Environmental Debt (part 2)

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Amy Larkin argues that by failing to factor in the future environmental costs of present economic activity, businesses are incurring debts that will have to be paid by someone. Externalizing such costs from business to society at large, and even future generations, boosts profits and makes environmentally damaging practices seem more economical than they really are. Since environmentally friendly practices are often less profitable in the short run, how can a free-market economy embrace them?

Private initiatives

One hopeful sign is that some corporations and their accounting firms are beginning to see the need for more “integrated” accounting, which includes environmental costs in financial calculations. “In November 2011, Puma became the first multinational corporation to create an integrated report that converted environmental information and data into monetary terms. The company’s 2010 Environmental Profit & Loss statement (EP&L) quantifies and monetizes environmental impact and integrates it into the operational P&L.” The results were startling: Puma found that its earnings would have been 75 percent lower if it had been charged the full cost of its operations.

Integrated accounting is challenging. Ideally it would include the cost of a product from “cradle to grave,” including the cost of disposing of it safely. Puma only got as far as “cradle to gate” accounting, the costs incurred in getting products to market. The more costs are considered, the more production and consumption practices may need to change to reduce them.

Larkin provides many examples of companies that are looking beyond short-term profits and trying to develop more sustainable ways of operating. Tiffany’s has taken initiative to reform mining practices, where “irresponsible mines, large and small, caused serious problems with water pollution, dislocation of local people, cyanide and heavy metal pollution and human rights abuses.” One incentive for Tiffany’s was to disassociate such practices from the image of their jewelry, which is supposed to be about “celebration and pleasure and memorializing love.”

Walmart shocked the retail world in 2006 by launching its sustainability initiative, vowing to “be supplied 100 percent by renewable energy; to create zero waste; and to sell products that sustain people and the environment.” This has been controversial with the company’s own shareholders, some of whom accused the leadership of socialism. (What socialist idea will they come up with next–decent wages?)

Unilever is the world’s largest ice cream company and a leader in methods of refrigeration. They decided to phase out hydrofluorocarbons (HFCs, a major contributor to climate change) from their coolers because they anticipated future regulations. They didn’t want to “get caught in costly and difficult supply problems reacting to a new regulatory framework imposed upon us,” in the words of their Vice President of Sustainability. They also went a step further, setting up an advocacy office to push for new industry standards and stricter regulation.

This brings up the point that social problems require social solutions. If only one company incurs the short-term costs of change, it may put itself at a competitive disadvantage and be punished by the market. The goal has to be for environmentally friendly innovations to be adopted throughout an industry, either through cooperative agreements or new regulations, or both. Larkin herself was a keynote speaker at the Sustainable Refrigeration Summit of the Consumer Goods Forum, an organization representing 400 retailers and manufacturers. Shortly after, the CGF board approved a recommendation to phase out HFCs.

Public initiatives

Larkin also praises far-sighted government initiatives when they have occurred. She cites the substantial health and financial benefits that have come from the Clean Air Act of 1963. More recently, however, “government is actually proving less reliable than business these days when it comes to environmental protection.” She doesn’t get into the politics of it, but clearly one of our major political parties has become steadfast in its opposition to new environmental legislation. The White House solar panels are a clue: Jimmy Carter had them put in, and Ronald Reagan had them taken out.

One area in which Larkin sees a role for government is in building a new energy infrastructure, with a smart grid and new storage capacity technology. Because renewable energy will be less centralized, it is “more complicated to ramp up than building a new Hoover Dam or a big nuclear power plant. Decentralized energy means that many players, many financiers and many regulations must align before taking action.” Larkin says that building the new energy infrastructure will cost about as much as going to war with Iraq. (One wonders why it’s so much easier to get support for war than for a safer and more sustainable energy system.)

One state that has moved ahead on its own is California. The California Solar Initiative (CSI) provides free solar installations for building owners who will make a ten-year commitment to buying solar power. With an annual budget of $3 billion, CSI provides more energy than Duke Energy gets from a new coal plant with similar up-front cost. But the environmental cost is much greater for dirty coal than for clean solar. The refusal to make such social investments will cost society more in the long run.

The challenge

At the end of her book, Larkin describes our current dilemma very bluntly. “If coal and oil cost their true prices based on new financial rules, how will that melt down the economy? If coal and oil continue to be underpriced, how will that melt down the environment?”

Opposition to making businesses accountable for environmental costs is understandable, since doing so seems very threatening to our present economy. Consumer prices would go up; some businesses would fail; some workers would lose their jobs. But carrying on business-as-usual will cost us more in the long run. The solution is a transition to business practices that can succeed without imposing such heavy environmental costs. If we are willing to share the start-up costs, new industries can flourish. The solar and wind energy industries each employ more workers than the coal industry already.

[M]any phenomenal technologies and systems are just coming to market or in development for water and energy efficiency. They will be deployed rapidly and at full scale only when their competitors no longer receive a financial advantage by overusing and polluting these same natural resources with no financial penalty. That means that we, the public, might have to spend more in the short term to provide these first movers a strong market advantage.

Change is hard, and no doubt there will be winners and losers. But if we can make the transition, we should see a net gain in the health and prosperity of the nation.

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