naked capitalism

The famed hedge fund investor George Soros has decided to make a serious push into clean energy, not only investing in projects but also forming an organization to weigh in on policy issues. From Bloomberg:

Billionaire George Soros, looking to address the “political problem” of climate change, said he will invest $1 billion in clean-energy technology and create an organization to advise policy makers on environmental issues…

“I want to apply rather stringent criteria to the investments,” said Soros in an e-mailed message. “They should be profitable but should also actually make a contribution to solving the problem.”…

Soros, 79, also will establish the Climate Policy Initiative, a San Francisco-based organization to which he will donate $10 million a year for 10 years.

“It will be part advisory service, part policy developer and part watchdog,” said Thomas Heller, who is heading the initiative. Heller is a professor at Stanford University Law School whose expertise is in energy law and regulation and environmental law.

Its goal is to look after the public interest as policies and programs are created to address climate change. The group will work in the U.S., Europe, China, India and Brazil, he said.

“The problem of global warming is primarily a political problem at this point,” Soros said. “The science is beyond dispute, but how do we achieve the objectives we all know are necessary? That is a political problem.”…

Soros has said he prefers a greenhouse-gas tax because carbon emission-trading systems, which are used in Europe, can be manipulated by investors.

At some point in 2009, the government may get past managing the crisis du jour and turn to those nasty, seemingly intractable problems we nevertheless have to address. such as greenhouse gas emissions.

One idea that had been bandied about is the idea of cap and trade, which would allow big bad carbon emitters to buy the right to do so from those who had cleaned up their act. I’m not alone in being less than keen about this regime (the very fact that Wall Street firms are keen to act as brokers should give cause for pause, and even conservative economists like Greg Makniw prefer straight up carbon taxes to cap and trade).

But the cap and trade concept may already have been dealt a near-fatal blow. As John Dizard explains in more detail, a court ruling called the legal standing of these rights in question, and it may not be possible to dispel the cloud around them.

From the Financial Times:

The most serious struggle will be over climate change, or the regulation of carbon emissions. You can forget all the chitchat about finding a consensus on this one: the coal people and the enviros are in this match until one side is carried out….

Wall Street and Chicago always like the creation of trading markets for new assets, especially if they can be inefficiently priced by the professionals. So while the coal people hate climate legislation, a lot of traders see an opportunity.

One of the problems, though, is that there are already government-created markets for sulphur dioxide and nitrogen oxide emissions, and those markets are in trouble. As I have written earlier in this space, a Federal appeals court decision on July 11 of last year appeared to kill the long-term value of credits under what was called the Clean Air Interstate Rule, a set of markets for pollution credits created by the Environmental Protection Agency. At a stroke, some tens of billions worth of rights to emit noxious gases were slashed in value by the court’s ruling that the EPA had exceeded its authority.

The EPA, along with utilities and some enviros, asked the court to modify or reconsider its decision, and, unusually, the court had second thoughts. In late December, the court indefinitely stayed its cancellation of Cair, allowed the trading to remain in place, and told the EPA that it had to come up with a fix, sometime in the undefined future. That is the simple version.

So, the price of the right to emit one ton of sulphur over the next year, which had been up to $600-$800, fell back to as little as $100 after the initial decision, and has now, after the court’s reconsideration, risen to $150-$200. At $600, utilities found it economic to build new pollution control systems before they were required by law, since they could sell for a lot of money the emission credits they earned…..

Now, though, the court ruling, and the wider realisation that allowances under cap-and-trade are not really property rights, has chilled such markets. Risk management committees for corporate buyers and trading houses are likely to hesitate before buying pollution permits that could lose value.

So any new market-based emissions controls had better have more certainty than the flawed Cair. In leaving Cair in place, the court seemed to reason it would retain its effectiveness in reducing emissions over the next couple of years, but that is not the case. Instead, the EPA’s pollution allowance market people believe the low prices created by the uncertainty over the future of Cair will have the perverse incentive of inducing utilities to use up existing pollution allowances by emitting more than they would have, while postponing building new controls. Or so the agency’s economic models say…

The Cair mess shows that it is easy to get market design wrong. With mortgage and derivatives markets, that costs billions. With Cair, it costs shortened lives.

Now, of course, it is possible that a new, bullet-proof version of trading rights could be devised. But it would probably be subject to serious scrutiny before anyone invested in the hope of being able to sell the resulting carbon rights.

The idea that reducing carbon emissions is bad for investors is in at least in part an urban legend. In an earlier post, we noted:

In 1997, British Petroleum decided to lower its carbon emissions below the 1990 level by 2010. It achieved the goal in 3 years rather than 13 at a cost of $20 million. Oh, and it happened to save $650 million. With that sort of calculus, you’d think that every big corporation would be on the emissions-reduction bandwagon.

While the savings for other companies may not be as dramatic, other analyses have found that investing in energy savings is attractive:

A study by the McKinsey Global Institute (MGI) found that an annual global investment of $170 billion in energy productivity through 2020 could half the global energy demand—an amount equivalent to 64 million barrels of oil per day. This investment would create energy savings with an average internal return rate of 17 percent, or $29 billion. MGI said the most cost-effective method for reducing global greenhouse gas (GHG) emissions is through energy productivity. Additionally, the report says the investment would cut CO2 emissions to about 550 parts per million—the amount needed to stabilize the gas at the safety limit set by the Intergovernmental Panel on Climate Change.

