Navigant Research Blog

An Internet Protocol for Smart Cities

— August 30, 2012

The list of smart city initiatives continues to grow.  Recent examples include the new EU smart city project fund; almost 400 U.S. cities competing for $9 million in awards for city innovation as part of the Mayors Challenge launched by Bloomberg Philanthropies; a £25 million ($40 million) Future Cities Demonstrator competition for cities in the United Kingdom; and a new smart cities network formed by 24 Spanish cities.  One of the most interesting new programs was launched in Barcelona in July.  The first City Protocol workshop, co-hosted by the City of Barcelona, GDF Suez and Cisco, brought together a diverse group of stakeholders including city councils, academia, suppliers and interest groups, all committed to the development of a “more sustainable, efficient, cohesive, innovative and smart city.”  Over 30 cities from across the world were represented, as well as around 20 suppliers, including Accenture, IBM, Microsoft, Oracle, Schneider Electric, Siemens, Telefonica, and Philips.

The City Protocol aims to enable cities that are “adaptive, learning, evolving, robust, autonomous, self-repairing, and self-reproducing.” The Protocol spans the whole of the city ecosystem including water, waste, matter, energy and utilities, mobility, goods, people, and information.  Taking its inspiration from the way Internet and Web standards have been delivered, it fosters a similar process of open, transparent, and robust collaboration on an international basis.  Leadership will be provided by the City Protocol Society (CPS), which will loosely follow the model of the The Internet Society,  addressing specific issues and delivering formal agreements, recommendations, technology standards, reference projects, policies, and certification models.

Of course, there are already many collaborative efforts on city innovation that focus on developing innovative solutions to common challenges.  The danger is that the City Protocol will be just another talking-shop on the fascinating challenges of urban renewal and growth.  There are two critical areas where it could make a real difference.

‘Anything Connected to Anything’

First, a well-defined and shared process for the ratification, incorporation, and further development of technology standards that meet the needs of smart cities would be a major step forward.  The City Protocol could make a significant contribution to enabling better integration of information flows and communications networks across multiple domains such as transport, sustainability, and public safety, for example.  This would make analogies to the Internet Protocol or to concepts such as the Smart City Operating System more than just metaphors.  Vint Cerf, one of the founding fathers of the Internet, told delegates to the first City Protocol Workshop that one of the biggest insights of the Internet’s early development was that eventual applications were less important than simply creating a platform where an arbitrary collection of computers could communicate over an arbitrary collection of networks.  Tim Berners-Lee had a similar vision for the World Wide Web: “Anything being potentially connected to anything.”  If the City Protocol can help develop a similar approach to connectivity across the diversity and complexity of urban operations, then it will be a major achievement.

However, the need to address practical issues around specific application areas is where the City Protocol most clearly diverges from the Internet Protocol.  This is also where its second major contribution can be made.  Participants in the City Protocol workshop recognized the need for better cost-benefit analyses that can reduce the risk and improve the repeatability of new programs in areas such as energy efficiency.  If the public and private sector can develop models for delivering financial returns and public benefits on energy efficiency programs or better managed transportation systems, for example, then it will be much easier to implement such smart city projects at scale.


New CAFE Rules Anger Just About Everyone

— August 30, 2012

The Obama administration announced new fuel economy rules this week requiring that vehicles reach 54.5 miles per gallon by 2025.  Typical of the corporate average fuel economy (CAFE) rules, there are many credits offered for different types of vehicles based on their drivetrains, encouraging automakers to make and sell alternative drive and alternative fuel vehicles. The effort to tighten CAFE standards has been the epitome of government sausage making.  The process required not only getting Republicans and Democrats to agree on something, but also getting environmentalists and, more importantly, auto manufacturers to agree on something that no party really likes.  All of this makes for a very messy show, and it’s the biggest reason why from 1990 to 2009 fuel economy for cars remained unchanged.

