Let me put this bluntly, right from the start, so that the message is clear: to call money spent on the environment a cost, when spending that money results in even more money coming back to you, is wrong. At the very least, it is a sloppy use of language. At worst, it is irresponsible, in both economic and environmental terms.
And yet, when it comes to the environment, people still make this basic error all the time.
Yes, I am on a soapbox. I am on a mission. I want to change the world, in this one specific way. And I want you to help me.
Here is what I ask to do: Read the following examples, commit them to memory, and whenever you hear or see someone using the phrase "environmental cost" inappropriately, offer them a gentle correction. Or a firm correction. Or, if you think this is what they respond to best, offer them a derisive sneer and say, "My, you obviously skipped a few days during your introductory course in economics, didn't you?"
Because the world is now brimming with proof that very many expenditures to keep our environment cleaner, help prevent climate change, and otherwise save our hides (as well as the hides of other creatures) are also profitable. Very profitable indeed.
The German Government has discovered that its policies and investments in reducing greenhouse gas emissions have had "zero negative effect" on the economy ... while producing 450,000 new jobs. It takes the smallest of logical leaps to realize that if nearly half a million people went from being on unemployment to paying taxes, the government's investment in reducing climate change will earn it billions of dollars.
Toyota Japan, in its "Environment and Social Report 2004," reported spending 201 billion yen on "environmental costs." A few pages later, in the same document, they reported on the impact of those expenditures among consumers. It turns out that Toyota's good environmental reputation resulted in 260 billion yen in additional purchases from consumers, who chose Toyota over the competition for green reasons ... which means that Toyota is making roughly a 30% return on its "environmental costs".
Writing in the Washington Post, Climate Group co-organizer Michael Northrop reported that six major companies -- IBM, DuPont, BT (British Telecom), Alcan, NorskeCanada and Bayer -- had each reduced CO2 emissions by at least 60 percent since the early 1990s ... and collectively made more than $4 billion in the process.
A study of buildings in California discovered that the average "premium" (that is, "extra cost") for a building to meet "green" standards was about two percent. That is, a green building "cost" two percent more than a non-green building. But the result of that additional two-percent outlay was a financial return of up to ten times the "premium", when impacts like lower absenteeism and higher worker productivity were figured in. Even if you took out these softer, harder-to-measure impacts on the workforce, and just looked at water and energy bills, the return on this additional outlay was still averaging fifty percent. In other words, building your building "green" can earn you between 50% and 1000% returns on the investment.
So I ask you: Why on earth do we allow high-return investments like these to be framed as "costs"? I propose that doing so should actually be considered a serious accounting error. Failure to take advantage of such obvious returns on investment is nothing more than bad management, and should cause boards of directors to worry about their fiduciary responsibility and lawsuits from shareholders.
I could go on -- and on and on -- but I want to keep this column below 750 words. If you need further proof, see The Natural Advantage of Nations, a scholarly compendium of analyses and case studies on the competitive advantage to be gained from sustainability. This book should now be required reading for all students of management, policy, and economics.
That means everyone should read it, because when it comes to managing the earth profitably and sustainability, we are all still students in these matters -- including those of us who profess to be professors and professionals.
So, please, join me in fighting economic illiteracy among people who really ought to know better. Ban the word "cost" from describing anything green and sustainable that actually makes money. And spread the word: investment.
This column originally appeared in The AtKisson Report of 14 April 2005. Sources listed separately there.
But how many more Hummers have been sold?
It is a cost if the money that comes back comes back to someone else...
Jolly good rant!
Accounting illiteracy is being committed, for sure, but it's the article that's got the problem. All expenditures are costs. Not all expenditures result in net costs. If you can build a building for yourself that results in net savings due to efficiency, to not undertake those expenses is simply irresponsible as long as the cost of the additional capital does not wipe out those savings.
Essentially, the right-wing argument "against environmentalism" has always been that where the cost makes sense, that is it brings back a net profit, it will be undertaken without the need for legislation and where it is a net cost, the expenditure should not be done at all because other, better things would have been done with that money.
