As per the University Grants Commission Scheme of things we teachers have to undergo two refresher courses between promotions. Some of the courses are multidisciplinary like Environmental Science which people from all or any discipline can attend. Well it is not entirely alien to me as I engage Environmental Management as a paper for the MBAs and MHRMs.
So the mandatory paper that I prepared was around the principle that it should be relevant both frm the environemtnal perspective and the Management perspective. Here is the article.......
Environmental Issues: Changing Business Value Perspectives
INTRODUCTION
Business as the applied aspect of Economics puts together the factors of production. They are land, labour, capital and entrepreneuship. While the first three are tangible, the last mentioned is the particular talent of the business man that puts all the other together for achieving the organizational mission and objectives.
The concern for environment is relatively new although awareness of the effects of human activities on the surroundings is not new. Traditional economics conveniently categorized the concern under the term ‘externalities’ and following suit, the firm hoodwinked itself to avoid any cognizance of the environmental degradation that it was causing.
Out of the factors of production, land is the term that comes to mean the environment although in a much restricted sense and the same was rewarded a rent. Labour was rewarded wage, capital was rewarded interest and entrepreneurship was rewarded profit. Although land was rewarded rent, the restricted sense in which the term land was used ignored its real value in its actual expanded meaning of environment.
In addition, the environment actually was treated as ‘the other’ in a mutually exclusive way from ‘the firm’.
To some extent this exclusion was justified in that in the initial days of industrialization, the waste or the environmental impact was minimal and the earth was supposed to be capable of taking up unlimited amounts of the discards of production. In fact historians note that people thronged after the motor cars to get a whiff of the exhaust because anyway it was far better than the horse dung it replaced.
VALUE IN USE AND VALUE IN EXCHANGE
While in the factor market the environment was restrictively valued thus, in the product market there were two types of values; value in use and value in exchange. Among those things that were valued in use but not valued in exchange was air and water according to Adam Smith himself. Modern man knows better; that he can bottle water and appropriate a value in exchange as well but not before he has polluted much of it. Thus we see that the conceptualization of value in the heydays of industrialization was different from the present one.
Further, land was intrinsically valued more as a community denoting location rather than instrumentally as a commodity for exchange.
The commodity aspect came in much later with notions of private property and private rights. Private rights also automatically attached duty upon the title holder to protect, preserve and maintain the land. Much worse was the commons which theoretically being everybody’s were grazed and otherwise used to degradation with responsibility upon none.
Even so there were communities who managed this issue in ingenious ways by creating layers of rights as in the case of country ponds in certain rural villages. There were rights of recreational fishing, annual harvest of fish, drinking water, water for bathing and washing and also as community centres for information exchange. In a similar way, the sacred groves of Kerala often attached to temples served rights limited to worship for the community. The wisdom of preserving a land as forest and attaching religious significance to them so that people dare not disturb them served the environmental interest in a creative way.
THE TRAGEDY OF THE COMMONS
The commons refers to anything that is held in common such as the air, water or a pasture. The human tendency is to benefit from the common, but when it comes to tending the same, since it belongs to nobody and since tending does not give any private gains no one is inclined to do it until enforced by law.
Eventually the benefits are stripped and the common becomes barren. Obviously with lesser populations and self restricted use it would still be possible to gain without much of a destruction but the industrial revolution and massive scale operations changed that.
With the industrial era with its massive scale of use of resources especially energy, the global commons also started getting affected. These include the atmosphere, oceans, space, communication spectrum, the moon, Mars and other future destinations. The global commons is thus a very specific outcome of industrialization and globalization which required responses of a global nature such as the Kyoto protocol and the Montreal protocol. Here again the responses gave different results. For instance the Montreal protocol relating to ozone depleting substances was largely a success since there was a technological alternative and also the substances were confined to the refrigeration and air conditioning industry alone. The Kyoto protocol on the other hand is not so much a success because of its spread into different sectors especially the fossil fuels and in a fossil fuel economy any attempt at mitigation of emissions would seriously affect the economic growth.
