Unit of Carbon, Chicago Climate Exchange: $1.65; Unit of Carbon, European Climate Exch: $18; Creating Capitalist Markets to Save the Planet: Priceless

During the Net Impact conference I attended a panel on Environmental Markets. The panel was of particular interest to me because some of the key ideas presented were in direct opposition to the thoughts of Hunter Lovins, a recent speaker at UC Berkeley’s Capitalism Next series. Hunter Lovins is a proponent of natural capitalism, the idea that as natural resources once considered nearly free become scarcer, for profit businesses should and will calculate the value of those resources as costs associated with their operations. She praised emerging environmental resource markets and a realization of her ideals. I was surprised, however, that she de-emphasized the role of government in inciting businesses to value natural resources. The Net Impact conference panel on environmental markets sought to explore why environmental commodities markets are emerging and what is driving companies to join them. In particular, given Ms. Lovin’s comments about the Chicago Climate Exchange (CCX), I was interested in hearing Megan Morgan from the CCX speak about its emergence.

I should probably start with an overview of the Chicago Climate Exchange. CCX began in 2000 as a grant to Dr. Richard Sandor, an economist at the Kellogg School of Management, to assess the feasibility of a cap and trade market in the U.S. to reduce greenhouse gas emissions. CCX trading began in 2003 with 13 charter members that sign legally binding agreements to reduce greenhouse gas emissions. Organizations that reduce more than the requirement may trade credits for money to those organizations that do not. Today, 11% of Fortune 100 companies participate, and similar carbon trading market has also been launched in Europe.

Given Ms. Lovin’s belief that a change in government policy is not needed to spur creation of natural markets, I was quite surprised to discover that the panelists thought just the opposite. According to the Net Impact panelists, the sole emergence of the CCX is because companies are anticipating government regulation. They believe that joining a voluntary carbon market will give them a competitive edge once regulation is created. For example, 25% of the largest U.S. coal emitters participate in the CCX. Megan Morgan quoted a coal industry CEO as saying his company joined CCX because, “We want to have a seat at the table rather than being eaten for lunch.” Companies are joining the CCX because:

• Regulation of carbon is increasingly becoming part of a dialogue for U.S. politicians. If or when regulation is passed, participants feel they will have a competitive edge over peers who have not yet taken steps to reduce their carbon emissions.
• Europe has begun to tax polluters, and many U.S. executives prefer a cap and trade system that would financially reward companies that find innovative ways to cut carbon emissions. Voluntarily joining such a system is a way of demonstrating support for such a model and of influencing future legislation.
• Being unprepared once carbon regulation is passed will impact return to shareholders.
• The initial audit companies participate in after joining CCX causes many companies to identify energy saving opportunities that save them money.
  

So, it seems that contrary to Ms. Lovin's belief, our government does set the tone for when and how businesses will choose to confront climate change. We can see from the emergence of the CCX that even the threat of a cap and trade system can spur creativity. I look forward to seeing what policy the Obama administration will implement in the coming years, and I truly hope that it will incentivize U.S. companies to find new and creative ways to cut carbon emissions.

A New Generation of Capitalism

Last week I wrote an entry on the blog of the Net Impact Club. Net Impact is a club for students interested in promoting social and environmental responsibility in business organizations. I am helping to plan a speaker series called Capitalism Next, which is exploring how capitalism as a system can evolve toward true sustainability. I would like to share that post with you below.

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On Wednesday, I had the opportunity to hear Hunter Lovins speak to a group of students from Haas and other UC Berkeley schools, including the schools of law, natural resources, and public policy. Lovins was the first speaker in a series of speakers, titled Capitalism Next, exploring how for-profit businesses can become truly sustainable. She proposes that because our world’s natural resources are becoming scarce, a new type of environmentally conscience capitalism is emerging, dubbed natural capitalism. During the industrial revolution, Lovins told us, human capital was in limited supply, and successful companies used machines and plentiful natural resources to create more value with less people. Today, in contrast, human capital is plentiful but our world’s natural resources are becoming scare. Consequently, we are experiencing a new capitalist revolution. Recognizing the value of natural resources, companies are now growing their bottom lines by minimizing their environmental impact. This is the capitalism of the future.

Lovins’ examples of companies “doing well by doing good” provides true hope for our planet. For example, Dow Chemical saved $3 Billion dollars over 3 years through their energy saving and waste reduction programs. Tesco, a leading international grocery retailer, has pledged to cut carbon emissions from all existing and new stores by 50%. Tesco has also launched a program to begin labeling foods sold in their stores with their carbon footprints. Companies are even voluntarily trading carbon on the Chicago Carbon Exchange. Participant companies include Dupont, Motorola, and Ford Motor Company. I was impressed that so many leading companies are taking steps toward environmentally responsible business.

I also came to Lovins’ speech with a unique framework. The same morning I had the privilege of touring Arterra, a new condo development which is positioned to become San Francisco’s first LEED certified residential high rise. For those who don’t know, LEED is a green building rating system that provides a set of standards for environmentally sustainable construction. The developers of Arterra are also proving that environmentally friendly business practices can lead to profitability. In this tough real estate market, Arterra has roughly five times the foot traffic of non-sustainable condo developments and is selling well. Arterra’s developers told the tour group that while green development projects do not sell for more money, the extra expense of sustainable building projects has become minimal. On this $90 Million dollar project, the extra cost of sustainability was only $300,000, approximately 1/3 of 1 percent of the total cost!

However, as exciting as I find the idea of natural capitalism to be, Lovins’ speech left me with many un-answered questions, some of which I hope will be addressed during future Capitalism Next sessions. First, I would like to understand more about the role of government in moving industry toward environmentally conscience business. My background is supply chain consulting. While I had the privilege to work with some companies that were cognizant of their environmental impact and actively addressing it, I saw many that were not. In addition, not every change toward corporate sustainability is going to have a positive ROI. Government has played a significant role in shaping and regulating our current capitalist system. For those organizations that are not voluntarily moving toward natural capitalism or taking sufficient steps in that direction, what role will government play?

In addition, I perceive an educational gap in the ability of our nation and the world to rapidly adopt more sustainable business practices. Classmate Ari Frankel pointed this gap out to me on the Arterra tour. While most real estate development companies recognize that green building is the future of development, and while they know green projects are sound business, many companies currently lack architects, developers, and interior designers with the knowledge and skills needed to bring an environmentally friendly project to fruition. What change in education will be needed to support natural capitalism and on what scale? How will existing educational institutions manage this?

I hope to find many opportunities at Haas to continue exploring the role of business in addressing the world’s social and environmental issues. I am definitely looking forward to future sessions of Capitalism Next.