Not surprisingly, automakers are not happy with the new rules.  Even less surprisingly, Republicans are eager to make that known.  Representative Darrell Issa (R-CA), who seems generally opposed to regulating the auto industry, leads the House Oversight and Government Reform Committee, which issued a report on August 10th showing that foreign automakers complained about the process.  The report quotes Toyota as claiming the rules “give preferential treatment to larger trucks [and are] ‘a second bailout for Detroit.’” There is likely some truth in here.  The credit system in the proposed rules do not provide credit for hybrid cars – Toyota and Honda’s alternative drivetrain bread and butter – but do provide credit for hybrid pickup trucks (only GM offers a hybrid pickup at the current time).  The report claims that German automakers are also unhappy, because diesels are not included for alternative drivetrain credit.  The final rules announced today did feature one change that will make Honda happy, a new credit was added for natural gas vehicles.

One big win for all the automakers in these new rules is getting California back into the national fold.  Earlier this year, California’s Air Resources Board (CARB) produced its own emissions and fuel economy standards, and a handful of other states jumped on board.  The new CAFE rules were negotiated in collaboration with CARB, which wanted a 5% annual rise fuel economy, but ultimately agreed to 3.5% increases for trucks in 2017–2021.  This brings California and the federal rules into alignment (mostly).

Upon the announcement of the new regulations, the Detroit Free Press reported that Rep. Issa issued a statement: “The rule finalized today by the Obama Administration will hurt American consumers by forcing them to drive more expensive and less safe automobiles.  I support the goal of higher fuel efficiency, but this rule will only add to the burdens American small businesses and middle class families face under the heavy hand of the Obama Administration.”

The rules do include a review period in 2021 to determine if the targets are technically feasible.  I’ve always thought this would ultimately prove to be the automakers’ way out from these requirements, and their responses to this week’s announcement seem to confirm that the review period and elimination of state-by-state regulations remain the industry’s two key objectives.  Depending on how the elections swing in November, the rules may not even make it that far before being shot down.


Chinese Auto Market Whipsawed by Conflicting Policies

— August 30, 2012

After several years of rapid expansion, China’s automotive market growth has slowed substantially, partly due to local regulations limiting vehicle sales in cities.  According to, auto sales grew in China by 2.9% in the first half of 2012, up slightly from the prior year’s 2.5%.  While many automakers would be happy with stable expansion, China saw 32% annual growth during the prior decade.

The government has been very aggressive in promoting vehicle sales, particularly “New Energy Vehicles” (NEVs), a term it uses to describe hybrids, plug-in vehicles, and other
fuel-efficient vehicles.  The government wants to see NEV sales reach 500,000 units annually by 2015.  Last year less than 9,000 NEVs were sold, a far cry from the government’s original plan.

Vehicle sales are stalled because four cities have established caps on annual vehicle sales due to traffic congestion and concerns about air quality.  For example, Guangzhou city is reducing license plate registrations by nearly two-thirds in 2012, and has set up a lottery system for more than half of the 120,000 tags for all vehicles.  NEVs are required to make up 10% of that amount, which should encourage sales, but also limits the potential of the market.  An auction is used for 40% of license plate sales in Guangzhou, which will further skew vehicle sales to more wealthy inhabitants.

Imposing limits on vehicle sales in major cities may make the cities safer and cleaner, but it goes against the national goal of growing the vehicle market, as nearly a quarter of China’s more than 1,300 auto and motorcycle manufacturers are on the verge of bankruptcy due to surplus capacity.  The Chinese government is considering shutting down automakers that can’t sell a minimum number of vehicles each year.  The manufacturing capacity in China is expected to be 50% above demand by 2015, according to the National Development and Reform Commission.

The Chinese government continues to offer financial incentives totaling $4 billion for purchasing NEVs, but consumers have been slow to adopt the technology, as outlined in Pike Research’s recently published Electric Vehicles in China report.

Less than 10,000 plug-in electric vehicles (PEVs) are expected to be sold in the country in 2012, which is a fraction of the government’s original goal for the year.  As shown below, Pike Research forecasts that sales of plug-in hybrid and battery electric vehicles in China will grow to 152,000 units by 2017, still less than 1% of the total light duty market.

PEV Sales by Segment in China: 2012-2017

(Source: Pike Research)

PEV growth in China is expected to be bolstered by the many joint ventures with Western automakers such as GM, Ford, Coda Automotive, and others, who will be bringing PEVs to China.

