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Chris DeMuth Jr. is the founder of Rangeley Capital LLC. Rangeley is an investment firm that focuses on event driven, value-oriented investment opportunities. Rangeley Capital and his value investing forum, Sifting the World (StW), search the world for misplaced bets. Rangeley exploits them for... More
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    Sep 17, 2013 5:30 PM | about stocks: FDX, UPS

    As a capitalist, I want to sacrifice nothing for the environment. My everyday driver gets mid-single digit miles per gallon. I love the logging trucks with the bumper stickers that say, "Earth First! We'll Log the Other Planets Later". I care about listening to environmentalists about as much as they would like to listen to... well as much as they would like to listen to me.

    Here is why my offer of "nothing" is actually a generous one that could help save the planet while it saves me money. We are so far beneath the efficiency curve that we can benefit the environment for no cost or hugely save costs for the current level of environmental benefit. Decision-makers should be congratulated when they are on the efficiency curve; however, that honorable status leaves little room for easy improvement. Such improvement requires tradeoffs, compromise, or hard work in order to eke out gain. I don't like tradeoffs, compromise, or hard work, so I love finding opportunities that are so far beneath the efficiency curve that one can take benefits without commensurate costs.

    How did we get here? The standard formulation of "I want to do something about the environment" gets at part of the problem. Any subject where good intentions are valued in and of themselves without regard to measured results tends towards poor, or at least, inefficient, consequences. We can take no pride in such waste, but we should exploit our position beneath the efficiency curve. I am not saying that I'm against sacrificing for the environment, only that sacrifice should be the last thing that we do - after we are on the curve.

    Junk Mail

    Each year in the U.S., over 5.6 million tons of junk mail end up in landfills. This is the equivalent of over 100 million trees worth of unsolicited mail. Over the course of a year, Americans waste an average of over 3 days opening and dealing with junk mail. The direct costs of disposing this mail is over $370 million. In short, junk mail hurts the environment while wasting time and money. Why? In part, because it is the beneficiary of a massive government subsidy that allows junk mail advertisers to pay sub-market prices to clog mailboxes and landfills. They are given sweetheart deals for bulk mail while first-class stamps have outpaced the rate of inflation. In fact, the US Postal Service/USPS has been busy negotiating new deals with junk mail advertising companies to increase the number of sales pitches sent through the mail. FedEx (NYSE:FDX) and United Parcel Service (NYSE:UPS) can deliver the mail that people want at prices that they are willing to pay while charging advertisers the market prices that would discourage waste - waste in the form of the environment, time, and money. We simply need to allow the USPS to reorganize in bankruptcy and to emerge as a private institution subject to market forces.

    Congested Commutes and Dress Codes

    Two work rituals that appear to be a product of habit with high environmental and other cost with little redeeming benefit include rush hour traffic and formal business attire. Sitting in traffic makes some amount of sense if one is rushing at the same hour to a job that requires a high level of coordination such as agriculture or manufacturing. But few service or capital-based jobs really require everyone to slosh on the same roads at the same time from residential to commercial zones and then to slosh in the other direction at another time. It is massively costly in terms of overusing internal combustion engine, covering cities such as Los Angeles (a hotbed of environmental good intentions) in smog. Flexible work hours that use less congested roads and schedules can alleviate much of this waste.

    Most work places use climate control so intensively to make up for workers who are overdressed or underdressed for the natural climate. Without the arbitrary and uncomfortable rules around work attire, workers could layer up in cooler climates and seasons and dress down in warmer climates and seasons. Once people are generally comfortable based on what they are allowed to wear, the use of climate control could be substantially reduced.

    Dirty Subsidies

    Many environmental resources are used more intensively and wastefully than they would in a market economy. For example, the Department of Energy has the authorization to make $37 billion of loan guarantees to energy companies. If these projects made sense, energy companies could pay for them by themselves or go to a bank for financing. If they don't make sense, then they should not do them. Each year, fossil fuels receive over $158 million of subsidies that could be easily eliminated. Nuclear power producers receive $77 million. Agriculture receives over $52 billion of commodity supports. If these subsidies were eliminated, land would be cultivated far less intensively and we would be left with a cleaner (and richer) country. What happens when the market demand does not support airlines? What happens is that they get hundreds of millions of dollars of subsidies each year to fly to places that people don't want to go.

