A Renewable Resource-Based Economy Requires Public-Private Partnership

Last week I had the honor of introducing two important events at Columbia University. Both focused on the role of the private sector in the transition to a sustainable, renewable, resource-based economy. The first, on Thursday evening, was to an overflowing audience in Low Library’s beautiful rotunda where we celebrated the release of the new book, The Financial Ecosystem: The Role of Finance in Achieving Sustainability, written by my friends and colleagues, Satyajit Bose and Guo Dong, and their colleague Anne Simpson. 

The second event was on Friday afternoon and was sponsored by the Columbia University Sustainability Management Student Association entitled “Climate Leadership: Disrupting Business as Usual,” which focused on the role of the private sector in addressing climate change. This symposium was also fully subscribed and held in a beautiful venue at Columbia’s Journalism School. Both events were intellectually stimulating and filled with positive energy.

Given the well-warranted fear of the coronavirus and the fact that Columbia has canceled classes today, these gatherings were particularly meaningful to me. Students in Columbia’s Sustainability Management and Environmental Science and Policy Masters programs continue to demonstrate their deep commitment to addressing the planet’s climate and sustainability crisis.

My student and faculty colleagues at Columbia are working to understand and enhance the role of the private sector in the transition to a sustainable economy. I am working in this area as well, studying the factors that stimulate sustainability innovation within organizations. Ultimately, it will be private sector behaviors that bring about the transition to environmental sustainability. But while we are focusing on the role and importance of the private sector, it is important that we do not let government shirk its responsibilities. Some of the responsibility for change will require public action.

These days, we are paying more attention to the term “sustainable finance,” both at Columbia University and in the wider world; attention is slowly creeping south on Broadway here in New York City down toward the financial world we still call Wall Street. Financial markets are the primary arenas of investment and economic activity in a capitalist global society, but they also play the important societal role of channeling capital to investment opportunities that are beneficial to natural and human ecosystems.

Behavior is influenced by the availability and price of capital finance, and sustainability factors must be reflected in the world as understood by finance professionals in order to be real and not merely symbolic. Green finance involves directing capital toward sustainability businesses and infrastructure, accounting for the business risk posed by climate change and ensuring that investments serve to protect rather than destroy our planet. 

Columbia’s Earth Institute along with the School of Professional Studies offers a number of excellent courses on sustainability finance in its Master of Sustainability Management program and starting in September will offer a 12-credit online certification in Sustainability Finance. We consider the issue of finance central to the transition to a renewable resource-based circular economy.

But the private sector can’t do this on its own. Some of the change we need requires new technology and only government can provide the scale of long-term funding needed for the basic scientific and engineering research needed to develop that technology. We also need to use the tax code to drive investment toward businesses built on renewable resources. We should provide tax credits and deductions to encourage investments in renewable resources. One of the greatest challenges will be to finance the modernization of the electric grid and the decarbonization of power generation. 

Some of the energy technology under development will enable homeowners to disconnect from the grid. State governments regulate electric utilities and they will need to structure and possibly subsidize electric rates to ensure that power companies remain financially viable during this transition. But in protecting utility capacity, they must not deploy their regulatory power or the clout of their energy utilities to prevent decentralization of energy generation.

Additionally, government needs to retain the critical sustainability rules of the road represented by environmental law and regulation. While very few people running a business want to pollute the environment, there are always unscrupulous people who are willing to dump toxins into the river to make a quick buck. 

Those people and their companies need to be punished and that means we need to retain and improve the rigor of environmental standards. Only government can play the role of an environmental police force. When there is certainty in standards, inspection and enforcement, you can count on the private sector to find new and innovative ways of complying with rules. This is why our economy has grown while America’s air and water improved dramatically over the past half-century. Regulation has not stimulated paralysis, but technological innovation. Cars meet mileage standards, but also provide innovative communications, safety and propulsion features as the engineers hired to meet regulatory standards find ways to improve the overall product.

Finally, government must set decarbonization targets and utilize many of its regulatory and taxation powers to work toward those goals. Both California and New York are attempting to do that. California appears more serious about it and is decarbonizing ahead of schedule. The sometimes overly-political Cuomo administration is making progress but is lagging behind its targets. The political environment in California is more conducive to decarbonization than in New York. New York is really two states — a wealthy and highly developed downstate and a poor and de-industrialized upstate. 

The upfront costs of building a modern energy system are within the means of the New York City region but might be beyond the reach of upstate communities. California also has the historic memory of the nation’s worst smog in Los Angeles and for that reason, support for environmental protection has long been universal and bipartisan. But at least these two states are working to build new energy systems. Most state governments are doing little or nothing.

While each sector has its own responsibilities, what is even more important is that they need to learn how to work together. The private sector cannot be viewed by government officials as its enemy or its owner. The two sectors must collaborate and partner. Collaboration requires that each partner understand how the world looks to the other party. What are their constraints? What incentives do they require? Government must use its police power strategically, avoid symbolism and remain focused on the operational issues of changing behavior. A more efficient, renewable resource-based energy system will cost upfront capital, but in the long run, will be less expensive to run and less vulnerable to disruption than the current system. Lower energy costs make businesses more price competitive, but the road to decarbonization will still be difficult to navigate. While energy consumers will all benefit, some energy producers will not benefit and may be driven from the marketplace.

Some believe that it is illegitimate for America’s government to intervene in the private market and steer it toward socially desirable goals. That is nonsense. Government intervention in the private sector is as American as apple pie. Examples abound: Land Grant Colleges to enhance agricultural productivity; ports and rivers developed by the U.S. Army Corps of Engineers to enhance shipping; the interstate highway system, America’s gift to the motor vehicle industry; tax deductions for mortgage interest and property tax, America’s gift to the housing industry; the development and then commercialization of the internet; the oil depletion allowance. The list is endless. We need to use those tools for sustainability and particularly to drive capital toward the circular economy.

 

Source: Blogs