Schlumberger CEO on climate change

I liked this quote (from an interview with the McKinsey Quarterly because it aligns well with what I've said before:

And then on climate change, our opinion—and it’s my opinion, this is a very personal thing—is that there is sufficient evidence of an increase in the level of emissions in the atmosphere to be concerned about the effect that it may have on the climate. But the science of climatology is by no means complete, and it is going to take a long time before we really know what the effect of these emissions is going to be. In the meantime, it is prudent and reasonable to try to reduce those emissions as much as we can.

Remember, that's not a hemp-wearing hippie talking. It’s not Al Gore, or Joe Romm, or any number of climate activists. It’s Andrew Gould, CEO of a $23 billion a year oil services company—a company with a vested interest in climate change not being real. If even he can admit that climate change is probably real, and that it makes sense to invest a small percentage of our wealth in averting its worst effects, surely even the most skeptical libertarian can admit that climate change may not be a hoax after all.

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Climate craps: global warming and uncertainty

Ending the use of coal overnight: new study shows it's possible

One of the common arguments against climate legislation is that clean energy technology just isn't ready yet. Most often, it's made to defend coal, and usually goes something like this: "Sure, maybe eventually we can replace coal, but right now that would be too expensive. For the next 50 years, we'll need to continue using coal at the same time we're developing cleaner alternative fuels."

This argument has always been illogical. Just because alternatives to coal are expensive now does not mean they always will be, and a major national push would soon bring down costs through economies of scale. But a new study goes even further, showing the "technology not there" argument to be not just illogical, but factually incorrect. In fact, the United States could replace nearly 100% of its coal-fired power generation--and do so almost overnight. How? With natural gas (which emits 50% less CO2 than coal). The Financial Times reports:

The shift from coal-fired generation to gas- fired generation sounds like something that would be lengthy and difficult to accomplish. But a new report by PFC Energy, the consultancy, indicates it is anything but. The report says US gas fired power plants average about 25 per cent utilisation, compared with 70-75 per cent for coal.

So operating existing plants at 72 per cent utilisation would theoretically increase gas demand by 30bn cubic feet per day - a rise of about 50 per cent - and displace almost all coal fired capacity. In doing so, carbon dioxide from the power sector would be cut 50 per cent, according to PFC.

Note that this is referring to existing power plants. In other words, we could completely eliminate the use of coal in this country without building hundreds of new power plants.

Also note that this is a recent development. Just three years ago, the idea of abundant natural gas replacing coal actually was ludicrous, and coal's defenders at least had a point. But that's no longer true. The difference is new technology that has unlocked previously out-of-reach shale gas formations such as the Marcellus Shale in Appalachia.

Providentially, much of the nation's most promising gas potential is in the very states where coal is currently strongest politically: West Virginia, Pennsylvania, and Ohio.

All of a sudden, coal miners who fear job losses from shutting down coal mines now could have gas fields in which to work. Looks like King Coal could have some competition for its most supportive Senators. (Indeed, last month The Hill reported that the natural gas lobby is "pushing new incentives to encourage utilities to switch from coal to natural gas, [and] in doing so, the sector is starting a lobbying fight with the coal industry." All I can say is, go get 'em boys.)

The bottom line: any time you hear someone say that the technology isn't there to switch from coal, you're being fed PR dog food. We don't have to wait for solar and wind costs to come down before abandoning coal, because natural gas is already cheap and abundant - and we can make the switch overnight. All that's needed is political will.

How do you take two pieces of fried chicken, cheese, bacon, and special sauce, and only get 550 calories? Deconstructing the Double Down

I flat out didn’t believe the Double Down’s calorie count. KFC claims the fried version of the sandwich has 550 calories, but intuitively, it just doesn’t seem to add up.

So this morning, I went online to see if the 550 figure was in the ballpark of believability. What I found surprised me.

The Double Down has four ingredients: two fried chicken filets, two slices of cheese, two strips of bacon, and “Colonel’s sauce,” which I’ll assume to be Thousand Island dressing. I’m not sure how big the chicken filets are, so to be conservative, I’m using “chicken strip.” Here’s how the calories add up:

Ingredient Calories

Chicken strip:                              117 (x 2)
Slice of cheese:                            94 (x 2)
Strip of bacon:                             46 (x 2)
1 tbsp Thousand Island Dressing: 31
_____________________________________________________
TOTAL                                          545

When I added it up, I was shocked. Just using nutrition facts I got on the internet, I came within 5 calories of KFC’s figure.

