Are North American Automakers Ready for a New Paradigm?

The state of the North American auto industry has become an internationally relevant crisis that few of us can ignore. Of course, many of us will say ‘they had it coming’, and we environmentalists will secretly welcome the prospect of an end to business models and marketing responsible for spewing forth parking lots full of SUVs.. however, this won’t be a walk in the park for anyone. The North American economy in general is highly dependent on the Auto industry, and in many local economies its significance is much greater. The secondary effects of a downturn in this sector are likely to branch out to all areas of the economy. Some hard-core environmentalists may argue that for the environment this is not necessarily a bad thing, as consumption is reduced, so is the impact associated with it. However, for environmental market transformation, this is not great news. As economies falter, prices for energy fall, reducing incentives to conserve and drive markets for new, more efficient products.

Clearly some kind of bailout is necessary to avert the economic and social crisis that could befall North American automakers, but will it be enough to get them on track? Can the same leadership that got them into their current position be trusted to bring them out of it? How effectively will a strategic change be implemented across the vast, unionized, and capital intensive operations of the auto sector? The road ahead for these companies is a path full of obstacles. The global economy is one, however even with a strong economic outlook the writing is on the wall for Chrysler et al. Chinese automaker BYD just announced its first hybrid, a plug-in hybrid that effectively leapfrogs the incumbent competition, and offering a 100km range on batteries alone, and a price of roughly $22,000. This is still expensive for the Chinese market, but looks pretty good compared to the alternatives here in N.A. If this company is able to access the full potential of its export market, it stands to do very well. Warren Buffet seems to think so, as he’s currently invested in 10% of the company.

One notable difference between BYM and the struggling North American automakers is that it began life as a battery company- it makes 30% of the world’s cell phone batteries, which gives it an edge on a critical component for plug-in hybrids. For this reason it is far better suited to changing the technological paradigm of personal transportation than its competition. Auto manufacturers are steeped in the history and culture of the internal combustion engine. Envisioning the automobile of the future as an intelligent, electro-mechanical appliance as opposed to an integral link in the petroleum economy will be far easier for companies who possess the capacity for innovation, and for re-imagining the cultural relationship between cars and people.

LCA is the answer, but who bears responsibility?

Lately there have been some interesting headlines. “Hybrids less sustainable than Hummers” was the general gist of a CNW report analyzing so-called ‘dust to dust’ emissions impacts from manufacture and use, a full life-cycle analysis (LCA) if you will. Are there some tenuous assumptions at the root of this? Probably. Is there any truth to it? Yes. This is a prime example of why life-cycle analysis is important- buying a car because it is more efficient to use ignores the environmental costs that the consumer doesn’t see- when there is no requirement for companies to build these costs into the products, there is no incentive to avoid them. In the end, auto makers care more about selling cars, while the market must demand efficiency. However, the use of LCA to justify the ‘green superiority’ of current technology over emerging technology is misleading. The truth is, nobody who buys a hummer or a hybrid is doing the environment a favour- both require enormous energy and raw materials to produce, and require fossil fuels to operate. However, whereas hybrids can reduce ongoing fuel use, especially as energy for production can increasingly be sourced from cleaner alternatives (such as renewables), conventional gas-guzzler technology marries consumers to a future of increased fossil fuel dependence. Hybrid technology is at the beginning of its cycle- meaning it is more costly to produce (financially and environmentally) at this point in time, but as adoption grows and efficiencies from scale can be acheived, these costs will be expected to decrease. Choosing a hybrid therefore means being part of the vanguard of market transformation, as opposed to being part of the resistance to it.

The same analysis applies to the debate on local vs. imported foods. Fuel use in transportation is not the only environmental impact of food production, and evaluating food with this metric alone ignores the fact that some places are simply better for growing more food at a lower cost (both financial and environmental). Agriculture and specialization are social advances that allowed us to produce more, using less energy than our hunter-gatherer ancestors. That being said, a lack of inclusion of environmental costs throughout food production and supply chains means that consumers are once again left without any clear indication of what is the more ’sustainable’ choice.