FACTOR PRODUCTIVITY AND NATURAL CAPITAL
Factor productivities have the advantage of being calculable. For labour this would depend on whether the operation was labour or technology intensive and could be calculated in terms of manpower cost per unit of production or manhours per unit of production. Contribution of capital could be calculated in terms of cost of capital or return on investment. Contribution of Entrepreneurship was calculated in terms of Efficiency, Profits, Market share, Company valuation, Market capitalization and Equity appreciation. While all these would find their rightful place in the books of accounts and statements, the contribution of environment, if calculated, would be a function of the ecosystem services that nature provides. In fact environmental contribution to production is not a revenue head but a capital base on which all other investments are made. The benefits that mankind derives from nature include provisioning services such as food, timber and water , regulating services such as climate, floods, and disease control, supporting services such as the nutrient cycle and pollination , cultural services such as physical and aesthetic enjoyment, and our community diversity based on geographic and topographical peculiarities. Even this classification of benefits does not provide the clear picture since if there is no environmental capital there cannot be any other investment.
In other words if we want more of wealth at the expense of the earth and eventually if the earth is stripped there is no economy at all. This would mean the realization and recognition of nature as the first capital which was definitely not the case earlier.
A spate of unexpected industrial disasters of a massive scale brought the global communities’ attention to the damage that business was doing to the environment. These were the Exxon Valdez oil spill, Bhopal Gas tragedy, Three Mile Island and Chernobyl nuclear disasters. These also gave rise to ethical questions regarding business itself. Ethics in general refers to the questions of right and wrong especially in as much as someone or society is affected. These disasters raised the question of whether nature or environment itself was to be treated as some ‘other’ or should it be included in the question of who is being affected adversely. Thus these disasters extended the concerns to not only other people but also to the environment in general.
ECONOMIC SOLUTIONS TO THE ENVIRONMENTAL ISSUES
The economic responses to the environmental issues in the true tradition of market forces vs government regulation was the incentive based approach, the private rights approach and the regulatory approach.
The incentive based approach provided rewards for good environmental practices, but the downside were also obvious; the incentives became licenses to pollute, costs were passed on to the consumer and it was difficult to regulate with attached room for corruption.
Property rights necessitated that the pollution be solely and directly felt by those who pollute and in this way discourage and disincentivise pollution in one’s rightful property. But while accountability was an advantage, the problem still remained as when the commons being privatized was problematic. How could air and rivers be privatized!
The regulatory model required enforcement but as with anything regulatory, was disliked by industry. Although the science of global warming was largely agreed upon there were some who treated it not so much in an anthropogenic way, rendering the science insufficient to develop consensus.
THE PROBLEM OF EXTERNALITY
Economics in its march considered certain issues as externalities as collateral effects outside the purview of the discipline. Externalities are defined as any unintended consequence whether negative or positive paid for or enjoyed by the society at large and sometimes even into the future as well. Environmental impacts qualify aptly as the most severe of those negative externalities. In the earlier days, the assumption was that environment was capable of assimilation of any amount of waste. Environmental Externalities were augmented by the fossil fuel based industrial economy and expressed themselves in pollution, habitat destruction, biodiversity loss and resource depletion. These were results of industrial scale activities but did not appear in the expenditure column and the task remains unfinished even today to make externalities into ‘internalities’ at firm level. However, externalities did appear as subtracted from calculations of GNP in a different measure termed Net Economic Welfare (NEW). But they remained at the macro economic level.
ECOLOGICAL FOOTPRINT AND ENVIRONMENTAL IMPACT
Simultaneously another measure termed ecological footprint also developed as an indicator of environmental effects. It is defined as the amount of ecosystem required for human support OR as the amount of environmental demands by a certain population at a certain consumption level.
Similarly, environmental Impact of a country was measured as a product of the Population, Affluence (Consumption patterns) and Technology. This recognized that population alone was not the culprit in the environmental debate but consumption patterns of a society and the technological stage at which the country was as well.
