Flaws in Economic Models of climate change do not alter the viability of a Carbon Tax Policy

By: Tommy Drenis

This past July, the House of Representatives passed a new resolution on carbon taxes, in which the general consensus of House members on an issue is expressed. In this case, members voted 229-180 in favor of a resolution “expressing the sense of Congress that a carbon tax would be detrimental to the United States economy” [1]. Following the decision by President Trump to withdraw from the Paris Accord in 2017, this vote represents continued sentiment by America’s elected officials that the economic effects of climate change do not eclipse those of a carbon tax policy.

Such political beliefs are not novel in the U.S. and have existed in the majority for a great period of time. Since the 1970s, in an attempt to reverse these beliefs, economists such as William Nordhaus have developed models of the economic effects of climate change, collectively referred to as integrated assessment models. In helping to begin these efforts, Nordhaus was recently awarded with the Nobel Prize in Economics [2].

More specifically, these models attempt to estimate the social cost of carbon, which is essentially the external cost of carbon emissions that society realizes in the form of climate change. However, such estimates of the social cost of carbon are very rough, based on many assumptions and uncertainties about the relationships between carbon emissions and temperature change, temperature change and economic effects, etc. [3]. As a result, even the Nobel Prize committee acknowledged that the integrated assessment models developed by Nordhaus cannot eliminate the uncertainty surrounding “the economic and human damages caused by climate change” [2].

The fact that these models are built on many assumptions and uncertainties builds the basis for the arguments that critics of carbon taxes propose. In the eyes of many, since these models cannot provide accurate estimates of the social cost of carbon without flaw, the economic basis for carbon taxes cannot be made.

 However, what these models clearly show is that carbon emissions do provide an external cost to society. While limited experimental data at the moment makes accurately identifying the social cost of carbon very difficult, it is obvious that such a cost does exist. As a result, the fact that there are flaws in estimating the exact social cost of carbon does not draw away from the fact that this cost is present.

Furthermore, the actual economic impact of a carbon tax policy is negligible. In fact, a very expensive $50 carbon tax rising by 5% every year was found to only deter U.S. GDP growth by 0.1% per year [4]. As a result, given that we know that carbon emissions create an external cost on society, and that the impact of carbon taxes is negligible, the disadvantages of not creating a carbon tax are much greater than implementing one.

For example, if the impact of climate change on the economy is much smaller than current rough estimates forecast, little cost to the economy will be endured with a carbon tax policy. However, if these current predictions greatly underestimate the extensive economic damage that climate change may cause, a carbon tax policy will be seen as both beneficial and necessary.

Whichever scenario the future holds, the greater downside that exists of not creating a carbon tax in the present is obvious. Therefore, the fact the economic models cannot accurately predict the exact cost of climate change on the economy is of little relevancy to the debate regarding a carbon tax policy.

At the moment, the U.S. is one of an increasingly small group of developed nations to have not yet implemented carbon taxes. With the U.S. producing around 16% of the world’s carbon emissions as of 2015, it is imperative that the decision is made to join the United Kingdom, France and others in levying a carbon tax [5].

1 – https://thehill.com/policy/energy-environment/396948-house-to-vote-on-measure-denouncing-carbon-tax

2 – https://www.nobelprize.org/uploads/2018/10/popular-economicsciencesprize2018.pdf

3 – http://web.mit.edu/rpindyck/www/Papers/PindyckClimateModelsJELSept2013.pdf

4 – https://www.theguardian.com/environment/climate-consensus-97-per-cent/2018/jul/16/comprehensive-study-carbon-taxes-wont-hamper-the-economy

5 – https://www.carbontax.org/where-carbon-is-taxed/

A look at Recent M&A Activity In Renewable Energy Start-Ups and the Regulatory Environment that supports it

By: Adbi Adan

When we think about the role renewable energy plays in our lives we rarely think about large companies. Our main focus on leading a greener life consists of turning off the lights, taking shorter showers and using public transportation. On the larger scale huge mergers and acquisitions of startups in the renewable energy space are proving to be a huge driver of the acceptance and adoptions of renewable in the business atmosphere. These acquisitions also serve as a way some of these companies can hedge their bets and go further into renewables.

