Climate Protection For Fun & Profit
Does this quote ring a bell?
"If we do it right, protecting the climate will yield not costs, but profits; not burdens, but benefits; not sacrifice, but a higher standard of living. There is a huge body of business evidence now showing that energy savings give better service at lower cost with higher profit. We have to tear down barriers to successful markets and we have to create incentives to enter them."
President Bill Clinton said that on October 22, when he announced the position that he'll take in December negotiations in Kyoto, Japan for a new global climate-change treaty.
Clinton's speech was a watershed event. For months, the Administration had been bogged down in competing claims and choices about what to do about global warming. Environmentalists advocated a carbon tax or technical standards and other "command-and-control" strategies. Most economists warned such strategies would be prohibitively expensive and would wreck the economy. The Global Climate Information Project, a coalition led by the coal industry, mounted a $13-million ad campaign pushing a do-nothing agenda.
The climate story told so far was about pain: high prices, lost jobs, weakened competitiveness, discomfort, privation, curtailment. The debate stalemated over who should bear the costs.
Clinton's speech turned the climate debate on its head. He made an end-run around costs, and focused instead on initiatives that will reduce greenhouse-gas emissions and boost the economy at the same time (he even mentioned compact-fluorescent lamps). Improved energy efficiency is the key to protecting the climate, he said, and removing the market barriers to efficiency will spur innovation, speed the introduction of new technologies, and increase economic competitiveness.
While many criticize Clinton's proposed emissions targets, this market-based strategy is likely to make the targets all but irrelevant.
Rocky Mountain Institute's (RMI) long-standing view is that it doesn't matter whether global warming is happening or not, because the most effective climate-protection measures are things we should be doing for economic reasons anyhow.
Early drafts of a new RMI study, "Climate: Making Sense and Making Money," written by Amory and Hunter Lovins at the request of the President's Council on Sustainable Development and funded by the Energy Foundation, was widely circulated among CEOs. Amory discussed it with top Administration officials and attended a White House climate-change conference led by the President in early October.
Aimed mainly at corporate leaders, the paper analyzes the market failures that prevent companies and individuals from being more resource-efficient-and shows how to turn those failures into profitable business opportunities.
"Climate change," write the Lovinses, is not the inevitable price of progress, but rather "an unnecessary artifact of the uneconomically wasteful use of resources." They estimate that simply implementing cost-effective energy-efficiency measures - measures that pay a better-than-market rate of return - could eliminate over half the threat of global climate change. Another quarter of the problem can be abated by sustainable farming and forestry practices that are about as profitable as current methods, and the rest will disappear thanks to already-mandated replacement of CFCs with new substitutes.
"So," the Lovinses ask, "if the 'cost' of protecting the climate ranges from strongly negative to roughly zero or irrelevant, what are we waiting for?"
What Are We Waiting For?
One of the mistakes economists and their models commonly make is to assume that markets behave perfectly. They don't. The fact that Americans haven't yet captured cost-effective energy-efficiency investments that could save $300 billion annually reflects a major market failure, caused by numerous real-world obstacles to the efficient allocation and use of resources.
What are practical ways to turn obstacles into opportunities? Some examples:
* Capital misallocation. Most companies don't assess potential energy-saving improvements the way they do other uses of the same money. Instead, they require a simple payback whose median is 1.9 years, which at a typical tax rate means a 71% real after-tax rate of return - around six times the marginal cost of capital. A new energy-retrofit "protocol" can help firms finance many such investments with other people's capital.
* Organizational failures. RMI staff visited a semiconductor plant where a pipe took an inexplicable jog in mid-air as if it were going around some invisible obstacle. It turns out the piping design had been copied from another plant that had a structural pillar in that location - "infectious repetitis" that perpetuates the inefficient status quo. Yet simple incentives can turn employees into efficiency bounty-hunters, resulting in huge benefits to the employer.
* Regulatory failures. All but a handful of states and nations reward regulated utilities for selling more energy and penalize them for cutting your bill, so shareholders and customers have opposite goals - with predictable results. Simple accounting innovations in a few states decouple utilities' profits from their sales volumes, and let utilities keep as extra profit part of whatever they save off their customers' bills. The nation's largest investor-owned utility, PG&E, thus added over $40 million of riskless return to its 1992 bottom line while saving customers nine times that much. Proper restructuring can do the same.
* Informational failures. Do you know where to get everything you would need to optimize your own energy use, how to shop for it, and how to get it properly installed? If not, you've just observed a market barrier: if you didn't know something is possible, you can't choose to do it. Federal labeling and efficiency standards have taken a bite out of these failures, but far more opportunities languish ungrasped.
* Risks to manufacturers and distributors. Faced with the risks of developing and stocking new efficient products, companies often opt to play it safe instead. Governments and large institutional customers can reduce these risks with contests, "golden carrots," and other procurement policies that actually get the chicken to lay the egg.
* Perverse incentives. Standard contracts penalize good architects and engineers: those who work harder to eliminate costly equipment earn lower fees, or at best get the same fees for more work. Such backwards incentives have led the United States to misallocate about $1 trillion to air-conditioning equipment (and utility systems to power them) that wouldn't have been bought if the same buildings had been optimally designed. Innovative design contracts and leases can realign these incentives.
America Has Done It Before
Between 1979 and 1986, the nation's economy grew 19% while total energy use shrank 6%. It's true that Americans were motivated at that time by high and rising energy prices-but it doesn't necessarily follow that, as economists often argue, it will take equally high energy prices to repeat that success.
Consider the case of Seattle, which has the cheapest electricity of any major U.S. city. During 1990-96, residents saved electric loads nearly 12 times as fast as those in Chicago, even though Seattle electricity prices are about half of Chicago's. Why? Because their utility, Seattle City Lights, showed them how.
Moral of story: making an informed, effective, and efficient market in energy-saving devices and practices can fully substitute for a bare price signal, and indeed can influence energy-saving choices even more than can price alone. That is, people can save energy faster if they have extensive ability to respond to a weak price signal than if they have little ability to respond to a strong one.
Climate need not be a divisive issue. It can unite us around markets, profits, enterprise, and opportunity. As Bill Clinton put it, "climate change can bring us together around what America does best - we innovate, we compete, we find solutions to problems, and we do it in a way that promotes entrepreneurship and strengthens the American economy."
"Climate: Making Sense and Making Money" (E97-13) is available from RMI for $8.00 plus shipping & handling. It can also be downloaded from our website: (http://www.rmi.org)
Excerpted from Rocky Mountain Institute Newsletter
The official website for the Kyoto Climate Change Conference in December: http://www.cop3.de