Today, I decided to learn about three topics about which I have very little understanding – Nuclear, Water and carbon trading. I found all three of these topics fascinating and learned quite a bit from the people that have given these topics quite a bit of thought. Nuclear Energy vs. Non-Proliferation This panel had the most diversity of opinions – consisting of an American believer in nuclear technology (Shirley Ann Jackson – former commissioner of Nuclear Regulatory Commission and current president of Rensselaer Polytechnic Institute), an Indian policy researcher who is a skeptic of the nuclear technology (Brahma Chellaney – Professor of strategic studies – Center for Policy Research), an Iranian (Mohammed J. A. Larijani) and Nobuo Tanaka, Executive director of International Energy Agency. The discussion began with the carbon emission targets established by Inter-governmental Panel on Climate Change. To meet IPCC targets, all power plants constructed after 2030 must be carbon free. This is obviously quite a tall order. Most panelists and participants believed that nuclear power belonged as part of an overall solution that includes wind, solar and other renewable technologies. The panel felt that Non Proliferation aspects of this technology can be overcome if the nations were to conduct policy discussions based on rational arguments rather than nationalistic pride. The arguments advanced in this direction were:

1. Dual nature of nuclear technology (it can do good or evil) is true of all advanced technologies ……. Common approaches can be developed for all of these
2. Sensitive nuclear technology is now widely available because of advances in communications and age of this technology (nuclear power plants have been in operation for over 35 years)
3. Nuclear power is the only non-carbon emitting baseload power solution
4. Increase in nuclear power reactors do not have any direct relationship with increased risk of nuclear proliferation, especially if the host country does not insist on enriching nuclear fuel

Of course, the discussion was very spirited, with Mr. Larijani talking about unfairness of US and EU stance against Iranian development of nuclear energy and Mr. Chellaney insisting that nuclear energy is a bad solution because the so-called competitive power produced by nuclear reactors do not take into account the societal costs imposed by it that consists of increased risk of catastrophic accidents and the cost incurred by the society of safeguarding nuclear material and cost of waste storage. There was quite a discussion around the issue of whether to make the fuel cycle available to every one (fuel cycle refers to enrichment of Uranium to be used as fuel and then separation of spent fuel into highly radioactive plutonium and less radioactive components that need to be stored as waste). This is the part that makes nuclear non-proliferation people very nervous. One viewpoint held that an international consortium should own the fuel cycle and provide fuel for use in nuclear reactors. Detractors (e.g., Iran) pointed out that the fuel may not be available if a regime change were to happen, thereby destroying energy security. On the other hand, enrichment technology is the major area where radioactive material potentially gets diverted for non-peaceful uses. Water This was another interesting discussion with Ban Ki-moon (Secretary-General of the United Nations) appealing the world to wake up to the terrible dangers of conflicts that might result from a shortage of water. He pointed out that one of the flashpoints of Darfur conflict was the failure of rains and the subsequent water shortage in that area. Panelists Peter Brabeck-Letmathe (Chairman and CEO of Nestle), E. Neville Isdell (Chairman and CEO of the Coca Cola Company), Andrew N. Liveris (Chairman and CEO of Dow Chemical) and Fred Krupp (President of Environmental Defense) discussed what can be done in this regard. Obviously the shortage of water is a problem – we all know that. This problem is more acute in developing countries but is also present in the US. 70% of the water is drawn by agriculture but 90% is used by agriculture – the difference comes from the fact that most industrial companies recycle their water. The discussion was around the fact that enlightened minds must get together and come up with solutions. In my view, unless there is a good business model that allows for competitive returns for investment in this area, nothing substantial is going to happen. All appeals to people’s compassion is good but usually does not result in substantive action. We need some way to bring in market forces into action, i.e., if 90% of the water is used by agriculture, how can we price that water to take into account their use of a declining asset? Of course, this line of thinking runs smack into the powerful farm lobby in every country. Second, there has got to be a way (through government policy) that allows a strong return on investment in water resource development and distribution. If market-based policies are enacted then, I believe, we will have a lot of entrepreneurial talent tackling these problems. Otherwise, it will remain a nice discussion topic. Carbon Trading We had quite an interesting dinner, sitting alongside the likes of Yvo De Boer (Executive Secretary, UN framework convention on climate change), David King (who worked with Tony Blair and Gordon Brown to enact UK’s cap and trading system for carbon), Ed Markey (Congressman from Massachusetts 7^th District), Christoph Franz (CEO of Swiss Air Lines), Dan Olsson (CEO of Stena, a shipping company) and Peter Schwartz (Chairman of Global Business Network). It was very interesting and encouraging to hear that European businesses such as Swiss Air, Stena and DHL already expect some form of carbon tax or trade system and have begun to include related costs in their models which boost the return from energy efficiency projects. An example was provided that BP implemented an internal cap and trade system within BP’s world-wide subsidiaries which resulted in hard savings of $650 million (without including carbon taxes, etc.) for a total investment of $30 million. David King and Ed Markey pointed out that cap and trade system on Sox emissions worked really well to reduce acid rains and, therefore, a similar system for carbon should also work well. In fact, Ed Markey forecasted that a cap and trade system could well be instituted in the US regardless of who wins the elections. Green Jobs I was one of the panelists on this forum. My views on this issue that were presented follows this item. The discussion was very interesting with the panel identifying major opportunities in the areas of building retrofits and installation of renewable energy projects. The point was brought out that for the solutions to be politically palatable, the green jobs need to be created in the communities where older jobs are lost, e.g., from closure of coal-fired power plants, etc. Incentives could take the form of regulation of a minimum level of ‘greenness’ (to be defined), carbon taxes that can be implemented by individual communities, and financial incentives in the form of subsidies or low-interest loans will be required to jump start this process and bring about green investment and concomitant green job creation. My thesis on this subject is reproduced below:

