This review was first published in International Affairs Volume 87, Issue 2,pages 467–520, March 2011

By David L. Levy

You cannot argue with rocks. This is the crux of Bryan Lovell’s argument in Challenged by Carbon, a book that combines a geological case for taking climate change seriously with an insider’s tale of the evolution of the oil industry’s stance on the issue. Lovell is a renowned geologist with degrees from Oxford and Harvard, and after a fifteen year career working with BP, is currently a senior research fellow at Cambridge and President of the Geological Society of London. The oil industry is, of course, responsible for emission of vast quantities of greenhouse gases and the major US-based companies have historically anchored corporate opposition to regulating carbon. After presenting the ominous evidence inscribed in the rocks about the severity of our climate problem, a more optimistic Lovell argues that the oil industry can also be part of the solution, by deploying its political prowess, financial resources, and technological expertise. He makes the case that sequestration, or Carbon Capture and Storage (CCS), is a feasible and cost effective solution for a significant portion of emissions.

Lovell explains how recent progress in geological science enables relatively high-definition dating of rock to within timescales of thousands, rather than millions, of years. Analysis of these long-buried rocks has revealed a dire warning for our industrial civilization. Around 55 million years ago, over 1000 gigatonnes of carbon (GTC) were released into the atmosphere during a short period, geologically speaking, of around 10,000 years. This coincided with an unprecedented warming of the planet, the Paleocene-Eocene Thermal Maximum. Ocean temperatures rose by 4-5 degrees Celsius, , mass extinctions of animal and plant life occurred, and it took nearly 200,000 years for the climate to settle down. We humans have already added about 300 GTC to the atmosphere in the last two centuries, and currently add about nine more every year.

You cannot argue with rocks, but you can argue with the interpretation of data encoded in them. For those like myself already convinced of the science of climate change, based atmospheric science and simulations, the geological evidence is further proof, if any was needed. Lovell sets out the scientific case in a reasonably accessible way, though I suspect there is much more intriguing story to be told about the evolution of the science, the debates amongst the geologists, and the realization of the dramatic import of the secrets in the ancient rocks. Lovell’s treatment of the evidence, however, is neither a compelling narrative nor particularly persuasive. Exploring the subject in the authoritative blog RealClimate.org, I found that there are still large areas of uncertainty in the data and their interpretation.[1] Ten thousand years is a long time in climate politics. The total carbon released might have been up to 3000 GT, and with the higher levels of atmospheric CO2 at the time, even this represents less than doubling of the level. We don’t know enough about other influences on climate at the time, especially the more complex feedback effects among clouds, forests and ice cover.

In the most original section of the book, Lovell traces the role of geologists in BP in shifting the direction of the company. In January 1997, David Jenkins, BP’s Director of Technology and former Chief Geologist, sent a memo to BP’s managing directors emphasizing both the scientific and business case for climate change. This process culminated with CEO John Browne’s historic speech at Stanford University in May 1997, in which Browne broke ranks with the industry by acknowledging the reality of climate change and pledging to take steps to address it. Lovell makes the case that BP was particularly open to the influence of geologists because of the centrality of the discipline in the oil business and the consequent respect for their expertise, especially from internal corporate scientists. This resonates with findings from my own research (together with Professor Sandra Rothenberg) on industry’s response to climate change, which points to the importance of the organizational channels that filter and legitimize particular perspectives. At Exxon, Brian Flannery, a respected atmospheric scientist and a climate skeptic, led a highly centralized strategy team that left little room for debate. European companies, by contrast, lacked internal expertise in atmospheric science, and so relied more on outside scientists who hewed to the mainstream consensus.

Geologists also feature as Lovell’s heroes in finding ways to bury carbon back underground. The same technological expertise that is used to locate and extract oil and gas can be applied toward long-term storage in underground reservoirs, giving companies an economic interest in developing the process. Lovell the geologist points out that storage in existing oil and gas reservoirs is relatively straightforward but limited in potential scale. Far greater capacity is available in saline aquifers, though he acknowledges that the permanence and side effects are uncertain. If Lovell’s strength is geology, he falters, however, in making a clear business case for the commercial viability of CCS. He cites one study showing that CCS might add 1 to 5 cents per kilowatt hour to the cost of coal-fired power, which might be viable at the low end but more than doubles the cost of electricity at the high end. Various cost estimates for CCS are given, from $6 to $10 per tonne, though he notes that a carbon price of $50 per tonne would be needed to make it viable. Aside from the confusion of numbers, Lovell doesn’t comment on the political challenge of securing a carbon price this high, at least in the US context.

Lovell could be a very influential player in the climate debate as an oil industry expert and former inside. Despite his knowledge of the rocks, this book unfortunately suffers from uneven and inelegant style and structure, wandering from a fifteen page verbatim report on a public BP-Exxon debate to Edinburgh South election results and Hertfordshire Puddingstone, complete with pictures in case readers are unfamiliar with these rocks. Notably, Lovell recognizes that industry needs a push to take action.  Proclaiming that “Earth is not for negotiation”, Lovell advocates passionately for climate Keynesianism, stronger governmental policies and international institutions to create the incentives and regulations to steer corporate strategies. Climate policy is in disarray, however, and even a rock solid case does not seem to overcome the political obstacles to action.

Can capitalism effectively respond to climate change? This is the timely and critically important question posed by Peter Newell and Matthew Paterson at the beginning of their book, Climate Capitalism. It’s the same question that motivated me to focus my own research on the topic of business and climate change nearly fifteen years ago.