In order to achieve this, MGI said the global industry sectors need to invest about $83 billion per year, residential sectors would need to invest about $40 billion, and the transport and commercial sectors must invest $25 billion and $22 billion per year, respectively. Diana Farrell, director of MGI, said “the vast majority of global executives say fixing global warming problems can boost profits…. We’ve identified huge opportunities to reduce energy demand and carbon emissions through improved efficiency.”

This study was published in early February 2008 (see here for the full report).

Reuters today (hat tip reader Jorgen) reports that institutional investors are calling for faster, more aggressive action to reduce greenhouse gases:

Global institutional investors holding more than $6 trillion in assets pushed policymakers Tuesday to quickly hash out a binding agreement to cut greenhouse gas emissions and promote clean technology.

More than 130 big investors, including London Pensions Fund Authority, want countries to agree to reduce the climate- warming emissions by 50 percent to 80 percent by 2050.

Those numbers are in line with global warming policy favored by U.S. President-elect Barack Obama, who supports an 80 percent reduction in carbon emissions by mid-century.

The investors also want policymakers to set long and medium term emission reduction targets for developed countries and to provide for an expanded and more liquid global carbon market…

They have also called on the U.S. Securities and Exchange Commission to force publicly traded companies to disclose climate-related risks along with other factors that affect their business.

“As institutional investors, we are concerned with the risks presented by climate change to the global economy and to our diversified portfolios,” said Mike Taylor, chief executive of London Pensions Fund Authority….

The group of global investors want countries to sign on to a new binding agreement to succeed the Kyoto Protocol climate pact, which set binding targets for industrialized countries to cut greenhouse gas emissions.

The European Union is aiming to cut greenhouse gas emissions 20 percent by 2020 and increase the share of wind, solar, hydro, wave power and biofuels in their energy mix by the same date.

The United States is alone among major industrialized countries in rejecting the Kyoto Protocol, but is participating in discussions to craft a follow-up global agreement.

“It is time to put an agreement in place where the United States is involved,” said Mindy Lubber, the president of Ceres, a coalition of investors and environmental groups working on climate change issues.

The global group of investors is hoping its voice is heard ahead of a December climate change convention in Poland.

Nick Butler, in “The falling oil price is a lull in the storm,” argues that the break in oil prices is likely to persist for a bit due to improvements on the supply side, but that falling into complacency would be a mistake.

The bad thing about the volatility in oil prices is that it is an impediment to moving to new sources. The Financial Times, in an editorial last year, stressed the importance of having a stable price for carbon to facilitate the transition to cleaner sources. But as much as the runup of oil to nearly $150 a barrel led to conservation in advanced economies (which is far and away the biggest opportunity over the short to intermediate term), the sudden drop to almost $110 leaves open the possibility that it might retreat further (which this article contends will happen later in the year), which would call the viability of alternative energy into question and may also lead to more consumer use (at a minimum, airlines may be able to lower prices and add flights although their nickel and diming is no doubt here to stay). But governments seem loath to design tax regimes designed to achieve a certain end price.

From the Financial Times:

The explanation for the change in sentiment [on oil prices] lies in a combination of factors that between them are transforming the level of spare production capacity – a measure that over the past two years has become the leading indicator of world oil prices and a signal to speculators.

First, demand levels have slipped back and look set to end the year more than 500,000 barrels a day below the initial projections. Demand, especially for petrol , is down in the US and Europe as high prices work through to the pumps and as the economic slowdown takes hold. The Japanese economy, the second-largest single source of energy demand in the world – at 4.5m b/d – shrank by more than 2 per cent in the second quarter.

Almost all the remaining growth in oil consumption is now coming from the emerging markets – especially China and India. Even there the rate of increase in demand has slowed in the past six months. In a market that is sensitive to every change, even the Chinese constraints on car use in advance of the Olympics have had an impact.

More important is the other side of the equation. High prices have encouraged producers to expand output and a series of new development projects around the world, such as the delayed Khursaniyah project in Saudi Arabia and new offshore fields in Nigeria and Angola, are due to come on stream over the next six months.

The net result of these changes is that the level of spare capacity, which dropped at one point to little more than 1m b/d, has crept up to about 1.8m b/d and could rise to 3m b/d by next spring. Three million b/d was the historic level of spare capacity in place throughout the 1990s – a comfortable margin of security against problems anywhere in the world. If such levels are restored the stage is set for a reduction of prices through the autumn and winter. Prices could break through the symbolic $100 a barrel level – only this time they will be heading downwards.

Those brave enough to predict oil prices are usually wrong, but the perception that the fundamentals have changed has begun to affect the trading market and behaviour of speculators. That is why the Russian invasion of Georgia had so little impact. Speculators in particular are pulling out of oil – with a few beginning to bet on a further substantial fall. In the words of one London trader: when prices have risen by more than 100 per cent in 12 months the chances are that the next move will be downwards.

