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Bad Analysis of a US Carbon Tax by AEI

Rob Day: August 30, 2012, 9:08 AM

If "thought leaders" don't put much thought into their analysis, the analysis is worse than useless. 

That is the case with this terrible piece of "analysis" from Benjamin Zycher of American Enterprise Institute that came out this morning. He takes a look at whether a U.S. carbon tax could be "efficient" in the economic sense -- that is, if it would net out to being positive economically. When I'd heard recently that the AEI was starting to look at and talk again about carbon tax policies, I'd been encouraged to hear it, so I eagerly read the column as soon as I saw it this morning (thanks to Coral Davenport for tweeting it out). Unfortunately, Zycher appears to have approached this "analysis" with such a bias as to ignore some basic logic and obvious facts when concluding that a carbon tax is unlikely to be efficient.

First of all, when the column starts its second paragraph with, "Let us shunt aside the very real continuing questions of the underlying climate science," the jig is up. This continuing allusion to there being any uncertainty about the very real emerging damages of very evident ongoing and accelerating climate change is such a condemnable canard that I won't even go into it here. But at this point, the only "real continuing questions" are about how bad it's going to get, and how quickly. Not basic questions of whether carbon dioxide drives harmful climate change. So Zycher reveals himself as an evidence-ignoring advocate, not a serious analyst, at least in this unfortunate instance. But let's tear apart his core logic anyway, just for fun.

His core argument boils down to one simple point: since climate change is a global problem with global causes, any one country unilaterally imposing a carbon tax on themselves would be punitive to their economy but inconsequential for avoided damages.  It would allow free-riders to gain a trade advantage by avoiding imposing the tax on themselves, without preventing the negative outcomes.

"Any such policies, in order even theoretically to yield measurable effects, must be adopted by a number of nations sufficient to represent a significant proportion of world economic output." 

He doesn't define "significant proportion" at all. He just -- without any justification for why this is a threshold -- declares that this means: "A carbon tax, in order to have an actual effect on the purported carbon dioxide externality, must be imposed by all of the OECD countries at a minimum."

Here's the problem.

ALMOST ALL OF THE OECD ALREADY PRICES CARBON, BENJAMIN. Not sure if you got that memo. And perhaps they do it ineffectively versus a more "efficient" policy like an appropriately priced carbon tax. BUT THEY ALREADY PRICE IT. So by your own logic, the U.S. and Canada are the free-riders. Thanks for pointing that out. 

Furthermore, since it's completely unclear how he decided that the aggregate economies of the OECD is the necessary threshold, let us examine that for a minute.

The U.S. ranks about sixth in carbon emissions. Yes, if we unilaterally impose a price on carbon on ourselves and no one else does (again, not the actual situation; see above), the economic costs of the policy would be concentrated on the U.S. economy and the economic benefits would be diluted by five-sixths.

But that's not to zero.

Take the following illustration: If your office where you are reading this occupies one out of six floors of a building where everyone shares a common utility bill pro rata, then if you make investments in energy-efficient light bulbs, etc., to reduce the building's electricity bill, you don't see but one-sixth of the cost benefit, and yet you still bought the entire bulb. But this doesn't say there aren't some basic investments that might still make sense to you. So the payback period on an efficient bulb purchase goes from four months to two years if the benefits are diluted? You might still like a two-year payback. A smart economist would.

In short, diluted policy benefits don't completely prohibit any pricing scheme from being valuable at all; it just changes how aggressively you would establish the price and what kinds of investments would make sense in terms of palatable payback. 

And of course, as stated above, it's a fairly dumb argument anyway, given that everyone else in the building is already buying efficient light bulbs, and the U.S. is the last to do so. So it makes no sense, logically or factually.

Even more importantly, Zycher must be aware that not every damage-caused economic cost is marginal in a linear fashion. Some dangers are too significant to treat with linear payback analysis, but instead require the consideration of asymmetric risk profiles.