I'm all for an educational campaign that spreads the knowledge that certain environmental expenditures can lead to a net profit (spending on LED lights is a great example). I believe, though, that the legislature is a lousy way of doing such a campaign and imposes its own, usually hidden, costs that make environmental expenditures more expensive than they otherwise might have been.
I get the idea you're trying to communicate - that money spent for "greening" often leads to more money coming back over the long term - but technically speaking, pretty much everything in a business can be boiled down to income and expenses (ie, costs).
And one could make an argument that all expenses are invetsments, since the idea is that you spend money to make even more money. For example, advertising expenses - it's an invetsment in future customers. Cost of goods sold - that's an investment in future sales of the products. And so on.
Let's not make errors in using accounting terminology ourselves by saying that costs aren't costs just because those costs lead to income. Most costs lead to income one way or another - that's the point of spending the money in the first place.
Also as someone who looks at "green" tech alot I must note that alot of bottom line denoted people are also waiting because the tech is getting cheaper and it makes sense to wait if it will save you money to do so.
Joseph, just a note -- one of Alan's points is that, at least with some of the examples, the payback isn't a "long term" result, but something much faster.
Wintermane, the wait or act problem is something not limited to environmental technology; it's a condition of every fast-moving situation. It's true that waiting will nearly always mean better technology at lower prices -- but that's true for computers, too. In the early days of the computer boom, some companies were paralyzed, not wanting to get locked into immediately-obsolete technology when something even better was right around the corner. Something even better is always right around the corner; the trick is seeing clearly when the benefits of acting outweigh the benefits of waiting. What Alan is arguing, I think correctly, is that the benefits of waiting are often overstated, and of the benefits of acting are often underappreciated.
Joseph, just a note -- one of Alan's points is that, at least with some of the examples, the payback isn't a "long term" result, but something much faster.
True, but it still doesn't change the fact about basic accounting and financial terminology.
"Cost" and "investment" aren't mutually exclusive terms, but from an accounting perspective, you need to track your costs (expenses) without regard to any return they may or may not create.
I guess my main suggestion is to focus on the framing argument - ie, emphasizing the fact that extra expenses incurred upfront for a "green" approach will often reap greater rewards eventually, whether short- or long-term. If one says "If It Makes Money, It's Not a 'Cost'!", then one is actually stating a falsehood or simply demonstrating a misunderstanding of financial and accounting nomenclature.
One of my favorite examples are the terms "debit" and "credit". Their conventional meanings are the ones that people understand perhaps from their bank statements or credit card bills -- a debit means an expense or additional debt, a credit means a charge-back against one's outstanding balance. But in financial accounting, "debit" merely indicates the left column and "credit" the right column in double-entry accounting.
To give an example of counterintuitive terminology:
When a client pays off a bill, the accounting transaction would be to debit (or add to) Cash and credit (or subtract from) Accounts Receivable. Both Cash and Accounts Receivable are Assets, which on a Balance Sheet are on the left side.
But if something is a Liability or Owner's Equity, which are on the right side of a Balance Sheet, a credit would add to a balance and a debit would subtract from it -- the opposite of Assets.
In classical microeconomics (our reigning sophistry), one would compare marginal benefit to marginal cost, in real dollars. A real world example is "greening" a building. Most people ask, "What's the payback?" That's the wrong question. There's a stream of payments involved with owning and operating a building, i.e., mortgage payment, fuel bill, maintenance, etc. If I have to increase the mortgage payment by say, $500 a month, for energy efficiency improvements, but I decrease the energy bill of the building by $600 a month, then it's rational to do that. Marginal cost is less than marginal benefit. You would keep making decisions this way until marginal cost exceeds marginal benefit. In these terms, Alan is saying that it's not a "cost" when there's a net benefit - it's exactly that - a net benefit.
