Andy Stevenson's Blog: Health and the Environment

The Clean Air Act's Investment Returns Rival Warren Buffett's

2010-02-11T06:06:14Z

What if I were to tell you that we are all shareholders in an investment vehicle that has produced better returns than Warren Buffett's Berkshire Hathaway over the past forty years. Strange as it seems it's true. Stranger yet, that investment vehicle is called the Clean Air Act.

According to the EPA study of the cost and benefits of the Clean Air Act, compliance costs totaled $500 billion from 1970 to 1990. While these investments in cleaner air, water and reduced death are indeed significant, they pale in comparison to the $22.1 trillion in benefits gained by its shareholders, the American people, over this time frame from lower mortality, fewer cases of chronic illness, and less frequent trips to the hospital (see table below):

During this period, emissions of sulfur dioxide (SOx), nitrogen oxide (NOx), volatile organic compounds (VOCs), and carbon monoxide (CO) were reduced by 30-50% while primary particulates fell 75% and lead (Lb) emissions fell 99%. These reductions were achieved while the population grew 23% and the economy grew 70% and clearly demonstrate how good environmental policy can produce exceptional economic results.

In fact, the returns on these investments in our health and welfare are so dramatic that they rival the performance of Warren Buffett's Berkshire Hathaway during its heyday. On an annualized basis, the Clean Air Act returned only 1% less than Mr. Buffett during the period from 1970 to 1990 (21% vs 22% on an inflation adjusted annualized basis).

Furthermore, the EPA's cost-benefit estimates for the 1990 Clean Air Act Amendments, which focused on reducing acid rain, ozone destruction, and other hazardous air pollutants are forecast to be equally successful as investments for us, the shareholders in America's future. In constant 1990 dollars, these additional programs are estimated to cost $210 billion from 1990 through 2010 and yield $1,200 billion in benefits.

This six-fold return on investment, combined with the returns from the program during the period from 1970-1990 put the Clean Air Act ahead of Warren Buffett's Berkshire Hathaway on an annualized basis during this forty year period. In fact, using the EPA's estimates, investments made to comply with the Clear Air Act actually outperformed Mr. Buffett by nearly 20% on a total return basis during this time frame (see graph below):

And while this comparison is far from exact given the difficulties in valuing death, sickness, and quality of life, it seems fair to say that these shareholder returns, which total nearly $37 trillion in current dollars, put the Clean Air Act in very good company indeed.

Americans are Dying to Support our Fossil Fuel Habit

2009-10-26T06:12:42Z

A new report from the National Research Council of the National Academy of Sciences (NAS) reveals that our energy bills are $120bln higher than they appear due to the "hidden costs" associated with the air pollution created by burning fossil fuels. The NAS report, which was commissioned by the US Treasury on behalf of Congress, estimates that over 90% of these hidden costs are due to premature death, implying that at least 18,000 Americans die each year to support our fossil fuel addiction (see table below):

The report concludes that these estimates are conservative as they do not include any costs related to climate change, national security, other pollutants, or the impacts of mountain top coal mining and that if these other costs were included they would raise the hidden cost of fossil fuels far higher than the $878 per household estimated using the assumptions underlying the NAS report.

Paying for our Fossil Fuel Addiction with Our Lives

According to the analysis, over half of these hidden costs come from the burning of coal to generate electric power. We currently burn over a billion tons of coal each year, releasing millions of tons of dangerous pollutants into the air in the process. The NAS report estimates that the "hidden" costs of these emissions at $62bln per year or around $530 per family on average. For people who live east of the Mississippi River, along the Ohio River Valley, in the Middle Atlantic and the South, however, these "hidden" costs are significantly higher as are the risks that these costs may be "paid" for by a loved one.

The report does note that these hidden costs from burning coal are actually expected to fall somewhat to around $38bln per year by 2030 as cleaner plants come on line. While this is a significant improvement given that coal consumption is expected to rise by 20% in 2030 under business as usual, it still means that over 165,000 Americans are expected to die prematurely due to the production of coal-fired power. It must also be remembered that this trillion dollar "hidden" cost is additional to the effects of producing over 50 billion tons of CO2 pollution from these facilities during this timeframe. Costs that are expected to accelerate the impacts of climate change around the world.

Under climate legislation, however, these hidden costs are expected to decline as coal-fired power is steadily replaced by cleaner alternatives. Indeed, under the government modeling of the ACES climate bill, coal consumption is expected to fall by 50% when compared to business as usual forecasts. This reduction in coal consumption is expected to not only help reduce the number of lives lost from breathing dirty air by the thousands but also lower our cumulative CO2 output from coal plants by around 25% between now and 2030.

