Peak Oil and Investing: Part II - Liquid Assets

In my previous blog, "Peak Oil and Investing - Part I - Retirement Funds" I discussed the pros and cons of retirement funds as they relate to peak oil. All of the analysis is made under the assumption that peak oil will affect us in the immediate future and that we will need access to as many funds as possible to adapt and survive in a world of peak oil. If you don't believe that this is the case, then it is probably best to continue investing in your retirement account as everyone else recommends.

The quick summary is that it is always worth it to contribute to a 401(k) when your employer matches your contribution. The benefits of contributing to a Roth IRA are not as clear and the level of contribution in this account should be determined on how big of an impact you believe peak oil will be.

Because I believe that peak oil will make significant changes and I want to be best prepared, I want to keep the majority of my assets liquid and accessible at any time.

Liquid Assets
The alternative to retirement accounts is to keep your assets liquid in cash, stocks, CD's (Certificate of Deposit), and savings, checking, and high yield money market accounts. With the exception of CD's and bonds, you can have these assets converted into cash and in your hands in less than a week. Even CD's and bonds can be sold, but because the prices can fluctuate, it is possible to lose money on the investment.

Taxes
All earnings made in the investment vehicles outlined below (with the exception of muni bonds) are subject to federal, state and local income tax. Any income earned from these sources will be taxed at your marginal tax rate.

Muni bonds are "triple tax free" because it is exempt from federal, state, and local income tax. Stocks or funds that are held for less than one year are taxed at your marginal tax rate, but for funds held over a year, the rate is only 15% for federal tax brackets 25% and higher.

Taxes are only paid when your stocks are sold. However, if you own a fund or a stock pays dividends, it is possible that you will have to pay taxes even if you did not sell a fund or stock in that year.

Stocks
With stocks it is possible to invest in many different companies and sectors of the economy. I will not go into specifics in this blog about where an investor should put his/her money. That topic will be addressed in my next blog. However, I will mention again, as I wrote in Adding Values to Your Investment: FTSE 4Good Index and Socially Responsible Invseting: Can it Beat a Traditional Mutual Fund, that a sound investing strategy is to buy index funds which cover a broad segment of the market.

It may be possible to make money fast with the next "killer stock". But as shown in The Bogleheads' Guide to Investing by Taylor Larimore and A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition by Burton Malkiel have shown, index funds will almost always beat actively managed funds. Most stocks can be sold and then

CD's
A CD (Certificate of Deposit) can be purchased at virtually any lending institution. The way it works is that you pay a bank to buy a CD with a fixed interest rate. The interest rates will depend on the length of the CD and the lending institution. The CD's will pay the fixed amount of interest at a specified time interval and at the end of maturity the bank pays back the lender the original purchase price of the CD.

Currently the market is not terribly great for CD's. The Federal Reserve interest rate cuts have decreased the interest rate on CD's and it is often better to put your money into a High Yield Money Market Account. See Bankaholic's CD Rates.

Bonds
There are a variety of bonds out there, but I will focus on a specific subset of bonds, the municipal bond. Bonds are essentially an I.O.U. to the company or municipality you are buying it from which allows them to raise capital for projects. They will then pay you a rate as stated on the bond (typically twice or 12 times a year). When the bond matures (ages usually range from 1-30 years) you then are paid back the value of the bond.

Bonds are good ways to guarantee a stable income over a period of time. However, traditionally, stocks have beaten bonds in the long run. There have been periods in history (such as the 1980's) where high interest rates caused bonds to beat out the stock market.

Municipal bonds are important because they are "triple tax free". This means they are exempt from federal, state, and local income tax. For people in higher tax brackets (25%+) and/or people who live in states with income taxes, municipal bonds can be a great way to have tax free earnings. Typically the interest rate on munis are lower, but if your income tax rate is high, it is often beneficial to invest in munis.

