Enterprise Resilience Management Blog

Foreign Aid (Good and Bad)

Among those eager to tell the incoming Obama administration how to do its job were Lorne Craner, the president of the International Republican Institute; Bill Frist, a former Republican leader of the Senate; Kenneth Hackett, the president of Catholic Relief Services; and Alan Patricof, a founder of a venture capital firm. All of them are appointees to the Millennium Challenge Corporation’s board of directors and together they wrote an op-ed piece last December about how U.S. foreign aid should be dispersed ["U.S. Aid Should Be Earned," New York Times, 20 December 2008]. They wrote:

"Not all foreign aid is the same. Hard lessons learned over the past five decades have taught us that good governance, accountability, local ownership and long-term engagement are the keys to success. In January, the new administration will inherit the five-year-old Millennium Challenge Corporation, which was created by Congress to ensure that foreign assistance operates according to these principles. He would do well to adopt it as a core development tool. Aid works best in countries whose governments are capable and committed. Before directing any American aid to a country, the corporation measures its performance on 17 indicators of democratic government, anti-corruption efforts, investments in health and education (particularly for girls) and economic freedom. Only those countries that perform strongly are allowed to compete for a five-year compact that makes them eligible to receive American aid for programs intended to reduce poverty and stimulate economic growth. By building its program around independent measures of policy performance, the corporation has been able to catalyze reform in poor countries — sometimes before any aid money is spent."

As readers of this blog know, I'm a big fan of standards. The fact that those administering the Millennium Challenge Corporation have witnessed reforms in recipient countries even "before any money is spent" underscores the truth that given goals to achieve most countries will make an effort. The World Bank found this to be true when it established its Doing Business Index. Countries immediately began reforms that would help them move up on the Index without the World Bank having to invest a dime. The MCC directors continue:

"Aid programs are sustainable only when they are designed and carried out by the country that needs them. The Millennium Challenge Corporation insists on playing a robust consulting role to ensure that any program the United States helps finance has a good rate of return and a clear effect on reducing poverty, and that the highest standards of accounting are followed. But it also requires that poor countries assume primary responsibility for their own development to ensure that our assistance truly helps the poor help themselves."

One challenge to this approach has been that countries like China and Venezuela have offered some poor nations aid without conditions (see my post entitled Rogue Aid). They provide this "no strings aid" because, as Moises Naim writes, "they seek to further their own national interests, advance an ideological agenda or even line their own pockets. Rogue aid providers couldn’t care less about the long-term well-being of the population of the countries they aid." Countries that have accepted such aid are now seeing the downside of depending on it ["As Chinese Investment in Africa Drops, Hope Sinks," by Lydia Polgreen, New York Times, 25 March 2009]. Reporting from Conakry, Guinea, Polgreen wrote:

"With a no-strings-attached approach and a strong appetite for risk, China seemed to offer Africa a complete economic and political alternative to the heavily conditioned aid and economic restructuring that Western countries and international aid agencies pressed on Africa for years, often with uninspiring consequences. Rising China, seeking friends and resources, seemed to be issuing blank checks. ... But Chinese companies are now driving harder bargains and avoiding some of the most chaotic corners of the continent. African governments facing falling revenues are realizing that they may still need the West’s help after all."

The Economist reports that rogue aid hasn't completely gone away ["An (iron) fistful of help," 6 June 2009 print issue]. The magazine writes:

"Authoritarian governments are using their money to buy influence abroad. Sometimes the money comes as a commercial loan; sometimes, as a grant; frequently, as both. These flows are changing the business of aid, undermining attempts by Western countries to improve their programmes and encouraging recipients to play donors off against each other."

What prompted the article was the release of a study entitled Undermining Democracy that was conducted by Freedom House, Radio Free Europe/Radio Liberty, and Radio Free Asia. The study took a detailed look "at the use by China, Iran, Russia and Venezuela of what it calls 'authoritarian aid'. The study is the first attempt to estimate the global scale of such operations."

"Autocracies offer an alternative to western aid in several ways. In the past decade rich countries have tried to improve a dismal record of development spending by linking aid closely to the priorities of recipients (rather than financing a big project which the country does not need) and by demanding good governance. China and the rest do not. Much of their aid is overtly political. Iran’s offer of free electricity to Shia parts of Iraq is one example, Venezuela’s bankrolling of Cuba another. Most is steered towards a few friendly regimes, or (in China’s case) places with natural resources."

The study was mostly conducted before the current recession hit. Many of deals that China was making in Africa are now in jeopardy Polgreen reports. She continues:

"In 2007 China announced a $9 billion deal with Congo for access to its giant trove of copper, cobalt, tin and gold in exchange for developing roads, schools, dams and railways needed to rebuild a country roughly the size of Western Europe and shattered by more than a decade of war. But that deal is now in doubt as falling prices have left Congo in a much weaker negotiating position."

In fact, The Economist reports that the Congo "and the International Monetary Fund are arguing about a bail-out. ... But the sticking point is, unexpectedly, not the country’s economic policy, but how exactly to repay a $9 billion credit that Congo secured last year from China." The article notes that the long-term impacts of rogue aid can be harmful.

"Naturally, help from harsh regimes is rarely encumbered with pesky demands for good governance. This makes it welcome to corrupt officials and even to those merely sick of being lectured by Westerners. Alas, it can encourage bad governance. China, the report says, is training 1,000 Central Asian policemen and judicial officials 'most of whom could be classified as working in anti-democratic enterprises'. The report concludes that authoritarian regimes are using aid to boost their soft power. If so, the spread of authoritarian aid is a challenge to more than just Western ideas of the right sort of giving."

Current global economic woes make foreign aid a touchy subject in some quarters. Why are we helping people in other countries when there is so much need at home right now? Shouldn't we be taking care of Americans first? The problem with that kind of thinking is twofold. First, ignoring the plight of others would forever knock out the moral underpinnings of U.S. foreign policy. Second, an improved economy at home may well rest on the recovery of emerging market countries abroad. The World Bank estimates that approximately 50 million more people will "tumble into poverty this year amid the largest decline in global trade in 80 years" ["Haiti’s Woes Are Top Test for Aid Effort," by Neil MacFarquhar, New York Times, 30 March 2009]. MacFarquhar continues:

"The results ripple through every index. An additional 200,000 to 400,000 infants, for example, may die every year for the next six years because of the crisis, the bank said. Amid the turmoil, the United Nations is reminding the world’s wealthy nations, however embattled their finances, not to forget the poorest."

One of the recommendations that winds its way through most discussions of aid is allowing recipient countries to play a major role in establishing priorities and methods of implementing development programs. Jeffrey Sachs, the well-known director of the Earth Institute at Columbia University, recommends that "recipient countries ... be invited to prepare plans and budgets that would be reviewed by independent experts" ["Homegrown Aid," New York Times, 8 April 2009]. Sachs continues:

"These plans would describe the inputs needed by the farmers, the expected increase in production, how the strategy would be put into place and how much money would be required. Such plans, if described with care, could then be closely monitored by the United States and other donors to gauge results and avoid corruption. Two international programs during the last decade, championed jointly by the United States, other governments and the Gates Foundation, have demonstrated the benefits of such a scientific, results-based aid approach: the Global Alliance for Vaccines and Immunization, and the Global Fund to Fight AIDS, Tuberculosis and Malaria. These programs have saved millions of lives and protected hundreds of millions more from disease and infection."

Aid, of course, is not going to bring the global economy out of recession. At best, aid provides a holding strategy in the most desperate countries that buys time to develop a market-driven recovery. I have stressed time and again that foreign direct investment plays a much more important role in sustainable development than does official development aid. Aid, however, is required to help establish some of the pre-conditions necessary to attract FDI. Public, commercial, and non-governmental organizations must work together to move a sustainable development agenda forward. Without goals and standards, such an agenda cannot be achieved. That is why not all aid is good.

Tensions Continue in Northern Iraq

During the general election in Iraq, things were mostly quiet and in order except in Northern Iraq in the area surrounding Mosul (see my post The Iraqi Election). Tension in the region is caused by three principal factors: crime, the continued insurgency, and mistrust between Kurds and Arabs. For more details about the latter situation, read my post Nastiness in Nineveh. I concluded that post with these words:

"With the June deadline looming for the withdrawal of American troops from Iraqi cities, renewed efforts need to be made to find a solution to growing tensions. Unfortunately, many people in the area believe that only confrontation will result in a solution. Such an outcome would be bad for both sides since it would set back development efforts and drain scarce resources which could be put to better use than fighting a civil war. Nineveh may never achieve the greatness it enjoyed in the past, but men of good will can make it better than it is today."

June has come and gone; but men of good will have yet to emerge. Tensions seem to be increasing rather than diminishing ["Insurgency Remains Tenacious in North Iraq," by Steven Lee Myers and Campbell Robertson, New York Times, 9 July 2009]. Myers and Robertson report:

"Now that American troops have largely pulled back from Iraq’s cities, one violent region remains particularly intractable: Nineveh Province and its turbulent capital, Mosul. Even a major military offensive in the months before the withdrawal did not quell the insurgency or reduce the violence. On Thursday, a twin suicide attack by bombers wearing explosive vests punctuated a recent string of attacks, a wave of violence that shows little sign of relenting. ... The persistent violence in Mosul and Nineveh underscores the broader turmoil afflicting Iraq. But it also reflects the region’s unique mixture of insurgency and ethnic tensions between Kurds and Arabs, as well as a proliferation of criminal gangs, that makes the north the most dangerous part of the country."

The article points out that the insurgency was defeated elsewhere in Iraq by gaining the support of the local populace against the insurgents. With tensions remaining high between Kurds and Arabs, cooperation between the groups has been non-existent. As a result, the strategy used elsewhere in Iraq has failed to take hold in Nineveh. The most recent violence, however, wasn't between Kurds and Arabs. The attacks appeared to be the work of the Islamic State of Iraq, an umbrella insurgency group that includes Al Qaeda in Mesopotamia. Although the "attack occurred in a Shiite neighborhood in a city largely populated by Turkmen Sunnis, ... it appears to have been aimed at Iraq’s security forces." With the future of both Southern and Northern Iraq hanging in the balance, now would be a good time for Kurds and Arabs to set aside differences and defeat the insurgency. That, however, appears unlikely. As a result, hope is slowly being sapped from the area's citizens as the constant threat of insurrection hangs over the area like a pall.