Let's say no one in the building wants to purchase a fire extinguisher system. So if you want to install one, you have to pay for it all yourself. And if the building burns down (and BTW, it's getting hot in your office, and you already periodically smell smoke coming out of the vents), you have no where else to go. I don't know about you, but in that case, I'm twisting everyone's arm to help pay for the fire extinguisher system -- but even if I can't get them to do it, I'm still (bitterly) paying for it myself. Some risks are just too dangerous not to address, especially if the cost of installing the system doesn't really impact my bottom line that dramatically, even without multi-tenant cooperation.

And indeed, that's what actual thoughtful economic analysis suggests is the case. As recent modeling by researchers at Harvard suggests: "With a relatively modest carbon tax -- about $5 per ton of CO2 -- you could save 31 million tons of CO2 in the United States, and that would change the price of electricity by a barely noticeable amount."

Take those tax receipts and completely recycle them to directly reduce income taxes, BTW, and you could yield net positive economic benefits even aside from any climate-change-related damages.

Look, I'm not closed-minded about alternative solutions to carbon tax policy and especially welcome cogent analysis of its limitations (economic and political) and the challenges of effective implementation. It may well not be the right answer, although after having worked around smart economists for much of my career, that's where most of their analysis has pointed. I welcome groups like AEI (along with RFF, WRI, etc.) taking a sober look at the topic and getting into the pragmatic pros and cons and proper details. A serious, balanced analysis may well show that, the devil being in the details, a real-world carbon tax cannot be "efficient."

But this "analysis" by Zycher isn't serious or balanced. It's an illogical argument based clearly upon a pre-ordained answer. Mr. Zycher has had a long career as a prominent economic thinker, so this is frankly shocking. Please do better.

Lessons From The Past Ten Years: Self-Description

Rob Day: August 28, 2012, 3:48 PM

Because of some of the unique features of our markets and customers, early-stage cleantech startups quite often have to walk a fine line when figuring out how to describe themselves to the outside world.

At the heart of the problem is that the entrepreneurs have two completely different target audiences for these messages. The first are prospective customers, who are typically change-averse, can be somewhat technophobic, and often aren't currently seeking a solution. But the second major audience is funders, and VCs want to find something that's very "different," that's somewhat daring, that they can describe to the partners at their firm (and to their LPs) as something "sexy" and market-changing.

It can be nearly impossible for a startup to satisfy both groups with the same message and positioning. Not to mention other potential audiences, like strategic partners, government types, or prospective employees.

The approach tried most often over the past decade has been to go after the funders, and along the way grab journalists' attention, by trying to sound as revolutionary as possible. Get enough funding and enough media attention, and you can build enough apparent momentum that customers will eventually "get it" and beat a path to your door. Sound like you're going to blow up the status quo and force the market to pay attention to you. Frankly, more often than not once I've drilled down into a startup's pitch past all the buzzwords to get to what they're actually doing, it turns out to be pretty simple anyway. But for some reason the message had to be radicalized.

This "get on board with the revolution" approach to self-description has had only limited success -- in part because there's so much random noise out there (see the last column on PR) that these can't all be revolutionary ideas. But mostly because the customers appear to have been more turned off by talk of revolution than turned on (at least until it's obvious the revolution is going to win and they're about to be left out, but we're a long way from that threshold in most cleantech markets).

Absolutely, there are some technophile early adopters out there. And not coincidentally, they tend to be the customers Silicon Valley VCs run into, or talk to in a diligence call, or reach when they speak to a technologist at a large corporation. 