Unlike other environmental issues, such as ozone depletion or acid rain, climate change represents a far more systemic challenge to the contemporary path of capitalist development, which is premised on ever increasing production, consumption, use of natural resources, and disposal of waste. The development of modern industrial societies has relied on fossil fuels as cheap sources of energy for their transportation, manufacturing, and energy systems, and a host of important economic sectors from agriculture to chemicals and construction are also heavily dependent on these fuels. In the last decade, rapid growth in China, India, Brazil, and elsewhere has brought a carbon-intense lifestyle within reach of several billion of the world’s population, who aspire to own cars and electronic appliances, live in spacious  homes with heating and cooling, and fly on vacations.

Climate Capitalism examines whether capitalism can survive the challenge of addressing global warming induced by emissions of greenhouse gases (GHGs). Can the market and private capital develop new governance mechanisms, such as carbon trading, and deliver new low-carbon technologies that will decarbonize the economy while ensuring growth and full employment? As the authors note, these are complex, ambitious questions. Given the scale of the economy-wide transformations required and the absence of a simple “silver bullet” solution, major institutional innovations are necessary. But capitalism is not going to quietly disappear. Indeed, the system has historically demonstrated remarkable resilience, flexibility, and pragmatism in responding to past challenges, from wars to the Great Depression. The impacts and responses to climate change will have differential impacts across economic sectors, countries, and labor markets, so the issue raises “questions of strategy, politics, and power” (preface: ix).

Posing these questions leads the authors to adopt a political economy approach that locates climate change as a problem rooted in the way our production is organized, our economy is structured, and our patterns of growth and consumption. Overall, the result is an excellent review of the shifting business response to climate change and the emergence of market-based efforts to address GHG emissions. It does so in a style that is lucid, informative, and relatively free of jargon, though with enough detail (and comprehensive glossary) of the multitude of organizations and initiatives that it can serve as a guide to “speaking carbon”. Colorful vignettes, such as the climate awakening of parcel delivery company TNT’s CEO Peter Bakker, help make the book more accessible and lively, breaking up the sometimes dense description of market instruments. Though there is not a lot new here for those already steeped in the topic, it’s a valuable contribution to the sparse literature on the political economy of climate change and would be very appropriate for undergraduate or graduate university classes. In fact, I will assign it for my upcoming MBA course on Business and Climate Change.   The process of contesting the reality, meaning, and appropriate response to climate change has sharpened the ideological distinctions among political camps, who have sought to mobilize the issue (or deny it) to further their agendas. Some environmentalists see climate change as the embodiment of an inherent contradiction between capitalism and environmental sustainability, and hence as a crisis that can catalyze a profound reorientation of our economy toward more egalitarian, participative, and local processes.

If capitalism succeeds in confronting climate change, it would not to be celebrated from this perspective, but rather be viewed as a waste of a crisis. In a parallel manner, carbon-intense sectors such as coal and oil have tended, at least until the early 2000s, to view climate change as a mortal threat, and thus resorted to denial.

For neoliberals, climate change presents a welcome, if extreme, test of the efficacy of markets and private capital in addressing a seemingly intractable environmental problem, one that has defied conventional state-led efforts to develop a binding international treaty. An increasing number of people from business and finance are expressing confidence that a price on carbon can send appropriate signals across the economy, guiding consumers toward low-carbon choices and manufacturers toward carbon management systems that reduce costs and risks. Venture capitalists and entrepreneurs are expected to redirect their resources and creativity toward low-carbon innovation. Politicians at every level find this market-based approach attractive, as it promises to attract investment, create “green jobs”, and improve regional competitiveness without the political or financial costs of major regulation or subsidies.

For supporters of a European-style mixed economy, or liberals in the American context,   climate change highlights the negative externalities of GHG emissions and the failure of markets to plan for the longer-term and invest in the major structural economic changes needed. The issue therefore creates an opportunity to pursue “climate Keynesianism”, a new era of government activism and intervention to regulate emissions and stimulate investment and innovation, in addition to stronger oversight over carbon markets. Climate Keynesians also recognize the importance of overcoming collective action problems and building stronger institutions of governance at multiple levels, from cities to the international arena.

Newell and Paterson do not adopt an explicit stance in the book, but they demonstrate a grudging embrace of carbon markets, despite acknowledging their many flaws, with a good dose of climate Keynesianism to ensure their effectiveness. The authors bring a realpolitik sensitivity to climate change; if we are to address climate change in a meaningful way within the necessary timescale, carbon capitalism is the only game in town that can galvanize a powerful network of actors with the potential to take serious action. They stress that carbon capitalism offers the opportunity to successfully mobilize the resources, energy, and political support of key sectors of business and finance, as well as policymakers. Carbon markets offer strategic flexibility for manufacturers, new market opportunities for traders and financial firms, and a source of capital for developing countries. Capitalism can be bent and shaped to this task, but fundamentally we are relying on existing systems of financial and corporate governance. Nevertheless, success is far from assured.

The book’s discussion of the political economy of the emerging carbon governance system highlights that it is far from a unified rational structure designed by a benevolent planner. Rather, the actual carbon system is a messy, fragmented outcome of a contested, dynamic political process. For example, carbon markets have been shaped by the protests against them, so that accounting standards and verification of carbon reductions have been tightened up in response to criticism. Competition among suppliers of carbon credits has also led to the strengthening of certification standards. Establishing the rules and conventions of carbon markets entails conflict and collaboration among states, business, and NGOs, but there are considerable differences in interests, goals, and ideologies between the European Union and the United States, between rich northern countries and the poorer countries of the south, and across industrial sectors and NGOs.