Money Market Accounts
Although the Federal Reserve interest rate cuts have drastically lowered the interest rate in money market accounts, this is still a great place to put funds you need within a week. If you open an account with Washington Mutual, Ing Direct, or ETrade, you can get interest rates in the 3-4% rate, which can be better than many CD's.

One risk with money market accounts is that the bank can at anytime and without notice, change your rate of interest. My rates at Capital One went from 5.00% to 3.25% within a period of 3 months because of the rate cutes. It looks though, that the rates will still stay above 3% and this is a good place to park your money if you think you'll need access to it in the near future. If the rates continue to decline, it would be wise to look towards CD's as a more stable source of income. See Bankaholic's Money Market Rates

Checking/Savings
These accounts typically have low (if any) interest rates for the deposits. Usually the rate is well under 1.0%. Thus, these should only be used to access cash through an ATM or to pay for purchases. Money should be transfered from money market accounts on an as-needed basis to cover the appropriate expenses.

My Thoughts
I have discussed the major retirement accounts and liquid assets and I hope that you have a better understand of how each type of investment vehicle works. I have decided to invest primarily in the Vanguard California Long Term Tax Exempt Bond Fund and the Vanguard Target Retirement 2040 Fund (See Adding Values to Your Investment: FTSE 4Good Index for more information). I also have a 6 month emergency fund set aside in case a major emergency occurred. This money is currently in a Washington Mutual Online Savings account that yields 4.0% APY.

In my next article I will discuss the types of stocks and commodities that you should consider. Oil or solar ? Wheat or corn? Financial or technology? Dollar or Euro? I will look at not only how peak oil will affect the market, but how fractional reserve and the unstable lending practices of the past 7 years affect investment decisions.

Related Blogs:

• Peak Oil and Investing - Part I - Retirement Accounts
  
• The Party's Over - Richard Heinberg: Book Review
• Peak Oil: Are we on our way down?
  
• Shell CEO Virtually Admits to Peak Oil
• Energyville Part I: How Will you Power it?
• Energyville Part II: The Discussion
  

Related Links:

• The Oil Drum
  

Recommended Books:

• The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century - James Howard Kunstler
• The Party's Over: Oil, War And The Fate Of Industrial Societies - Richard Heinberg
  Review
• PowerDown - Richard Heinberg
  

Recommended Movies:

• The End of Suburbia
• The Power of Community: How Cuba Survived Peak Oil
• A Crude Awakening - The Oil Crash

Peak Oil and Investing - Part I - Retirement Accounts

Retirement Accounts
Retirement accounts are a great way to save for the future. The benefits are numerous. Some include tax-free earnings for Roth IRA's and pre-tax money going into a 401(k) account with the taxes on earnings deferred until the money is withdrawn from your account. But these benefits apply only when you are willing to follow the rules and not pull out your money early. If you do and do not meet special conditions, you are penalized for your early withdrawal.

There are two investment vehicles that are seen as great tax shelters, the Roth IRA and the 401(k). Typically the advice that most investors will give is that you should max out your employer 401(k) contribution, max out your Roth IRA contribution, and then invest the rest of your retirement money into a 401(k). However, this advice only applies under the assumption that there is no radical change in the economy and that you will not need this money in the next 20-40 years.

The conventional wisdom in virtually every investing and money advice is that you should put your money into these retirement accounts. Under most circumstances, I would agree and would put my money into the accounts. However, peak oil changes everything and clouds the future.

If you believe that peak oil will have a significant impact on everyday life and that it will require funds to overcome, you should think twice about starting (or continuing) investing into your retirement funds. In the remainder of the blog I will discuss the availability of tapping those retirement funds in case of the "Long Emergency" and what readers should consider doing in light of peak oil.

Peak Oil: The X Factor
My knowledge of peak oil makes me extremely wary of putting my money into any investment vehicle that cannot be withdrawn (without penalties) until I turn 59 1/2. For me, that would be 35 years in the future and I personally believe that I will be able to use my money much better if I kept liquid assets. Peak oil will have a tremendous impact on the economy and way of life.

