Valuing the Planet: The Role of Economics

An eco-friendly stance is pretty easy to sell, but it remains to be seen whether this seemingly-broad corporate commitment represents an actual shift in policy

By Rotman

Published: Jun 17, 2010 06:12:38 AM IST

Updated: Jun 17, 2010 06:58:57 AM IST

Suddenly, everyone is ‘green’: it’s a topic at dinner parties, fuel for water-cooler debates and an emerging component of personal style. A quick scan of leading business publications demonstrates that being green has caught on in the corporate world, as well. But is all this chatter really a win for sustainability, or is it simply the latest marketing ploy by smart executives?

The efforts of Al Gore, the Discovery Channel and others have fostered an unprecedented affection for our planet over the last few years. Consumer awareness has gone up accordingly, and the market has answered with products and services that feature sustainability as a differentiator. From buildings and houses to cars, clothing, furniture, light bulbs, food and cleaning supplies, virtually every category of consumption has at least one major competitor offering sustainable alternatives.

Clearly, major corporations and the advertising agencies they employ have been hard at work. Indeed, the number of green-focused agencies has increased tenfold since 2003. The risk, of course, is that this ‘green boom’ is simply a passing trend, supported by the smoke and mirrors of powerful marketing departments. An eco-friendly stance is pretty easy to sell, but it remains to be seen whether this seemingly-broad corporate commitment represents an actual shift in policy.

In a recent survey, 65 per cent of adult Internet users said they ‘only sometimes’ believe green advertisements, while 12 per cent said they ‘never’ believe them. Why the skepticism? Perhaps because nothing really seems to have changed: when people look around, they see the same old focus on how much is bought rather than what is bought or how things are used.

Empty buildings still light up our city skylines; highways still choke with single-occupant SUVs; paper, plastic, and glass still find their way into landfills; and oil is still the economy’s lifeblood. In fact, the U.S. Department of Energy projects that primary energy consumption will continue to rise, reaching 118 quadrillion BTU, with 6.85 trillion metric tons of CO2 emissions by 2030. These numbers already take into account projected reductions and efficiencies, and the results are simply staggering. What’s worse, the consumption levels they reflect are for the U.S. only; surely the haze visible during the Olympic soccer games in Beijing didn’t go unnoticed.

If consumers don’t start to see results soon, it will become increasingly difficult for firms to sell their eco-friendly products. Marketing that is unsupported by corporate action or tangible results will fuel concerns over the real value of going green. But it is critical that the green movement endures: the current environmental craze needs to be molded into a lasting international movement that ingrains sustainability into our processes of production and consumption.

Supply and demand caused our environmental problems in the first place, and they are ultimately the only forces that can fix it. With the perpetual quest to produce, consume and grow has come a deepening dependence on an infrastructure that is extremely damaging to the planet. Consumers want more things, and they want them faster and cheaper than ever before. As a result, the earth has been routinely stripped and polluted, while cheaper man-made materials have replaced sustainable alternatives.

Indeed, it seems that almost every product can be tied to environmental damage: cars and airplanes consume huge quantities of fuel; the miracle of plastic pollutes for centuries; rapidly-obsolete electronics seep mercury into water supplies; even cows are polluters. North Americans consume a tremendous amount of products derived from animals—and livestock emits 18 per cent of all harmful greenhouse gases -- more than automobiles and other kinds of transportation. The fact is, many of the things we can’t live without come with tremendous environmental tradeoffs.

While it’s easy to blame corporations, the supply side is only half of the equation. There are certainly examples of gross corporate exploitation, but for the most part, companies have simply created supply to satisfy demand, or created supply where they anticipated demand would one day be. Most consumers have been happy to reap the benefits of cheaper products and increased commercial availability.

In fact, current environmental conditions can be largely attributed to a history of consumers prioritizing immediate desires over long-term considerations. Booming economics and misaligned perceptions of need have generated a set of consumer standards where the impetus to protect the environment has never been more powerful than the desire to have a high-fructose corn syrup breakfast cereal. The current climate situation falls solely and firmly on the intricate dance between consumers and producers.

