From the Introduction to Saving Energy, Growing Jobs

David B. Goldstein

No one supports pollution as public policy. No matter what one’s political philosophy or business goals, clean air, safe drinking water, foods free from poisons, and the protection of unspoiled environments are seemingly universal goals.

Then why is environmental policy so controversial? The only plausible policy reasons to oppose environmental protection, and indeed, the primary arguments anti-environmental advocates raise on virtually all of the major environmental controversies of the last several decades, are the beliefs that a clean environment…
1. Requires unacceptable compromises in our economic well-being, or
2. Places unreasonable restrictions on human freedoms.

This book demonstrates how such concerns are ill founded. The arguments and evidence I offer instead support how and why well-designed policies for environmental protection will enhance economic development, create greater employment, and provide more democratic ground rules for the economy.

The Case for Environmental Protection

When the environmental movement in America began to take strong advocacy positions, after 1970, opponents of environmental protection argued that there was a fundamental tradeoff between economic growth and prosperity and the environment: the more we protected the environment, the more sacrifices wewould have to make economically.

Economic theory allegedly supports such standard wisdom—that environmental quality competes with economic growth. Most of the anti-environmental arguments of the past, and many of the critical arguments that continue into the present, are theory-based economic arguments about how a particular environmental policy will lead to any or all of the following conclusions:
Hurt business. This is the most frequently heard argument against environmental protection. Environmental laws are claimed to restrict business’s choices, raising costs and cutting profits and growth.
Hurt consumers—particularly poor people—or increase poverty. If environmental laws increase the costs of basic necessities, this will arguably affect the poor disproportionately. (The latter argument is perhaps the least convincing because low-income advocates and consumer groups rarely oppose environmental laws, and often support them.)
Compromise freedom or limit property rights. Opponents of environmental protection sometimes argue that environmental policies limit market choice or restrict property rights.
However, a closer examination of economic theory actually supports the opposite of such conclusions: that environmental protection policies can enhance economic growth, help consumers (and specifically the poor), and reduce restrictions on individual and corporate freedom.

Both theory and practical experience illustrate how environmental policies:
     Reduce costs to businesses and consumers
     Increase productivity by encouraging new technologies
     Overcome systematic failures of real markets to maximize profits and in particular to promote innovation
    Enhance competition by breaking up nonmarket relationships between a few industry-leading companies (that frequently have large and stable market shares for their products)

Businesses and their political allies consistently have argued that environmental regulations and incentives compromise profitability and growth. However, for the last few years both political parties officially have been  supportive of environmental protection and maintain that we can have both economic growth and environmental protection at the same time. (Visit each of their websites.) But these arguments are based mainly on hopes, without reference to facts and experiences.

So what are the facts with respect to the impact of environmental policy on economic growth? Considering the great significance of this question, I will show how the economic benefits of only a few of the many environmental policies are in the trillions of dollars—surprisingly little solid research on this subject can be found. The few studies that have been done generally support the view taken here, but they have mostly focused on a narrower and more difficult hypothesis: that all environmental regulation promotes economic growth. Documentation of the benefits of environmental protection, which includes regulation but also involves other policies that protect the environment, will necessitate further research and study. This book sets forth some of the evidence that is available now, and suggests some directions for the research effort.

The Relationship Between Environmental Protection and Economic Growth

Increased evidence based on almost forty years of experience in strong environmental protection policy in the United States and globally supports the assertion that carefully designed environmental protection policy affirmatively promotes economic growth. I provide specific examples of environmental regulations and other policies that have had unexpectedly large economic benefits—independent of the direct environmental benefits. Environmental regulation can promote innovation—the engine of economic growth for the twenty-first century—and enhance competition.

I suggest that well-designed environmental policies, including regulations as well as incentives, can both spur innovation and overcome failures of the marketplace. They break apart cozy, anti-competitive relationships between large corporations, and promote broader and deeper competition, and the more effective use of market forces. They can also enhance personal freedom and democracy  by eliminating or revising private-sector regulations that limit economic choice.

Failures of the market are more widespread and systematic than is generally understood, and the influence of intrusive private-sector regulations, often written by established companies, is larger than many people realize, so to free the markets and promote competition through environmental policies could be surprisingly effective.

