Canadian Politics from Canada's Centre

Thursday, July 06, 2006

Markets Can Also Save The Environment

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My economics prof has generously contributed another great editorial piece on how economic solutions can be used to deal with environmental problems.

Markets Can Also Save The Environment

by Professor Philippe Ghayad

I recently wrote an article about how the government can influence certain markets so that consumers do not waste environmental resources. But, if the markets are left unhindered will firms and consumers totally squander these resources? The answer seems to be no. The reason lies in the three Ps: Profits, Progress and Probity.

The first two Ps (Profits and Progress) come from the relationship between the quest for profits (from shareholders or your basic citizen who wants to increase his/her wealth) and the creativity of labor. For example, shareholders want high return on the money that they have invested in firms. Consequently, firms want to show positive growth and healthy future profits to its shareholders. That is, firms do not want to simply maximize profit for one day or for one week. They want to show that they have a bright future so that more investors purchase their stock and this in turn will drive up the price of shares. This is where progress comes into play or what is called "thinking outside of the box."

A great example of this would be Toyota. They were enterprising enough to invest in hybrid cars in the mid-1990s when the price of a barrel of oil was less than 20$ (it is now about 70$ a barrel) and environmental worries were of no great concern. In 1997, Toyota was ahead of all its competitors when it came out with their first hybrid model, the Prius. They were pushing the envelope when their competitors like Ford and GM were satisfied building large, gas guzzling cars. Now that the price of gasoline seems to be stuck at around one dollar a litre and that it is believed that hybrid cars will be about 20% of the market in 2010, Toyota's ingenuity has kept it one large step ahead of its competition with regards to hybrid technology. But what about its shareholders? Toyota's profits last year were 12 billion dollars US (Ford's and GM's were -0.14 and -8.8 billion dollars US respectively). Toyota's market capitalization was 182 billion dollars US (Ford's and GM's were 12.6 and 14.4 billion dollars US respectively) and its share price is now about 100$ (Ford's and GM's are about 6$ and 27$ respectively). Toyota's foresightedness and progress generated profits not only for its shareholders but also the environment.

Columbia University physicist Klaus Lackner is another example of how the search for profit generates progress. He has come up with a contraption that can capture CO-2 from the air on a scale that would slowdown global warming. These devices can be used to suck out the CO-2 produced by 15,000 cars running at a time from the surrounding air. The carbon captured can then be transferred underground. The world-wide condemnation of global warming and the hunt for solutions made Lackner's project economically and financially viable. If the project was not profitable, Lackner would probably be working on another project that would be (no rational scientist would work on a model that continuously loses money, uses up resources and is not useful to the world). But he's not the only one trying to counter global warming. He is competition with what he assumes are thousands of labs that are trying to find ways to create CO-2 curbing technologies. The most efficient and environmentally safe projects will win. All in the name of profits, progress and... maybe probity.

The notion of probity is that most citizens have a certain moral denominator. We are not parasites that want to consume past our point of satiation without any regard of the consequences on our surroundings. We tend to make ethical choices. This is why most us recycle, do not litter profusely, purchase biological goods, drive hybrid or fuel-efficient cars and maybe invest in "green" companies. This notion of ethics is also existent in producers. A great example is Minnesota dairy farmer Dennis Haubenschild who has invested in ways to re-use methane from cow manure. Pound for pound, methane is 20 times more potent than CO-2. He converts the methane into a gas that powers his farm (Progress). Not only that, but Haubenschild makes money by selling credits for putting less greenhouse gas into the atmosphere (Profits). However, Haubenschild stated that his principal reasons for changing his methods of
production were environmental concerns and not financial ones.

Another example is the company RecycleBank in Philadelphia. Created by a lawyer and an MBA student this recycling company pays households credits to recycle. The amount of recycling a household does is optically weighed when it is picked up by city workers. The weight is then converted into credits, which can then be exchanged for discount coupons at different retailers (ex: Starbucks, Home Depot). RecycleBank, which charges the municipalities 24$ per house, seems to have created a Win-Win-Win-Win situation. The company itself, RecycleBank, wins since it makes profit from the municipalities. The municipality wins since it pays less money to incineration and garbage dumps. Households save money at specific retailers when they recycle and the retailers win because they are participating in a worthy cause (Probity).

Markets can be blamed for a lot of the harm done to environmental resources. But they might also be part of the solution.

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Here are some related articles:

Creative Taxing Can Save the Environment
Interview with Green Leadership Candidate Elizabeth May
A correction Prof Ghayad made to an idea of mine on purchasing power

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At 4:31 a.m., Canadian Politico Anonymous Mark said:

Toyota Is Out To Save The Environment and they deserve praise for that. They are currently strengthening technologies that are environmentally friendly and pursuing energy diversification so as to be able to limit the use of fossil fuels like petroleum. Let's hope that more government agencies and automakers alike will support this kind of advocacy.


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