In a world of declining oil supplies and increasing demand, keeping your assets liquid will be vital to adapting to the new economy that emerges. It would be a terrible waste to have all of your hard earned money trapped in a retirement account that you cannot access without heavy penalties, even though you desperately need the money because of peak oil.

I do not necessarily share the same alarmist views like James Howard Kunstler (author of The Long Emergency), but do believe that there will be significant changes. Willingness to adapt, and for better or worse, money, will be the key factors that will determine the quality of life after peak oil. Thus, it is important to ensure that you have access to as much of your money as possible.

Roth IRA
Roth IRA's in 2008 have a $5000 annual contribution limit with post-tax dollars. The reason why the Roth IRA is a great investment vehicle is that all of the earnings and contributions can be withdrawn (under the proper rules) tax free. This is the reason why most people choose to max out their Roth IRA accounts if possible.

Contributions made to the Roth IRA can be withdrawn at ANY TIME penalty free. The only penalties will be assessed is if earnings are withdrawn. If the earnings are withdrawn before 59 1/2 and not within the hardship withdrawal rules, then they will be subject to a 10% penalty and will be treated as taxable income. This will hurt those who are in high federal income tax brackets and investors in states with state income taxes.

Roth IRA Example: Tom invests $5000 for two years for a total of $10,000 in his Roth IRA account. At a later date, the value of his Roth IRA account is $20,000. Let's say that Tom wants to close the account and withdraw the entire balance. Because the $10,000 is a contribution that has already been taxed, he gets all of that money tax free.

However, the $10,000 in earnings is subject to the 10% penalty ($1000) and any Federal or State Income taxes. Let's assume he pays no state income tax and his marginal federal income tax rate is 25%. That means that he will have to pay $2500 of taxes in addition to the $1000 penalty, resulting in a net of $6500 from the $10,000 earned.

Because the contributions can be withdrawn at any time penalty free, the only disadvantages to investing in the Roth IRA the penalty on the earnings and the earnings being treated as taxable income if it is not a qualified withdrawal. However, the penalty is a non-trivial amount and if you are not looking to invest in a Roth IRA

401(k)
Although there is the Roth 401(k) option also available, I am going to focus on the 401(k) because most people choose this option in combination with a Roth IRA. This is to diversify your investments and hedge against changes in tax policy. The Roth IRA offers investments that are post-tax dollars, whereas the 401(k) account allows you to use pre-tax dollars. The only difference between the Roth 401(k) and 401(k) is that the Roth 401(k) is funded with post tax money.

The 401(k) is funded with pre-tax money and will be taxed upon withdrawal. The maximum contribution for 2008 is $15,500 unless you qualify for "catch up" payments. Most investors recommend contributing to a 401(k) because the investment starts with a higher principal because it is pre-tax, the earnings can compound tax-free until withdrawal, and the tax bracket at retirement will be lower than when the 401(k) money was contributed. The 401(k) has the same penalty 10% penalty as the Roth IRA and anything withdrawn from a 401(k) will always be considered taxable income.

The main benefit with a 401(k) is that many, if not most employers offer some sort of match. For some it is 33%, 50% or even 100% of the employee contribution up to a certain percentage. Although an early withdrawal will incur a 10% penalty (income taxes must be paid on 401(k) whether it is withdrawn early or in a qualified distribution), it is still wise to invest in order to get your employer 401(k) contribution

401(k) Match Example:Sally contributes $5,000 to her 401(k) and her employer has a 100% match. Let's say that she is fully vested in the employer match and thus she has $10,000 in her 401(k) account.

If Sally decides to take out the money from her 401(k) and does have a qualified distribution (see above), then she will have to pay a 10% penalty on top of income tax. Let's assume that she is in the 25% tax bracket and pays no state income tax. Her penalty will be $1000 and the taxes will be $2500, which leaves her with $6500.

If Sally would have taken her $5000 and put it into a non-401(k) fund, she would have only had $3750 after taxes, which is a little over half of what she would have made with an employer 401(k) match after penalties and taxes.

