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

    January 26, 2022 - CE Noticias Financieras


      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 a good thing, considering that people's lives are prospering thanks to economic activity and the global growth of countries. However, it is important to be aware of the implications of this growth, as the construction industry, electricity generation and human nutrition currently contribute 77% of the greenhouse gases emitted into the atmosphere.

      Technological innovations that attempt to solve environmental problems, also known as "Green technologies", have the disadvantage of not advancing rapidly 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, cellular telephony, electricity, among others. The changes and the improvement in people's lives are strong and measurable. This is not so for green technologies. Their 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 the electrons from a coal-fired power plant. In addition, adoption costs are high, making them unaffordable for the masses.

      Bill Gates in his book: "How to avoid a climate disaster", talks about the concept of green premiums. Green premiums are the difference between the cost of a product that pollutes, from production, delivery, use, to disposal, versus a product that does not pollute or uses clean energy sources. For example, the cost of current fuel is $2.22 usd per gallon, versus the cost of biofuel, which is $5.35. The difference is $3.33 dollars, a price premium of approximately 41%. This differential is the green premium.

      Another example is hamburger meat, where a pound of meat is $3.79 versus plant-based meat priced at $5.76 per pound. The price premium is almost 65%.

      As can be seen the "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, charging 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 life of the vehicle.

      On the other hand, the green premium concept allows us to look at 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 may rise because it is not cheap to produce due to the physical or natural conditions of the location. 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 can we reduce this cost, how can we make clean energy affordable for all, how can the poorest countries grow without polluting?

      Gates, in his book "how to avoid a climate disaster", proposes two measures that governments should promote: promoting alternatives that reduce emissions and/or imposing penalties or fines for the hidden costs of pollution. The first alternative requires innovation from both public and private companies, as well as demand from the consuming public. Changing the "mindset" to really generate a change with incentives that generate sustainable growth alliances.

      For the second measure, currently when companies create products or customers buy them, they do not pay an extra charge for the carbon emissions involved in the whole 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 may be a drastic measure, but it would force producers and consumers to think about clean alternatives and innovate.

      According to the report "Financing the clean industrial revolution", in recent years 124 out 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 in 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 doing in Mexico?

      Alicia Fernanda Galindo Manrique is Director of the Bachelor's Degree Program in Public Accounting and Finance. She is a professor in the Department of Accounting and Finance at the Monterrey Campus of 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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