Fossil Fuels Get Huge Master Limited Partnership Tax Breaks – “Green” Energy Shut Out

Since 2008, investors have poured several hundred billion dollars into fossil fuel-related master limited partnerships that shield income from virtually all corporate taxation. The MLP tax loophole — a sort of reverse carbon tax — has heavily subsidized the nation’s ongoing oil and natural gas fracking boom.

Solar, wind and other renewable energy companies are not eligible for the MLP tax dodge. Although bipartisan support is building in Congress to extend the tax deductions to them, insiders say legislation to do so will most likely have to wait for and be a part of a comprehensive tax reform package, which has proven elusive.

Until then, existing incentives will serve as a drag on the U.S. economy’s transition from fossil fuels to renewable energy sources. As long as Congress fails to act, fossil fuels will continue to exploit their government-approved competitive advantage even as mounting evidence shows their use accelerates global warming and prompts calls to tax carbon. Continue reading Fossil Fuels Get Huge Master Limited Partnership Tax Breaks – “Green” Energy Shut Out

How Much Is Nature Worth?

A recently published article estimated the total value of the environment to people at $145 trillion per year. That’s about twice as much as the total output of the global economy – nearly $75 trillion in 2013.

Ecosystem services – clean water, clean air, temperature regulation, food production, etc. – are the myriad ways in which people benefit from nature.  Environmental economics is a growing field that, in part, tries to put a price tag on how much nature benefits people. The hope is that policy-makers and businesses will be more likely to preserve nature if they understand its importance.

Robert Costanza

The article is an update on a 1997 study by the same lead author, Robert Costanza. In 1997, Costanza and his co-authors estimated global ecosystem services to be worth $33 trillion per year. What’s behind the big increase? Costanza uses data from other studies to estimate values for ecosystems and biomes. For a simplified example, Costanza takes a weighted average of all the studies that have tried to value coral reefs to estimate a dollar per hectare average. That average is then multiplied by the number of hectares worldwide that have coral reefs. Costanza’s global estimate is going up mostly because other studies are assigning higher values to ecosystem services. That is a reflection of the improving science of environmental economics and a better appreciation for the value of different services that nature provides.

$ amount per hectare X number of hectares = $ amount worldwide

Unfortunately, ecosystems are declining globally, reducing the supply of ecosystem services. For instance, between 2000 and 2010, more than 240,000 square kilometers of the Amazon rainforest were deforested – an area almost as large as the United Kingdom. In addition to other important services, forests play an important role in climate change regulation. As trees grow, they take in carbon dioxide and store it as biomass, and when they are burnt or cut down to make way for agriculture, that carbon dioxide is released into the atmosphere, contributing to climate change. In Latin America and the Caribbean, about two-thirds of greenhouse gas emissions are related to forestry and agriculture.

Greenhouse Gas Emissions by Sector in Latin America and the Caribbean (IDB 2013)

The study found that the provision of ecosystem services between 1997 and 2011 has declined by $4.3-20.2 trillion per year. Our economic activities are destroying huge amounts of value generated by ecosystems.

The key point from the article is: “A better understanding of the role of ecosystem services emphasizes our natural assets as critical components of inclusive wealth, well-being, and sustainability.” Environmental campaigns sometimes focus on iconic species like the polar bear, orangutan, or jaguar, and attempt to pull at the public’s heart strings. Costanza and other proponents of valuing nature are shifting the conversation to point out that there are actually selfish reasons why people should also care about nature.

There are a number of arguments against this approach. Many critics claim that attempting to value nature is one step removed from commoditizing it. Nature has some intrinsic, non-anthropogenic value, that is left out of this equation.

Another critique is of the actual valuation studies and the many reasons to question their accuracy. First, modeling and economics have a difficult time with ecological complexity. Take the Amazon rainforest. Destroying one percent of the Amazon reduces the ecosystem services provided by the rainforest by X amount. But if you destroy twenty percent of the Amazon, it doesn’t reduce services by 20X. Since the rainforest actually generates most of the rainfall that trees use, destroying twenty percent of the rainforest would lead to lower rainfall in other parts of the Amazon. Drought would lead to tree die off, more forest fires, and the possible collapse of the entire ecosystem. There are tipping points beyond which the Amazon cannot recover. If the tipping point for the Amazon is twenty percent, the cost of destroying twenty percent is much more than 20X, it could be as much as the entire value of the rainforest.

Valuation methods also have troubling implications for equity concerns. Markets distribute resources based on purchasing power and price signals (the value of a good is the price paid for it), not where the resource would be best used. If you have a finite quantity of ecosystem services, people with the most money will “buy” most of the ecosystem services.