None of this resolves the long-term challenges facing energy policymakers. The world is still dependent on hydrocarbons for more than 80 per cent of daily energy needs. A year of rising prices has only served to shift demand to coal. As a result carbon emissions continue to rise. The dependence of the world’s consumers on Saudi Arabia, Russia and a few other producers remains high. Imports are set to rise in the US, Europe, China and Japan.

The big oil companies are losing market share and seem unable to secure significant access to the few new discoveries being made in areas such as Brazil. The bulk of supplies are controlled by state companies. With Russia and the core of the Middle East closed off, big oil groups face a fundamental challenge to their raison d’être. Falling prices will relieve some of the pressure on consumers but complacency would be misplaced. This is a lull in the storm not a reversion to normality. The need for a transition to a more diversified, lower-carbon energy economy is as urgent as ever.

The auction rate securities market seize up has found more and more firms accused of less than upright behavior. The state of Massachusetts contends that Merrill misled investors about the risks of the instruments. A common complaint is that brokers presented the ARS as being as safe as money market funds.

From Bloomberg:

Massachusetts Secretary of State William Galvin accused Merrill Lynch & Co. of fraud, claiming the investment bank sold auction-rate securities to investors while misleading them about the market’s stability.

Merrill, based in New York, also “co-opted” its research department to help sell the securities, Galvin said in a statement today. The state’s administrative claim asks the third-largest U.S. securities firm to “make good” on sales of now-frozen holdings, compensate investors who sold their bonds or shares at a loss and pay an unspecified fine.

“This company was aggressively selling” the securities “to investors and its auction desk was censoring the research analysts to make sure they downplayed” market risks, Galvin said in the statement. “They knew the auction markets were in trouble, but the investors were the last to know.’….

Merrill decided to stop supporting bids with its own money five days after one of its analysts told financial advisers the bonds represented “a good, conservative, reasonable investment,” Galvin said.

“Our research reflected the honest belief that ARS offered higher returns in exchange for less liquidity and noted that market changes had begun to occur,” said Mark Herr, a spokesman for Merrill, using the acronym for auction-rate securities.

The securities firm, whose market value trails Goldman Sachs Group Inc. and Morgan Stanley, made about $90 million in profit during 2006 and 2007 from its auction-rate program, Galvin said in the statement.

“Time after time, when confronted with conflicts of interest, Merrill Lynch was consistent in that it placed its own interests ahead of its investor clients,” according to the complaint.

The International Energy Agency has determined that for greenhouse gas emissions to be reduced to the level recommended by the Intergovernmental Panel on Climate Change (and some contend that report was too conservative), carbon prices would need to be $200 a ton, more than four time the price now in effect for the EU carbon trading scheme.

From the Financial Times:

The cost of carbon dioxide emissions would need to be at least $200 per tonne – many times today’s levels – to deliver the cuts proposed by scientists to avert the threat of global warming, the International Energy Agency said on Friday.

The rich countries’ energy watchdog warned that the cost of emissions, set by trading schemes or carbon taxes, would need to be that high to make investment in technologies such as hydrogen-fuelled vehicles commercially viable….

Nobuo Tanaka, IEA executive director, said the world needed a “technology revolution” to halve greenhouse gas emissions by 2050, which would “completely transform the way we produce and use energy”.

“If we really go to the 50 per cent reduction, costs are going to be very steep,” he said.

The Intergovernmental Panel on Climate Change, an advisory body to world leaders, concluded last year that global carbon dioxide emissions would need to fall by 50 to 85 per cent by 2050 to prevent average global temperatures from rising more than 2 degrees centigrade.

Among the Group of Eight leading economies, Japan, Germany, the UK, France, Italy and Canada, but not the US or Russia, have endorsed the goal of cutting emissions by half.

The IEA report, commissioned by G8 leaders at the Gleneagles summit in 2005, put the cost at $45,000bn during the next 40 years, or 1.1 per cent of global economic output over the period.

The agency said the world needed to build 32 nuclear plants and 17,500 wind turbines every year, and outfit 35 coal-fired power stations annually with carbon capture and storage equipment; rates of investment that are far ahead of today’s levels.

It also said reducing carbon emissions by half would require commercialising technologies now deemed too experimental or expensive, saying: “Nearly 1bn electric and fuel cell vehicles need to be on the roads by 2050.”

To make those vehicles commercially viable, it said, carbon dioxide emissions would need to be priced at $200 per tonne, providing there was good technological progress. Without that progress, the price would need to be $500 per tonne…

Sixty per cent of the investment would need to be made in developing countries, the agency said. Disagreements over who should pay for such investments have been a major stumbling block to convincing China, India and other fast-growing but poor countries to sign on to emissions-cutting schemes.

Gideon Rachman in “We cannot go on eating like this” in the Financial Times, points out the increasing heated discussion between advanced and emerging economies over resource issues, particularly food.

The positions of the two camps are fairly easy to set forth: the West says, “You can’t have what we have, it’ll ruin the planet,” while developing countries argue, “Our people deserve the same lifestyle.”