My Thoughts
What do I plan to do? I have thought long and hard about this topic because it could end up being a matter of survival.

Currently I am not contributing to my 401(k) stock plan because I don't get a company match. However, starting in January next year, I will get a 50% match on up to 6% of my income. I will contribute to my 401(k) fund to get my full company match because it would be foolish to give up free money from your employer. Simply put, contribute to get your company match, because you will still make more money even after the penalties.

I am still undecided if I want to contribute to my Roth IRA. I still have until April 15th to contribute $4000 to my 2007 account. "Conventional" wisdom says that you should max out your Roth IRA because it will provide you with the most income when you retire due to the tax free earnings. I agree completely with this statement under "conventional" circumstances. But unfortunately peak oil is far from conventional and will affect us more than most expect. All is not lost if you invest in a Roth IRA and take an early withdrawal, because you can get back your contributions tax free and earnings after penalties and taxes.

Is it better to just take it and invest in a mutual fund or is the Roth IRA and early withdrawal the best method? Unfortunately there is no clear answer for this because it depends on a variety of circumstances. Any earnings from a long term investment (over one year) is currently taxed at 15% for tax brackets 25% and higher.

Naturally, this is better than being taxed at the marginal tax bracket. However, in a non tax-advantaged account, taxes may have to be paid on dividends which will affect the investment compounding. Additionally, the earnings in the Roth IRA account will be penalized by an extra 10%.

What you choose to do related with your retirement accounts should be dependent on how significant you think that peak oil will affect our economy, our country, and our world. I tend to have a non-optimistic view of peak oil and think that we will face a serious crisis. It may not be catastrophe that Kunstler describes, but I believe that it will be significant enough seriously rethink contributing to retirement accounts.

In the end it is up to each person to decide how they should invest their money. If you believe that it is more serious, consider keeping more OUT of retirement accounts and as liquid as possible. This will help you have the flexibility to adapt to the new environment.

If you think that peak oil will be overcome by technology, innovation, and "the market", then it would be wise to keep as much money in the retirement accounts as possible, because they offer the best tax shelter for your money.

Either way, I hope that you are saving money in one form or another and continue to look out and plan for your financial future.

Related Blogs:

• The Party's Over - Richard Heinberg: Book Review
• Peak Oil: Are we on our way down?
  
• Shell CEO Virtually Admits to Peak Oil
• Energyville Part I: How Will you Power it?
• Energyville Part II: The Discussion
  

Related Links:

• The Oil Drum
  

Recommended Books:

• The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century - James Howard Kunstler
• The Party's Over: Oil, War And The Fate Of Industrial Societies - Richard Heinberg
  Review
• PowerDown - Richard Heinberg
  

Recommended Movies:

• The End of Suburbia
• The Power of Community: How Cuba Survived Peak Oil
• A Crude Awakening - The Oil Crash

Peak Oil: Are we on our way down?

The Oil Drum and Peak Oil
The Oil Drum has is a great resource for information related to peak oil and oil production in the world. They have a "Peak Oil" update and the last one was updated in December 2007. It looks at the Energy Information Administration data to plot actual observed production and compares that to the numerous models that have been proposed.

For the figures and data, see The Oil Drum: Peak Oil Update Decmeber 2007. Also, the Peak Oil Update is available in PDF format.

In short, it looks like we have reached the peak for Crude/Condensate (conventional oil), Natural Gas Liquids, and Total Liquids. Convention oil hit a peak in May 2005 and based on the production data from countries around the world, it looks like it will be the "real peak" and conventional oil will never be produced in the same quantities as before.

The peak that we have seen in the past 2-3 years isn't quite the "peak and sharp decline" that many people had predicted, but more of an extended plateau. Regardless of the shape, there is strong evidence which includes the production and price of oil, that we cannot produce any more oil.

Forecasts
What is most alarming, is how off the predictions that CERA (Cambridge Energy Research Associates) and IEA (International Energy Agency) are from the actual observed production. They have been proven to be wrong time and time again, yet the media readily uses them as "reliable" sources (See The Oil Drum's "Peak Oil, IHS Data and The Broken Clock" article for more information).

