Falling oil Prices and a Global Climate Agreement

The decline in oil prices underscores the risk associated with fossil fuel investment. On December 1 as the COP20 talks began in Lima Peru, the UN's climate chief said that falling oil prices show the "high risk" of fossil fuel investments compared with renewable energies. This perspective was underscored by the December 14th Lima draft agreement that included mention of a world free from fossil fuel emissions by 2050. A final global climate agreement is scheduled to be signed in 2015 at COP21 in Paris. Prior to the Lima agreement there were agreements by the US and China and the European Union to cut greenhouse emissions from the burning of fossil fuels.

Video - Why Oil Prices Will Keep Falling

Oil prices are already low and they continue to decline as more downward pressure is expected. On Friday December 12th the International Energy Agency (IEA) forecast a decline in demand for 2015 and they further predicted that healthy non-OPEC supply gains were poised to aggravate a global oil glut. The current outlook for global oil demand for 2015 was cut from 230,000 barrels per day (bpd) to 0.9 million bpd.

An Upside to Low Oil Prices?

While there is a clear downside to lower oil prices for renewable energy, there may also be a silver lining. Low oil prices are bad for renewable energy, but if they fall low enough they could decrease extraction of some of the dirtiest fossil fuels.

Declining oil prices are attributable to the fact that there is now more supply than demand. The low oil prices may be part of an effort by OPEC to leverage market forces that will slow extraction of tar sands oil in North America.

The Economic Costs of Canada's Oil Obsession

Canada's dependence on fossil fuels not only contributes to climate change it represents a serious threat to the economy. As oil prices plummet to a five year low, the Canadian economy is feeling the heat.  The declining price of hydrocarbons have driven down the value of the Canadian dollar and impacted stock prices on the TSE.

Canada's ruling Conservatives have bet on oil and this has disastrous implications for all Canadians. The fact that Canada is so closely tied to fossil fuels means that the nation's petro-currency is subject to profound market volatility.

Low Oil Prices will Slow Renewable Energy and Impede the Growth of the Green Economy

With oil prices at a 5-year low, renewable energy and the green economy are being hit with some serious headwinds. Low oil prices are not only detrimental to the growth of renewable energy it is also decreases demand for hybrid and electric cars as well as cleantech in general. High oil prices buoy interest in renewables, while low oil prices put downward pressure on the growth of the low carbon economy.

For more than a quarter century we have been exploring the ways in which oil prices are related to renewable energy. A 1989 World Bank study showed how renewable energy technologies are directly impacted by the price of oil. However this study added the caveat that the impact is muted in remote and rural applications (where fossil fuels are less available).

Market Forces and the UK's Green Deal

In 2012 the UK is launching the green deal, which will unleash the competitive forces in the energy efficiency market. The green deal will be the biggest home energy improvement programme of modern times. Due in part to the green deal the energy efficiency market in the UK could reach £800m by 2020.

Social Capitalism

Social capitalism is a new market-based economic system. It addresses the problems inherent in both capitalism and socialism. Traditional capitalism often overlooks human and environmental interests and the central planning of traditional socialism impedes a rational allocation of resources.

In social capitalism, governments create greater profit opportunities for entrepreneurs by investing in desirable future industry and technologies (like rewable energy).

The essence of social capitalism is that markets work best and output is maximized through sound social management of the macroeconomy. Social capitalism posits that government regulation, and sponsorship of markets, can lead to superior economic outcomes.

Government investment in the green economy or securities regulation are examples of social capitalism. Regulation should be as limited as possible, however, regulation is needed to ensure that individuals and corporations do not exploit markets for personal gain at the expense of market growth, economic stability and environmental sustainability.

For business, social capitalism is the ability to create positive, healthy development. Businesses practicing social capitalism give back to society while creating an environment that is conducive to profit maximization.

Social capitalism is not hostile to free markets or the private ownership of property. Instead, social capitalism recognizes the unique success of capitalism, particularly under appropriate social supervision. Social capitalism thus seeks to create a balanced approach to business and the role of the state, with a view to optimizing the business environment for maximum sustainable economic growth.