Last, any valuation study will have to deal with time and discount rates, which is a controversial subject. Any financial analysis discounts future earnings by a discount rate because earnings today are worth more than future earnings. But what should the discount rate be? The opportunity cost of capital – what you would earn on investing earnings today – is typically used as the discount rate. But using such a rate – between three and ten percent – is going to dramatically reduce the value of future earnings. Discounted at five percent, five trillion dollars in 2100 is only worth 72 billion dollars today. That means that we place a very low value on benefits to future generations. Given that ecosystem degradation and climate change are long-term phenomena whose damages will be felt most severely by future generations, there are obvious implications.

Despite the problems with valuation, I think it is still an important step forward because it is (slowly) changing the conversation about nature. The exact number in Costanza’s study is less important than the conclusion that: nature provides great value to people, even if we don’t pay for it.

The Forest Trust: An Interview with Scott Poynton

Duncan Gromko recently intereviewed Scott Poynton, Founder and Executive Director of The Forest Trust (TFT), an NGO. TFT works with companies to make commodity production more responsible by working on environmental and social issues in their supply chains. TFT recently started working with Asia Pulp and Paper (APP) and Wilmar, two companies in the pulp and paper and palm oil sectors that have been responsible for significant deforestation across Southeast Asia. Can TFT help companies eliminate deforestation from their supply chains? Does Poynton worry about green washing accusations, for working with companies that have had such a negative impact on the environment?

Scott Poynton

Duncan Gromko: You’re from Australia, but a lot of TFT’s work is in Indonesia. What drew you to Indonesia?

Scott Poynton: I actually started my work in Vietnam and I lived there for six years on two occasions and have travelled extensively throughout Southeast Asia. With deforestation being such a huge issue in Indonesia, we’ve naturally been drawn here to try and work on that.

DG: What is TFT’s mission?

SP: I always say our mission is to stick to our values. People expect us to say it’s to save forests, but we have a fundamental set of values: truth, respect, humility, compassion, and courage. If we act according to those values, good things happen.

DG: Why did you decide to work with companies?

SP: If you talk about putting your finger firmly on the problem of deforestation, the problem is global supply chains because they suck the deforestation through them. We work with companies to help them make their business operations more responsible.

DG: What does that work look like in practice?

SP: For example, with APP we helped them develop a policy to remove deforestation from their supply chain. The policy is about 10% of the work. 90% of the work is getting out into the bush, in their supply chains, looking at where they get their products, how they’re doing their business, who they’re buying from, and what those guys are doing. If the company is a retailer, they say, “We don’t want our furniture to cause deforestation.” We help them make a policy and see where they get their wood from. And sometimes they don’t know. So we help them work that out and find responsible suppliers. It’s a very hands-on approach.

If you go and talk to a company with compassion and respect, with the courage to tell them the truth and the humility to act in a dignified way and not pretend you’re the bloody expert, we find that we can help people move forward to find their own path to transformation because they’re ready to talk to us. That’s where those abstract values come into play.

DG: Why do companies want to work with you? What is the benefit to the companies?

Palm Oil Plantation

SP: Some companies are getting beaten up by NGOs and turn to TFT. Nestle was an example. There was this Greenpeace video with an orangutan’s finger in the Kit Kat. I live just down the road from Nestle. They invited me to speak to them, they understood that the problem they had was they didn’t have full visibility right out to what was happening in the plantations supplying their raw materials.

Other companies are not being attacked, but just want to change their supply chain. They say, “We hear a lot about deforestation in palm oil supply chains, and we don’t want to be a part of that. We want to be responsible.” So they come to work with us to help them ensure that’s the case.

DG: It sounds like a good cop/bad cop relationship with Greenpeace. Is that an explicit relationship, where you put together a strategy or is it something that happens organically?

SP: It’s organic. Greenpeace is so active in this space that they end up inadvertently pushing companies to us. It’s not a deliberate strategy. Over time we’ve built a lot of trust with each other. We have a good reputation for stepping into really complex situations where the company doesn’t know what to do. Nestle was a good example. Greenpeace had asked them not to cause deforestation and Nestle had a policy not to. And yet you saw what happened [with the orangutan advertisement]. We said, “You’re speaking Nestle-ese and Greenpeace is speaking Greenpeace-ese and you guys aren’t connecting.” We act as translators, to help the company understand Greenpeace’s demands and to translate those into a policy response for the company. We help the company convey its serious intentions to Greenpeace.