One recent acquisition that made waves in the startup world was Google’s acquisition of Nest Labs LLC. Nest is famous for their Nest thermostat, a thermostat that utilizes technology to limit waste and distribute heat or air conditioning effectively. This acquisition costed Google 3.2 Billion dollars. Many have speculated Google’s acquisition of Nest is a bold into the energy space. Google also this year reached its goal of becoming a 100% renewable run company. Google is making bold moves into the energy space and it just shows that these big companies view the energy market as a market they have to be in. Another tech company that is expanding its reach more aggressively in the renewable energy space is Tesla. Tesla currently is investing heavily in their electric vehicles, both cars and trucks, to solar roofing. A lot of this is coming from Tesla’s CEO Elon Musk. Musk also invested heavily in SolarCity another subsidiary of Tesla focused on drastically reducing the cost of solar panels.

Lately valuations for energy companies has been growing exponentially. Just last year the average Series A round for a clean energy company was 7 million up 2 million from 2015. Many venture capitalist are taking a long bet on an assortment of clean tech companies, but still are a bit hesitant. It’s widely acknowledged that renewable energy is the future, but for VCs this area is still surrounded by a lot of uncertainty, particularly around regulation. Regulation around energy policy in the past few years has been extremely volatile. With the span of a few a few years the United States went from setting higher fuel standards for cars to pulling out of the Paris Climate agreement. This vast change is what some say is driving away institutional capital from investing more heavily in clean tech start-ups.

When we think about the role start-ups are going to play in ushering in the new wave of renewable energy it is pivotal we create a regulatory environment that not only fosters growth, but also protects nature. The current problem with regulation in the energy space is that either it’s too extreme or too lax. This type of regulation in no way will help start up reach the scale needed to tackle the climate change crisis our generation is currently facing. Cleantech startups possess a skill that has the ability to impact not just our energy consumption, but how we interact with energy all together.

Fuel Cell Technology Advancement

By: Yang Yan

    Fuel cell (FC) is an electrochemical device that can directly convert the chemical energy of hydrogen, natural gas, methanol and other fuels into electricity. In addition to its applications in new energy vehicles such as Toyota Mirai, the fuel cell train manufactured by Alstom has entered commercial operation in Germany in September 2018. Depending on the material used and operating temperature, FCs can be divided into several types. A comparison of major classifications is shown in Table 1.

Yang 1.PNG

Solid Oxide Fuel Cells (SOFCs) are one of the main focuses in FC research. In 2010, Bloom Energy Inc. (NYSE: BE) in the US introduced an SOFC mini-power station that will provide US households with low-cost and environmentally-friendly power 24/7. The company is now the SOFC provider for Google, Walmart, FedEx, AT&T, Panasonic and many more fortune 500s. In 2017, Kyocera Japan Ltd. (OTCMKTS: KYOCY) introduced the first commercial 3 kW SOFC system. The system achieves a standalone efficiency of 52% and, through waste heat cycle, the overall system efficiency can reach 90%. The system integrates four small stacks with a power of 700 W and can deliver 3 kW of power externally.

Figure 1 SOFC system outside of Macy’s store

Figure 1 SOFC system outside of Macy’s store

SOFC has many unique advantages. At present, SOFC has application prospects in large, medium and small distributed power stations, portable power bank, military, aerospace and other fields. Significant advantages are:

1. High efficiency. The power efficiency can reach more than 60%; with waste heat and gas turbine combined use, the total efficiency can reach up to 90% or more;

2. Reliability. achieves operating times more than 90% and power available more than 99.99% of the time. This is the main reason why computer facilities, call centers, data processing centers and high technology manufacturing facilities choose SOFC:

3. All-solid-state structure, leading to easy assemble and cell amplification;

4. Use of common, low-cost catalysts, which can effectively control manufacturing costs;

5. A wide range of fuel options; In addition to the use of hydrogen, natural gas, liquefied petroleum gas, ethanol and even biological waste gas could be used. This is useful in waste treatment plants, as the cell can convert biomass gases to electricity with minimal environment impact.