"The attacks in Mosul ... are ... often small, directed and constant, with a toll that accumulates inexorably even as it draws less attention. For three months, policemen have been killed at the rate of roughly one a day. Lawyers have been singled out and shot, as have university professors, students, government officials, retired soldiers, mothers and daughters, and even the coach of the Iraqi national karate team. In all of Nineveh, 94 Iraqis were killed last month, the vast majority of them in Mosul, Iraqi security officials and employees of Nineveh’s morgue said. July is already on track to be equally deadly, or worse. With its proximity to the Syrian border, a crossing point for foreign fighters, the region has long been one of the most difficult to pacify. Although initially calm after the American invasion, the region became a haven for insurgents pushed out of Baghdad and other parts of Iraq after the large influx of American troops — the so-called surge — began in 2007."

Although most the attacks in Nineveh have been against police and other security officers, tensions on the political stage remain focused on disagreements between Kurds and Arabs. Political changes in the semiautonomous Kurdish region are not helping the situation ["Kurds Defy Baghdad, Laying Claim to Land and Oil," by Sam Dagher, New York Times, 9 July 2009]. Dagher reports:

"With little notice and almost no public debate, Iraq’s Kurdish leaders are pushing ahead with a new constitution for their semiautonomous region, a step that has alarmed Iraqi and American officials who fear that the move poses a new threat to the country’s unity. The new constitution, approved by Kurdistan’s parliament two weeks ago and scheduled for a referendum this year, underscores the level of mistrust and bad faith between the region and the central government in Baghdad. And it raises the question of whether a peaceful resolution of disputes between the two is possible, despite intensive cajoling by the United States. The proposed constitution enshrines Kurdish claims to territories and the oil and gas beneath them. But these claims are disputed by both the federal government in Baghdad and ethnic groups on the ground, and were supposed to be resolved in talks begun quietly last month between the Iraqi and Kurdish governments, sponsored by the United Nations and backed by the United States. Instead, the Kurdish parliament pushed ahead and passed the constitution, partly as a message that it would resist pressure from the American and Iraqi governments to make concessions."

Iraq's central government and the United States fear that the new constitution is another step toward creating a separate Kurdish state -- a move that both governments oppose. For their part, the Kurds remain both mistrustful and frustrated with Iraq's central government.

"Kurdish officials defended their efforts to adopt a new constitution that defines the Kurdistan region as comprising their three provinces and also tries to add all of hotly contested and oil-rich Kirkuk Province, as well as other disputed areas in Nineveh and Diyala Provinces. Iraq’s federal Constitution allows the Kurds the right to their own constitution, referring any conflicts to Iraq’s highest court. Susan Shihab, a member of Kurdistan’s parliament, said she no longer had faith that the rights of Kurds under the federal constitution from 2005 would be respected. 'What is missing the most in the new Iraq is confidence,' she said. At the same time, though, some Kurds acknowledge that they have grown frustrated with the halting talks to resolve territorial disputes and other issues involving Kurds’ political power in Iraq."

Although U.S. officials understand Kurdish frustration, they find the push for a new constitution "unhelpful." Not all Kurds favor the new constitution. Dagher concludes:

"Many people in Kurdistan are deeply troubled by how the constitution was hastily passed and the extraordinary powers it gives the president, without meaningful checks and balances. A group of civil society organizations in the Kurdish city of Sulaimaniya began a campaign last month opposing the constitution. Namo Sharif, an activist involved in the effort, said a Kurdish government official called him a 'traitor.' Kwestan Mohammed, a member of the regional parliament who joined a new coalition running against the two ruling parties in the July elections, said that Kurdistan needed its own constitution but that the document in its current form planted the seeds of endless conflict with the central government and made the region’s president an 'absolute' ruler."

Although rationale individuals would admit that the best way forward would be peaceful negotiation of differences, history has so colored the relationship between Kurds and Arabs that emotions, not logic, are the governing force in the region. For the time being, the Kurdistan Regional Government and the central Iraqi government need to isolate the more peaceful areas of the country from the more unstable ones. They can't permit tensions in the north to disrupt economic progress being made elsewhere in the country. Since the Kurds and the Arabs are unlikely to work out a solution on their own, the international community needs to remain a primary player in ongoing negotiations.

Innovation, Inventions, and Investment

As I noted in my post entitled Innovating the Future, more and more headlines are asking where are all the jobs are that were supposed to be created by Congress' trillion-dollar stimulus package? In earlier posts about how to get the U.S. and global economies back on track, I have promoted the notion that the Obama administration and Congress should pay more attention to fostering conditions that will promote innovation and entrepreneurs (see for example, my post entitled Entrepreneurs and Economic Recovery). New York Times' columnist Thomas Friedman is also a believer in the power of innovation ["Invent, Invent, Invent," 27 June 2009]. He reports about a chance meeting he had in St. Petersburg, Russia, with the former chairman of Intel Craig Barrett. He asked Barrett how the U.S. could get itself out of its current economic conundrum and Barrett surprised him by saying that every person who gets a driver's license in the U.S. should have a high school diploma first. His logic was simple: "No diploma — no license. Hey, why would we want to put a kid who can barely add, read or write behind the wheel of a car?" Like Friedman, you might wonder what getting a driver's license has to do with getting the U.S. out of its current recession. Friedman writes:

"Now what does that have to do with pulling us out of the Great Recession? A lot. Historically, recessions have been a time when new companies, like Microsoft, get born, and good companies separate themselves from their competition. It makes sense. When times are tight, people look for new, less expensive ways to do old things. Necessity breeds invention. Therefore, the country that uses this crisis to make its population smarter and more innovative — and endows its people with more tools and basic research to invent new goods and services — is the one that will not just survive but thrive down the road. We might be able to stimulate our way back to stability, but we can only invent our way back to prosperity. We need everyone at every level to get smarter. I still believe that America, with its unrivaled freedoms, venture capital industry, research universities and openness to new immigrants has the best assets to be taking advantage of this moment — to out-innovate our competition. But we should be pressing these advantages to the max right now."

Almost everyone has been exposed to the notion that most new jobs are going to be created by small businesses and in new industries. That being the case, we can only sit back and marvel as the government spends so much time and money trying to save dying businesses. The future awaits; but it won't wait for long. Friedman continues:

"We should be taking advantage. Now is when we should be stapling a green card to the diploma of any foreign student who earns an advanced degree at any U.S. university, and we should be ending all H-1B visa restrictions on knowledge workers who want to come here. They would invent many more jobs than they would supplant. The world’s best brains are on sale. Let’s buy more! Barrett argues that we should also use this crisis to: 1) require every state to benchmark their education standards against the best in the world, not the state next door; 2) double the budgets for basic scientific research at the National Science Foundation, the Department of Energy and the National Institute of Standards and Technology; 3) lower the corporate tax rate; 4) revamp Sarbanes-Oxley so that it is easier to start a small business; 5) find a cost-effective way to extend health care to every American. We need to do all we can now to get more brains connected to more capital to spawn more new companies faster. As Jeff Immelt, the chief of General Electric, put it in a speech on Friday, this moment is 'an opportunity to turn financial adversity into national advantage, to launch innovations of lasting value to our country.'"

Friedman's point about finding ways "to get more brains connected to more capital to spawn new companies faster" is one the things that the state of Maryland is trying to do ["Biotech Start-Ups Show Dedication, Line Up Again for Tax Credits," by Kim Hart, Washington Post, 29 June 2009]. Hart reports that a Maryland tax credit program "encourages investment in Maryland biotechnology start-ups by letting investors receive a tax credit for 50 percent of the money they put into eligible companies. The state provides $6 million a year for the tax credits. The funding for the program was in danger of getting slashed this year due to tightened budgets, despite Gov. Martin O'Malley's efforts to increase it. The credit cannot exceed $50,000 for individual investors and $250,000 for corporations and venture capital firms." The program is so popular that individuals and company representatives begin lining up for "first come, first served" opportunity a week before applications can be submitted. For the first time, the state has made University of Maryland's BioPark facility available to applicants beginning five days before applications can be submitted. The building has a gym, a shower and carpeted floors. Applicants used to have camp on the street outside. The fact that Maryland's legislature threatened to cancel the program indicates how out of tune many politicians are with solutions that have the best chance of making a difference in the future. The first four companies waiting in line to receive the tax credits this year were BioMarker Strategies, a cancer diagnostics company, Zymetis, an alternative fuel-producing firm, Sequella, which develops treatments for infectious diseases, and Gliknik, a firm that develops drugs for autoimmune diseases.

To find out how someone in the state felt about the tax credit program and how it affects economic development in Maryland, I contacted Dr. Richard Zakour, Executive Director of the MdBio Division of the Tech Council of Maryland. He said, "In leading the effort to organize a campaign to maintain the funding of this program, the Tech Council of Maryland has stressed how successful this program has been since its inception four years ago. The state's investment of $18 million has been more than matched by $30 million of private investment in 38 different companies in Maryland. This funding has not only helped many of these companies to survive, but has led to the creation of new jobs that will be around for a number of years." Dr. Zakour notes that this program is recognized as being one of the most innovative in the country.

