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Denis Hayes delivers the keynote address at BELL 2002

WRI Board Member Denis Hayes delivers a thought-provoking keynote address at the 2002 BELL Conference -- "An Ecologically Honest Bottom Line: Lessons for Business from the Collapse of the Soviet Union"

WRI Board Member Denis Hayes delivered this keynote address at the 2002 BELL Conference, held at the Donald Bren School of Environmental Science and Management, University of California, Santa Barbara. Find full coverage of that conference at BELL 2002.

On an airplane last year, I found myself seated next to a gray-suited businessman who was reading a popular magazine. It had a dramatic photograph of flooding and other hurricane damage on the cover, with a headline linking extreme weather to climate change.

Pointing to the photo of streets filled with water, my seatmate remarked, “You know, this global warming thing seems to be real. Just look at these floods. I’m starting to think I’d better get myself a sports utility vehicle.”

To give you some idea of how narrow my circle of friends is, it literally did not occur to me that he might not be joking.

I assumed he was making an ironic comment about emissions of greenhouse gases by these urban assault vehicles, so I told him the answer was to buy Daimler-Chrysler’s new monster, the Unimog, manufactured for the consumer market by its Freightliner division.

“The Unimog weighs more than two Chevrolet Suburbans,” I told him. “You could crush Ford Explorers like gnats. And don’t worry about flooding. It’s 9 feet 7 inches tall – high as a basket ball hoop. The ocean could rise 2 or 3 feet and you’d still be dry.”

To my horror, my seatmate was really interested.

This guy had never connected the dots between 6-ton, 10-mile-per-gallon Sports Utility Vehicles and the climate change that threatened to flood Florida.

Interestingly, we were flying back from Europe. Gasoline is very expensive in Europe because people, in country after country, through their democratically-elected governments, put a multiple-dollar tax on it so that everyone won’t use as much. In America, where a politician who proposes a 4 cent a gallon gasoline tax is deemed a candidate for the next edition of Profiles in Courage, this seems astonishing.

Europe is a comfortable, prosperous, mobile continent. But its automobiles don’t look much like ours.

Ford, which sells a delightful, super-efficient little car called the Ka in Europe, is convinced there is no market for it in the United States. Similarly, Ford has no plans to sell its 18 foot 11-inch Excursion in Europe. If you pulled an Excursion, with its 44-gallon gasoline tank, into a service station in, say, Milan and uttered the fateful words, “Fill ‘er up,” the bill would be $220 dollars. There is no meaningful market for the Excursion in Europe.

Americans don’t just buy these behemoths. We drive them. Americans drove 60 percent more total miles last year than the Germans, French, British, Japanese, Canadians, Mexicans, and Swedes combined.

Here, for professors, is a thought exercise: if everyone in the world drove as far last year as the average American, the total would have been more than 51 trillion miles. Since the mean distance from the Earth to the moon is 240,000 miles, that would be equal to driving 213 million trips to the moon. In one year!

That may give you some insight into how widely replicable the American lifestyle is.

When the sheer volume of American driving is multiplied times the size of the average vehicle in the American new vehicle fleet – a fleet that hit its peak fuel efficiency in the mid-1980s and is now more than half sports utility vehicles, vans, and other light trucks – the impact is stunning. We should not be shocked that it is fostering real resentment in much of the world.

Some of you may have noticed the story buried in this morning’s paper about hundreds of unarmed, desperately poor Nigerian women seizing control of five ChevronTexaco facilities. Nigeria is the fifth largest exporter of oil to the United States. To permit us to drive to Wal-Mart in vehicles designed for the Serengeti, they lead environmentally-abused lives under squalid conditions enforced by government-sanctioned thugs.

Last year, Americans, with 4 percent of the world’s population, consumed 42 percent of the world’s gasoline.

How “sustainable” a ratio do you think that is?

How many wars will we fight because we chose to price gasoline at $1.50 a gallon?

Honest Accounting of Ecological Costs

OK. This is sort of interesting stuff, but you may be asking yourself, “What’s the point?”

Actually, I’m slowly queuing up a thesis I want to advance this morning. It’s a little bit controversial, so I need to get you into a frame of reference to seriously consider it.

