Green incentives

“If it’s the right thing, then why does it hurt so bad?”

You know how sometimes life is funny in the way that doing the “right thing” feels extremely unpleasant while you’re in the midst of doing it? Sure, some of us might have different levels of patience, or have stronger convictions of delayed gratification. But even with that, at the very least, these activities feel annoying at best, and we all just want to get it done and over with.

For example, I know that eating vegetables is good for my health. My brain tells me that this is a fact. But my heart (and my gut) tell me otherwise.

So how does one reconcile these two seemingly diametrically opposite and competing needs? Well, to some, a possible acceptable compromise might be to prepare the vege with butter, or mayo, or some fatty dressing. Some might even go as far as to batter it up and have it deep fried.

In short, while you acknowledge that there are long term benefits to you eating vege, you have to do something to also make the very present experience more palatable. You need a very immediate incentive.

Leaving this green incentive for another type of green incentive, we acknowledge that global warming is bad. One possible way to stop (or at least, delay) global warming might be to change our lifestyles, e.g. walk or cycle more, consume less electricity, reuse as much as possible, etc.

But you see, to many of us fortunate enough, our lifestyles are the only lifestyles we know, and old habits die hard. “Surely,” we all collectively ask, “there must be some way that we can continue living the way we have always lived while saving the environment from ourselves too, right?”

And to be fair, at our current population levels, the changing our own personal lifestyles might not provide the whole answer - food has to be grown at the scale that we need, and this necessitates the use of industrially produced fertilizer, and industrial-sized machinery, and we need the industrial-scale logistics to get food from the farms to our plates. We also all need roofs over our heads. At the densities required, we need steel, concrete, glass, etc. for this. Everything here requires processes that generate greenhouse gases (at least with the technology we have now). We, as individuals, can’t simply “change our lifestyles” away from the need for mass-produced food supplies and housing (unless we take a very dark turn and somehow halve our population or something).

Having your cake and eating it

Hence, we need a compromise. One possible solution to this problem is to electrify as many aspects of our lives as possible. The idea here is that instead of burning things directly to give us the energy that we need to, say, drive a car for example, we get the car to run on electricity.

Sure, one might argue that this is just adding a layer of complexity into the flow of how we use energy. In “normal” cars, the flow of energy from a consumer point of view is (also ignoring all the effort needed for exploration, extraction, refining and distribution of the fuel):

1. Pump petrol into car;
2. Burn the petrol in metal box with moving parts;
3. Explosion moves said moving parts, which in turn moves our wheels.

Three simple steps. It’s like a kettle on steroids. Everyone knows how kettles work. Everyone has them around. Very tangible. Very immediate concept.

Electric vehicles on the other hand, the mental image of the flow of energy looks like this:

1. Pump oil into big metal box with moving parts in a large building;
2. Explosion moves said moving parts, but instead of moving a wheel made out of rubber, it moves a wheel that has coils and coils of wires and magnets. Magnets moving relative to wires make electricity;
3. The electricity is sent through more big metal wires hanging in the sky to where we live;
4. The electricity goes into a magic box that uses electronics to change the electricity from one that changes direction back and forth every 1/50th (1/60th in the US) into one that doesn’t change direction;
5. Electricity causes some chemicals in another magical box in our electric car to change;
6. When we finally come to driving, the new chemicals change back into the old chemicals, temporarily freeing up electrons, which clever people have taken advantage of to force the electrons down a pathway of our design, using this to spin more magnets which so happens to be connected to our wheels (I can never remember which handedness of Fleming’s rule applied during A-levels).

Basically, what we are doing a lot to decouple the activity of burning something and the activity of driving across space and time. We are just using electricity as a medium to transmit the energy across locations, and using chemicals to store the energy across time.

But wait, how does this help? If we have added all these extra steps between burning and driving, doesn’t that introduce more inefficiencies? Won’t we be better off just burning the fuel and using it there and then?

Well, that may not necessarily be true, because burning fuels in a big building may actually be more efficient than using the same fuel and burning it in many many many individual metal kettles in our cars. But that’s not the main point.

The point is, because we have decoupled the source of energy from the driving. (Just as many problems in computer science can be solved by adding a layer of indirection, we shall see that this can apply to physical problems too) We can take Step 1 of the second list and replace it with something else that can spin our magnets. We can, for instance, replace it with something that doesn’t produce greenhouse gases at runtime, like wind or solar or whatever.

“Good job! We’ve gone through all of that, and we have now solved global warming! And we get to keep our lifestyles! Yay!”

Well, we have the next problem - building the infrastructure for our new Step 1 (e.g. solar, wind, etc.), along with more infrastructure to support Steps 2 to 6, takes a lot of effort and money. For example, a random Google search gave me this result of a cost of ￡267.39 per 80 watt panel (including VAT). For reference, my laptop alone takes 45 watts. To power our homes and factories, we’re going to need a lot of ￡￡￡￡$$$$$$$$￡￡$￡$$￡$￡$$.

Hence, we need another compromise to our compromise. The first compromise was a technical compromise. Our next compromise needs to be a financial one.

“Daddy, money!”

In general, one way we signal to people that we want something is by telling them, “Hey, if you get this for me, I’m willing to pay you good money to make it worth your while.”