It turns out a big reason for CNW’s low scoring of hybrids in terms of environmental impact stems from the quantities of nickel used in their batteries. Much of this comes from our very own Sudbury, Ontario, and the operations there have not had a stellar record in terms of the environment (though they are improving). So how can Toyota minimize the impacts of the nickel that goes into their batteries? The choices, including buying nickel somewhere else, or switching technologies (future hybrids will almost certainly use lithium batteries, for capacity reasons) may not make economic sense- and we can’t expect companies to operate against prevailing economics. If Inco or Falconbridge on the other hand had to factor environmental costs into their prices, then there would be an economic incentive both for them, and their customers, to seek less polluting alternatives. Unfortunately, leveraging a local tax or fee against a commodity will necessarily harm export revenues- few governments would be willing to take this on as a policy project.

On the other side of the coin, would increasing the costs of such commodities mean that technologies such as hybrids wouldn’t get developed? Well, let’s not forget that steel, petroleum and other more conventional raw materials all have associated costs too- a comprehensive integration of environmental impacts into all raw materials would drive us to use less of everything- maybe we’d forget about the hybrids vs. hummers debate and be riding bicycles more.

LCA is important in evaluating the overall impacts of the products we buy and use, but asking consumers to make choices where the economic realities don’t reflect the environmental realities doesn’t make sense. It all comes down to creating economic instruments that reflect the existing externalities associated with industrial activity. While there is opportunity for voluntary action by companies, what consumers need are standards and assurances of transparency, without having to do all their homework themselves. We clearly need policies to put this in place- unfortunately this will probably degenerate into finger pointing over who bears the responsibility for what costs, and how much each industry and sector must pay.

Governments have to start thinking strategically- like some of the best-in-class companies who are taking the lead on environmental issues, and creating the infrastructure needed to transform themselves. Think of BP, DuPont or Shell as companies that have taken on the responsibility to transform themselves towards sustainability. This requires the destruction of traditional sources of value, but in the end will enable the creation of new ones which are better positioned for the future. In particular, Canada cannot let itself become complacent in an environment of rising commodity prices. The resource sector is booming, but we are already seeing a rapid erosion of domestic ownership in resource companies. While our natural endowment in resources is largely responsible for our strong economic position now, if we don’t invest in innovative sectors such as clean technology, we risk compromising future competitiveness.

Towards a Sustainable Model for Mining Companies

The announcement last week about the Clinton-Guistra Sustainable Growth Initiative got me thinking again about a recurring subject of interest- how to meet the challenge of sustainability in the mining and resource sector. The Clinton-Giustra Sustainable Growth Initiative, a plan to bring together mining companies to provide funds for sustainable third-world development is significant not just in that it has drawn partners such as Newmont and Teck Cominco, who have made commitments to contribute to the initiative, and that Mr. Guistra has pledged $100M plus half his income from the resource sector for the rest of his life towards the endeavor, but that it may be another step in shifting the model for mining enterprises towards adopting sustainable development as a core business objective.

A year-and-a-half ago, I was given an assignment as part of my MBA coursework on defining a sustainability strategy for a company in a challenging sector: Gold Mining. As a resource-based and extractive industry, mining is inherently damaging to the natural environment. Gold, while a key component in electronics, fillings etc., is almost completely driven by the market for gold jewelry, either for investment or cultural/decorative purposes. Furthermore, key areas in gold mining today are places such as South Africa, South America, Indonesia- places which have both endemic socio-economic problems, and where the largely European and North American controlled mining companies do not have a great record in terms of upholding human rights.

It was in looking at one of the most notorious players- Freeport-McMoran, where I got the idea for the solution. F-M was widely criticized in the late 90’s early 00’s for their role in supporting Indonesia’s government under Suharto. The Suharto regime has been recognized for its corruption, and the stories of crimes committed by this government against its people throughout its history of militarism and autocracy are egregious. Essentially, F-M was playing the game that mining companies play in order to operate in areas such as Indonesia- you buy your way in. F-M was giving piles of cash to the government for ’security services’ and other things- as well as making Suharto a ‘partner’ in the endeavor through a loan to purchase shares- which was subsequently forgiven.