The key here is that Thousand Island dressing is actually a pretty low-calorie dressing. In my mental model, I was assuming 100 calories for the dressing—in retrospect, a major overestimate.

Now, the X-factor here is the size of the chicken filets. If they’re roughly the size of a chicken strip, I’ll believe KFC. If they’re much bigger though, KFC may have some accounting problems.

I’m getting a Double Down tonight though, so I’ll soon know.

If there’s a moral of the story, it’s that you should never assume your “common sense” assumptions are correct without testing the numbers. What you’ll find can often surprise you.

Goldman and Jay-Z: The allure of the game...

The allure of breakin the law
Is always too much for me to ever ignore
I gotta thing for them big body Benzes, it dulls my senses
In love with a V-Dub engine
Man I'm high off life, f*** it I'm wasted
Bey Venay kicks, or them Marvin Kaye wrists
My women friend get tennis bracelets
Trips to Venice, get they winters replaced with
the sun, it ain't even fun no more I'm jaded
Man, it's just a game, I just play it to play it…

I’m livin’ proof that crime do pay.

- Jay-Z, “Allure”

In news about another New York City institution:

Beset by accusations of securities fraud, Goldman Sachs nevertheless showed Tuesday that it was still very good at what it does best: making money.

Earnings for the Wall Street giant rose 91 percent in the first quarter of 2010, to $3.46 billion or $5.59 a share, up from $1.81 billion or $3.39 a share in the same period last year. Revenues increased 36 percent to $12.78 billion, up from $9.42 billion in the quarter a year ago.

Analysts surveyed by Bloomberg had expected revenue of $11.05 billion and earnings of $4.14 a share.

Quote of the Day

The mind-set of businesses has already changed. Businesses have accepted that they have to address climate change. In fact it seems that is much more accepted by business than it is by political leaders.
- Lars Josefsson, CEO of Vattenfall (one of the largest utilities in Europe), August 2000 - April 2010

Two weeks ago, I noted that anti-government rhetoric coming out of certain politicians in Washington seems yet to be lagging behind the thinking of the business leaders said politicians purport to support. Glad to see there are some CEOs out there who agree with me.

Tax cuts are a bad sales pitch for Democrats

As a sales & marketing consultant, I have some advice for Democratic politicians: telling people how much you’ve cut their taxes is terrible salesmanship.

Sounds strange, right? The public hates taxes, and generally perceives Democrats as favoring higher taxes—so shouldn’t neutralizing that perception improve Democrats’ competitive position? Indeed, how could lowering taxes HURT a politician?

Simple: the key to effective selling is NOT explaining why you’re better than competitors at the thing the customer cares about—rather, effective selling means making the customer care about the thing you do better than the competition. For Democrats, as long as the public cares about lower taxes, hawking tax cuts plays to the other side’s competitive advantage. To win the tax issue, Democrats must reframe the debate to de-link “low taxes” from “good policy.”

Democratic officials, though, apparently don’t understand this basic marketing concept of differentiation. Instead, they are gleefully pushing an AP story which found that “Congress cut individuals' federal taxes for this year by about $173 billion shortly after President Barack Obama took office, dwarfing the $28.6 billion in increases by states”:

"The fact is in the past year we have had more tax cuts than almost anytime in our nation's history," said Rep. Steve Cohen, D-Tenn. "It's something that people don't realize because of the false rhetoric that is spread throughout this Congress.”

…

"From investing in small business to buying a home or making it energy efficient, to sending your children to college to buying a car, these tax cuts are helping families and businesses across the country," said Rep. Russ Carnahan, D-Mo.

Liberal bloggers like Steve Benen are picking up the theme as well. They wonder, Democrats are cutting taxes, so why isn’t the public giving them credit? To policy wonks, it’s an information: if Democrats can keep hitting the “we cut taxes too!” theme enough, the public will eventually pick up on it.

The problem is, this “me-too-manship” fails in politics as badly as in business. This is just like a B2B salesperson trying to compete on price. The sales rep does his best to understand what the customer is looking for, and designs a solution to meet that need. Unfortunately, competitors are asking the exact same questions and diagnosing the same needs. With every competitor designing its solution around the same set of needs, the final offerings all look alike. Price becomes the only perceptible difference, leaving salespeople to out-discount each other and destroy profits all around.