The other large source of hidden costs comes from the combustion of transportation fuels. According to the study, air pollution from vehicles costs us $56bln per year ($36bln from light-duty and $20bln from heavy-duty vehicles). This works out to about 29 cents a gallon or roughly $330 per household per year. What is more, tailpipe pollution is not expected to improve over the next two decades according to the NAS report. This means that by the year 2030, the cumulative air pollution damages from burning transportation fuels and coal are expected to exceed $2trln. An extremely high cost of our addiction to fossil fuels given the 340,000 premature deaths this figure represents (see graph below):

Natural gas is the final fossil fuel source of air pollution included in the study with externalized heath costs of around $2.14bln per year ($741mln from electric power and around $1.4bln from heating our homes, offices, and powering our industrial output). This roughly translates into an additional 0.16 cents per KWh of natural gas power if it were included into our fuel bills, adding around $18 per year to household energy costs. While this is a relatively small hidden cost, the overall hidden costs of natural gas with respect to global warming are still significant. Indeed, under climate legislation natural gas is expected to replace coal as our second largest source of CO2 emissions (after transportation fuels) by the year 2030 (see graph below):

In sum, Americans are literally dying by the thousands to support our addiction to fossil fuels. In fact, you and I have a better chance of dying from air pollution than we do from homicide. What is more, while the "hidden" costs highlighted in the NAS study are only a small portion of the overall hidden costs associated with our current energy economy, they present an immediate threat to our friends and family that cannot easily be ignored. Costs that should make us even more vigilant in our efforts to pass strong climate change policy and help create a cleaner energy future.

Counting Up to a Climate Disaster

2009-06-19T20:09:48Z

At 70 feet across, Deutsche Bank Asset Management's new "carbon counter" billboard is advertised as the world's first real-time calculator of global greenhouse gas emissions.

This billboard, together with its web-based counterpart, were created as a way to not only bring into focus the problem of climate change but to highlight the economic opportunities that exist in transitioning our $6trln global energy economy away from its heavy dependence on fossil fuels.

The carbon counter itself measures the amount of greenhouse gas emissions we have already put into the air (3.6 trillion tons) and how quickly this number rises (about 800 tons a second) over time. The numbers are compiled and adjusted monthly by scientists at MIT and are expressed as carbon dioxide equivalent tons instead of straight tons of carbon dioxide. This is due to the fact that carbon dioxide is only responsible for about two-thirds of greenhouse gas in the atmosphere, with the rest coming from methane (18.5%), nitrous dioxide (6.2%) and residual Montreal Protocol halocarbon gases (9%). If the counter were only measuring CO2 the number would be around 3 trillion tons.

While this carbon counter points to solutions that can help us address this issue starting today- from lowering your carbon footprint to contacting your Congressman about climate policy to investing in clean technologies- it also reminds us that the clock is ticking and the numbers are moving in the wrong direction. The DBAM carbon counter is effectively counting up to a climate disaster that will only get harder and harder to avoid if nothing is done to slow and ultimately reverse this trend.

Failure to acknowledge what this carbon counter is telling us may mean that some day we will be looking back to note how higher points on the billboard coincide directly with higher global surface temperatures. We will see how a business as usual rise in our greenhouse gas emissions through 2030 (using the EIA's latest forecasts) will lead to a 2 degree Celsius rise in surface temperatures by 2035 (under the Stern Report analysis) and how further inaction could increase temperatures by 5 degrees Celsius in the year 2100 (under MIT's latest analysis). A rise in temperature that would dramatically distabilize global commerce, create even more "failed" states around the world, and submerge vast amounts of the world's coastal plains.

In sum, Deutsche Bank Asset Management should be applauded for bringing this critical number to our attention. The general public should be aware of our progress or failure in meeting this challenge and it is now rightly on display at 33rd and 7th Avenue.

Green Economic Stimulus Delivers with Jobs and Payback

2009-01-12T15:11:35Z

While President-elect Obama's $775bln economic stimulus plan should be applauded for including many important provisions for green jobs over the next three years, his messaging on why green jobs are a critical component to our economic recovery seems to be getting lost along the way.

In basic terms, economic stimulus packages are about two things, jobs and payback.

Jobs

With the economy losing 2.6million jobs over the past year and around 21 million American workers jobless or underemployed, jobs, jobs, and more jobs are desperately needed to help put money back in peoples' pockets and get the economy moving again.