I think that every person needs to be extremely skeptical of forecasts and press releases by companies and the government on the issue of peak oil. It is one issue that they don't want to touch with a 10-foot pole and if they do they will an unrealistic optimistic view of it.

My Thoughts
The Oil Drum has the most thorough analysis of peak oil that I have found. The analysis and data strongly indicates that we have already passed peak oil and that we are "on the way down". It is disconcerting that the media has shown little if any coverage on the topic. However, whether or not the media likes it, peak oil will happen and it is up to the people to become aware of the situation and inform themselves.

What should we do to prepare ourselves for peak oil? I think that people in Western countries will have an extreme advantage over those in developing countries. We have so much more wealth and we will be able to buy ourselves (at least temporarily) out of the peak oil conditions. However, as crude production continues to decline, the price of goods and the luxuries that we previously have been able to afford will be beyond our means.

In my opinion, the best way to prepare for peak oil is to shift into a lower energy lifestyle. Doing this will let you save money and simultaneously reduce your dependency on oil related products. Because virtually every product in the world is in some way shape or form affected by oil, reducing our consumption will invariably lead to more protection against the looming oil crisis.

Those that will be affected most are those that will not, or cannot, adopt to the new environment of limited oil supplies. Consider reducing your consumption not only for a greener lifestyle, bigger savings, but self preservation. I wish it were not true, but many people will be driven to where they will have to struggle to survive. Preparing today for peak oil will put you in a much better position for when the effects of peak oil begin to hit you.

Related Blogs:

• The Party's Over - Richard Heinberg: Book Review
• Fuel of War: Article Review
• Shell CEO Virtually Admits to Peak Oil
• Energyville Part I: How Will you Power it?
• Energyville Part II: The Discussion
  

Related Links:

• The Oil Drum
  

Recommended Books:

• The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century - James Howard Kunstler
• Resource Wars - Michael Klare
  
• The Party's Over: Oil, War And The Fate Of Industrial Societies - Richard Heinberg
  Review
• PowerDown - Richard Heinberg
  

Recommended Movies:

• The End of Suburbia
• The Power of Community: How Cuba Survived Peak Oil
• A Crude Awakening - The Oil Crash

Adding Values to Your Investment: FTSE 4Good Index

Value and Values?
Wouldn't it be great to add not only value, but VALUES to your investment? Socially responsible investing has been increasing in popularity but has not completely proven itself able to outperform passively managed index funds. However, in principal the idea is good because it will eliminate risk by screening companies on their social responsibility and in theory will reduce investment risks.

The FTSE 4Good Index (pronounced "footsie") is an index which screens companies for socially responsible practices. Like Calvert, Parnassus, and Domini, they have various criteria on defining what "socially responsible" and this will naturally determine which companies will be included in the index. FTSE 4Good is unique in that it creates "challenging yet achievable" standards. But FTSE don't stop there. They constantly increase their standards and any companies that do not meet the standards will be removed from the index.

Vanguard's Socially Responsible Option
Vanguard has a great option with their FTSE Social Index Fund Investor Shares (VFTSX). Briefly, the fund seeks to track the FTSE 4Good Index, is a no load index fund (no sales or redemption fees) and has a low 0.24% expense ratio (for more information see the Fund Snapshot and Fund Prospectus). As I detailed in my blog post Socially Responsible Investing: Can it be traditional funds?, I could not justify investing in the various socially responsible funds because of the high expense ratios and fees.

Luckily, Vanguard offers a more cost effective index fund compared to other available SRI funds. Previously, Vanguard had benchmarked the Calvert Social Fund but switched for a variety of reasons (See Social Fund's article). Vanguard's low cost SRI fund intrigued me and deserved further investigation as an investment option.

FTSE 4Good Overview
For an overview, take a look at the FTSE 4Good Index Brochure and the Inclusion Criteria Brochure. Below I've listed the types of companies that they exclude, and then the factors the fund uses to determine what remaining companies will be included in the fund.

