Going Green with ‘Smart’ Regulation

When it comes to business adopting more sustainable practices, Ruben Lobel, a professor of operations and information management at Wharton, puts much of his faith in new green technologies. The problem, however, is that those technologies are likely to be slow to arrive. Rather than risk waiting for these new technologies to develop, he suggested government action to accelerate the process. 

Based on his research, Lobel advocated combining the carrot of intelligently designed subsidies with the stick of effective regulations. On the one hand, subsidies can help create the manufacturing and consumer base new technologies need to take off and become self-sustaining. The subsidies give these new green technology companies the ability to stay in business, producing more and more of what they sell, and learn how to produce it more effectively and less expensively. This is what Lobel called “the learning-by-doing effect.”

Lobel made his comments at a recent conference sponsored by Wharton’s Initiative for Global Environmental Leadership at Penn/Wharton (IGEL). This year’s conference was entitled, “Greening the Supply Chain: Best Business Practices and Future Trends.”

On the consumer side, subsidies encourage more people to use new technologies, which makes more people aware of and comfortable with the new systems, creating a positive feedback loop that helps grow the consumer base. Lobel called this phenomenon “technology diffusion.” However you refer to it, the result is greater production and increasing economies of scale, he said. 

For subsidies to be effective,however,Lobel’s research shows that they must be consistent and intelligently designed. Governments that do not model the effects of various subsidy levels before settling on an amount, and that make frequent small changes in response to changing market conditions, however well intentioned, are unlikely to accomplish policy goals, Lobel noted.

Sometimes, set subsidies are applied to an entire industry, rather than varying according to the purchase price. (Federal tax credits for electric cars are an example, Lobel said.) By establishing subsidies that are properly structured to motivate the desired behavior, and keeping the subsidies constant enough that people are willing to make long-term decisions based on them, government can create incentives that effectively move consumers, manufacturers and investors, Lobel noted 

As for regulations, Lobel pointed out that companies are currently free to engage in economic activity that harms the environment and people without suffering any negative consequences. Essentially, they create what economists call “negative externalities,” forcing taxpayers or others to bear the ultimate cost of their actions. Legislation,said Lobel,can force companies to pay for the environmental damage they cause,which in turn provides a strong financial incentive for them to change their behavior.

Lobel’s comments and additional articles based on the IGEL conference and related research, are available through this Knowledge@Wharton special report, “Greening the Supply Chain: Best Practices and Future Trends.”

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