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Wednesday, October 2, 2013

Strategic CSR - Free markets

The article in the url below highlights the inefficiencies of markets—in particular, the market for energy and the government subsidies that distort it to such a great extent. A more enlightened approach to government support for this market, the article claims, would help correct federal deficits as well as begin to address important social challenges, such as climate change:
“The International Monetary Fund, in a comprehensive critique of the subsidies released Wednesday, wants to change that. Energy subsidies, it says, aggravate budget deficits, crowd out public spending on health and education, discourage private investment in energy, encourage excessive energy consumption, artificially promote capital-intensive industries, accelerate the depletion of natural resources and exacerbate climate change. Other than that, there is nothing wrong with them.”
Governments use subsidies to placate their citizens and the large businesses that produce energy:
“The most obvious way that governments subsidize energy is by charging households and businesses less than it costs to produce and distribute gasoline, cooking fuel and electricity. Taxpayers, now or later, pick up the tab. The IMF says these subsidies added up to $481 billion in 2011. Globally, this amounts to 2% of government revenues, but about 22% of revenues in the Middle East and North Africa. … Globally, holding down energy prices increases consumption of fossil fuels. Eliminating those direct subsidies, the IMF estimates, would reduce energy consumption enough to bring the world one-fourth of the way toward the goals set at the climate-change conference in Copenhagen in 2009.”
This graphic that accompanies the article demonstrates how these subsidies, on a global scale, add up to $1.9 trillion a year:
“‘The question is whether a country should choose to let someone buy something for $1 when the total cost—both of producing it and the costs imposed on society—are $1.25,’ says David Lipton, the IMF's No 2.”
This conversation feeds into the idea of lifecycle pricing (Chapter 8, Case-study: Lifecycle Pricing, p473). What should be clear from the example above, and others cited in the third edition, is that markets do not currently do a good enough job of accounting for the true costs of production in the prices that are charged to consumers. The reason for this is that the markets we have created are riddled with inefficiencies (what economists call externalities and politicians call subsidies, tax breaks, loopholes, etc.). These inefficiencies introduce costs into the system that prevent the final price reflecting a product’s true value (i.e., its total costs).
As such, we need to reform our market system. The goal should be to work towards a model in which all inefficiencies are eradicated and all costs are included in the price that is charged for each product and service. In other words, the price of a product should not only include the cost of production, but also include the costs associated with replenishing the raw materials used and disposing/recycling of the waste after consumption. Attempts to put a price on carbon reflect this process (either through a carbon tax or cap-and-trade program), while firms’ efforts to develop carbon footprints (Chapter 8, Figure 8.4, p538) provide a possible means of implementation.
An economy where externalities are internalized, and embedded within a moral framework (see the CSR Filter, Chapter 4 and Conscious Capitalism, Chapter 5) moves us closer to the economy Adam Smith envisioned and wrote about in his classic treatise The Theory of Moral Sentiments—truly free markets filled with values-based businesses and vigilant stakeholders (see: Strategic CSR: Free ‘free markets’).
Take care
David Chandler & Bill Werther
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Rethinking Energy Subsidies
By David Wessel
March 28, 2013
The Wall Street Journal
Late Edition – Final