Green Technology: A Cost Benefit Analysis of Business going Green

Cost Benefit Analysis of Green Technology.

I. Introduction Many business owners fear the costs associated with going green and although the net return varies according to the sector, in most cases these fears are unwarranted. Sustainable business practices should be evaluated based on a cost/benefit analysis. The benefits for things like brand reputation and employee loyalty, must be weighed against the costs and risks. When considering the value of sustainable practices businesses need to be notified of a wide range of benefits. Human resources are a good example of a department that benefits from greener practices. According to The Harvard Business Review’s summary of a number of green building studies, green facilities have been shown to increase the productivity of employees. Research further reveals that retailers who installed skylights saved energy and boosted sales by as much as 40 percent. Other research has indicated that loyalty and morale are positively impacted by a green workplace. Greening a physical environment contributes to health and reduces sick days. MonsterTRACK.com study revealed that people want to work for a company that is green. These factors enable green companies to attract and retain the best people, while saving human resources time and money. Green initiatives can save money, strengthen employee loyalty, enhance a company’s reputation and increase productivity. (Richard Matthews) Businesses that invest in green initiatives improve their bottom line while businesses that ignore climate change are doomed to incur much greater costs down the road. A cost benefit assessment of many sustainable initiatives reveals the merit of being greener. (Richard Matthews) The conventional energy industry is facing a host of threats that make clean energy technologies more attractive. Increasing costs of oil and natural gas are causing the energy industry to reevaluate plans for expansion in those sectors. In Europe and Japan, new regulations on greenhouse gas emissions will hit the energy industry harder than any other; and the speculation surrounding parallel regulation in the United States is increasing uncertainty within the industry regarding future costs. At the same time, new opportunities for clean energy technologies are making the technologies more affordable. Growing public support and regulations mandating the adoption of renewable energy technologies are driving the growth of markets for clean energy technologies.
Thesis:
As America and the world go green, it creates new paradigms for traditional industry that wishes to adopt this new energy source. The conversion to, or supplementation with solar is a big step for corporations as well as conservation. This is particularly true where labor is concerned. The following will explore the impact of green technology on labor, investment, demand, and the impact on consumers. It will support the hypothesis that the capital costs of going green are offset by the long-term gains in growth.