The most functional elements of the carbon system arise out of the convergence of powerful interests. The book describes, for example, how the Clean Development Mechanism suits the US desire for flexibility and markets, and the desperation of poorer countries for foreign investment. Yet the authors caution that even the CDM is not necessarily delivering much in the way of carbon reduction nor development. One reason is the uneven playing field in the establishment of these programs, in which environmentalists have been relatively weak partners compared with business and finance.

The story of the dramatic transition in the business stance toward climate change in the latter 1990s, from denial and conflict over the science and economics to a more accommodating and engaged position, is by now well known. Newell and Paterson provide a solid overview, and emphasize that this was not just a matter of industry waking up to climate as a real problem and figuring out the right thing to do. Indeed, there was no major breakthrough in the science during this period. Rather, the perceived balance of costs and benefits, of risks and rewards, shifted as many companies began to see the inevitability of carbon regulation, the threats of higher fuel costs, reputational loss, and technological obsolescence. Simultaneously, the rise of new business groups such as the US Climate Action Partnership highlighted the opportunities in new product markets and from energy savings, and created competitive and normative pressures for companies to follow suite. Most firms were not ready to radically change their core strategies, but were willing to hedge their bets and make some modest investments in measuring their carbon footprint and exploring low carbon technologies.

Yet the extent and permanence of this revolution is somewhat overstated. The authors observe (p. 36) that “it may seem hard to believe today, but there was once a time that business denied there was such a thing as climate change”. It’s true that during mid-to late 2000s, it appeared that business had called a ceasefire in the carbon wars and was willing to accept a weak carbon regime as part of a grand “Carbon Compromise”. Like a monster that refuses to die, however, climate denial keeps coming back from the dead. Climategate and a couple of unusually cold winters in Europe and the eastern US have helped fuel the climate backlash, leading to a dramatic rise in climate skepticism in public surveys. The ground had been well prepared, however, by business groups. In 2009, Energy Citizens, a US-based group set up and financed primarily by the American Petroleum Institute (API) with support from the National Association of Manufacturers, staged about 20 large rallies against carbon regulation. This was complemented by a massive increase in lobbying efforts by the fossil fuel industry. Private foundations such as those controlled by the billionaire Koch brothers, have also poured many millions of dollars into organizations engaged in climate denial and lobbying against regulation.

The core of book discusses the awakening of financial actors to climate change and the development of financial markets and instruments, from catastrophe bonds to the European Trading System. This is climate capitalism at work, and the authors cover the complex ground admirably. Insurance companies, pension funds, and banks began paying attention in early 2000s to climate risks, including physical damage from hurricanes and flooding, the business risks facing carbon-intense firms from higher fuel prices or from technological obsolescence, and reputational and legal risks. The rise of information governance systems such as the Carbon Disclosure Project (CDP) are traced to the UNEP Finance Initiative and usefully placed in the context of heightened investor activism in the wake of corporate governance scandals at Enron and elsewhere.

A few key players, such as Cantor Fitzgerald and Deutsche Bank, were central figures in forging the carbon markets, and not surprisingly, they shaped the rules and processes to suit their capabilities and interests. The strategic agency of these actors highlights a core theme, that carbon markets are political and institutional constructs, relying on a vast legal and accounting infrastructure to commoditize carbon; to establish property rights, count and certify tradable units, and to enable exchange across different jurisdictions and gases. Yet the agency of environmental NGOs in leveraging investors is perhaps underplayed. The CDP is described as a consortium of investors, but like the Global Reporting Initiative, it functions (and is perceived) more like an NGO trying to shift corporate behavior by enlisting investors to demonstrate their concern for climate change and the value of information disclosure. Moreover, investors increasingly appear rather dubious about the value of carbon disclosure in assessing risks and asset values.

Overall, Newell and Paterson provide a mixed and cautious assessment of this brave new world of carbon capitalism. While they recognize the power of galvanizing the financial sector, they describe free market advocates as naïve and irresponsible for failing to recognize that markets can fail due to fraud, speculative bubbles, and lack of information and oversight. They pay less attention to other problems of carbon capitalism. Despite the rapid growth of venture capital and entrepreneurs pursuing opportunities in the clean tech sector, the scale of private investment in research and development is puny and faltering. Unlike the IT industry, scaling up projects to demonstrate commercial viability faces a gaping “valley of death”, as risk-averse investors shy away from the large-scale investments required. More fundamentally, a price on carbon is a weak tool with which to overcome the inertia of “carbon lock-in”, the intertwined economic, technological, cultural and political systems that constitute our carbon-intense economy and lifestyles.

The climate change field is so fast moving that even a 2010 book can quickly seem dated. Where climate regulation and a carbon price were once seen as inevitable, there is now uncertainty and confusion. Where denial was passé, has now revived. Characterizing the current prospects for climate capitalism is not easy. Since the collapse of international negotiations in Copenhagen in December 2009, two large oil companies, BP and ConocoPhillips, along with Caterpillar, manufacturer of heavy industrial machinery, have pulled out of the US Climate Action Partnership, the leading business organization in the US promoting cap-and-trade legislation. There is little chance of the US instituting any kind of carbon market at the national level in the near future; indeed, the EPA and US states are instead turning to more traditional command and control style regulatory approaches.

The book concludes with a number of provocative scenarios. In the neoliberal utopia of carbon capitalism, carbon markets and venture capitalists facilitate a smooth transition to a low carbon-economy. Yet if this vision of ecological modernization is to be realized, economic growth must be delinked from carbon, as growth itself is sacrosanct. The challenge requires further scrutiny, because of the enormous hurdles regarding population growth, dematerialization of output, energy efficiency and renewables. Stagnation is a more pessimistic, though increasingly likely, scenario. The authors sketch out a world in which the failure of international negotiations combined with limited and poorly functioning carbon markets leads to cynicism and fatalism, with rich countries engaging in large scale adaptation and the poor left to fend for themselves. A third scenario is decarbonized dystopia, in which geo-engineering, biofuels, nuclear power, and carbon sequestration provide technological fixes but with high risks to our health, food supply, or unexpected side effects. Climate Keynesianism is the fourth scenario, entailing stronger governmental supervision of markets and systemic investments in transportation and energy infrastructure.