In these terms, Alan is saying that it's not a "cost" when there's a net benefit - it's exactly that - a net benefit.
Yes, but he's pulling the use of the term "cost" (and critcizing it) from companies making statements about their finances, and they are using the term in an accurate sense. The Toyota example he mentions specifically uses the term "environmental costs" but puts it in context of the benefits that accrue, as well as separating what they consider maintenance expenses from "investments".
If I pay $100 for materials and labor, that is an expense of $100. If I then sell the product of that material and labor at $150, then I have revenue of $150. If I sell the product at $75, then I have revenue of $75.
In the first case, I make a profit. In the second, I have a loss. In either case, the expense still exists, independent of my revenue.
Joseph, with all kindness and respect, I think you're clinging to an argument that has little bearing on Alan's main point - the cultural perception that sustainability efforts are mostly "costs." Alan isn't dissecting a spreadsheet; he's trying to challenge a cultural meme. Neither expenditure nor profit matter in isolation - it's the ratio that matters. That was Alan's point.
I deal with this practically every day in my work, which is environmental architecture. I have to work hard to overcome deeply held prejudices against expenditures for "green" features. (There's never any concern about expenditures for trophy kitchens, multimedia centers or walk-in humidors, mind you.) I have facts on my side, and most clients usually, eventually see this. But they're often surprised to learn that investing in a high-performance building provides them with a better rate of return, at much less risk, than say, the stock market. I have facts; they have a bias that spending money on sustainability is a "sacrifice.". That's what Alan was challenging in his essay.
Costs are costs. A Dell computer costs me $500, no matter how much money it makes me. Any expenditure is a cost, that's just the way accounting is done.
If you want to change the world, always ask people "Ok, what's the return?"
People aren't used to thinking of environmental costs as one that provide returns, but they obviously can be. Ask them what the return is.
I believe that even using the economics nomenclature it is proper to still think of "costs" and "benefits" and to make sure that you keep them seperate. Sure, you might end up with a net social benefit, but it is important to make note of what you are giving up and what you are gaining.
You should do your homework. German unemployment is at a post war record high, the economy is chronically stagnant and common perception is that ridiculous anti-nuclear, anti-energy, anti-technology policies are the problem rather than the solution. "Environmentalism" comes with a heavy social cost - it is not profitable.
and common perception is that ridiculous anti-nuclear, anti-energy, anti-technology policies are the problem rather than the solution. "Environmentalism" comes with a heavy social cost - it is not profitable.
1) "Common perception" does not constitute proof. In fact, it is frequently incorrect.
2) Germany is dealing with a host of changes that have little to do with its environmental policies.
When you actually can make a reasoned argument based on empirical data, please check back with us.
joseph's arguments are right on and i appreciate his persistence because there's nothing worse than debating with an anti-environmentalist and getting stuck on issues like this. it makes you appear brainwashed by environmentalist propaganda when you argue against very basic definitions of common terms. they love to attack and exploit this sort of thing and show you how blind you are to the truth.
the article claimed at the very beginning, "At the very least, it is a sloppy use of language. At worst, it is irresponsible, in both economic and environmental terms."
this is false and a disservice to environmentalists who attempt to preach beyond the choir. i understand the intent of the post and agree it's a good premise. you may think it's only semantics, david, but if you were to sit down with businessmen arguing tooth and nail against taking environmentally positive steps, statements such as these would kill your credibility.
Hijiki, thanks for your comments. You're helping me see that it's good to use accurate terms, especially if we're to make convincing environmental arguments. I'll bet that Alan will agree to more precision in his language, but his central point still stands, and I think it's more than a matter of semantics.
I sit down with business people all the time, and factually demonstrate that high-performance buildings generate a positive cash flow for them. I have a Master's Degree in Economics, which helps me speak their language. I often encounter an attitude, an ingrained assumption that investments which improve environmental performance are "too expensive", "have no payback", "are an unnecessary cost", etc. This form people who emphatically DO NOT ask about the paybacks for mahogany conference tables, executive wet bars, or other, non-environmental, "features". (Of course I'm speaking tongue-in-cheek here - I don't do projects with those "features".) There is an ingrained bias that environmental investments aren't economic, when they very often are. There's also an ingrained bias not to apply the same economic calculus to other aspects of a business, a home, a neighborhood, a school, etc.