II. Literature Review Some members of the business community are already playing a leading role in the war against climate change. These companies are making better use of resources, increasing energy efficiency measures, creating more energy-efficient products, and investing in green energy technologies. Many of these businesses are implementing technologies that reduce CO2 emissions and increasing their use of renewable energy while decreasing their use of energy derived from fossil fuels. (Black 2008)
Companies like Xerox, PUMA, HP, Wal-Mart and even smaller companies like Zotos are successfully incorporating sustainability initiatives and reducing their environmental footprint. (Kanzig et al. 2008 p.12) Assessment and reporting is an important part of these efforts and we are seeing more and more measurement tools, best practices, benchmarks and verification. Wal-Mart is the largest retailer in the US, it has specific environmental goals to reduce energy use in its stores and pressure its 60,000 suppliers in its worldwide supply chain to follow its lead. On energy efficiency, Wal-Mart wants to increase the fuel efficiency of its truck fleet by 25% over the next three years and double it within ten years. By 2020, it is expected to save the company $494 million a year. The company also plans to build stores that are at least 25% more energy efficient ( Levy et al. 2005). By addressing the environmental issues inherent in their business models, companies not only improve their practices, but also ensure the sustainability of their core business and help to make entire markets more sustainable. For many companies, looking at more efficient energy use can pay off in the medium to long term. The problem is that shareholders are preoccupied there quarterly reports and with short term returns, and it may take many years for the costs of climate change to become apparent. However, heavily subsidized carbon-heavy fuels will not be artificially cheap forever and clean technology will be less expensive once it gains critical mass. Some businesses are looking at longer-term time horizons and they increasingly understand that companies that ignore the trend will be at a competitive disadvantage. (Levy et al. 2005)
Businesses are increasingly concerned about factoring environmental risks along-side other factors that impact a company’s performance and value. This trend will continue as carbon intensity starts to show up on balance books through organizations such as the Carbon Disclosure Project. The involvement of the business community is crucial to global carbon reduction. Around 97 percent of the C02 emitted by western industrialized countries comes from burning coal, oil and gas for energy, much of which is used by business. Some businesses are offsetting their carbon by paying someone else to plant trees or find other ways to reduce carbon emissions. (Bierman 2001) Businesses have purchased carbon offsets including HSBC and The Guardian newspaper. Efficiency initiatives and renewable energy have many advantages for the environment and businesses increasingly understand the benefits for their bottom line. A global transition to a sustainable economy requires the large-scale mobilization of our financial, technological, and organizational resources. Climate change is one of the major concerns of this century, and it has been estimated that annual global investment of more than $500 billion will be needed over the coming decades to keep warming within a 2 degrees. Of Celsius limit (Florini 2001). The vast scale of these investments and the need to integrate sustainable technologies, practices, and products across the supply chains of every economic sector highlight the importance of creating governance structures that will redirect corporate resources toward sustainability (Gupta 2008). Growing concern about an international “governance deficit” has fueled this embrace of private resources and capacity. It is important, however, to recognize that large companies are already, highly engaged in global environmental governance systems in their roles as polluters, investors, suppliers, buyers, innovators, lobbyists, and marketers.” Private decisions over products and processes, technologies and research, and distribution and sourcing have vast environmental consequences with wide societal ramifications and broad geographic reach”(Levy et al 2005).
The Complexity of Carbon Lock-In
It is our current governance systems over energy and transportation that produce carbon lock-in, the “interlocking technological, institutional and social force that perpetuate fossil fuel-based infrastructures in spite of their known environmental externalities.”(Unruh 2000 p.12) Lock-in is more than an economic and technological phenomenon. Institutions such as the mass media, unions, government agencies, and professional certification bodies generate standards, rules, norms, routines and cultural practices that stabilize the dominant technologies. The automobile, for example, is intimately connected to our patterns of work, leisure, and shopping. Organizations with vested interests associated with existing technologies, such as industry associations and unions, become powerful actors who perpetuate the status quo. An understanding of the complexity, interdependencies, and inertia of the current system highlights the challenges of a sustainability transition (Unruh 2000 p.12).
External cost and benefits. (Chart # 1)
[pic]

It is pointless to preach to consumers to abandon their cars and plane travel, or to admonish companies to give priority to sustainability. Economic activity is deeply embedded in economic and social institutions, and companies are constrained by corporate governance, capital markets, competition, and the wider consumer culture. It is naïve to simply specify “ideal” governance institutions that would, for example, create a high global price for carbon, mandate clean production systems, and empower non-financial stakeholders. Meaningful change requires careful study of the contested terrain of corporate environmental practice and governance, and a long-term strategy to win new allies, reframe the issues, shift norms, and realign economic incentives, and craft new rules and oversight mechanisms. What we need is a strategic approach to building governance for a green economy.

Demand curve with external costs: ( See Chart # 2) if social costs are not accounted for price is too low to cover all costs and hence quantity produced is unnecessarily high (because the producers of the good and their customers are essentially underpaying the total, real factors of production.)
If the consumers only take into account their own private cost, they will end up at price Pp and quantity Qp, instead of the more efficient price Ps and quantity Qs. These latter reflect the idea that the marginal social benefit should equal the marginal social cost, that is that production should be increased only as long as the marginal social benefit exceeds the marginal social cost The result is that a free market is inefficient since at the quantity Qp, the social benefit is less than the social cost, so society as a whole would be better off if the goods between Qp and Qs had not been produced. The problem is that people are buying and consuming too much steel.