Another organization that sees a bright future for innovative companies and is willing to invest in them is Google. It recently announced that it was establishing a for-profit venture fund that would invest up to $100 million over the next twelve months ["Google to Announce Venture Fund," by Miguel Helft, New York Times, 31 March 2009]. Helft reports that "Google will tap the connections of its employees and its ties to the venture capital world to find promising startups in areas like the Internet, clean technology and life sciences." Some analysts argue that the problem today is not too little but too much venture capital ["Venture Capitalists Look for a Return to the A B C’s," by Claire Cain Miller, New York Times, 6 July 2009]. Miller writes:

"The biggest names in the industry are concerned about low returns and are blaming several factors: funds that have grown too large, the M.B.A.’s that have invaded the industry and older partners who have lost touch with what is new in technology. 'I personally believe and I think the evidence proves that the venture industry has gotten too big, the funds have gotten too big,' said Alan Patricof, an investor for 40 years who backed America Online and Apple, at a recent venture investing conference in San Francisco. 'Our biggest challenge today for venture capital is to think smaller.' Mr. Patricof is part of a growing chorus of voices calling for the amount of money in venture funds to shrink drastically to levels last seen two decades ago. His firm, Greycroft Partners, is taking a retro approach with a $75 million fund that makes smaller investments."

It may seem counterintuitive during a time of crisis to conclude that there is too much investment money available. It wouldn't really be a problem if there were enough good ideas to go around. In the post cited at the beginning of this one, I discuss an article by Michael Mandel of BusinessWeek who believes that that past decade has seen a drought of new ideas. As a result, too much money is chasing too few ideas. Miller continues:

"Instead of figuring out how much start-ups actually need, too many firms calculate how much they have in their funds, divide it by the number of partners and the number of boards they can sit on, and come up with a sum to invest in each start-up, said Ben Horowitz, a partner in a new venture firm, Andreesen Horowitz. That often means forcing $3 million into a company that needs $300,000, he said. Overfinancing results in too many firms backing too many start-ups that do the same thing, some critics say, and it inflates the valuation of companies so that investors get smaller returns when they eventually sell."

The good news is that VC firms looking to invest less could actually stimulate greater innovation. Entrepreneurs are more likely to believe they have a chance of obtaining venture capital when the amount they are seeking is modest. Although most VC firms are looking for significant returns on investment, not all good ideas are found in the for-profit world. There are innovative ideas in the non-profit world that also deserve access to capital, but finding that capital is challenging -- very challenging. A New York Times' editorial discusses a White House initiative that could make the challenge of finding capital less daunting ["Communities, Innovation and Washington," 1 June 2009]. The editorial staff writes:

"Central to the initiative is the creation of a Social Innovation Fund housed at the Corporation for National and Community Service. Congress has authorized the fund, and President Obama’s 2010 budget allots $50 million for it to start. The plan recognizes a hard reality of the nonprofit world: It is a lot easier to secure foundation grants and other short-term financing to develop a model program than it is to come up with the capital to expand successful programs and their potential for systemic change. The fund is supposed to address that problem by identifying successful high-impact programs prime for further development and expansion and then using government dollars as a catalyst to raise sustainable financing from foundations, businesses and individual donors."

The Social Innovation Fund would be a source of seed money to help programs prove themselves worthy of further investment. Sometimes a little money can go a long way. Netflix, the popular movie provider, understands that the future belongs to innovators. About three years ago it announced a million dollar prize for anyone coming up with a software program that would "that improve the movie recommendations made by Netflix’s existing software by more than 10 percent" ["And the Winner of the $1 Million Netflix Prize (Probably) Is …" by Steve Lohr, New York Times, 26 June 2009]. Lohr reports that "after nearly three years and entries from more than 50,000 contestants, a multinational team says that it has met the requirements to win the million-dollar Netflix Prize." Is this a good deal for Netflix? Run the numbers. If each of those 50,000 contestants had spent only one hour on the project and had been paid $50/hour, that would have been $2.5 million in effort. Some "contestants" consisted of teams of more than one person and those people spent many more than one hour on the project. The savings for Netflix is enormous as are the likely rewards. Netflix says that accurate recommendations increase its appeal to its customers. Lohr writes:

"The Netflix Prize contest has been hailed as prime example of 'prize economics' and the crowdsourcing of innovation. Prize economics refers to running a contest to generate a new innovation at less cost than an in-house research and development effort, and crowd-sourcing refers to using the proverbial wisdom of crowds to accomplish a task. Netflix has said that $1 million would be a bargain price for an improved recommendation engine, which would increase customer satisfaction and generate more movie rental business."

The probable winning team is an interesting group that is actually "a coalition of four teams calling itself BellKor’s Pragmatic Chaos — made up of statisticians, machine learning experts and computer engineers from America, Austria, Canada and Israel." What is even more interesting is that they began as competitors in the contest and then joined forces.

"BellKor’s Pragmatic Chaos is a pretty elite crowd. The group is a collection of the 2007 and 2008 winners of the Netflix Progress Prizes — $50,000 a year for the teams that made the most progress toward the 10 percent improvement — and a pair of engineers from Montreal who have long been near the top of the contest’s leaderboard. The team includes Bob Bell and Chris Volinsky of the statistics research department at AT&T Research (members of the 2007 and 2008 Progress Prize-winning teams); Andreas Toscher and Michael Jahrer, machine learning experts at Commendo research and consulting in Austria (members of the 2008 winning team); Martin Piotte and Martin Chabbert, engineers and founders of Pragmatic Theory in Montreal; and Yehuda Koren, a senior scientist at Yahoo Research in Israel (a member of the 2007 and 2008 winning teams)."

In a way, the Netflix Prize served as a collaborative space that generated what Frans Johansson calls the Medici Effect -- the valuable and surprising results of sharing ideas across sectors. Individuals involved in the contest from both Netflix and the apparent winning team admitted that collaboration was the key to meeting Netflix's challenge. Under the rules of the contest, competitors now have 30 days to beat the winning entry. If none of them do, the prize will be awarded to BellKor’s Pragmatic Chaos. The articles by Friedman, Hart, Helft and Lohr share one common thread, the belief that innovation is going to mark the path to a more successful future. I agree with them. Only Miller's article threw a dash of cold water on the innovation environment; but even her article underscores the fact that there is money to be found if an idea is good enough.

The Protean Corporation

Michael Shawn Malone is a man of many talents. He has been an author, columnist, editor, investor, business-man, and television host. He is also considered one of the world's the first high tech reporters. His beat was Silicon Valley. His latest book is entitled The Future Arrived Yesterday: The Rise of the Protean Corporation and What It Means for You. Malone says he wrote the book after looking at his resume and realizing that many of the companies he worked for no longer exist. He began wondering what a company had to do to survive in an era increasingly defined by rapid change. Senior BusinessWeek writer Spencer Ante has written a review of Malone's new book ["Change is Good--So Get Used to It," 22 June 2009 print issue]. Ante believes that Malone's look into the future should be taken seriously because Malone has a history of getting things right.

"In books such as 1993's The Virtual Corporation, Malone boldly--and presciently--described how technology would reshape corporate reality. In his 2007 book, Bill & Dave: How Hewlett and Packard Built the World's Greatest Company, he reached into the past to chronicle the Valley's first startup. When he became one of the first reporters to cover technology as a beat, back in 1980 for the San Jose Mercury News, Michael S. Malone made telling the story of Silicon Valley his raison d'etre. Now, with The Future Arrived Yesterday: The Rise of the Protean Corporation and What It Means for You, Malone has his forecaster hat back on and another game-changing theory. And because his past predictions about the impact of digital technologies were so often on the mark, many people really do want to know what he's been noodling over."

From the title, we know that Malone is going to write about change. "Protean" means readily taking on varied shapes, forms, or meanings. We can also surmise that Malone believes that only companies that can change with the times will survive. Ante continues:

"The central idea here is both simple and powerful: The global economy has entered a new era, and a mercurial corporate form Malone calls the Protean Corporation will become the dominant species by the middle of the next decade. 'These Protean Corporations,' he writes, 'will behave like perpetual entrepreneurial startups, continuously changing their form, direction, even their identity. They will be true corporate shape-shifters.' This notion may not come as a shock, but the huge repercussions Malone envisions just might."

The notion certainly doesn't surprise me. My company, Enterra Solutions, is something of a shape-shifter itself. I began the company as an enterprise that would focus on automating business processes (something that it still does) but the company also morphed into one that deals heavily in helping emerging market countries promote sustainable development. Malone, however, seems just as concerned about what must remain permanent about a company as he is about what should change. Ante continues:

"The big challenge will be finding a way to protect the core DNA of a company as it reinvents itself over a time frame of months rather than once a generation or decade. Workers will need to be more adaptable than ever. 'The company that employs you for the next 20 years may radically change a dozen times, and you will have to find your place in each of those reincarnations,' writes Malone."

From what I gather, Malone doesn't believe that most workers will adapt. He thinks that every company has (or will have) a core group of employees that defines the company (even through its many transformations) and that an ever-changing cloud of transitory employees will surround them as the company changes over time. As Ante explains, Malone believes that companies will either change or they will die.

"Corporations that fail to figure out how to couple permanence with perpetual change will be 'swept away,' [Malone] says. Although it's a grandiose theory, Malone presents a strong and timely case that business is entering a phase of creative destruction where nothing can be taken for granted and change is the only constant."

Of course, there is nothing new about the notion that change is the only constant in either business or life. The Greek philosopher Heraclitus (540 BC-480 BC) wrote, "Nothing endures but change." What seems to be new about Malone's thinking is that successful corporations will organize themselves in such a way that creative destruction happens from within rather than being imposed by outside forces. Imposed creative destruction means that a company probably won't survive. Ante explains that several factors have created the conditions that make internal creative destruction a modern necessity. First, as companies become more virtual there is less structural framework to hold companies together. As Ante writes, "'Ever-greater virtualization' is eating away at organizational structures and replacing them with 'networks of free agents.'" Secondly, younger employees seem to be possessed with a greater spirit of entrepreneurism than older generations. This "entrepreneurial mindset of today's twenty-somethings will serve as a 'catalyst for radical change.'" Malone calls these people "intrapreneurs."