As technology improves to take into consideration environmental performance, this equation might require modification.
BUSINESS RESPONSE
Business approached the environmental issue in different ways. The compliance based approach took on a minimal compliance of various laws or one step further demonstrated the environmental commitment as with an Environmental Management System (EMS) such as ISO 14001.
At a different level, businesses resorted to the measurement of environmental efficiency of a firm in a measure termed Eco – Efficiency. It was defined as a ratio of the Environmental impact per product or service value and considered measures such as the Energy consumption, Water consumption, Greenhouse gases, CFCs and Solid wastes to unit production.
The third and the latest approach is Environmental issue as an opportunity in which Environmental performance is a new parameter of Strategic Differentiation as in the qualifications of a green company, green product, green processes. Further Environmental products , alternate business models such as defining business as service not product, businesses of renewable energy, or plastic degrading micro organisms figure well as trends in business.
CONCLUSION
Thus we see that the earliest approach was one of negligence where environment was left unattended, because nature was abundant. The next approach was to treat environment as commons where when it is everybody’s, it rapidly degraded. Later, environment was merely an externality where economics could not /need not concern.
Still later, environment was recognized as a ‘problem’, because the excesses started becoming obvious. The recognition that the environment was the real capital gave rise to the concept of natural capital.
For business in its lookout for opportunities the ‘environmental issue’ gives a new direction. The general view is ‘if it cannot be ignored can we make use of it’? Still further environment got prominence in design and life cycle of product as against end of pipeline treatment because there is savings in environment. Generally the movement was from environment as necessarily degrading in the march of economic progress to environment as a partner for business and economic development.
In summary, the attitudes of business have undergone a sea change from considering the environmental issue as something to live with to as an opportunity. The general direction of the future would be to take advantage of environment in a way that taking care of environment becomes a good business proposition itself.
-------------------
REFERENCES
Hardin, Garret. (1968). Tragedy of the Commons.
Reinhardt, Forest. Bringing the environment Down to earth
Natural Capitalism, California Management Review.
Industrial Ecology
Smith, Adam. Wealth of Nations
Business and international environmental treaties
So the mandatory paper that I prepared was around the principle that it should be relevant both frm the environemtnal perspective and the Management perspective. Here is the article.......
Environmental Issues: Changing Business Value Perspectives
INTRODUCTION
Business as the applied aspect of Economics puts together the factors of production. They are land, labour, capital and entrepreneuship. While the first three are tangible, the last mentioned is the particular talent of the business man that puts all the other together for achieving the organizational mission and objectives.
The concern for environment is relatively new although awareness of the effects of human activities on the surroundings is not new. Traditional economics conveniently categorized the concern under the term ‘externalities’ and following suit, the firm hoodwinked itself to avoid any cognizance of the environmental degradation that it was causing.
Out of the factors of production, land is the term that comes to mean the environment although in a much restricted sense and the same was rewarded a rent. Labour was rewarded wage, capital was rewarded interest and entrepreneurship was rewarded profit. Although land was rewarded rent, the restricted sense in which the term land was used ignored its real value in its actual expanded meaning of environment.
In addition, the environment actually was treated as ‘the other’ in a mutually exclusive way from ‘the firm’.
To some extent this exclusion was justified in that in the initial days of industrialization, the waste or the environmental impact was minimal and the earth was supposed to be capable of taking up unlimited amounts of the discards of production. In fact historians note that people thronged after the motor cars to get a whiff of the exhaust because anyway it was far better than the horse dung it replaced.
VALUE IN USE AND VALUE IN EXCHANGE
While in the factor market the environment was restrictively valued thus, in the product market there were two types of values; value in use and value in exchange. Among those things that were valued in use but not valued in exchange was air and water according to Adam Smith himself. Modern man knows better; that he can bottle water and appropriate a value in exchange as well but not before he has polluted much of it. Thus we see that the conceptualization of value in the heydays of industrialization was different from the present one.