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Private Public Cooperation Behind SA Joule

The Joule electric city car is manufactured by Optimal Energy with help from the government of South Africa (SA). The Joule is the first vehicle to be developed and manufactured by a wholly owned SA company. The major powers in the global economy are developing greener vehicles, but so are small companies from less affluent nations. The Joule is getting ready to meet the growing demand. It is widely believed that by 2020, 10% of world automotive production will be in electric vehicles.

The project is being funded partly by the Industrial Development Corporation, the Department of Trade and Industry, and the Department of Science and Technology. The Joule is benefiting from the SA government's second industrial policy action plan, which seeks to increase local automotive content and manufacturing.

Commercial production of the Joule should begin in 2013, reaching 50000 units a year by 2015. The company will employ more than 2000 people in its assembly operation, while supplier and support activities could create a further 8000 downstream jobs.

Kobus Meiring, CEO of Optimal Energy said, "We want to make it clear that we are not aiming at the green market as such, but rather the C-segment, in competition with cars like the Toyota Corolla," he says.

SA Finance Minister Pravin Gordhan said in this year's budget speech the government hoped "to influence the composition of SA's vehicle fleet to become more energy efficient and environmentally friendly".

These efforts will help SA meet her Copenhagen Accord commitments to reduce greenhouse gas emissions 34% by 2020 and 42% by 2025.

Although the car is expected to establish a local market, the company says 90% will be exported. If more green vehicles are to be sold in SA, there needs to be better support infrastructure and better market education.

Above all, "it must be a combined drive between government and industry," says Mike Whitfield, CEO of Nissan SA.

The fact that the SA motorists will not pay more for a greener car means that the Joule must not only have zero emissions it must also be inexpensive.
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Creative Capitalism: Market-Based Social Change

To be sustainable a business must also be profitable. Readers of The Green Market know that I am an earnest advocate of viable socially responsible business. This philosophy is put into practice in my firm's Green consulting projects with the small business community. Implicit in this philosophy is the marriage of market forces and social responsibility.

This is not a new idea. Almost half a century ago David Rockefeller, the president of Chase Manhattan Bank, said, "The old concept that the owner of a business had a right to use his property as a he pleased to maximize profits has evolved into the belief that ownership carries certain binding social obligations." In recent years Microsoft's Bill Gates has joined the ranks of a growing number of people who share this view. For the past 20 years, Microsoft has used corporate philanthropy as a way to bring technology to people who don't have access. They have donated more than $3 billion in cash and software and perhaps most importantly shown people how to use technology to create solutions. In a January 24, 2008 speech at the World Economic Forum, Gates outlined sensible solutions to the challenges we face.

Gates used to believe that technology could solve all the key problems and although this is true for billions of people, "breakthroughs change lives only where people can afford to buy them—only where there is economic demand. And economic demand is not the same as economic need." Technological innovations are important but insufficient to address the myriad challenges we face. To truly improve the fate of the planet and its inhabitants we require what Gates has called 'system innovation'.

We have reason for optimism, we have seen significant improvements on many fronts from the status of women and minorities, to radicaly increased life expectancy. And political, social and economic freedoms have never been enjoyed by more people around the world. However, like Gates, I am an impatient optimist who seeks expedient solutions to the problems we face.

A major problem with capitalism is that market incentives often cause people and the environment to benefit in inverse proportion to their need. Capitalism that serves large corporations and wealthier people must be made to serve poorer people and the environment as well. We need to refine the capitalist system so that it benefits the environment and all its inhabitants. "The great advances in the world have often aggravated the inequities in the world. The least needy see the most improvement, and the most needy see the least. Not only do these people miss the benefits of the global economy – they will suffer from the negative effects of economic growth they missed out on. Climate change will have the biggest effect on people who have done the least to cause it."

Capitalism may be flawed in some important respects but they are fixable problems which do not detract from its many positive attributes. "The genius of capitalism lies in its ability to make self-interest serve the wider interest. The potential of a big financial return for innovation unleashes a broad set of talented people in pursuit of many different discoveries. This system driven by self-interest is responsible for the great innovations that have improved the lives of billions."

