The Green (Re)Allocation

Posted by Milos Sugovic

Many Americans have already taken important steps to make their homes energy efficient while those that are dropping the ball would pick up their slack if financial resources permit, according to a recent national survey conducted by Yale and George Mason University. There’s no surprise: Americans are willing and ready for energy efficiency and pollution reduction, especially if it saves them money in the long-run and improves the quality of their lives. 

The most intriguing finding of the survey is that consumers face a natural barrier to going green – the significant upfront financial cost. A reduction in this barrier requires a new set of market instruments, perhaps one where upfront costs are diffused over time like the cost of a cellphone that’s covered via monthly fees (and let’s not forget the government subsidy option either). But assuming this barrier to sustainable consumer behavior is done away with, will the U.S. of A. pollute less? Will CO2 emissions drop to 1990 levels? Probably not.

The consumer wants to reduce emissions demand given the push that’s coming from the new administration, energy prices and declining incomes. But here’s the paradox: an environmentally friendly consumer base reduces a supplier’s pollution level, which creates room for other polluters to “make up” for the reduction and keep national emissions constant. So effectively, nothing really changes.

For constructive insight look to the land down under: The Australian government has launched an initiative to fund insulation for more than 2 million homes to reduce carbon emissions by up to 49 million tonnes by 2020. The Australian Institute policy research center says the carbon pollution reduction scheme will just reallocate those emissions via emissions trading, known in the US as cap-and trade. 

Under cap-and-trade, there’s a limit on the amount of pollution that can be emitted. Companies are issued pollution permits which represent their right to pollute a set amount. Those that need to increase emissions buy these credits from the ones that pollute less. So in theory, those that can reduce emissions cheaply will have an incentive to do so. 

Now, if households turn their electric heaters off, they’ll free up the power plant’s pollution permits for trade. So a consumer-focused pollution reduction scheme becomes a pollution reallocation scheme, according to the Australian Institute. Loop this reasoning back home, and the consumers’ willingness to reduce pollution under a cap-and-trade system turns into nothing more than a pollution reallocation. 

So here’s the moral of the story from a PR point of view: The burden of pollution reduction does not rest with the consumer solely, even thought we’re misled to believe so. With the rules of the game spelled out as they are, there are perverse market incentives and unintended outcomes. Companies wishing to step up to the green challenge don’t have much room to rest all bragging rights on the ability to change consumer behavior - consumers and the public are already motivated, willing and ready to reward those firms that “go green.” But CEOs mustn’t forget that corporate social responsibility starts with the word “corporate” and not “consumer.”