Record Shows Profit-Seeking Drives Green Innovation

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By Jane S. Shaw

David Driesen is disappointed that market mechanisms such as trading pollution credits do not automatically spur innovations that further reduce pollution. But that's taking a short-term view. Trading reduces the often heavy cost of regulation, freeing up funds for other uses. And the success of the private sector in using its funds to improve the environment is quite impressive.

Most analysts recognize that the environment in a modern free-market country such as the United States is cleaner than it used to be, cleaner than socialist countries are, and cleaner than most developing countries are likely to be for some time. This fact is supported by studies around the world showing an "environmental Kuznets curve."

The environmental Kuznets curve is a graph showing the relationship of the income of a nation to its environmental quality. (The name comes from similar curves relating national income and wealth distribution developed by the economist Simon Kuznets.) Researchers have found that as a country's income increases from very low levels, pollution goes up at first, but after a certain income level is reached (about $6,000 to $8,000 per capita), pollution declines. Thus, increasing national wealth leads to a better environment.

Scholars debate the reasons for this relationship, and some give credit to environmental activism and government regulation. Yet history shows us that companies have made environmental progress even when regulation was minimal.

Companies face pressures to reduce pollution and waste. Over time, manufacturers reduced smokestack emissions because smoke is unburned fuel, and valuable fuel was escaping through their chimneys. One company's waste can be another's resource, so entire industries grew up using the byproducts of established industries. In the 19th century, for example, lard, tallow, bones, and other waste products from meat packing became the sources of soap, margarine, beef extract, glue, fertilizer, and other products; exploiting these wastes helped develop the chemical industry.

The quest to lower material costs continues. The amount of aluminum in a beverage can has fallen by at least 27 percent since the 1960s. Fiber optics made from sand have replaced copper wires, the amount of steel used in skyscrapers has gone down dramatically, and the waste of wood in producing lumber has declined to less than 2 percent.

In modern times, environmental factors have surged in importance. Workers are not willing to live under smoky skies or next to polluted rivers — so companies have to clean up. Corporate reputations hinge on environmental actions. Whether Union Carbide caused the disaster in Bhopal, India, or not, most people thought it did, and the company did not survive as an independent entity (it is now a subsidiary of Dow Chemical). Today, certification programs such as the LEED or "green" building standard and the Sustainable Forestry Initiative show that some consumers expect environmentally sound production processes. And many people pay more for organic grain, locally cultivated produce, and shade-grown coffee.

The history of air pollution control in the United States illustrates the environmental progress that occurred well before federal laws forced companies to meet emissions standards. Respected researchers have noted that air pollution fell in the United States long before the passage of the Clean Air Act of 1970.

Robert Crandall of the Brookings Institution concluded in Controlling Industrial Pollution that "pollution reduction was more effective in the 1960s, before there was a serious federal policy dealing with stationary sources." Paul Portney, president of Resources for the Future, came to virtually the same conclusion in Public Policies for Environmental Protection: "While we must be leery of trends based on such a small number of sites, these data are important because they suggest that air quality was improving as fast or faster before the Clean Air Act than it has since that time."

Of course, environmental improvements are not due solely to corporate actions. During the 20th century, families switched from coal to fuel oil and natural gas for home heating, helping to clear the skies. Local regulations played a role. But certainly, much environmental improvement came from profit-seeking companies.

Market competition is powerful. After World War II, both East and West Germany had a "people's car" — the Volkswagen in the west and the Trabant in the east. The Volkswagen, operating in a market system, became famous for its technological innovations. But the Trabant, produced in a non-market system, was an object of ridicule. Made about as cheaply as a car could be, the Trabant couldn't go faster than 66 miles an hour, was hard to handle, and didn't have a gas gauge. Furthermore, as Car and Driver reported, it "spewed a plume of oil and gray exhaust smoke." It was such a polluter that the Environmental Protection Agency didn't allow the editors to drive the car on public roads.

A dynamic market system forces innovations, and these innovations include environmental improvements. Market mechanisms such as emissions trading free up money that companies will use to satisfy the desires of consumers and employees. As peoples' desires for beautiful surroundings increase, suppliers of goods and services respond with even more measures that enhance environmental quality.

Jane S. Shaw is Senior Associate of PERC, the Property and Environment Research Center in Bozeman, Montana. This essay appeared in The Environmental Forum (November/December 2003, a publication of the Environmental Law Institue.

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Before joining PERC, Jane Shaw was a journalist who had developed an uneasy feeling that much of the commentary about environmental policy that she read--and even some that she wrote--was tilted in the wrong direction. The usual solution to an environmental problem was to turn it over to the government. She had become uncomfortable with this...
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