Additionally, more competitive market structures that result from environmental protection policies can promote economic growth by encouraging innovative thought, product development, and changes in industrial processes to make them more productive, more profitable, and cleaner. Improving productive processes yields more jobs; and the activity of improving products and processes produces higher-paying jobs. More transparent market rules and regulations protect our freedoms by reducing the ability of a limited number of companies with strong economic power to limit the choices for everyone else.

I draw these conclusions based in large part on the achievements of energy-efficiency policies that have been adopted in the United States since the 1970s:
1. Since 1976, the U.S. Congress, the Department of Energy, and the California Energy Commission, along with several other states, have set energy-efficiency standards for dozens of appliances and pieces of equipment, such as refrigerators, air-conditioners, and lighting equipment. The predicted net economic benefits of these standards are estimated conservatively at over one trillion dollars1. And, as will be shown, the actual benefits include product improvements whose value has not been counted in this estimate. Moreover the actual costs are much lower than were predicted. In many cases they were zero or even negative (in other words the cost of the efficient product was even less than the cost of the product they replaced).
2. Energy-efficiency standards for new buildings, implemented in the United States by states, have generated at least $200 billion of net energy benefits. And, as I will describe below, the nonenergy benefits greatly exceed the energy benefits.
These immense savings are only the tip of the iceberg. The United States has not been consistent or aggressive in its efforts to promote energy efficiency. Policies that have clear benefit have been ignored as the issue became mired in political squabbles that were based on larger and, as I will show, irrelevant geopolitical or ideological debates. So the potential savings are much larger—well into the tens of trillions of dollars. These savings will generate millions of new jobs. The subject of energy efficiency is introduced in Chapter 2, and the issue is explored in depth throughout Part 1.
3. The benefits of environmental policy in promoting growth are not limited to energy efficiency, however. The Congress and the Environmental Protection Agency, along with the California Air Resources Board, have regulated air pollution emissions since the 1970s. The net economic benefits of the federal regulations have been estimated at $1 trillion, with $1.2 trillion of benefits being obtained for $220 million of costs.

Of course, not all environmental policies are alike. Some work better than others and there are undoubtedly a few areas where environmental quality might come at the expense of some level of economic growth. But there is increasing evidence that well-designed environmental policies, including regulations, promote economic growth, and indeed are one of the few strategies that we understand that can do so.

The observation that well-designed environmental policies promote economic growth is particularly interesting because up until now, they have done so without trying. That is, economic development has not been a design objective of environmental policy: the economic benefit comes almost by accident. Therefore it is likely that, if economic development were an explicit goal of environmental policy making, we could do an even better job.

If the success of environmentalism leads to greater growth, why would anyone be opposed? This book explores how the politics of environmental policy are affecting the debate more than real economic interests. The politics begin with the organized opposition of the business community to almost all of the environmental initiatives that promise real change.

Organized Business Opposition to Environmental Protection

The relationship between environmental protection and economic development, not only in the United States but also throughout the world, has profound consequences for environmental policy. If environmental protection truly promotes economic development, the business community should be supportive of environmental policies on the whole—even if a few companies oppose selected environmental protection plans. Instead virtually all of the organized business community opposes serious environmental protection proposals.

Such opposition to environmental protection is particularly odd in a supposedly competitive economy. Regardless of whether environmental policy helps or hurts business in general, any particular environmental policy is likely to have winners and losers in different companies and in different industries.

For example, a regulation that requires increased efficiency for air-conditioners might be opposed by power companies with excess capacity for electricity generation that they sell at high profit to other utilities that are short of power (due to high air-conditioner usage), yet utilities facing the reverse situation should support the regulation. This regulation might be attractive to aluminum and copper manufacturers because it would require higher production of these materials to make more efficient air-conditioners. Naturally small businesses and building owners, whose electric bills would decrease if efficient air-conditioners reduced the risk of blackouts and kept electricity prices down, should support such efficiency regulation.
Surprisingly, however, this almost never happens. Instead the organized business community tends overwhelmingly to support the interests of those corporations who expect to lose from the policy change and ignores the interests of the potential winners. The self-expected losers, by and large, are economic incumbents—a relatively few large and well-established corporations that have sizable shares of their markets.