For the last half of the 20th century – encompassing the entire adult careers of all the people in this room – the dominant international fact of life was the Cold War. There were two Superpowers – each capable of annihilating the other – engaged in a global ideological struggle. The Cold War provided the rationale for everything from the Interstate Highway System to the Space Race to language labs.

Ultimately, communism spun into a death spiral and democratic capitalism emerged triumphant. The former Soviet Union splintered, with astonishing speed, into numerous nations, the strongest of which now resemble a Third World economy.

Many explanations – military, cultural, political, and even religious – have been advanced for the overnight transformation of the Soviet Union from Superpower to basket case. Here’s my theory:

Under communism, prices were not allowed to reflect economic realities. Economic success requires good information and Darwinian culling of uncompetitive enterprises. Soviet resource allocations were so grossly inefficient that the Soviet economy simply could not produce enough goods and services to sustain its legitimacy. In the end, the hidden costs finally overpowered the real assets, and Soviet society collapsed in on itself like a black hole.

OK, here is the controversial thesis: Under communism, prices were not allowed to reflect economic reality. Under capitalism, prices don’t reflect ecological reality. In the long run, the capitalist flaw – if uncorrected – may prove to be the more catastrophic.

Externalities

Environmental externalities were of mostly academic interest thirty years ago, when, as an undergraduate, I read articles by Ezra Mishan and Joan Robinson. However, they have now outgrown the “academic” box. Costs universally treated as “external” to economic decision-making are often more important than the internal factors that actually drive the decisions.

Like other recent massive accounting frauds that move expenses off the balance sheets, this economic fiction contributes to a false sense of well-being.

Measured without reference to distributional issues and ignoring environmental externalities, the global economy has been an incredible triumph. Output grew from $6 trillion in 1950 to $43 trillion in 2000.

But those Nigerian women in the ChevronTexaco facilities don’t plan to let us ignore distributional issues. The global economy may temporarily look a little better if Ken Lay earns a few hundred million extra bucks, but those women don’t care one way or another about Ken Lay’s bank account.

1.2 billion people – four times the population of the United States – still earn less than $1 per day. The number hasn’t changed during ten years of truly robust global growth.

When zealots armed with box cutters can topple the World Trade Center, when a Philippine junior college student living in a slum with outdoor plumbing can create a Internet virus that causes tens of billions of dollars of damage, when a very small scientific team with modest resources can build a “live” polio virus from scratch, such economic disparity poses some obvious perils.

More to the point this morning, the so-called “external” costs of various activities – things like climate change, an epidemic of extinction, devastating damage to the ocean floor, loss of top soil, skyrocketing childhood asthma rates, depletion of aquifers, elimination of wetlands, the bioaccumulation of hormone-mimicking substances in every food chain, etc. – are becoming enormous.

Refusing to reflect these real costs in our national income accounts and in our corporate financial statements is every bit as misleading – and even more guaranteed to produce a catastrophe – as surreptitiously shifting debts to offshore corporations in the Cayman Islands.

Costs are costs, and sooner or later the piper has to be paid. The ecological bubble is of a different – a greater – order of magnitude than the tech bubble.

Let me note parenthetically that the term “bubble” has a frivolous connotation that belies the importance of the problems caused by fraudulent accounting. In the last 18 months, about $7 trillion in stock market valuation has simply vanished in the US (and much of the rest of the world has been sucked into our downdraft.)

$7 trillion equals about $700,000 for every American household!

The (hopefully short-term) implications for capital availability of vaporizing $7 trillion are staggering, but they pale next to the implications of, say, global climate change – which will necessarily not be short-term.

The Ecological Bubble

Biological systems can operate for a while beyond their long-term carrying capacity, but sooner or later ecological realities must be faced.

Ecological overshoots – whether of elk or prairie dogs or aphids or yeast – are absolutely analogous to bubble economies. Everything seems to be going swimmingly until suddenly, like cartoon characters, they find that they have run over the edge of the cliff. And no matter how hard they churn their legs, they can’t avoid a long drop.

And as with bubble economies, the greater the violation of the boundary conditions, the sharper and deeper the eventual collapse.