Missing here is the dystopia of stagnation and delay followed by emergency conditions that provoke more urgent, authoritarian and intrusive response by states. Governments faced with the need for urgent adaptation and rapid emission cuts could well resort to wartime measures such as rationing and direct control of investment and production in key sectors. Economic dislocation could generate widespread unrest, and the security implications of climate change, from refugees to water and food shortages, are just beginning to be appreciated. The outcome, however, could well disappoint those who expected the climate crisis to usher a new era of a flourishing civil society and egalitarian harmony. Capitalism may yet survive the climate crisis, but in a form that is barely recognizable.

I was asked recently to write a short essay on environmentalism to be published in a book on ‘Key Concepts in Critical Management Studies’ to be published by Sage later in 2010. I hope it’s useful for those who want a little bit of history and critical understanding of environmentalist as a concept and a movement. It’s not directly about climate change, but my thinking about climate change is certainly influenced by these frameworks. The references should also prove useful to anyone who wants to follow up further. A bit academic in terms of style, but accessible, nonetheless!

Environmentalism refers to a social movement and associated body of thought that expresses concern for the state of the natural environment and seeks to limit the impact of human activities on the environment.

Environmentalism has grown out of concerns that the natural environment and human health are adversely affected by the rapid growth of urbanization, industrialization, population and consumption in the modern era. These processes are associated with loss of natural habitats and endangerment of species, land degradation, natural resource depletion, and pollution of air, land, and water due to waste products. Environmental concerns have shifted over time and vary by location (Guha, 2000). Urbanization and industrialization created expressions of environmentalism directed toward urban effluent and hazardous factory wastes. Wilderness conservation and species protection have played a key role in the United States, through the national parks system and private land trusts.

North American environmentalism has traditionally highlighted the intrinsic, experiential, and recreational value of nature for humans. In Europe, where high population density and industrialization largely preceded the rise of environmentalism, efforts have focused more on managing industrial pollution and waste, protecting human health from toxics and nuclear risks, and energy efficiency. More recently, attention has shifted to transboundary regional and global issues such as acid rain, ozone depletion, and climate change. In developing countries, priority has been given to desertification, water resources, soil erosion and degradation.

Economists regard environmental pollution and resource depletion as negative externalities, costs that are imposed on society and not taken into account by private firms in their decision making. The ability of firms to externalize environmental costs while appropriating profits from production generates incentives for firms to overproduce goods with harmful environmental impacts and under-invest in measures to reduce these impacts (Stavins, 1989). The standard economic solution is to force firms to internalize the environmental costs by taxing environmentally harmful products or processes, enabling legal processes for damages, or direct regulation (Portney, 2000).  

It is therefore not surprising that business has traditionally viewed environmental concerns as a threat to profitability and managerial autonomy. Business has generally opposed new environmental regulations and the establishment of regulatory authorities, frequently contesting the scientific basis for understanding harmful impacts and pointing to high compliance costs.

The wave of environmental activism in the 1960s and 1970s, originating with the publication of Carson’s Silent Spring in 1962, led to the establishment of the US Environmental Protection Agency in 1970 and similar agencies in other countries. Business acquiesced partly to assuage key stakeholders, including consumers, non-governmental organizations (NGOs), and government agencies, and partly because federal regulation would preempt an expensive patchwork of varied and sometimes stricter state laws.

Business opposition to environmental regulation grew during subsequent decades as standards became more extensive and stringent. Business perceived that environmental risks were not balanced against compliance costs, and that direct regulation was an inefficient and blunt tool to address environmental concerns. During the 1990s, regulatory authorities began to experiment with market-based measures, such as the trading system for SO2, and industries launched self-regulation initiatives such as the US chemical industry’s Responsible Care program. Business, NGOs, and governmental agencies experimented with partnerships and voluntary agreements as part of the increasingly complex field of societal environmental governance (Prakash & Potoski, 2006). The decade also saw the rise of a “win-win” discourse of corporate environmentalism that framed environmental and economic goals as potentially complementary, and the emergence of environmental management as an academic field (Hoffman & Ventresca, 2002).

Paradigms of Environmentalism

Egri and Pinfield (1996), in a review of the literature on organization theory and the environment, identify three paradigms for understanding the relationship between environment, society, and economy. The dominant social paradigm is anthropocentric and neoliberal, encompassing assumptions that human welfare is aligned with the maximization of economic growth, personal consumption, and corporate pursuit of profits. Unlimited economic growth is assumed to flow from exploiting infinite natural resources, technological innovation, the primacy of markets, and a minimal role for government. The environment, in this paradigm, is regarded as an instrumental economic input, perhaps a constraint, but its sole purpose is the generation of economic value for humans.

Radical environmentalism, by contrast, is biocentric, emphasizing the intrinsic value of nature and the dependence of human economic and social life within larger dynamic ecosystems. In this paradigm, environmentalism derives less from concerns about resource depletion or harmful toxics, but more from respect for other species and appreciation of the interconnected complexity and fragility of ecosystems. Various schools of radical environmentalism have different points of departure (Merchant, 1992). Neo-Marxist variants emphasize production for profit under capitalism and the political power of corporate elites (Pepper, 1993). Deep ecologists also critique modern industrialism but focus on cultural and normative anthropocentrism, in which humankind is distinct from and superior to nature, entitled to control and subdue it (Naess, 1989).