This discussion implies that negative externalities (such as pollution) is more than merely an ethical problem. The problem is one of the disjuncture between marginal private and social costs that is not solved by the free market.
Demand Curve ( Chart # 2)
[pic]

III. Analysis of Literature. Total Valuation There are three components to the total value approach: direct use, indirect use and non- use values. Therefore:
Total Value (TV) = Direct Values (DV) + Indirect Values (IV) + Non-Use Values (NuV)

Existing approaches to valuation fail to capture the full value of clean energy technologies. Investors typically consider only the direct return on their investment, rather than looking down the value chain to identify other financial benefits that increase the worth of clean energy technologies. Clean energy technologies deliver a total value (TV) far greater than their ability to generate electricity, reduce energy consumption, or fuel the world’s growing transportation sector. Understanding the total value of clean energy can help investors make better-informed decisions about project selection and implementation, as well as provide a more complete framework for effective business valuation. (Ehrenfeld 2009)
The framework for the total value proposition presented in this paper can be applied to renewable electricity generation, distributed generation technology, energy efficiency, and clean fuels. While millions of dollars have been invested in these technologies, deployment has proceeded at a much slower rate than anticipated, primarily due to the fact that investors do not believe that they can monetize the full suite of benefits that these technologies present. Although the production processes and types of uses vary among these types of technologies, they offer a similar set of benefits, which are the focus of this paper. The broader economic impacts of either locating a clean energy technology firm in a specific area or implementing the technology are spread to many different constituencies. This increased spending multiplies within the community and is shared among many actors – everyone from the stylist at the local beauty parlor to the owners of the car dealership. Property values may increase as a result of the installation of new technology (whether wind turbines, solar PV, or a biorefinery), which can contribute to an increased tax base. In turn, the amount of funding available for education, local government, and government services increases as well. On an international level, rural electrification has been shown to result in higher levels of education, which increases an individual’s long-term earning potential (Social Investment Firm Report 2005).
“Benefit-cost analysis can play an important role in legislative and regulatory policy debates on protecting and improving health, safety, and the natural environment. Although formal benefit-cost analysis should not be viewed as either necessary or sufficient for designing sensible policy, it can provide an exceptionally useful framework for consistently organizing disparate information, and in this way, it can greatly improve the process and, hence, the outcome of policy analysis. If properly done, benefit-cost analysis can be of great help to agencies participating in the development of environmental, health and safety regulations, and it can likewise be useful in evaluating agency decision-making and in shaping statutes.” (Tietenberg et al. 2009).
Direct Use Use value reflects the direct use of the environmental resource. “Energy is one of the biggest expenses of building ownership and will be an even greater financial burden for owners in the future as energy prices escalate. Owners can’t take control of energy costs if they don’t know where to begin. Benchmarking – or measuring and rating – a building’s energy performance is that critical first step owners can take to start controlling energy costs and saving money.”(White 2009 p.36) A number of different studies linked through IMT show that buildings with good energy ratings will command higher rents, sell for higher prices and have lower vacancy rates than other buildings. (White 2009 p.36)
On its website, IMT states that most U.S. building owners, including governments, have not measured the energy efficiency of their buildings. The result of such inaction has historically limited an owner’s ability to “manage and reduce energy consumption.” Such energy consumption management also has a direct impact on the overall profitability of a building. According to a March 2008 national study by the CoStar Group, rental rates in Energy Star-labeled buildings command a $2.40 per square foot premium over similar non-labeled buildings and have 3.6 percent higher occupancy rates (White 2009 p.40).
Indirect Use:
Indirect use value attributed to indirect utilization of ecosystem services, through the positive externalities that ecosystems provide. Methods to place a monetary value on ecosystem services where there are no market prices include "stated preference" methods and "revealed preference" methods. Stated preference methods, such as the contingent valuation method ask people for their willingness to pay for a certain ecosystem service.
IV. Application of theoretical Framework (Policy) Governance mechanisms can potentially shift corporate behavior toward sustainability. First, regulation can direct companies to meet specific goals, such as renewable in the power sector, or fuel efficiency for vehicles. Second, economic incentives for sustainability can be structured through taxes, subsidies, or new financial instruments such as carbon markets. Third, public pressures can lead companies to shift their norms and practices, for example, by embracing information disclosure initiatives such as the Global Reporting Initiative (GRI) and the Carbon Disclosure Project (CDP). The fourth and most radical approach is to restructure the foundations of corporate governance so that productive organizations internalize the drive to serve multiple stakeholders and goals, including the workforce, the community, and the environment. Each of these approaches has possibilities and limitations. Regulation is the most traditional means of influencing corporate behavior, but it can face huge political hurdles, as illustrated by the current post-Kyoto climate regime quagmire and inaction in the U.S. Congress. Regulation not only generates corporate opposition but also frequently faces reluctance from politicians more concerned about competitiveness and employment than sustainability. Some have made a spirited argument for a Global Environmental Organization to overcome problems of collective action and coordinate national regulation, but others are wary of the centralization of unaccountable power (Bierman 2001 p.45). Providing economic incentives harnesses the private sector’s profit motive, but these incentives are often driven by political rather than environmental considerations, as in the case of ethanol subsidies. They can have unintended and perverse impacts, driving up the cost of food. They strain governmental budgets and are frequently opposed by vested interests.