If there were any single lesson from the science of ecology that I would like to see understood by the next generation of business leaders it is that homo sapiens is currently overshooting the long-term carrying capacity of the planet.

As a result, the IUCN reports that 1/8 of all bird species are endangered; 1/4 of all species of mammals are endangered; and 1/3 of all fish species are endangered.

We have two options. We can began working very hard to build a global economy, designed along ecological principles, to operate within the planet’s carrying capacity. Or we can carry on with business as usual and race off the edge of the cliff.

The Power of Markets

How does this relate to the education of business students?

In my experience, the typical MBA enters the world of business with a powerful belief in the efficacy of markets. This is well-placed. But if the prices are wrong, all that market power will be harnessed to produce exactly the wrong result. And if that MBA, later in life, works hard to promote wrong prices, he or she will be working powerfully to promote the eventual collapse of our mixed market economy.

Let me play with this a little. Most of you own an electric clock, and most of you also own a battery-operated watch. The clock is powered by electricity that costs, in most of America, about 8 cents per kilowatt hour. The watch is powered by a tiny, long-lived battery that contains an absolutely trivial amount of electricity. The electricity delivered by the battery costs a staggering $27,000 per kilowatt-hour. Again, that compares with 8 cents per kilowatt-hour for the clock.

Unsurprisingly, watches are more efficient than electric clocks. Vastly more efficient.

A typical electric clock draws about four watts. The clock thus uses one kilowatt-hour about every ten days, and 36 kilowatt-hours per year. (1) If we assume that everyone in the United States owns one electric clock, the nation consumes the total output of two giant 500 megawatt coal-fired power plants just running its electric clocks. (2) These power plants consumes as much coal as can be delivered by 100 railroad hopper cars every day.

If, however, every one of those clocks were as efficient as the average battery-powered watch, all the clocks in America, combined, would use a total of just 4 horsepower. Instead of requiring 100 railroad cars of coal per day, America's electric clocks would run for 5 years just one railroad car load of coal.

At the same time that it demonstrates the awesome power of prices, this is a textbook case of market imperfection. Let's say it cost $10 more to make a clock as efficient as a watch. This is an arbitrary figure, but it may be reasonable since decent battery-powered watches can be purchased for $10 to $15 dollars. At 8 cents a kilowatt-hour, it costs about $3 to run a clock for a year. So if it cost $10 to make the clock more efficient, you would earn 30 percent, after taxes, on your investment with absolute safety. That beats the dickens out of my IRA. But even if the increased efficiency were free, how many people are going to choose one clock over another because it will save them $3/year? That's 8/10 of a cent a day.

Yet, considering the environmental impact of consuming 100 railroad cars of coal a day – the greenhouse gases, the small particulates, the strip mines, the acid rain and acid mine drainage, the unit trains, etc. – it is clearly in our interest as a nation, and as a species, to encourage much more efficient clocks.

This strikes many -- myself among them -- as a reasonable role for government to play. As long as the cost of making a more efficient clock is economically reasonable, why not set minimum performance standards for clocks? We would not prescribe how clocks must be designed, but we would limit how much energy they could use. (This might be expected to be less controversial than CAFE standards for automobiles. Most Americans don't have a love affair with high-horsepower clocks.)

Market Worship

Clocks, of course, are a comparatively trivial issue. Vastly more energy is consumed by refrigerators and furnaces and water heaters, and federal energy efficiency standards have been issued for these appliances. The average refrigerator today uses only 40 percent as much electricity as the most efficient refrigerator sold five years ago. It still keeps your food cold; it comes in the same nifty decorator colors; it fits into that little niche in your kitchen. But the electrical bill to run it is 60 percent less – and it pays for the incremental cost of the efficiency features in less than a year.

By increasing the efficiency with which lights and appliances use energy, we have eliminated the need to build scores of enormous new power plants. Appliance efficiency standards have saved consumers money; they have saved utilities money; and they have reduced a wide range of environmental externalities.

Still, no one will be shocked to know that most leaders in the appliance industry have fought aggressively against such standards, or that they have found a friend in the Bush White House, which seeks to eliminate many of these hugely effective rules.

Why? There is no rational argument against appliance efficiency standards. The arguments are pure ideology: regulations represent a government intrusion in the marketplace.

