Green Dreams in Shangri-La

By THOMAS L. FRIEDMAN
The New York Times
Published: October 28, 2005
Shangri-La County, China

I came to Shangri-La and I met the Buddha.

Well, not the Buddha, but one of the "living Buddhas" designated by the Buddhist hierarchy as spiritual leaders throughout this Tibetan region of China, and not the mythic Shangri-La of "Lost Horizon," but this lush western China countryside near the border with Burma that has renamed itself Shangri-La to attract more tourists.

But don't underestimate this Shangri-La. Its spectacular wetlands, pine forests and mountains (this is where your rhododendrons originally came from) make up one of the 34 biodiversity hot spots designated worldwide by Conservation International as places with large numbers of unique plant and animal species threatened by human development - which, once lost, may never come back.

And that's why I came here. Because Shangri-La County is a microcosm of the biggest challenge facing China. Put simply: if development doesn't come to Shangri-La and other rural areas, the divide between haves and have-nots will widen and destabilize China. But if the wrong development comes here, it will add to global warming and ravage the rural environment where many of China's indigenous cultures and species are nested.

Yes, China must get its smoke-belching factories out of the coastal cities because they are making the cities unlivable, but if it just pushes them into the countryside, they will destroy way too much of China's farmland, and the natural areas that are the home of things like Tibetan culture.

The living Buddha, Ang Weng, is right in the middle of this drama, trying to promote a higher living standard for his people - without destroying the "sacred forests" essential to Tibetan spirituality. The living Buddha wears a sunny smile and a cowboy hat. His wife, who makes a mean butter tea, a traditional Tibetan drink, translated from his Tibetan dialect into Chinese for my translator.

He got right to the point: "The human brain is moving much faster into the modern world than the environment, and this fast move is having an impact on the environment. Build this and build that, and you lose the environment."

The good, and surprising, news I found in Shangri-La was how much the poor villagers here were coming up with their own green growth solutions. For instance, the 39 families in the village of Hamugu have bundled their savings to build a lodge for ecotourists drawn by the wetlands. "We just need a Web site," the manager told me. A local botanist has built Shangri-La Alpine Botanic Garden, which employs two dozen people and shares profits with the local village.

It also has the finest public toilet I've ever used, a solar-powered composting toilet with an automated plastic green seat cover - in the middle of nowhere! It was labeled "The Lavatory of Environmental Protection of the Travel."

A U.S. multinational, 3M, is financing the restoration of the local forests to reduce climate change and protect the watersheds. And the old log-and-mud town of Zhongdian here is a Disneyland-like traditional Tibetan village, with hot-pot restaurants that attract droves of Chinese tourists.

"All the basic elements of a network solution to safeguard environment and culture are here," said Lu Zhi, Conservation International's director in China and my traveling companion. (My wife's a C.I. board member.) "But the challenge is how do you organize this business-N.G.O.-government network more effectively so you can provide ecofriendly alternatives to industrial development that could be replicated in the rest of rural China ."

Not only would this be enormously important for China's environment, but it could also be a model for other developing countries. What we don't want is for China to protect its own environment and then strip everyone else's in the developing world by importing their forests and minerals.

"For 30 years, the business of development has been Americans and Europeans lecturing poor countries about how they need to do things differently," said Glenn Prickett, a senior vice president with Conservation International. "What we hope to see here is a new paradigm, where China, itself a developing country, offers a new model of sustainable development to other developing countries."

I sure hope so. We all need China to start assuming an environmental leadership role commensurate with its impact on the world. Imagine a day when China is sharing its own approaches to environmentally and culturally sustainable development with other developing countries - not just pursuing them for its resources.

Now that would be a great leap forward.

