This January, thousands of economists descended upon the city of Denver in what could be one of the greatest concentrations of power in the nation outside of Washington DC: the American Economics Association's annual meeting. The meeting's attendees have advised and educated a great many leaders of the world's most important nations, corporations, and financial institutions.
While throngs of economists sampled downtown's finest hotels and restaurants, I reckon that I was the only one who ventured to Stapleton - a grey industrial zone that's flanked by a SuperFund site to the north and the I-70 to the south. I went to Stapleton to understand the movement toward socially responsible and environmentally sustainable business, an economic phenomenon that has captivated popular attention but has yet to penetrate the consciousness of the economic thinkers who were about to convene at the downtown Sheraton.
I visited a local entrepreneur named Scott Leopold, who heads the Leopold Bros. distillery along with his brother Todd. With a background in both environmental engineering and business, Scott's vision for the distillery integrates environmental conservation into the most basic principles of doing business - minimizing costs and delivering a quality product to the consumer. At the company's earlier incarnation as a brewery in Ann Arbor, Michigan, Scott engineered a brewing process that brought the volume of waste water from ten glasses down to one glass per glass of beer. Improvements like this have myriad benefits to municipalities that have to pay for water treatment, to the quality of drinking water for residents, and to wildlife affected by water pollutants. But they are also just good business, an approach he calls "Grain to Glass."
Under a simplistic economic model, competition automatically drives firms to adopt all practices that maximize profits (and minimize costs). Under this view, the notion of a movement for environmental evangelism scarcely makes any sense. There would be no role for academics to meddle in the nitty gritty of business operations, and we would have nothing of value to tell managers that would help them run their companies.
But what if competition worked in an entirely different way? Not as a one-dimensional race between firms selling identical products at the lowest price possible, but one in which firms muddle their way toward scarce plateaus in an infinite-dimensional product landscape. In this world, even seemingly indistinguishable handles of $10 bottom-shelf vodka may mask vastly different production processes. In an economy where imperfect knowledge and imperfect leadership are pitched against continual changes in technology, competitors, and consumer tastes, there is room for firms to leave money on the table while still maintaining a niche in this fearsome ecosystem.
The latter view squares with a much-publicized 2008 analysis by McKinsey & Company stating that the United States could reduce its overall greenhouse gas emissions by 1-2 gigatons per year (up to 28% of 2005 levels) while saving money in the process. On a much smaller scale, I conducted studies of my university campus during graduate school demonstrating that five-figure reductions in annual energy costs could be achieved by simply turning off the lights at night in a single building. As it turns out, Scott Leopold himself tackled these very issues during his previous career as environmental engineer advising Fortune 500 firms how to save money and conserve resources at the same time. By all indications, the potential savings are real.
After hearing about the tenfold reduction in waste water at the brewery as a result of his engineering efforts, I asked him whether his innovations were being widely adopted throughout the industry and his views on the biggest barriers to such adoption. While he said that the Leopold Bros. has successfully passed on many of its sustainable practices to other brewers and distillers, the industry still has a long way to go, and many inefficiencies persist.
Implementing these practices requires the rare combination of environmental engineering expertise and master craftsmanship that are possessed in abundance by the brothers Leopold (Todd has a degree in brewing and apprenticed in Germany), but few other outfits in the alcoholic beverage industry. Knowledge, as economists say, is a public good - once an idea is created it can be used by everyone. But it takes time and effort to disseminate and a great deal of ingenuity to implement. In practice, lack of awareness and expertise can severely limit the pace of innovation adoption. Even socially-minded entrepreneurs like Scott Leopold who want others to follow in their footsteps are not nearly enough to bridge the knowledge gap.
So what can we do to hasten the marriage of environmental and economic efficiency?
Challenges for consumers
The best way for consumers to push for sustainable practices is to reward businesses that adopt them by purchasing their products. But given the scarce and often misleading information about corporate practices, figuring out how to vote our values with our wallets can be even harder than doing so with ballots.
From his experience both as an environmental engineer and with Leopold Bros., Scott Leopold warned that appearances can be deceiving. Many companies that use resource-efficient practices don't advertise them at all, and many that tout green credentials don't even take the most basic measures to back up their claims.
Thus, in my view, the most important thing consumers can do is to educate ourselves. I find a few trustworthy resources like GoodGuide.com and The Green Lantern and use them as starting points to cut through the misinformation morass.
Buy the best products you can based on the information you can find, and keep revising your purchasing behavior as you learn more.
Challenges for business
An alarming number of business leaders are still asleep when it comes to combining conservation with good business. Some may even find this concept ideologically repellent.
Using McKinsey's emissions report and experience from pioneering firms like Leopold Bros., it's not hard to identify broad categories of profit opportunities. But changing the nature of an organization so it can take full advantage of these opportunities may require sweeping and painful changes that cut across finance, operations, marketing, and corporate culture. Some businesses will no doubt find themselves incapable of such change, but those that do will be better positioned to succeed.
Challenges for academics
I think a big role for academics to play is to bridge the knowledge gap between the industry leaders who can identify and implement cost-cutting environmental practices, and those who lack the awareness and expertise to do so. After all, our own forte is to produce, codify, and disseminate knowledge.
On a purely academic level, the failure of economic efficiency when it comes to resource use presents many good research opportunities. What are the factors that mediate the spread of innovation? What frictions prevent inefficient firms from being driven out of the market? What frictions prevent profitable investments from being made inside firms? What is the role of individual managers in promoting efficient and inefficient corporate practices?
Perhaps future AEA meetings will show that studying conservation can make for good economics, just as practicing it makes for good business.
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