These economic incumbents are the big companies that think (or worry that) they have the most to lose from increased competition or technological innovation.  They assume that they’re defending their real economic self-interests by attempts to sustain their entrenched positions through politic power -- but often this is not a realistic assumption. Often large corporations fade into insignificance when they fail to adjust to new realities of unanticipated competition and technological progress. In fact, they often have the most to gain from environmental policies that require innovation  because large, established companies may find it easier to develop and sell new technologies than their competitors.

Given this misperception, it’s no surprise that economic incumbents might lobby against policies that change the status quo. What is a surprise is that the rest of the business community—and political leaders who support economic growth and competition—would join them.Yet such political alliances are almost universal. Corporations that fear the consequences of a particular environmental policy will lobby vigorously to protect the status quo, while those businesses that would benefit remain silent—or worse, speak out in support of the self-perceived losers.

Changing Corporate Attitudes Toward Environmental Regulation and Protection

A recognition that environmental protection promotes economic growth could change the dynamic between corporations and environmental advocates and regulators. If environmental policymakers better understood the diverse interests of different corporations, government could develop policies that not only  protected the environment more thoroughly, but also were more supportive of economic growth. A similar understanding could also transform the attitudes of environmental advocates. Simply put, if we all understood that less pollution means more profits for corporate America, environmental/business partnerships would undoubtedly be significantly more common and a more substantial part of the agenda of environmental organizations.

The fact that the business community and the environmental community have differing perspectives suggests that basic strategic decisions result from obsolete, knee-jerk reactions rather than rational assessments of self-interest.

I saw this in part of my work as an environmental advocate in the 1970s and 80s when the positions of both the environmental and the business community were quite rigid. Environmental advocates supported enhancements in energy-efficiency regulations for products that used significant amounts of energy and, naturally, their builders and manufacturers opposed these enhancements. Neither side talked to each other.

The standoff began to change in the 1980s, after face-to-face negotiations over federal-level appliance efficiency legislation, and a dialogue emerged between some companies and environmental advocates. On occasion the companies that saw themselves as winners from a proposed regulation began to work in alliance with environmental advocates in support of that regulation. Friendlier relationships paved the way toward greater cooperation. I recall when an appliance company that had previously worked collaboratively with the efficiency advocates decided that it was going to oppose their position on a particular regulation—one that was open to public comment—its representative phoned me. Here’s an excerpt of that conversation:

     “I’m calling to give you a heads-up on the issue of the proposed efficiency standards for our product,” the vice president in charge of governmental relations told me. “Just so you aren’t surprised, I wanted to tell you that we are going to be on opposite sides on this particular issue.”
     “What is your opposition based on?” I asked him. “Wouldn’t your company make more money with the regulation than without it?”
      “More money? I don’t know if we have done a calculation. Let me get back to you on that.”
A few weeks later, the same industry spokesman called back and said, “The company thought about the issues a little more and has changed its position. We will now support the regulation.”
       “Great,” I said. “Why such a reversal?”
     “Well… our engineers and managers did a spreadsheet on the difference in our profitability with or without the regulation and found that their business would be more profitable with the higher standard.”
      “Okay,” I continued, “So let me ask you a question: do you understand your competitors’ businesses enough to be able to predict whether, if they performed the same spreadsheet, they would get the same answer?”
      “Yeah, we know the competition would reach the same conclusion if they ran the numbers.”

Yet none of the other manufacturers supported the rule in the end. Thus it is most likely that one of the following two things happened: either the other companies never analyzed how the regulation would affect their profit, but reacted automatically in opposition out of habit; or that other companies preferred to maintain a consistent business position of opposition to environmental regulations even if it hurt their own interests.

Such an observation raises deep questions about how the political/economic system truly works. How do corporate leaders decide about environmental issues, both those that affect their companies directly and those that affect them indirectly? How do the business and environmental communities affect the structure of markets and competition in the United States? What are the motivations for these communities’ positions?

The Influence of Myth in Environmental Policy Debates

The crucial influence that myths and misunderstandings play in our national debate on environmental policy is a major subject of this book. I assert that myths—idealized and oversimplified stories—about how the economy functions and what are the appropriate positions for businesses or environmental advocates to take explain the entrenched positions of many large corporations on major environmental issues much better than any rational accounting of self-interest. As we debunk such myths, we open up major opportunities for partnership between businesses and environmentalists.