While F-M’s operations in Indonesia, one of the most important areas in the world for copper and gold, do not exactly paint a rosy picture even today, things have improved. Suharto is out, and standards of living are increasing. F-M has realized that simply funneling cash into a corrupt government is not a recipe for sustainable business- rather putting this money to work to create infrastructure, education, health care, environmental management capacity, as well as creating local economic development through providing business loans, can align both corporate and sustainable development goals.

I realized through examining this shift that the model for the future is not through looking at mining companies as producing and selling ore, but as providing development services. Essentially, mining companies are leveraging their own capital and knowledge to transform part of a region’s natural capital (in the form of mineral ore) into liquid capital (cash). The goal of such an exercise should be to use this injection of capital to be a catalyst in transforming a third-world subsistence economy to a sustainable developed economy by establishing an economic platform that can support multi-sector and value-added industries. It is therefore incumbent on mining companies to make significant commitments to local communities in return for their license to operate.

The challenge, of course, is how to make this happen in a way that truly serves all stakeholders. Mining companies are often seen as pseudo-empires, and in the case of F-M, have the legacy of colonialism to thank for their license to operate, not a clear mandate from the local public. What type of policies and structures will enable maximum accountability? Joint ownership, profit sharing with local communities? What should be the role of government and NGOs in overseeing this process?

In terms of government oversight, the South-African government has been proactive in encouraging this type of relationship- enforcing minimum domestic ownership levels as well as employment and management quotas for black citizens. However, relying on government to provide regulation which ensures responsible business practices is the pitfall that Freeport-McMoran ran into. Mining companies themselves have to perceive sustainable development as strategically aligned with profit and the economic sustainability of their own enterprises, but do they have the capability to be accountable for those goals to all stakeholders?

Clinton, Guistra, and others are banking on the partnership formula between companies and NGOs as a solution to this problem.  An NGO such as the Clinton Foundation can ensure credibility and some degree of accountability and oversight. The multilateral nature of the initiative establishes a benchmark for sustainable practices and reduces the potential for individual interests clouding the objectives of the whole. While it may be optimistic to think that this could represent a strategic shift for resource companies around the globe, it could signal the beginning of a new mindset that could allow further evolution of sustainable strategy in this sector.

CFLs: Lighting the path to energy efficiency?

Unless you’re a die hard canadian football fanatic, you probably know that CFL stands for Compact Fluorescent Lamp, and you may also know that around the world, governments are banking on this technology making our old incandescent lightbulbs a think of th past. Canada and Australia have both mandated a ban on incandescent light bulbs (by 2010 and 2012 respectively).

The good news is that CFLs are far more efficient (roughly 3 times) than incandescent light bulbs, and can last much longer (varies, but on the order of 10 times longer). I would still like to see a full life cycle analysis of CFLs which take into account energy and materials used in manufacturing (they are much more complex pieces of technology). One of the drawbacks which has had the greatest attention is the fact that CFL bulbs contain mercury, which, if disposed of impoperly, becomes an airborne, easily absorbed toxin which can pass directly into our bodies and into the food we eat, as well as bioaccumulating in the food chain. The need to combine large scale use of CFLs with an extensive recycling program is therefore crucial. Fortunately, the technology to safely recover the mercury from used fluorescent lamps is fairly simple, and will hopefully be adopted through take-back programs by major retailers. However, mercury contamination due to accidental breakage may still be a concern- see Fox News’ piece of, ahem, reporting on the subject (if you can really take anything from Fox News (or the CEI, source of this story) seriously, which I can’t).

For a more enlightened (ouch, bad pun) illustration of the facts associated with CFLs, Clean Nova Scotia has an excellent page here. In particular, treehugger.com provides an insightful response to mercury concerns:

“Ironically, compact fluorescent bulbs are responsible for less mercury contamination than the incandescent bulbs they replaced, even though incandescents don’t contain any mercury. The highest source of mercury in America’s air and water results from the burning of fossil fuels, such as coal, at utilities that supply electricity. Since a compact fluorescent bulb uses 75 percent less energy than an incandescent bulb, and lasts at least six times longer, it is responsible for far less mercury pollution in the long run. A coal-burning power plant will emit four times more mercury to produce the electricity for an incandescent bulb than for a compact fluorescent.”