This is exactly the trap Democrats are falling into by promoting their tax cuts; the strategy can only result in a game of tax cut one upsmanship. Since Republicans are already perceived as the party of low taxes, a Republican can respond to any Democrat’s claims of tax cuts by saying, “I’ll do you one better.”

Instead of trying to outdo Republicans on their competitive advantage, Democrats need to reframe the debate—re-chalk the field, so to speak, around their competitive advantage. Since the public will never believe that Democrats will give them lower taxes than Republicans, Democrats should concede the point and sell the public on the value of the services their taxes are funding.

Here’s a sales pitch for Tax Day 2011:

Imagine a world without taxes. No roads and no bridges. No schools or teachers. No police, firefighters, or soldiers. This tax day, we want to thank all responsible Americans for their contributions that make life in society possible.

This pitch completely changes the goal posts of the tax debate. The winner isn’t the politician who can lower taxes the most, but rather who can provide the best services: Democrats’ competitive advantage. Taxes are no longer seen as an evil to be eliminated, but rather as the contribution responsible citizens make in return for the benefits of living in society. Indeed, lowering taxes TOO much would jeopardize society’s ability to function.

Is it risky? Sure. But that always beats a race to the bottom—whether you’re pitching products or policies.

Happy tax day! What are you thankful for?

Todd Flanders: Daddy, what do taxes pay for?
Ned Flanders: Oh, why, everything! Policemen, trees, sunshine! And lets not forget the folks who just don't feel like working, God bless 'em!

The tax man's taken all my dough,
And left me in my stately home,
Lazing on a sunny afternoon.
And I can't sail my yacht,
He's taken everything I've got,
All I've got's this sunny afternoon.
- The Kinks, "Sunny Afternoon"

If I were rich, I might hate paying taxes a little more. Until that day though, I'll be thankful for the subsidized buses that take me to work, the roads they drive on, the police officers who protect me from crime, the firefighters who will put out fires if my apartment burns down, the soldiers who protect my country from foreign invasion, and the teachers who gave me the education without which I never could have succeeded.

Oh, and also the refund check.



I like giving credit to the perpetually underrated but sneakily famous Kinks, but no tax day post could be complete without an homage to the most famous tax song of all time:

Chocolate Frosted Sugar Bombs vs. fresh food

Real food is making a comeback. Life on foreign shores has exposed the study abroad generation to the pleasures of unpackaged foods. Whole Foods earned $8 billion last year, and its stock is up 287% since February 2009. Films like Food, Inc. and Fast Food Nation have opened our eyes to the horrors of processed food and factory farming, while fresh food evangelists exhort us to "avoid foods you see advertised on television."

But before there was Michael Pollan, there was Bill Watterson:

Calvin: "But it's fortified with eight essential vitamins, so it's good for you! Look, it says right on the box, 'part of a wholesome, nutritious, balanced breakfast.'"

Hobbes: "And they show a guy eating five grapefruits and a dozen bran muffins."

Oh, the things marketers will do to make their product claims! If only it were just a comic strip.

Fight Club and coal company death panels: The value of a statistical life

A new car built by my company leaves somewhere traveling at 60 mph. The rear differential locks up. The car crashes and burns with everyone trapped inside. Now: should we initiate a recall? Take the number of vehicles in the field, A, multiply by the probable rate of failure, B, multiply by the average out-of-court settlement, C. A times B times C equals X. If X is less than the cost of a recall, we don't do one.
- Ed Norton in Fight Club

In light of last week's deadly blast at a Massey Energy coal mine in West Virginia, the above quote seemed particularly relevant. Does anyone doubt that there's somebody at Massey who's busy making these types of calculations? "Take the number of mine explosions per year, A; multiply by the probable number of miners killed per explosion, B; multiply by the average out-of-court settlement, C. A times B times C equals X. If X is less than the cost of new safety equipment + the lost revenue due to slower production, Massey doesn't make the investment in safety."

How much might the average out-of-court settlement be? Well that depends on how much you think a life is worth. And actuaries think they know how much a life is worth... but it's not as much as they used to.