"Malone says these 'intrapreneurs' must be supported and given freedom, funding, technical resources, and a stake, much like a startup with venture capital. 'Companies of the future must not only support fully the creation of new entrepreneurial enterprises within their corporate operations and do whatever it takes to make the company's work environment conducive to startups, but even take the next step of basing their corporate strategy on the presence of these internal startups.' It's an idea so audacious that--in a sped-up, hypercompetitive future--it just might work."

One business leader who seems to agree with Malone is Anne Mulcahy, chairwoman and chief executive of the Xerox Corporation ["The Keeper of That Tapping Pen," by Adam Bryant, New York Times, 21 March 2009]. Bryant asked Ms. Mulcahy if she looks for specific characteristics in new employees that she might not have looked for in years past. She answered:

"Adaptability and flexibility. One of the things that is mind-boggling right now is how much we have to change all the time. For anybody who’s into comfort and structure, it gets harder and harder to feel satisfied in the company. It’s almost like you have to embrace a lot of ambiguity and be adaptable and not get into the rigidness or expectation-setting that I think there used to be 10 years ago, when you could kind of plot it out and define where you were going to go. I think it’s a lot more fluid right now. It has to be. The people who really do the best are those who actually sense it, enjoy it almost, that lack of definition around their roles and what they can contribute."

On that point, I believe Malone and Mulcahy agree completely. I don't think that Mulcahy would have any difficulty describing Xerox as a protean corporation. I agree with King Whitney, Jr., who wrote, "Change has a considerable psychological impact on the human mind. To the fearful it is threatening because it means that things may get worse. To the hopeful it is encouraging because things may get better. To the confident it is inspiring because the challenge exists to make things better." Protean companies are confident companies as well as hopeful ones.

Celebrating Freedom

Although tomorrow is the actual anniversary of America's declaration of independence from Britain, many companies are giving their employees the day off today to celebrate. After all, what good is a holiday if it doesn't get you out work! Back in January Freedom House, an American lobby group, released its report about "how the world fared with its freedoms during the Bush years -- "an initial five years of improvement were followed by a three-year decline—less in 2008 than previously, but still disappointing" ["It never stays long," The Economist, 17 January 2009 print issue]. The report was gloomy because of "Russia’s rigged elections" and developments in countries that were once part of the Soviet Union. Iraq posted "a slightly better score" than the year before but Afghanistan moved "from 'partly free' to 'not free' in Freedom House’s broad three-category system." In general, "the Middle East and north Africa region—the centrepiece of Mr Bush’s efforts to promote freedom—showed little measurable improvement over the previous year" and next year will probably be even worse based on the travesty of Iran's presidential elections [see my post entitled The Tragedy of the Iranian Elections] and the drama unfolding in Honduras. The article reports:

"More widely, the number of 'electoral democracies' (those with tolerably free and fair elections) dropped by two, to 119 (thanks to four demotions and two promotions). The general trend was down too, with declines in freedom of expression and association, and a weaker rule of law."

Although people in the United States too often equate freedom with the type of representational democracy it enjoys, there are many people who long to enjoy even the most basic of human rights. In China, human rights lawyers are being disbarred. In Africa, activists against corruption are being killed. In Iran, protesters are beaten, jailed, and even gunned down. That is why it is important to have a day that celebrates freedom and reminds us that freedom is something to be cherished and protected. We can only hope that The Economist is wrong when it declares that freedom "never stays long." Dwight D. Eisenhower, who served as both a general and a president, said this about freedom:

"Freedom has its life in the hearts, the actions, the spirit of men and so it must be daily earned and refreshed - else like a flower cut from its life-giving roots, it will wither and die."

Freedom cannot be taken for granted. If it is, leaders will inevitably come along who will claim that they must provide security by limiting freedom. With cunning and guile, they will slip the noose of tyranny around the necks of their people and claim to be leading them to the promised land. In the end, they will only tighten the noose and strangle the last gasps of freedom from a country. Celebrating freedom is a good thing; but defending it daily is even better.

"Giveaway" Reminder -- Today is the Last Day

Just a reminder that there is still time to enter to win a beautiful Knoll desk lamp (worth nearly $200) thanks to AllModern.com. For details on how to enter, see my post The Office of the Future. The winner will be drawn today at 5 EDT. I will announce the winner tomorrow.

Innovating the Future

One of the frequently asked questions about the U.S. stimulus package centers on new jobs: Where are they? States like Michigan are shedding jobs so fast that even its high-powered campaign to attract businesses to the state can't keep up ["Michigan Works to Remake Itself Without King Auto," by Bill Vlasic and Nick Bunkley, New York Times, 9 June 2009]. "About 800,000 jobs have been lost in the state about one in every six — since 2000," reports Vlasic and Bunkley, "and its unemployment rate has reached 12.7 percent, higher than any other state." Michigan is trying to attract high tech businesses through a high-powered ad campaign and it is investing heavily in retraining laid-off workers. In other words, rather than trying to save dying businesses Michigan is trying to establish conditions that will make it stronger in the future. From the beginning of this current economic crisis, I have supported the idea that government's primary role is to establish conditions favorable for entrepreneurs. New York Times' columnist Steve Lohr reports that more and more governments are exploring the best role for them to fill ["Can Governments Till the Fields of Innovation?" 20 June 2009]. He writes:

"Governments are increasingly wading into the innovation game, declaring innovation agendas and appointing senior innovation officials. The impetus comes from two fronts: daunting challenges in fields like energy, the environment and health care that require collaboration between the public and private sectors; and shortcomings of traditional economic development and industrial policies. Innovation policy, to be sure, is an emerging discipline. It lacks crisp definitions or metrics."

I favor public/private partnerships, especially in emerging market countries; but the balance between what should be public and what should be private is not an easy one to achieve. Many government leaders, including those in the Obama administration, are coming to believe that innovation and entrepreneurship are critical for a brighter future. According to Lohr, the Obama administration has directed "the Bureau of Economic Analysis to develop statistics that 'uniquely measure the role of innovation' in the economy. And the government’s new chief technology officer, Aneesh Chopra, speaks of building 'innovation platforms' to spur growth." The focus of Lohr's article was a workshop about innovation policy for government leaders "organized and moderated by John Kao, a former professor at Harvard Business School and founder of the Large Scale Innovation. ... The main participants were innovation-policy practitioners from nine countries: Australia, Brazil, Britain, Chile, Colombia, Finland, India, Norway and Singapore."

"Innovation policy is an attempt to bring some coordination to often disparate government initiatives in scientific research, education, business incentives, immigration and even intellectual property. 'It’s about setting an agenda and helping build a portfolio of skills that let an economy and a society move forward in smarter, faster ways,' Mr. Kao said. Yet if the reach of innovation policy is broad, the attendees agreed, it is best done with a lighter touch than industrial policies of the past, which often focused on specific companies for government support. They used metaphors like 'impresario' and 'orchestra conductor' to describe government’s role. The ideal, they said, is 'stewardship,' not command and control."

One of the things that governments shouldn't do, participants believed, is pick winners and losers and then implement policies that favor the winners. Governments should "create the conditions so that new industries can rise more easily." I couldn't agree more. Every country, however, faces unique challenges and encouraging innovation that targets that challenge is also important. Lohr notes, for example, that Finland has the "second-fastest-aging society in the world, after Japan." As a result, it is looking to for ways to encourage innovation in medical-related fields. Australia, faced with a harsh environment, is looking to "improve strains of drought-resistant wheat and cotton for export." Boeing is also establishing an unmanned aerial vehicle (UAV) facility in Australia because UAVs can be tested without fear of running into something. India is supporting innovative industries that can export innovative technologies to the rest of the world, reversing the trend of having to import technologies from the developed world. Evidence that India's strategy is working, Lohr claims, includes the "Nano automobile, and low-cost drugs for tuberculosis and psoriasis."

America is still considered the world's most innovative country; but, as I have written before, many people believe that it may be losing its innovative edge (for example, read my posts Another Slowdown to Worry About -- Innovation?, America's Competitive Edge and Fostering Innovation and Restoring America's Competitive Edge). One writer questions the perception that America remains the world's most innovative country. He believes that most fields of innovation have lain fallow for the past decade ["Innovation Interrupted," by Michael Mandel, BusinessWeek, 15 June 2009 print issue]. Mandel writes:

"'We live in an era of rapid innovation.' I'm sure you've heard that phrase, or some variant, over and over again. The evidence appears to be all around us: Google, Facebook, Twitter, smartphones, flat-screen televisions, the Internet itself. But what if the conventional wisdom is wrong? What if outside of a few high-profile areas, the past decade has seen far too few commercial innovations that can transform lives and move the economy forward? What if, rather than being an era of rapid innovation, this has been an era of innovation interrupted? And if that's true, is there any reason to expect the next decade to be any better? These are not comfortable questions in the U.S. Pride in America's innovative spirit is one of the few things that both Democrats and Republicans—from Bill Clinton to George W. Bush to Barack Obama—share. But there's growing evidence that the innovation shortfall of the past decade is not only real but may also have contributed to today's financial crisis."

Mandel reminds us of the optimism that preceded the bursting of the dot.com bubble. The U.S. appeared to be on the verge of an exciting and profitable era. Reality, however, didn't keep pace with expectations.

"If the reality of innovation was less than the perception, that helps explain why America's apparent boom was built on borrowing. The information technology revolution is worth cheering about, but it isn't sufficient by itself to sustain strong growth—especially since much of the actual production of tech gear shifted to Asia. With far fewer breakthrough products than expected, Americans had little new to sell to the rest of the world. Exports stagnated, stuck at around 11% of gross domestic product until 2006, while imports soared. That forced the U.S. to borrow trillions of dollars from overseas. The same surges of imports and borrowing also distorted economic statistics so that growth from 1998 to 2007, rather than averaging 2.7% per year, may have been closer to 2.3% per year. While Wall Street's mistakes may have triggered the financial crisis, the innovation shortfall helps explain why the collapse has been so broad."

Having made his case for "innovation interrupted," Mandel then provides a bit of cheer amid the gloom.