While I think more policy action needs to be taken to encourage new technologies, I acknowledge that government light bulb bans could be seen as jumping onto a technological bandwagon before all the ramifications are clear (full life-cycle impacts for example, possibility of mercury exposure due to breakage) . However, because of these decisions, we should see a lot more focus on addressing these concerns as well as other possible efficient lighting solutions. Besides CFLs there are other promising technologies such as LED lighting, which will get a needed boost from the light bulb bans (not to mention the world of possibility in natural lighting through good design…).

As a side-note/rant: What I would like to know is how all these right wing, (purported) ‘free-market’ advocates like the CEI (who also generally take the view that technology, rather than behavioural change, will save us from the effects of our own consumption) think new solutions will be found if we persist in clinging to old technologies without providing incentives for new ones to develop? Their answer no doubt will be ‘market forces’ but this simply ignores the facts that existing markets are flawed in that they don’t account for all the externalities they create.

Sustainable tea goes primetime

Unilever recently announced that it would begin certifying tea under its Lipton brands as sustainable through the Rainforest Alliance. Ostensibly, this is part of a larger commitment to eventually source all of its tea from sustainable and ethical sources. Unilever has been engaged in strategic ‘green’ thinking for some time, but does the decision to certify Lipton tea indicate that the differentiation advantage available to otherwise commodity products such as tea through independent certification has become a real priority, or is it an incremental effort designed to leverage the marketability of a green image? Initially the certification will apply only to select brands such as Lipton Yellow Label, and will be limited to European markets, with the addition of North American markets by 2015. However, as the world’s largest tea brand, Lipton could have significant impact in encouraging sustainable practices.

Currently the Rainforest Alliance certifies coffee, bananas, citrus, cocoa, and flowers. The Unilever initiative underscores the importance for corporations to leverage NGO accountability and reputation, as well as the ability for corporations to help NGOs develop capacity.

The Rainforest Alliance uses a peer-review process when performing its certification, and leverages a network of independent NGOs operating in agricultural sectors. Its certification standards are available on their website, however it is not clear how often certification must be renewed.

David Suzuki at the Canadian Club of Toronto

-

Had the chance to listen to a Canadian environmental icon the other week, Dr. David Suzuki. It was a relatively swanked up affair, at the Sheraton downtown, everyone in suits (except Suzuki). They did serve certified organic salmon, and local vegetables for lunch however, making the event somewhat less incongruous with the theme.

The speech was what some might consider typical environmentalist ‘doom and gloom’. Suzuki made reference to science’s environmental warnings, long unheeded by the popular media and politicians, as well as the dire consequences of inaction. Very little, if any, of this I had not heard before. Moreover, given the huge media surge of given to global warming courtesy of An Inconvenient Truth, most of the audience probably had similar knowledge. Certain criticisms were apt- such as the sorry state of today’s media, which has become largely a vehicle for commercial promotion. Also, fickle nature of political will, and the need for commitment to hard fought, if flawed, agreements such as Kyoto. Some criticisms I felt were a little off-side, such as of the internet, for giving us ‘too much’ information, allowing the most minority viewpoints an audience- this, I would argue is precisely what makes it an effective tool for democratic journalism. An interesting comment was made on the sustainability of cities; while it can be argued that urban populations are on a per-capita basis less environmentally damaging than rural populations, Suzuki’s point is that the socialization of city life tends to disassociate the natural environment from our activities. In this, I believe he is right, and that future urban models must consider the need for connection to natural environment within the urban context.

The primary impact of the speech, however, was the passion with which it was delivered. Becoming angry and emotional at times, David Suzuki embodies a love of the natural world that is often lost in today’s debates on environmental economics and sustainable development. As Suzuki says, “the Earth is our mother”, and the natural environment serves us not only through its utility, but culturally and psychologically. As the debate about ‘what to do about the environment’ becomes increasingly pragmatic, maybe we need a bit of passion injected- this stuff is important, and anyone who understands the significance should be worked up about it.