Between 2003 and 2008, the "culture of life" Bush administration EPA lowered its reckoning of the "value of a statistical life" by $900,000, from $7.8 million to $6.9 million. The decision effectively meant that more people could die before a pollution reduction regulation would be considered "cost effective":

When drawing up regulations, government agencies put a value on human life and then weigh the costs versus the lifesaving benefits of a proposed rule. The less a life is worth to the government, the less the need for a regulation, such as tighter restrictions on pollution.

Consider, for example, a hypothetical regulation that costs $18 billion to enforce but will prevent 2,500 deaths. At $7.8 million per person (the old figure), the lifesaving benefits outweigh the costs. But at $6.9 million per person, the rule costs more than the lives it saves, so it may not be adopted.

Ironically enough, coal miners help calculate the value of a statistical life. Here's how to do it. First, take the average difference in pay between workers in a dangerous job (like coal mining) and workers in a similar but less dangerous job. The extra money coal miners earn is the "danger premium"--in other words, how much a person must be compensated to get them to accept the higher danger of dismemberment or death. From the risk premium, economists extrapolate how much monetary value people place on their lives: hence, the economic value of a life.

Which brings us back to the Massey explosion and Ed Norton's equation. Pretend it's January 2007, right after the company's last deadly explosion (2006), and Massey is deciding whether or not to buy safety equipment and implement new safety policies. Also pretend that Massey has perfect foresight, and can see the 2010 explosion coming. Now we can engage in an exercise of economic cynicism.

First, what would safety investments get you? Assume Massey pays $6.9 million for each of the 25 killed miners. That's $172.5 million. Let's double it with other fines just for good measure, and you're at $345 million: a big number to be sure, but one that will probably come down on appeal--say, to $250 million.

And Massey probably won't pay that sum immediately--it can always issue legal challenges to delay paying the fines for years (indeed, Massey has contested two-thirds of fines since 2006, contributing to a "backlog of approximately 16,000 cases that some safety advocates contend could be allowing unsafe mines to continue operating.") Because money has a time value attached to it--the further in the future money is earned or lost, the less valuable it is to you today--whatever Massey ultimately pays counts as even less than $250 million in the cost-benefit calculation. Say Massey finally pays the fine in 2015. Assume a discount rate of 5%, and we're down to $195.88 million in present value benefits of safety equipment.

Now, how do the costs stack up? I know nothing about mines, but for argument's sake, let's say investing in safety equipment would have cost $25 million in January 2007. Still less than the $195.88 fine. But that's not all: safety procedures slow down the process of mining coal, so there's also a revenue impact to consider--we'll assume a 1% reduction in annual revenues. In the three years following the 2006 explosion, Massey averaged $2.6 billion in annual revenues. Assume that the economy recovers in 2010 and Massey gets back to its 2008 number of $2.9 billion, which it earns each year from 2010-2015. In 2007 present value, a 1% hit comes out to $173.89 million in cumulative lost revenues. Add in the year-1 hit of $25 million for the safety equipment, and the costs of safety outweigh the economic benefits by $3.01 million: Massey forgoes safety and swallows the fines.

Of course, it's 100% certain that some of my assumptions are wrong. And there could always be more accidents which add to the fine total, as well as costs in terms of bad PR and regulatory risk. All of which could make safety investments pay off. (Indeed, Massey's stock is down 13% since the explosion, while competitors' are at 52-week highs, suggesting that investors think Massey made the wrong bet on safety.)

But that would miss the point, which is not about the outcomes of the decisions but rather the process by which they’re made. When business decisions are based solely on economic calculation, when CEOs only protect life when it's cost effective to do so, we'll end up with decisions like the one potentially made at Massey to forgo safety equipment--calculated decisions to disregard human welfare in order to maximize profits. And all of it rationalized by the cold logic that the only purpose of an enterprise is to maximize shareholder wealth. To quote Max Weber:

Today it is primarily the capitalist market economy which demands that the official business of the administration be discharged precisely, unambiguously, continuously, and with as much speed as possible… Bureaucratization offers above all the optimum possibility for carrying through the principle of specialized administrative functions according to purely objective considerations… The "objective" discharge of business primarily means a discharge of business according to calculable rules and without regard for persons. "Without regard for persons" is also the watchword of the market and, in general, of all pursuits of naked economic interests…

The bureaucracy is "dehumanized," the more completely it succeeds in eliminating from official business love, hatred, and all purely personal, irrational, and emotional elements which escape calculation… The more complicated and specialized modern culture becomes, the more its external supporting apparatus demands the personally detached and strictly "objective" expert, in lieu of the master of older social structures, who was moved by personal sympathy and favor, by grace and gratitude.