These “red-green” debates raise significant theoretical issues. Neo-Marxists accuse deep ecologists of lacking an analysis of class and power, and view the cultural infatuation with consumption and technology as part of the ideological superstructure of capitalism. Deep ecologists accuse neo-Marxists of harboring modernist anthropocentric ambitions to harness nature for human benefit. Neo-Marxists reply that ecocentrism is both undesirable in its potential for misanthropism and misguided in its efforts to assign intrinsic value and moral consideration to nature. Ecofeminists share this critique of anthropocentrism but point to patriarchy as the ideological underpinning of the construction of nature as feminine and its subjugation by industry, technology, and the military (Salleh, 1992).

(continued in part 2, which looks at corporate environmentalism, an expression of ‘reform environmentalism’)

by Charles Perrow

In 1984 I published a book, Normal Accidents (revised edition, 1999), that argued that we should abandon systems with catastrophic potential if they were interactively complex and tightly coupled, unless they could be redesigned to minimize these dangerous characteristics.  Complexity and coupling can be reduced through modular, rather than integrated designs, and catastrophic potential reduced through deconcentrating hazardous materials close to population centers or sensitive ecologies.  We might decide that some systems with catastrophic potential are so vital that the risk of a rare, but possible system failure is worth running.  Government officials felt that way about our nuclear defense system for many decades, steadily increasing the risks of a huge catastrophe.  I will argue that deepwater drilling, especially in ecologically sensitive areas, should be abandoned, because it combines complexity and coupling with catastrophic potential.

Interactive complexity is not simply many parts; it means that many of the parts can interact in ways no designer anticipated and no operator can understand.  Since everything is subject to failure, the more complex the system the more opportunities for unexpected interactions of failures.  Tight coupling means that failures can cascade through the system since the system cannot be stopped, fixed and restarted without damage; substitutions are not available, and failed subsystems cannot be isolated.

I do not think that the failure on April 20, 2010 of the rig built by Transocean and run by BP had a system accident (or “normal accident”).  While such rigs are very complex and very tightly coupled, it is more likely that faulty executive decisions resulted in knowingly running unnecessary and dangerous risks.  To be a system failure, in my definition, requires that even if everyone tries as hard as they can to operate safely, it is in the nature of complex, tightly coupled systems to inevitably (though rarely)  have the unforeseeable interaction of failures, usually small ones individually, that can cascade through the system.  This was not the case with the Transocean rig; BP management frequently overrode the objections and warnings of its own operators and engineers, and those of its subcontractor, Transocean, and independent consultants.  Nothing that transpired was unexpected.  

BP has had a history of ignoring warnings by its own staff in order to cut costs.  A refinery explosion in 2005 and a massive oil spill in Prudhoe Bay, Alaska in 2006, resulted in (small) criminal penalties for executive malfeasance; the pipeline had a smaller spill last year, and there are currently strident warnings about the dangers of a massive spill on the pipeline in Alaska.  The firm had a close call in 2005 with its deepwater drilling Thunder Horse rig.

With this record, perhaps deepwater drilling is safe if the other firms engaged in it do practice safety.  It is hard to tell.  Exxon-Mobil is reportedly very concerned with safety after the Valdez accident, and said to be the industry leader in safety.  But it is not encouraging that in July of this year Attorney General Eric Holden was asked if BP was doing anything different than others in the industry.  He noted “certain commonality of the way oil companies had been operating” in the Gulf, but since the investigation of drilling is ongoing, he would give no specifics.  BP may be an extreme case of putting profits over the safety of their workers, the environment, and the viability of the firm, but disasters in the chemical industry have been increasing in recent decades, so one should not be reassured that BP is the only bad apple.

The Materials Management Service (MMS) reports there are 33 rigs that have permits for exploratory drilling in deepwater in the Gulf; 29 were inspected after the spill and no serious violations were found. One may be skeptical of their finding.  For example, MMS only recommends, but does not require, a backup blowout preventer (the preventer failed in the April 20, 2010 Horizon accident).  MMS does not set specifications for all pipes, allowing BP to use less safe pipes in its rig, and so on.  Furthermore, the unsafe practices in the Horizon rig occurred when the rig ran into trouble; inspection would not catch such bad practices.  We cannot be reassured that BP is an outlier and other firms would operate safely, though a news story about Exxon’s last minute abandonment of a project, the deepest drilling at the time, is encouraging.  Less encouraging is that another drilling firm bought the lease to the abandoned exploratory drilling and has continued to drill, but for two years has recovered no oil from what is expected to be a vast pool.

Perhaps we should be reassured that the Horizon accident has alerted the industry to the dangers of deepwater drilling sufficiently to make accidents extremely rare, and furthermore has led them to have adequate emergency response facilities on hand if there is the rare accident.  After all, the nuclear power industry appears to have made significant safety improvements since the TMI accident; could not the deepwater drilling industry improve as well?  A rebuttal is that nuclear plants in the U.S. continue to have near misses despite improvements, and are not as much endangered by storms and hurricanes. BP, at least, does not appear to have changed its safety provisions in spite of the Thunder Horse near-disaster on July 11, 2005, because of a pump valve installed backwards and cracks in underwater pipes because of shoddy welding, and its Atlantis rig is being investigated because of whistleblower charges of unverified engineering documents.