Further, land was intrinsically valued more as a community denoting location rather than instrumentally as a commodity for exchange.
The commodity aspect came in much later with notions of private property and private rights. Private rights also automatically attached duty upon the title holder to protect, preserve and maintain the land. Much worse was the commons which theoretically being everybody’s were grazed and otherwise used to degradation with responsibility upon none.
Even so there were communities who managed this issue in ingenious ways by creating layers of rights as in the case of country ponds in certain rural villages. There were rights of recreational fishing, annual harvest of fish, drinking water, water for bathing and washing and also as community centres for information exchange. In a similar way, the sacred groves of Kerala often attached to temples served rights limited to worship for the community. The wisdom of preserving a land as forest and attaching religious significance to them so that people dare not disturb them served the environmental interest in a creative way.
THE TRAGEDY OF THE COMMONS
The commons refers to anything that is held in common such as the air, water or a pasture. The human tendency is to benefit from the common, but when it comes to tending the same, since it belongs to nobody and since tending does not give any private gains no one is inclined to do it until enforced by law.
Eventually the benefits are stripped and the common becomes barren. Obviously with lesser populations and self restricted use it would still be possible to gain without much of a destruction but the industrial revolution and massive scale operations changed that.
With the industrial era with its massive scale of use of resources especially energy, the global commons also started getting affected. These include the atmosphere, oceans, space, communication spectrum, the moon, Mars and other future destinations. The global commons is thus a very specific outcome of industrialization and globalization which required responses of a global nature such as the Kyoto protocol and the Montreal protocol. Here again the responses gave different results. For instance the Montreal protocol relating to ozone depleting substances was largely a success since there was a technological alternative and also the substances were confined to the refrigeration and air conditioning industry alone. The Kyoto protocol on the other hand is not so much a success because of its spread into different sectors especially the fossil fuels and in a fossil fuel economy any attempt at mitigation of emissions would seriously affect the economic growth.
FACTOR PRODUCTIVITY AND NATURAL CAPITAL
Factor productivities have the advantage of being calculable. For labour this would depend on whether the operation was labour or technology intensive and could be calculated in terms of manpower cost per unit of production or manhours per unit of production. Contribution of capital could be calculated in terms of cost of capital or return on investment. Contribution of Entrepreneurship was calculated in terms of Efficiency, Profits, Market share, Company valuation, Market capitalization and Equity appreciation. While all these would find their rightful place in the books of accounts and statements, the contribution of environment, if calculated, would be a function of the ecosystem services that nature provides. In fact environmental contribution to production is not a revenue head but a capital base on which all other investments are made. The benefits that mankind derives from nature include provisioning services such as food, timber and water , regulating services such as climate, floods, and disease control, supporting services such as the nutrient cycle and pollination , cultural services such as physical and aesthetic enjoyment, and our community diversity based on geographic and topographical peculiarities. Even this classification of benefits does not provide the clear picture since if there is no environmental capital there cannot be any other investment.
In other words if we want more of wealth at the expense of the earth and eventually if the earth is stripped there is no economy at all. This would mean the realization and recognition of nature as the first capital which was definitely not the case earlier.
A spate of unexpected industrial disasters of a massive scale brought the global communities’ attention to the damage that business was doing to the environment. These were the Exxon Valdez oil spill, Bhopal Gas tragedy, Three Mile Island and Chernobyl nuclear disasters. These also gave rise to ethical questions regarding business itself. Ethics in general refers to the questions of right and wrong especially in as much as someone or society is affected. These disasters raised the question of whether nature or environment itself was to be treated as some ‘other’ or should it be included in the question of who is being affected adversely. Thus these disasters extended the concerns to not only other people but also to the environment in general.
ECONOMIC SOLUTIONS TO THE ENVIRONMENTAL ISSUES
The economic responses to the environmental issues in the true tradition of market forces vs government regulation was the incentive based approach, the private rights approach and the regulatory approach.
The incentive based approach provided rewards for good environmental practices, but the downside were also obvious; the incentives became licenses to pollute, costs were passed on to the consumer and it was difficult to regulate with attached room for corruption.