    How does the market tell industries to stop? One way is through insurance premiums. Build in a floodplain? Insurance says, "stop". Over farm? Insurance says, "stop". But no one likes to be told "stop", so the government pays people $400 million each year to build in environmentally sensitive floodplains. Then it kicks in $11 billion to pay farmers to over farm relative to market demand in the form of crop insurance. Energy insurance caps liabilities so that oil companies can get out of paying for spills (taxpayers foot bills over $75 million) and nuclear companies can get out of paying for leaks (taxpayers foot bills north of $2 billion per nuclear reactor). The government subsidizes timber operations on federal land. Special favors for business on public land that cause overuse cost about $25 million per year. The Army Corps of Engineers and the Bureau of Reclamation spend billions each year to dam rivers in locations where neither the environment nor the economy are in need of dams. In each of these cases, if the activity made sense, the market would be doing it already. If the activity does not make sense, the environment should not have to bear it.

    What the Efficiency Curve Means For Investing

    What does this have to do with investing? As with the environment, there are plenty of situations that are priced so inefficiently, that one can massively gain by exploiting these inefficiencies. Should one make deep sacrifices in terms of treasure or risk? That is beyond the scope of this post. However, if you make any sacrifices at all, make them as a last resort. Start by taking advantage of all of the many opportunities that are free. Hone your sense for situations that are so wacky, where resources are so misused, that they can be easily improved for substantial benefit.

    Stocks: FDX, UPS
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  • arbtrader
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    A very good (but left of center) friend works for a major paper company. He said an internal study they used proved that their manufacturing techniques of intensive timber cultivation and economies of scale were far more efficient than paper recycling.


    Recycling is really stupid for cheap commodities like paper. They get your 20 lb of paper scrap every week using lots of diesel in specialized trucks, process it, ship it again for more processing, then put it into a distribution system as a lower quality product than pure pulp.


    How many entrenched bureaucracies would have to admit they are wrong to reverse the feel-good recycle your paper movement?
    17 Sep 2013, 10:19 PM Reply Like
  • Chris DeMuth Jr.
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    Comments (11123) | Send Message
    Author’s reply » Such a good example.
    17 Sep 2013, 10:42 PM Reply Like
  • SafisKusai
    , contributor
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    I never really thought of insurance as a way to regulate the free market, but it makes a lot of sense. Costs to insure something in a stupid place would be too expensive to warrant building or working in the location in the first place.
    18 Sep 2013, 12:47 AM Reply Like
  • Chris DeMuth Jr.
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    Author’s reply » Exactly. For example, the insurance market would limit housing on floodplains. A free market for flood insurance would be more environmentally friendly (and safer) than the current system which essentially pays people to build homes in dangerous flood zones.
    18 Sep 2013, 07:32 AM Reply Like
  • TimeOnTarget
    , contributor
    Comments (3638) | Send Message
    Chris --


    The biggest debacle is ethanol. Subsidized to the tune of 30 Billion Federal Taxpayer dollars. I loved this blurb describing the "value" of one of the ethanol subsidies:


    "This tax break is called the Volumetric Ethanol Excise Tax Credit. Its cost to the government ($2.5 billion in 2006) is offset by savings in crop payments to farmers. In 2006 high corn prices caused by ethanol demand reduced farm support payments by roughly $6 billion."


    Damn, those figures sure look convincing . . . . . our Congress is sooo frugal with our money, always trying to save, save, save us money . . . .


    I saw one figure that in 2011 the increased costs attributable to ethanol were 14.5 billion dollars -- or roughly 10 cents a gallon. That figure does not include the volumemetric ethanol excise tax credit, which essentially added 4 cents on top of that--unless you think the government had a surplus of funds that year that they didn't spend.


    Subsidies give way to mandates (after a period of having both subsidies and mandates-- something every efficient, beneficial, value-adding enterprise needs). I haven't seen any current research on the additional costs of ethanol, but I think that it is probably pretty safe to assume that they are in the same vicinity as they would have been in 2011.


    But hell, let's be conservative and assume that the use of ethanol mandated by Congress is only costing Americans an additional 10 billion dollars a year. By the way, that 10 billion dollars is not going to Mom and Pop farmers: It is going to big agriculture, companies like Monsanto (the bottom slime in the cesspool of environmental miscreants -- not exactly a "worthy" beneficiary of what people perhaps assume are environmentally beneficial expenditures).


    Let's not be too picky on the total cost of ethanol until we see what Congress is buying the U.S. taxpayers with their money. For their $10 Billion Dollars the U.S. taxpayer gets:


    i) no net energy benefit;
    ii) horrific adverse environmental impacts; and
    iii) their engines fouled and corroded.


