia professor Rita Gunther McGrath observes, you don’t – so you need your experimenters to be expert in learning from all outcomes – including failures.

The current crop of entrepreneurs is doing exactly this.  As sustainability author Andrew Winston has blogged for HBR, both new business leaders and venture capitalists are making bets on businesses that solve sustainability problems.  These aren’t first-time-right ventures, but resilient enterprises that have kept going until they found a solution.  For example, third place winner PK Clean has based its business on technologies that are the fallout from many inventions and innovations tested and redesigned over decades.

But how do we decide what sorts of experiment to run?  The answer comes from a good understanding of the organisation’s impacts and vulnerabilities.  Your experiments will aim to reduce these.  From this point of view, the experts are not the external change consultants, but your internal experts who know full well what your firm does to the environment (even if they don’t know how much), and who have a pretty good idea of your firm’s critical needs – those things you cannot do business without.

The key factor for success is straightforward: manage your changes as experiments, not just “pilot projects”.  In other words, the aim should be not to “prove” that they are a success, but to evaluate them critically and learn from the results.

We humans are coming to dominate our planet in a way we did not anticipate.  The coming decades will favour those firms that acknowledge this, and deal with the changing environment with ingenuity and open-mindedness.  The winners will accept that the answers may not yet be “out there” – they’ll use sound methodologies to find the answers that really work... if only until the next change.