"Many of the technological high hopes of 1998, it turns out, were simply delayed. Scientific progress continued, the technologies have matured, and more innovations are coming to market—everything from the first gout treatment in 40 years to cloud computing, the long-ballyhooed phenomenon 'information at your fingertips.' The path has been long and winding, but if the rate of commercialization picks up, the current downturn may not be as protracted as expected."

For the latest on cloud computing, see my post entitled Update on Cloud Computing. One of the innovative technologies that has languished for the past decade is tissue engineering. Mandel details the story of Organogenesis, a small company in Canton, MA. A decade ago the company developed the world's first living skin substitute (called Apligraf) and had received FDA approval to sell it. Unfortunately, the tissue substitute cost more to produce than it could be sold for. The company went bankrupt. Skip forward a decade, however, and things have changed. Geoff MacKay, the new CEO of Organogenesis, has straightened out the company's manufacturing, logistics, and sales, and has turned Apligraf into a moneymaker.

"Sales of Apligraf are growing at more than 20% per year, the company is taking over two more buildings on the same street in Canton, and it has FDA approval to install high-reliability robots from Japan's Denso, the same supplier Toyota uses, he says. Employment is expected to climb from 350 jobs to about 600, the company is introducing products, and MacKay is talking about 'cautious globalization.' In other words, Organogenesis is fulfilling the promise of 1998—a decade later."

Mandel claims you can "multiply that story a hundredfold and extend it to other areas." One of those areas, he says, is "micromachines—miniaturized gyroscopes, pumps, levers, or sensors on a silicon chip—also known as MEMS (microelectromechanical systems)." A decade ago MEMS were the "next big thing" -- or maybe not. That may be changing, however, Mandel reports that a company called WiSpry "is now about to start shipping MEMS chips that will go into cell phones, improving battery life and reducing dropped calls." Another area of interrupted innovation has been the biotech sector. Mandel reports that "2008 was the first year that the U.S. biotech industry collectively made a profit, according to a recent report by Ernst & Young—and that performance is not expected to be repeated in 2009." For more on the future of biotech, see my post entitled Biotechnology's Third Wave.

"A December 2006 paper by the Brookings Institution, co-authored by Peter R. Orszag, now head of the Office of Management & Budget, observed: 'Because the U.S. is at the frontier of modern technological and scientific advances, sustaining economic growth depends substantially on our ability to advance that frontier.' The flip side: A shortfall in innovation could undercut growth and incomes, especially over a decade-long period."

Orszag's conclusion was correct. America's economy lives on the future's frontiers and its business leaders must boldly explore and advance those frontiers. Entrepreneurs are today's Lewises and Clarks. One of the things that I preach to leaders of developing countries is that they must diversify their economies. America is no different. Mandel notes that "no industrial revolution in the past has been based on a single technology." Any future economic revolution must be built on innovations in a number of sectors. Mandel concludes:

"The professor, trader, and author Nassim Nicholas Taleb calls technological breakthroughs 'positive Black Swans'—unexpected events with huge positive consequences that in retrospect look inevitable. Some, such as Google, come out of nowhere to dominate within a short time. Others take years to mature and are surprising only because people forgot they were there. We've learned over the past 10 years just how unpredictable technology can be. But right about now, the U.S. could use a few positive Black Swans."

Another BusinessWeek reporter, Reena Jana, discusses another decade-old idea that was once touted as the next big thing, automated innovation. She notes that the process turned out to be a dud for introducing new products, but "now it's a sharp tool for cutting costs" ["Dusting Off a Big Idea in Hard Times," 22 June 2009 print issue].

"Dozens of software companies are using algorithms once intended for product development to help corporations pinpoint ways to reduce spending. San Diego's Natural Selection, a 16-year-old company that created the program used by Pfizer to try to auto-invent drugs, is helping clients streamline delivery routes and retrofit facilities. Among its recent customers: General Electric and the U.S. Air Force. Some of the original corporate participants in auto-innovation are back at it, too, including Pfizer and HP. HP's adventures (or misadventures) in particular show how ideas that bombed at first can become valuable when given a second chance. 'Successful innovations are often built on the backs of failed ones,' notes Scott D. Anthony, president of business consultancy Innosight and author of a just-published book, The Silver Lining: An Innovation Playbook for Uncertain Times. 'It makes sense to make it a regular practice to go back and see what pieces of rejected ideas might offer important tools if they can be applied in new ways.' Like researchers at 3M and Google, staff scientists at HP Labs are urged to spend a chunk of their workweek on self-initiated projects. Evan Kirshenbaum, a computer programmer who has worked at HP since 1989 and holds more than 20 programming patents, began in early 1998 using his spare time on auto innovation writing code to combine and recombine snippets of ideas to discover new ones."

In past discussions about innovation, I've noted that many innovators fill their offices with interesting gadgets that they've picked up over the years hoping that someday they will help inspire a new use of an old idea. Apparently old software code can serve the same purpose. Of course I'm interested in automated computer processes because they were what initially led to me found Enterra Solutions. They remain an important part of the business. Mandel's and Jana's articles offer a glimmer of hope that we sit on the cusp of a new outburst of innovation and progress. If true, it couldn't come at a better time.

"Giveaway" Reminder -- Last Full Day to Enter

There is still time to enter to win a beautiful Knoll desk lamp (worth nearly $200) thanks to AllModern.com. For details, see my post The Office of the Future. The winner will be drawn tomorrow (5 pm EDT) and announced in on Saturday, July 4th.

Nukes, Development, and Port Security

North Korea's recent backsliding in the nuclear arena, Pakistan's troubles with the Taliban, and Iran's stunning election results have once again brought nuclear issues to the forefront. Last year, a Congressionally-charted commission concluded that "the development of nuclear arsenals by both Iran and North Korea could lead to 'a cascade of proliferation,' making it more probable that terrorists could get their hands on an atomic weapon" ["Panel Cites 'Tipping Point' On Nuclear Proliferation," by Walter Pincus, Washington Post, 16 December 2008].

"In the interim report, the commission called for a global nonproliferation strategy as the best way to keep nuclear materials out of terrorists' hands. Such a U.S. effort 'would require intense cooperation with other nations, especially other nuclear powers' and with the International Atomic Energy Agency, the panel added. It called for strong U.S. financial, technical and political support to the IAEA. ... At the same time, the commission called for the United States to begin discussing with allies how to strengthen the Non-Proliferation Treaty. That pact, the commission said, provides a legal framework but lacks the tools to make it work. 'Its effectiveness has been undermined by errors in how it has been interpreted and by failures of enforcement by the U.N. Security Council,' the panel said."

All sorts of debates rage about nuclear policy. Some individuals want to see the world freed from nuclear weapons and others want to see nuclear arsenals updated and strengthened. The Commission appeared ambivalent on this point.

"The commission said, its final report will 'define the most efficient and effective way to maintain a credible, safe, secure and reliable deterrent for the long term.' Eliminating nuclear stockpiles should remain a national goal, the panel said, although it conceded that nuclear weapons may be needed into 'the indefinite future,' albeit at a size 'appropriate to existing threats.' The commission added: 'The U.S. deterrent must be both visible and credible, not only to our possible adversaries, but to our allies as well.'"

Nuclear arms control talks -- once thought to be a relic of the cold war -- have once again begun between the United States and Russia ["Report Urges Updating of Nuclear Weapons Policy," by Walter Pincus, Washington Post, 14 April 2009]. A study by two arms-control advocacy groups, the Federation of American Scientists and Natural Resources Defense Council, concludes that the time is right to draft new nuclear policies.

"The study's main purpose is to propose a new nuclear doctrine for the United States, one it defines as 'minimal deterrence.' Under that doctrine, the nation would retain enough nuclear weaponry 'to deter nuclear use in the first place.' The study creates a new category called 'infrastructure targeting,' under which attacks would focus on 'electrical, oil and energy nodes' that support war industries. 'A minimal nuclear deterrence policy with infrastructure targeting does not require nuclear forces to be on alert or even to react quickly,' according to the study. The authors propose keeping weapons in the current stockpile but lowering their yields -- to a degree. The weapons, the report said, should remain devastating enough to deter any nation from striking the United States or any of its allies."

Talk about "infrastructure targeting" concerns a lot of countries -- many that have a reason to be concerned ["Developing Nations Seek Assurances on Nuclear Arms," by Colum Lynch, Washington Times, 16 May 2009].

"Cuba, Iran and other developing nations [have] demanded that the five original nuclear powers accept legally binding commitments to dismantle their nuclear arsenals and provide assurances they will not use such weapons against states that do not possess atomic weapons."

So-called rogue nations understand that they have been in the cross-hairs of other countries for some time. Leaders of countries like North Korea and Iran often pride themselves in taking a road apart from the rest of the world when it comes to nuclear proliferation -- on the other hand they have no desire to see nuclear weapons used against them. Other developing nations are also concerned that events in their country (such as the unwelcomed arrival of terrorists establishing training camps) could result in their infrastructure being targeted. As I have often noted, one of the things that keeps many developing nations from progressing is a lack of infrastructure. It should surprise no one that such countries are concerned that even their inadequate infrastructure could be targets for nuclear weapons. Original members of the so-called nuclear club insist that their nuclear arsenals will never be used that way; but, without binding assurances, potential target nations remain skeptical.

As a result of these differences of view, the recommended strengthening of the Nuclear Proliferation Treaty is unlikely to occur. There had been rising hopes that a strengthened treaty could be worked out. The 189 current signatories reached agreement on a procedural agenda for a major review conference on the treaty in New York next May, but the conditions insisted upon by countries like Cuba and Iran faced stiff opposition from France, who "said it would not yield to any legally binding commitments to undertake further reductions in its nuclear arsenal or to allow international inspections of its nuclear stockpile." One sign that nations are paying more attention to nuclear proliferation is that North Korea's latest nuclear weapons test "triggered a swifter, stronger and more uniform wave of international condemnation, most notably from the isolated nation's historical allies, China and Russia."

