The Green Premium, a reality check

Is there a Green premium? For those shielded from the decades-long debate, on account of youth or a long residency on the International Space Station, the idea is this: consumers will pay more for sustainable products than fossil-based products.

Some say yes, some say no, some say heck no.

About the Green Premium

Dooma Wendschuh, who is CEO and founder of Province Brands offered us up good news and bad news. The good news, the green premium is real. The bad news, it’s tiny, situational, and hard to tell from the premium paid for things in vogue or the prices paid by early adopters with advanced needs. After all, Jimmy Choo shoes sell at a premium, too, that’s vogue. 

Over on an episode of DigestConnect, Darcy Prather, president of Kalion, makers of glucaric acid, said that you have to look beyond the same-as “buck-a-pound” markets, and find “five bucks-a-pound” additive markets where you can enhance performance with green molecules. That’s a green premium — but it’s subtle.

What about the Green Preference?

This is the theory “if you can make it for the same price as my current product, I’ll choose green”. A number of companies have focused on reaching “parity with oil,” and thereby earning orders from customers who “will select green if it costs the same”. Rennovia, Rivertop Renewables were two that talked about this.

I asked about the Green Preference at DigestConnect, for which we had 400 registrants to gather online to talk about renewable chemicals and biomaterials. What we learned? A tie in the price is an ephemeral thing, oil can sink to $30 at the drop of a hat — what companies are competing with right now is not petroleum’s cost, but petroleum’s price. Here at the Digest we’ve heard significant support of the idea that if you match petroleum’s cost, there’s a preference for green — but think $15 or $20 oil, not $50 or $70. In other words, real, but nigh impossible to reach. $10 per installed gallon capex — or $420 per barrel — over 20 years, that’s $21 per barrel in hard costs, even before making a product. So, we tend to think of this as something that exists only in a frame of reference that includes a price on carbon, probably a steep one. 

Which brings us to Green Hornet

Here’s the idea that if you don’t go sufficiently green, sufficiently fast, there’s a backlash from the customer base, regardless of the price a company has to pay to green it’s supply chain. 

There’s some evidence that this is happening, and working. There’s Norwegian Airlines’ bankruptcy filing, which was presumably caused by a number of factors, but the flight-shaming campaign of Greta Thunberg et al have been given more than a little credit. Consider the election of four directors to the ExxonMobil board on a “sustainability ticket”. Our conclusion, the Green Hornet is real, but it tends to impact high-profile corporations, the smaller companies that form the supply-chain are less impacted.

And then there’s Green Re-Alignment

Here, governments are simply pursuing green re-alignment, outright bans of fossil fuels, making it a moot point whether green costs more or less, green becomes the market standard and the market price. The bans appear to follow the smoking ban pathway — slow, incremental, sector by sector. 

The government is interested mostly in power, heat, fuels, the big apps. They appear to care much less about chemicals and materials, which is weird. Usually, incentives are aimed at the small volume, high margin products, which would be materials. Only later, after companies establish manufacturing beachheads, does the focus shift to the big applications. So, Apple makes the iPod before the iPhone, and so forth. 

In the world of renewables. the incentives are done in reverse. Companies are incentivized to attack large scale markets first. To date, this approach has resulted in overpromising and underdelivering, and if you have heard the COP 26 meeting decoded as “Countries Over Promising” 26, that’s why.

What about Green Engagement?

You might cal it Green Entanglement.  This is the idea that rising demand for green products, initially, expands demand faster than supply, raising prices. Later, as supply catches up, green manufacturers achieve great economies of scale, reducing costs.  It’s hard to distinguish this from the standard Product Adoption Curve for hot products. After all, we experienced all of this with the iPhone and the Tickle Me Elmo doll. We tend to ask for data, and there’s not much.

The Bottom Line

In the end, the industry seems to believe that standard market rules apply, green products need to be adopted in smaller, niche markets first, then broaden out as costs dive. Solar is an example where early adopters made a market that was based in incentives and green pull, now it’s mainstream. Biobased technologies ought to begin in pharma where the margins are sky high, and broaden out to materials, then the big apps like power, fuels, heat. Where governments feel they cannot wait for market forces, a low-carbon standard helps, though it helps more when it covers the early applications like materials, as well as the big volume movers like fuels. Polluter pays, that works.

The Green Hornet is an accelerator. Green Re-Alignment — the green bans — that’s for use in entirely dire situations where you have entrenched users, polluters do not pay, and the social costs are becoming unaffordably high. Sounds like the case in heavy-duty fuels and heat. The Green Preference seems to be a fiction — doubtless there is one, but situationally, how often would it happen? The Green Premium, there’s some evidence but it’s hard to isolate from tradition early-adopter stuff, and probably not worth thinking about.