Dan’s EcoGeekery

Efficiency Effects

Perhaps, in a small way, efficiency has contributed to our recent economic downturn.

There has been a kind of split personality amongst managers and executives for quite some time. They have been of two minds regarding their internal operations and their external financial entanglements. Borrowing Rushkoff's paradigm of the corporation as fundamentally a manager of debt, the decisions made have been less than ideal because of the different standards used when managing 'external' vs. 'internal' debt.

By internal, I mean that when a company purchases equipment, it doesn't expect to instantly regain the value of that equipment at the flip of the 'on' switch. They plan the purchase with a Return On Investment (ROI) scheme. They predict how much the equipment will cost to purchase and to operate, balance that against how much revenue they expect to generate, and decide if the purchase is profitable enough.

And by external, I mean that the company will sell stocks, take loans from banks, purchase insurance, and make other financial arrangements with third parties to collect capital for operations and fiscal security. So Rushkoff's label of 'managers of debt' seems apt. But they are inconsistent in their management.

Per Amory Lovins, internal equipment is often purchased with very short ROIs requirements while the external fiscal deals can have an order of magnitude longer ROIs. That effectively makes the equipment look like a worse investment when compared to investing in stocks, for example. Which is not consistent with trying to maximize the profitability of the company, since both the external fiscal dealing and the internal operations contribute to the bottom line.

This bias did not arise from intentional neglect or outright stupidity on the part of executives and managers, but rather from a cultural bias amongst the major fiscal decision makers. The same way scientist and engineers as a community look down on mixing with end users, the executives and managers have difficulty seeing a more efficient tool as having the same capability for generating profits that a bit of market speculation might. So they skew their company's spending towards external financial ventures rather than internal investments that might pay off quicker with less risk.

Right now the smart investment money prefers US government bonds over stocks, since stocks are riskier. Which makes internal investments into efficiency much more attractive. The confidence is high, the returns are rapid, and the external fiscal environment favors trimming down.

Some major companies have been proving the soundness of these investments. Lovins' recent debate with an economist (with lots of actual numbers from actual firms) cited profitable efficiencies found at Dow, BP, IBM, GE and Dupont. They are teaching their competitors that going efficient is the best strategy for the near future. But someone is probably losing revenue somewhere along the line. At least part of the billions of dollars of profits he cited must have been a loss to some part of the economy.

An Industry of Inefficiency?

As glad as I am to hear of such wonderful efficiencies and reductions in the carbon footprints of major corporations, I have to consider further: Who is being hurt by this? With less electricity and water being consumed, with less materials entering the waste stream, there must be some companies that are getting less business. Could these companies be said to be part of an industry of inefficiency?

Here in California, we have been proven wise to have been tough on our utilities in the 1970's. We forced them, kicking and screaming, to work under rules that rewarded them for selling less energy to their customers. The power companies of other states work under the old model where they get more money for selling more power, and polluting more along the way. It is not very surprising that PG&E has become the greenest utility in the country, even to the point of lobbying for more efficiency and clean energy mandates.

Relative to PG&E, utilities that rely on coal, for example, seem to benefit when corporations and individual consumers are wasteful. They get more revenue from a wasteful, inefficient customer base than from an efficient one. So they have no interest in implementing new efficiency standards. In fact, their obligation to their shareholders that they maximize profits would seem to require them to discourage efficiency legislation and practices.

I am not saying that there are people who get up for work looking forward to creating some more waste for the sake of sheer malevolence. I am saying that there will be some who will rightly worry when the public thinking of the day turns towards efficiency. The insecurity they feel about their investments, their workplace, or their job will be quite justified as our consumer economy demands a higher MPG rating, as our health care reforms discourage unnecessary procedures, and as the shareholders demand better management techniques.

Amory Lovins used a wonderful phrase when talking about corporations being forced through competition to adopt efficiency practices: "... they will either change their minds or their managers." Maybe the manager whose training didn't include sustainable management techniques might want to educate himself on such methods as a hedge against getting fired some day soon.

And considering how many managers had efficiency low on the priority list, how few executives paid attention to something as lower management as the electric bill, how few employees are even asked to turn the light off in an empty room, one must wonder how much of our economy is based upon waste? As we find our society can't afford the wasteful practices in the face of global competition and global warming, how much of the old investments in the industries of inefficiency will evaporate? What will happen to those who owe at least part of their paycheck to waste?

We should feel some sympathy for those who will be displaced by the sustainability trends. But we should try to give them "a hand up, not a handout" when that demographic is large enough to warrant government expenditures. Let's retrain those coal workers to do efficiency retrofits, install solar panels, or process biofuels. Fewer people will suffer less if we adopt the green practices sooner rather than later. 

We should be expect some real resistance to change from those that invested heavily in the inefficiency industries. They will be willing to devote a significant portion of their investment capital towards preventing the loss of the rest of their investments. But ultimately, our capitalist system will seduce them back towards the industries of growth and profit.

One of my favorite aspects of Amory Lovins' lecture series was the discovery that the fundamental drives of capitalism might happily coincide with the need to reduce civilization's carbon footprint. Corporations and capitalism might be our most effective tools for getting us out of the mess that corporations and capitalism got us into. After all, they are terraforming the Earth without even really trying. Imagine what they can accomplish when they are deliberate and motivated.

Reference:
- Amory Lovins debate on ForaTV
- Amory Lovins 4th of 5 lectures on energy efficiency at Stanford.
- Doug Rushkoff's interview about his new book, Life Inc.