TWC Individual Review Topic Paper
Ng Yu Jun G11
Carbon trading mechanisms and technology
Abstract:
The degradation of the world started with the noble intention of improving living standards across the globe, trying to make the world a better place for us to live in. However, looking at the condition of the world today, one would be shocked at the power of reckless human greed. The climate crisis we face today, is but a consequence of consideration without deliberation.
Global climate changes in recent times are becoming more and more adverse, necessitating a relatively immediate change both in our current rate of consumption, and as well as enlightening companies to take into consideration the detrimental impacts towards the environment, during the production process.
Figure 1.
If our greatest mistake began centuries ago, we have to stand up and correct it. We cannot just continue moving forward, we need to look at the past. We cannot adopt the traditional framework of only looking at improving our standard of living, but rather we need to look at improving living in a sustainable manner, where our pursuit of material comforts would not compromise energy sustainability.
This paper examines the path of unsustainability undertaken from the time of the Industrial Revolution and the free-market mechanisms that have been in place even before then, that might have led to decades of wrong decision making building on inaccurate market information and sentiments at that point of time, from both the consumer’s as well as the producer’s perspective. It also examines the specific innovations which might have played a crucial role in either alleviating or elevating the environmental problem, as well as exploring the viability of green technology during the Industrial Revolution, which is deemed to be the turning point in mankind’s path to destruction.
Fossil fuels: a short history.
Fossil fuels are non-renewable energy sources that are characterized by their low cost, high energy production efficiencies. When these are burnt, the high carbon content inherent in fossil fuels result in the release of carbon dioxide, a gas known for causing the “greenhouse effect”. An excess of these greenhouse gases over-saturates the atmosphere, destroying the fragile balance of the ecosystem, resulting in global climate change.
Figure 2.
With that said, the slowly rising global temperature indicates that we are currently releasing greenhouse gases at rates exceeding that of natural replenishment. However, in recent years, instead of reducing our fossil fuel usage, we have done the exact opposite, accelerating our rate of our consumption fossil fuels. This is reflected in the global fossil carbon emissions that have increased by more than six folds in the short span of 100 years, between the 1900s to the 2000s.
We have far surpassed the stage of experimentation for fossil fuels; We know what the benefits can bring us, but we also know of the undesirable environmental changes that are happening around us. We should not follow in the destructive footsteps of the past, but rather learn to live without compromising the ability of future generations to meet their own needs.
Specific Innovation of Interest:
Carbon trading mechanisms, mainly carbon credits and carbon offsets.
A brief introduction:
Carbon credits were first implemented in the European Union (EU) during the Kyoto Protocol in 2005. The said innovation assigns binding carbon emission quotas to each member country, which places a cap on the amount of greenhouse gas emissions by each country. As shown below, this means that participating countries that emit under their allowances, can sell their excess credits to other countries that over-produce on their part. This allows ensures that the overall emission of each country is kept in check, as pre-determined by the European Union group of countries.
Figure 3.
Another carbon trading mechanism would be carbon offsets. This is geared to cover generic companies that wish to engage in green activities. Carbon offset credits are generated through eco-friendly projects that reduce the level of greenhouse gases in the atmosphere through carbon sequestration, and the idea behind this is that the removal of greenhouse gases offsets the emissions from other sources.
These 2 carbon trading mechanisms feature a tradable unit with an attached monetary value that is determined through free-market forces, and can be bought and sold in the carbon market. It aims to regulate the widespread use of fossil fuels, by internalizing the additional costs to the environment into the separate products.
Rationale for selecting this innovation:
Carbon trading mechanisms are evolutionary in its workings, it was a simple matter of limiting the amount of greenhouse gas emissions. It was, however, revolutionary in its approach, becoming one of the first models that presented a viable mechanism based off free-market forces, to regulate greenhouse gas emissions around the globe. Most importantly, it was not too radical of a change to the immediate economic environment, ensuring energy security whilst mitigating the environmental impacts at the same time. This distinction from other green proposals made it a generally accepted option, and thus feasible for governments to implement immediately.
Furthermore, carbon trading mechanisms adopt a direct method aimed at targeting the root cause of the problem, directly affecting the greenhouse gas emissions causing the pollution to the environment. It has also shown relatively effective results in comparison with the past.
“Past”
Industrial revolution – A “revolution” in the wrong direction?