The article does a good job of highlighting some of the issues without going into the charged area of solutions (mainly because the author doesn’t see any obvious ways out). However, there are some oversights. The first is that the planet is facing a number of resource constraints, and food, water, and energy are interlinked. Look how the hasty adoption of corn-based ethanol as a fuel has created havoc in grain prices (note that Brazilian sugar-based ethanol, by contrast, is not problematic from a food markets standpoint). Similarly, some economists have argued that the food crisis can be easily remedied, since 60-70% of the land currently under cultivation is not up to the productivity levels of modern agriculture. Ah, but that sort of high-out farming is more energy and equipment intensive. So these issues need to be addressed jointly, but that does not appear to be the way these discussions are headed.

Second, the ugly third rail issue (somehow verboten) is population. The planet has too many people, period. The main reason for the increase in global population is not higher birth rates but higher survival rates. And birth rates in first world economies haven’t fallen fast enough to compensate for declining child mortality rates (and more or less static birth rates) in developing countries. But to talk about the need for, ahem, family planning is a charged issue in the US (and that’s before you get to the Bush administration fealty to dubious methods like abstinence) which guarantees we won’t bring it up as a collective issue. As biologist E.O. Wilson said in a 1993 essay, “Is Humanity Suicidal“:

Now in the midst of a population explosion, the human species has doubled to 5.5 billion during the past 50 years. It is scheduled to double again in the next 50 years. No other single species in evolutionary history has even remotely approached the sheer mass in protoplasm generated by humanity.

Darwin’s dice have rolled badly for Earth. It was a misfortune for the living world in particular, many scientists believe, that a carnivorous primate and not some more benign form of animal made the breakthrough. Our species retains hereditary traits that add greatly to our destructive impact. We are tribal and aggressively territorial, intent on private space beyond minimal requirements and oriented by selfish sexual and reproductive drives. Cooperation beyond the family and tribal levels comes hard.

Worse, our liking for meat causes us to use the sun’s energy at low efficiency. It is a general rule of ecology that (very roughly) only about 10 percent of the sun’s energy captured by photosynthesis to produce plant tissue is converted into energy in the tissue of herbivores, the animals that eat the plants. Of that amount, 10 percent reaches the tissue of the carnivores feeding on the herbivores. Similarly, only 10 percent is transferred to carnivores that eat carnivores. And so on for another step or two.

In a wetlands chain that runs from marsh grass to grasshopper to warbler to hawk, the energy captured during green production shrinks a thousandfold. In other words, it takes a great deal of grass to support a hawk. Human beings, like hawks, are top carnivores, at the end of the food chain whenever they eat meat, two or more links removed from the plants; if chicken, for example, two links, and if tuna, four links.

Even with most societies confined today to a mostly vegetarian diet, humanity is gobbling up a large part of the rest of the living world. We appropriate between 20 and 40 percent of the sun’s energy that would otherwise be fixed into the tissue of natural vegetation, principally by our consumption of crops and timber, construction of buildings and roadways and the creation of wastelands. In the relentless search for more food, we have reduced animal life in lakes, rivers and now, increasingly, the open ocean.

But even recognizing that the problem is fundamentally one of population, merely stopping the growth rate is like halting a supertanker; reversing it would take even longer and raises intergenearational challenges (how do you take care of an overhang of old people?) and paranoid suspicions that restraints on birth rates are really attempts at genocide.

With that as prelude comes three, sacrifice. The only way first world countries can moderate the demands of rapidly growing third world nations is to demonstrate willingness to make real lifestyle cutbacks. Cynically, that is making a virtue of necessity, because the West and the developing world simply continue on their resource collision course, we’ll all be considerably less well off. But again, such idealism flies in the face of how America works. Suggest, for instance, that people eat less beef and pork and enrage the agricultural lobby (and not to mention hamburger chains). Oh, we dare not do that, no matter how great the stakes. So we’ll have to wait until rationing, whether formal or de facto though vastly higher prices, is forced upon us. Or worse.

From the Financial Times:

It is all very awkward. China and India are getting richer. And it appears their new middle classes want all the things we want: cars, washing machines, even meat. Here in the west, we have to restrain ourselves from saying: “Stop. You can’t live like us. The planet can’t stand it. And our wallets can’t stand it. Have you seen the price of petrol?”

Global equity is the awkward issue lying behind the world food crisis. In the long run, it will also prove fundamental to discussions on energy and global warming.

But, for the moment, this difficult, abstract issue is largely obscured by the urgency of finding practical solutions to rising food prices.

Everywhere I have travelled over the past six months, the cost of food has dominated political discussion. In Pakistan I was told that, while foreigners might worry about terrorism or President Pervez Musharraf, ordinary Pakistanis were much more concerned by the soaring price of wheat. In the Middle East, the political impact of rising food prices is discussed with more urgency than Iran or the Palestinians. But food-price inflation is an issue not just in poor countries. In France, aides to President Nicolas Sarkozy point to the rising cost of food and fuel as the key to his slump in the polls. In Britain and the US, unpopular governments tell a similar story…

There is a strong risk that rising food prices will lead to global political friction. Look at the reaction in India to some fairly anodyne comments by President George W. Bush. He said that rising prosperity in the developing world led to people “demanding better nutrition and better food” and so “demand is higher and that causes prices to go up”.

