Thursday, February 2

Alicia Galindo: Green premiums – The green cost of having zero emissions

Our modern existence, which includes food, transportation, agriculture, construction and the way we live, emits greenhouse gases that are trapped in the atmosphere. As time goes on, more people will live a lifestyle that includes each of these activities. This is good, considering that people’s lives are prospering thanks to the economic activity and global growth of countries. However, it is important to be aware of the implications of this growth, since currently the construction industry, the generation of electricity and the feeding of people, contribute to the generation of 77% of the greenhouse gases that are emitted into the atmosphere.

Technological innovations that try to solve environmental problems, also known as “Green technologies”, have the disadvantage of not moving quickly to replace the ravages of climate change. As we know, any innovation that leads to a significant change in people’s lives is adopted on a large scale, for example, the internet, cell phones, electricity, among others. The changes and improvement in people’s lives are forceful and measurable. Not so for green technologies. His achievements and findings are millimetric or almost invisible. For example, the energy produced by a windmill, which in turn produces electrons to power light bulbs, does no better than electrons from a coal plant. In addition to the above, the adoption costs are high, which makes them unaffordable for the masses.

Bill Gates in his book: “How to avoid a climate disaster”, talks about the concept of green premiums. The green premiums serve to know the difference between the cost between a product that pollutes, -from its production, delivery, use, to its disposal-, versus another product that does not or uses clean energy sources. For example, the cost of fuel today is $2.22 per gallon, versus the cost of biofuel which is $5.35. The difference is $3.33 dollars, an overprice of approximately 41%. This spread is the green premium.

Another example is hamburger meat, where the meat is $3.79 per pound versus plant-based meat, which is priced at $5.76 per pound. The overprice is almost 65%

As you can see, “clean” or “green” products are more expensive and the difference is the green premium. It is important to clarify in this example that for some products the premium could be higher, for example, having an electric car. The green premium could be increased due to the cost of maintenance, insurance, loading time, prepared facilities, etc. It is not only the fact of buying an electric vehicle, but all the elements involved from its use to its maintenance and the life of the vehicle.

On the other hand, the concept of green premium allows us to observe what kind of innovations could reduce premiums versus others, as well as the differences between regions. For example; Solar energy could be very cheap in some places, while in other regions the cost can rise because its production is not cheap due to the physical or natural conditions of the place. The solution seems to lie in reducing green premiums. If this premium is high for a particular product, it will be more expensive to eliminate the emissions caused. But if the answer is so easy, how could we reduce this cost? How to make clean and affordable energy for all? How could the poorest countries grow without polluting?

In this sense, Gates, in his book “how to avoid a climate disaster”,) proposes two measures that governments should promote: promote alternatives that reduce emissions and/or impose penalties or fines for the hidden costs of pollution. In the first alternative, innovation is required from both public and private companies, as well as from the demand of the consuming public. Change the “mindset” to really generate a change with incentives that generate alliances of sustainable growth.

For the second measure, currently when companies create products or customers buy them, they do not pay an extra cost for the carbon emission involved in the entire process. This surcharge could create an incentive to have carbon-free alternatives. This sends a strong signal to the market: an extra cost associated with products whose production process involves the emission of harmful gases, as well as an increase in the price of fossil energy that truly reflects its cost. This measure could be somewhat drastic, but it would force producers and consumers to think of clean alternatives and innovate.

According to the report called “Financing the clean industrial revolution”, in recent years 124 of 194 countries and 400 of the 2,000 largest existing companies have made commitments to create innovations and stop emitting greenhouse gases. Investment in research and development should be a priority for the coming years. Many Fintech companies will be riding this wave of growth. Governments must take the lead and propose, with the help of public and private initiative, new alternatives that generate long-term benefits without polluting. How are we in Mexico?

Alicia Fernanda Galindo Manrique She is the Director of the Graduate Program in Public Accounting and Finance. She is a professor in the Accounting and Finance Department of the Monterrey Campus of the Tecnológico de Monterrey and an adjunct professor at EGADE Business School. She is currently a researcher, candidate level, recognized by the SNI.

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