The 18th and 19th century was an era of drastic changes for humankind, marked by macro-level technological strides made during the Industrial revolution. It was a period of fossil fuels and steam engines, where coal became the fossil fuel of choice as the source of energy, while the steam engine converted the heat energy into work done. Steam engines were then designed to fit the demands of the different factories. Spurred by the advent of machinery, production capabilities flew through the roof, and businesses were seen moving from a once labor-intensive agrarian, handicraft economy to one that was dominated by machinery, increasing their output by manifolds.
As man’s capacity grew, man’s rapacious desire for more grew with it. Rate of growth and production became the only measures of a company’s financial position that actually mattered, leaving only a general unspoken ignorance towards unsustainability. People knew that the coal and oil sources, though abundant, would not last forever. However, the cost-efficiency of coal in business operations was too great of a chance to pass up. Companies did not want to “waste resources” investing in R&D for something that was not a main concern, the opportunity cost of falling behind others in sales was too great to bear, and companies believed they should “worry only when other people worry”.
As production grew, demand for products grew, and companies expanded their scale of operations. Unfortunately, these scaling effects were also translated onto pollution. The increasingly widespread burning of coal to power factories resulted in thickening black smog being released into the environment.
That was not all. The extension of electricity to consumers only compounded the problem, resulting in a sudden spike in the demand for electrical energy for which production facilities could not satisfy. This gap between the production capabilities of factories and consumer demand was filled up by the invention of the internal combustion engine in the 1850s, enabling factories to burn more coal at any one time.
There was another factor affecting demand, and that would be the trend of globalization between countries, boosting trade for goods and services between countries. Products were now internationally known, with demand arising from different parts of the world.
Viability of green energy technology during the Industrial revolution.
In retrospect, was there any way in which we have changed the course of history to avoid the problems we face today? The answer to that question lies within the reasons behind the technological progress made (or the lack there-of) in the main sources of energy, hydroelectric dams and coal, at the point of the consumption explosion.
The origins of hydroelectric power date all the way back to the 400B.C., only being adapted to fulling mills in 1643A.D. This resulted in 2 different models of waterwheels, the overshot waterwheel and the undershot waterwheel, the former requiring a high drop of about 17 feet whilst the latter could operate on flat ground. However, there was a trade-off in the efficiency of energy production which varied greatly, from 70% for the overshot as compared to the 20% of undershot. This meant that geographical prerequisites played an important role in the feasibility in the adoption of hydroelectricity, according to the accessibility to water sources. This did not favor countries with cities at the heart of the land, and was thus counter-productive to the popular trend of urbanization during the Industrial revolution, which aimed to centralize goods and services.
The very first commercialized method of utilizing coal-generated power was the steam engine, invented in 1712 by Thomas Newcomen. Unfortunately, the inefficient, profligate consumption of coal meant that it could only be adopted in places where coal was cheap and in abundance.
The main technological breakthroughs in both sources of energy came at roughly the same period of time. John Smeaton innovated the breast wheel which was essentially an intermediate waterwheel between undershot and overshot models, that could also operate on flat land as well as increasing the energy efficiency of undershot waterwheels by 30%. James Watt improved on Newcomen’s design of the steam engine, making it 75% more efficient in energy generation. These two breakthroughs meant that either one of these sources could be adopted to fuel the economy.
As we now know, hydroelectric power was overshadowed by the steam engine, and there are a few reasons to why this happened.
One plausible reason is that the importance of hydroelectric power in the Industrial Revolution was not as recognized because steam was more spectacular and in a sense more revolutionary at that point of time. The long history of hydroelectric power, and the relatively slow developments in it, only served to move it into the background.
Another important factor would be the accessibility to the raw materials involved in producing the energy in the choice of coal over hydroelectricity. The invention of railways served dual-purposes, improving the means of transportation for humans as well as facilitating the commercial movement of coal, which far outshone the alternative of having to build irrigation canals to filter water into the main parts of the city. This is important as urbanization took over, and there was a move away from agriculture which rendered irrigation practices useless.
Figure 4
The determining factor was most definitely Britain’s abundance in coal, but had high labor costs. The interactions between these two factors indicated that it was cost efficient for the British to move from labor-intensive towards capital-intensive, coal-fueled factories. This high wage-cheap energy framework served to place the steam engine into the pivotal role it played in the Industrial revolution, through the use of steam-powered machines.