Property rights necessitated that the pollution be solely and directly felt by those who pollute and in this way discourage and disincentivise pollution in one’s rightful property. But while accountability was an advantage, the problem still remained as when the commons being privatized was problematic. How could air and rivers be privatized!
The regulatory model required enforcement but as with anything regulatory, was disliked by industry. Although the science of global warming was largely agreed upon there were some who treated it not so much in an anthropogenic way, rendering the science insufficient to develop consensus.
THE PROBLEM OF EXTERNALITY
Economics in its march considered certain issues as externalities as collateral effects outside the purview of the discipline. Externalities are defined as any unintended consequence whether negative or positive paid for or enjoyed by the society at large and sometimes even into the future as well. Environmental impacts qualify aptly as the most severe of those negative externalities. In the earlier days, the assumption was that environment was capable of assimilation of any amount of waste. Environmental Externalities were augmented by the fossil fuel based industrial economy and expressed themselves in pollution, habitat destruction, biodiversity loss and resource depletion. These were results of industrial scale activities but did not appear in the expenditure column and the task remains unfinished even today to make externalities into ‘internalities’ at firm level. However, externalities did appear as subtracted from calculations of GNP in a different measure termed Net Economic Welfare (NEW). But they remained at the macro economic level.
ECOLOGICAL FOOTPRINT AND ENVIRONMENTAL IMPACT
Simultaneously another measure termed ecological footprint also developed as an indicator of environmental effects. It is defined as the amount of ecosystem required for human support OR as the amount of environmental demands by a certain population at a certain consumption level.
Similarly, environmental Impact of a country was measured as a product of the Population, Affluence (Consumption patterns) and Technology. This recognized that population alone was not the culprit in the environmental debate but consumption patterns of a society and the technological stage at which the country was as well.
As technology improves to take into consideration environmental performance, this equation might require modification.
BUSINESS RESPONSE
Business approached the environmental issue in different ways. The compliance based approach took on a minimal compliance of various laws or one step further demonstrated the environmental commitment as with an Environmental Management System (EMS) such as ISO 14001.
At a different level, businesses resorted to the measurement of environmental efficiency of a firm in a measure termed Eco – Efficiency. It was defined as a ratio of the Environmental impact per product or service value and considered measures such as the Energy consumption, Water consumption, Greenhouse gases, CFCs and Solid wastes to unit production.
The third and the latest approach is Environmental issue as an opportunity in which Environmental performance is a new parameter of Strategic Differentiation as in the qualifications of a green company, green product, green processes. Further Environmental products , alternate business models such as defining business as service not product, businesses of renewable energy, or plastic degrading micro organisms figure well as trends in business.
CONCLUSION
Thus we see that the earliest approach was one of negligence where environment was left unattended, because nature was abundant. The next approach was to treat environment as commons where when it is everybody’s, it rapidly degraded. Later, environment was merely an externality where economics could not /need not concern.
Still later, environment was recognized as a ‘problem’, because the excesses started becoming obvious. The recognition that the environment was the real capital gave rise to the concept of natural capital.
For business in its lookout for opportunities the ‘environmental issue’ gives a new direction. The general view is ‘if it cannot be ignored can we make use of it’? Still further environment got prominence in design and life cycle of product as against end of pipeline treatment because there is savings in environment. Generally the movement was from environment as necessarily degrading in the march of economic progress to environment as a partner for business and economic development.
In summary, the attitudes of business have undergone a sea change from considering the environmental issue as something to live with to as an opportunity. The general direction of the future would be to take advantage of environment in a way that taking care of environment becomes a good business proposition itself.
-------------------
REFERENCES
Hardin, Garret. (1968). Tragedy of the Commons.
Reinhardt, Forest. Bringing the environment Down to earth
Natural Capitalism, California Management Review.
Industrial Ecology
Smith, Adam. Wealth of Nations
Business and international environmental treaties
No comments:
Post a Comment