Friday, October 27, 2006

Morgan Stanley Jumps on the Greenwagon

Morgan Stanley has become the latest big corporate titan to join the fight against climate change. It announced (see official press release) yesterday that it plans to invest about $3 billion over the next 5 years in the brokering of carbon emissions credits trading and in structuring and financing carbon reduction projects.

Morgan Stanley's announcement is just the latest in the string of events in what I perceive as a fundamental "green shift" in corporate America and Wall Street, spurred on by the following trends and factors, among others:

1. Sustained high oil prices created by geopolitical uncertainty and hurricane damage to oil rigs in the gulf region has created a money gusher for oil producers (see most recently Exxon and Shell) and infrastructure companies building additional refining and oil rig capacity;

2. The high oil prices have created a sense of political urgency for oil security, creating new investment opportunities in biofuels as an alternative to gasoline, and energy efficient cars like the hybrids (see earlier posting on hybrid cars);

3. Volatile swings in natural gas prices have wrecked the fortunes of multi-billion dollar hedge fund Amaranth, among others, highlighting symptoms of a bigger problem--the uncertainty of natural gas supply and its potential to create jolts in the world economy (see earlier posting on Russia's stronghold on natural gas supplies);

4. The "clean tech" sector has received a surge of venture capital funding, making it the third most invested VC sector after life sciences and software (see also cleantech's record breaking Q3);

5. Despite a lack of carbon emissions regulations in the U.S. at the national level, various states are forging ahead to create regional carbon markets (read about California joining forces with northeastern states)

6. The ratification of the Kyoto Protocol and as a result, the implementation of the EU-wide Emissions Trading System has created a market for carbon, providing financial players with opportunities to trade, broker and arbitrage;

7. The clean development mechanism (CDM) and joint implementation (JI) schemes under the Kyoto Protocol, both similar programs which allows a country to invest in carbon reduction projects in other countries and gain emissions credits that can either be traded or used to offset the country's Kyoto emissions quota, can creates opportunities for ecopreneurs to structure, finance and broker such carbon reduction projects (click here for a recent example of a CDM project brokered by Ecosecurities);

8. China, soon the be the world's dominant economy, is taking bold moves, amongst which is the investment of US$175 billion over the next 5 years in environmental protection, and conducting a "green accounting" of its national economy (see earlier post on China's Green GDP). When China moves, Wall Street and corporate America notices;

9. The recent Clinton Global Initiative has made green sexy, raising some $4 billion in commitments for a green technology investments highlighted by the Virgin Group's Richard Branson's $3 billion commitment and former World Bank head, James Wolfensohn's launch of his $1 billion green technology private equity fund.

These are just some of the many drivers which has created a green wave of corporate environmentalism (see earlier post), especially with respect to climate change issues. Morgan Stanley's foray into the carbon market comes in the heels of Goldman Sach's own carbon initiatives, and is important for its signal that Wall Street is ready to get involved in the fight against climate change in a big way. Details of how this $3 billion will be deployed by Morgan Stanley and about the source of these funds are scarce, but the rest of Wall Street will surely be paying attention.

Climate Change Capital, a boutique London-based investment bank, raises $1 billion for CDM investment fund (article); China dominates world CDM market (article).

Thursday, October 19, 2006

Biofuels in S.E. Asia--"Technology Gone Mad"

Singapore's air quality has taken a hit as forest fires in neighboring Indonesia. The Pollutant Standards Index (PSI) hit the "unhealthy" 100-plus range for the first time this year in the last two weeks, hitting as high as 150. This is not the first time that Indonesian forest fires have made its impact felt across borders. In 1997, Indonesian fires caused the PSI in Singapore to hit a record 226. The haze, as it is euphemistically termed, has has directly had direct economic consequences for the tiny island-state, costing Singapore in 1997 an estimated US$300 million (including lost tourism revenues and respiratory health costs) and US$50 million since September of this year. Its bitter pill for Singapore, which has tough environmental standards and prides itself as being "clean and green," to swallow.

The traditionally-cited causes of the Indonesian forest fires have been the poor logging practices driven by shifting cultivators, and in the case of 1997, especially dry weather brought on by the El Nino climatic phenomenon. The deep irony is that the slash-and-burn logging that has created the fires in 2006 is a product of the frenzied drive to cultivate biodiesel crops such as oil palm (see article).