The British society was well known for its positive stance towards the development of partial knowledge, providing both the incentives and opportunities to apply useful knowledge to technology. With the focus of British economy now moving towards coal, it served as a springboard for further developments in the steam engine.
The problems of unrestrained demand, along with an unsustainable source of energy, coupled with less than desirable effects to the environment, left for future generations to bear - all these factors ultimately manifested into the problem we have today.
“Present”
As we step into the 20th and 21st century, it can be illustrated through the introduction of Information and Communications Technology (ICT). Examples of these would be the television, the radio, the phone and the Internet. The invention of the ICT connected people around the globe, erasing concepts of time and distance. It provided an avenue for businesses to engage their customers on a more personal level, especially for customers from abroad, creating much more positive business-customer relations.
At the same time, ICT provides a platform for businesses to increase product awareness by reaching out to a large target audience, which has in turn, given rise to a different consumption pattern than before. Aptly named “Invented consumerism”, it is essentially a global transformation of desire towards a common societal perception of a high-quality lifestyle. The dynamics behind consumption has now changed, where consumption becomes consumerism. It is no longer about consuming sufficiently to survive; it is all about consuming to try to achieve the societal ideals of a high life - the acquisition of goods and services as a measure of one’s social status.
Businesses then capitalize on this desire, using commercials to inflate irrational demand for products, and thus resulting reckless consumerism. It is important to note that repeat purchases encourage business behaviors, meaning reckless consumers inadvertently lead to even more reckless producers.
On the producer’s front, nothing significant has changed since the Industrial era, Company production processes have slowly evolved over the years, electrical plants were now separated but yet companies were still following the old model of burning fossil fuels. The booming economies of the countries have almost been exclusively fueled by fossil fuels. Mankind’s dependence on fossil fuels is now undeniable, we are using it to create almost everything. This time around, centuries have passed, and we have nearly depleted our coal reserves. We moved on from coal, looking towards peak oil as the next source of fossil-fueled energy. However, now even that is reaching dangerously low supply levels. With the demand for energy far outstripping the supply available on hand, energy concerns are becoming a main concern for the world, and rightly so. We had been growing on borrowed time, and the time to face the consequences has since caught up with us.
There were haphazard attempts along the way to utilize green energy, but none were really considered seriously on a global scale. This is because the green energy industry is currently being underpinned by its high cost to benefit ratio in comparison to fossil fuels, making it a viable alternative that unfortunately does not make economic sense for the transition towards renewable energy.
These factors have only served to ameliorate the environmental problems we currently face. This is where carbon credits come into play.
a. Imperfect cost allocation (Producer side)
Currently, the traditional process of allocating costs on fossil fuels is inaccurate. It only takes into account the basic costs incurred within the business and society, without taking into account the negative externalities to the environment. Through the inaccurate measurement of economic prices, there has been a distortion of free-market forces in favor towards the use of fossil fuels. Incorrect market information has led to the evolution of societal wants in accordance to this.
Figure 5
Carbon credits bring the marginal private costs of production back up to equitable terms with the marginal costs to society, thereby accounting for environmental costs incurred during the production process and realigning the market forces to its supposed equilibrium.
b. Green awareness (consumer side)
Through ICT, the steady stream of information flow facilitated the awareness of environmental concerns to penetrate the general mass of consumers. Towards the end of the 20th century, environmental problems were growing more and more apparent, and people were now more discerning of the production processes before purchasing a product. Firms no longer had free reign over the way they conducted the business, there would be no more cutting of corners in the environmental department. They were now forced to shoulder these stakeholder concerns as a part of making profits, making investments towards green causes. Unfortunately, with no model in place to evaluate a company’s efforts towards environmental causes, the extent and quality of these efforts was still very much a grey area. All that could be deduced was whether a company was inclined towards environmental causes, or not.
With the implementation of carbon trading mechanisms, this provides a new environmental bottom line to provide a common basis of comparison across different companies. Consumers are now able to perform a qualitative analysis of how green a firm is, and will be, giving rise to green competitiveness.
“Future”
The 21st century and beyond definitely holds much promise towards sustainable development. With the evolution of green mindsets questioning the sustainability of current practices, we are starting to see a call for a shift from our fossil fueled economy towards other alternatives. Whether that potential will be fully realized, is another story that has yet to unfold. One emerging problem that needs to be addressed in the said shift is that with many more varied energy sources, the environmental degradation will come in forms other than simply greenhouse gases.