DG: A lot of the companies you work with, like APP and Wilmar, have done some terrible things in the past and now you come in and give them this stamp of approval. Are you worried that you’re legitimizing companies that aren’t squeaky-clean?

SP: I recognize that companies might have done some pretty grim things in the past. You run the risk of letting people off the hook, but we say to the company, “If you don’t implement the policy, we will walk away.” It’s our credibility at stake. We have walked away from companies. We walked away from a bank that asked to work with us. When I asked who they were doing business with, they wouldn’t tell us. I told them I couldn’t do my job without that information, but they said, “Don’t worry about that, we just want to give you a big donation to say we’re working with you.” So we decided we couldn’t work like that and we walked away.

By getting Nestle, [Golden Agri-Resources (GAR) – a palm oil company], APP, and Wilmar, we’ve got some big companies looking seriously at how they can transform their processes. If these guys can change their operations, anyone can. Inevitably, some people will accuse us of green washing. But there’s no company out there that has a stronger policy than a TFT member. And there’s no company implementing their policy like a TFT member. There are NGOs who don’t like us because we engage with companies. But those particular NGOs tend to complain a lot and like to criticize; it’s their role. My view is that complaining can make folk uncomfortable, and that’s good, it’s part of the change process, but alone it doesn’t do much to change things. I’m not interested in complaining, I’m interested in transformation.

DG: What are your thoughts on some of the agribusiness certification standards?

SP: The Roundtable on Sustainable Palm Oil standard allows peat and secondary forests to be cleared. Their standard allows deforestation and it hasn’t slowed deforestation rates yet they claim RSPO certified means “sustainable.” I think that amounts to green washing.

DG: Wilmar and APP have recently made no deforestation commitments; does getting these huge companies on board represent a bigger change in business?

SP: I think so. More and more companies are looking at it and we’re seeing the start of the tipping point. What’s happening in consumer countries, led by Nestle, is that many more companies don’t want to be linked to deforestation. They provide the pull of the supply chain, to say “listen, Wilmar and APP, we don’t want to be linked to deforestation.” So the companies have jumped and they’re implementing their policies. In Wilmar’s case, they’re so big and dominating of the sector that everyone else is thinking of changing too. I think we’ve started something together with these companies and we’re approaching a tipping point.

DG: What happened to make consumer goods companies want these changes?

SP: NGO campaigns have increased pressure. And there’s been so much in the media about climate change and the links between deforestation and climate change. Sumatra [Indonesia] is almost bare. The Amazon has been devastated. The Congo Basin is in trouble. People in America, in Australia – mind you they just elected the most ridiculous government ever, that doesn’t believe in climate change – and people in Europe are starting to be affected by climate change. When [the NGO community] was talking about saving the tiger or saving the panda, people agreed with it, but it wasn’t really in their daily life. But look at what’s happening now: the floods in the UK, the extreme weather events in the U.S., and Australia is cooking. So it’s affecting them and they’re responding by saying, “We don’t want you to cause deforestation to supply us products. Stop it.”

DG: With the lack of government action around the environment and climate change, can groups like TFT and other civil society make a big difference?

SP: We can achieve a lot more, but I’m not sure exactly how much. Our theory of change is that governments are worried about making policy changes that put people out of jobs, which in democracy will cost them their job. We’re trying to prove to governments that we can implement these commitments without losing jobs. We need cases like APP, Wilmar, and GAR to show to governments that No Deforestation commitments can actually increase business from consumer countries.

DG: Anything else to add?

SP: It’s a really interesting time now with the big companies coming on board to provide the case study to government. The Wilmar announcement can really change the way food is grown and the way the world does business. If we can do it, there’s no reason why there should be deforestation in soy, in any commodity. We’re at a game-changing threshold. If we can cross it we’ll be in a different place.

Ivy League University Votes To Dump Oil and Gas Investments

On Dec. 11, the Cornell University Faculty Senate adopted by a 43-13 vote a resolution calling for the school to divest by 2035 all its investments in the top 200 holding companies ranked by fossil fuel reserves. A similar resolution adopted by the Cornell Student Assembly in the spring had called for divestiture by 2020.

“These reserves already comprise three to five times more than the total amount of fossil fuels that can be burned before exceeding the 2°C rise in mean global temperature that scientists and governments have agreed is the threshold for dangerous climate change,” eight pro-divestment Cornell faculty members wrote in a letter to the student newspaper Dec. 4. “Nonetheless, these companies are financially committed to burning these reserves and continuing to explore for even more.” Continue reading Ivy League University Votes To Dump Oil and Gas Investments