The reaction in India was furious. Commentators railed about how much more Americans eat than Indians – chucking in a few nasty asides about fat Yanks and liposuction.

On one level, this reaction was ridiculous. Most impartial analysts, including the World Bank, agree that rising prosperity in the developing world is an important underlying cause of rising food prices.

But the emotional Indian reaction is also understandable. Any hint that the good life is available only to westerners is unacceptable. Europeans and Americans do eat much more per head than the Chinese or Indians. While rising food prices strain household budgets in the west, they risk famines in Africa and Asia.

The west is also making its own contribution to the food crisis – through subsidies for biofuels….The moral dilemmas thrown up by calculating per capita consumption are not confined to food. They apply just as acutely to global warming.

The US points out that China is now the world’s biggest source of carbon dioxide emissions. No global agreement on greenhouse gases will be worthwhile unless it includes China, India and other rising powers.

The Chinese respond by pointing out that the average American still has a far larger carbon footprint than the average Chinese….The moral quandary is made all the more tricky by the fact that the stock of man-made greenhouse gases in the atmosphere – the source of today’s global warming – is overwhelmingly the product of two centuries of western industrialisation. But now that it is the developing world’s turn, the west says it is time to stop….

Western politicians struggle to find a convincing response to these developing-world complaints. But they will struggle just as hard to persuade their voters to cut back, to accommodate the rise of a richer Asia.

So – with food, as with climate change – we shall have to hope that technology rides to the rescue. It has happened before. At the beginning of the 20th century, the discovery of nitrogen-based chemical fertilisers massively expanded world food supplies – just as experts were fretting that the world’s booming population would lead to famine. In the 1960s, the “green revolution” allowed for a further leap in agricultural production.

The trouble is that the new technological fixes are elusive. Wider tolerance of genetically modified crops might help with food. But many of the technologies touted to cut global warming – such as solar power and carbon capture – are far from fruition.

Politicians can help the process by providing incentives for behaviour changes and investment in new technologies. However, there will be a very difficult transition as the world adjusts to higher food and energy prices and waits for new technologies to emerge and flourish.

But what is the alternative? Any solution that is based on asking India and China to stay poor is politically and morally unsustainable.

Ooh, just when you though you had your had a pretty complete list of Looming Problems, the officialdom goes and increases it.

An article in the current issue of Science reports that nitrogen is a significant culprit and environmental degradation. Nitrogen pollution is a serious matter because there isn’t at the moment any obvious way around it. The three main constituents of fertilizer are potassium, potash and nitrogen. Industrial nitrogen is produced from natural gas and (according to Morningstar via the blog Gristmill) its unit gross profit has more than doubled from 2004 to 2007 due to a strong increase in demand.

And the more cultivation, the more nitrogen. Fertilization releases large amounts of nitrous oxide, which is 296 times as potent a greenhouse gas as carbon dioxide. And nitrogen has other environmental costs. From Climate Ark:

Nitrogen pollution of the world’s oceans is harming marine ecosystems and contributing to global warming, report two reviews published in the journal Science.

The research, which involved dozens of scientists from around the world, shows that human activity is dramatically altering nitrogen cycles in Earth’s oceans, soils, and atmosphere. The papers report that agricultural runoff and the burning of fossil fuels have boosted the supply of reactive nitrogen in the open oceans 50 percent above the normal range.

The first paper, led by Robert Duce of Texas A&M University, found that nitrogen produced by human activity is responsible for about a third of the nitrous oxide and a tenth of the carbon dioxide input to the world’s oceans each year. The researchers say the excess nitrogen “can deplete essential oxygen levels in the water and has significant effects on climate, food production, and ecosystems all over the world,” according to a statement from Science.

Duce and colleagues calculate that humans account for up to three percent of the new marine biological production annually. While the increased biological activity sequesters CO2 from the atmosphere, the process produces nitrous oxide (N20), a greenhouse gas far more potent than carbon dioxide.

“This fertilization of the ocean by human activities has an important impact on the exchange of the greenhouse gases carbon dioxide and nitrous oxide and should be considered in future climate change scenarios,” Duce, a professor at Texas A&M University, said.

“Anyone concerned about climate change will be alarmed at the scale of man’s impact on the world’s oceans, as revealed by our new study,” added Peter Liss, a co-author of the paper and an environmental scientist at the University of East Anglia. “The natural nitrogen cycle has been very heavily influenced by human activity over the last century — perhaps even more so than the carbon cycle — and we expect the damaging effects to continue to grow. It is vital that policy makers take action now to arrest this.

“The solution lies in controlling the use of nitrogen fertilizer and tackling pollution from the rapidly increasing numbers of cars, particularly in the developing world,” he continued.

