Zapaterismo

China in Africa

Africa has been on my mind a bit lately, in part due to a wonderful (though likely quite controversial) article from last month's Fast Company, which I finally got around to reading.  The article touches on China's land grab on the African continent, telling a story that many will be fascinated to hear.

Certainly, part of the reason that China has been able to so aggressively go about acquiring raw materials from African countries is because of the relative lack of local industry in so many African countries.  I'll be posting some more thoughts on this soon, as Hernando de Soto's book, The Mystery of Capital, sparked some thinking, but also wanted to share the following TED talk that makes a similar point, though it comes from a different direction.

Addendum:

I should also note that, according to the Fast Company article, part of the reason for China's aggressive move into Africa has to do with an entirely different talent management challenge than is being faced in most of the rest of the World.  In China, the challenge isn't only producing enough skilled workers and managerial talent, it's also finding jobs for the millions of unskilled and unemployed that China is working to integrate into the country's middle class. 

A mighty wind

Since gas prices across the US reached an average of $4/gallon this last week, I thought it timely to share this wonderful Fast Company article.

If there is one fabulous thing about skyrocketing fuel prices, it's their ability to make even people like this guy believers in alternative energy.

A much needed distraction

New Year's SMART Goals?

To lighten things up a bit after a series of intense posts, check out the Heath brothers' (authors of Made to Stick) column in this month's Fast Company... Does this sound eerily HR?

If you like that one... or even if you don't... I would also suggest taking a look at David Roberts's Green Business column this month.  It is a much more informed and eloquent version of what I tried to say in a pair of posts (here and here) not long ago.

And a picture, just for fun, of a scene of the Ciclovia in Bogota (thanks to themikebot's photostream).  Every Sunday from 7am to 2pm the city closes down its major arteries to car traffic and opens them up to walkers, runners, and bikers.  It's a fabulous, inspiring scene.

19.20.21

While I ripped on BusinessWeek's innovation article a couple of weeks back, I do have to give them credit for introducing me to the 19.20.21 project.

I have little doubt that the world of the future will be one in which the vast majority of the world's population lives in major urban centers. 

The sociologist in me finds it fascinating to think about both the opportunities and challenges such a reality will present.  I'm looking forward to seeing, hearing, and reading the findings of this not so humble endeavor.

Too bad it's not an open-source project - I would love to be a part of it.

Back in the saddle, part II

My recent post on CO2 allowances and trading actually only touched on the economics behind allowances.  Since the concept of building environmental degradation into a firm's fixed production costs could be implemented a number of ways, including via an emissions tax, I thought it important to offer quick comments on why it makes sense to enact by way of a market mechanism.

There are two primary reasons to do it this way, as I see it.

1. Allows our global society to reduce emissions in a more cost-effective manner. 

I'll illustrate with a simple example.  Suppose GE and GM each receive 1000 emissions "credits."  So whatever the units are, they can use 1,000 of them every calendar year before they are assessed a fee for overuse of the world's environmental resources. To date, suppose each has been actually using 1200 of those units.

However, GE, with its leading edge technology, is able to reduce emissions at a cost of $20/unit, while it costs GM $35/unit to do the same.  So if both were to independently take action to reduce emissions, they could both become compliant to the tune of $4000 + $7000 = $11,000.

Now, let's put a market for emissions in place that is demanding $25/unit for CO2 credits.

If you're GE, you suddenly have incentive to not only become compliant, but to continue innovating and applying new technology to the business in order to emit well below quota.  For example, you might lower emissions by 400 units to put you at 800 total.  That way, you can turn around and sell your excess 200 units to GM a cost much lower than what they would pay to become compliant otherwise.

Instead of $11,000 being spent, the total for the two firms looks like this: (Cost of bringing GE to 1,000 units + GE profit from additional 200 unit trade) – (Cost of credits to GM) = ($4000 - $1000) + $5000 = $8000.

The same reduction in emissions is produced at about 70% of the cost.  Everybody wins.

2. Companies are incented to innovate to bring emissions below compliance levels.

For the reasons already made clear the by example above, putting a market in place encourages companies to innovate in their products, processes, and business models to minimize their environmental impact and establish comparative advantage.  This way, they can make a buck off of the difference and perhaps even turn their compliance unit into a profit center.

Ironically, this latter point is also one of the reasons that divvying up allowances between and within countries is so highly political.  Those already at an advantage in terms of access to affordable, clean technology potentially have more to gain from such a system.

Anyhow, basic economic concepts, but interesting to explore in some detail to see how the numbers work out. I hope it's informative.

Back in the Saddle

I've been largely absent from the blogosphere over the last couple of weeks.  Work, shoveling snow, catching up on reading, and tending to family/household matters (i.e. the holidays) has pretty much dispelled any energy or desire I've had for writing.

And now that I'm forcing myself to pick it back up, I can't think of anything to talk about that seems terribly interesting. This is despite the fact that I've had plenty of ideas cross my mind.

Environmental sustainability, however, is one topic I've been chewing on a great deal that always merits attention.

With the talks in Bali right now focusing on the highly politicized issues of who will reduce emissions by how much, when, and by what means, it's easy to get caught up in the debate surrounding efforts to stem climate change. Certainly, when you consider the difficultly in deciding how to fairly divide upCO2 allowances between and within countries, and when you ponder the challenges inherent in reporting and enforcement, it starts to feel like an impossible endeavor. Why even bother (hint: if you're George W. Bush, you don't).

All of this makes it easy to forget the basic economics underlying emissions allowances and trading that make them such compelling ideas and so worth pursuing.  Let's revisit these principles for a second.

Free markets are driven by two things – consumer demand and industry supply.  While demand is impacted by everything from basic human needs to advertising to individual preference, supply is dictated by the balance firms draw between the additional expense they incur and the additional revenue they bring in by varying levels of production (economists call this marginal analysis). 

To better illustrate, if I own a widget company, I'm ideally going to continue producing widgets until the cost of producing one more exceeds the additional revenue generated by selling that one extra widget. This is how I maximize profit.

So what if we pretend that the destruction of public goods like clean air and water isn't a cost of production?  Doesn't that lead companies to an erroneous conclusion around where that balance sits? 

Indeed, it's no different than forgetting to account for overhead when reporting earnings. Just think of how much more money your company could make if it could ignore those silly expenses.

In essence, this is what has been going on since the beginning of time.  We've cheated ourselves into thinking that our operations are more profitable than they really are by ignoring some significant costs of doing business. And now our world is paying for it.

The point of allowances and trading, then, is to start factoring in – internalizing – this cost of production in order to correct the balance. 

When you look at it this way, two things jump out.

1. CO2 allowances are actually a pretty good deal.  You only pay when you exceed your quota, and if you stay under quota you can trade in the excess for money!
2. There seems to be little justification for limiting CO2 allowances to heavy industry.  Even though I work for a consulting company, don't I impact the environment by hopping on an airplane to visit with a client? Why shouldn't my company have to account for that? And for that matter, don't I impact the environment by driving to the grocery store?  Why do I expect to pay for gas but not for my emissions?

As I think about the world my kids will live in, it's inspiring to imagine a place where the environmental and social impact of what we do becomes just another line-item in our budgets.

Hey, it could happen.