An argument against a ban on deepwater drilling is that the expensive rigs able to do this would simply move to other locations that have no ban.  It is similar to intensive policing in one area; it simply drives the criminals to other areas, thus we should make no effort to increase policing in the high crime area – an argument for inaction. Were they to move to Norway or Brazil, where drilling takes place, they would have to have stronger safety standards – e.g. a backup blowout preventer – than those required in the Gulf.  But they might move their rigs to other nations where standards are presumably below those of the Gulf, and where there may be ecosystems as vulnerable as those of the Gulf.  The only response to this argument, unfortunately, is that one has to begin somewhere, and the U.S. ban just might encourage other nations to tighten regulations.

A further argument has been put forth by the oil industry and state governments bordering the Gulf: the economic impact upon the area would be severe in terms of jobs lost and business activity associated with pumping, transporting and selling the oil.  But the effect upon oil-related jobs is not likely to be as severe as the effect upon non-oil activities.  Oil is capital intensive, with few workers per unit of capital; non-oil activities such as fishing and tourism are labor intensive.  More jobs are at stake in non-oil operations.

A final argument is that we need the oil; shutting down deep-sea drilling would raise the price of oil in the U.S. and make us more dependent upon foreign sources.  Raising the price of oil is to be encouraged.  A higher price of oil would mean that investments in non-carbon sources of energy, such as solar, wind, and geothermal would increase, as would investments in efficiency and conservation.  The price of oil should be much higher to encourage these investments.  Since a carbon tax is out of the question in the U.S., and a pollution tax on gasoline unlikely because of public opposition, and especially oil industry opposition, curtailing production is the next best step.  Another step, a bit more likely than a carbon tax, would be a steep tax upon imported oil, reducing our dependency by tipping the market away from imports.  The market at present is not a “free” one, since the true costs of burning oil are not reflected in its price – the “externality” of pollution is treated as a free good when it actually imposes a heavy tax upon citizens and their environment.

The interactive complexity and tight coupling of deep-sea drilling rigs is apparent; even if BP had not skimped on safety and not overridden the objections of their own personnel and those of their subcontractors, the system could have the rare but possible unexpected interaction of failures. They are inevitable since nothing is perfect.  Profit motives and lax regulation only make such disasters more likely.

An introduction to the new book ‘Upsetting the Offset: The Political Economy of Carbon Markets’, edited by Steffen Böhm and Sidhartha Dabhi (MayFlyBooks, December 2009), by the authors. The book can be ordered or downloaded free here.

Dr. Steffen Böhm is Reader in Management at Essex Business School, UK. Siddhartha Dabhi is a researcher at Essex Business School, University of Essex, UK.

December 2009 saw world leaders come together in Copenhagen to try to agree on a post-Kyoto deal to save the planet from global warming. But the attempts to hammer out a new deal met with an apparent failure. But was it a failure? Many commentators would argue that the apparent failure can be seen as a welcome breathing space to question the underlying mechanisms that are supposed to help us fight climate change. In this way, Upsetting the Offset is a very timely book, as it critically engages with the political economy of carbon markets, which have emerged as the dominant instrument to mitigate climate change.

This book argues that carbon markets are one of the most ambitious projects of neo-liberal capitalism, in its attempt to create a business opportunity out of what many would label as the most important issue mankind is currently facing: climate change. The underlying ideology of carbon markets is to internalize and reduce the risk of climate change by putting a price tag on carbon emissions. The core assumption is that the power of a self-regulating market will achieve maximum possible reductions of carbon emissions at the lowest possible cost. The book, which comprises 30 chapters written by some of the world’s most renowned critics of carbon markets, shows that this efficient market is a myth. All the evidence collected so far about the actual workings of carbon markets points to the alarming conclusion that carbon markets, instead of reducing carbon emissions, provide perverse incentives for the increase of carbon emissions, while also having detrimental social and environmental impacts on local communities in many so-called developing countries of the Global South.

Part I of the book introduces carbon markets, focusing specifically on the logic of the Clean Development Mechanism (CDM), one of the most prominent carbon markets administered and controlled by the United Nations. The first introductory chapter by Steffen Böhm and Siddhartha Dabhi gives a broad overview of the most recent climate change science and the political steps taken so far towards its mitigation. The main aim of this chapter is to form a premise for why the authors of this book might want to ‘Upset the Offset’ and engage in a critique of carbon markets. The second introductory chapter by Larry Lohmann talks about the formation of carbon markets through the commodification of the atmosphere. In this chapter Lohmann illustrates in detail how carbon emissions are converted into an abstract, quantifiable commodity, thus opening up endless avenues for creative accounting, a huge trading market, and leading to financialization and securitization of a “fictitious commodity”, to use Polanyi’s term.

Part II of the book comprises a range of case studies from Thailand to Chile, from Uruguay to India, presenting rich details of the often negative effects of CDM and voluntary offset projects on local communities in the Global South. The CDM has been packaged as a ‘win-win’ strategy where technology transfer takes place bringing emissions reductions and sustainable development to the South. But on the ground, it turns out that what the rich North pays the poorer South for is continued pollution and fostering inequalities between the masses and the elites. With its rich empirical detail, this section of the book shatters the false  illusions created by carbon market proponents, who have been promising a green capitalism where profit maximization is possible in an environmentally sustainable and socially just way. While tree planting, biomass electricity generation and wind power may sound green and ethical, it turns out that they often are too good to be true.    Part II begins with papers by Melissa Checker, Tamra Gilbertson, Cristián Alarcón and Isaac ‘Asume’ Osuoka, showing how ‘developed’ and ‘developing’ countries and their respective governments, corporations and local communities are interlocked in a complex web of carbon market relations, which, rather than promoting sustainable development, help to increase inequalities between North and South. The next set of chapters – written by Ricardo Carrere, Raquel Nuñez, Rafael Kurter Flores et al. and Steffen Böhm – are aimed at breaking our illusion of considering industrial tree plantations to be real forests that would help us fight climate change. The last set of cases – written by Soumitra Ghosh, Hadida Yasmin, Siddhartha Dabhi, Nishant Mate and Soumya Dutta – come from India, which is one of the largest hosts of CDM and voluntary offset projects. These cases expose the greenwash created through the usual rhetoric of technology transfer, employment generation, emissions reduction and sustainable development.

