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Jan 29, 2014

Fixing the Broken Compass: Finding Our Way to Natural Capitalism


In 1999, Rocky Mountain Institute co-founder and chief scientist Amory Lovins co-authored a piece for the Harvard Business Review entitled “A Road Map for Natural Capitalism.” It aimed to come up with a new economic model that took the needs of sustainability into account. This article laid out the business logic for solving environmental problems while also generating a profit for the companies involved – true win-wins, in other words.

“The real problem with our [current] economic compass is that it points in exactly the wrong direction,” he wrote. “Most businesses are acting as though people are still scarce and nature abundant… But the pattern of scarcity is shifting; now, people aren’t scarce, but nature is.”

If we are to solve perhaps the greatest challenge that global capitalism has created – climate change – it is essential that we reconcile our prevailing economic model to place more emphasis on the importance of natural capitalism. Here’s how:

The first step is to build pricing signals into the market that reflect shifts in scarcity such as the external factors burdening our natural world. We are already making progress here.

Assigning a price to carbon is perhaps the most obvious – and contentious – way to mobilize market forces to help tackle climate change. It’s interesting that most citizens of developed countries happily pay for trash collection services and don’t refute the need for waste companies to treat their refuse before releasing it into the environment, and yet applying a similar logic to carbon is still seen as controversial. Nevertheless, a number of states are taking a stand, and it’s reassuring to see early experiments in carbon taxes and cap-and-trade schemes in Canada, China, the European Union, New Zealand and on both seaboards of the U.S.

Even without government, recent research from the Carbon Disclosure Project showed that an increasing number of U.S. companies are now placing an internal price on carbon when evaluating potential projects — citing climate change risk. Businesses and investors are calculating their possible returns on certain assets with a notional carbon price in mind, acknowledging that formal pricing is likely to become a reality eventually.

Make no mistake: whether enforced by local government policy, encouraged by a long-promised global deal on climate change in Paris in 2015, the result of prescient corporate planning, or simply in response to an extreme weather event like the one that recently put portions of New York City under 10 feet of water, the march towards putting a hard financial value on carbon emissions is underway and gaining momentum, whatever the critics would like to think.

Increasing the transparency of risk

Pricing externalities like carbon is the surest long-term way to modify corporate and market behavior, but, in the meantime, better acknowledging the investment risks of both established and emerging energy assets can also be a powerful incentive to help repair Lovins’ proverbial “broken compass.”

At an individual project level, investing in energy efficiency projects can offer a bond-like consistency in financial returns, while also mitigating against the ongoing volatility in fuel prices. These assets therefore effectively create a natural hedge against market dynamics. Contrast this situation with a new coal-fired power station, for example, which is not only vulnerable to fluctuating fossil fuel prices but also to the very real possibility that, over the next 40 years of its life, regulatory changes or a punitive carbon price could significantly erode its economic viability — dramatically impairing its current worth in the process.

These are all very rational approaches to risk and valuation, but, increasingly, carbon-intensive assets could also become stranded if investors lose faith in their economic potential. Consider, for example, the current push by college students to make their universities divest fossil fuel investments. If this increasing social push for institutions to shift their portfolios away from these assets gains momentum, fossil fuel businesses may suddenly find themselves facing much higher capital costs, and new investments in carbon-intensive assets could become unprofitable.

This situation becomes even more disconcerting if we consider the potential implications of a single, international carbon budget designed to restrict global warming to within the “acceptable” 2 degrees Celsius band. Such a cap on total CO2 emissions would effectively dictate that two-thirds of the planet’s remaining known fossil fuel reserves should stay in the ground. This in turn would represent a massive balance sheet risk to some of the most powerful economies and corporations in the world. Acknowledging these risks entails not just a punitive discounting approach, but also a dramatic write-off in value.

Letting the market sort itself

As with any revolution, retooling our economy to address the opportunities and challenges presented by natural capitalism will create both winners and losers. New technologies will break through; new businesses will prosper; new skills will be in demand; new rules will emerge; and new fortunes will be made. At the same time, however, there will be losers: certain established technologies will be rendered obsolete; some established businesses will struggle; skills from a previous industrial age may become redundant; old rules will be revisited; and a certain proportion of economic value will inevitably be eroded, even as new sustainable economies emerge to fill the gap. Throughout the process, there will also be a natural tendency to defend the past.

Successfully honoring natural capital means we will need to challenge our instinctive defense mechanisms that defer to the known and the proven. Doing so means unwinding some of those supportive policies and presumptions that have made the current carbon extraction industries and businesses some of the most financially- productive in the world. We will also need to be prepared to write-off established assets that no longer produce true value because of their environmental impact. We will have to accept that formerly great icons of success, titans of an earlier age, may tumble. Ask those who ran mainframe computer companies or former telecoms monopolists about the cost of disruption and paradigm shift. A similar value shift is inevitable in the world of energy as well – indeed, it is already underway, as unpalatable as that thought might seem in certain quarters.

In 2009, Royal Dutch Shell executives Gert Jan Kramer and Martin Haigh argued that new forms of energy take a very long time to become material sources of global power supply. But there are signs that this reality is changing, too. The logic of the past, where growing energy supply generally required massive capital projects with correspondingly long lead times, is being overturned before our eyes.