But if you actually want to scale revenues with the much larger body of "normal" customers, you can't sound too disruptive -- even if that's what you are. Whether it's the Bloom Box or Zipcar or my own portfolio company Digital Lumens, even radical game-changing ideas seem to do better with these customers when positioned as fitting into their existing patterns and simplifying their lives, not as "bleeding-edge" technologies. Bloom Box started out as an SOFC story (f/k/a "IonAmerica"), and on 60 Minutes there was the breathless mention of how it could radically change how your home is powered. But where it's making progress now with customers is as a replacement distributed generation solution that is flexible enough to be able to use renewably-produced methane (which then is further simplified to just "green uninterruptible onsite power"). Zipcar has a lot under the hood (so to speak), but has been successful because they used all of that to simply tell customers they could have wheels when they want them. And Digital Lumens' embedded-intelligence lighting solution is so much more than just efficient lights -- but to prospective customers, that's what they've learned to lead with, only later bringing into the conversation all of the powerful operational advantages (even beyond lighting) that the products and services offer. All three companies then secondarily tell investors and strategic partners about the disruptive solution they are offering -- but they make sure to not lead with that message with customers.

So that would be my suggestion: Focus on prospective customers when developing messaging, even early on. Let investors and others (even, at the right time, customers!) discover only later how cool it is that you're bringing them this solution in this amazing new way.

I know investors will tell you you need to be disruptive and that they're not looking for "incremental solutions." So figure out how to explain in a 1:1 conversation how your seemingly simple solution truly is disruptive (if it is), or aim for a different type of investor (if it isn't). But don't make that the public face of your company. Because at least for now, it's more important to make sure customers aren't scared off by your message than to worry that investors won't find your solution to be exciting. 

For investors, nothing is more exciting right now than revenues, anyway.

Lessons From the Past Ten Years: PR

Rob Day: August 10, 2012, 1:36 PM

What is the right PR strategy for cleantech startups?

It's a question I've been thinking about a lot lately, and talking about with communications professionals. Because I feel that those of us in cleantech (myself in particular) have generally done it wrong over the past ten years.

Wrong in one of two ways -- either 1) going out too hard, too early, or 2) starving a growth opportunity.

I've backed companies that've made both of these mistakes, so I understand how they come about.

In the first "too hard, too early" mistake, there are companies in our sector (you already know them, so I don't feel the need to name them) that've put on a heavy PR push ahead of having fully commercialized and economic customer offerings. The targets of this strategy are follow-on dollars and strategic partnerships, and possibly even with an eye toward an early exit. Create a hype cycle around a company, and at the peak of that hype cycle, take advantage of it to either drive immediate returns or springboard the company to another level.

The problem is, for the capital-intensive companies that typically have deployed this strategy in the cleantech sector, the window of opportunity that it might create is typically too small for this PR strategy to not be hugely risky. Why? As we've talked about before, the combination of likely commercialization timeframe slippages, slow market adoption, and high cash burn can be deadly. In other words, you build a lot of hype around a company under the expectation that the next 12 months will be the period when the company is "ready for primetime," but that 12 months slips out another year, and all of a sudden you have an OVER-hyped company that's overpromised and underdelivered and is out of money and burning through it like crazy. And then you get the kind of attention from journalists that you DON'T want, compounding the problem. Not a recipe for success (or follow-on investments), and in fact this condensed story arc can describe many of the more visible blowups our sector has witnessed over the past few years. Misguided PR strategy played a major role in those, I believe.

So the lesson is: Don't hype up what you can't yet sell.

But conversely, the second mistake I see quite often is UNDER-investing in PR and communications. It's the natural instinct of CEOs of capital-light startups to want to avoid any unnecessary costs, and PR is a very visible cost center. And with many of the cleantech VCs and entrepreneurs I know, they see the first mistake described above and they have an allergic reaction to it. They don't want their CEOs distracted by public visibility, rather than operational performance. The desire is to underpromise and overdeliver, under the assumption that the market should reward actual success with resultant visibility, just naturally.

So the PR strategy is, in many of these cases, simply putting out a press release and having an inexpensive PR contractor help pull that together and get it out to the newswires and a target journalist list, about every six weeks or so. I get about 40 of these press releases and "story idea" emails each day myself, simply because I write this column and thus got added to one of those lists or another. It's a "spray and pray" approach, and the fact that I'm receiving a press release is in itself proof that the PR person didn't put much thought into their outreach list.