Having presented the case studies, Part III offers a broader critique of carbon markets. What these seven chapters show is that carbon markets are not merely mechanisms to combat climate change. Instead, they must be seen in relation to the historical development of capitalism. In fact, carbon markets can be seen as the expansion of the market system to new spheres which so far have escaped commodification. This is where a crucial question needs to be asked: can we trust capitalist markets to deal with such a grave and global problem as climate change, given that capitalist production and consumption regimes have created the problem in the first place? The authors of Part III argue that there is now overwhelming evidence that carbon markets will not help us mitigate climate change by commodifying the atmosphere, which should be seen as a common good shared by humanity. Instead, carbon markets will lead to more exploitation, inequalities and perverse speculations and financial bubbles of the kind the world has seen explode in 2008. Therefore, carbon markets should be seen as a dangerous diversion from the need to drastically change lifestyles and economic, social and political structures that will help to free ourselves from the world’s addiction to fossil fuels.

Part IV of the book is a step towards hope. Each paper in this section points to real alternatives to carbon markets, many of which already exist in local communities around the world. If indeed carbon markets often deliver quite perverse outcomes – as many contributions to this book have shown – then what are the alternatives? What can be practically done to mitigate climate change and create a real sustainable, low carbon future? These authors stress that a sustainable future is in our hands. The first two papers by Patrick Bond and Philippe Cullet offer a more ‘political’ answer to carbon markets, suggesting that, rather than managing complex carbon markets, governments in the North need to think about the ‘ecological debt’ they have created and consider climate change from a point of view of justice. The remaining papers  offer a range of very practical insights into how communities already live in sustainable ways. What these contributions seem to be saying is that communities around the world cannot depend on governments or markets to save them from climate change. If something has to be done, then it has to be done by each and every person.

Overall, the book alerts us to the realization that climate change is not just a problem of global warming and rising sea-levels. It is a wider problem of politics, economy, society and culture. It is a problem of a system that believes in relentless economic growth without paying much attention to the ‘externalities’, as the economists call all those social and environmental costs that cannot, or rather must not, be accounted for. One of the key issues that arise from Upsetting the Offset is that governments, corporations and citizens at large need to stop thinking that climate change can be stopped by simply introducing markets and putting a price tag on carbon. There is no evidence that has emerged so far showing that carbon markets actually work in terms of reducing carbon emissions. On the contrary, this book provides plenty of credible evidence that carbon markets are, in fact, a smokescreen and a dangerous diversion, preventing us from focusing on the real issues at hand.

Dr. Renato J. Orsato is Senior Research Fellow at INSEAD Social Innovation Centre, France. He has been a researcher, educator, and consultant for the past 15 years.

Review by David L. Levy

From time to time I’ll be reviewing books related to business and climate change that might be useful for academics and businesspeople. There are quite a few more general books on environmental management and business sustainability (Stead and Stead’s Management for a Small Planet is a classic, now in its 3^rd edition). However, there are very few books that focus on climate change right now, though this market is likely to take off as climate change goes mainstream in business and colleges offer more courses on the subject.

Dr. Orsato’s Sustainability Strategies: When Does it Pay to be Green? is not about climate change per se, but its focus on business strategy was intriguing and close to my own interests. The frameworks offered are directly applicable to clean energy markets, and there is a chapter on eco-efficiency, with a section on carbon credits, and a chapter with an extended discussion of the auto industry.

Too many writers gush effusively about the profits to be made by being green. While preaching about “win-win” opportunities has served a useful role in creating a positive, even enthusiastic attitude toward clean energy investments among some businesspeople, investors, and policymakers, it does not always make for sharp, critical analysis. Dr. Orsato makes clear in the first chapter of his refreshingly cogent and dispassionate book that it’s not easy being green. There is always some low-lying fruit around, but once the easy picking is gone, the hard task is to craft a longer term sustainable strategy that has both economic and environmental benefits. Orsato observes “the scope for win-win scenarios is narrower than many wish them to be. Out of the vast array of actions taken by firms, only a few will be profitable, generate competitive advantage or create new market spaces.”

Managers have to take strategy seriously if they want to pursue green goals, as it can be difficult to appropriate or “monetize” public benefits, and competition can quickly erode competitive advantages. Orsato illustrates this point with a mini-case on how Tetra Pak tried to increase the recyclability of its retail drinks containers, which contain many thin layers of different materials, from metals to plastics and paper. The problem was that neither its direct customers, large food and drinks companies, nor final consumers are very concerned about recycling issues. Tetra was only able to justify its investment in expensive plasma technology based on the value of the aluminum it could extract and recycle.  

Strategy is about finding, exploiting, and defending sources of competitive advantage. Orsato gives us a brief review of the two major concepts of strategy, Porter’s positioning school and the Resource Based View (RBV). For Porter, competitive advantage (i.e. above normal profits, or economic rents) derives from marketplace positioning, in terms of pricing, branding, and product features. To endure over time, this competitive advantage would have to be protected by market structures such as barriers to entry or economies of scale. From this perspective, a number of firms in the same sector or business cluster can enjoy above normal profits. The RBV, by contrast, sees competitive advantage more as a firm-level package of unique resources and capabilities that take a long time to acquire and are difficult to copy. This perspective emphasizes internal processes and organizational competencies rather than external market structures.

