capitalism, carbon tax, corporate social responsibility, csr, shadow pricing
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“How to Train the Elephant” by Robert Repetto

Submitted by EFC Team on July 5th, 2016

Robert Repetto is a Senior Fellow of the Energy Future Coalition. The following article represents his personal views and not those of the organization.  

There’s an elephant in our garden – global capitalism. It’s already eaten more than a third of everything that grows, and its excretions are foul. The far left says, “It’s a dangerous beast. Shoot it before it destroys everything.” The far right says, “Leave it alone. It’s benign, and its dung makes good fertilizer.” Sensible folks in the middle say, “We’d better learn how to manage it before it does any more damage. Maybe we can train it to be more useful.”

Learning how to manage global capitalism is urgent. Already, our fresh waters, oceans, soils, forests, air and living ecosystems have been badly degraded, even though those resources will be needed to support many more people at rising living standards.

If we’re going to train the elephant, we’d better learn what makes it move. It’s not all that complicated. Despite its vast size, global capitalism operates on simple rules. First of all, it seeks and follows profits. Profits are the goal and the measure of success. CEOs may make nice speeches about corporate social responsibility, but they have to deliver profits, or their companies will fail, and they’ll lose their jobs.

Secondly, companies don’t raise profits just by doing the same thing over and over at ever-increasing scale.  If what they do is profitable, other companies will copy them, take market share, force down prices, and cut into the profit margin. For a while, McDonald’s could make lots of money turning out cheeseburgers and fries, but pretty soon, along came Burger King and Wendy’s, so McDonald’s had to come up with something new: Egg McMuffins, Chicken McNuggets and on from there. Companies keep profits growing by innovating and getting a jump on the competition through new products, processes, or ways of doing business. To keep profits increasing, capitalism is necessarily versatile and innovative.

Furthermore, although corporations are obsessive about profits, they’re quite pragmatic about how they make them. They’re quite willing to change business models, locations, industries and products in response to changing profit opportunities. Take General Electric, for example. It started by making electricity generating equipment, then light bulbs, moved on to refrigerators, then got into gas turbines and jet aircraft engines; on to lending and airplane leasing, then to wind power and medical imaging equipment. Then it shrank its finance business drastically. Recently it sold off its legacy refrigerator and appliance business. Because CEOs follow the profit trail, corporations can be either environmentally responsible or irresponsible, depending on the potential profits.  As a young Lyndon Johnson said to the school board in a small, rural Texas town when he was interviewed for a teaching job and asked whether he taught creationism or evolution, “I can teach it either way.”

Market capitalism is also the greatest communicator every devised. Market prices encapsulate enormous amounts of information about what people want, how much they want it, how much it costs to make, and who can make it best. Large modern corporations each employ tens of thousands of people. Even if their CEOs were serious about social responsibility, how would they engage their employees throughout the company’s various departments and locations – marketing, finance, plant operations, product design, R&D? Call them all in for retraining? Put pop-ups onto their computer screens? How would employees be instructed to weigh the various daily trade-offs among cost, energy use, consumer acceptability, waste reduction, and so on?

By far the best answer is to embody all these aspects of business operations into market prices, by ensuring that labor, energy, materials, and capital prices reflect the true costs of these resources and by ensuring that there are prices for disposing of waste products that accurately reflect the damages done by releasing them into the environment. If that were done, CEOs could just tell their people “Do your job. Make your numbers.” If wouldn’t matter if employees believed in climate science or understood toxicity dose-response functions. They could all go about their work trying to increase the value of sales and reduce the costs of production. The result would be socially responsible. The elephant would move in the right direction.

Interestingly, more and more CEOs understand this. Several hundred corporations have started charging an internal carbon price within their companies on the use of fossil fuels or the release of carbon dioxide. They’ve done this in large part to avoid making investment decisions that would prove to be unprofitable when and if there are real restrictions on carbon emissions. Money collected in these internal carbon taxes goes into a kitty of some sort and doesn’t affect overall corporate profitability but may make some departments and products seem more or less profitable.

Economists used to call this “shadow pricing,” and it was somewhat popular for a while. The problem is that shadow pricing only leads to shadow profits, not the real profits that determine how companies fare in the marketplace and how CEOs fare in board meetings. Moreover, the prices corporations are applying vary widely, even within the same industries. Another problem with shadow pricing is that the shadow falls only at the feet of the elephant. The firm’s own carbon emissions might be “taxed,” but what about the emissions of companies that supply it with materials and power? What about the emissions of customers who use its products? They are beyond the reach of the company’s internal carbon prices. As a result, although these increasingly popular internal carbon prices are better than nothing as a management tool, they are far less effective than real carbon prices would be.

The bottom line is this: Modern capitalism will become environmentally responsible when – and only when – it becomes more profitable to act responsibly than irresponsibly. Relying on laws and regulations that try to force companies to do what they don’t want to do – sacrifice profitability – will just make them resist, delay, lobby, litigate and, at best, comply half-heartedly. This approach has constrained the worst excesses but hasn’t prevented continuing environmental damage. As long as it’s more profitable to release waste products into the environment, companies will want to do that. When it becomes more profitable to reduce, recycle or eliminate those waste products, companies will find innovative ways to do that. As long as it’s more profitable for companies to deplete and despoil natural resources, companies will want to do that. When it becomes more profitable for companies to protect and restore natural resources, companies will work to do that.

That’s good news. It shows that the beast can be trained – and how: Policies can be adopted that establish a price on carbon emissions, raising the profitability of investments in greater energy efficiency and use of non-carbon fuels. Corporations will compete to find new and better ways to seize those opportunities. Fees can be levied on what society needs less of – pollution, use of increasingly scarce natural resources, etc. – and using that revenue, taxes can be reduced on what society needs more of – employment, income and investment. That kind of pricing reform would be doubly productive: improving the environment while stimulating the economy. If given the right policy signals and incentives, capitalism can deliver the best of both worlds: a productive, innovative economy and a sustainable, healthy environment.

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