4.09.2008

THE PRICE IS STILL WRONG

I had the pleasure of attending Temple University's third annual Social Entrepreneurship Conference this morning. What a refreshing experience, to hear from thought leaders in the for-profit, non-profit, and investment communities, and to see so many students and professionals in attendance to hear from them. I am heartened that we are moving closer to a world in which the intersection between financial profit and social good is the best place to be, and not an arena where the tree-huggers and capitalists feel they have to slug it out.

As an economist, I appreciated peoples' concerns about what we label "externalities." The classic negative externality is pollution: the producers of pollution aren't bearing enough of the cost to society of the pollution, and as a result, absent government intervention, we would tend to produce more than a socially efficient level of pollution. If you will, the "price" of pollution is far too low, and as a result, we are "consuming" too much of it.

Green innovation has flourished in this recent era of rising energy prices. One panelist salvages grease from our sewers and converts it to diesel, which saves our municipal infrastructure and provides a green alternative to gas. Another panelist spoke of how carpet manufacturers his firm was investing in figured out how to reduce polyurethane content in the backing, resulting in lower prices and higher margins. A third spoke of how the convenience and affordability of Philly Car Share has led many users to choose to live in high-density, transit-oriented neighborhoods. All of these innovations are good for the environment and good for society, and none would have come into being if higher energy prices hadn't made them make sense from a business standpoint.

So here's the trillion dollar question for our presidential candidates: has supply and demand absolved us of using public policy to account for these negative externalities? One panelist noted that despite the rise in some energy prices, the price is still wrong: electricity, for example, is still being sold in this state for less than what it costs to produce it.

It may seem politically suicidal, but a carbon tax would help get the price right. A carbon tax helps fix the wrong signal that the current price is telling the market, and leads to a more efficient supply/demand equilibrium. You can even do a dollar-for-dollar swap between energy taxes and income taxes, so that the working poor, who would be hit the hardest by higher prices on their groceries and utilities, are no worse off as we transition towards a more environmentally sensible mix of taxes.

Fortunately, these and other ideas are being seriously discussed at the national level. And fortunately, the intersection between financial profit and social good is growing: according to the keynote speaker, we're talking about 30,000 socially responsible firms, 60 million values-driven consumers, and $2.7 trillion in professional managed money in socially responsible funds.

Still, there's a reluctance in DC to make tough decisions about environmental policy. Too many businesses and investors make a false dichotomy between maximizing financial profit and maximizing social good. Too many times, it's not a false dichotomy at all, but a very real one, where good-hearted people have to make tough choices between honoring their responsibility to maximize shareholder value and doing what's best for other stakeholders like their employees or their communities.

I believe it was uber-VC John Doerr, who is bullish on green investments, who noted that while the Internet was about revolutionizing the way we do business, environmental technologies will be about fundamental things that we humans tend to need for survival, like air and water. And if you believe in Maslow's hierarchy of needs, you have to think that the potential market and payoff will therefore dwarf anything the business world has ever seen. Here's hoping our elected officials get this, and for our sake and our children's sake, enact courageous policies that help get the price right so that good business is more synonymous with good environmental stewardship.
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