The market does many things with efficiency, creativity, and speed. But the market is not a proper focus for blind religious devotion. Various problems limit the effectiveness of an unbridled market in achieving important public purposes. In the case of appliances, markets actually produce a less efficient outcome than can be achieved through regulation. They can even tend to stifle technological innovation, when that innovation involves an increased initial cost.

Lobbying Against Self-Interest

Before the passage of the first Clean Air Act & Clean Water Act, I routinely encountered corporate executives who said they wanted to clean up their plants but were unable to do so unless even-handed laws and regulations forced their competitors to clean theirs up as well. This was perhaps the strongest single argument for anti-pollution laws. However, faced with the actual possibility of anti-pollution laws, virtually all of these same business leaders fought them tooth and nail as tinkering with the market.

In CERES, even companies that are making heroic, expensive internal efforts to improve their environmental performance, tend to have high-powered lobbyists in Washington, D.C. working day and night to make sure that their competitors are not required to take similar steps, or indeed, any steps.

Here in California, where my plane descended yesterday into a Los Angeles airshed that tempted me to see whether I could hold my breath for 45 minutes, the solid phalanx of automobile lobbyists against every initiative to clean up the air is legendary. They are currently spending a fortune in a doomed effort to defeat a proposed California law limiting greenhouse gases.

Diesel engine manufacturers have lobbied for years against federal efforts to clean up their emissions. Here in Southern California, 71 percent of airborne cancer risk comes from the 2 percent of vehicles that have diesel engines. Cummins Engine and Mack Trucks already meet the new federal standards – so this is not an impossible hurdle. Indeed, some of us think they should be tougher. But Caterpillar and its allies in the trucking industry would rather continue to fob off their environmental externalities on a citizenry that has no choice but to breathe. This is – not to put too fine a point on it – as evil and deceptive and sleazy as anything that Ken Lay or Bernie Ebbers or the nameless co-conspirators at Arthur Anderson ever thought about.

Market Corrections

The market is not a proper focus for blind religious devotion.

A free market would have swiftly converted the Grand Canyon into a huge hydroelectric complex -- as, indeed, it was on the verge of doing until the Sierra Club stopped it.

An unconstrained market would have cut down every 2000-year-old redwood tree -- just as it was doing prior to the creation of Redwood National Park -- and no economically rational entrepreneur ever would have grown another. No matter what discount rate it uses, no business can plant a sapling and let it grow for 2,000 years. (3)

America has a mechanism to deal with things that are not well-served by the market. It's called government. Government is the way that we assert the fundamental values of the majority, constrained by the rights of the minority. Government is the realm in which we decide what is dispensable and what is -- literally -- priceless.

For example, we made a political decision that free speech is not for sale.

We made a political decision that slavery -- an economic relationship, once served by a global market -- should be abolished. (4)

We made a political decision that the Tellico Dam was more important than the snail darter.

On the other hand, we made a political decision that the General Sherman Tree (a giant Sequoia – probably the world’s largest living mass – that could have been converted into many thousands of dollars worth of lumber and shingles) was priceless. Even for a million dollars, or a billion dollars, no one can cut down the General Sherman Tree. It is not for sale at any price.

Political decisions, at their core, are based on values. Of course, not everyone shares the same values. If we did, there would be no need for politics.

In the decades following the Great Depression, a broadly-shared consensus developed over certain core values that defined what kind of nation we wanted to be.

For the last six decades, the American economy has been the product of a balance reached between an aggressive, entrepreneurial private sector and a restraining public sector, guided by the consensus that emerged under the New Deal.

The private sector -- when unconstrained -- is prone to various excesses -- things we can see today in scores of early-stage capitalist societies in places such as Indonesia, Russia, Peru, and China. (5)

American politics has tempered these excesses by banning child labor, outlawing trusts and monopolies, standardizing financial reporting, safeguarding occupational health and safety, prohibiting racial and sexual and religious discrimination, protecting the environment, etc.

That balancing act, while flawed and at least occasionally deeply unsatisfying to all the participants, has been a crucial component of American greatness.

