Green Economics from the Spectacle of Firms

Often, we see companies undertaking cutting-edge groundbreaking research, causing them to invent research and development procedures that mass-produce commodities at a competitive unit cost of production. While it is certainly a boon to boost our technological capabilities and satisfy our material standard of living, it is detrimental to our non-material standard of living. 

From polluted skies that help cause respiratory illnesses, to contaminated water that we might consume, the inexhaustible list of issues stretches. The negative externalities of pollution have been dismissed, as the producers, in this case the corporate giants, have overlooked the marginal external costs (MEC). As private producers, naturally, they will most likely only be concerned about marginal private costs (MPC) and benefits as corporate giants are incentivised by their profit maximisation. 

A Robust Mix of Policies  

While it should be acknowledged that every solution has a set of trade-offs, it can also be argued that it is possible to minimise them and decide where they can occur. Hence, as economic growth is a double-edged sword, countries should wield it judiciously to strike a delicate balance between health and wealth. 

There are many changes that can be made by the firm:

• Implementing a circular business model

• Effluents

• Reducing chemical discharge to prevent soil leaching

• Utilising  novel technology

All companies should aim for a circular business model, in which zero net waste is generated. This can be done by setting up effluent (liquid waste or sewage) treatment plants near every manufacturing zone (Fig. 1). Effluent can be discharged into the water so that the dirty water is cleaned, and reused (Fig. 2). In every step of the business, societal welfare must be factored in. In the short term, it does not seem to be a pressing issue that deserves our attention. However, in the long run, it is deeply embedded in all of our lives: it can directly impact our health, or indirectly affect the productivity of employees, either way, diminishing material gains seems to be the sole goal of several firms. 

Figure 1: The circular business model. Constructed by Adam Khan-Qureshi, based on Ref [1].

Figure 2: Effluent discharge. Reprinted from Ref [2].

Furthermore, companies should reduce the amount of chemicals originating from pesticides and fertilisers that are leached into the soil, as there could be a high concentration of ions from nutrients in drinking water that harm consumers. 

Other novel technology can also be explored. For example, flue gas desulphurisation can be implemented. This would dampen the pH of acid rain, making it safer. 

Changes that can be made from a macroeconomic level that engage several firms, governments, and financial institutions include the following:

• Green Bonds 

• Taxes

• Cap and Trade System

• Education and Campaigns 

• Public Private Partnerships (PPP) 

Green Bonds 

Green bonds are financial instruments where financial projects are aimed at agriculture, fishing, and energy efficiency. It is an attractive option as it qualifies firms for tax exemption/reduction, thus benefiting them monetarily and raising their rate of returns. For instance, in India, the Rampur Hydropower Project was implemented to supply low-carbon hydroelectric power; it produces 1,957,000 megawatts annually, saving 1,407,700 tons of carbon dioxide from being emitted every year [3]. 

Taxes

Taxes, such as eco or green tax, could be imposed on producers in order to reduce their production, and therefore, their emissions. This, however, may have economic repercussions as you cannot eradicate the deadweight loss of taxation completely, meaning there will be economic loss due to the imposition of the new taxes [4]. This is because the marginal external cost (MEC) is hard to estimate, hence, a proportional level of tax cannot be imposed.

Cap and Trade System

Another suggestion would be for a central authority to distribute tradable permits (similar to carbon capping) that allow for a set amount of a specific pollutant to be discharged over a set time period. While this seems appealing upon initial examination, non-polluting firms could sell their permits to polluting firms, thus granting them more leeway. This does not solve the root of the problem, as the cost to purchase the tradable permit might only constitute a small proportion of the estimated profits, therefore, the firm would be willing to purchase the permit. 

A prominent difference between tax and capping is that the former raises the cost of producing, while the latter fixes the total amount of carbon emitted [5]. In my view, carbon capping works better than carbon taxing, as there is a limit to how much pollution occurs no matter how much a firm is willing to pay. However, the carbon should be capped such that the quota is fixed exactly at the socially optimal level of production (no more, no less, to ensure that the social welfare is maximised). 

Education and Campaigns

Another solution that can be considered is the use of education and campaigns to raise awareness of the downsides of pollution. Due to lack of information, it is possible that some firms do not realise how harmful their methods of production are. Through education, they can be made aware of the undesirable effects of demerit goods, such as the production of plastics (especially when the plastics are not reused, are non-biodegradable, and are incinerated). However, it is undeniable that education and campaigns take time to show effect as taste and preferences need time to adapt.

Private Public Partnerships (PPP)

PPP’s can be carried out to ensure that public welfare is factored into the profit motive. They also guarantee that the knowledge of private firms regarding greener ways of production can be harnessed to improve water quality in rural, remote areas that private firms often overlook as they do not classify such areas as profitable ventures. At the same time, PPP’s can be an effective check and balance on private firms. 

Concluding Remarks

This clearly illustrates the imperative role that corporate social responsibility (CSR) plays. Even with several solutions, it is ultimately the willingness of firms to engage, implement, and enforce these mechanisms within their own domain that determines their success. For it to yield fruition, it takes funds, time, and effort; there will inevitably be an opportunity cost involved as these tools could be used elsewhere to gain more profit. However, it is a worthwhile tradeoff to invest in sustainability so that the very profits that firms yearn to make can be sustained. 

While it seems like a single company’s pollution is negligible, it inflicts a scalable impact when every company begins to adopt such a nonchalant mindset. Just like raindrops accumulate into a puddle, everyone’s inconsiderate actions have a compounding effect. Every small environmentally-friendly solution makes a huge difference! 

To finish off with a simple analogy, imagine the world like a parent. We always fight with them, argue with them, sometimes win, other times lose. They have a threshold potential, after which, they rage. Similarly, just because the grievous impact of climate change has not engulfed us in its full form yet, we should not be taking advantage of it, because it could flare up at any time!

References

[1] Anon (2019). “Mission”, Circular Innovations in plastics, 2019, [Online]. Available: https://circular-plastics.com/en/about-us/mission/

[2] United States Department of Agriculture “Discharge pipe”, Wikimedia Commons [public domain], [Online]. Available:  https://commons.wikimedia.org/wiki/File:Discharge_pipe.jpg

[3] T. Segal (March, 2020). “Green Bond Definition”, Investopedia, [Online]. Available: https://www.investopedia.com/terms/g/green-bond.asp

[4] J. Kagan (July, 2020). “Deadweight Loss Of Taxation”, Investopedia, [Online]. Available: https://www.investopedia.com/terms/d/deadweight-loss-of-taxation.asp

[5] K. Baumert (April, 1998). “Carbon Taxes vs. Emissions Trading”, Global Policy Forum, [Online]. Available: https://www.globalpolicy.org/global-taxes/45883-carbon-taxes-vs-emissions-trading.html