6. Low cell noise, less pollutant emissions; This is useful in urban areas, industrial facilities, airports, and zones with strict emissions standards.

7. Long cell life, up to 10 years.

Given that SOFCs can directly use hydrocarbons as fuel, its large-scale application can promote the efficient and clean utilization of coal, natural gas and biomass.

yang 3.PNG

Peer to Peer Energy Trading: Activating Renewables

By: Avery Smith

The traditional idea of a singular energy utility company distributing energy is an under-engineered and inefficient way to distribute energy in a marketplace beginning to be dominated by renewables. Renewables are plagued by inconsistency, often depending on weather and location. In this sense, even as renewable electricity has begun to be generated at the same scale as traditional methods, the real breakthrough in widespread adoption will follow the appearance of a real method to store and distribute variably-generated sources of energy.

blockchain 1.jpg

Blockchains have arisen as a solution to solve this market inefficiency. A blockchain is a digital, public ledger in which records can be stored and transactions can be executed and validated between individuals. In the conventional sense, blockchains have allowed consumers to execute simple monetary transactions: a user attempts to send money to another user, and the participating community verifies the validity (i.e. ensures the sender has available balance, ensures the sender is real). However, the recent development of "smart-contract" based blockchain solutions has allowed the technology to evolve far beyond peer-to-peer payments. A smart contract can be defined as a program which leverages the computing power of a blockchain to validate a contract. Contributing peers can all publicly view the terms of the contract and execute a transaction under a given set of conditions. For example, smart contracts can be used to manage employment agreements, ensuring that employees are paid fairly and transparently.

blockchain 2.png

The complexity of these "smart contracts" is not limited to simple applications. Energy startups have already begun to see blockchains as a venue to eliminate the middleman of a utility company, allowing users to trade energy between each other at a dynamic price. The application of this trading has already been fleshed out by several startups. For example, startup P2PEP explains in their whitepaper: “All you have do to is download our DApp and start trading renewable energy. For large scale renewable energy producers, this is extremely appealing since there are a lot of users on the network that are tired of the environmentally unfriendly energy they are forced to use today and are craving for someone to sell them greenenergy at a decent price.” The execution of contracts directly between producers and consumers will avoid the mispricing of the underlying asset. Instead, pricing would be flexible and based not on the thoughts of some arbitrary central planner, but rather on supply and demand. This will allow renewables to flourish in that it will incentivize individual producers of electricity (e.g. households with solar panels) to sell energy to network peers at a rate higher than that paid by a utility company, given an increased demand. 

 

blockchain 3.jpg

For example, in New York City, LO3 energy has begun its "Brooklyn Microgrid" project. Here, consumers and producers were able to set a minimum and maximum purchase price for electricity. Then, on top of a blockchain, energy was distributed in more efficient manner. Although it has not been analyzed from an academic perspective, LO3 claims that this method of distribution has increased security and efficiency in the local grid. Further, energy startup Grid+ has leveraged the Ethereum blockchain in order to attempt pass wholesale pricing to consumers. Although this project has not yet been implemented on a large scale, it has raised $40 MM in an initial round of funding.

Although it remains to be conclusively proven, these blockchain powered energy distribution methods, and all smarter forms of grid technology for that matter, will provide the necessary infrastructure for renewable energy to freely move through the marketplace. This will not only drive usage and lower cost, but finally provide the venue for unsubsidized renewables to truly jump the hurdle and become a dominate force in the market.

Modernizing the Not-Yet-Modernized: Africa’s Solar Cell Phone Kiosks

By Melissa Marketos

To this day, Africa suffers from an immense energy poverty: more than 30% of the continent’s populace does not have access to electricity; sub-Saharan Africa generates the lowest amount of electricity in the world; citizens experience constant power cuts throughout the year. Africa’s energy problem has been soaring for decades, despite the fact that its lands possess an abundance of available natural resources. In fact, the continent is endowed with the highest number of available solar resources in the world because it is the sunniest continent on earth.