Business should not have a knee-jerk reaction against every effort to institutionalize public values. Indeed, well-educated business executives should be leading advocates of the government internalizing all external costs, especially those which diminish a public good or deplete a finite resource.

A Climate of Change

Many businesses have begun to step up to the plate on climate change. Although the President of the United States has not yet caught on, scientific support for the proposition that humans are changing the world’s climate now approximates the level of support enjoyed by the proposition that the Earth revolves around the sun, and not vice versa.

The smartest business leaders are way ahead of the President on this.

DuPont has committed to keep its total energy use flat through the next ten years, to obtain 10 percent of its total energy in 2010 from renewable sources, and to produce 65 percent less greenhouse gases in 2010 than it produced in 1990. Promises are cheap, but DuPont has already held its energy use flat since 1991, and it has already reduced its greenhouse gas emissions by 45 percent since 1990.

BP is now the world’s third largest manufacturer of solar cells – behind two Japanese companies – and an ardent supporter of the Kyoto Protocols on climate change. Whether or not Kyoto is ratified, BP has committed to meeting Kyoto’s greenhouse gas reduction goals for the company.

Shell is forecasting that renewable energy could meet half of all global energy demand by 2050 – a market opportunity of tens of trillions of dollars.

IBM, which has already reduced its CO2 emissions by 20 percent from 1990 levels, has stunningly committed to further reductions of 4 percent a year into the indefinite future. The pledge covers its 30 manufacturing facilities in 14 countries.

Toyota and Honda have leaped ahead of the Big Three again, with efficient new cars for sale in America. Toyota’s Prius has a great sound system, comfortable seats, power everything, and a spacious trunk. My Prius, fully loaded, cost $21,000, and it averaged 52 miles per gallon on a trip last weekend. Honda offers both the two passenger Insight and the larger Civic with hybrid drive trains.

But even the best companies are not putting serious political muscle behind public policies that would internalize the costs of climate change, as Europe and Japan have with their high-priced gasoline. Companies are extremely unlikely to lobby for tough environmental standards, even when such standards would advance their own narrow economic prospects.

The Job of Business Educators

Soviet ministers fought to the very end to maintain an economic system that was divorced from economic realities, and they sowed the seeds of their own collapse.

American business executives are fighting vigorously to divorce their economic system from ecological realities. To the extent that they succeed, they, too, are sowing the seeds of their own eventual collapse. We have to hope that the next generation of business leaders has a broader understanding of their world.

H.G. Wells wrote famously that “Human history becomes more and more a race between education and catastrophe.”

Nowhere is this more true than in business education.

Those of you who are educating tomorrow’s leaders have a responsibility to convince them that it is appropriate and desirable to create a framework that aligns the power of the marketplace behind sustainable values – building an economy that is congruent with the laws of ecology. If you can accomplish that, you will dramatically improve the human prospect.

Denis Hayes is President of the Bullitt Foundation, an environmental philanthropy located in Seattle. The views expressed in this speech do not necessarily represent the views of the Bullitt Foundation or its board.

End Notes

(1) It uses 4-watt-hours per hour, 96 watt-hours per day, and 960 watt-hours -- almost a kilowatt-hour -- in ten days. So it uses about 36 kilowatt hours per year. At 8 cents per kilowatt-hour, the clock will use about $3.00 worth of electricity per year.

(2) 4 watts per person multiplied by 260,000,000 persons equals 1,040,000,000 -- or 1,040 megawatts.

(3) Suppose a company had $10 to invest in the year 1 AD. They could have bought a redwood sapling, planted, nourished it, protected it, and today they would have a magnificent tree. Or they could have invested the same money safely, earning 5% interest. The latter investment today would be worth more than the Gross National Product of the United States. What would you rather own: the United States or one 2,000-year-old redwood tree? How happy would your shareholders be if you had chosen the redwood tree?

(4) Some prominent conservatives opposed to the Emancipation Proclamation, arguing that it violated the "takings" clause of the Constitution.

(5) To see pure capitalism, visit Shenzhen, the glitzy, fast-paced, tough Chinese “special economic zone” about 30 miles north of Hong Kong where business is business. It is like Pottersville in It’s a Wonderful l Life without George Bailey to make it humane or civil.

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