Orsato draws from both schools of strategy to give a framework for thinking about sustainability strategy, a classic business-school 2×2 matrix for competing in existing markets. Orsato also offers a fifth strategy, the Blue Ocean or Sustainable Value Innovation (SVI) boldly go where no business has gone before approach. The book is structured around five chapters that go into more detail for each strategy.

Orsato is wary of the first strategy, eco-efficiency based on lowering costs in internal operations. He notes that efficient management of costs and risks is really a part of operational effectiveness, not strategy. Everyone will soon be doing it, so it becomes a license to operate rather than a longer term source of value. I would point out, however, that companies like Walmart and Toyota have developed long term strategic advantages from their systemic “lean production” approach to reducing costs (and improving logistics, quality). In metals, chemicals, cement, and other industries there is probably room for reducing energy and materials costs based on proprietary technologies and processes.

The chapter on Beyond Compliance strategies delves into how companies can spin their investments in greening internal processes into external reputational advantage. Orsato suggests that businesses can do this by joining Green Clubs, for example, signing up to voluntary industry/NGO standards such as GRI, ISO14000, CDP, or joining a more exclusive club such as Ceres’ BICEP or Pew’s BELC. Firms can reap value in terms of brand and reputation, as well as influencing standards and regulations, though Orsato suggests that the primary value is defensive, in deflecting criticism and antagonistic campaigns, and deterring regulation. For a more detailed view of Green Clubs, I’d recommend The Voluntary Environmentalists by Aseem Prakesh and Matthew Potoski. They discuss, for example, how club joiners might be the dirtiest companies looking to gain a free ride from club membership, or clean companies looking for recognition but without new commitments.

Eco-branding, the third strategy, is based on differentiation in the final product market. The chapter dwells on various types of eco-labels, such as the FSC labels on wood products or carbon labels, though Orsato acknowledges that there are significant methodological problems in developing reliable and meaningful labels, and consumers are confused or indifferent. Stephen Stokes has similarly argued in Sticker Shock that developing these labels can be extremely expensive, add little value for consumers, and not be the best source of process-level information for management to cut costs (back to strategy 1). In general, Stokes points out that it’s hard to build green brands at the product level, aside from notable exceptions such as Toyota’s Prius.

A significant gap in this chapter is that there is little discussion of differentiation strategies for products with obvious green credentials, from hybrid cars to compact fluorescent bulbs to advanced batteries. A123’s recent very successful IPO points to the capital market premium currently available for well differentiated products in the low-carbon space, though the long-term leadership of lithium batteries for storage, and of any particular lithium company, is highly questionable. Tom Konrad has written one of the best analyses of the storage sector one of the best analyses of the storage sector explaining his skepticism. My point here is that serious strategic analysis at the sector or company level requires very detailed consideration of technologies, costs, regulations, commercialization trajectories, and other factors. The strategic frameworks in Orsato’s book are a useful starting point, but are too generic for investors and industry specialists.

The chapter on environmental cost leadership discusses, amongst other examples, how Brazilian biofuels have established a strategic advantage over corn-based ethanol, though their exclusion from the US market by tariff barriers should probably have received more attention as a demonstration of the importance of non-market strategy. Similarly, Boeing and Airbus are competing to provide the lowest operating cost planes to airlines, though contracts are frequently influenced by national political factors.

The most provocative chapter is that on Blue Ocean strategies, or what Orsato terms Sustainable Value Innovation (SVI) in a rare spasm of consultantspeak. The point of SVI is to avoid competition by sailing into clear blue ocean, entirely new market spaces. For Orsato, SVI redefines the boundaries of an industry, often crossing public-private lines. It’s a systems-level strategy that “requires changes in both the nature and technology of products and in the logic by which systems of production and consumption are organized.” Sounds like a very tall order, and indeed it is.

Within the context of a case study of the auto industry, Orsato illustrates the concept by arguing that the three main current paths to low-carbon transportation, small light cars, biofuels, and hybrids, are not SVI. They represent marginal, incremental improvements to products that compete within the same parameters as existing products. Instead, Orsato examines SVI using the examples of Zipcar, Velib cycles, and Shai Agassi’s Better Place project to provide a replaceable battery infrastructure for pure electric vehicles. These companies provide mobility services and leverage government to overcome system level obstacles. For consumers who might balk at the high cost of EV cars, a battery leasing service packaged with a regional information system to assist drivers could represent a market transformation, and one with built in barriers to entry to protect the first mover. While these ventures clearly represent radical restructuring of markets, I suspect that these opportunities are very few, and that blue oceans can be infested with sharks. And where is there really any market space devoid of competition? Consumers will still compare the price and convenience of Velib versus the metro, Zipcar versus car ownership.

Overall, I found the book reasonably well written and accessible, without too much jargon, and the case studies are well chosen. It provides useful frameworks, but is far from a “how to” manual. The grounding in strategy provides a firm basis for the frameworks offered in the book, though I was looking for a deeper and more extended discussion of strategic insights in relation to clean energy. For example, auto companies struggling with the question of how much to invest in hybrids and EVs have to consider not just the marketplace but the extent to which their own “core competencies” lie in vehicle, design, and assembly, and not just a specific drivechain modality. Similarly, the RBV school of strategy suggests that oil companies might find that their core competencies extend better to biofuels than wind or solar, explaining the recent pullback by BP and Shell (see Back to Petroleum?). Nevertheless, there is no clear answer to the question of whether oil companies can, in fact, develop new competencies in clean energy over years of investment and organic growth, or whether they should wait, as Exxon seems to be doing, for technology risk to decline and then seek to acquire clean energy assets in the capital markets. In the meantime, this is one of the best books available on strategic management of sustainability.