The technological advancements and applications of renewable energy in Africa has the potential to greatly reduce the continent’s energy poverty, especially in rural areas, as well as  improving the lives of many in the continent. Major sectors such as agriculture, education, communication, and technology all require consistent and cost-effective energy to spur the much-needed development of the continent. Indeed, many African nations today have already adopted solar, wind, and geothermal plants that provide energy in rural areas. Many small-scale companies and startups have ventured into provision of renewable energy in the continent, one being Mobile Solar Cell Phone Kiosk.

Henri Nyakarundi, a Rwandese entrepreneur, fabricates and distributes solar-powered mobile kiosks that charge cell phones in Rwanda. This innovative concept is not only convenient but also essential to connect the country's population: the World Bank estimates that over 70% of the population in Rwanda own a cell phone; however, less than 25% of its population has access to electricity.

The solar-powered kiosks, with the capacity to charge up to 80 phones simultaneously, are positioned on bicycles and leased to individuals in the country. The micro-franchisees profit from mobile charging, mobile credit add-ons, and prepaid electricity sales. Nyakarundi cleverly states that his idea is “a business in a box.”

This Rwandese innovation is beginning to become recognized internationally. For instance, Rwanda Red Cross refugee campus housing Burundi immigrants have begun using the charging stations. With these stations, refugees are trained to work as operators to earn their own income. 

Investing in the Electric Vehicle Space

By Pranav Srinath

According to the Bloomberg New Energy Finance forecast, the cost of manufacturing electric vehicles is decreasing quicker than previously anticipated. Lithium-ion batteries, key components of electric vehicles, make up a large percentage of the total cost of the car and the price of these batteries have been observed to fall due to increased production and a possible over-supply. Bloomberg predicts the prices of electric vehicles to be competitive without subsidies by 2025 and that a third of the auto market will be occupied by electric vehicles by 2040. This is further supported by the economic benefits offered by the low cost of charging electric vehicles and incentives provided by governments and companies.

Hence, the electric vehicle market can be seen as a sensible space to invest in. With prices perceived to be drop rapidly and demand to increase steadily, one may desire to take advantage of the increased production of these vehicles. One may choose to invest in particular companies and conduct their own due diligence by looking at a particular manufacturer’s balance sheets and management. Another option could be to invest in unit trusts and open-ended investment companies and let a professional fund manager manage your investments for you. However, one must not only keep in mind the volatility and cyclical nature of the technology sector but also the risks associated specifically with the electric vehicle market.

Firstly, electric vehicles are not as economically viable as they may seem. Currently, electric vehicles are only $6000-$14000 more expensive than regular internal combustion engine vehicles. However, this estimate takes into consideration subsidies provided by the government. The cost difference without subsidies ranges from $13000-$19000. Furthermore, these differences could increase if companies decide to revert to normal corporate profitability.

The next difference between perception and reality has to do with the batteries used in these vehicles. While the battery cell may seem to be decreasing in price, the battery packs used in vehicles consisting of cells and mechanical parts will not drop much due to the relatively fixed cost of mechanical parts. Subsidies provided by the government might appear beneficial in the short run. However, the high costs to manufacturers and low profitability can lead to decreased innovation and reduced investment in research and development. This would have the direct opposite effect to what is generally expected of the electric vehicle market.

It should also be noted that a high percentage of government revenue is generated from carbon and gasoline taxes. Once there is a decline in consumption of these taxable goods, there will be a decrease in revenue and the government may no longer be able to provide subsidies to the Electric vehicle industry. This would also be accompanied by increased costs in raw materials used in the production of batteries, mining and the source for electricity production.

Consumers will only be interested in going green and adopting electric vehicles as long as they see an economic benefit. Once the economic benefit starts to decrease and costs to the consumer increase, the future of electric vehicles being projected might not appear as bright as it currently does. Hence, one must understand the potential risks of investing in this space. With companies like Tesla burning large amounts of cash on a daily basis with the promise of returning investments in the future, one might be tempted to enter this space. However, it would only be sensible to take into account all the potential risks associated with making the decision to invest.

Dawn of The Electric Cars, Is America Ready For The Change?

