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William A. Levinson

Quality Insider

Henry Ford Would Dump California

Cap and trade one evil for another

Published: Thursday, December 13, 2012 - 17:14

Henry Ford would have fired for incompetence any manager who tried to move jobs offshore for cheap labor. He believed—and more important, proved—that intelligent management can make most jobs sufficiently value-adding to justify high wages for American workers. If he was alive today, however, California’s enactment of a cap-and-trade law would disqualify the state from consideration as a Ford manufacturing venue under the following criteria.

As noted in Today and Tomorrow, by Henry Ford (Doubleday Page & Co., 1926): The location of a new plant is largely determined by the cost of its power and the price at which it may make and ship goods to a given territory.

Energy is effectively part of the bill of materials for any energy-intensive manufactured product and especially for many chemicals. Advice to “use energy more efficiently” is useless because a certain amount of energy is nonnegotiable with the laws of nature. It is particularly telling that, while it’s theoretically possible to reduce a product’s labor cost indefinitely—Ford realized productivity improvements of fiftyfold or greater—there is no way to get below this minimum energy cost.

You cannot, for example, make aluminum for less than about 2.56 kilowatt-hours per pound. Aluminum has a very strong affinity for oxygen, and it takes an enormous amount of energy to separate the two elements. This is well-illustrated in the value stream for aluminum cans on page 39 of Lean Thinking, by James P. Womack and Daniel T. Jones (Simon & Schuster, 1996). Cheap energy is so important to the manufacture of aluminum that bauxite, mined in Australia, is shipped halfway across the world to Scandinavia, which has cheap hydroelectric power, for processing.

It pays to go out of business

Just to understand how energy policies can lead to crazy situations, at one point Oregon, Washington, and Montana were able to shut down production at aluminum plants and turn them into nonvalue-adding middlemen. Marianne Lavelle reports in “The Power Hungry Get Powered Down” (U.S. News & World Report, April 30, 2001): “Locked into long-term contracts at $22 per megawatt-hour (while the going rate shot up to $300), many closed their mills and resold their electricity—realizing hefty profits even after paying idled workers. Kaiser Aluminum made $100 million on energy sales in the last quarter of 2000, more than offsetting the $90 million it lost on other operations.”

Trade one evil for another

Aluminum manufacturers, like most other manufacturers, already seek to use energy and other resources as efficiently as possible. Cap and trade adds nothing to the equation. Cap and trade is a law that puts a cap on carbon dioxide emissions, and the government issues or sells permits to companies that allow them to emit a certain amount. If they emit more, they must purchase additional permits from those that emit less. This is the “trade” aspect of cap and trade. Cap and trade is, therefore, not an incentive to be more efficient; it is an incentive to move the energy-intensive jobs to another state, or offshore to a country like China.

China’s commitment to reduce its “carbon intensity” does not mean any costly or extraordinary efforts to reduce overall greenhouse gas emissions. “Carbon intensity” is simply the amount of carbon dioxide emitted per unit of gross domestic product (GDP). China has, therefore, committed only to good engineering and sound business practices when it says that it will decrease its carbon intensity by 40–45 percent by 2020. However, that will only reduce its carbon intensity from the current 2.2 to 1.21 by 2020. The United States meanwhile has a carbon intensity of 0.42. So by moving energy-intensive jobs to China, we are not only taking jobs away from the United States, we are also harming the environment because it will take more than twice the amount of CO2 per unit of GDP in China to produce the same product in the United States.

This means cap and trade will not reduce carbon dioxide. It will only move it, along with the associated high-wage jobs, to China or to other states. If Californians, who recently supported cap and trade, do not want these high-wage manufacturing jobs, there are, for example, hundreds of thousands of unemployed and underemployed workers in Pennsylvania who will be more than happy to do them. The exodus of California’s industries will simply exemplify the operation of totally nonpartisan, impartial, and inarguable laws of economics, science, and human behavior. Rudyard Kipling’s poem, “The Gods of the Copybook Headings,” personify the laws in question.

California vs. Kipling’s Gods of the Copybook Headings

In the first stanza of “The God’s of the Copybook Headings,” Kipling’s Gods of the Market Place embody delusions to the effect that we can enjoy wealth that we do not produce—or compel compliance with cap-and-trade mandates when producers can simply opt out by moving elsewhere. The Gods of the Copybook Headings will simply not stand behind wishes and ideologies that are not consistent with reality:

“With the Hopes that our World is built on they were utterly out of touch,
They denied that the Moon was Stilton [cheese]; they denied she was even Dutch;
They denied that Wishes were Horses; they denied that a Pig had Wings;
So we worshipped the Gods of the Market Who promised these beautiful things.”

Cap and trade is state-imposed muda (waste), and not many customers are willing to pay for muda. This obliges businesses to get rid of it by leaving California in favor of another state, or an offshore location. The Gods of the Market Place may promise high-wage “green” jobs under cap and trade, but the Gods of the Copybook Headings will deliver something very different—and their vote is the only one that counts in the long run.

“Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.

As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool’s bandaged finger goes wabbling back to the Fire;

And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!”

The Gods of the Market Place once promised limitless profits through the exchange of Dutch tulip bulbs, speculation in stocks (1929), and more recently, speculation in mortgage-backed securities. California’s cap-and-trade law is simply the latest false promise, and it leads to the same place: unemployment, lost tax revenue, and general poverty. It is therefore only a matter of time before The Gods of the Copybook Headings with terror and slaughter return.

