Valuing the Planet: The Role of Economics
Green supply
Corporations seeking to go green have their work cut out for them. Executives face the constant pressures of The Street to achieve profit targets—and profits increase when operating costs are low and sales high -- two things that have historically worked against green production. For many companies, changing the game now to focus on green products would require massive financial commitments and carry tremendous risk. Years of product development, economies of scale, and process innovation have created a set of environmentally-unfriendly mainstay products and processes that can’t simply be abandoned now that people have watched An Inconvenient Truth. So it’s easy for businesses to perpetuate the sustainability issue with lower-cost, non-green products as they seek a return on their investments. For many companies, financial success means continuing business as usual, regardless of the effects on the environment.
In some cases however, companies have proven that green marketing can pay off. GE’s widely known Ecomagination campaign, which promotes sales of eco-friendly products, crossed the $14 billion mark in 2007. Even better, GE raised its 2010 revenue forecast for the effort from $20 to $25 billion. Green products and services are finally starting to show they can be a true source of retail value.
At the same time, natural scarcities and rising costs are changing the playing field for operations, as well as sales. As the cost of oil has climbed steadily, so has the cost of production, transportation, and operations. As COOs search for ways to reduce expenses, energy consumption has taken the spotlight—not as a ploy to entice consumers, but as a real tactic for cutting costs. While marketers may claim that real change was the goal all along, the term ‘greenwashing’ was coined long before oil reached $100 per barrel. The reality is that in the current economy, going green is fast becoming a business necessity.
The mobile telecommunications industry is a great example. Due to the rising cost of energy, collective operating expense across worldwide networks is expected to top $22 billion by 2013. In fact, some carriers in Africa report energy rates as high as 50 per cent of their total operating costs. Going green is rapidly becoming an essential business strategy, and carriers are asking infrastructure providers to develop more energy-efficient equipment. As a result, the average power consumption per base station per year is expected to drop by 10 per cent in the next five years alone. Unfortunately, such improvements in efficiency are overwhelmed by subscriber growth—but it’s a step in the right direction.
Green Demand
Consumer needs and desires can be just as powerful as those of business in determining the direction of the open market. Thanks to prominent media coverage and the rise in green marketing (regardless of motivation), more people than ever are factoring environmental impact into their purchasing decisions.
Unfortunately, being green is expensive, making a green lifestyle something of a luxury item. Buy a hybrid car; pay a premium. Buy a compact fluorescent light bulb; pay a premium (at least up front). Buy wind power; pay a premium. In times of economic prosperity, people can afford to pay more for discretionary features such as eco-friendly ingredients. With extra dollars to spend during the early 2000s, many Americans felt free to fulfill their sense of growing moral obligation to the environment. In a February 2008 survey by DoubleClick Performics, 45 per cent of respondents said they would pay at least five per cent more for environmentally friendly products.
But national fiscal health has obscured the core of true sustainability—the idea that everything comes with an environmental tradeoff. Today, as an increasing number of citizens are struggling to fill their tanks at the pump, the average family simply can’t afford to offset its carbon by paying for credits on an obscure website. A price-sensitive family has a much harder time buying green products if it is struggling to pay for groceries.
Sadly, just as the energy crisis stimulates green thinking on the part of corporations, it can tighten green spending on the part of consumers. For most of the world’s population, price is—and will continue to be—the most important consideration when making a purchase. And for now, green products are still simply too expensive to be ubiquitous. Unless relative costs come down, green products will be nothing more than a fad with compelling media coverage.
Even if green products become affordable, there are still other elements of demand that must be addressed. All too often, consumers fail to account for the long-term human benefit of green products—making it easier to spend that extra five dollars on something more immediately rewarding. Long-term environmental results are hard to communicate in a society with a short attention span and a need for instant gratification. Education will be the key.
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