You can view the webcast of the speech here.

Dion’s Environmental Bull (Market)

I have to admit that hearing a political leader talking about market-based mechanisms for reducing carbon emissions in a way that makes sense gets me.. right.. there.. I start to get all teary and dream of the possibility that this country (or any country for that matter) might actually elect someone who can do something which is truly for the good of their people and the planet.

A lot of people are talking about the environment these days. What I think is significant is that it is finally gaining recognition not simply as an issue, but as THE issue. For anyone who understands the requirements of sustainability, not just in environmental terms, but in economic and social ones as well, it is apparent that this has been left off the agenda too long, and now needs top billing.

But is Stephane Dion going too far by saying “Canada can get rich by going green“? This has been an argument which most economics-savvy environmentalists have brought out when faced with the problematic issue of international competitiveness in light of uneven the adoption of the Kyoto accord and similar policies.

The basis for carbon trading is not “taxing” anybody, and it is not “selling” clean air. It is simply this: If we build in cost to polluting industries, we can use the same market mechanism to reward industries who are pollute less, thereby steering behaviours and consumer purchasing power towards more environmental benign products, technologies and activities. Indeed, as long as this is managed well in the short term, this could be manageable- maintaining a reasonable standard of living, while reducing emissions.

Kyoto attempted to organize this on an international scale, and threw in provisions for developing nations. This has been termed by many as “unfair” and has provided a lot of fodder for debate, though it is probably more of a red herring. The real issue, especially for Canada is the United States. With over 80% of our trade with the US, an uneven policy which increases the cost of Canadian manufacturing relative to the US threatens to greatly imbalance trade and foreign investment.

Dion’s argument, and the one that many of the ‘natural capitalism’ ilk use, is that in order to be competitive, we need to innovate, and to innovate you have to encourage technology development. Thus the creation of a carbon cap-and-trade system would place high economic value on technologies which reduce emissions. By taking an aggressive stand on reducing emissions, Canada could also become a world leader in developing environmentally friendly technologies.

I’ve found that when the issue of ‘technology’ is discussed, it often detracts from the issue of changing behaviours- which I believe is arguably more important. However, this is why the issue of economic cost is often overstated- without cost, there will be no change in behaviours towards cost avoidance. No matter how badly we want to have the best of both worlds, we have to recognize that environmental degradation and our culture of high resource use goes hand in hand.

Nevertheless, I support Dion’s argument. Here is why: International competitiveness is no longer merely an issue of resources- while Canada has benefited greatly from its resources in the past, it has failed to build economic power worldwide. Increasingly, Canadian resource companies are becoming foreign owned, while manufacturers are being threatened by rivals from less developed economies (think Bombardier vs. Embraer). Behind the US, the worlds largest economies are Japan, Germany, the UK, and France. These are not resource rich countries by any means. I would even venture that the economic competitiveness of these countries has something to do with their history of resource scarcity. Japan, has perhaps the lowest natural resources per capita (and while human resources are definitely significant, I think the point still stands), and is poised to take over the US as the world’s automotive manufacturing juggernaut (now if only we could just stop driving the things, we’d all be better off). All these countries faced serious economic and social catastrophe within the last century. Perhaps our worry about our ‘delicate’ economic position is causing us to forego valuable opportunities for development of competitive capacity in areas which are increasingly driving today’s’ more globalized economies: technology and innovation.

In my mind, sustainability is not a choice. Eventually, governments will be forced to reduce resource consumption, either compelled by environmental or economic considerations. If computers and the internet have been the innovation driving economic growth in areas such as silicon valley and south-east Asia, who will capitalize on the potential world markets for efficiency and environmental innovation? Dion’s environmental plan is also the most ambitious and bold economic strategy plan that perhaps the country has ever seen. We have reason to scrutinize such statements very carefully, but we also have reason to listen up.

