Hack:
Getting the Prices Right - The Key to Markets that Are Principled, Patient, Social. And that Work
Getting the prices right is key to the ecological dilemma. It impacts: the ability of "greener products" to compete against dirtier products that benefit from subsidies, direct and indirect; investors’ ability to accurately price risk and benefit; and policy debates that are notoriously wrong headed about real costs and benefits.
Adam Smith observed that perfect markets depend on perfect information. Without it, companies and customers are condemned to operate in distorted markets with a distorted sense of the real cost of things.
This impacts the ability of "greener products" to compete successfully, the ability of investors to accurately price risk and benefit, and national policy debates that, in the US at least, are notoriously wrong-headed about real costs and benefits.
The distortions are particularly evident for energy, where no-one pays costs of Persian Gulf military presence, air pollution, mountain top removal or climate change in the price of the product. The opportunities are particular evident in IT, where the trends in big data, radical transparency and interoperability are enabling the ecoanalytics that will make this possible.
This is key to the sustainability challenge. If we can get the market distortions of subsidies out of the way, if we can get the lie of 'externalities' internalized, if we can enable "the price at the pump" to reflect true, total costs, we have a chance at success. If we don't, we don't.
There as yet is no integrated, systematic, strategic approach to doing so. But it is emerging.
The solution requires two complementary moves: Remove the distortions. Provide the signals. Here's how.
- Kill the Subsidies
Just as one man’s meat is another man’s poison, one woman’s “subsidy” is another woman’s “investment.” There are several alternatives for clearing out this mess:
a. Zero them all out and start over.
All of them: fossil, nuclear and renewables, for example, in the energy economy. This is a far more viable politicallly strategy than trying to increase subsidies to renewables in a tough economy, and would have the same net effect, since subsidies to fossil and nuclear energy exceed those to renewables by at least an order of magnitude.
b. Zero out that don’t support clear policy goals.
This presumes of course that there are clear public policy goals...
c. Zero out those that don’t meet specified subsidy criteria
(eg, projected ROI or sROI, rather than sheer political muscle)
d. Sunset all subsidies after a certain number of years.
We’ll give you a boost but not a free ride. I may have made sense to reduce the risk of the nuclear power industry in its early years, for example, but sixty years down the road – or sooner – it’s time to fish or cut bait.
2. Charge – or internalize - the externalites
In the ideal world, prices – for example, at the pump – would reflect the true, full costs of the delivered product or service. For example, the “true” (societal) cost of a gallon of gasoline includes not only extraction, refining, shipping and selling, but also pollution and climate, deterioation of infrastructure, health impacts, cleaning bills, and, oh yes, the military investjment to keep the supply lanes open. Estimates range from $10 top $20 per gallon. If that was the price at the pump, no one would drive the cars we’re driving today. (In fact no one would make the cars we’re driving today.)
3. Adopt Producer Responsibility
One way to do this is via Extended Producer Responsibility schemes, well established in Europe, Canada and Japan, and for selected commodities in the US. The logic is simple, even thought the execution might not be:
- Shift accountability for waste management and recycling systems to Producers (usually defined under EPR policies as brand owners and first importers)
- Have producers bear the cost of those functions, and reap the benefits of strategies (from product redesign to take-back scemes) that reduce those costs
- Have government (local, regional, or national) set goals and ratchet them down, and collaborative industry associations manage the systems
4. Reality-based accounting
Develop finance tools and accounting standards, practices and systems that accurately reflect the current economic fiction of “externalities” (pollution, health impacts, etc), the business realities of ancillary benefit (such as the capitalizedvalue of energy efficiency investments) contingent risk, and the management leverage of integral design and valuation (that can properly assess the synergistic value impact of portfolios of interacting measures, rather than just rannk order prioritizing the ROI of indivdiual measures).
5. Generative feedback
Real time performance feedback of relevant information, presented in context, doesn’t just report on behavior; it drives it. And changes the way people talk and think about it. Just as Prius owners inevitably change their driving behavior (whether they want to or not, whether they intend to watch their energy dashboard or not, and regardless of penalties or incentives), relevant performance feedback can engage stakeholders, steer strategy, and markedly improve implementation – the Achilles heel of most sustainability initiatives. This is one of the most powerful tools for change I’ve seen in two decades of corporate change work – far more effective that the usual tools of training, exhortation, incentives and the like. Put that feedback everywhere – the home, the factory, the city council chamber – and watch behavior and performance change.
Today, when you go to the store to buy an apple, a shirt, a car, a home, you’re presented with choices you can’t make. The organic apple is healthier, but more expensive. The organic cotton shirt uses less water, erodes sell soil, does less damage to worker health, but is more expensive. And so on. So the informed consumer either has to be very informed, or do an LCA in their head, or pay a luxury tax for the better product.
But with externalities internalized (or at least not subsidized) the better – environmentally preferable – product might be less expensive as well, providing a market based incentive for increased sales, which would in turn drive economies of scale that would further lower prices, and increased profits, which would encourage companies to shift practices in socially and environmentall beneficial directions.
Consumers can make decisions and changes when they make purchases. Until external costs are built into prices at the point of purchase, the best we can do is to regulate and make policies to rein in the negative environmental impacts made by others. So like Sisyphus, we push the sustainability boulder up the regulatory hill, only to watch it roll back down again.
Puma has given us an example: create financial statements that reflect physical reality; that internalize externalities, at least at a conceptual level; and that provide a guidance system that can help navigate contingent future risk
Carbon markets afford another. But even where political conditions constrain carbon markets, investment managers can add a kind of ghost pricing by managing to metrics like MSCI’s “carbon beta” (which compares monetized potential carbon-related risk with EBITDA as a material investment factor).
But systemically, the will require something like LCA on steroids – an across-the-economy (or at least across-the-supply chain) – ability to track, assess and compare the full complement of costs, impacts and benefits of each and every thing. And that, in turn, will require a new information infrastructure for business supply chains that is open, interoperable, transparent and secure -- seeming contradictions that are being resolved now.
Herman Daly, Robert Costanza. Paul Hawken. Amory Lovins. Hunter Lovins. Hazel Henderson. Many others
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