The cost of PEV batteries in China is expected to drop by 60% during the next decade, according to Pike Research’s report.  Quality should also increase as China gets access to lithium ion battery technology from the U.S., including companies such as Boston Power and A123 Systems, which recently received substantial investments from China.

FAW Motor is one of many struggling automakers that have reduced their planned production of NEVs.  FAW recently cut its investment in NEV manufacturing by more than half, to less than $700 million.  China is proving that even in markets where the government has a much stronger hand in guiding the economy, it’s hard to force consumers to transition to new technologies such as plug-in electric vehicles.


In Shanghai, Carbon Goes on the Market

— August 30, 2012

This month Shanghai began an ambitious emissions trading system (ETS) intended to curb carbon dioxide emissions.  Approximately 200 local companies will participate in the program, which targets industrial firms that produce more than 20,000 metric tons of carbon annually, and non-industrial firms that produce more than 10,000 metric tons a year.  Carbon permits will be free during the program’s initial phase, but then market forces will set the price.  The scheme will be based on the mechanics of the Shanghai Environmental and Energy Exchange, with significant funding from the Asian Development Bank.

Similar programs are planned in Beijing, Chongqing, Hubei, Guangdong, Shenzhen, and Tianjin.  While the nuances of each program will vary, these initiatives will act as pilot projects for a nationwide carbon trading scheme, set to be implemented by 2015.

Shanghai’s energy demand is forecast to nearly double by 2020 and, considering the country’s vast coal reserves, a corresponding increase in greenhouse gas emissions would be inevitable without some effort at reduction.  The question becomes: by choosing an ETS, has China selected the most effective policy to combat pollution while minimizing the social impact?

The two most popular policies for emissions reductions are carbon trading schemes and carbon taxes.  They are fundamentally different, and therefore, neither is considered a “one size fits all” solution.

Carbon trading, as in the Shanghai scheme, creates an absolute maximum to the emissions of a region or company (the “cap” in “cap and trade”) and allows the market to sort out the most efficient means for achieving that goal.  Trading systems create dynamic economic efficiency by allowing companies with the lowest abatement costs (the cost of reducing their pollution) to do so, and then profit by selling their unused permits.  Companies with high abatement costs can purchase these credits if the credits costs less than retrofits required to meet the cap.  The European Union launched its Emissions Trading System in 2005.  The scheme aims to reduce total emissions 21% below 2005 levels by 2020; results so far have been mixed.  California plans to roll out a carbon ETS in 2013 that will cover approximately 85% off all carbon emissions in the state, including utility and transportation fuels.

The Tax Option

Carbon taxes, on the other hand, place a fee on every ton of carbon produced by specific industries, or on all emissions in a country, region, or state.  Taxes are simpler to implement because their mechanisms are already well understood by both politicians and the general public, and they are relatively easy to enforce.  Unlike a cap and trade system, taxes incent carbon emitters to reduce pollution as much as possible, whereas an ETS only requires reductions to a specific level.

Furthermore, some creative manipulation of the existing tax code can result in minimal economic impacts.  British Columbia has a revenue neutral carbon tax in place, which it has recently increased to $30 per ton.  Revenues from the carbon tax, levied against all the carbon from fossil fuels, are used to reduce corporate and individual income taxes; which have resulted in some of the lowest rates in the G8.  Despite economic growth, the tax has significantly reduced carbon output and fossil fuel demand.

China’s ETS is another signal of the country’s slow but steady shift to free-market capitalism.  From an economic perspective, a trading scheme may be the most logical path to curtail China’s carbon emissions, given the rapid economic expansion of the country, and the corresponding exponential demand for energy. True, the ETS introduces some complications into carbon emission compliance, but its smaller economic impact on businesses, compared to a carbon tax, should help bolster China’s continued growth.  If structured correctly, the scheme will allow China to integrate its carbon markets with Europe, Australia, and others, further incorporating the once-secluded Middle Kingdom into the world economy.

(Photo Copyright Douglas Janson)


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