Battery assault
Sep 22nd 2005 | TOKYO
From The Economist print edition
How Toyota has seized the initiative

IT IS going awfully fast, and they are not sure where it is leading them, but Toyota's rivals reckon they have no choice but to give chase. The Japanese carmaker is so pleased with the success of its Prius, an electric-and-petrol hybrid car that has sold well in America, that it is pressing ahead with plans to put hybrid engines in a range of other cars and sport-utility vehicles (SUVs). Next week Toyota will launch a new advertising campaign in which it will spend up to $60m trumpeting its hybrid technology. Competitors, ranging from America's General Motors to Germany's BMW and DaimlerChrysler, are scrambling to roll out hybrids of their own. On September 21st Ford announced that it could increase production of hybrid cars tenfold by 2010.

Adding a hybrid engine costs thousands of dollars, which puts off many consumers, but Toyota is pressing ahead anyway, confident that, with practice, it can master fuel-saving technologies more quickly than rivals. Since it launched the new Prius in America in 2003, Toyota has sold over 150,000. It can probably sell many more hybrids, now that it has begun putting such engines into its other models.

The Prius, after all, is an odd-looking machine. Its owners are either so green, or so keen to pinch their petrol pennies, that they were willing to buy an ugly car to prove it. By contrast, some buyers who would never go near a Prius may choose an existing SUV or luxury car over a rival model if it comes with a fuel-saving and eco-friendly hybrid option that is partly subsidized by the maker. Toyota began offering hybrid versions of its Highlander and Lexus SUVs earlier this year. Although Americans love their oversized SUVs, they are heavy machines that guzzle petrol. So buying a hybrid version might ease some of the guilt, even if the savings at the pump do not end up offsetting the higher price.

Toyota will also put a hybrid engine into one of its Lexus luxury sedans, and Honda will do the same for its Acura. That will give wealthy greens a chance to tout their eco-friendly credentials without sacrificing style. Selling hybrid sedans to middle-class consumers might be trickier, but the Japanese are going to try. Honda has just launched a new hybrid version of its popular Civic in America, and Toyota will begin selling hybrid versions of its Camry sedan in 2007. Overall, Toyota is racing towards its target of selling 1m hybrid vehicles worldwide by 2010.

That is the last thing that it’s American, European and Korean rivals want to hear. Many of their executives complain that hybrids are unprofitable and over-hyped. Those rivals are upset with Toyota, for setting the agenda so deftly; with themselves, for failing to keep pace; and with consumers, for having the temerity to buy what they do not want to sell. The European carmakers have trumpeted diesel technology as a fuel-efficient and eco-friendly alternative. Toyota also sees merit in diesels—it opened a new diesel-engine plant in Poland last week—but it has no intention of making life easy for its rivals by taking its foot off the hybrid accelerator.

So everyone else is now playing catch-up. General Motors is teaming up with Daimler Chrysler and BMW on hybrid technology, and will launch hybrid-equipped SUVs in 2007. Volkswagen is co-operating with Porsche. Ford is ramping up production. Toyota may leave them in the dust anyway. While its rivals struggle to integrate hybrid engines into their vehicles, the Japanese giant hopes soon to cut the extra costs of those engines in half.

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A Tankful of Sugar
Apr 21st 2005 | PANAMA CITY
From The Economist print edition
Has Brazil found the answer to high petrol prices?

While motorists elsewhere fret about high fuel prices, new-car buyers in Brazil can feel smug. They can fill up with petrol, ethanol (alcohol) or any combination of the two. And right now, ethanol is up to 55% cheaper at the pump in Brazil than regular gasoline.

Brazilians are the beneficiaries of an automotive revolution: “flex fuel” cars that run as readily on ethanol as on regular petrol were introduced in 2003, and have since grabbed nearly two-thirds of the market. In America some 4.5m vehicles can run on blends of up to 85% ethanol, but that fuel is available only in Minnesota. In Brazil, ethanol is everywhere, thanks to a 30-year-old policy of promoting fuel derived from homegrown sugar cane.

Eager for energy independence or lower emissions of greenhouse gases, other countries are now starting to promote “bio fuels”. But America and Europe favor their own farmers, who produce fuel based on corn or rape-seed that is mainly used as an additive to conventional petrol- and is dirtier and more expensive than Brazil’s sugar-based ethanol. So, bio-fuelled cars may take years to catch on in other markets.