Policy Incentives Public policy has the power to jump-start markets. Most, but not all of the policy incentives discussed result in immediate revenue streams for the developer, generator, end user, or others. Those benefits that do not bring revenue directly to these parties still play a vital role in the adoption of clean energy technologies. Regulations that require the adoption of clean energy technologies drive the market, creating demand where there was very little. These policy incentives help make clean energy technologies more cost-competitive with traditional energy sources and make the investment more attractive. The move toward social and environmental disclosure represents a form of informational governance or “civil regulation” that some herald as a new era of transparency, accountability, and stakeholder engagement (Florini 2003). Critics have argued that disclosure is actually a privatized form of voluntary self-governance that protects against more onerous regulation and accomplishes little for sustainability or democratic ideals(Gupta 2008). Thee non-governmental organizations (NGOs) who promote initiatives such as CDP seek not only to change corporate practices but also to empower civil society actors as active partners in corporate decision-making (Levy et al. 2010). Simultaneously, business strives to promote a more corporate version of disclosure geared toward management of reputation, liability, energy costs, and investor relations. These three mechanisms for promoting sustainability—regulation, economic incentives, and increased disclosure programs—leave intact the fundamental structures of corporate governance in which companies strive to maximize profits and are primarily accountable to capital markets. Any attempt to divert companies from this goal inevitably faces resistance, and companies are frequently able to thwart, weaken, or skirt regulation through the deployment of lawyers, lobbyists, and accountants.
Sustainability advocates enthusiastically make the “win-win” case that improving environmental disclosure and practice actually raises financial performance; indeed, the core strategy of GRI and CDP has been to enlist investors as key allies in creating a demand for disclosure. There is certainly some low-lying fruit in the energy area, but it takes considerable investment and creativity to find real win-win solutions, and they won’t fix all of the massive environmental externalities of our industrial system of production and mass consumption. Even when cost-effective solutions exist, they often face various behavioral and non-market barriers to large scale deployment. The fourth and most radical approach is to reengineer structures of governance so that organizations internalize not just environmental costs but the sustainability mission itself. A variety of experiments are under way with organizational forms that attempt to combine the economic efficiency and market orientation of the private sector with the concern for social and environmental goals of not for- profit organizations. The Corporation 20/20 initiative has brought together a range of ideas about governance structures to promote a “Great Transition” to a more sustainable society. Marjorie Kelly of the Tellus Institute, cofounder of Corporation 20/20, has described a three-part typology of structures of “for-Benefit companies”: Stakeholder-Owned Companies, Mission-Controlled Companies, and Public-Private Hybrids. “The essential framework of such a company—its ownership, governance, capitalization, and compensation structures—is designed to support this dual mission (White 2009). The ambitious agenda of Corporation 20/20 hints at the hurdles it faces. Some of the organizations Kelly describes deliberately limit their dividends, profitability targets, and growth rates in order to address their goals. Building an economy based on such organizations would therefore require a revolution in capital markets. While some investment funds apply social screens, constraints on pursuit of returns are anathema to capital markets. Treating stakeholders, such as labor and environmental groups, as active participants in decisions rather than bothersome constituents to be consulted and managed, replaces shareholder supremacy with a more complex and multi-layered form of governance.
V. Summary/Conclusion
A Strategic Shift is Necessary Even if many more organizations become environmentally aware and follow best practice, there is no guarantee that the global economy would be sustainable at a planetary level. As John Ehrenfeld, sustainability scholar and current executive director of the International Society for Industrial Ecology, has described, sustainability is a systems-level phenomenon based on the balance of human activities and the earth’s natural processes. The sum total of global production and consumption, from cars and planes to food and energy, puts an intolerable strain on the earth’s capacity to provide fresh water and absorb carbon dioxide and other pollutants (Ehrenfeld 2009). This is becoming strikingly clear with the rapid industrialization of China, India, and Brazil. Moreover, the redesign of our cities, transportation systems, and energy infrastructure requires such a massive scale of investment and regional planning that individual business organizations, however well intentioned, cannot meet the challenge. Given these challenges, we need to move aggressively, but pragmatically and strategically, on all these modes of governance to create pressures for change. We need sectoral, national, and global institutions, bringing together business, government and civil society that can play a role in planning, coordinating, and financing the transition.
VI. References
Levy, D. L. and P. J. Newell (eds.). 2005. The Business of Global Environmental Governance. Cambridge, MA: MIT Press.