This would mean the main function of carbon trading mechanisms will be rendered relatively useless, signaling the end of the starting chapter for carbon trading mechanisms. Greenhouse gas emissions may not be the only non-sustainable environmental cost associated with the production of energy. Thus, the future of carbon trading mechanisms would lie in an evolution of these mechanisms in tandem with these changes, through adjustments made to encompass environmental issues far beyond that of its initial intended scope of greenhouse gases.
In the near future, I foresee 2 main sources of energy becoming a big component in our energy supply.
a. Nuclear energy
There has been a resurgence in interest in yet another “fossil fuel”, nuclear energy. Nuclear energy boasts of low costs, high-energy production efficiency, similar to that of fossil fuels. Better yet, it has a fraction of the greenhouse gas emitted throughout the entire production process.
Figure 6
This has led to many countries looking to nuclear energy as the next source of energy. However, there is the existing problem of the waste material disposal, which is non-biodegradable. Current technology is unable to make it renewable as well. This is its main detriment to the environment, which is also known as nuclear energy’s Achilles heel.
Carbon trading mechanisms could be modified to quantify and internalize this environmental cost into the cost of nuclear energy.
b. Renewable energy
The main proponent behind our search for energy alternatives are the detriments to the environment associated with the production process, but does it mean that we should mount a full-scale transformation of existing energy plants towards renewable sources of energy? The answer would be a cautious “yes”. It is imperative that we achieve long-term sustainability at all costs, but we have to take account the possible limitations in the move towards renewable energy. Renewable sources of energy such as hydroelectric power, is still relatively unreliable in energy production, as it requires a constant environment to generate a constant supply of energy – The rate of energy production ebbs and flows with the changes in the environment around it.
Taking into account the benefits and disadvantages faced by fossil fuels and renewable energy, perhaps a reasonable proposition would be a move towards a singularity where carbon dioxide emissions from fossil fuels is able to be absorbed by the environment? For it is not greenhouse gas emission that is a problem; it is the excess of greenhouse gases that is being emitted. A gradual move to reduce our dependency on fossil fuels, as we start our search for other sources of energy.
However, this does not do anything regarding energy security. Fossil fuels are still going to be depleted at any rate, and we cannot rely on fossil fuels being a possible source of energy in the future. We have to make a concerted effort towards the development of other sources of energy, and come up with one in the near future. If not, the lack of a backup plan to fall back on will ultimately be our undoing.
Summary:
The problem is that we are facing issues that have existed since centuries ago, but up until today, we are still applying the traditional models that do not address these concerns. The issues with the traditional models are:
a. Fossil fuels
The very basis of this entire environmental crisis we are facing now is due to the incorporation of fossil fuels as our main source of energy, and that we have been doing so at an exponential rate for centuries. Regardless of however much emphasis we put onto conservation and renewable energy, and even though we have recognized the banes of fossil fuels, it is so closely integrated with the infrastructure of technology today that its benefits cannot be ignored. As such, I do not see the demand for oil diminishing in the near future. Given that centuries have passed with the same cost model in place, it would take years, probably decades, for companies to adapt to the new move towards green technology.
We have opened “Pandora’s Box” of fossil fuels, and our addiction to fossil fueled energy will take awhile before we can say we are free.
b. Growth
“Growth (noun): The act or process, or a manner of growing; development; gradual increase”
“Greed (noun): The excessive or rapacious desire, especially for wealth or material possessions”
One has positive connotations associated with the word; the other has negative connotations. Yet greed could be passed off simply as aggressive growth. There has been no clear line drawn between the two words, and this is reflected in the traditional business models. “The only way is up”.
Growth is desirable, unrestrained growth is undesirable.
Are we on an unrestrained cycle of never-ending expansion? It certainly seems to be so, with no framework of sustainability and limits imposed. This bubble that is termed “economic growth” will eventually burst one day, given the limited constraints of the finite resources on our planet.
Where is the limit? And where is OUR limit? It seems we are going to find out the answer to these two questions, the hard way.
c. Negligence of “nature’s cost”
We need to realize that there has been a cost that has always been left out: the cost to nature. We have always neglected the fact that the activities we engage in might have an impact on the environment around us, thinking that the world can sort itself out. The climatic constraints we are facing are the results of our ignorance. These constraints imply a reduction in the use of fossil fuels, to reduce our carbon footprint on the planet.
