Reset: Making Sustainability the Centerpiece of Our Recovery
Talk has begun to turn to the new economy that will emerge from the present collapse. General Electric CEO Jeff Immelt has suggested that the current crisis is not just a recession but a fundamental "reset" of how business gets done. And Time magazine has taken up this theme with a reset cover story. But there has been little discussion of exactly what changes - in principles and practices -- should be made so that we rebuild our economy on firmer foundations. As we celebrate Earth Day this week, it is a good time to commit to "sustainability" as a centerpiece of a revitalized regulatory system.
For the past three decades, debate has raged over whether and how to deregulate. But while markets offer the prospect of promoting innovation, growth, and prosperity, few now believe that capitalism is self-correcting or that the private sector needs only minimal supervision. From the demise of Lehman Brothers and AIG to the skullduggery of Bernie Madoff and Allan Stanford, the signs of inadequate regulation and market failure surround us.
Two particular forms of market failure underlie the meltdown of the past year and make sustainability the right touchstone for our regulatory reset efforts:
• Externalized costs and risks
• Incomplete information
Both of these problems require that we rethink our approach to regulation -- and re-establish the fundamentals of our economy on a more sustainable basis. And note that this principle should apply broadly, not just in the financial arena.
We need regulations which ensure that companies cannot structure their operations so that any upside gains accrue to their owners (or worse yet their managers), while risks or costs get shifted onto society as a whole. In the banking sector, rules against over-leveraging are urgently required. The recently released Turner Report in the UK outlines the first steps in this direction that should be taken. More generally, financial reporting rules must be designed to expose hidden risks and externalized costs.
We should likewise insist that companies which send emissions up a smokestack or out an effluent pipe cease their pollution or pay for the harm inflicted on the community. In our "reset" world, economic success cannot come at the price of harms imposed on the public in the form of contaminated air and water or risk of climate change. Thus while we lay the foundation for a more sustainable economy, let's similarly adopt rules that provide for a sustainable environmental future. This will require overhauling the traditional approach to environmental regulation which countenances way too much in the way of externalities by offering "permits" up to a certain level of harm.
President Obama's call for a price on carbon dioxide emissions represents a good first step in the "no externalities" direction. But let's broaden the push and make polluters pay for all the harm they cause. If companies -- and each one of us in our personal lives -- had to pay for our waste and pollution, behavior would change. Putting a price on harm-causing creates incentives for care and conservation -- efficiency and resource productivity.
More importantly, these price signals will drive a market response. Companies that are positioned to help others reduce their waste or cut their emissions will find customers eager for their goods and services. And where no easy solutions are available, harm charges will motivate "cleantech" innovation as inventors and entrepreneurs recognize the prospect of making money by solving environmental problems.
In parallel with a commitment to internalizing externalities, we must adopt transparency as a watchword. Market capitalism does not work without adequate information about economic actors. This reality has been understood in theory, but now needs to be advanced in practice. Government has a critical role to play in establishing the terms of disclosure about companies, markets, products, investment vehicles, and more. Public officials must also be empowered to ensure that disclosures are complete and accurate.
Well-designed reporting rules make it easier to spot externalized costs or risks and harder to hide malfeasance. Widely available metrics also facilitate benchmarking across companies, which offers a mechanism for assessing performance, highlighting leaders and laggards, and spurring competitive pressures that drive all toward better results. Studying the leaders offers an important way to identify best practices in everything from corporate strategy to pollution control. Likewise, outliers (such as those who make 10% returns year after year without fail) can be isolated for special review and scrutiny.
Such transparency would make it easier to refine our compensation systems to reward superior performance and real value creation. Carefully constructed disclosure rules could help, on the other hand, to unmask mere financial engineering, which should not be credited with outsized rewards.
There is a great deal of work to be done to re-establish prosperity across our country and the world. Smart regulation can channel corporate behavior and individual effort toward sustainable economic growth -- that is durable because it rests on solid underpinnings not hidden risks or externalized costs.
Daniel C. Esty is the Hillhouse Professor at Yale University with appointments in both the Yale Law School and the Yale School of Forestry and Environmental Studies. He is the co-author (with Andrew Winston) of the prize-winning book, Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage (just released in a revised and updated edition published by John Wiley). A former Deputy Assistant Administrator at the US Environmental Protection Agency, Professor Esty advised the Obama Campaign on energy and environmental issues and served on the Obama Transition Team.
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This is an excellent article. I'm glad to see that someone is taking up this cause.
The planet has been able to sustain itself without the benefit of your brainpower.
May it be ever thus.
