The Economics of Sustainability

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The Economics of Sustainability

An Interview with Environmental Defense Fund Economist Gernot Wagner
March 26, 2012
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    In This Interview
    Gernot Wagner, Economist, Environmental Defense Fund


    Bachelor’s degree in environmental science, master’s and PhD in political economy and government, Harvard University

    Master’s in economics, Stanford University

    Career Highlights

    Economist at the Environmental Defense Fund, 2008 – present

    Adjunct professor of energy economics at Columbia University’s School of International and Public Affairs, 2011 – present

    Peter Martin Fellow at The Financial Times, 2007

    Consultant at The Boston Consulting Group, 2007 – 2008


    Gernot Wagner is an economist with the Environmental Defense Fund. In his book But Will the Planet Notice? How Smart Economics Can Save the World, he argues that individual action, while often guided by the best of intentions, may not lead to noticeable, lasting change. In fact, it can even be counterproductive. Knut Haanæs, global leader of BCG’s Sustainability Initiative, recently sat down with Mr. Wagner to discuss the potential of market forces and economic incentives to induce real change, as well as the link between sustainability and competitive advantage.

    You seem to live your life in a way that supports the ideals of sustainability. And yet last year you published a book that says individual action won’t save the planet. Why not?

    I am a vegetarian. I don’t have a driver’s license. I try to do all the right things and certainly want to teach my one-year-old these values. But I’m under no illusion that these individual actions make a difference to the wider outcome. In the end, it all comes down to policy. That even goes for companies. Wal-Mart recently committed to decreasing its carbon footprint by 20 million tons over five years. That’s great. It’s also tiny relative to the 6 billion tons the U.S. emits every year. Even Wal-Mart’s commitment can only make a difference if and when it leads to fundamental policy change.

    The trick, of course, is getting from here to there. Most environmentalists tend to assume that green behavior will lead to green policies. I’m not so sure that link is quite as clear as we’d like to think.

    In your book, you say we need to apply economics and incentives. Can you describe some examples of real solutions?

    Take flying, both as an example of why individual action doesn’t make a difference, and as an example of what can work. Some airlines give you the option to buy carbon offsets when you purchase your ticket. They clearly don’t do that because they want to make you feel bad about flying. Quite the opposite. They want you to feel good about flying in the hope you’ll do more of it. What’s more, when you buy that offset, airlines don’t see any of the right incentives. They don’t buy more fuel-efficient planes or fly more fuel-efficient routes. That’s the bad news.

    The good news is that there is a real solution out there. Beginning January of this year, every flight to, from, and within Europe is now covered under the EU’s emissions-trading system. The system isn’t perfect. It doesn’t incorporate the full cost of every ton of emissions, which is at least about $20 per passenger on a transatlantic flight. Right now, the cost translates to something closer to $2. But $2 per passenger for a third of all flights globally—that’s how many flights are affected by this system—is something the planet will certainly notice. That’s exactly the kind of policy change that does make a difference.

    Is individual action important at all?

    Individual action—including the corporate kind—can be important, but only if it leads to more action. If your recycling leads you to vote for fundamental policy reform, sign me up. Sadly, I’m afraid it may well go the other way. The “single-action-bias” phenomenon is well-documented, and it can happen on a massive scale. You do one thing, and you move on. If that one thing is recycling, that’s a problem, to put it mildly. I’d much rather have that one thing be calling for policy change—perhaps literally, by calling your representative.

    What are the lessons for companies? Can they build advantage and do the right thing at the same time?

    A big lesson for companies is that having certainty and clarity around key policies matters. Let’s look at an example from Europe. Vattenfall was one of the first utilities that got engaged in the policy process. The company wanted to plan ahead, so it could anticipate changes that will have a significant impact on its business. It helps to have a seat at the table from the very beginning.

    A good example from the U.S. is General Electric. Its CEO, Jeff Immelt, was one of the loudest voices to call on Washington to pass comprehensive climate and energy policy. GE recognizes that it’s a question of when, not if, something will be done about global warming. Being able to plan ahead is as important for GE as it is for anyone.

    Companies that actively work to understand and assimilate policy change can put themselves in a position to gain an edge. Sustainability needs to become part of a CEO’s long-term thinking.

    Fundamental changes in policy won’t come easily. What will it take for such reforms to gain momentum?

    I realize it can sometimes seem daunting, and we can’t necessarily count on Washington to come up with a strong federal policy soon. Still, there is a lot going on at the policy level. The EU has been a pioneer with its comprehensive climate policy. India has a coal tax. China is piloting cap-and-trade systems as part of its twelfth Five-Year Plan. Australia and New Zealand just passed similar measures. And the U.S. is also following suit, albeit on the state level: California is putting in place a cap-and-trade system that is quite strong, even relative to Europe.

    How do you get the ground support for this kind of change? How do you get this popular movement in place? The answer comes down to incremental policy intervention. For example, Washington, D.C.—the city, not the federal government—implemented a 5 cent tax on disposable grocery bags at the beginning of 2010. Five cents per bag doesn’t seem like something that would influence people’s behavior. It turns out, however, that it makes a huge difference—it’s led to a significant decline in the use of disposable bags.

    Now, plastic bags aren’t quite at the level of rising temperatures and sea levels, but the policy certainly points in the right direction. It’s all about having prices work their magic, as opposed to having the government telling you what you can and cannot do. You could do a lot worse than show Washingtonians—and hopefully many others soon—how this type of approach can solve problems in the least intrusive way possible. It’s about leveling the playing field by making polluters pay for their actions.

    Our annual study with MIT Sloan Management Review found that many companies are actually stepping up their commitments to sustainability. Are you surprised that they’re pressing ahead with these efforts?

    It’s a sign of forward-looking corporate behavior. Some political rhetoric notwithstanding, most companies can’t afford to ignore the science and the inevitable conclusions. They realize that moving into a low-carbon world is a foregone conclusion. The specific policy instrument may be up in the air—it could happen through a cap-and-trade system, a carbon tax, a value-added tax, or other changes in the tax and regulatory system, combined with massive subsidies for energy R&D—but eventually we will get there. If you’re responsible for long-term planning, you need to start preparing now to ensure your company is not caught flat-footed.

    What about emerging markets? How are they addressing sustainability?

    Now here’s the real irony: on a policy level, many emerging markets are taking the lead. India and China are often seen as leading the charge, but others aren’t far behind. Brazil has a national emissions-reduction goal. Many others are following suit. This may not be all that surprising. Relative to industrialized countries, emerging markets have much less capital locked into a fossil-fuel-based economy. It’s often much cheaper to start from scratch without all that stranded capital. And it’s no secret that China and others are inventing their way into the twenty-first-century energy sector, while Washington, sadly, is struggling to get its act together.

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