Environmental Sustainability Updates

From CNN.com:

Lots of people, especially those trying to battle high utility bills, believe in energy-efficient homebuilding.

But there's something holding green technology back: It simply costs more to include it than it adds to resale value.

Appraisals for newly built green homes do not fully reflect the cost of green technology, and the lower appraisal values mean buyers often cannot get the full financing they need from banks.

That discourages developers from using green technology, in turn diminishing the market for more green products.

"We can't get lenders to appreciate the value, and if we can't get the values recognized, manufacturers can't justify moving these products forward," said Bill Nolan, a Florida home building consultant.

Simple economics: Costs don't represent value.  Costs represent, well, costs...

Consumers determine the value of the improvements.  It isn't the lenders responsibility to 'appreciate the value' just because the builder claims construction costs are higher.  If buyers are willing to pay more for these green improvements than their 'brown' equivalent, then the market price for the house--and the appraised value--will reflect that.  Like this (I actually typed that last paragraph before I read the end of the article--good to know that what I wrote makes sense, assuming that agreeing with a CNN writer is a measure of the external validity of my argument):

"It doesn't do a lot of good to simply add value based on cost," said David Snook, a California-based appraiser who serves on the real property committee on education for the American Society of Appraisers. "The question is 'How much will the market pay on resale?'"

The appraiser's job is to accurately assess the value of the home. If a feature costs $50,000 to install but only adds $25,000 to the price when the home is resold, the appraisal cannot reflect the full $50,000 spent.

"Appraisers don't make the market, they reflect it," said Jim Amorin, spokesman for the Appraisal Institute. "Cost does not necessarily equal value. It depends on how the market reacts to the feature."

For anyone looking for an end of semester Econ 101 case study, well, you can thank me later (Hat Tip: Alan Dove):

When the American economy plunged into our current recession, consumers’ cautious spending led to an unexpected crisis. Although most of us didn’t notice, our unyielding pocketbooks caused a shortage in a crucial solvent used throughout the chemical industry.

The staple solvent, called acetonitrile, is unheard of to most of us, but in a way, we deeply depend on it.  It’s commonly used in both chemical research and manufacturing, and one of its more important roles is in testing the quality of many pharmaceutical drugs before they go out on the shelves.

But in the fall of 2008, chemists started having trouble getting their hands on acetonitrile.

I'm sensing a supply decrease story, with a twist...

“I never really thought about where acetonitrile came from until I couldn’t get any,” says chemist Jay Conrad. The Princeton University researcher regularly uses acetonitrile solvent in his hunt for new medical drugs. Conrad noticed provisions of acetonitrile getting low around October 2008. Soon after, emails circulated through the chemistry department, warning research groups to be conservative with their stocks.

What effects do you anticipate from a decrease in supply of acetonitrile?

Econ 101 Answer: We would expect the price of acetonitrile to increase, leading to decreased consumption of acetonitrile and an increase in the demand for substitutes.  

Econ 201 Answer: It depends on the elasticity of demand for acetonitrile.  If the demand is elastic (for example, if there are readily available substitutes) then the decrease in supply of acetonitrile will have little effect on the price of acetonitrile or associated products.  If the demand is inelastic (few substitutes), then the decrease in supply will dramatically increase the price of acetonitrile and associated products.

The situation continued to deteriorate in early 2009; by then, supplies were essentially exhausted. Universities and chemical companies around the world experienced similar situations.  The industry was suffering from “acetonitrile anxiety.”

The funny thing about this chemical is that even though lots of chemists need it, no one specializes in making it. Instead, the world’s supply of acetonitrile is nothing more than a happy byproduct in the manufacturing of a material that goes into everything from carpets and car bumpers to refrigerators and LEGO plastic.

Think of it this way: when you roast up a big turkey over the holidays, you don’t need the little bit of juice left over in the bottom of the pan — but you certainly can use it to make a lot of delicious gravy. In the same way, the chemical industry relies on the production of our ordinary household objects to get its acetonitrile.

But last year, with a looming recession, people stopped buying consumer goods, which meant that not enough acetonitrile was produced on the side — no turkey, no gravy.

"No turkey, no gravy"--I like that.  Maybe I should make that my new catch phrase.

Kids: "Dad would you please stop singing in the car when you are driving us and our friends to the movies? You can't sing, and it's embarrassing."

Me: "To turkey, no gravy."

Yep, that'll work.   

“All those materials took a dive as people stopped buying, but there wasn’t a slowdown in demand for acetonitrile,” recalls Amin Dhalla, the business director at INEOS Nitriles in League City, Texas.

INEOS is the world’s largest single acetonitrile purveyor. They alone generate over 45 percent of the world’s 70,000-ton supply — enough to fill nearly 40 Olympic-sized swimming pools. According to Dhalla, the supplies were “very, very short,” and as less acetonitrile became available, it didn’t take long before chemists felt the squeeze.

In the wake of the dilemma, chemical supply companies — middlemen that purchase chemicals from producers and sell them to solvent consumers — dramatically marked up the prices of the remaining supplies. Within months, the price of acetonitrile rose nearly tenfold.

I love it when economics works. Now I just need some evidence that demand is inelastic...

“The problem is, there’s nothing else quite like acetonitrile,” says Paul Reider, the former vice president of research at the California biotech company Amgen. Its unique properties are unlike most other chemicals, he explains, so substitutes are hard to come by. And because it has been widely available since the 1960s, chemists have learned to love acetonitrile.

Thank you...

Given its prevalence, the lack of acetonitrile was cause for distress in many industrial and chemical research labs. In a few cases, major pharmaceutical companies simply paid the exorbitant prices and monopolized much of the available supply rather than go through the lengthy process of finding alternatives.  Because these companies used the remaining acetonitrile to test their products, drug safety was never really a concern.

But many companies and universities couldn’t pay the soaring prices, so they began to rethink their acetonitrile needs.

In other words, they were looking for ways to make the demand more elastic...

Looking for inexpensive solutions, many chemists took a more conservative approach: replace, reduce, and recycle, says Harald Richie, a business director at Thermo Scientific. The U.K.-based company produces and sells the technology used to check the safety of drugs and other products — a technology that has traditionally been heavily reliant on acetonitrile. Thermo Scientific and other companies such as Agilent Technologies in Wilmington, Delaware, encouraged their clients to choose alternative chemicals or, better yet, simply use less solvent altogether.

Other companies began recycling acetonitrile, which saved them from needing to purchase large quantities of fresh supplies. Although the recycling option has been available to companies for decades, most simply don’t do it when supplies are readily available.

“People are now thinking about alternative ways to do chemistry,” says Ronald Majors, the business development manager at Agilent. “It has opened up their eyes.” Using these new methods, chemists found ways to get the kind of results they had before the market crashed.

As fate would have it, just when everyone was settling into a new chemical regimen, the late spring of 2009 saw the prospects for acetonitrile bloom and recover. The world economy began to improve, and acetonitrile supplies were rejuvenated as consumers purchased more material goods.

Although the acetonitrile saga appears to have come to an end, Majors hopes the period of shortage has left the chemical industry better prepared for future economic turbulence.

“If there is something we’re going to take away from this,” he says, “it’s that people are going to think more about where their chemicals come from, and perhaps use less.”

I doubt it...we'll probably just subsidize LEGO production.