    It basically takes as much energy to make ethanol as ethanol has in fuel value. It is essentially an energy wash. A giant hamster wheel that does nothing productive in terms of creating energy. Large conventional oil reservoirs used to mean that there was something like a 30 to 1 gain on energy expended creating fuel vs. the energy contained in the fuel (i.e., its BTU content). As big conventional reservoirs have gotten much harder to find, oil as gotten less efficient. With "tight oil" plays, where you have to drill horizontally at times for almost 2 miles, then do sometimes 30 or 40 stage frac jobs, injecting water and millions of pound of proppant, I think the efficiency is more in the nature of 4 to 1.


    That's not great, for sure, but it is one heck of a lot better than essentially the 1 for 1 ratio that ethanol provides. This alone should have killed the concept of ethanol as an energy policy. But, each state has two Senators and there are a lot of agricultural states . . . . . corrupt, self-interested swine.


    Like hamster wheels, which are found in hamster cages, ethanol does have a lot of poop associated with it.


    From clearing the land, to not rotating crops, to fertilizers, pesticides, and herbicides, to the 784 gallons of high-quality water expended to make a gallon of ethanol, what you might assume would be the cleanest part of the process is an environmental nightmare.


    One example of an impact is noted in this Scientific American article about the dramatically reduced numbers of Monarch butterflies:


    " But it wasn't until the introduction of glyphosate herbicide in the '90s, together with increased planting of genetically modified glyphosate-tolerant corn and soybeans, that monarch populations began to drop sharply. Because of the use of this herbicide, there has been a 58 percent decline in milkweed availability and an 81 percent decline in monarch production in the Midwest from 1999 to 2010, Rendón said."


    OK, now lets get to the fact that there are a lot of air emissions associated with the plants that produce ethanol -- call those the "stupidity emissions." And let's not forget the fact that ethanol is corrosive and can't be shipped by pipeline because of what it will do the pipeline and the water it will pick up. (Do you, perhaps, feel a sense of foreboding about what I am going to tell you about what ethanol does to your engines?)


    So, how do we get our nice energy wash ethanol to market since it can't go in the energy efficient pipelines? By truck. Starting to get the idea this wasn't a well conceived energy policy? And, I think it goes without saying, that in addition to all the other emissions associated with producing ethanol, it is significantly worse than gasoline in terms of greenhouse gas emissions.


    Then there is the huge blending hassle after that, since that has to be done last minute, since ethanol doesn't really blend well with hydrocarbon, like it does with water, including ground water, were it can migrate like hell, like MTBE did, way farther and faster than hydrocarbon ever could.


    But finally, it is in your car, where it: i) helps; or ii) hurts in terms of the emissions associated with operating your car? Helps? Or hurts? No clear answer to that yet, so it is probably pretty much a wash. It may help with CO emissions, which are among the least troubling ones. It seems to hurt with NOx emissions, which are among the most troubling to deal with and potentially expensive because of their effect on ozone and air quality attainment.


    Regarding VOC emissions, it may have a slight positive effect on tailpipe VOC emissions. That appears to be real slight and is probably more than offset, probably a lot more than just offset, by the effect it has on VOCs that are otherwise emitted, e.g., leaks from seals and corrosion. Ethanol is corrosive to rubber compounds and the things typically used as seals in cars. Had to unexpectedly replace a head gasket lately? I have--in both my wife's car and my truck.


    Oh, and there are certain things that ethanol, being a real polar compound and all, is a really good solvent for some things -- making it likely to dissolve the grunge in your gas tank that gasoline alone probably would not-- and getting that stuff directly to your engine. I like to make my own solvents some of the time. My polar solvent "big gun" is a mixture of ethanol (35%), methanol (15%), isopropyl alcohol (10%), and acetone (40%). My "green" polar solvent is ethanol and isopropyl alcohol.


    Anyway, the word corrosion reminds me to not forget to mention that ethanol is corrosive to steel and aluminum. I'm sure there is none of that in your car. I haven't seen any studies about the costs related to additional corrosion caused by ethanol -- probably would be pretty amazingly difficult to quantify.


    I'd be a whole lot happier if I could just directly pay big agriculture my share of whatever financial windfall it is getting as a result of the largess of Congress: I really, really hate putting that crap in my truck and cars.