More recently, the United Nations Conference on Disarmament, after a decade of deadlock, "approved a working group to negotiate a treaty banning the production of fissionable material for nuclear weapons" ["U.N. Hopes to Ban New Fissionable Material, Space-Based Weapons," by Walter Pincus, Washington Post, 2 June 2009]. Despite the breakthrough, Pincus cautions that we shouldn't "expect quick action."

"The last international pact this 65-nation group successfully negotiated was the 1996 Comprehensive Test Ban Treaty, which has yet to come into force, partly because the U.S. Senate has not voted for its ratification. It was in 1993 that the U.N. General Assembly first passed a resolution calling for negotiations on a fissile-material treaty. Then two years elapsed before the underlying mandate for an 'effectively verifiable' one was approved by the conference. President Obama has made a fissile-material treaty part of his arms-control agenda. But there are signs a fissile pact faces problems, in part because the conference approves only by consensus, meaning everyone must agree."

All of these articles point to one truth: nuclear weapons proliferation and similar threats are likely to be around for some time. That brings me to the article that really caught my eye because it touches on port and harbor security -- one of the areas in which Enterra Solutions works. I found the article particularly intriguing because it was written by a professor of management science at the Stanford Graduate School of Business rather than a typical national security expert ["A Threat in Every Port," by Lawrence M. Wein, New York Times, 14 June 2009]. Wein writes:

"While President Obama’s future vision of 'a world with no nuclear weapons' is certainly laudable, for the present America still needs to do everything it can to prevent a terrorist from detonating such a bomb on our soil. The Domestic Nuclear Detection Office, part of the Department of Homeland Security, is in charge of developing a worldwide nuclear-detection system that, primarily, would use technology to monitor vehicles and shipping containers along the various transportation networks by which nuclear weapons could be smuggled into America. Yet the Government Accountability Office found last year that the detection office 'lacks an overarching strategic plan,' despite the $2.8 billion a year spent on the initiative."

In drafting a strategy, Wein suggests that the DHS "view the problem strategically ... through game theory."

"In this case, the government plays first and uses its budget to place detection resources — technology, security experts and the like — at the various 'nodes' along the transportation network, like seaports, airports and border stations. The terrorists, in turn, can be expected to choose the path that gives them the best chance to carry out an attack. As the accompanying chart illustrates, there are a dizzying number of paths that terrorists could use to transport a foreign-built weapon to an American target city — 132 variations, in fact, taking into consideration all four likely modes of transport: commercial airplane, cargo airplane, container ship and cruise ship. So, how do we decide which route the terrorists are most likely to choose and which path we the are most vulnerable to? Game theory implies that we should maintain an equal chance of detecting fissile material along each of the 132 paths because if we harden one path too much, the terrorists will simply choose an easier one. On top of it all, the agency needs to consider cost-effectiveness: if certain sets of nodes along the transportation network are much more cost-effective to reinforce than others, then the best defense may not come from allocating resources equitably across the system."

Wein points out that since "transferring [a nuclear bomb] to a foreign airport or seaport are the two steps that are on all 132 paths" they "represent excellent choke points." I agree with Wein's basic point. When we talk with port operation authorities, we talk about security in terms of creating a trusted supply chain. This is particularly important for developing countries, which are considered likely transit points for such a bomb. If a country can become part of the solution rather than remain part of the problem, then its opportunities for development increase. Wein goes into some detail about how to address each path noted on the above diagram, but I want to concentrate on the maritime path. Wein writes:

"The Coast Guard is undertaking a three-year pilot project aimed at securing maritime routes, but faces daunting challenges in both identifying suspect vessels and detecting fissile material amid the background radiation present at sea. This pathway will perhaps be the weakest link in our border defense for the next several years, and should be one of the highest priorities of the Domestic Nuclear Detection Office."

That is one reason that sea services are extremely interested in creating a Maritime Domain Awareness system that provides persistent ocean surveillance that can help make the identification and tracking of suspect vessels easier. For more on this subject, see my post Persistent Ocean Surveillance. Wein is concerned about this subject because he understands that screening systems, inappropriately implemented, could negatively affect the flow of commerce around the world. Since the threats would come primarily from developing countries, this could have particular impact on countries desperately trying to connect to the global economy.

"Giveaway" Reminder -- Three More Days to Enter

There is still time to enter to win a beautiful Knoll desk lamp (worth nearly $200) thanks to AllModern.com. For details, see my post The Office of the Future. The winner will be drawn this Friday (5 pm EDT) and announced in on Saturday, July 4th.

Carbon Capture and Storage

In a recent blog, I noted that legislation being voted on today and aimed at controlling greenhouse gas emissions is counting on the fact that technology will be developed that effectively and efficiently captures carbon emissions and stores them underground. The Obama administration supports Congress in its efforts and recently announced that it is restarting a public-private project to capture and store carbon dioxide emissions that was abandoned by the Bush administration ["U.S.-Private Bid to Trap Carbon Emissions Is Revived," by Kate Galbraith, New York Times, 12 June 2009]. The Bush administration abandoned the project because "costs had doubled to $1.8 billion, from $950 million. A study later found that a math error had caused the increase to be overstated; costs had actually risen 39 percent, to $1.3 billion." The project goes by the name FutureGen. Even though the U.S. Secretary of Energy, Steven Chu, announced that the project had been resurrected, Galbraith reports that life has not yet been fully breathed into the project.

"The project does not have a green light yet. The Department of Energy said it and FutureGen would make a final decision early next year, after additional cost assessments. For now, the department is estimating government contributions at slightly more than $1 billion, with most of that coming from stimulus money designated for advancing clean coal technologies. The FutureGen Alliance of large coal producers and users will provide $400 million to $600 million."

If the project receives a green light, "a coal plant will be built in Mattoon, Ill., that will store nearly all of its emissions underground, where they cannot contribute to global warming. ... The plant would test techniques for converting coal to a gas, capturing pollutants and burning the gas for power. The carbon dioxide would be compressed and pumped into deep soil layers. Monitoring devices would test whether any had escaped into the air." During his campaign for president, Mr. Obama expressed his confidence that clean coal technology could be developed and he promised to pursue that technology. Restarting FutureGen represents partial fulfillment of that campaign promise. The Economist warns, however, that "politicians are pinning their hopes for delivery from global warming on a technology that is not quite airtight." ["Trouble in store," 7 March 2009 print edition]. The magazine writes:

"The idea that clean coal, or to be more specific, a technology known as carbon capture and storage (CCS), will save the world from global warming has become something of an article of faith among policymakers too. CCS features prominently in all the main blueprints for reducing greenhouse-gas emissions. The Stern Review, a celebrated report on the economics of climate change, considers it “essential”. It provides one of the seven tranches of emissions cuts proposed by Robert Socolow of Princeton University. The International Energy Agency (IEA) reckons the world will need over 200 power plants equipped with CCS by 2030 to limit the rise in average global temperatures to about 3°C—a bigger increase than many scientists would like. ... Despite all this enthusiasm, however, there is not a single big power plant using CCS anywhere in the world. Utilities refuse to build any, since the technology is expensive and unproven."

This is not the first time that I've written about doubts surrounding the development of "clean coal" technologies. Read my post entitled The Conundrum of "Clean Coal" for more information. Some environmentalists worry that no carbon capture and storage scheme will be foolproof and that leaks could occur. Such leaks would wipe out years of effort to clean up the environment and mean that billions of dollars would have been wasted. The Economist continues:

"CCS sounds beguilingly simple. It entails isolating carbon dioxide wherever it is produced in large quantities, such as the smokestacks of coal-fired power plants, compressing it and pumping it underground. The oil and chemical industries already use most of the processes that this involves, although not in combination. And oil, gas and salt water seem to stay put in certain rock formations indefinitely, suggesting that carbon dioxide should as well. ... In a purely technical sense, CCS looks promising. There are several proven ways to isolate carbon dioxide from fossil fuels, using a variety of combustion techniques and an assortment of chemical 'scrubbers' to react with the gas."

The article also points out that oil companies in the U.S. already have extensive experience moving carbon dioxide through pipes into the ground to pressurize expiring oil fields. All of that sounds very promising, but [and there always seems to be a "but"] the article notes that the long-pole in the tent is cost.

"The chemical steps in the capture consume energy, as do the compression and transport of the carbon dioxide. That will use up a quarter or more of the output of a power station fitted with CCS, according to most estimates. So plants with CCS will need to be at least a third bigger than normal ones to generate the same net amount of power, and will also consume at least a third more fuel. In addition, there is the extra expense of building the capture plant and the injection pipelines. If the storage site is far from the power plant, yet more energy will be needed to move the carbon dioxide."

There are also health concerns surrounding carbon capture and storage.

"Spills would also be a health risk, since carbon dioxide is heavier than air, and so can build up in low-lying or poorly ventilated spots. Earlier this year, Zurich Financial Services said it would offer insurance for CCS plants and storage sites while they were operating, and for a limited time thereafter. But CCS advocates all assume that governments will eventually take charge of reservoirs, along with all the monitoring costs and legal liabilities. America’s lawmakers went a step further, and agreed to insure the proposed FutureGen plant and to indemnify the firms behind it from all lawsuits arising from leaks."

Although the article concludes that "for the moment, at least, CCS is mostly hot air," it does provide examples of projects, like FutureGen, to make it work. Another example is "Vattenfall, a Swedish utility [that] opened the first power plant to incorporate CCS at Schwarze Pumpe, in Germany." For more about this plant, read my post entitled The Search for Clean Coal. In an accompanying article in the same issue, The Economist discussed technology that removes carbon dioxide directly from the air ["Scrubbing the skies"].

"Some researchers think there might be a simpler way to reduce the level of CO₂ in the atmosphere: to build 'air capture' machines that, as their name suggests, grab it from the air. This is not as mad as it sounds. After all, such machines already exist: they are used to 'scrub' carbon dioxide from the air on board submarines and spacecraft. 'It has been around for decades, but the only people who cared were at NASA, because too much CO₂ in a space shuttle means you die,' says Matthew Eisaman, a researcher at the Palo Alto Research Centre (PARC) in California. Proponents of air capture propose scaling up such machinery so that it can process the atmosphere directly, extracting the CO₂ so that it can be sold for industrial use or stored underground."