Sustained high oil prices have pushed biofuel investments over the tipping point, not just in the U.S. but also in China and Southeast Asia. Investors have been throwing heaps of cash into the ethanol/biofuels sectors, underlined by a couple of high profile IPOs (Aventine and VeraSun) in the US stockmarkets. GreenCarCongress has been tracking the swell of news of the big investments that the likes of Malaysia and Indonesia--the worlds largest producers of palm oil--are making biofuels, particularly as derived from oil palm. The international NGO Friends of the Earth (FOE) has been very vocal about the unsustainability of such oil palm plantations (See the FOE report- "Oil for Ape scandal").

As excerpted from the article:

"Why are we burning our forests to plant something that we have been told will be clean, environmentally friendly fuel?" asks S.M. Idris, chairman of environmental lobby group Sahabat Alam Malaysia. "This is technology gone mad."

Hong Kong Redux
The timing of the Singapore haze is ironic because of recent press coverage of deteriorating air quality in Hong Kong, a victim of manufacturing-intensive industrial pollution from neighboring Guangdong province. The Wall Street Journal (Oct. 18, reproduced here, and related blog posting on The China Expat here) reports that status of Hong Kong's preeminence as Asia's financial capital is at risk, as evidenced by the relocation of various hedge funds relocate to Singapore because of the bad Hong Kong air.

It is at one level tragic that these hedge funds have traded one bad for another. It underscores why law alone, because of its existence is boxed in by geopolitical boundaries, can never be a complete solution. And perhaps it will impress upon the high financiers, like those in Singapore and Hong Kong, to consider the ecological and social implications of their investment allocations.

Monday, October 02, 2006

Gross Domestic Pollution?

Last month, China has released a report announcing the results of a joint study by the State Environmental Protection Administration and the National Bureau of Statistics to conduct a "Green GDP accounting" and monetize the cost of pollution to the Chinese economy in 2004 [See press release here]. According to the report, some US$64 billion of damage was incurred by environmental pollution and ecological damage, amounting to some 3% of its US$2 trillion economy.

From the Wall Stree Journal ("Why Beijing is Trying to Tally the Hidden Costs of Pollution"; October 2, 2006, page A2):

"Green GDP is one part of the budding field of environmental economics, which aims to apply rigorous business-accounting methods to environmental problems. "Green economists" are driven by the notion that typical methods of measuring growth -- namely GDP -- are too crude a way to measure the overall health of an economy...While GDP looks at the market value of goods and service produced in a country each year, it ignores the fact that a nation might be fueling its expansion by polluting or burning through natural resources in an unsustainable way. In fact, the usual methods of calculating GDP make destroying the environment look good for the economy. If an industry pollutes in the process of manufacturing products, and the government pays to clean up the mess, both activities add to GDP. China's report estimates it would take a one-time direct investment of about $136 billion -- nearly 7% of GDP -- to clean up all the pollution pumped into the nation's air, water and soil in 2004."

Another take of the limits of GDP (or GNP, a slightly different notion) can be summed up in the words of former U.S. Senator Roberty Kennedy:

"The gross national product includes air pollution and advertising for cigarettes and ambulances to clear our highways of carnage. It counts special locks for our doors and jails for the people who break them. GNP includes the destruction of the redwoods and the death of Lake Superior. It grows with the production of napalm, and missiles and nuclear warheads... it does not allow for the health of our families, the quality of their education, or the joy of their play. It is indifferent to the decency of our factories and the safety of our streets alike. It does not include the beauty of our poetry or the strength of our marriages, or the intelligence of our public debate or the integrity of our public officials. It measures everything, in short, except that which makes life worthwhile."

[For an excellent review of further criticisms on the way GDP/GNP is calculated, see Wikipedia's entry for "Gross domestic product"]

While the concept of a green GDP is not new, what is groundbreaking is a government's official announcement and calculation of such figures, and even more surprising is that it is China, for so long a target of environmetnalists' ire, is the first government to do so. (For a great article on the environmental paradox that is China, read this post titled "A Tale of Two Chinas" from Joel Makower. Sidebar: I query whether it really a paradox rather than a case of "drastic sitruations calls for drastic measures" which results in China having the most challenging of environmental problems on the one hand, and having the most progressive of environmental policies on the other hand, with the latter being a rational reponse to the former.)

Due to the limitations of data availibitlity, the China study was limited in that only "environmental pollution" and "ecological damage" costs were factored in. Ideally, according to Beijing officials, five types of natural resource use costs (minerals, forest, water and fishery resources) should also be accounted for. Furthermore, only 10 of 20 submetics under "environmental pollution" were included in the study. This suggests that the $64 billion figure is clearly an underestimate.

In any case, this Green GDP accounting is a landmark study which may catalyze an revolution in the way economists measure economc growth. Let's hope this is not a one-time study, and that green GDP accounting will be eventually integrated into the mainstream.