For all the talk of government "death panels" in health care, we often forget that major corporations are making such life-and-death calculations every day: deliberating on whether it's more expensive to clean up toxic waste or just dump it and pay the fine, on the cost of covering a lifesaving treatment vs. the PR fallout from rescinding a cancer patient's coverage, on how many Pintos can blow up before a recall makes financial sense--and yes, on how many coal miners can die in explosions before lawsuits start to dig into profits. Max Weber must have watched Fight Club.

Lest we forget Massey CEO Don Blankenship's infamous 2005 memo:

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This is tremendous tea: Tea Party caught on tape

Offering a fascinating look into the psyche of young Tea Partiers, this rare footage from 1998 captures what may be the earliest known Tea Party to have been held in the United States:

A fraction of infinity is still infinity: everything you need to know about climate change in seven sentences

I just finished reading Paul Krugman's 8,000 word masterpiece on climate economics, "Building a Green Economy." If you read one thing on climate change this year, read this.

It's true, Krugman essentially replicates an argument I made in a previous post, which interestingly enough was cited in the New York Times blog "Dot Earth" (maybe THAT'S where Krugman stole my argument from!). It's okay though - he does the job so much more thoroughly and precisely than I ever could. After all, he is a Nobel laureate.

I highly suggest reading the whole piece, but I know you may not have time for 8,000 words. So I'll summarize the four main points of Krugman's argument:

1. Nearly all economists agree that the costs of reducing greenhouse gas emissions will be negligible, and likely cheaper than expected.

2. Nearly all scientists agree that the risk of catastrophic climate change is non-negligible, and likely worse than expected.

3. When absolute catastrophe is among the possible risks, decisions should be made on the basis of that worst-case risk, NOT the most likely scenario.

4. Therefore, the prudent, conservative, personally responsible choice is to invest in an insurance policy to mitigate against the threat of climate change.

You don't have to believe your house is going to burn down to know you should buy home insurance. In the same way, you can be skeptical about global warming and still think it's a good idea to insure against the risk that you're wrong. In the words of writer Jonathan Schell (words which became a popular piece of evidence in my high school debate days), "though the risk... may be fractional, the stakes are infinite, and a fraction of infinity is still infinity."

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Keep your carbon off my property: Paul Krugman explains externalities

Don't believe in global warming? Ask an insurance company

Keep your carbon off my property: Paul Krugman explains externalities

To hear some commentators, "free market" means the same thing as "small government." According to this mindset, government and freedom are zero sum. If you want to make the market more free, it always means reducing government interference in the market. And by the same token, any increase in government control over economic activity reduces economic liberty.

But market exchanges don't happen in a vacuum, and they often produce side effects. That's what we call an externality, and it's the classic Econ 101 example of how government interference in markets can make them more free. In an excellent piece on climate change economics, Paul Krugman gives a great intro lesson in externalities for the non-economics student:

But what if a deal between consenting adults imposes costs on people who are not part of the exchange? What if you manufacture a widget and I buy it, to our mutual benefit, but the process of producing that widget involves dumping toxic sludge into other people’s drinking water? When there are “negative externalities” — costs that economic actors impose on others without paying a price for their actions — any presumption that the market economy, left to its own devices, will do the right thing goes out the window. So what should we do? Environmental economics is all about answering that question.

In other words, it's totally simplistic to talk of cap-and-trade as a restriction on freedom. Whose freedom - factories' and coal companies'? And what kind of freedom - the freedom to pollute? The freedom to waste? The freedom to emit dangerous gases into an atmosphere shared by all, even if other people don't want you polluting their atmosphere?

Surely anyone who lives in democratic society lives by the precept that "you can do whatever you want - but not if it affects somebody else." And surely anyone who believes in capitalism and property rights believes in my right to keep other people's carbon pollution off my property.

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So much for global cooling

After a winter of record snow, is April 7 too early to complain about it being too hot? (Yes.)