Exclusions

• Tobacco Producers
• Companies manufacturing either whole, strategic parts, or platforms for nuclear weapons systems
• Companies manufacturing whole weapons systems
• Owners or operators of nuclear power stations
• Companies involved in the extraction or processing of uranium

Screening factors

• Working towards environmental sustainability (Climate Change)
  
• Developing positive relationships with stakeholders
• Up-holding and supporting universal human rights
• Ensuring good supply chain labor standards
• Countering bribery

Within each of the screening factors there is an myriad of criteria and divided by high/medium/low impact and even identifies specific sub-sectors/industries that have special criteria. For more specifics see FTSE 4Good's Criteria Documents.

What holdings does the index have?
After the exclusions and the rigorous screens and filters that the FTSE has performed there are a few funds that remain. Their holdings can be found here.

I was surprised to see Rio Tinto included. They are a mineral/mining company that has not had the best reputation in the past. Also, it interested me that no oil/petroleum companies are present. Given the circumstances of peak oil and how well these companies are performing, I feel like it is not wise to exclude these companies.

This is where socially responsible investing can get extremely difficult, because there are a set of criteria and if a company doesn't meet them, they are not included. Although I want to believe that there are rational people determining the criteria that these companies should have, it worries me that emotions might get in the way of investing. I personally would never bet against any energy companies, in particular petroleum because they are so integral to our society and will only make more once peak oil hits.

My Thoughts
This index is relatively new and there isn't much performance history. However, I have to say that they have an extensive and rigorous set of criteria to select socially responsible funds. I want to believe that these screens will provide the investor with a superior profile but I am reluctant to do so because it eliminates a significant amount of the market. Burton Malkiel's book "A Random Walk Down Wall Street" and the book "The Bogleheads' Guide to Investing" give very strong evidence that it is extremely difficult to beat the market. Many active fund managers choose to instead track the market with low cost index funds for their own portfolios.

I think that once I get a larger amount of assets, I will look towards adding socially responsible investing as a small portion of it. Before that though, my investments will go primarily into the Target 2040 Retirement Fund which automatically diversifies your investments and will change them to more conservative investments as you approach your retirement. Target Retirement funds represents a much broader market profile and does not involve as many risks as an index fund like the FTSE 4Good Index. The Target Retirement 2040 fund is comprised of other "staple" Vanguard index funds which are seen below:

1. Total Stock Market - 72.0%
2. Total Bond Market - 10.1%
3. European Stock - 9.9
4. Pacific Stock - 4.4%
5. Emerging Markets - 3.6

This ratio of stock/bond/foreign is typical of an investor of my age. As I grow older the portfolio will shift towards a higher percentage of bonds for reduced risks. I see these retirement funds as a great way for beginning investors to get a broad mix of investments.

The second major part of my portfolio will involve California Long Term and Intermediate Term Tax Exempt funds. These funds have California Muni Bonds which are "triple tax free". This means they are not subject to Federal, State, or Local income taxes. For me that is extremely important because of my high federal and California state income tax brackets.

Once I have a substantial amount invested into the Target Retirement and Tax Exempt Muni funds, I will begin investing in the socially responsible funds. At the moment I plan to invest 10-15% of my portfolio into SRI funds. If there is strong evidence in the future that SRI funds can outperform traditional funds, I will consider investing more into SRI specific funds. However, until then, I will stick with a more traditional strategy with a 80/20 mix of stocks/bonds with some money in munis.

Related Blogs:

• Socially Responsible Investment: Can it beat traditional mutual funds?
• Microlending: Socially Responsible Investing

Related Links:

• Vanguard
  
• Social Investment Forum

Recommended Books:

• The SRI Advantage: Why Socially Responsible Investing Has Outperformed Financially - Peter Camejo
  
• The Bogleheads' Guide to Investing Taylor Larimore
• A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition - Burton Malkiel

Recycling: Does it make a difference?

