State of the World 2008
Daniel C. Esty
Hillhouse Professor of Environmental Law & Policy,
Director of the Center for the Environment and Business, Yale University.
Director of the Yale Center for Environmental Law and Policy.
State of the World 2008 makes it clear that our planet and every individual on it face substantial environmental challenges. From the buildup of greenhouse gas emissions in the atmosphere to significant water shortages and a wide range of pollution and natural resource management issues, the road to a sustainable economy is full of potholes. But there are signs of hope. As documented throughout this volume, the pace and scale of environmental innovation is extraordinary.
Most notably, there has been a sea change in business attitudes toward the environment over the last several years. Companies large and small, in manufacturing and in services, in the old economies of the United States and Europe as well as the emerging economic powerhouses of the developing world, have come to recognize that the environment is more than regulations to follow, costs to bear, and risks to manage. As society steps up to a wide range of pollution control and natural resource management challenges””and commits substantial resources to finding solutions””there will be significant market opportunities for those who can bring solutions to bear.
A number of CEOs are remaking their companies around this emerging “œcleantech” opportunity. At General Electric, for example, CEO Jeff Immelt launched an “œecomagination” campaign designed to promote the company”™s high-efficiency locomotives and jet engines, wind turbines, solar power technologies, water purification systems, and cleaner coal electric generating equipment. This is not because he is a “œdo gooder” but because he believes that these markets offer the prospect of high growth and high margins.
Similarly, Andrew Liveris, CEO of Dow, a company that I have worked with, wants his top managers to drive innovation and Dow revenues by having the company lead the way toward a world of sustainable chemistry, solutions to climate change, and progress on such environmental problems as water availability.
Action at the business-environmental interface is, of course, not limited to the United States. In Norway, REC has emerged as a leading producer of photovoltaic panels with a market capitalization in excess of $17 billion. Japan-based Toyota has become the fastest-growing and most profitable automaker in the world by putting fuel economy and environmental sensitivity at the heart of its strategy. Grupo Nueva, a Chilean forest products company, is building its business by putting environmental commitment into everything the company does.
In addition, hundreds of small cleantech companies have been launched worldwide in the past several years. From solar power businesses like Ausra and Solarec to geothermal energy producers such as Altarock to cellulosic ethanol technology developers such as Range and Coskata, environmental innovation is being pushed in hundreds of directions. More than $100 billion in venture capital, private equity, corporate research and development funding, and government support for technology development was invested in environmental start-up ventures over the past year.
In parallel with the business world”™s new environmental focus lies an important policy story centered on innovation as the key to environmental progress and a sustainable economy. A fundamentally changed environmental trajectory requires substantial technological breakthroughs.
How do we promote environment-related innovation? The answer is increasingly apparent: private-sector investment guided by carefully structured market-based incentives.
A technology development process that depends on a few thousand government officials setting standards and defining “œbest available technologies” cannot possibly explore or even imagine all the ideas that need to be funded and tested. It makes more sense to shift the burden of action to the business community so that companies have an incentive to think broadly about opportunities for progress. And the private sector has a much larger scale of capital available to devote to technology development. The funding required amounts to hundreds of billions of dollars””not the hundreds of millions of dollars that government might spend.
The private sector is also better positioned to take the requisite risks to produce technology breakthroughs. Venture capitalists do not blink at the prospect of only 1 project in 10 paying off. That kind of success ratio in government would be entirely unacceptable. In addition, the business community is in a better position to reward success in a way that will draw the most talented people into the quest for environmental solutions. Entrepreneurs who recognize the opportunity for a big payday put in long hours and motivate a team of people to put in extra effort.
There is still a critical role for government and regulations. But the Environmental Protection Agency and state-level regulators as well as environmental ministries around the world need to shift from doing technology development to establishing incentives in the marketplace that promote innovation and that draw in the private sector. In particular, they need to put a price on causing environmental harms so that those who offer ways to eliminate pollution and cut down on nonrenewable resource use will be rewarded.
Two parallel trends in the environmental arena promise to further an innovation emphasis. First, the move to market-based mechanisms and away from “œcommand and control” regulation dramatically shifts the focus of the private sector. Under the traditional environmental protection model, where government not only sets the standards but also dictates the particular technology that needs to be deployed, companies have little incentive to innovate. They simply follow the guidelines and regulations provided. Under an economic-incentive-based approach, in contrast, as companies (and the individuals who buy their products) find themselves paying a price for every increment of harm caused or natural resource consumed, a strong incentive emerges to figure out ways to reduce these payments. Thus, the shift toward a serious commitment to the Polluter Pays Principle offers the prospect of sharpening the incentive at every level in society for energy conservation, improved resource productivity, and innovation.
The second broad trend that supports a shift toward an innovation-centered environmental policy approach emerges from the opportunities of the Information Age to tailor economic incentives with greater precision. Historically, it has been extremely difficult and expensive to track individual emitters or natural resource consumers. But in our digital era, sensors, data collection technologies, and information management systems are increasingly cheap and easy to deploy. It is possible to keep track of emissions and resource use on a much more refined basis. The acid rain allowance trading program of the Clean Air Act of 1990, for instance, depends on sulfur dioxide emissions monitors being placed in each power plant in the United States. Similar monitoring and measurement technologies are now available to track emissions from every smokestack, factory, and business in the country and from every car”™s tailpipe as well. Why not send a car pollution bill at the end of each month to every driver? There is no better way to motivate car owners to demand more fuel-efficient and less-polluting cars than to have them pay for the harms that their vehicles individually cause.
Information technologies can also be used to identify and disseminate “œbest practices” in terms of technologies and policies. Advanced information management systems make it much easier to benchmark performance, track trends, spot problems, and identify which environmental interventions are effective. Governments, companies, communities, and individual families can then focus on replicating successful strategies and not investing in projects or approaches that are not producing good results.
It is easy to be a pessimist in the face of the daunting environmental challenges that every one of us faces. But the prospect of environmental innovation makes me an optimist, at least over the longer term.
Progress, of course, depends on redoubling the business community”™s focus on the environment. The logic of making the environment a core element of corporate strategy seems straightforward. No company or industry today can afford to ignore energy costs, pollution issues, and other environmental challenges. Those that do risk competitive disadvantage. And CEOs who take these challenges seriously are often finding ways to innovate that translate into reduced costs (eco-efficiency), better managed risks, new lines of revenue, and strengthened brand loyalty.
Continued environmental progress will require smart government policies. Moving companies toward a sustainable trajectory will happen faster with clear economic incentives. But individual consumers must also be made to understand the part they play in polluting and consuming nonrenewable natural resources.
In blazing a path toward a world of sustainable economies, State of the World 2008 highlights the importance of innovation. This volume shows the next steps that must be taken in the business world, in the policy community, and by every one of us.