Getting my news

I was happy to see my local cable provider (with whom I have love-hate relationship) (ok, who am I kidding, it’s hate-hate.. I really have very little use for cable television) adding BBC World to its channel lineup. For anyone who hasn’t watched, BBC world is a great way to find out what’s going on beyond the typical North American media filters (Iraq this, Afghanistan that, celebrity shocker of the week etc…). No media source is truly objective, but I would venture that compared to what’s out there, the BBC comes pretty close. More importantly, it offers a perspective that differs from a great deal of what we are typically exposed to, challenging us to decide for ourselves.

TVO’s The Agenda had a great program last night on the role of media (both conventional and new media), with some truly intelligent debate and insightful opinions (thank you TVO!). Above all, the importance of media and journalism to providing democratic checks on government was underscored. While new media has provided an unprecedented level of access to information, there was a concern about whether the economics of the medium will be able to support high-calibre in-depth investigative journalism. The counter to this would be that the economics of conventional broadcast media certainly don’t support this- instead they rely on high production values- but let’s face it, networks aren’t all that concerned with the news anyway. New media, by virtue of its ability to give anyone a voice, provides the ability for the collective audience to put the spotlight on things as they happen, leaving the uncovering of news to those who have the most interest in doing so. The choice of what is important then becomes purely democratic… or at least the theory goes. Another consideration is that things like google news alerts are great in bringing together diverse sources of information on a topic, but while this promotes increased immersion in a particular subject, our exposure to other subjects we might not choose to pursue on our own becomes more limited. Thus the defence of newspapers is mounted by people who just love to get their fingers grimy every morning.

As a side-note, a great site that was mentioned on the show has made my bookmarks toolbar: Daylife presents an innovative way to view news items by combining content from various sources and maximizing the visual potential of the on-line medium.

TTC’s growing network (online)

It’s good to hear about any progress in public transit in Toronto, even if it is only in the online realm. The TTC’s plans to redesign its website and better engage with bloggers and the patrons of online media (See today’s article in the Globe “Transit Commission goes to the blogs”, and the post in spacingwire from a former TTC manager for some history and interesting details). Maybe Adam Giambrone’s strategy of engaging the capabilities of online communication represents more than a new focus on technology, perhaps it means the TTC will begin to operate a bit more like a business, and perceive itself as a real brand. The TTCs past failures to capitalize on the potential of social media represented failure to engage both its customers and some of its most ardent champions.

It’s about risk, stupid

Jon Anda, in a recent article in the Financial Times, proves that climate change action isn’t just for environmentalists anymore. A legislated carbon cap-and-trade system is in my mind the no-brainer of the decade.. I have yet to see an argument convincing enough to persuade me otherwise. While it seems that by now each side should have exhausted their ammunition firing back and forth over the wasted ruins of Kyoto, the fires of debate seem to be able to continuously rage on the issue of carbon trading. One of the reasons for this is that it seems is that nobody is really arguing about the same thing. Debates on action to curb emissions blur into a debate on climate change science. Discussion of mechanisms are defeated because of uncertainties about targets. Mr. Anda’s important contribution to this debate is to put the argument for in terms of financial logic. He makes two very important points- one is that carbon trading arguments should have nothing to do with the argument over the validity of global warming science- If anyone has seen the recent climate change action ads with the train, this is like debating whether or not the train is real, or a fictional construct of your imagination, instead of just stepping out of the way. The other point is that the logic for acting to reduce emissions is not based on certainty of the outcome, it is based on the certainty of risk. Arguments for action have been far too easy to refute by simply demanding proof that such action would in fact achieve its objectives, or that inaction is certain to incur costs. The argument therefore becomes very similar to that employed for hedging. Of course, even after Bay St. is has convinced itself of this idea, the government is likely to maintain its current strategy of inaction. All these arguments do nothing to address the real source of change resistance- interests vested in high-emissions capital. It nevertheless seems perfectly obvious to me that of all the alternatives, employing market mechanisms to assign costs to emissions is the fairest way to go about reducing them. But then again maybe this is why the opposition exists.