In most urban cities, recycling bins are abundant and are found in most public buildings. Recycling is considered the right thing to do for the environment. But is recycling really what we should be doing, or is it a stepping stone towards something greater?

We are Living in a Material World
Different end products require different amounts of energy and processing to recycle a product. Certain materials such as aluminum have definite advantages when recycled. The energy to recycle aluminum is 95% less than creating it from raw materials. However, for products like paper, plastic, and glass, it is not necessarily advantageous to recycle the product.

One reason is that the energy and cost to collect and transport the recyclable can be greater than the cost and energy to manufacture the product from raw materials. This of course is partially due to the fact that most environmental costs today are externalized, and the cost of harvesting virgin materials is vastly below the true cost.

However, we must work within the societal and political framework that we currently live in. It means that sometimes it is not economical to transport heavy glass bottles to be recycled when we are able to produce it from raw materials for less.

Location, location, location
The largest factor outside of the material that is recycled is where you are trying to recycle. The first aspect of recycling location is the population density of a given city/town. If there is a high density of people, it means that collection trucks are more efficient and use less energy for transportation per unit mass of recycled material.

The second aspect of location is amount of land available for landfills and how far away from the recyclers it is. Rural areas have access to cheaper land and are able to cheaply discard their otherwise recyclable products. Location is a strong factor in the recycling equation and will ultimately influence the economics of recycling.

The Three R's: Reduce, Reuse, Recycle
When most people talk about being environmentally friendly, they will typically look at recycling as a key indicator of "being green". However, this is the wrong approach because there are many other things that are much more efficient than recycling.

In Germany and other countries, they use higher density PET (polyethylene terephthalate) bottles which can be refilled up to 20 times. The bottles only have to be collected and sanitized before resuse and don't need to be crushed, heated, and reformed for use.

There is a reason that the Three R's are arranged in the order of "Reduce, Reuse, Recycle". Reusing is more important than recycling, and reducing is the best way to be "green". However, unless you are willing to completely withdraw from the consumer society that we are living in, it will be impossible to reduce your impact to nothing. The only way we can "eliminate" our environmental impact is to rethink the way we make things.

Cradle to Grave Paradigm
There is a fundamental problem with recycling. We continue to follow the "Cradle to Grave" paradigm. Yes, we are finding more uses for a product and extending it's life, but in the end it WILL end up in a landfill.

When materials are recycled, the quality (purity, or usefulness) of the product decreases to the point where it eventually must be discarded. One example is pulp fibers. When paper or any pulp products get recycled, the pulp fibers get smaller after each time it is recycled until they are no longer usable and are either burned for energy or sent to a landfill.

Recycling products can be seen as treating the symptoms of a problem, where the actual cause is not being addressed. The only way to solve our problems is to redesign our processes to be "Cradle to Cradle" and in sync with the ecological cycles. Our products should be designed such that the "waste" streams should be the nutrients and input to another system, whether it is the ecosystem or a man-made system. If, and only if, we are able to redesign our products to be "Cradle to Cradle", will we truly be a sustainable society.

My Thoughts
It may seem like I have a negative view about recycling, but in reality I don't. I try to recycle everything that I possible can and I will even carry a can around until I find a recycling bin.

My problem with recycling is that it is not a solution, but instead temporary band-aid to the larger problem. We need to move from a "Cradle to Grave" paradigm towards "Cradle to Cradle". That means that we will have to redesign many (if not ALL) products in our lives so that they will become part of the ecological cycle. (See William McDonough's book Cradle to Cradle)

I encourage all of my readers to continue recycling. But while doing so, think about the other R's. Reuse any products before you recycle them, or better yet, reduce your consumption.

Recommended Books:

• Cradle to Cradle: Remaking the Way We Make Things - William McDonough
• The Ecology of Commerce - Paul Hawken
• Entropy: A New World View - Jeremy Rifkin
  
• Ishmael: An Adventure of the Mind and Spirit - Daniel Quinn