In 1860, the total Nr deposition to the Earth’s surface was 32 million metric tons of nitrogen, mostly from natural emission sources. By the early 1990s, total Nr deposition had increased to 100 million metric tons. The difference was entirely due to anthropogenic activities. In some regions, deposition increased 100-fold. Adapted from Galloway et al, 2004 and appearing at initrogen.org. Caption quoted from Human Alteration of the Nitrogen Cycle: Threats, Benefits, and Opportunities, a Joint UNESCO-SCOPE-INI Policy Brief.

In the second paper, James N. Galloway of the University of Virginia and colleagues highlight health and environmental problems that arise from increased nitrogen pollution. The authors note an “extreme imbalance” of nitrogen and argue for the need to reduce the amount of reactive nitrogen in the environment.

“The public does not yet know much about nitrogen, but in many ways it is as big an issue as carbon, and due to the interactions of nitrogen and carbon, makes the challenge of providing food and energy to the world’s peoples without harming the global environment a tremendous challenge,” Galloway explained. “We are accumulating reactive nitrogen in the environment at alarming rates, and this may prove to be as serious as putting carbon dioxide in the atmosphere.”

“Nitrogen is needed to grow food but because of the inefficiencies of nitrogen uptake by plants and animals, only about 10 to 15 percent of reactive nitrogen ever enters a human mouth as food. The rest is lost to the environment and injected into the atmosphere by combustion,” he continued. “We must soon begin to manage nitrogen use in an integrated manner by decreasing our rate of creation of reactive nitrogen while continuing to produce enough food and energy to sustain a growing world population.”

There are some interesting cross currents in the day’s offerings on oil.

What a difference a year makes. Not so long ago, the peak oil crowd was seen in much the same light as the discredited Club of Rome: worrywarts about a bad future that would probably take a long time to arrive. Now everyone is on the resource scarcity bandwagon.

Martin Wolf offers a workmanlike treatment of the “this time it’s real” thesis; what is intriguing are some divergent observations from Gary Becker and in particular Richard Posner (hat tip reader Steve), who advocates aggressive taxing of energy. Mirable dictu, I never would have expected that from his end of the political spectrum (although Posner isn’t as easily pigeonholed as some other thinkers). I hope his stature encourages others to warm up to the idea.

First from Wolf in the Financial Times:

Here are three facts about oil: it is a finite resource; it drives the global transport system; and if emerging economies consumed oil as Europeans do, world consumption would jump by 150 per cent. What is happening today is an early warning of this stark reality. It is tempting to blame the prices on speculators and big bad oil companies. The reality is different….

It looks increasingly hard to expand supply by the annual amount of about 1.4m barrels a day needed to meet demand. This means an extra Saudi Arabia every seven years. According to the International Energy Agency, almost two-thirds of additional capacity needed over the next eight years is required to replace declining output from existing fields. This makes the task even harder than it seems. As the latest World Economic Outlook from the International Monetary Fund adds, the fact that peak production is reached sooner, because of today’s efficient technologies, also means that subsequent declines are steeper.

This is not to argue that speculation has played no role in recent rises in prices. But it is hard to believe it has been a really big one…. As I have argued before, if speculation were raising prices above the warranted level, one would expect to see inventories piling up rapidly, as supply exceeds the rate at which oil is burned.

Note that Wolf’s views on oil are in part based on the assumption of continued strong growth ex the US. This is contradicted by IMF forecasts that anticipate global growth of 3.7% (that may sound like a good number for the US, but is considered sluggish for the world as a whole). Over the last two quarters, the IMF has slashed its forecasts from 4.9% and sounded this cautionary note in its end of April release:

Citing the unfolding financial market turmoil as the biggest downside risk to the global economy, the April 2008 report said the IMF expects world growth to slow to 3.7 percent in 2008—0.5 percentage point lower than what was forecast in the January 2008 World Economic Outlook Update.

Further, world growth would achieve little pickup in 2009, and there is a 25 percent chance that the global economy will record 3 percent or less growth in 2008 and 2009, equivalent to a global recession.

Contrast this with Wolf:

The price spikes of the 1970s were followed by big absolute falls in demand and output (see chart). This was partly because of the recessions and partly because of rising efficiency. Both forces should work again this time, but to a much smaller extent. The slowdown in the US economy is indeed likely to be significant. Slowdowns will also occur in western Europe and Japan and even in the emerging world. But the latter will still grow rapidly. Overall, the world economy – and so world oil demand – is likely to continue to grow reasonably briskly. Similarly, the improved efficiency of use of petroleum, as people switch to more efficient vehicles, notably in north America (where the room for doing so is so large), will be offset by the rising tide of demand for motorised transport in the world’s fast-growing emerging countries.

This is admittedly a difference of degree rather than kind. His evidence:

The areas of difference with the Becker/Posner tag team are instructive. First from Becker, who claims that conservation and new technology will tame oil price hikes:

The run-up in the world price of oil during the past several years, and especially the rapid climb during the last few weeks to over $120 per barrel, has fueled predictions that the price will reach $200 a barrel in the rather near future. Such predictions are not based on much analysis, and mainly just extrapolate this sharp upward trend in oil prices into the future. The price of oil in “real” terms (i.e., relative to general prices) will not reach $200 in this time frame without either terrorist or other attacks that destroy major oil-producing facilities, or huge taxes on oil consumption….