For Brazil, this is a second try at a failed romance. Prompted by the oil shocks of the 1970’s, Brazilian governments used laws and subsidies to promote ethanol-only cars, which had 90% of the market by the late 1980’s. But supplies of sugar-based fuel dried up suddenly when planters rushed to meet a surge in demand for sugar. Sales of ethanol-powered cars dropped to nearly zero by 1990- one taxi driver famously set his alight outside Congress.

Flex-fuel cars have persuaded Brazilians to give ethanol a second try. The initiative came from the Brazilian operations of parts suppliers such as Magneti Marelli, owned by Fiat of Italy, and Bosch, a German company. They persuaded the government to extend to flex-fuel cars the tax break previously applied to ethanol-only models. Volkswagen was first to the market, followed quickly by other big manufacturers.

The Brazilian car industry as a whole is struggling. Might exports of flex-fuel cars prove its salvation? Probably not! Alas. If the cars become popular outside Brazil, they could easily be made elsewhere, Brazilian parts suppliers are more likely to benefit than car makers. Bosch has sold fuel-supply systems for America’s fleet of superfluous flex-fuel cars. Magneti Marelli would probably start by exporting components, but with higher volumes would move towards selling the technology. Brazil’s biggest opportunity may be to sell fuel rather than flexibility. Its cost of sugar production is so low that ethanol can compete with petrol even with oil prices at $35 a barrel, about half of today’s price.

Are you being served?
Apr 21st 2005 | PANAMA CITY
From The Economist print edition

Environmental entries are starting to appear on the balance sheet. Perhaps soon, the best things in life will not be free

This is part 2 of an article we had in our Fall Hot topics - View previous newsletter if you need part 1

Putting a proper value on ecological services is bound up with another economic anomaly that haunts environmental economics. This is the creation of what economists term externalities—economic impacts made when those taking a decision do not bear all the costs (or reap all the gains) of their actions. When a piece of natural habitat is ploughed, for example, the conversion may make sense to the land owner, but it may also damage fisheries downstream, increase flooding and clog rivers with sediment. This makes those who lose out angry. It can also, in some circumstances, subtract from, rather than add to, a country's total wealth.

The problems discussed above all involve externalities as well as the need to price ecological services correctly. If Catskill farmers had not changed their methods, for example, New York City's government would not have faced the question of how to keep its water potable. But when an externality affects only a relatively small, recognisable group of people, negotiation between the parties can often resolve the matter. If, however, an externality is a public “bad” (ie, the opposite of a public good), such deals are not possible.

Public goods are those which are in everybody's interest to have, but in no one's interest to provide, clean air, for example, or, more controversially, the preservation of rare species of plant or animal.

In such situations, the first reaction is frequently to legislate to try to ban the externality. But a more efficient solution can often be what is known as a cap and trade scheme, in which legislation creates both an overall limit to the amount of the externality in question, whether it be a polluting chemical or the destruction of a type of habitat, and a market in the right to impose the externality within that limit.

Cap and trade schemes are best known in the context of polluting gases. Sulphur-dioxide-emission rights have been traded in America for years, and in countries that have signed up to the Kyoto protocol on climate change a market is starting to develop in carbon dioxide. But cap and trade can work in other contexts as well. Fisheries are a well-tested example, while in Australia, farmers who use irrigation (which increases soil salinity) can buy “transpiration credits” from forest owners whose trees, by sucking up water in the process known as transpiration, reduce salinity.

In America, similar markets in wetlands and endangered species have arisen. These are run through so-called mitigation banks. Such banks are created by permanently protecting privately owned swamps, or land that is inhabited by endangered species. This creates a supply of environmental “credits”. Those who want to destroy wetlands, or species-rich habitats, for agricultural or development purposes are able to buy credits from a mitigation bank allowing them to do so. New federal guidelines mean that mitigation banking is becoming popular in many American states. Indeed, it is even starting to finance the emergence of companies dedicated to restoring wetlands, or building them from scratch.