To me, Alan is saying - let's make the case for the economic benefits of environmentalism. Let's insist on public discourse including "net benefits" of environmentalism, not just "costs." You and Joseph are, admirably, holding out for precise language. Well, let's apply that standard to the typical public discourse of environmentalism, which often has imprecise and incomplete language. Because we can - the facts are on our side, as Alan points out with example after example.
yeah, i think most of us agree on what alan and you are saying and that it's all good conceptually. we're just pointing out the importance of paying attention to those technicalities so we don't get discredited from the start by saying something like 'it actually won't cost you a thing'. people will listen more to consultants than to salesmen.
and i do wonder about some of the examples... take germany since it was brought up. the claim is that anti-global warming initiatives created 450,000 new jobs. that's a lot of jobs...can it be accurate? how direct is the attribution? how many fossil-related jobs were lost in the same period? the source article is very wishy-washy, not to mention a questionable source, and alan's paraphrasing lost much of the unsuredness of the original article (ie. he dropped the "estimated" and "thought to have") and then he claims this automatically equates to a windfall in income tax revenue.
personally, i don't care much about any of that... i think the planet is more important than the economy, but my free-market loving neighbors won't listen to that. as much as i want to believe this info, if i pull out stats like these, i would get laughed off stage. i'm not arguing that green options aren't profitable but if we want to reach people who reject these ideas then i think we need to dig deeper and make those stats and technicalities bulletproof.
i apologize for being the devils advocate but there are so many real life devils that i end up debating this stuff with.
I appreciate the interest in this piece; apparently my attempts to be rhetorically provocative obscured focus on my principal points, for some people.
Let's first acknowledge that there is an important difference between the formal language of accounting and the common way in which certain accounting terms are used. "Cost" means one thing to an accountant, and something else to most other people, including business people.
My key message is the central importance of how expenditures on sustainability get framed, especially in those cases where there is a proven return, and especially for the general public (and I include there people like city council members and, yes, business people, with whom I have not experienced a loss of credibility, so far as I know, in making this argument). The word "cost" (and similar words like "premium") frames these expenditures as extra economic burdens, in the minds of most listeners, regardless of where they show up on a chart of accounts. The framing obscures -- or even appears to negate -- the fact that those expenditures are practically guaranteed to have a positive effect on the balance sheet. That framing is inaccurate, and certainly doesn't help proven money-savers and money-makers to get adopted.
-- Investment, in common parlance, is a better framing word -- the word by which to introduce these expenditures to people. It compares them to, say, money you use to buy a certificate of deposit that provides you with a guaranteed rate of return. That kind of placement of money is not a "cost" by any stretch of the accounting imagination, though the money is tied up for a while.
Sure, to answer Willemsen, lots of expenses, like adverstising, can get "framed" as investments ... and they very often are, especially by the people selling those services, often with far less empirical evidence to back up their claims.
Yes, the "premium", say, for a green building obviously shows up on the cost side in the accounting for that building. (Technically, it is not a cost, but a "capital expenditure"). Money goes out to buy the super-insulated windows, for example. The problem is that the money that later did not go out in terms of energy expenditures -- the savings, or the "return on investment" in superinsulated windows -- does not show up anywhere in books of the project. Savings realized are only "realized" -- that is to say, the actual people involved have to think, and realize that they have saved X% over time. It doesn't appear anywhere in the bookkeeping. That's a big part of the problem we're facing ... and the reason that framing is so important. Framing determines how people think about it.