CREATING ‘GREEN’ JOBS

The objective to create jobs by various countries in the clean energy space by encouraging clean energy investment is laudable and effective strategy that will raise the country’s human resources skill-set, provide permanent jobs and develop services exports. The key to success is finding white space opportunities in this emerging industry and make long-term commitments. Clean energy technologies is an emerging industry that covers a wide space. There are sufficient white space opportunities for newcomers (companies and countries) to carve out a large and profitable position. Most of the activity to-date has been in developing new technologies. While wind and nuclear energy is competitive and well on its way to implementation, bio-fuels, solar, transportation, energy storage and energy conservation technologies are just about getting ready for implementation. Most technology development activities are focused in the US and Europe where a suitable entrepreneurial habitat already exists. However, the implementation of these technologies have to be distributed around the world. This is where an opportunity exists for countries to encourage investment and create a robust installation, maintenance and operations industry, creating high value jobs and developing the expertise that can power a services export industry. Opportunities According to New Energy Finance, of $48.9 billion expenditures in clean energy during 2005, 55% or $27 billion was spent on technology development and pilot production facilities. Of the $22 billion in implementation projects, 70% was spent on wind energy and 20% on biofuels production. Wind energy is already competitive with coal for power production in areas with strong winds and, as a result, wind projects are only limited by short-term supply constraints for wind turbines. Nuclear energy is also competitive and significant activity has begun in developing new nuclear projects. Momentum in building new nuclear plants is obviously still constrained by poor safety perception, nuclear non-proliferation issues and waste handling difficulties. In addition to wind and nuclear, there are some other technologies that are now competitive and ready for large scale implementation, including solar thermal, green architecture, demand response, improved agricultural water management and improved waste management. Solar PV, biofuels and efficient lighting technologies are expected to be competitive with conventional alternatives within 2-5 years. In addition, significant opportunity exists to build a distributed electric generation infrastructure, thereby reducing 33%-50% losses experienced in electricity transmission. Encouraging ‘Green’ Investment There is a well established project finance structure for implementation of competitive technologies. However, the two hurdles in effective implementation of project finance structure are the presence of market and technology risks. Technology risks arise from the fact that the clean energy technologies are still quite untested with significant scale-up and operations risks. Market risk arises from the dominance of coal and oil powered energy infrastructure and the fact that the competitiveness of alternative technologies depend upon continued high oil prices, continued progress on implementing stricter emissions control on coal-fired power plants and some form of carbon tax. Progressive countries that implement policies to minimize or eliminate the market and technology risks inherent in clean energy investments should see a significant growth in such projects. Implementing feed-in tariffs can eliminate the market risk faced by clean energy developers. This will also encourage implementation of distributed energy generation infrastructure as it removes a significant effort that project developers have to expend on negotiating individual energy purchase agreements. For electric utilities, the feed-in tariffs guarantee a fixed price electric power regardless of oil prices. To minimize the technology risk, one idea is for the countries to establish a clean energy fund with similar objectives as the IFC, i.e., the dual objectives of financial returns and societal returns. This fund can invest as subordinated debt in projects that are financially attractive and will create appropriate ‘green’ energy jobs. Type of ‘Green Jobs’ to be expected By enabling clean energy investment projects, countries will create jobs that are skilled, permanent and abundant. Jobs in new technology development are usually very highly skilled but few in number. In addition, successful commercialization of technology development requires a suitable entrepreneurial habitat consisting of strong research institutions, venture capital and depth in entrepreneurial talent. Creating this entire infrastructure is time consuming and requires creating a new culture – clearly a daunting task. Moreover, production jobs associated with new technology commercialization are mobile and rapidly move to the lowest cost countries. Implementation of the clean technology projects, on the other hand, creates jobs that are skilled and permanent. These jobs are in the services category of implementation, maintenance and operation of clean energy projects. Learning curve effects are the largest determinants of efficiency in implementing new technologies. Therefore, countries and companies that are able to amass such expertise will have a cost and time advantage over competitors in implementing follow-on projects. This expertise, embodied in human resources and corporate knowledge base can be exported as services, similar to what Schlumberger does in the field of oil and gas services. Summary In summary, focusing on implementing a proactive environmental policy along with a strong regulatory and structural framework focused on encouraging clean energy investments will have strong and beneficial impact on the development of permanent ‘Green’ jobs, skilled human resources and export-oriented services industry. I hope that this blog is proving to be useful. Until tomorrow!!!