The problems with this approach are, first, that the market doesn't seem to do a very good job of rewarding early success with the level of attention you would expect; and second, when there's a big "company-making" event (a big massive news story that should get the company a lot of positive attention), they don't have the resources to get effective attention for it. I've seen some real squandered opportunities where companies did amazing things and hit very important milestones but couldn't get any attention for it. 

Why doesn't the market reward early success? Because it gets lost in the noise. There are simply too many press releases out there. Putting myself in journalists' shoes, I don't know how they would decide to snag one press release in particular out of the 100 they must get per day and, under deadline, decide, "I'm going to dig into this one and write up a longer story about it." The press releases always announce every victory, big and small, in the same breathless terms, so how are the journos supposed to know which stories are important and which are minor? And the regurgitated press releases that show up buried in one magazine or website or another, while counting as a "press mention," don't really get paid attention to. 

The "Every-Six-Weeks PR Spray and Pray" strategy is an inexpensive way to remind the world you're alive and making some progress, and to get some regurgitated mentions in trade journals and such, where maybe a customer sees you briefly. Those are valuable outcomes, but they're not going to sufficiently signal to strategic partners, unreached customers, follow-on investors, etc. that your company is something they must take the time to learn more about. And the number of times a journalist at a major newspaper or news site will then stumble upon that press release and decide on their own to write a feature story about your startup is zero. It's not a sufficient strategy, therefore, for when you do have something to sell and you have hit that inflection point, and you want to make sure the CEO at that potential strategic partner or acquirer or customer sees your startup mentioned and thinks to have someone follow up.

These markets we are selling into are highly fragmented, difficult to reach, difficult to aggregate, and difficult to motivate. Customers are rarely proactive, and investors and large corporates have long call lists to work through. The right visible PR "win" can help cut through all that. I'm convinced it can be a hugely valuable tool, worth investing in, at the right place and time. But only if done right, and in a way that cuts through the noise.

So the lesson is: Don't starve PR when you do have something to sell.

But an important caveat: How can the individual capital-light startup justify having great PR/comm resources at the ready? After all, even a small retainer with a good communications firm will cost several thousand dollars per month. That's an extra employee or two that could have been hired. That's how the CEO has to look at it. That's how the board has to look at it. Yes, so there are one or two times per year when you need to ramp up and get bigger attention for what you're doing. The rest of the year, PR needs can be handled much more simply or even just in-house. So do you sacrifice hiring that extra engineer or salesperson so you can HOPE to get attention once a year and HOPE it results in more sales or better partnership traction?

It's a dilemma -- one I'm still trying to figure out. The answer may be a different type of client contract for communications strategy firms than the traditional monthly retainer, so that they have more clients, each of whom pays less in aggregate, but on a "per-day" basis, they actually make more money. The challenge there is obviously managing their own workflow and client development costs to make it work out reliably and profitably. Another potential answer is that investment groups like mine perhaps should take on the onus of the ongoing relationship with the communications firm, but have an arrangement to dedicate resources to the portfolio companies in most need at any particular time. The challenge there, of course, is that it also places the cost burden on the investment firm, and most don't have any budget for anything like that. 

This doesn't even get into the next layer of difficulty: HOW to get attention from the right target audiences. Meaty feature articles? Social media mentions? Vertical-specific trade journals? Online advertising? Not to mention such "minor" details as branding, message development, etc., etc. Wrestling with the implementation tactics is where the communications firms really bring value, and where I see more cleantech startups simply trying to make it up as they go along. The engineers shouldn't be running the marketing department. But too often at cleantech startups they do.

So this is a problem we need to figure out. Overhype too early is not only wasteful, it's dangerous. But it also turns out that successful market introduction isn't by itself the inflection point many investors and entrepreneurs have expected it to be in the cleantech sector. Geoffrey Moore was right -- that only gets your product in the hands of early adopters. And crossing the chasm to the broader market, even with successful customer stories and a compelling economic value proposition, is really hard. PR is an important tool in particular for that major business challenge. And it's a business challenge that cleantech startups are now wrestling with more than ever.