I'm sure a few folks will continue to take issue with my explanations, but I hope these are at least a bit clearer. I am quite confident that you face no risk of credibility loss by telling a business person that spending 2% more to make a building "green" should be considered not as an additional cost, but as an investment, with an almost guaranteed rate of return. The numbers will back you up.
But practice your framing beforehand, as you will lose credibility if you tell someone at the end of the day, or the financial year, regardless of whether it returns a positive return, a cost is a cost, unless it's a capital expense, then it can be amortised, but you might not see a positive return on investment because savings aren't realised unless they're realised.
I reckon Alan should write a new song on this - it's as muddier than exponential growth. Silly comments aside, the following point of Alan's is an important one which I'm taking away:
the savings, or the "return on investment" in superinsulated windows -- does not show up anywhere in books of the project. Savings realized are only "realized" -- that is to say, the actual people involved have to think, and realize that they have saved X% over time. It doesn't appear anywhere in the bookkeeping
A business could realise this by doing a quick n dirty cost-benefit-analysis, but probably need to be prompted (pushed) to think about in. Savings lack the sex-appeal of revenue, but they do assist profits which are even sexier!!
we agree on the premise of reframing the debate. i understand and agree with your key point and think it was well focused. it's your suggestion on how to use this strategy that isn't as absolute and may be flawed. by all means, we should reframe the debate using beneficial terms such as 'investment' instead of 'cost'... george lakoff has demonstrated this beautifully. but if i try to correct an opponent's usage as you suggest, i lose credibility (since my redefinition is arguably inaccurate) and i expose my strategy and then the debate gets derailed into an argument over words and the real debate goes nowhere.
as i'm sure you know, neocons use this technique effectively, but maybe the key is to do it without looking as if you're changing the terms? for example, imagine if g.w.bush actually came out and said, "senator kerry, you need to call this a death tax instead of an inheritance tax" and proceeded to explain why. would people be persuaded as much as if he had just started using the term on his own? by not calling attention to the word switch, he succeeded spectacularly.
so i think changing the words when you speak is an excellent suggestion, but telling your antagonists that that's what you're doing and asking them to follow along might not be such a great suggestion. maybe the difference is in how ideologically entrenched your opponent is.
Businesspeople weigh return and risk. Junk bonds return more than AAA bonds, but are riskier. It's important to stress both. "Sustainability" is often a new mode of thinking - therefore "risky". (How sad that slow, collective suicide is seen as "safer".) Every time you demonstrate the track record and demonstrated performance of a "Green" innovation, you're helping to "reframe" the issue. One reason that "Green" building is taking off is because there are now enough examples, with proven records. I think the same thing will happen with hybrid cars.
David Foley remarked:
``"Sustainability" is often a new mode of thinking - therefore "risky". (How sad that slow, collective suicide is seen as "safer".)''
This seems to be true of most any new mode of thinking. The idea of having a risk management plan has until recently been considered a cost with no benefit, and the idea of using financial risk transfer instruments to handle the risks of doing business on the Internet is still strange and new to many if not most business people. It's much easier to continue trying to rely on firewalls and monopoly software, even though both have been demonstrated to be inadequate.
Reframing the debate is a fine idea. Doing it without setting yourself up for a derailed argument via your wording would be even better.
And here's a suggestion for somebody to convince.
Jack Stack, relatively famous and articulate business writer, who seems to be doing an annual series of open letters to the president in Inc. magazine, in the most recent of which he repeated the usual canard about environmental requirements having to be balanced against economics:
Note that I'm not saying it's not possible for there to be a bad environmental law that produces economic damage; such a thing could happen. My point is that he assumes that that's usually the case and cites a few examples without any economic analysis to back up why he thinks they illustrate his point.
Maybe a somebody from Worldchanging could write to him, or even debate him....
How do you sell something that is almost invisible?
"Saving" energy is invisible to most people. The cost of this "saving" is very visible. If a building cost 5% more, the cost is very visible and immediate. The savings only occurs in the future. Most people are oriented towards the present, the future will somehow take care of itself. I spent an extra 4% on insulating my house and have saved this cost many times. I have tried to explain it to many people and only a few seem to understand it.
