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Archive for July, 2010

What is a Green Investment Bank? Well this it seems lies at the heart of most things; From the red (Labour’s) corner the green investment bank was described as using £1 billion of public capital derived from assets with a matching of £1 billion from the private sector to enable the financing of low carbon infrastructure. From the blue/yellow (Tory/Lib-Dem’s) corner the bank is described as an aid to tackling the barriers to financing low carbon investment by providing:

1. Insurance policies for low carbon technologies and infrastructure where there are current gaps in the market,
2. Green bonds to allow the insurance industry to invest in for a 20-30 year term with yields to match their annuity options, and
3. Green ISA’s.

These would be financed with additional public funds from the ‘rationalisation’ of some existing quangos and funds.

So far so similar – both groups seem to want to offer products to investors to attract private money into low carbon/green projects and both rely on some public money being available.

So what’s the gossip?

Timeline

Last Budget, March 2010 The then chancellor announced £1.5bn to kick-start green energy projects from the sale of assets such as the channel tunnel.
Elections, May 2010 Result: Conservative/LibDem Coalition.
End of June 2010 Green Investment Bank Commission reports on the operation of a Green Investment Bank for Conservatives.
Mid-July 2010 Rumblings that the Green Investment Bank is to be cancelled.

In an article titled ‘UK shelves green investment bank’ the FT actually reported a broad political consensus in favour of such a bank (15/07/2010), however, in the same article it is clear that the initial plan for a bank based on Labour’s last budget is unlikely. It seems that in times such as these we are all pawns in the big game of the spending review which will report in the autumn. Until then we can say that:

1. There are difficulties with funding the low carbon sector,
2. There is political will across parties to address this issue,
3. How this issue will be addressed, whether a Green Investment Bank is brought into existence and at what scale will be determined by the outcomes of the spending review.

Enjoy the summer till then…

Ermintrude

Links:
UK Shelves Green Investment Plan – FT
Scrapping the green investment bank would be a disaster for jobs – Ed Miliband
Aldersgate Group News
Bob Wigley – Chairman, Green Investment Bank Commission

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A few weeks ago I read with thoughtfulness Rick Outzen of the Daily Beast’s post on “BP’s Shocking Memo”.  I thought about writing a blog post about how I didn’t agree with Outzen.  But I haven’t until now because, well, it is a touchy and controversial subject.  However, the reason we started and continue to write Cow Burps is to explain our view of the world through an (environmental) economics lens and to therefore bring greater understanding of (environmental) economic concepts to those reading the blog.  I will cover quite a large scope in this post and I hope that by the end I can convince you, maybe not fully, but at least that there is a valid viewpoint to be had.

So I ask you please to read to the end before making the decision to make me your next steak dinner!  We of course welcome your views and any comments you have.

See, the thing is, I believe that Rick Outzen’s piece on BP’s cost benefit analysis is hugely misleading on three points:

1)     BP does not estimate “the value of a worker’s life”

2)     BP should be congratulated for using the figure of $10 million

3)     The major failure of BP’s cost benefit analysis was not on using the $10 million figure, it was on their estimation of risk.

For example, the large font print reads:

EXCLUSIVE: This internal BP document shows how the company took deadly risks to save money by opting to build cheaper facilities for workers. The company estimated the value of a worker’s life at $10 million.

It is likely that BP did not actually estimate “the value of a worker’s life”, but instead used the value of a statistical life, also known as a ‘value of a prevented fatality’ and ‘value of mortality risk’.  They value the benefit of risk reduction or the costs of risk increases to individuals. The concept is used regularly, not only in cost benefit analyses but also by you in your everyday life.

Consider, for instance, the last time you rode in a car without your seatbelt on. Or the last time you took a shortcut at night through some dark street. Or the last time you didn’t chew properly when you ate something.  In these cases you valued the added comfort of not being strapped in, the quicker travelling time and the convenience of not having to chew (…) over the risk that you could be killed or injured.

It is impossible to put an infinite value on reducing the risk of fatalities to zero. Everyday you and I trade off tiny (and in some of your cases, especially if you are an Alaskan king crab fisher, maybe not so tiny!) risks to our lives to get to work, to have fun, to nourish ourselves.  Similarly, organisations such as BP send workers out to do tasks that could endanger their lives. Just like the Alaskan king crab fishers, the workers accept these high-risk tasks for the higher pay they receive (to compensate for the risk they take) compared to other jobs they could undertake that are less dangerous.  From another angle, governments make decisions about spending money to reduce fatalities such as building better roads to reduce the risk of accidents.  They know that accidents and fatalities will still happen, however the only real way to rule this out would be to ban motor vehicles altogether – a not impossible plan but one that, even if citizens agreed, would be crippling to the economy and would, in most people’s point of views, make everyone worse off.

Outzen’s point is that BP should have housed workers in blast-resistant structures rather than trailers.  However, if we look at the slide he presents, it still shows that blast-resistant structures have a vulnerability of 0.01. If, as is implied by Outzen’s article, Outzen feels that any risk of fatality is too high, he should instead have argued that BP should not have sent their workers out to the oil refinery in the first place, rather than that they should have housed them in blast-resistant structures.

So now that we have established that it is possible and not morally corrupt to use a value of statistical life for cost-benefit analysis, let’s look at BP’s value and ask ourselves whether it is enough. Outzen claims that BP used a value of $10 million per worker. This is actually $2.6 million more than the value the US Environmental Protection Agency (EPA) puts on the value of statistical life, and the EPA traditionally uses the highest value of statistical life amongst all US government agencies.

So what did go wrong?  From reading Outzen’s article, it is clear that with regards to the explosion in Texas, what was wrong with the cost-benefit analysis was the assessment of existing risk, or how frequent “the big bad wolf blows… per piggy lifetime”.  As the benefit of risk reduction measures to society is calculated as the value of a statistical life x reduction in risk x people affected by the reduction in risk, this assessment of existing risk is important, since a reduction in risk is the product of existing risk and the measures you put in place to mitigate against the existing risk.  This benefit calculation directly affects what kind of measures are taken.

For example, if you live on a farm in the middle of the countryside surrounded by farmland where explosions are not very likely (say 1 in a million), you will benefit less from building a blast resistant structure that mitigates your risk by 50% (reducing your risk to 1 in 2 million) than if you lived on an operating oil field where explosions are more likely, say 1 in 500, where it would halve your risk to 1 in 1000 (making the reduction in risk 2000 times more ‘beneficial’ in the oilfield than in the countryside).

Outzen writes “At Texas City, all of the fatalities and many of the serious injuries occurred in or around the nine contractor trailers near the isom unit, which contained large quantities of flammable hydrocarbons and had a history of releases, fires, and other safety incidents.”

From this description it looks like the big bad wolf could blow at any point and as the estimation for the probability of an explosion at the refinery is nowhere to be found, one is left wondering what it was and how it was estimated.

Coming up in a future post: Everything else BP left out of their cost-benefit analysis.

More information on Value of Statistical Life:
EPA – Value of Statistical Life Analysis and Environmental Policy: A White Paper for Presentation to Science Advisory Board – Environmental Economics Advisory Committee

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