By Jeong Doo Cho

In the past decade the automotive industry has been undergoing a slow but sure transformation away from the internal combustion engine that it had for so long favored. Drastic developments in battery technology in the past decade, backed by strong governmental push on environmentalism has seen the rapid rise of electric automobiles. Early models of the electric car date back to as far as 1894. However, they never made it to the production lines, largely because of their limited range and efficiency. Today’s electric cars, powered by lithium-ion batteries, can do much better. Chevrolet Bolt has a range of 383 km; Tesla’s Model S more than 1,000km on a single charge. Adding to the electric vehicles meteoric rise is a drastic increase in cost efficiency-the cost per kilowatt-hour of electric batteries has fallen from $1,000 in 2010 to $130-200 in 2018. Such has led to predictions that the “total cost of ownership” of an electric car will in 2018 reach parity with a petrol car. Certainly, the market for electric cars is looking very optimistic with a projected market share of 14% of global car sales by 2025, up from 1% today. Regulations are backing the electric car movement too. As of September 2017, an upwards of 13 countries are committed to a lengthening list of zero emission automobile countries pledging to ban petrol powered cars by as early as 2030.

But is the world really ready for electric cars?

One large issue lies in lagging charging infrastructure. Currently, with over 44,000 public charging stations across the nation electric car owners in the US have little problem finding a place to charge their cars. But it's important to take into account that in 2017, electric cars represent only about 1% of cars sold in the U.S, and 0.2% of all cars on the road. Scaling up electric vehicle usage to a nation level presents questions about the feasibility of building an accessible power infrastructure to support it.  

“You see models that say, ‘We’ll sell a million EVs this year, then two, then four and so on,’ but I have concerns about the practicalities of this transition,” says Francis O’Sullivan, director of research for the MIT Energy Initiative.

 Research shows that most EV owners charge their cars in their garages, and existing power stations are found in businesses cities and wealthy suburbs where most deep pocketed early adopters reside. However, the state of the current charging infrastructure fails to account for a larger pool of the general public that a large scale adoption of EV’s could call for: everyday city dwellers who lack garages.

All said and done, the electric vehicle industry is only in its early dawn. “All things cannot be sorted before the industry starts,” says Pasquale Romano, chief executive of ChargePoint, which controls the largest U.S. network of charging stations. Only time will tell if cities and nations will be able to implement the necessary infrastructure to sustain the rapidly growing EV industry.

 

 

 

 


 

Energy 101: Renewables v. The Grid Event Summary

Our own Thomas Lee led the latest installment in Wharton Energy’s Energy 101: Renewables vs. The Grid. The future of renewable energy is limited not so much by generation capacity, but more so by complicated aspects like transmission, storage, and dispatchability. As Thomas pointed out, there has actually been a rapid expansion of renewable capacity, driven by fallen costs, generous policies, and advances in financing. In some political spheres there are exceptionally ambitious targets for renewable production: Austria, Denmark, and Nicaragua are all international examples while the state of Hawaii and the Sanders campaign’s national platform are domestic ones. While this may seem rosy for the more environmentally conscious, such boons are only problems to come for the cynically minded. The argument is that the grid as it currently exists may not be ready for the new cycles and strains presented by renewable sources of electricity. While the incident was not related to renewables, the 2003 Northeast Blackout, which impacted 45 million Americans in 8 states, as well as 10 million in Ontario, was presented as an example of how exceptionally the grid can fail when subjected to excess stress. In response, Thomas proposed that there must be a diverse portfolio of energy sources to meet total demand, broken down into baseload, dispatchable, and renewable. The final, parting lesson was that additional renewable capacity does not necessarily guarantee a decrease in reliability or a specific change in price, as was proven by Germany’s Energiewende (Energy Transition), which has shifted national electricity generation towards renewables and has seen a 38% increase in grid reliability, a decrease in wholesale electricity prices, and an increase in price at the retail level. Thanks to all those who joined us and to Thomas for an incredible presentation. Be sure to join us for our final Energy 101 on Tuesday, April 12: Energy Storage and Fuel Cells.