Economic stimulus packages are designed to help retain and create good paying jobs by creating pockets of demand in the economy. These jobs can be created to deliver short-term stimulus; like investing in "shovel ready" infrastructure projects, or to deliver long-term stimulus; like investment in current and emerging industries.

While long-term job growth is certainly preferred to short-term job growth, if President-elect Obama is serious about retaining and creating 3-4 million jobs over the next three years, he will need to focus his efforts on both, with emphasis on jobs that will pay well enough to increase overall demand in the economy.

Payback

President-elect Obama plans to invest $775bln of our taxpayer dollars in a stimulus package designed to help re-power the economy. Given the enormous sums involved, it is critical that this money is spent well and that these investments pay back in order to avoid adding to the debt burden of future generations.

The economic stimulus packages that were implemented during Japan's "lost decade" offer an important case in point on how throwing money at the problem is not enough. The Japanese government spent nearly $1trln on fiscal stimulus packages to help revive their economy in the 1990's and now have little to show for these efforts other than a mountain of debt and bridges that go nowhere.

This is not to say that we shouldn't be putting people to work building and repairing bridges, but when we build these bridges we need to keep in mind how they will pay back to society and whether or not they take us to a place we actually want to go.

Green Economic Stimulus Delivers

Green economic stimulus responds to both of the challenges outlined above of creating jobs and providing payback, and does it in a way that is hard to compete with.

First let us look at the jobs picture. Global output is falling at an alarming rate, making top line growth opportunities hard to come by. As a result, if we are going to help industry avoid further lay-offs, something needs to be done to improve bottom-line costs to help them better weather the current economic storm.

One obvious area we can have a meaningful impact on our bottom line costs as a nation is in the energy arena, where our energy productivity ranks amongst the lowest in the developed world. America's energy productivity, as measured in GDP terms per Quads of Btu of energy, currently generates $112 of GDP per Quad of Btu which is less than half that of the world leader Japan, which generates $229 of GDP per QBTU.

Indeed it will be no small task to engineer, design, manufacture, site, install, and service this more productive energy economy that needs to be built to dramatically improve our energy productivity as a nation. In fact, it will require the employment of millions of Americans in the following areas:

1) Jobs in improving the energy efficiency of homes and offices. This means jobs for electricians, plumbers, construction workers, and engineers.
2) Jobs in finding and developing alternative sources of energy.
3) Jobs in building cleaner cars.
4) Jobs in improving our crumbling infrastructure.
5) Jobs in education and worker re-training.
6) Jobs in transitioning our major polluting industries into low carbon providers of energy services. This means building out of carbon, capture and storage at coal plants and improving the efficiency rates of domestic oil production through enhanced oil recovery, both huge jobs spinners in their own right.

Now let us look at the payback. The following is just a short list of the ways green jobs can payback the American taxpayer:

1) Green jobs payback by improving our economic position in the world by developing whole new industries to help re-power the US economy over the long term. This would include creating new export opportunities to help improve our balance of trade position.
2) Green jobs payback by improving our national security position by cutting the amount of foreign oil that needs to be imported to run the economy. By increasing corporate average fuel economy (CAFÉ) standards to 40mpg by 2020, the American consumer can save $176bln in fuels costs alone.
3) Green jobs payback by increasing our energy productivity, driving down our overall energy costs and making our manufacturing sector more competitive. Investments in combined heat and power alone can save us nearly $1trln in net reduced energy costs through 2030.
4) Green jobs payback by enhancing our climate security by cutting our greenhouse gas emissions to the benefit of current and future generations.
5) Green jobs payback by encouraging massive investments in education and technology, keeping America at the cutting edge of innovative solutions.
6) Green jobs reduce the amount of the other fossil fuel pollutants in the air, including particle matter, smog, mercury and acid rain, reducing health care costs from many respiratory disorders.

In sum, using some of President-elect Obama's economic stimulus package to invest in a new energy economy makes good economic sense for the American taxpayer from both a jobs and payback perspective. And while some tax breaks are useful in stimulating additional demand, it should be remembered that other tax breaks are not that productive. Additional tax breaks given to Exxon Mobil are a case in point. Given that the company has been spending the bulk of its profits to buy back its own stock over the past 5 years, the amount of job growth and payback attached to providing them with additional benefits is probably fairly small.

Lastly, green stimulus should also be seen in the context of passing climate legislation. Passing climate legislation as part of a cap, invest now and recover strategy, would add further momentum to the President-elects goal of employing millions of Americans by using future carbon revenues today as transition assistance to bringing about a more productive and efficient long-term growth model for the US economy.