Tuesday, January 8, 2008

Complying with Regulations Will Cost a Bundle

Tonight the New Hampshire primary reports are coming in. While CARE is not a political organization, we do watch with interest as politics in America impacts future energy policies. Here we have a posting from a source we do not usually follow as they usually feature stock/investment topics. (If you have not read the past posting from Whiskey and Gunpowder, please check it out.) Here “Whiskey and Gunpowder” looks into what at first appears to be pollution in India and China. But read on. The author, Chris Mayer, brings it around to America’s political season and the issue near and dear to our heart: the economics of energy and on the flip side environmental protection. Chris’ voice is a fresh one with some interesting perspectives. He, like us at CARE, believes energy is under attack. Chris uses the term “utilites are under siege,” but the bottom line is the same. Complying with current, new, and un-thought of regulations will cost a bundle—a cost that will ultimately be borne by the consumer. As you read on, you are likely to want to know more of the unique perspective provided in Whiskey and Gunpowder. Please check them out.

India’s Biggest Problem
“Walking In This Climate Is Such Gentle Agony,” wrote Gozzano to open his book on India.
Guido Gozzano (1883-1916), a distinguished Italian poet, visited India in 1912. He spent six weeks on the subcontinent and wrote letters about his travels. He made many observations about the heat. “Never have I been so glad not to be overweight in this climate,” he wrote. “India is truly infernal for anyone with a few extra pounds.”

Later, he went on to write about how the heat “creates mirages, dissolves in the air, makes it quiver and flutter on the horizon.”

Wonder what Gozzano would make of India today, where on most days you can’t even see the horizon. It’s still hot as hell and humid in Bombay, for example, where many travelers begin their tour of India. (I know the official name is Mumbai, but I found almost all the locals kept referring to the city as Bombay. Plus, the name Bombay conjures up all those familiar images of a long ago past).

Today, the soupy thick smog of pollution makes the air even worse. Visibility is incredibly poor most of the time. For days, I never saw the sun except blurred through a gray screen of smog. You could smell the pollution when you landed and when you stepped outside, and in some places — say, near a standing body of water — the air is so foul, even some locals cover their noses as they walk by.

It’s more than just an anecdote about India, or some irritant for travelers. It’s a serious health issue for the people living there. According to In Spite of the Gods, Edward Luce’s excellent book on India, air pollution causes about one-eighth of premature deaths in India. Hundreds of thousands of children die due to exposure to contaminated water.

Of course, India is not alone in this. China, the other big rapidly industrializing nation on the stage, has big problems with pollution of all kinds, too. Air quality in China is awful. I spent some time in China in 2005, and I remember the stink when I opened my suitcase back home. It smelled like I had lived in a bar for three weeks.

Robyn Meredith, in her recent book on China and India, titled The Elephant and the Dragon, also comments on China’s poor air quality. She writes one section from the city of Chongqing, an industrial city of 30 million people. (For perspective, that’s about the number of people that live in the whole state of California.) “Sunlight barely reaches the ground, dimmed by thick, gray smog,” she writes. “Skyscrapers just three blocks away are mere outlines because of the air pollution.”

Meredith cites the World Health Organization (WHO), which says that 200 cities in China fail to meet WHO standards for airborne particulates that cause respiratory diseases. “All but two of the world’s 20 most polluted cities are in India or China.”

Writer James Kynge calls the environmental degradation a “concealed debt”—which people will pay for eventually. Already, 16 of the top 20 most polluted cities are in China. Kynge writes in China Shakes the World —another terrific book on China—“acid rain falls over 30% of [China's] territory.”

I think you get the idea… The rapid rise of China and India has come with a cost: Serious environmental damage, on many levels.

But the governments know about the problem. Things are starting to change. Delhi was the worst polluted city in the world in 2004, but the government has since taken steps to clean it up. Today, all buses run on natural gas, for example.

In China, too, officials are pushing companies to adopt greener methods. A recent story from the Wall Street Journal talked about some of China’s new tougher stance: “Worried that China's boom is bringing with it supply gluts and high pollution, the government has spent the year trying to rein in the expansion of many industries.”

The WSJ goes on to give examples, including the cement industry. “In cement, for instance, officials are pushing companies to adopt newer and costlier production methods that are less polluting, which should help the meet new environmental goals.”

It’s not an isolated story. Another recent headline reads: “China Shifts Pollution Fight, New Rules Target Export Industry With Stiff Penalties.”

So let’s recap. There is clearly a big problem. We also have some action and policies mandating cleanup and imposing clean air standards. The whole issue is also starting to attract some serious money. Recently, the Wall Street Journal reported General Motors’ announcement that it would invest in green technologies in China, “as concerns about pollution and fossil fuels deepen in the world’s fastest-growing auto market.” GM will put $250 million into building a research facility in Shanghai.

As big of a problem as pollution is, I’m betting there are some fortunes out there for those who have good solutions.

And that’s where I’m turning my eye right now…

It’s also not just an issue in these rapidly industrializing countries. Let’s look at the biggest economy of them all: The United States. You know it’s an election year. “Green” is in. The global warming issue—regardless of what you think of its merits—is a popular one with voters. So politicians need green credentials. That means pushing forward measures to reduce carbon emissions, for instance.

There has already been growing opposition to building new coal plants. Utilities have already shelved a number of these projects. Others are in the process of hashing out deals with state and federal regulators.

Coal provides about half of our electricity. And coal is a dirty fuel in the eyes of the greenies, who fret about the emission of carbon dioxides (so-called greenhouse gases) and other pollutants.

So basically, the utility industry is under siege. It can only do so much with alternative energy. The nation isn’t going to get the bulk of its electricity from wind, solar or nuclear power anytime soon. Coal is still king. And utilities must find a way to work with it.

Complying with clean air regulations will cost a bundle. The Environmental Protection Agency estimates that the power industry will spend $2.7-6.1 billion annually between 2010-2020 to comply with the clean air regulations. Those figures will probably prove conservative.

This is the overwhelming issue facing the power industry today: reducing its carbon emissions. This is a difficult issue to tackle and may take some time before real change occurs. Keep looking into this area of the world and you’ll notice that change will have to come before things get too far out of hand.

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