Keep trying to explain it. Try different explanations with different people.
Thinking about renewables in terms of "payback" has been a bone of contention in the field for at least 25 years.
Solar energy has no cash flow. That is one reason why it is viscerally opposed by some people. They can't see a way to make money on it because there's no monthly bill. It's the same thing, or was, with financing for windmills and mortgages for homes that include energy efficiency above and beyond the building code.
The bald fact is that we have always been a solar society. We will always be a solar society. Every single human being is solar powered. We just don't count the calories or btu's that come from the sun. The sunlight falling on the fields and gardens that feed us are on the order of at least three times the total annual energy budget but nobody is entering them on the bottom line.
Last time I looked, agriculture was the third highest user of energy, about 3% of the total, after oil and chemicals and steel production. That agricultural percentage counts only the energy that goes into the tractors and combines, the fertilizers, pesticides and herbicides, the transportation and processing. Not one ray of sunlight that goes into photosynthesis counts. That's a free good, isn't it?
Your first source provides no evidence that 450 000 jobs have been created by policies to reduce greenhouse gases, it merely asserts it. Moreover, even if some jobs had been created because of greenhouse-reducing policies, you would need to show that these jobs are not being paid for by the government, otherwise your assertion that the government earns money from their taxes is false, because in fact the government is losing money by having to pay for their salaries from tax revenues.
And even if the government is not paying for them, you would need to show that the people who have supposedly got new jobs as a result of anti-greenhouse policies aren't people who would probably have got jobs anyway somewhere else over that time period, in which case (i) the government would have got the tax revenues anyway, and (ii) these people may have worked in jobs that would have added more value to the economy.
The Washington Post article you refer to is dubious.
"[Britain] aims to produce 10 percent of its energy needs from renewable sources, primarily wind, by 2010. And it hopes to raise this to 20 percent by 2020. The cost of this transition has been insignificant."
False. Wind power has proved to be vastly more expensive and inefficient than traditional methods of generating power, and has in addition created a huge controversy over the fact that large amounts of land have been disfigured by wind farms.
"Britain's lowered emissions and improved economic growth can be attributed in part to an impressive decrease of 42 percent in CO 2 emissions intensity".
No serious economist would attribute Britain's improved economic growth to the reduction in CO2 emissions, even in part.
"Through manufacturing modifications, however, Lafarge has lowered emissions of greenhouse gases nearly 11 percent from 1990 levels. At the same time, Lafarge is realizing significant cost savings and strengthening its future competitiveness."
Do you really think this is adequate evidence? Did the cost savings come from lowering greenhouse gas emissions? In what ways has the company become more competitive? In what way is its future competiveness related to its anti-greenhouse policies? This sounds like typical hyped-up company waffle to me.
I'm not saying that reducing carbon emissions can't be a good idea in itself, and I'm not saying that it can't make economic sense (and constructing green buildings does often seem to be a good way to go), but there's little in your article that convinced me.
We human being really crualist animal. We are only responsible to destroying our envoroment. Iam staying in India here people are so lazy they are destroying the rainyforest but no one raise a single tree.Main culpirt of destroying the forest are white people, one of the thinker rightly wrote ,that white people are curse to mankind. From eighteen century white people evade all over world and destroyed all rainyforest. Now there is duty of every white man to give compansation to world paying every day one doller for improving the enveroment
One of the writers notes that a cost that does not return income to the expender of the cost is still an unbalanced cost (my term). Value returned to someone else does not balance the cost to the spender. That is why we have rules, laws, and regulations, so that the value which may accrue not to the spender of the cost but to society, can still be properly accounted for. It is properly acocunted for by requiring that everyone (for example) not pollute the atmostphere. The benefit is not to the factory owners, but to those who do not now have to breathe polluted air. So society is the better off. This only works if *all* factories are required not to pollute (ie. a level playing field).