Carbon Trading, Bubble Hysteria

In the past, I thought that carbon trading of the style proposed by the Kyoto treaty could be a positive way to affect change, both from the point of view of climate change and peak oil. I have gradually come to change my mind, and I now favour a vanilla carbon tax with no loop holes. My decision was largely made watching the fallout from the dot-com bust, and now the US mortgage security shenanigan's.

Anything that Wall Street can game to enrich themselves, they will game. These crony capitalists with their derivatives and good-old-boys compensation schemes are really the enemy of free market entrepreneurship. If you bought $50 puts on Bear Sterns on Monday (10Mar2008), you gained a lot of money, but no wealth was crated.

I fail to see any advantage in giving Wall Street access to the carbon market.

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A lot of people suspect that the recent run-up in commodities is largely due to money flowing out of mortgage securities and into commodities. I am not convinced of this, due to a number of factors.

Past pump and dumps in commodities — such as nickel — can work because you can store an entire years worth of the world's nickel production in a single large warehouse. On the other hand, a day's worth of oil production is roughly a cube 300 m on each side. It's very difficult to take oil out of the system unless you are a national oil company.

Furthermore, demand remains remarkably inelastic. Predictions of any tipping point where demand suddenly falls off at some price-point haven't panned out. When oil is consumed, it's really gone.

In addition, a huge hunk of the recent run-up in crude oil prices is simply due to the devaluation of the US dollar. The proof is in the US dollar index. So yes, the US is getting hosed on their oil consumption but the majority of the world's consumption is pretty well hedged against this rise.

China even subsidizes the cost of oil to their citizen-consumers. They have to do something with their dollar reserves. So even if we see a lot of demand destruction for petroleum from the USA it's not clear if that will really hammer the price of oil back down to $80 for a sustained period. The twin inflationary and deflationary pressures currently at war between the US Federal Reserve and Wall Street respectively make that an extremely difficult call to make.

I know one thing for sure. I will never hire someone with an MBA on their resume.

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This brings up another question, namely is there potential for a bubble in investment in the so-called 'Cleantech' sector?

The world economy is in a slow transition from fossil fuels to alternative sources of energy, true or false? If you answer "true," then your only reasonable explanation for a bubble would be that the alternatives are growing at an unsustainable rate relative to the increase in the price of fossil fuels.

Unlike say, Pets.com or granite counter tops, a wind turbine or photovoltaic power has intrinsic value. They produce electricity, which is a very high-quality form of energy. I can calculate the net present value of a set of photovoltaic panels to a rather high degree of accuracy (~10 %), merely by noting the climate in which they are installed and their age.

The gap between the cost of doing work with oil as your energy source compared to electricity continues to enlarge. Consider, with electricity at $0.09/kWh, natural gas futures at $10.00/MMbtu, and oil at $111/bbl, the value of switching to electrons may pay back quickly. Note: these numbers are changing as fast as I can type this article.

Energy Currency	Energy Cost (US$/GJ)	Energy to Work Efficiency	Exergy Cost ($US/GJ)
Electricity	25.00	1.0	25.00
Natural Gas	9.50	0.4	23.70
Crude Oil	17.35	0.35	49.55

At this point, electrifying train tracks or heating your home with a heat pump looks really good going forward (natural gas isn't nearly as fungible as oil). Look at it this way, there are 153 million employed people in the US, and they consume 19.6 million barrels of oil a day. That's $14.20/day or $5190 a year per (money earning) person at current prices. That's a lot of Starbucks.

There is a potentially enormous sum of money to be made in weaning North America, Japan, and Europe off the oil habit. It's not going to be easy since there is still a massive amount fossil fuels in the Earth's crust. The saving grace of the alternative energy industry is that its costs will go down with time whereas fossil fuel companies will have to extract poorer and poorer quality resources and hence become more expensive.

Of course, not everyone involved in cleantech will be idealists. A number of companies will be formed with the express aim of relieving investors of their capital. These fraudsters will primarily aim at people conceited enough to believe that they understand science, but lack the actual formal education to evaluate what they are seeing in numerical terms. I'm looking at the dot-com millionaires here. Beware the Rube Goldberg machine, or the company with salaries a much higher proportion of their expenses than equipment.

I will say, from personal experience, doing research in a corporate environment where every line of research has to have an immediate application and money for equipment is tight isn't very efficient compared to government funded labs. Now the bureaucracy, well...