These myths also appear to have a decisive influence on the thought processes of our elected officials and public administrators, which increases the perceived level of controversy of environmental decisions and polarizes many of the political debates.

Debunking the Myths of Economic Theory

A key area of mythology focuses on economic theory. Throughout the last forty years, opponents of environmental protection have based most of their arguments on economics  and, in particular, on the argument that government regulations are unnecessary in a competitive market and inevitably reduce economic welfare.

Mainstream economists seldom seriously address such an argument. However, careful examination of economic theory—before we even look at economic data—shows that the concept of a conflict between regulation and market forces (the idea that regulation is the opposite of market forces) is fatally flawed. Instead regulations are a necessary part of a functional free market. (I address this issue throughout the book.)

The supposed political battle between the advocates of market forces and the advocates of regulation may actually serve as the basis of business opposition to environmental protection; or it may be just an advocacy technique used when it is thought to be politically effective or convenient. But the explanation that perhaps it is just a tool of advocacy begs the question of what might be the true motivation of its advocates.

Do most businesses truly see regulation as an attack on free enterprise? If so, what is the basis for this myth’s acceptance? And why do they support, through membership fees and other expenses, such private-sector organizations as trade associations whose primary purpose often is to promulgate and enforce regulations? This expense can be considerable. One major trade association employs almost half of its staff on the development and certification of industry standards. Surely its members don’t consider this activity something that conflicts with free markets!

Myths and Political Alliances

The myth that in order to support free markets one must oppose regulation is only one of a number of myths that are preventing a constructive dialogue between business and environmental leaders—a dialogue that could lead to policies that more effectively promote economic development while they also encourage environmental progress.

For both environmentalists and their opponents, many of the myths that block constructive dialogue focus on the supposed alliances of the opposition. Many of the arguments on both sides address issues far removed from the environment, but closely connected with what each side believes the other really desires.

I present throughout this book one important red herring that afflicts the arguments of both sides—the issue of government-planned economic activity, as opposed to market-based economic activity. Many of the arguments against environmental protection actually are concerned more about the issue of potentially dangerous top-down government economic planning—the sort that was used in the Soviet Union—than they are about the environment itself.

The question of government-planned economic activity is more important than it appears because much of the opposition to environmental policies disproportionately emphasizes the issue of government control versus individual choice as the primary reason to oppose environmental protection. A surprisingly large percentage of the anti-environmental writings on the Internet address the authors’ opposition to a state-controlled economy and their apparent belief that environmentalism is a stalking horse for big government. This is all the more surprising given that Communism is no longer an ideologically competitive system since the fall of the Soviet Union.

Perhaps even more difficult to accept is how anti-environmentalists can ignore the fact that Communist countries had the world’s worst record on pollution control and environmental health. Why would environmental advocates want to promote a system that so obviously failed?

 Anti-environmentalists’ attempts to equate environmental protection with a command-economy that overturns free markets are ironic, moreover, because the evidence suggests the reverse: environmental protection policies tend to create or strengthen competitive markets. Yet, equally inexplicably, environmental advocates seldom use pro-market arguments to support their recommendations. Instead environmental writings often emphasize images of big, bad corporations that intentionally destroy the environment just to increase profits. These myths are intended to appeal to a populist and anti-corporate sentiment that may be a defensible political position but that has little to do with the environment.

Environmental mythology often focuses on the identification of supposed bad guys who are responsible for pollution. Yet to frame the problem this way, even if or when it is correct, leads in unproductive directions. It sets up the debate as a power struggle rather than a policy decision, with business on one side and the public on the other.
To frame environmental issues as a struggle between corporations and the public interest just reinforces the myth that environmentalism is a stalking horse for government control of business. It also encourages an already-strong tendency for businesses to react to issues based on peer identification and group loyalty rather than on self-interest and competitive advantage.

The ultimate irony is that when business leaders respond to environmental issues with a unified voice of opposition, it simply reinforces trends toward the very result that anti-environmentalists fear most: top-down economic decision-making by political forces rather than market forces. Free-market advocates should not care whether markets are hobbled by government’s or business’s politically chosen policies: both are in fundamental conflict with the concept of competition.

 



  $18.95 trade paperback
  384 pages, 6" X 9"

    
  ISBN: 0-9720021-6-2


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