Climate change stays a key problem that we must solve in the following decade. We say decade because it might already be too late for any further solution.
We will all must pay a price for burning fossil fuels, but unfortunately most of that price is not going to be paid by those that burn fossil fuels. It is a classic problem of negative externalities: the profits of an activity – on this case, burning fossil fuels to provide energy – are privatized while the prices to human health and the environment are socialized.
In theory, we all know the best way to take care of these problems. Either we regulate the activities, as President Richard Nixon did within the Nineteen Seventies by creating the Environmental Protection Agency (EPA) to scale back air and water pollution. Or we are able to internalize the prices by setting a price on emissions rights or introducing emissions trading programs, as is common practice across Europe and is currently being introduced in China.
The problem with these approaches is that they’re green whiplashes. They restrict entrepreneurial freedom and are subsequently not very fashionable with, say, the fossil fuel burning corporations. But that doesn’t mean that popularity is as essential to us as incentives. The resistance of oil corporations to environmental regulations and carbon pricing within the US has been enormous, although recent events in Exxon And Sleeve suggest that it might be losing the fight.
Nevertheless, the present price for CO2 emissions is mostly too low and is estimated to be at best 50% of the goal price. CO2 emitters invest heavily in lobbying to maintain these costs well below the required threshold to advertise the rapid and effective change needed to avoid the worst impacts of climate change.
But regulations must transcend pricing carbon emissions. Do we also need rules that help prevent and manage the danger of stranded assets? In short: yes.
This got us considering. … Instead of using the green follow force change, we could use the green carrot to encourage change. After all, these approaches should not mutually exclusive.
One strategy to introduce green carrots is to create a marketplace for royalties from research and development in renewable and sustainable energy. Both the oil and gas and mining industries are already among the many leading developers of green technology patents, but monetizing this research is difficult. An organization can either leverage the know-how and introduce the technology internally, or sit on it.
A mining company that builds a brand new mine can sell the long run production of that mine to royalty corporations for a lump sum payment. For the royalty company, that is comparable to buying an annuity financed by the mine’s production. Incidentally, greening the so-called dirty industries has perhaps the best potential to counteract climate change.
In the biotech sector, corporations have already specialized in financing mental property and receive a share of the revenue from the finished product. Why is there no such system for the event of green technologies?
Currently, US taxpayers receive tax breaks for investing in oil exploration projects. Why don’t we close this tax loophole and use the cash raised to pay special royalties to energy and mining corporations that develop green technologies?
Alternatively, we could back dedicated green tech royalty corporations to enter a brand new market. Investors could then put money into the shares of those green tech royalty corporations and make a benefit from changing the world, slightly than saving taxes by destroying it.
We could even go a step further and learn from successful enterprise capital models in countries like Israel. Today, Israel is considered one of the world’s leading technology hubs, and far of that credit goes to the government-funded incubator Yozma. In 1993, the federal government founded Yozma with $100 million in seed capital. Yozma supported early-stage corporations in exchange for as much as a 40 percent stake within the projects—provided private investors funded the remaining. After seven years, investors could repay Yozma’s government support at face value plus interest. It worked, and by 1998, the enterprise capital market in Israel was large enough to denationalise Yozma.
This effectiveness of investment incentives mustn’t be underestimated. Today, Israel spends more on research and development as a percentage of GDP than some other country and is second only to the United States in enterprise capital investment as a percentage of GDP. Israel used incentives to remodel its rusty Nineties economy into a contemporary, high-tech economy. Why cannot the United States take the identical approach to speed up its transition from a carbon-based to a green economy and look to the oil industry for leadership?
If the rewards are palatable and the incentives are right, oil and mining corporations shall be comfortable to speculate in green technologies. The old adage of doing good and succeeding at it’s the fitting way for all of us.
And while we might imagine of the stick first, we should always always remember the appeal of the carrot.
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Photo credit: ©Getty Images / Vitalina Rybakova