Need sustainability in terms of:
1. Economic sustainable. If it kllls our jobs and factories, then it will certainly fail
2. Preserve gas and oil reserves. Don't use them up at a mile a minute and suddenly run out. That would be the biggest economic crash of all time. No on carbon tax. Yes on oil tax. $4 gallon gas makes people want to burn less carbon.
You gotta look at the reality. When gas got to $4+ a gallon, people simply stopped consuming as much. Thats bad, in a 70% consumer driven economy. If we were a production based economy, might not be a bad idea... I think a lot of production based nations do just that.
Unless the USA suddenly starts making quality products that compete on a global scale, there is no point in raising prices that affect the buying power of the 85% of the country that can't afford it.
This country has lost its way. Its consumer based with consumers that cant/wont consume. Now our goverment is trying to force us to consume terrible technology that raises our cost of living, and tax us simply for being alive. We can't compete with the rest of the world with junk wind/solar tech... the countries that could use it the most cant afford it, or are rich enough to do it themselves.
I wish I had an answer. The only export I have knowledge of, that is sustainable and well managed, is our timber. Might be some wheat exports? Someone feel free to enlighten me as to American products the rest of the world is clamoring for...
Debate won't bring us anywhere. It's the action that's matters.
http://vanillaseven.com
I believe debate is the solution.
More inaction means less harm caused by "warmists" trying to save the planet from a non-existent problem.
Don't bring your logic and reason here, rikki. We need to save the world right now, no questions asked. We need to do whatever it takes, no matter the consequences, to accomplish this short term goal.
You need to look past the toxic heavy metals involved in the production of solar panels, the destruction of huge expanses of wild lands to put in wind turbine farms, the higher expense, the lower dependability requiring coal and oil as backups anyway, the higher expense, the huge energy cost to make these new products, and the overall higher expense.
I mean, gosh, we are trying to save the planet here, not create a mass panic and use it to sell extremely expensive junk technology.
We can go a long way by deciding NOT to throw away excess energy by lighting the night sky.
Light Pollution is the only form of pollution that's easy to solve. Some lights don't need to be on, other outdoor lights need to be directed ....
DOWN TO THE GROUND WHRE THE LIGHT IS NEEDED, NOT INTO YOUR EYES TO PRODUCE GLARE OR INTO THE SKY TO LIGHT THE UNDERSIDES OF CLOUDS, BIRDS AND AIRPLANES!
The sunlight is polluting half of the earth right now! SHUT IT DOWN!!
Oh, Son, you never cease to amuse me. You can choose to live in a dark cave if you want, but don't expect anyone else to.
obama needs to build solar panel plants in WVA and Texas to signal the beginning of the end of big coal and big oil...and also to give those coal and oil workers nice high-tech jobs where their lives won't be in danger....
Costs a lot of money to build solar power plants. Not sure if you heard, but theres a really big deal going on with this thing called a deficit, and something else called a budget. Crazy I know.
Your life is in danger every time you drive a car, walk down the street, eat food, or sleep in your bed. Yet the human species is thriving.
Coal and oil workers are already high tech. They don't use pick axes and oil lamps anymore. Offshore oil drilling platforms are amazing feats of technology, as are the massive coal seam shovels and other modern mechanical devices that are used today.
How about NO regulation?
No. It doesn't work.
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The economic goal of the 21st century should be sustainability and not growth as the continued push for the latter is jeopardizing the former. Everyone who is sincerely interested in securing our planet's future should read Herman Daly's book Beyond Growth.
The elephant in the room is that there are too many humans for this planet to sustain...got to get rid of them and stay rid of them...Oh!...but what happened to our constantly expanding productivity??? Can't have it both ways...which will it be?
No, the elephant is that industry can't be made sustainable. Its not just the population... the population is just the catalyst for something that would go on no matter how small the population if there is still industrialism.
I disagree and you offer no argument other than opinion.
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I totally agree but our politicians seem to be blind to this reality or at least pretend to be. In the meanwhile, the new rage in urban planning is what planners call "smart growth" i.e., trying to pack the growing population into existing urban centres which saves land but doesn't stem the demand for other resources. So what is "smart" about that?
Feel free to not reproduce if you think there are too many people.
Love evolution.
You are completely wrong.
You have inadvertently hit upon the bottom-line belief of the environmental movement: a hatred of people.
When your belief system tells you that people are simply one more species on the planet and one that is a plague and a virus which threatens to upset the perfection of Mother Ghia, then it's only natural to hate people.
Except other environmentalists, who share such an 'enlightened' view.
