Can Amortizations Save the Planet?
A way to understand what it’ll cost to decarbonize the world
Accounting is one of those areas of study that are always depicted as extremely boring, technical, abstract, and sometimes even disconnected from reality. Here I want to provide, using accounting concepts, a way to understand how we can think of the cost to convert the production of electricity from fossil fuels to non-contaminant means.
First I need to explain the connection between an accounting concept called amortization and depreciation and capital investment. Let me use an example to explain what I suggest in the title.
Let’s say there is a plant producing electricity with a total value of $1,000,000. The company that owns it believes and the entire industry accepts, such plant will work with reasonable maintenance for 40 years. The accountants of the firm will proceed to take away, from the books of the company a 1/40th of the value every year, $25,000. You can read a related article here for a different story and angle on this concept. That taking away from the books is called amortization and depreciation.
If the company plans to continue producing electricity by any means, it has to not only continue maintaining that plant but also make plans and eventually invest in another. Simply maintaining the plant will not cover all use and eventual deterioration of the capital. Enter investment.
While the company plans for investing in future plants, it will have to make a decision about financing the plant, it is more likely than not that the company doesn’t have at least $1,000,000 in cash somewhere to simply pay for the construction of a new one, or even fractions to pay across the years. A more likely scenario nowadays is financing, encouraged for a low cost of long-term capital, such as construction, and development.
With those tools in hand, management will be well advised to pay, in the financing, at least the same amount described above, which is $25,000. Ideally, the construction will end the last day of activity of the old plan, in this ideal example, and the company will never have extra capacity, nor lose any as well.
Where is the decarbonization?
Well, what happens if, a company with carbon-based electricity production uses the opportunity to maintain electricity production by investing in a non-contaminating technology. Such a strategy can leverage an ongoing set of actions by all companies in the energy sector, they must solve for future production capacity, all of them have financial plans in place with appropriate and certain metrics, including production, financing, and all dates associated with them.
Can we enter into a conversion phase, which could be accelerated by incentives? COuld the cost of investing in non-contaminating technologies be leveraged by a tax reduction incentive? Could there be longer-term financing for such investment? Rather than penalizing, encouraging tends to work better. Rather than opposing any given energy, reorienting them seems to cause less friction.