As the picture that accompanied the article shows, proponents are talking about "industrial-sized" sky scrubbers. The big advantage for sky scrubbers, the article notes, is that they can be located anywhere -- not just at the source where CO₂ is being generated. This is a big advantage because it could help eliminate miles of pipeline needed to carry CO₂ to underground storage facilities. The scrubbers could be built right above the storage facility and pumped directly into the ground. This would reduce both cost and risk. Scrubbers would also capture CO₂ emitted by mobile emission sources like cars, trucks, and airplanes.

Since scrubbers could be located anywhere, there is the possibility that developing countries with few resources aside from vast tracts of non-productive land could eventually find wealth by working scrubber farms and monitoring underground storage facilities. Since the scrubbers require power to work, adjacent solar or wind farms could use these same tracts of previously non-productive land to generate and store energy. The article discusses a couple of ways scrubber designs would work:

"Several designs are being developed, but they involve variations on the same theme. In each case air is brought into contact with a 'sorbent' material, which binds chemically with the carbon dioxide. The efficiency of this process depends on the surface area of the sorbent, and an easy way to increase the surface area is to spray a liquid sorbent into the air as a fine mist. At PARC, researchers propose building towers several metres high through which the air would be wafted, coming into contact with a sorbent mist. Having absorbed CO₂ from the air, the liquid would drain into a chamber where the gas would be extracted from the sorbent by a series of chemical reactions, or by applying an electric current, depending on the system’s design. The sorbent can then be recycled, and the CO₂ compressed into liquid form for removal. A group at the University of Calgary, led by David Keith, has already demonstrated an air-capture prototype based on a spray tower. Klaus Lackner, professor of geophysics at Columbia University and a pioneer in the field, has devised another approach that uses a solid sorbent, consisting of thin sheets of material coated with proprietary chemicals. Carbon dioxide is trapped as the air wafts over these sheets, and is then absorbed by liquid chemicals that are washed over the sheets. The CO₂ is extracted from the liquid by applying heat. A cupboard-sized prototype (pictured) has already shown that the concept will work, and Dr Lackner is a member of a company, Global Research Technologies (GRT), that hopes to commercialise the technology. A machine the size of a standard shipping container, he estimates, could capture one tonne of CO₂ a day."

Current estimates are that about 36.7 gigatons of carbon dioxide are emitted each year. Of course, not all of those emissions must be dealt with by scrubbers; but it doesn't take a math genius to know that a lot of scrubbers would be needed to deal with the problem if no other technologies were also in place. Cost is again the long pole in the tent. Some of those costs could be offset by placing scrubbers next to plants that require carbon dioxide for commercial uses. "By mass," the article reports, "carbon dioxide is in fact the 19th most important commodity chemical in America, according to the Department of Energy." Still, the article notes, that unless the cost per ton of capturing carbon dioxide can be reduced to below the cost of a permit that allows the release of a ton of CO₂ the project is probably doomed. Currently, a scrubber can produce a ton of CO₂ for about $200, while a permit to release a ton of carbon dioxide recently fell below $10. That's a big cost deficit to overcome.

"Giveaway" Reminder

Just a reminder that there is still time to enter to win a beautiful Knoll desk lamp (worth nearly $200) thanks to AllModern.com. For details, see my post The Office of the Future. The winner will be drawn next Friday and announced in on Saturday, July 4th.

Biotechnology's Third Wave

Several years ago I recall reading an article by Francis Fukuyama in which he predicted that biotechnology would be one of the world's largest economic sectors in the future. Although the biotechnology sector continues to grow, it hasn't quite been equal to Fukuyama's glowing prediction. The Economist reports that "a 'third wave' of biotechnology is arriving." It wonders if "it will be able to avoid a poor reception from the general public this time around?" ["Third time lucky," 6 June 2009 print edition]. The magazine writes:

"For a long time the public has perceived biotechnology to mean dangerous meddling with the genes in food crops. But biotechnology is of course about much more than transgenic food: it also encompasses the use of microbes to make pharmaceuticals, for example. The many benefits of the first wave of biotech products, in medicine, have unfortunately been overshadowed by the supposed risks of biotech’s second wave, in agriculture. Might its third wave—so-called industrial biotech, also known as 'white biotech' or 'green chemistry'—resolve biotech’s image problem?"

Before leaving the subject of the so-called second wave of biotechnology that deals with agriculture, its future may be brighter than its dim past. In its report entitled Global Trends 2025, the National Intelligence Council predicts that “resource issues will gain prominence on the international agenda. Unprecedented global economic growth … will continue to put pressure on a number of highly strategic resources, including energy, food, and water, and demand is projected to outstrip easily available supplies over the next decade or so. … The World Bank estimates that demand for food will rise by 50 percent by 2030. … Lack of access to stable supplies of water is reaching critical proportions, particularly for agricultural purposes, and the problem will worsen because of rapid urbanization worldwide and the roughly 1.2 billion persons to be added over the next 20 years.” Agriculture biotechnology may hold part of the solution to the challenges detailed by the NIC.

Returning to the third wave of biotechnology, The Economist continues:

"As with other forms of biotechnology, industrial biotech involves engineering biological molecules and microbes with desirable new properties. What is different is how they are then used: to replace chemical processes with biological ones. Whether this is to produce chemicals for other processes or to create products such as biopolymers with new properties, there is huge scope to harness biology to accomplish what previously needed big, dirty chemical factories, but in cleaner and greener ways."

The agricultural wave of biotech concerned (and still concerns) some people because they aren't sure what kind of unintended consequences the release of genetically-altered crops might have on the environment. The third wave of biotech begins with the assumption that it will make the environment better not worse. That is why The Economist is more sanguine about its reception. The article notes that the industrial-biotechnology sector is already large (about $140 billion in 2007); but it still has enormous potential. Only about 6% of all chemicals sales are currently generated with the help of biotechnology.

"Steen Riisgaard, chief executive of Novozymes, a biotechnology company, says he imagines a future in which bio-refineries are dotted around the countryside producing fuels and other chemicals from biomass such as agricultural waste."

The article provides several examples of companies that are using industrial biotechnology techniques.

"One company which has been working in industrial biotechnology for years is DSM, based in Heerlen in the Netherlands. In the 1990s it started making enzymes for cheese and omega-6 fatty acids for infant formulas, and went on to develop a biological process to produce cephalosporin, an antibiotic, in a much cleaner way than the chemical processes used to make the drug. Its most recent effort has been to find a biological way to produce a chemical called succinic acid, which is used to make a wide range of products including spandex, biopolymers for agriculture, de-icing salts, esters, resins and acidity regulators in foods."

The process, the article reports, uses 40% less energy and produces fewer carbon-dioxide emissions than the process it replaces. Another company mentioned is Novozymes.

"Novozymes, as its name suggests, has focused its attention on supplying optimised enzymes—biological molecules that help make reactions happen faster, or at lower temperatures. This sounds trivial but it can make the difference between a commercial and a non-commercial process. The company says it has 47% of the market for industrial enzymes, which are used in areas such as detergents, brewing, baking or to produce animal feeds. ... Novozymes says it is close to completing its acrylic-acid process. Around 40% of acrylic acid produced is used to make super-absorbent material like that found in nappies (diapers); most of the rest goes into paints and coatings. Novozymes says its process will be competitive with chemical methods at an oil price of $60 a barrel or higher."

Oil prices have been steadily creeping back up and it looks like they will hold above the price Novozymes needs to be competitive. For people like me who are interested in helping emerging market countries achieve sustainable development, any process that can help market countries develop using processes that are kinder to the environment than those used in the past is exciting.

"Proponents of industrial biotechnology are optimistic that they can avoid the pitfalls that hindered the adoption of biotech crops, which have been criticised by their opponents as unnatural 'Frankenfoods' that extend corporate control of agriculture. For one thing, unlike transgenic tomatoes, say, industrial-biotech products are not sold directly to consumers. And instead of displacing “natural” products with bioengineered alternatives, as in agriculture, industrial biotechnology generally displaces fossil fuels and their associated chemical processes with greener biological alternatives. Surely that should make it easier to convince people of its benefits, and hence to rehabilitate the notion of biotechnology more widely?"

As the question implies, few things are black and white. Some biotech processes use food crops as raw materials. As the article notes, the use of food crops for any purpose other than feeding people or livestock has generated a lot of controversy. Biofuels were highly touted until last year's food crisis, when their widespread use was called into question. The article concludes:

"The use of agricultural waste is less controversial. Mr Riisgaard reckons that converting agricultural waste into other chemicals (including fuels) using industrial biotechnology could replace 20-25% of global oil consumption. And there is plenty of waste about. He also suggests that raw materials could be grown on marginal land which is unsuitable for food production. That is true, but it could have knock-on effects on biodiversity. Perhaps the most promising approach for advocates of biotechnology’s third wave is to emphasise the potential for a new, greener chemicals industry to create jobs in remote rural areas."

I'm particularly excited by the prospect that agricultural waste can be used in industrial biotech processes because it means that land can remain in use to feed people and livestock. It also provides another revenue stream for those involved in agriculture. Development begins and ends with jobs. If this third wave of biotechnology helps create good jobs for people in both developed and developing countries it will likely receive the warm reception anticipated by The Economist. The current economic crisis has given most of us a renewed appreciation for our work. Those living in poverty have always had an appreciation for labor and its spoils. The better the jobs people can find, the better their futures will be.

"Giveaway" Reminder

Just a reminder that there is still time to enter to win a beautiful Knoll desk lamp (worth nearly $200), thanks to AllModern.com. For details, see my post The Office of the Future.