Discuss

About The Author

William A. Levinson’s picture

William A. Levinson

William A. Levinson, P.E., FASQ, CQE, CMQOE is the principal of Levinson Productivity Systems P.C. and the author of the book The Expanded and Annotated My Life and Work: Henry Ford's Universal Code for World-Class Success.

Comments

Cap & Trade

The cap & trade method is an attempt to capture an externality of the power generation process and feed it back into the costing function so that capitalism can correctly find the true cost/benefit balance.

It is clear that you do not find the cap & trade method an effective way to do this.

Skipping the whole question of "is excess carbon bad" - assume that is for this question - how do you propose to capture this externality so that capitalism can function correctly?

Is it even correct to anticipate a cost and feed it back into the process to reduce the final cost? Do you have to allow a reactor to melt down to find out how expensive it is to clean up afterwards? Waiting until the true costs are easily measurable (sea rises 2 meters, triggering another ice age, ...) is likely to make the eventual cost much higher.

Or are you proposing that the correct behavior of an organization is to foul the environment until someone makes you pay for the damage and them move on to some other place and repeat the process?

 

Mark

Cap and Trade only moves the carbon dioxide

Climate change may well be inevitable, as shown by the fact that the world got itself into and out of several ice ages with no human intervention whatsoever. People who owned land in what is now the English Channel obviously had to relocate as a result. If the Dutch had founded New Amsterdam several hundred years before they actually did, a lot of New York would already be under water (or behind dikes).

Suppose the sea does rise another 2 meters, or 20 meters (it has risen over 100 since the last Ice Age). We could throw trillions of dollars at the problem in an attempt to emulate King Canute's futile command that the tide not come in, or we could use the money to mitigate the problem if it does happen.

The people in the Maldives are complaining that the industrialized world is causing climate change that might submerge their islands. Suppose it does; it would be far cheaper to relocate the Maldives' entire population, and buy new homes for them, than to squander money on an agenda that might not even prevent the problem. (In other words, we could easily pay now AND pay later.)

Now, suppose I'm a manufacturing employer in California, and have just been subjected to costly cap and trade mandates. I am not going to pay for state-imposed muda, and neither are my customers. I am therefore going to move the jobs to another state, or else offshore. That does not even get rid of the carbon dioxide; it just gets rid of the jobs.

A reactor is another matter entirely. Carbon dioxide is not poisonous (except in concentrations that far exceed anything we are talking about today), while the products of a nuclear meltdown are obviously hazardous to human life. The same goes for genuine pollutants like nitrogen and sulfer oxides--I support regulation of those, along with things like mercury. I like natural gas because it burns cleaner than coal and (incidentally) produces less carbon dioxide, and now it is becoming economical.

Henry Ford ....

Mr. Levinson,

 

Interesting thesis, and well written.  However, I am not fully convinced of the conclusions.  If cap and trade is not an incentive to drive either efficiency or, at least, reduce carbon emissions, what would be a preferred alternative?  For too long industry has not had to account for all aspects of their operations, particulalry carbon output.  Granted, the deleterious effects of carbon emissions is a more recently understood negative impact, but the point is that manufacturers everywhere need to account for all aspects of their operations, and wastes are certainly a part of that.  Would you support a carbon tax?  More direct regulations that require particular control technologies be applied?  Something else? 

Yes, in this case California has taken a lead role (again) with the cap and trade system, and certainly risks some negative consequences, but it is likely that other parts of the U.S., and eventually the world, will also begin to implement some kinds of carbon-controlling requirements.  The question remains, what would be the better approach?  With this action, at least we can learn if cap and trade will have greater positives or negatives.  Someone always must try new approaches first; this time it is a state that tends to lead in the arena of environmental management in this country.

Thanks for your thoughtful arguments - look forward to a response.

 

Cost of carbon waste

Re: "If cap and trade is not an incentive to drive either efficiency or, at least, reduce carbon emissions, what would be a preferred alternative?" The cost of wasted energy is a sufficient incentive by itself. Any action taken to reduce this waste will reduce carbon emissions, if the energy comes from a carbon source. One would, of course, seek to eliminate the waste even if the energy is from a non-carbon source. Cap and trade will, on the other hand, not get rid of the waste, and may even make it worse. If there is a cheaper alternative to carbon fuels, businesses will adopt them regardless of carbon mandates. If there are not, businesses will deal with them by shipping all the carbon dioxide (and the associated jobs) offshore to countries that do not even regulate real pollutants like sulfur and nitrogen oxides. Then we will have the carbon dioxide, plus particulates, acid rain, and so on. Rudyard Kipling's "The Gods of the Copybook Headings" is highly instructive. The poem shows that we cannot have what we want simply by wishing for it, or legislating it.

Wonderful

Wonderful and insightful piece. Am always delighted to find sagacity from days gone by transcending to modern applicability. Thank you.

Thumbs up on the Henry Ford/Cap and Trade article

I loved the article "Henry Ford Would Dump California". This needs to be required reading for every American.  It certainly will be for my class at the community college.

Oops!

Posted to wrong area.

Value-Adding

Yes, Mr. Levinson, I share your point of view: from a non-teleological point of view, there is no such a thing as (totally) useful or useless, but it is a continuosly variable shade of Utility. Though I personally quite abhor how the word "utility" is commonly used and meant of, because it only implies aims but not origin, the psychological way of thinking "to what end?" is still deeply rooted in the western world culture, as opposite to an "as is" sight that would also make many things easier. Thank you, I look forward to your next columns.