While the laws of supply and demand have driven society to harm the environment, they also contain the power to correct the problem. If companies can find true economic value in shifting to green products, more sustainable products will find their way onto store shelves. If consumers decide that sustainability is a critical feature of the products and services they want to buy—not just sometimes, but always—then the situation can change overnight. Buying patterns would adjust, and companies would adapt to meet the need.

Green supply
Corporations seeking to go green have their work cut out for them. Executives face the constant pressures of The Street to achieve profit targets—and profits increase when operating costs are low and sales high -- two things that have historically worked against green production. For many companies, changing the game now to focus on green products would require massive financial commitments and carry tremendous risk. Years of product development, economies of scale, and process innovation have created a set of environmentally-unfriendly mainstay products and processes that can’t simply be abandoned now that people have watched An Inconvenient Truth. So it’s easy for businesses to perpetuate the sustainability issue with lower-cost, non-green products as they seek a return on their investments. For many companies, financial success means continuing business as usual, regardless of the effects on the environment.

In some cases however, companies have proven that green marketing can pay off. GE’s widely known Ecomagination campaign, which promotes sales of eco-friendly products, crossed the $14 billion mark in 2007. Even better, GE raised its 2010 revenue forecast for the effort from $20 to $25 billion. Green products and services are finally starting to show they can be a true source of retail value.

At the same time, natural scarcities and rising costs are changing the playing field for operations, as well as sales. As the cost of oil has climbed steadily, so has the cost of production, transportation, and operations. As COOs search for ways to reduce expenses, energy consumption has taken the spotlight—not as a ploy to entice consumers, but as a real tactic for cutting costs. While marketers may claim that real change was the goal all along, the term ‘greenwashing’ was coined long before oil reached $100 per barrel. The reality is that in the current economy, going green is fast becoming a business necessity.

The mobile telecommunications industry is a great example. Due to the rising cost of energy, collective operating expense across worldwide networks is expected to top $22 billion by 2013. In fact, some carriers in Africa report energy rates as high as 50 per cent of their total operating costs. Going green is rapidly becoming an essential business strategy, and carriers are asking infrastructure providers to develop more energy-efficient equipment. As a result, the average power consumption per base station per year is expected to drop by 10 per cent in the next five years alone. Unfortunately, such improvements in efficiency are overwhelmed by subscriber growth—but it’s a step in the right direction.

Green Demand
Consumer needs and desires can be just as powerful as those of business in determining the direction of the open market. Thanks to prominent media coverage and the rise in green marketing (regardless of motivation), more people than ever are factoring environmental impact into their purchasing decisions.

Unfortunately, being green is expensive, making a green lifestyle something of a luxury item. Buy a hybrid car; pay a premium. Buy a compact fluorescent light bulb; pay a premium (at least up front). Buy wind power; pay a premium. In times of economic prosperity, people can afford to pay more for discretionary features such as eco-friendly ingredients. With extra dollars to spend during the early 2000s, many Americans felt free to fulfill their sense of growing moral obligation to the environment. In a February 2008 survey by DoubleClick Performics, 45 per cent of respondents said they would pay at least five per cent more for environmentally friendly products.

But national fiscal health has obscured the core of true sustainability—the idea that everything comes with an environmental tradeoff. Today, as an increasing number of citizens are struggling to fill their tanks at the pump, the average family simply can’t afford to offset its carbon by paying for credits on an obscure website. A price-sensitive family has a much harder time buying green products if it is struggling to pay for groceries.

Sadly, just as the energy crisis stimulates green thinking on the part of corporations, it can tighten green spending on the part of consumers. For most of the world’s population, price is—and will continue to be—the most important consideration when making a purchase. And for now, green products are still simply too expensive to be ubiquitous. Unless relative costs come down, green products will be nothing more than a fad with compelling media coverage.

