Wednesday, November 17, 2010

The Green Economy Strategic Opportunities Illusion

FLG listened to this interview (mp3) with Gregory Unruh about green corporate strategy. The most fascinating thing is what is glossed over. Throughout the interview, Unruh talks about corporate social responsibility and partnering with NGOs, and how these create opportunities for profit. They do to the extent that customers care about these things or, more commonly, regulation occurs because let's be honest, all other things being equal, green products are more expensive. So, people need to care about those green factors more than price or be forced into buying them.

But the key moment comes towards the end when they talk about the move from incandescent to fluorescent light bulbs. As you probably know, this move has been legislated. But some Republicans want to roll this back, saying that this is a freedom issue. The interviewer mentions how the industry said, let's not go back. We've already committed by investing in the new production facilities.

Now, Unruh's response is idiotic. He says, that this is all ideologically driven and not based on internally consistent rational decisions. Further, he says, if we are going to go back to incandescent lightbulbs, then why not also say we should go back to kerosene lamps and whale oil.

Well, FLG can still buy kerosene lamps. They weren't banned by law. But let's leave that aside because a little bit later the crux of the issue arises.

Unruh says (FLG had to transcribe so it's not verbatim):
The political noise is problematic, but especially for the companies that have figured out how to take advantage. So, a lot of companies are moving away from incandescent bulbs to fluorescent and other types of lighting because there is more profit in it. The old incandescent technology has run its course and it's a low margin business. And companies have made the investment and see better opportunities, new markets by moving to these more sophisticated, more advanced light bulbs. I think what you see is that the companies who have made this decision, have identified opportunities. For example, in the energy sector in general, there are a number of companies, electricity utilities and others, that recognize climate change is a real problem and it's not going to go away. It is, from a strategic risk management position, good to take steps now, and they have already begun to make those kinds of investments partially expecting that the regulatory environment will come along and to have those expectation ripped out from under them and provide that kind of chaos and uncertainty in the marketplace is a real problem. What you want to do for long-term, capital intensive strategic planning is have some kind of stable environment by which you can make some forecasting. The other companies that have not decided to make the investment or sustainability, well, they benefit obviously by the chaos because it just puts off any kind of political initiative as well. Again, there's two sets of companies we're seeing, the companies that have identified sustainability as a persistent future trend that's not going to go away, and one in which they can see opportunities to profit. And then other companies that only see it as a threat. They don't see how they can move to given their existing investments, infrastructure, capital, and business model. The innovative companies are the ones who are hurt most by this political football we're seeing now around the environment and climate change and sustainability in general.
This exemplifies exactly what FLG has been saying.  Green demand is not like ordinary economic demand.  It's a politically imposed demand.  Here Unruh takes a normative stance that companies who buy into the green economy idea are innovative and that the ones who don't are presumably behind the curve.  

But if Unruh's claim that incandescent has run its course and isn't profitable anymore, then why do we need the regulatory impetus?   If these so-called innovative companies, who saw greater profit potential in the new florescent market are so great, then why do they care if the less lucrative, less attractive market is still around?  Sure, they're substitute products, but obviously there's something fishy about the story that says regulatory barriers need to be imposed to make the shift.  It's not some natural, organic market outcome.

Ultimately, Unruh is a committed environmentalist in a business professor's clothing.  The opposition to various environmental regulation is irrational, internally inconsistent, and ideologically driven.  The rational people are on the side of sustainability and environmental regulation.  Innovative companies will follow that path and assume that regulation will be forth coming, and importantly position themselves to take advantage of opportunities that regulation creates. 

FLG doesn't disagree that environmental regulation creates opportunities for individual companies, but he does have three problems with Unruh's normative assumptions.  First, Unruh portrays his normative assumptions as positive ones.  Second, when the opportunities are created by regulation, those opportunities suffer from the vicissitudes of politics.  While it is difficult to predict economic conditions in the future, it is even harder to predict the exact timing and nature of legislation.  Lastly, regulation itself interferes with the mutually-beneficial nature of the free market system.   From  a purely economic standpoint, green regulation and policies are akin to the economic adage of breaking windows to kick start economic activity -- it's a destruction of wealth.  Now, because of externalities and such, we may be better off on the whole because of regulation, but from a GDP point of view we will be worse off.  Green tech and the green economy will create opportunities for individual firms, but is, at it's core, no matter what language people use, including this business professor, a politically created demand that will be imposed through legislation and regulation, not a typical economic demand, and it will make us worse off in strictly economic terms.  So, a business person who tries to find opportunities in the green economy, needs to recognize that they are basically making a political bet.


George Pal said...

Unarguable points all. There was however something that caught my attention.

”partnering with NGOs”

“Innovative companies will follow that path and assume that regulation will be forth coming”

I’ve noticed the growing association of NGO’s and corporations and find it more than a little worrisome. Back in the neighborhood, when the owners of Tavern on the Brink heard someone was thinking of opening a bar in the vicinity, they would send Tony ‘Bananas’ to set the guy straight. Tony was the local NGO and always delivered the same message – “not gonna open”.

NGOs give corporations political muscle and plausible deniability of big money influencing elections and laws. In turn, NGOs get subsidized by the corporations, and cloak the corporations’ interests in high tone virtue to see to it that government regulation - advantageous to the corporation - will be forthcoming. There’s nothing to put an end to free markets and competition like well-heeled virtue.

The Ancient said...

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