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.