The old model failed to take into account sustainability of practices carried out indefinitely. Thankfully, through the introduction of carbon trading mechanisms, this sustainable mindset has been facilitated both practically, as well as conceptually in two ways; Practically through the forced realignment of market forces by internalizing environmental costs, and conceptually through improving green awareness globally.
However, carbon trading mechanisms are limited in their effectiveness of solving the problem of pollution. It is but a temporal stopgap measure more than anything, aimed at reigning in the rate of degradation caused by greenhouse gases. If given enough time, companies might exploit other loopholes to cut costs; one of these ways could be through utilizing a new source of energy that bypasses greenhouse gas emissions, but incurs environmental costs in other methods. Thus, carbon trading mechanisms need to be constantly updated in accordance to the environmental needs of the world.
Nevertheless, carbon trading mechanisms present a good first step in the bid to gain momentum for green awareness. They have facilitated the diffusion of green sentiments, becoming an exemplar in improving green awareness around the globe.
Currently, green efforts are on a voluntary basis – Member countries in the EU were not forced to sign the carbon credit pact, and carbon offsets are not compulsory. Hence, I feel that the next step in green awareness would be making it mandatory for every country in the world to participate in. However, it should be implemented in stages, and extent of the change at each stage should be varied through stratification of the different groups – developing and developed countries. This is because developed countries are better able to leverage on existing technologies to further propel sustainable energy technologies, whilst allowing for diffusion of technologies to the developing groups to catch up.
There is also the question of consumption sustainability. On the demand side, it is unacceptable to claim that the market has a stranglehold on consumers for environmentally unfriendly products made from fossil fuels. We need to further educate consumers to learn how to make trade-offs between the benefits of getting a product, and the environmental costs associated with the product.
Conclusion:
We need to move towards a sustainability paradigm - not only producing sustainably, but consuming sustainably as well. For not only do these environmental responsibilities fall on shoulders of the companies, but also on those of the consumers as well. The world has to realize this, before its too late.
We know what has to be changed, and know it can be changed, but we need to believe it can be changed. For this continuum to happen, mindsets must be open to change. We need to adapt to the turbulent times ahead of us, for the good of the human race.
References:
1. Robert C. Allen, (2010) Why was the Industrial Revolution British? http://www.econ.yale.edu/seminars/Kuznets/allen-101007.pdf
2. Joel Mokyr, (1999) Knowledge, Technology, and Economic Growth http://faculty.wcas.northwestern.edu/~jmokyr/Groningen.pdf
3. Brent Sohngen, (2010) Carbon offsets in forest and land use http://www.nap.edu/openbook.php?record_id=13023&page=100
4. Christian Dowie, (2007) Carbon offsets: Saviour or cop-out?
5. Anup Shah, (2011) Consumption and Consumerism
6. Thomas B. Cochran, (2005) Position paper: Commercial nuclear power http://www.nrdc.org/nuclear/power/power.pdf
7. Lewis Hackett, (1992) Industrial Revolution
8. World Energy Council, (2010) Pursuing Sustainability: 2010 assessment of country energy and climate policies
9. Arthur Louis Dunham, (1955) The Industrial Revolution in France 1815-1848
10. Eric McLamb, (2011) Fossil fuels vs Renewable energy resources
11. Jason Morgan (2010) Comparing Energy Costs of Nuclear, Coal, Gas, Wind and Solar
12. Eric Neumayer, (2010) Human Development and Sustainability
http://hdr.undp.org/en/reports/global/hdr2010/papers/HDRP_2010_05.pdf
13. Google’s Carbon Offsets (2011)
http://static.googleusercontent.com/external_content/untrusted_dlcp/www.google.com/en//green/pdfs/google-carbon-offsets.pdf
14. Howard Hezob and Dan Golomb, (2004) Carbon Capture and Storage from Fossil use
http://sequestration.mit.edu/pdf/enclyclopedia_of_energy_article.pdf
Graphs and figures:
Figure 2: Source: http://www.treehugger.com/files/2009/03/is-ipcc-assessment-global-climate-change-wrong.php)
Figure 3: (Source: http://reducecarbon.wordpress.com/chapter-iii-the-carbon-market/)
Figure 5: (Source: http://priyankaseconomicblog.wordpress.com/2010/02/18/externalities-of-oil-in-uganda/)
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