The present boom in oil prices has been mainly driven by increases in demand from the rapidly growing developing nations….To be sure, supply problems…. have contributed…

[A]ny rise in oil prices to over $200 a barrel in the next few years would have serious disruptive effects on the world economy. To many persons who have commented on this prospect, such a high oil price seems plausible…For the evidence is rather strong that the short run response of both the supply of and the demand for oil to price increases is rather small….

However, the long run response to price increases of both the demand and supply for oil and other energy inputs is considerable. For example, given enough time to adjust, families react to much higher gasoline prices by purchasing cars, such as hybrids and compacts, that use less gasoline per mile driven. They also substitute trains and other public transportation for driving to work and for leisure purposes. High energy prices, and hence the opportunity for large profits, induce entrepreneurs to work more aggressively to find fuel-efficient technologies, including the use of batteries as a replacement for the internal combustion engine.

Clearly, given high enough oil prices, many ways are available to increase the supply of petroleum….Rising prices of oil and other energy inputs will eventually be controlled by new technologies that greatly economize on the use of these inputs. Increased supplies of oil and other energy sources that become profitable to exploit only with prolonged high prices will also push these prices back.

Now from Posner, who argues that high taxes on oil, or preferably CO2 emissions, will produce a benefits on a variety of fronts (including reducing wealth transfer to the Middle East):

I would like to see the price of oil rise to $200, despite the worldwide recession that would probably result, provided that it rises as a result of heavy taxes on oil or (better) carbon emissions. The taxes would jump start the development of clean fuels, and the financial impact on consumers could be buffered by returning a portion of the tax revenues in the form of income tax credits. That would not reduce the effect of the taxes on the demand for oil or the incentives to develop alternative fuels, because the marginal cost (the production and distribution cost plus the tax) of oil to consumers would not be affected. Higher oil prices are necessary to check global warming, reduce traffic congestion, and reduce dependence on foreign oil, so much of which is produced by countries that are either unstable or hostile to the United States. Heavy taxes on oil would reduce not only the amount of oil we import but also the revenue per barrel of the oil exporting nations, so there would be a double negative effect on those countries’ oil revenues: they would sell less oil and earn less per unit sold. The reason for the latter effect is the upward-sloping supply curve for oil. Suppose the first million barrels of oil can be produced at a cost of $1 per barrel and the second million at $2 per barrel. If total demand is one million barrels, the suppliers break even: they have revenues of $1 million and costs of $1 million. If total demand is two million barrels, the suppliers have revenues of $4 million (because the price of all barrels is determined by the price that the marginal purchaser is willing to pay) but costs of only $3 million ($1 million for the first million barrels, $2 million of the second). The lower the price of oil received by the oil producers (that is, the price net of tax), the lower their net income.

Unfortunately I cannot see a confluence of political forces that would make heavy taxes on oil feasible. We seem to be experiencing a democratic failure, in which long-term problems simply cannot be addressed.

There’s a good article at the New York Times, “Movable Feast Carries a Pollution Price Tag,” on the issue of CO2 emissions resulting from the delivery of foodstuffs around the world.

The article discusses at some length how international fuel tax breaks have facilitated this trade. Let’s face it, many foods are low value per unit weight products; they are not the sort that you’d expect to be transported halfway around the world. But subsidies on this scale are hard to unravel.

In the bad old days, people ate what was in season and preserved as much as they could. If we are going to be more environmentally sensitive about what we eat, we’ll have to accept less variety in fresh food. And having lived for a few months in the UK in the early 1980s, when they imported far less produce than now, the choices were limited and the quality less than stellar. It will be hard to get people who live in colder climes to go back to the ancien regime.

I’m skeptical that disclosure or regulation will do the trick. Taxes (or in this case, the end of the waiver) would be effective, but as the story notes, you’d need to have near universal cooperation. It would also hit the poor, who often have trouble affording decent produce, the hardest.

From the New York Times:

Cod caught off Norway is shipped to China to be turned into filets, then shipped back to Norway for sale. Argentine lemons fill supermarket shelves on the Citrus Coast of Spain, as local lemons rot on the ground. Half of Europe’s peas are grown and packaged in Kenya/

In the United States, FreshDirect proclaims kiwi season has expanded to “All year!” now that Italy has become the world’s leading supplier of New Zealand’s national fruit, taking over in the Southern Hemisphere’s winter.

Food has moved around the world since Europeans brought tea from China, but never at the speed or in the amounts it has over the last few years. Consumers in not only the richest nations but, increasingly, the developing world expect food whenever they crave it, with no concession to season or geography…..

But the movable feast comes at a cost: pollution — especially carbon dioxide, the main global warming gas — from transporting the food.

Under longstanding trade agreements, fuel for international freight carried by sea and air is not taxed. Now, many economists, environmental advocates and politicians say it is time to make shippers and shoppers pay for the pollution, through taxes or other measures.

“We’re shifting goods around the world in a way that looks really bizarre,” said Paul Watkiss, an Oxford University economist who wrote a recent European Union report on food imports.