Such liquid markets are different from the fee-for-service arrangements that pertain to such things as watershed management, and, as if to underscore the arrival of environmental trading in the marketplace, two recent publications have been launched to track the field. Platts, best known for newsletters that report prices in energy markets, started a newsletter called Emissions Daily in February. This covers the carbon-dioxide market in Europe, and the sulphur-dioxide and nitrogen-oxide markets in America, publishing daily price assessments for the leading contracts. The second publication is a website called the Ecosystem Marketplace, which tracks markets and payment schemes for ecological services such as water quality, carbon sequestration (planting trees as a way of absorbing carbon dioxide from the atmosphere) and habitat preservation.

The principle having been established, traders are now looking for other opportunities to arbitrage pollution. One promising area is the trading of nitrate emissions between factories and farmers. Farmers' emissions are generally less regulated than those of factories but—probably because of that—farmers can often reduce their nitrate output at a fraction of the cost that a factory would have to incur. Trading between the two means pollution standards can be met more cheaply.

The greening of the City

All these payments and new markets have not gone unnoticed in the City of London, and other financial centers. People there are watching closely for new financial opportunities, particularly within carbon-dioxide markets—and banks such as ABN AMRO plan to start selling “new environmental financial products”. While the City has little interest these days in specifically “green” investments, there is something of a greenward shift in the way its firms handle large-scale project finance. Almost two years ago, ten of the world's largest banks signed an agreement to address the social and environmental impacts of the projects they financed (at least, those worth more than $50m). The rules were dubbed “The Equator Principles”, and 29 financial institutions have now adopted them. An article published this year in a Euromoney handbook estimated that such “Equator” banks represented about 75% of the project-finance market in 2003. In its sustainability report for 2004, ABN AMRO reviewed 16 deals that had been subjected to the Equator principles. One had been rejected. Four were approved. The rest were modified to fit in with the principles.

Is it working? Of course, banks are not keen to discuss their businesses in any detail, so there is no real way of knowing. It is easy to be cynical about the principles as little more than “greenwash”. Nevertheless, Mr Forgach explains that when projects are under consideration they have to be screened with a “green check”. He describes this as a series of questions, analyses and consultations on the impact a project will have on biodiversity, the climate and “footprint stuff” (a measure of the consumption of ecological resources).

From the perspective of someone wanting to borrow money, this means that green issues have to be considered from the beginning, and possibly even acted on. So, the proposers of a mining project might have to consider damage to the river and to downstream fisheries of any additional sediment the mine would produce. Borrowers may have to change their plans (as they did in 11 of ABN AMRO's deals last year) so that they are more environmentally friendly, or offset damage by protecting land elsewhere.

In effect, this means that the environment has been brought on to the balance sheet. Furthermore, because insurance companies recognise that the environment can be a huge portion of the risk in a project, there may be a financial incentive for paying to protect it.

Valuation is only ever part of the answer, because not everything is for sale. Mr. Forgach says he has calculated that the Panamanians could get far more for their lovely fresh water by shutting down the canal, bottling the water and selling it. Running a canal is a crazy waste of water, he says, but America would not let Panama shut the canal.

Still, many conservationists dislike valuation. Some misunderstand it as an approach that ignores cultural and spiritual values. It does not. It simply converts these values into monetary units that can highlight the cost of a course of action. Of course, it might not be appropriate in some cases for this value to be a factor in making a conservation decision. For example, closing the canal and selling water, or building tower blocks on the site of St Paul's cathedral in London, might be perfectly rational from an economic perspective, but also very unlikely to happen.

The valuation of ecosystem services is not without its difficulties. Nevertheless, the fact that there is a growing consensus about how and where it is appropriate is an important step forward for economists and environmentalists. In 1817, David Ricardo, a pioneering economist, noted that abundance in nature was rarely rewarded: “where she is munificently beneficent she always works gratis.” But if nature pays, who then will pay for nature?

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