Capitalism harnesses self-interest in helpful and sustainable ways, but only on behalf of those who can pay. And environmental, philanthropic and governmental organizations are inadequate to meet the needs of the earth and its poor. We need a system that is capable of providing rapid improvements, a system that integrates creative innovation and market driven business.

A social mission is compatible with profits. In Gate's own words "To make the system sustainable, we need to use profit incentives whenever we can." When profits are not possible, recognition is a powerful market-based incentive for socially responsible businesses. "Recognition enhances a company's reputation and appeals to customers; above all, it attracts good people to the organization. As such, recognition triggers a market-based reward for good behavior. In markets where profits are not possible, recognition is a proxy; where profits are possible, recognition is an added incentive. The challenge is to design a system where market incentives, including profits and recognition, drive the change." Consumers then reward companies who do good work by buying their products. To help us to recognize those who have made contributions to social causes like Green, we need to invest intellectual capital to find ways for businesses, governments, NGOs, and the media to develop tools to measure social responsibility. "[R]ecognition brings market-based rewards to businesses that do the most work."

According to Gates, "there are two great forces of human nature: self-interest, and caring for others. The system innovation proposed by Gates is nothing less than a paradigm shift. He calls this innovation creative capitalism. "This is an approach where governments, businesses, and nonprofits work together to stretch the reach of market forces so that more people can make a profit, or gain recognition, doing work that eases the world's inequities." Helping others and the environment is not as far removed from the core of capitalism as some might think. The father of capitalism Adam Smith opened his first book with the following lines: "How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it."

"Creative capitalism takes this interest in the fortunes of others and ties it to our interest in our own fortunes—in ways that help advance both. This hybrid engine of self-interest and concern for others serves a much wider circle of people than can be reached by self-interest or caring alone." We must give our most innovative thinkers the time and resources to come up with solutions to the challenges of environmental degradation, poverty and disease. "This kind of creative capitalism matches business expertise with needs in the developing world to find markets that are already there, but are untapped. Sometimes market forces fail to make an impact in developing countries not because there's no demand, or because money is lacking, but because we don’t spend enough time studying the needs and limits of that market."

There are numerous examples of creative capitalism in the world today. One of the most accessible approaches employs tiered pricing. When the World Health Organization wanted to expand vaccination for meningitis in Africa, it first ascertained what people could afford to pay. Then they challenged their partners to meet this price. Another is Bono's RED Campaign which has demonstrated that people will pay a premium for the chance to be associated with a cause they care about. One of my personal favorites is Muhammad Yunus' now worldwide movement in microfinance. And cap and trade systems of greenhouse gas management are yet another well known example of creative capitalism. The potential ways in which creative capitalism can serve socially responsible causes are limitless.

Creative capitalism includes a direct role for governments in funding research and setting policy (legislation). Governments should disburse funds in ways that create market incentives for sustainable business activity. "What unifies all forms of creative capitalism is that they are market-driven efforts to bring solutions...As we refine and improve this approach, there is every reason to believe these engines of change will become larger, stronger, and more efficient. There is a growing understanding around the world that when change is driven by market-based incentives, you have a sustainable plan for change—because profits and recognition are renewable resources. These are not a few isolated stories; this is a world-wide movement, and we all have the ability and the responsibility to accelerate it."

There is a place for business, government and the non-profit world. Creative capitalism stretches the reach of market forces to help push things forward. From foreign aid to charitable gifts, we must find ways to put the power of market forces behind the effort to reduce our environmental impact.

We are living at a pivotal moment in human history, the paradigm shift proposed will enable us to find approaches that address the environmental and social problems we face. We need to understand that sustainable solutions entail projects that generate profits and where profit is not possible, recognition that enables consumers to reward these companies by buying their products. We can change the world and creative capitalism is key to the growth of socially responsible movements like Green, because there is no Green future without profitable Green companies.