Even if green products become affordable, there are still other elements of demand that must be addressed. All too often, consumers fail to account for the long-term human benefit of green products—making it easier to spend that extra five dollars on something more immediately rewarding. Long-term environmental results are hard to communicate in a society with a short attention span and a need for instant gratification. Education will be the key.

Perhaps more important, the ultimate threat to consumer demand for green products is perception of quality. Many green products are perceived to be (and in fact are) of worse quality than the regular alternative. In the end, consumers must understand the true value of green products and have access to goods that are both high-quality and cost-effective.

Consider the compact fluorescent light bulb (CFL). While this technology has been around since the 1970s, the bulbs are only now seeing widespread acceptance. One of the primary barriers to adoption has been the price premium; CFL bulbs sell for five to seven times the price of a standard bulb.

Although longer life span and lower electricity usage make CFLs cheaper in the long run, consumers long failed to understand the overall financial impact beyond initial retail price. It has taken significant educational investments and good packaging design to finally convince consumers to make the switch. CFLs have also suffered from quality perceptions—harsh light and delays in activation time favoured incandescent bulbs. Only recently, as energy costs have skyrocketed and the quality of products has improved, have CFLs really taken off, so that 67 per cent of consumers now have CFLs in their homes.
Even in industries where green products are booming, there is always the risk that consumers will revert back to cheaper, non-green products when price becomes an issue. The good news is that, for now, consumers are ready to keep the movement going. An April 2008 study showed that economic concerns have not diminished the demand for environmentally friendly products. More than 50 per cent of consumers said they’re still buying green products, and 36 per cent said they’re buying more.

Moving forward
In reality, what green products may save is not the planet, but the human race: current production and consumption habits are destroying the human habitat. It’s time to realize that there is a flaw in our capitalistic system, but one that can be fixed by establishing sustainability as a key component of supply and demand.

While a reduction of costs falls within the domain of industry, consumers must begin to generate stronger demand for green products. Those who can afford the luxury of green products should be participating in the market to kick-start products on the verge of going mainstream. Meanwhile, as many people as possible need to be educated about the fiscal and environmental benefits of purchasing and using green products. It is the consumer who must change the demand equation so that businesses reap the benefits of their environmental investments, and thus continue to fund them. But it’s also up to companies to create green products that act as suitable, high-quality substitutes for the original.

Clear information that integrates environmental cost factors into the purchase decision will also go a long way toward solving the problem. Consumers need to be convinced of the impact of their decisions, beyond personal finance—and for this to happen, more information is needed at the point of sale. Some have suggested that carbon offset programs or designations such as Energy Star are the solution, but these programs perpetuate the idea that being eco-friendly is discretionary. Imagine if the cost of a carbon offset were included in all purchases—the eco-friendly choice would become drastically more appealing.

Timberland, a manufacturer of shoes and apparel, has one of the more interesting solutions. The company prints a ‘nutrition’ label on every box of shoes so that consumers know how their decision to buy Timberland products affects the environment. It’s not quite the same as showing discrete costs, but it’s a step in the right direction.

Government can also help guide green economics. Policy change can have tremendous impact: Australia recently passed a bill to phase out all incandescent bulbs in favor of CFLs by 2010, and Canada has aimed to achieve the same goal by 2012. In Utah, state workers have moved to a four-day work week, which instantly reduced commuting costs for workers by 20 percent and shaved significant amounts off of the state electricity bill. Tax credits, incentives, grants, and other instruments can also help to bring down the relative price point of green products to make them more cost-effective.

In closing
Ultimately, mitigating the human impact on the environment will take more than a simple switch from a Hummer to a Prius or from incandescent to CFL. Rather, it will require a radical shift in the behaviour, expectations and norms set out by consumers and corporations alike. Such a drastic change will take significant time and effort.

As individuals, we can all help speed up the cycle. In the end, it is up to economics, but the economics is up to us.

David DeRemer is a senior strategist with frog design in New York City.

[This article has been reprinted, with permission, from Rotman Management, the magazine of the University of Toronto's Rotman School of Management]