U.S. Still Searching for Way Forward on Greenhouse Gases

Recently, the United States and China have been in negotiations about to move forward in an effort to reduce greenhous gas emissions ["China and U.S. Seek a Truce on Greenhouse Gases," by John M. Broder and Jonathan Ansfield, New York Times, 7 June 2009]. Broder and Ansfield report:

"For months the United States and China, by far the world’s two biggest emitters of greenhouse gases, have been warily circling each other in hopes of breaking a long impasse on global warming policy. They are, as President Obama's chief climate negotiator puts it, 'the two gorillas in the room,' and if they do not reach some sort of truce, there is no chance of forging a meaningful international treaty in Copenhagen later this year to restrict emissions. ... Both sides are demanding mutually assured reductions of emissions that are, in the current jargon, 'measurable, verifiable and reportable.' In the background hover threats of great retaliation in the form of tariffs or other trade barriers if one nation does not agree to ceilings on emissions. ... Many take the simple fact that the two nations, jointly responsible for more than 40 percent of the world’s greenhouse gas emissions, are even talking seriously to each other about the issue as a propitious sign after years of mutual distrust. But there is cause for profound skepticism as well. The Chinese continue to resist mandatory ceilings on their emissions and are making financial and environmental demands on the United States that are political roadblocks. The United States, despite optimistic words from the White House and Congress, has yet to enact any binding targets on greenhouse gas emissions. The energy bill now before Congress proposes emissions targets that are far short of what China and other nations say they expect of the United States. Compounding the difficulty is the fact that both countries are struggling economically and the Chinese and American publics appear far more interested in jobs than in tackling environmental problems, a task that would necessarily be costly. ... Yet the clock is ticking. Only six months remain before the opening of United Nations-sponsored talks in Copenhagen to produce a climate change treaty to replace the 1997 Kyoto Protocol. Without the full participation of the United States and China, most negotiators believe that any agreement is doomed to fail. Congress and two American presidents refused to accept the Kyoto accord, which expires in 2012, because it imposed no pollution limits on China or other developing countries. The American refusal to ratify the treaty and the lack of participation by China and other developing nations have left the pact all but toothless."

In order to make emissions more 'measurable, verifiable and reportable,' lawmakers in the United States are seriously considering enacting legislation that dictates caps, trades and offsets on carbon emissions ["Caps, Trades and Offsets: Can Climate Plan Work?" by David A. Fahrenthold, Washington Post, 26 May 2009]. Fahrenthold reports:

"It sounds like alchemy, an act of bureaucratic magic. Under the climate-change bill just approved by a House committee, the U.S. government would literally make a commodity -- as tradable as a Pontiac or a pork belly -- out of thin air. The bill would require polluters to obtain 'allowances' -- permits allowing them to emit a given amount of a greenhouse gas such as carbon dioxide or methane. Today, these gases are invisible, free and floating all around us. This bill would put a price on them. That would accomplish an economist's version of a triple back flip. It would divide a problem of the global commons into pieces and make those who use gas or electricity pay for their share of the emissions that result. ... The proposal would also create official carbon 'offsets' -- in some cases, a government-certified hypothetical calculation of an amount of gases that would have been emitted but were not. Those, too, could be bought by polluters."

Although there is a lot of support for a cap and trade market, there are also a lot of pitfalls to such a system according analysts interviewed by Fahrenthold. The biggest pitfall is the fact that the market is being created by the government which means that the rules under which it will operate will be subject to tremendous political pressures by special interests.

"To satisfy Democrats from states with coal mines or heavy industry that would be hit hard, committee leaders dropped their target for emissions reductions by 2020, from 20 percent to 17 percent. And they agreed that, instead of all credits being sold to the highest bidder, 85 percent would be given away. This had the effect of simultaneously outraging both Greenpeace -- 'If you give all the pollution credits away, it doesn't actually serve the market principle of making carbon have a cost,' spokesman Michael Crocker said -- and House Republicans. The bill's complexity led one Republican to cite the adage that a camel is a horse designed by a congressional committee. It may prove to be an elephant before long: The rest of the House and the Senate are waiting for their crack at it."

Despite the horse-trading that will go on, most environmental groups favor a cap-and-trade system:

"Many environmental groups say they support the bill, because it still creates a 'cap-and-trade' system. This requires polluters to amass credits equal to their emissions and then allows them -- and others, including Wall Street trading firms -- to sell them on an open market if they cut their emissions, giving them a surplus of credits. 'We have decided we're going to regulate the commons, which is the sky, or the air,' said Liz Martin Perera of the liberal-leaning Union of Concerned Scientists. And this is the best way, she said: 'It is able to harness the power of the market, to find the cheapest reductions first. If it's going to be cheaper for me to reduce [emissions] than you, then I'm just going to go ahead and reduce and sell you my permit.' The United States already has a working cap-and-trade system, used since 1995 to cut back the gases blamed for acid rain. The Environmental Protection Agency says the trading system has reduced the overall cost of cutting acid-rain-causing pollutants to one-third of what was projected. But comparing the two problems is like comparing a horn section and an orchestra. Acid-rain pollutants can be sucked out of a smokestack by adding 'scrubbers.' But nothing like that is commercially available for carbon dioxide -- polluters might have to replace the coal they burn with a different fuel, or replace the coal-burning plants with solar 'farms' and windmills."

It's because new ideas need to be created to make the cap-and-trade system work that the Democrats believe the emissions bill will create jobs. Another group that is eager to see a cap-and-trade system implemented is banks ["How Banks Will Pounce on Carbon Trading," by Mark Scott, BusinessWeek, 8 June 2009 print issue].

"While U.S. policymakers continue to squabble over the details of the 'cap-and-trade' proposal, big banks are gearing up for what they see as a new profit center. 'U.S. carbon trading is coming,' says Louis Redshaw, head of environmental markets at Barclays' investment bank. 'You have to be in it to win it.' The industry is calling on its experience in Europe, where regulators set limits on emissions in 2005 and the carbon market now tops $79 billion. With no such rules in the U.S., carbon trading is limited to a number of regional exchanges in which participation is often voluntary. Last year trading stateside amounted to less than $400 million. But that's about to change. ... Analysts figure rules will be in place by 2013, and carbon trading could top $1 trillion a year by 2020, according to research firm New Carbon Finance. At that size, carbon would rival oil as one of the largest commodity markets."

While the cap-and-trade system is fairly straight forward, the "offsets" portion of the bill isn't quite so clear. It requires the Environmental Protection Agency to predict how well new buildings and plants will do at eliminating emissions. Fahrenthold reports:

"Instead of buying an allowance to cover their pollution, a factory could buy an offset to negate it. An offset would be a certificate showing that, for example, emissions have been avoided, or taken up by newly planted trees, or captured and pumped underground."

Carbon capture remains a hot topic and I'll discuss the current debate in a future post. According to Scott, investment banks want to get in on the offset business as well.

"The carbon credits themselves could be a source of profit for financial firms. That's why Morgan Stanley, JPMorgan Chase, and Goldman Sachs are buying stakes in so-called offsetting companies. These independent businesses invest in eco-friendly projects, such as reforestation programs in Oregon, that reduce greenhouse gases and produce carbon credits as a result. The credits can be sold to companies looking to mitigate—or offset—their carbon footprint. Prices on the credits could soar once the U.S. imposes emission caps and the carbon market takes off. Says Seb Walhain, the global head of energy and commodities at Holland's Fortis Bank Nederland: 'Carbon soon will become part of the regular business for banks.' Some investment banks are doling out advice to companies preparing for restrictions in the U.S. Citigroup, for example, is working with utilities and oil refiners, which want to know whether carbon caps will hurt their bottom lines.

It's the giveaway of offset credits that has created most of the stir around the propoosed legislation ["Cap and trade, with handouts and loopholes," The Economist, 23 May 2009 print issue].

"Giving away permits creates several problems. First, it generates no money, thereby royally messing up Mr Obama’s budget. Second, it means that the permits go not to those who value them most (as in an auction) but to those whom the government favours. Under [ the Henry] Waxman-[Edward] Markey [bill], electricity-distributors would get the largest share, with the rest divided between energy-intensive manufacturers, carmakers, natural-gas distributors, states with renewable-energy programmes and so on. Oil firms, with only 2% of the permits, feel hard done by. But most polluters, having just been promised hundreds of billions of dollars’ worth of permits for nothing, are elated. So it is not just the owners of ski resorts and businesses with negligible carbon footprints that are queuing up to praise the bill. Duke Energy, a power generator with lots of coal-fired plants, is also enthusiastic. ... Another problem with Waxman-Markey is its complexity. At 932 pages, it is half as long again as an already-bloated previous draught. It includes a dizzying array of handouts, mandates and technical standards for everything from hot-food-holding cabinets to portable spas. It allows for a huge increase in 'offsets'—where a polluter pays someone else to stop polluting instead of curbing his own emissions. These are open to abuse, as Europe’s experience shows. There is little to stop foreign factories from starting to pollute just so that someone will pay them to stop."

The Economist complains, "Ideally, politicians who want to save the planet would be honest with voters about how much this will cost. But America’s leaders do not seem to think Americans are ready for straight talk about energy." The whole point of passing legislation controlling greenhouse emissions is to place a price on carbon. Such a scheme will undoubtedly raise costs of producing everything from cars to electricity, but environmental benefits are deemed by most to be worth the cost. Many of the beneficial effects of changing how we measure and pay for carbon use won't be immediately apparent. In the long run, however, new industries (and new opportunities) are likely to emerge. Because such industries are likely to be innovative, they are likely to create good jobs that benefit the economy as well as the environment. Obviously, the way ahead remains challenging, but doing something appears to be better than doing nothing. The U.S. House of Representatives has scheduled a vote on the legislation for this Friday ["Vote Set on House Climate Bill," by Steven Mufson, Washington Post, 24 June 2009].

"Giveaway" Reminder

Just a reminder that there is still time to enter to win a beautiful Knoll desk lamp (worth nearly $200), thanks to AllModern.com. For details, see my post The Office of the Future.