    In short, the energy and environmental "policies" related to ethanol that Congress is mandating are just a shade below the efficiency curve. In fact, if it weren't so obviously the result of corruption and undue influence against the public good, I would give it a TTSFTIEHO award (That's The Stupidest "Freaking" Thing I Ever Heard Of").


    At first I had total contempt for the Congress in passing the garbage laws related to ethanol that they did-- thought they were total drooling cretins. Then I realized it was essentially corruption behind it: They really didn't think it was a good idea---no one could. Just more "if it makes more money for my constituents, I don't care how bad an idea it is" typical Congress mentality.


    Now I have decided that the voters are the drooling cretins for underwriting this stupidity and not doing anything about it. Perhaps the problem isn't apathy: It might be comprehension. Fuel from corn-- "why yes, that sure does sound healthy and good for the environment."


    Sorry about the lengthy comment: You touched a bit of a chord with me . . . .
    24 Sep 2013, 09:38 PM Reply Like
  • Chris DeMuth Jr.
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    Comments (11123) | Send Message
    Author’s reply » Terrific post. Great example. Scratching the service of most government policies that appear to be buffoonish and you'll usually find something that is more evil than merely stupid. Once the nature of the corruption becomes clear, it is frequently that the impact is irrelevant to if not adverse to the stated intent.
    24 Sep 2013, 10:03 PM Reply Like
  • Chris DeMuth Jr.
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    Comments (11123) | Send Message
    Author’s reply » The Green Jobs Answer Man:
    14 Oct 2013, 02:11 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (11123) | Send Message
    Author’s reply » ‘Green’ Energy Kills Eagles:
    11 Dec 2013, 12:05 PM Reply Like
  • TimeOnTarget
    , contributor
    Comments (3638) | Send Message
    It really is a travesty. I'm concerned about the potential impacts of global warming, but a part of that is the impact it will have on our ecosystems. There just aren't that many eagles around. Seeing one up close in the wild is an amazing experience. Here it looks like they have lost sight of the forest for the trees. On top of that, there are some real issues with wind power really being all that useful to the grid because of its variability, although it does score well in a lot of other considerations like return on energy invested, etc.
    18 Dec 2013, 02:33 PM Reply Like
  • Chris DeMuth Jr.
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    Comments (11123) | Send Message
    Author’s reply » Truckers under Siege II:
    16 Dec 2013, 01:34 PM Reply Like
  • TimeOnTarget
    , contributor
    Comments (3638) | Send Message
    Yeah, the trucker regs are some classics as far as government overreach goes. To the extent that they needed any at all (both the company and their insurers have an incentive not to cause crashes and fatalities it seems to me) the gov't rules should have been minimalist.


    One government rule that actually works well is OSHA's process safety management rule. I think that is because it is less like a regular government rule, but more like "you have to have a system to do this and follow your system."
    18 Dec 2013, 02:29 PM Reply Like
  • jacobtr
    , contributor
    Comments (781) | Send Message
    The free market has been making some great strides in recent years to move the economy closer to the efficiency curve. Consider Uber, AirBnB, and other such companies that use idle capacity (capital and labor) productively rather than the status quo of needing more resources. Also Zip Car and others of that model, which don't necessarily use latent resources, but use new resources more efficiently. Certainly these are good things for the environment, but done for capitalist reasons.


    Your ideas are great as well. I'd love to see more telecommuting. I think toll-based roads with variable tolls based on the time would be a great way to use free-market principles to solve the traffic issues.
    14 Jul 2015, 10:28 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (11123) | Send Message
    Author’s reply » jacobtr,


    Uber and AirBnB are so exciting. They are about taking our resources and using them efficiently, which is lucrative and clean. I love such efforts because I want to make money, want a clean environment, but also because I like the aesthetics of efficiency. I love it when people can use my stuff and get value from it when I'm not using it.


    Sitting in traffic always has struck me as miserable, expensive, wasteful, and dirty. I sit looking across a lake with a short walk for a commute and reinvest all of that time into swimming and reading and gas money into investing and philanthropy, both of which I prefer. If businesses were forced to internalize more negative externalities, they would encourage more people to do the same.
    14 Jul 2015, 10:47 AM Reply Like
  • The Protagonist
    , contributor
    Comments (2616) | Send Message
    Well it could be worse, in China there was a traffic jam a few years ago that was 20M cars long and lasted 10days.


    And then some guy came up with the solution to your problem:
    15 Jul 2015, 04:27 AM Reply Like
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