Solar panels on the roof of a family home require a much simpler capital sign-off process – generally around the breakfast table – than coal-fired power stations or fracking wells; they come in handy, modular, “as needed” chunks; and they can be implemented in weeks, not years. More dramatically, returns on investment in energy-efficiency projects often filter through within months, rather than decades, and these projects are gaining traction everywhere from China’s commercial sector to European and U.S. real estate markets. A single LED lamp is not a revolution – but large-scale roll-out of LED lamps is.

Fixing the broken compass

So, what are the implications of these various trends? The happy reality is that industrial upheaval may already be gathering pace, even without the stick of a high carbon tax or dramatic shift in the perceived risk of traditional, fossil-based investment assets. The largest utility firms in Europe, increasingly brought to their knees by the emergence of decentralized power, were recently forced to beg the European Commission for mercy.

Their balance sheets no longer represent a basis for investments in large-scale energy projects. And their customers are increasingly embracing a future of renewable distributed power, selling energy from one home to another. Electric cars, long the laughing stock of Detroit, Houston and Wall Street alike, achieved a 12 percent market share in Norway last year.

Could it be that a new energy economy, founded on a far more thoughtful and far-sighted approach to managing our planet’s resources, is already emerging? It is certainly a predictable outcome and modern capitalism should take note. Those who design their business models and encourage their industries to embrace this shift should be positioned to prosper disproportionately in a brave new world where natural capitalism reigns.

Image credit: Flickr/Calsidyrose

This blog post originally appeared on Triple Pundit.


Showing 1-4 of 4 comments

January 30, 2014

In Haiti, charcoal is produced. In the Centre province, 21-30% of the income of the poor comes from the sale of charcoal and wood. I suggest that the tax of carbon be set at the thrid world going rate for charcoal. This is not an original thought. Island states will have a conference on sustainability this year. It is sponsored b the UN. If there is a way for Island states to master sustainability, then perhaps there is a way for the rest of us. www.sids2014.org

January 30, 2014

Weaselskin Institute and Center for Conservation Studies
Mahatma Gandhi - "Be the change that you wish to see in the world.”
Conservation is defined as the action of: preservation, protection or restoration of the natural environment, natural ecosystems, vegetation and wildlife; preservation, repair, and prevention of deterioration of archaeological, historical, and cultural sites and artifacts; prevention of excessive or wasteful use of a resource.
The twenty first century arrived when humanity has just begun to recognize our necessity to incorporate conservation into our way of life on this planet. Awareness is always the first step on the long road to recovery from any addictive lifestyle. Many more steps will be necessary to successfully achieve communities planned around conservative lifestyles. Planning derives from education and knowledge. Knowledge comes from research.
Weaselskin Institute is here now researching possible changes while preserving the past all for the benefit of educating the future.
Weaselskin Institute is a charitable non-profit educational and research organization with its mission to foster programs ensuing from:
Wildlife habitat and archaeological area conservation studies
Equine experiential education for youth character and leadership
Athletic and healthy lifestyle promotion and coaching enrichment
Sustainable/eco-protective agriculture and forest product development
Energy research for regional renewable resources
Local - global distribution of knowledge through collaboration

“When you teach a class to a child you open a mind for a day. When you teach a class to a teacher you open thousands of children's minds over a lifetime.”

February 4, 2014

When we closed the door on Nature, did we throw away the key? I say no. When we judge something as 'natural', we imply that certain analogies concerning its structure and function will be consistent with those of other things we consider to be 'natural'. Of course there is a sense in which everything about us is 'natural' as we are as natural as the day is long.

Applying a Natural Remedy to a failing system involves understanding the function of the system i.e. how it is failing, and if it is 'natural'; comparisons on any scale should be true to form. If we consider any economic system to be first analogous to a system in our bodies, for instance; we immediately must hit upon the blood system; which exactly like money, is dysfunctional the minute it stops FLOWING. Therefore to cure its dysfunction-- an elephantiasis-like accrual of money in one place-- we need to transfuse, to massage, to manage the obstacles to flow, like tumors, clots, in short, poor circulation. The blood in the body does play some favorites, at times to the brain go the spoils, as it were; the major organs get their share; but digestion can wait, in a pinch, when running away takes priority. There will be cramps; but no permanent damage, and in general the blood system is egalitarian. Capitalism often is not; and there's the rub. Simple abuse, the equivalent of putting a rubber band around your wrist, explains Capitalism's failure. The 'selfishness' implied in such a self destructive act is not the 'enlightened' kind.

Criminal acts are the problem here; and their perpetrators are not being punished, which has been the source of disappointment and cynicism among the people, who like the other essential organs in the body besides the greedy stomach, are waiting for their share.

February 4, 2014

An Alternative to Capitalism (since we cannot legislate morality)

Several decades ago, Margaret Thatcher claimed: "There is no alternative". She was referring to capitalism. Today, this negative attitude still persists.

I would like to offer an alternative to capitalism for the American people to consider. Please click on the following link. It will take you to my essay titled: "Home of the Brave?" which was published by the Athenaeum Library of Philosophy:


John Steinsvold

Perhaps in time the so-called dark ages will be thought of as including our own.
--Georg C. Lichtenberg

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