October 26, 2007

Reg State Concrete Conundrum

by PG

Sadly, Columbia no longer requires first year law students to take a course in the Foundations of the Regulatory State. Although the title sounds awfully boring, it's an excellent way to introduce students with no economics background to basic concepts of supply/demand and cost-benefit analysis, as well as nudging them toward thinking about unintended consequences to law. But this fact set could have made a nice exam question:

But making cement means making pollution, in the form of carbon dioxide emissions. Cement plants account for 5 percent of global emissions of carbon dioxide, the main cause of global warming. Cement has no viable recycling potential; each new road, each new building needs new cement. Now, green incentives may be increasing pollution. The European Union subsidizes Western companies that buy outmoded cement plants in poor countries and refit them with green technology. But the greenest technologies can reduce carbon dioxide emissions by only about 20 percent. So when Western companies revamp Eastern factories, the emissions decrease for each ton of concrete produced. But the amount of cement produced often goes way up, as does the total pollution generated. ...

Cement poses a basic problem: the chemical reaction that creates it releases large amounts of carbon dioxide. Sixty percent of emissions caused by making cement are from this chemical process alone, Mr. Luneau of Lafarge said. The remainder is produced from the fuels used in production, although those emissions may be mitigated with the use of greener technology.
"Demand is growing so fast and continues to grow, and you can't cap that," Mr. Luneau said. "Our core business is cement, so there is a limit to what we can change."

Carbon trading arrangements -- green incentives created by the European Union and the Kyoto agreement on curbing greenhouse gases -- encourage purchases in Eastern Europe and Russia by Lafarge and competitors, like HeidelbergCement. But they also allow manufacturers to increase total production, both in the developing world and at home.
The European Union effectively limits production of European cement makers in their home countries by capping their yearly emissions allowances. But there are no limits in places like Ukraine.
Moreover, European companies get increased emission allowances at home -- carbon credits -- by mounting green cleanup projects elsewhere. So buying an old Soviet factory and converting it to green technology can bring multiple paybacks.
"The investment is much more attractive than it used to be," said Lennard de Klerk, director of Global Carbon, a Budapest firm that brokers such carbon investments in Ukraine, Russia and Bulgaria. Factor the value of the carbon credits into the cost of refitting a factory in Ukraine, and the predicted rate of return rises to almost 12 percent from 8.8 percent, he said.

Though to really highlight the point, the question should be about whether we should mandate or incentivize revamping old factories if doing so would itself require concrete.

October 26, 2007 04:40 PM | TrackBack
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