The temperature in Washington DC yesterday hit an unseasonable 90 degrees - 2 degrees off the record for that date.

And it's not just Washington DC experiencing unusual heat. According to data from the National Climatic Data Center, 1,116 daily record highs were either tied or broken across the United States between March 29 and April 4, compared to only 77 record lows:

Okay deniers. You had your fun building snow castles on the National Mall, but the gig is up, and it didn't take long. Global cooling, we hardly knew thee.

Of course, weather does not equal climate, so I'd be remiss without rehashing this graphic showing record highs outpacing record lows over the past 50 years - one of many smoking guns in the evidence for manmade climate change:

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Shameless self promotion

As of the time of this post's publication, if you type "explain health care reform" on Google, WAG is the number one hit.

The question is, should I view this as cool or terrifying?

On the one hand, kind of neat to know that what I'm writing is actually having an impact.

On the other hand, the first thing many people will read for information on health care reform will be written by "guy on the Internet." An example of how the Internet era is breaking down Experts' mediation between raw facts and the public's consciousness - Google's algorithms don't account for author qualifications.

At least, unlike some sites, this guy on the Internet has critical thinking skills, so even if I'm wrong on some things, you can trust the analysis to be well thought out.

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Companies agree: "health care reform won't cost us jack"

Conservative commentators have been crowing over AT&T's report that health care reform has caused it to take a $1 billion accounting charge. House Majority Leader John Boehner called it another example of "job killing tax increases."

Actual business leaders disagree.

Noted bastion of socialism CFO.com explains that "Health care hit is minimal":

AT&T, Caterpillar, and Deere are among the companies that are reporting large first-quarter accounting charges because of the repeal of a tax deduction by the new health-care law. But the charges will have little effect on company valuations or cash flow, analysts say.

The Patient Protection and Affordable Care Act strips companies of a 28% tax deduction related to retiree drug benefits. The deduction is actually the tax-free treatment of a government subsidy that companies receive for providing retiree drug benefits equivalent to Medicare Part D, says tax expert Robert Willens, who heads a consultancy in New York. Since the deduction can't be claimed until the benefits are paid out, companies make the adjustment by writing down the deferred tax asset balances related to the subsidy, notes Willens.

Under the new law, the subsidy is no longer tax-free and must be included in a company's taxable-income calculation. The law eliminates the "double dipping" possibilities that were part of the tax code since 2003, says Willens. Under the original Medicare prescription-drug law, companies received deductions for making payments into retiree drug plans, as well as getting tax-free treatment for the subsidies they received for paying into the plans.

Last week AT&T announced it plans to take a $1 billion noncash charge related to the new law in the first quarter. Also announcing first-quarter charges were Caterpillar ($100 million), Deere ($150 million), and AK Steel ($31 million). Steelcase and DTE Energy also said they would be subject to similar accounting charges, although they have not yet specified the amounts.

A study of S&P 500 companies by Credit Suisse shows that the new law will cause companies to reduce their deferred tax assets by an aggregate $4.5 billion, with 45 of the companies possibly seeing a charge that is more than 10% of their consensus first-quarter earnings estimates. However, investors should not "overreact" to the potential earnings hit, cautions Credit Suisse's David Zion, because the charge will have very little effect on company valuations.

Indeed, the "eye-popping" numbers being reported are not a good indication of the costs being incurred in the first quarter, notes study co-author Christopher Cornett. That's because a quirk in the accounting rules requires companies to recognize the present value today of future cash costs going out as far as the drug benefits are offered.

...

The Credit Suisse report also points out that corporate cash flows from operations won't suffer much from the loss of the tax deduction, either. Between 2013 and 2019, it's likely that 20 companies will pay more than $5 million per year, on average, of additional taxes as a result of the new law. However, the tax hit amounts to less than 1% of the trailing five-year average cash flow from operations for each of the companies.

This argument is strikingly similar to ones made by liberal commentators.

It's becoming clear that although the GOP claims to be the party of markets and of business, the party's ideology is increasingly disconnected from what's actually good for business. Today's business leaders have recognized that sensible regulation is a prerequisite for the operation of their companies, and politicians have been slow to catch up. 20 years from now, will the GOP have updated its policy positions to account for the new realities of business, or will a new generation of businesspeople abandon the party that has championed their interests for the past century?