Thank you for a terrific article, Daniel. I am greatly encouraged by the statements being made by leaders such as yourself in support of a more sustainable, new economy. Insight now seems to be penetrating beyond the level of sweeping rhetoric to actually include specific proposals. I appreciated the way your article looked specifically at some of the moves that might drive the behaviors we need of a system-wide level, both using "carrots" and "sticks".
What I am not seeing enough of yet though - and that may well be just my limited scope of vision - is consensus building. Every day we read new op-ed pieces from some of the greatest minds in our world, from fields spanning economics, finance, international development, ecology, management, sustainability and so forth. We have enough opinions from individuals now, enough talk. I want to see leaders stepping up to weave a consensus together to take action. Perhaps, Daniel, you are as well positioned as anyone to play a part in this? If you are already doing so, I'd love to hear more about it.
Chris
http://csr4ceos.typepad.com
There are estimates that the Methane Hydrate deposits in the Gulf of Mexico alone can power the entire USA for upwards of 350 years. Seems fairly sustainable to me.
I have wondered why there isn't more interest in the methane hydrates on the ocean floor. Would they be any harder to exploit from an engineering point-of-view than offshore oil deposits? I think methane is a cleaner burning fuel than oil or coal.
You Sir, put most of my concerns, questions and thoughts about the "reset" of America that President Obama and many have touched on recently into a very interestingly short and effective article! For that, I thank you and only wish more people could "get it".
Your long list of credentials and accomplishments, show that you were an excellent pick for the Obama Transition Team. Now, if only you could find the time from your many duties to somehow work with our new President to inform and educate more Americans (and the world) why this "reset" is THE only hope to save our planet.
And, with this "reset" every human being, irrespective of their national origins, color of their skin, spirituality and all other things that seem to make us different will finally be able to climb over the mountain of greed, ignorance and arrogance and see the dream that only the "privileged" have seen.
As many Americans, I have been one of the lucky "privileged" to live in a country that allows me to go to bed with my stomach full and wake up feeling fulfilled and challenged knowing that I have choices in my life. I know that we must all work to bring "life, liberty and the pursuit of happiness" to more people in the world to be truly satisfied and free and safe.
Thank You, Mr. Esty.
Oddly enough, the planet doesn't appear to need saving. Life is thriving. Vegetation is increasing, the seas are brimming with jellyfish. For every lion or polar bear you think the earth is losing, we are gaining more life in other species.
Guess because its not the cute and cuddly species, it doesnt really matter...
I was with you until "re-establish prosperity across our country and the world" and "sustainable economic growth."
There are the worshipers of free market who will continue to refuse to see its disadvantages because anything else threatens their liberty to earn and spend how they choose without regard to consequences.
And there's the white elephant of economic growth and prosperity that even the author of this article about "sustainability" won't let go of.
There's a slim opportunity here to ease the addiction of consumerism and shift values away from materialism, but I don't see it happening. I'm afraid we're doomed.
You can be afraid all you want. Doesn't mean we are doomed. Just means you'll be easy to control.
Why should anyone threaten my liberty to earn and spend how I choose? And what is the "addiction of consumerism?" You mean, buying food and things I might actually need?
I can only dream of a future when all my buying needs are decided by someone else.
There is a great deal of work to be done to re-establish prosperity across our country and the world. Smart regulation can channel corporate behavior and individual effort toward sustainable economic growth --
Yes, say control on shipping. There ought to be rewards for those who ship goods shorter distances, and penalties to those who ship long distances. Take for example the grapes from Chile I am eating right now. The carbon from moving and refrigerating these grapes has to be a large amount, compared to obtaining them from California, for example.
If people are so concerned about economic independence when it comes to energy, how can we continue to use energy like it is an incidental expense compared to all other costs?
Lagej corn is bad we dont need as much grown as we grow. The more corn a society eats the more malnutrition.(EVEN OLD SKOOL NON GMO NON HYBRID CORN) the human body expends excess energy digesting corn and it blocks nutrient uptake.
Feeding cows corn should be outlawed.
http://www.willthomas.net/Chemtrails/Image_Library/pages/chemtrails_hampton111202.htm
Hi Sheila,
Lead-acid batteries ready for your basement now! We have plenty of them they are long lasting and reliable and can be recycled.
http://www.willthomas.net/Chemtrails/Image_Library/pages/chemtrails_hampton111202.htm
Lead !!!! Toxic Lead?
LEAD IS TOXIC
Lead is not nearly as bad as some other metals and while all "heavy metals" are bad, nearly none of them are freaky-bad as you seem to think lead is. You sound alarmist and uninformed.
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