4 Unruh, G. C. 2000. Understanding carbon lock-in. Energy Policy, 28(12): 817-830.

Bierman, F. 2001. The emerging debate on the need for a World Environment Organization. Global Environmental Politics, 1(1): 45–55.

Florini, A. 2003. The Coming Democracy: New Rules for Running a New World. Washington D.C.: Island Press.

Gupta, A. 2008. Transparency Under Scrutiny: Information disclosure in global environmental governance. Global Environmental Politics, 8(2): 1–7.

Levy, D. L., H. S. Brown and M. de Jong. 2010. The Contested Politics of Corporate Governance: The Case of the Global Reporting Initiative. Business and Society, 49(1): 88–115.

White, A. (Ed). 2009. Paper Series on Restoring the Primacy of the Real Economy. Boston: Corporation 20/20, Tellus Institute, p.36. Available at http://tinyurl.com/restoringtheprimacy.

Ehrenfeld, J. 2009. Sustainability by Design. New Haven: Yale University Press.

Social Investment Forum. (2001) Report on Socially Responsible Investing Trends in the United States, as cited in Goodman, S.B. and Kron, J. and Little, T. (2001) The Environmental Fiduciary: The Case for Incorporating Environmental Factors into Investment Management Policies. The Rose Foundation for Communities and the Environment. Available: http://www.rosefdn.org/images/EFreport.pdf

Social Investment Forum. (2003) 2003 Report on Socially Responsible Investing Trends in the United States. Available: http://www.socialinvest.org/areas/research/trends/sri_trends_report_2003.pdf 122

Gunsauley, C. (October 1, 1999) “Grass roots support, good returns boost socially responsible funds.” Employee Benefit News. 123 Social Investment Forum. (2003) 2003 Report on Socially Responsible Investing Trends in the United States. Available: http://www.socialinvest.org/areas/research/trends/sri_trends_report_2003.pdf 124 Schepers, D.H. and S.

Prakash Sethi. (Spring 2003) “Do Socially Responsible Firms Actually Deliver What They Promise?” Business and Society Review 108(1): 11-32. 125 Ibid

Department of Energy – Energy Information Administration. (January 2005) Annual Energy Outlook 2005 With Projections to 2025. 144 Kammen, D. and K.Kapadia and M. Fripp. (April 2004) Putting Renewables to Work: How many jobs can the clean energy industry generate? Renewable and Appropriate Energy Laboratory Report: University of California, Berkeley.

Tietenberg et al. Environmental Economics and Policy, 6th Edition. Prentice Hall/CourseSmart, 08/11/09