He noted that Britain, for example, imports — and exports — 15,000 tons of waffles a year, and similarly exchanges 20 tons of bottled water with Australia. More important, Mr. Watkiss said, “we are not paying the environmental cost of all that travel.”

Europe is poised to change that. This year the European Commission in Brussels announced that all freight-carrying flights into and out of the European Union would be included in the trading bloc’s emissions-trading program by 2012, meaning permits will have to be purchased for the pollution they generate.

The commission is negotiating with the global shipping organization, the International Maritime Organization, over various alternatives to reduce greenhouse gases. If there is no solution by year’s end, sea freight will also be included in Europe’s emissions-trading program, said Barbara Helferrich, a spokeswoman for the European Commission’s Environment Directorate. “We’re really ready to have everyone reduce — or pay in some way,” she said.

The European Union, the world’s leading food importer, has increased imports 20 percent in the last five years. The value of fresh fruit and vegetables imported by the United States, in second place, nearly doubled from 2000 to 2006.

Under a little-known international treaty called the Convention on International Civil Aviation, signed in Chicago in 1944 to help the fledgling airline industry, fuel for international travel and transport of goods, including food, is exempt from taxes, unlike trucks, cars and buses. There is also no tax on fuel used by ocean freighters.

Proponents say ending these breaks could help ensure that producers and consumers pay the environmental cost of increasingly well-traveled food.

The food and transport industries say the issue is more complicated……

Some of those companies say that they are working to limit greenhouse gases produced by their businesses but that the question is how to do it. They oppose regulation and new taxes and, partly in an effort to head them off, are advocating consumer education instead.

Tesco, for instance, is introducing a labeling system that will let consumers assess a product’s carbon footprint.

Some foods that travel long distances may actually have an environmental advantage over local products, like flowers grown in the tropics instead of in energy-hungry European greenhouses…

Some studies have calculated that as little as 3 percent of emissions from the food sector are caused by transportation. But Mr. Watkiss, the Oxford economist, said the percentage was growing rapidly. Moreover, imported foods generate more emissions than generally acknowledged because they require layers of packaging and, in the case of perishable food, refrigeration.

Britain, with its short growing season and powerful supermarket chains, imports 95 percent of its fruit and more than half of its vegetables. Food accounts for 25 percent of truck shipments in Britain, according to the British environmental agency, DEFRA.

Mr. Datson of Tesco acknowledged that there were environmental consequences to the increased distances food travels, but he said his company was merely responding to consumer appetites. “The offer and range has been growing because our customers want things like snap peas year round,” Mr. Datson said. “We don’t see our job as consumer choice editing.”

Global supermarket chains like Tesco and Carrefour, spreading throughout Eastern Europe and Asia, cater to a market for convenience foods, like washed lettuce and cut vegetables. They also help expand the reach of global brands.

Pringles potato chips, for example, are now sold in more than 180 countries, though they are manufactured in only a handful of places, said Kay Puryear, a spokeswoman for Procter & Gamble, which makes Pringles.

Proponents of taxing transportation fuel say it would end such distortions by changing the economic calculus.

“Food is traveling because transport has become so cheap in a world of globalization,” said Frederic Hague, head of Norway’s environmental group Bellona. “If it was just a matter of processing fish cheaper in China, I’d be happy with it traveling there. The problem is pollution.”

The European Union has led the world in proposals to incorporate environmental costs into the price consumers pay for food.

Switzerland, which does not belong to the E.U., already taxes trucks that cross its borders.

In addition to bringing airlines under its emission-trading program, Brussels is also considering a freight charge specifically tied to the environmental toll from food shipping to shift the current calculus that “transporting freight is cheaper than producing goods locally,” the commission said.

The problem is measuring the emissions. The fact that food travels farther does not necessarily mean more energy is used. Some studies have shown that shipping fresh apples, onions and lamb from New Zealand might produce lower emissions than producing the goods in Europe, where — for example — storing apples for months would require refrigeration.

But those studies were done in New Zealand, and the food travel debate is inevitably intertwined with economic interests.

Last month, Tony Burke, the Australian minister for agriculture, fisheries and forestry, said that carbon footprinting and labeling food miles — the distance food has traveled — was “nothing more than protectionism.”

Shippers have vigorously fought the idea of levying a transportation fuel tax, noting that if some countries repealed those provisions of the Chicago Convention, it would wreak havoc with global trade, creating an uneven patchwork of fuel taxes.

It would also give countries that kept the exemption a huge trade advantage.

Some European retailers hope voluntary green measures like Tesco’s labeling — set to begin later this year — will slow the momentum for new taxes and regulations.

The company will begin testing the labeling system, starting with products like orange juice and laundry detergent.

Customers may be surprised by what they discover.

Box Fresh Organics, a popular British brand, advertises that 85 percent of its vegetables come from the British Midlands. But in winter, in its standard basket, only the potatoes and carrots are from Britain. The grapes are South African, the fennel is from Spain and the squash is Italian.

Today’s retailers could not survive if they failed to offer such variety, Mr. Moorehouse, the British food consultant, said.

“Unfortunately,” he said, “we’ve educated our customers to expect cheap food, that they can go to the market to get whatever they want, whenever they want it. All year. 24/7.”