And that’s typically how many markets work - if you want people to do more of Activity A, prices for Activity A have to go up. So what many states have done is that they have allowed people who produce extra electricity to sell it to the rest of the electrical grid. But when the state really, really wants something to be done, they often intervene further and offer to pay very extremely generous rates. So to incentivise the adoption of green sources of electricity, many states offer feed-in tariffs that are above market rates. You know, to figuratively prime the green pump.

But you see, money typically doesn’t magically come from thin air - someone has to pay for these above-market rates. Or if you’re a person who no longer believes that money can’t be printed infinitely, at the very least you also need a means to disincentivise people from frivolously using electricity as if there are no environmental costs to it. Sure, we might not necessarily feel the effects of global warming immediately. But if the government can put a price tag on it and charge it to the people too much dirty electricity, that should help people internalise the fact that actions have consequences.

So what tends to happen is that some states may choose to pay for these above-market rates by taking more money from users of electricity. One example is Germany’s Energiewende policy.

And this carrot and stick system may actually work well and create a virtuous cycle that promotes more adoption of green energy sources. For example, you may look at your electricity bill and say, “Oh, gee, our bill is pretty expensive. Maybe we should consider buying one of them solar panels.”

“But how are we going to get that money to pay for the panels?” your partner may ask. “Sure, I mean we’d get paid if we produce extra, but we need some money now to buy and install the panels”.

You go to your local bank, hoping that someone in there can offer a financing solution. That is their job after all. Happily, your banker tells you, “Ah yes, sure, we can give you a loan for your solar panels. Since the government is more or less guaranteeing a stream of payments for the next X years, we can just write a loan against said stream of money. And because it’s the government who is paying you, we can also offer you a low interest rate!”

You get the loan, and you are now better off because:

• You’ve stopped paying the consumption penalty;
• You’ve now gotten yourself a cheap loan, so much so that the income from the extra electricity you’ve sold is more than the payments needed to service the loan.

Plus, your banker is happy because they have one more asset that they can securitise and sell. Win-win!

Have we finally made the world a better place yet?

Well, I guess. At the very least we are directionally correct in terms of solving global warming. For example, as shown in the graph below, a larger percentage of Germany’s electricity is generated using green technologies (green segments) after the introduction of their feed-in tariff system in the 90’s:

Source: Institute of Electrical and Electronics Engineers

But you see, life isn’t always that clear cut and simple. Sure, you might be solving global warming this way, but this system just so happens to make German electricity one of the most expensive in Europe (tallest bar):

Source: European Commission Eurostat

And a lot of that cost comes from the surcharge that is imposed on consumption. The graph below shows how much this surcharge has increased over the years (green line):

Source: German Association of Energy and Water Industries

“But this is a good thing, right?” you retort. “This discourages frivolous energy use. You said that our current lifestyles are unsustainable anyway. This forces us to change our behaviour”

Ah yes, here’s the nuance - we have established that solar panels, wind turbines, etc. allow us to live the lifestyles that we more or less want with less damage to the environment. But you can now only enjoy this privilege if:

• You own your own house and you can do whatever you want with your roof;
• You are creditworthy enough to get a loan for the solar panels, or you can afford to pay for them outright in cash.

In other words, in this system, only richer people can afford to continue said lifestyle. Poorer people who may not own their own homes, or may live in a high density shared building (e.g. a block of flats) can’t. In very strong words, this may be a form of poor tax.

Here, for example, is a National Public Radio podcast of an interview with one such German family who constantly lives in literal darkness as their electricity bill takes up a very large proportion of their household income.

Does this mean that we have to make a trade off between saving the environment, and reducing inequality?

This is not just a German problem either. In California, for example, Assemblywoman Lorena Gonzalez (Democrat, District 80) is putting forward a piece of proposed legislation to disincentivise people who sell their green energy back to the Californian grid. She wrote:

It’s entirely unfair that under net energy metering working class families and families of color who have not had the same access to rooftop solar have actually had to foot the bill for this industry and pay higher energy bills. This inequitable cost-shift on to non-solar customers is only expected to continue and increase if we do not make changes to the system. 

Interesting plot twist, eh?

Is life nothing but doom and gloom then?

Probably one of the reasons why I write a lot and not do a lot because I might have a habit of leaving these important questions unanswered. In short, instead of finding yet another palatable compromise to this problem, I’m likely to be the one who just chooses to eat his vege without any dressing, and to just be done and over with.

But thankfully, there are people out there who are constantly trying to find solutions to problems. So what if our previous solution has generated more problems? Sure, we may be running into more walls despite having broken down the last one. At least we’re running in the correct direction.

Some of these people include people who are now championing community solar projects (also plugging in for a UK community solar project that one of my friends’ involved in). The operating model sounds something like this:

• So what if you’re individually too poor or uncredit-worthy? So what if you don’t own your own home?
• If we get enough people in the community to pool their money together to buy some land and some solar panels, they too can enjoy the benefits of feed-in tariffs. The less wealthy now too can enjoy the improvements in lifestyle without paying a penalty.

Source: War for the Planet of the Apes, 20th Century Fox.

So yeah, perhaps life isn’t all too bad. Sometimes, running into walls means progress. I’ll take progress over nothing.

Originally published on my Substack at https://aaronleong.substack.com/p/green-incentives