Book Review: Corporation 2020

by Duncan Gromko

The following was cross-posted with the Public Education Center's D.C. Bureau, which you can find by clicking here.

A recent TEEB for Business report estimated that the world’s 100 largest corporations do $7.3 trillion in damages each year to the global environment. These “externalized” costs are not borne by the business itself, but by society as a whole. Changing the way that corporations do business is critical to solving global environmental crises such as climate change. In the book Corporation 2020, Pavan Sukhdev presents a vision of how corporations can make this change.

Author of Corporation 2020: Pavan Sukhdev

A 1919 Michigan Court ruling formalized the role of a corporation: “A business corporation is organized and carried on primarily for the profit of the stockholders.” As long as this norm holds, corporations will continue to pursue private profit at the expense of the public good. Sukhdev writes: “According to urban legend, Willie Sutton, the immaculately dressed bank robber who robbed more than a hundred banks over a forty-year career, was once asked why he robbed banks and succinctly replied, ‘Because that’s where the money is.’” Since corporations don’t pay for pollution and other socialized costs from their activities, there is a profit motive to pursue polluting activities.

Sukhdev says that the modern corporation has four distorting characteristics: size, leverage, advertising, and lobbying. The number of “large” (greater than 0.1% of global GDP) corporations has grown from under 20 in 1970 to over 120 in 2010. Being large allows corporations to reduce transaction costs: rather than trading with other corporations, a corporation can simply redistribute resources internally. Sukhdev calls the modern corporation a “price arbitrageur par excellence” because it obtains labor, capital, and resources wherever they are cheapest to be sold wherever demand is highest.

The second characteristic, leverage, is related to size. Taking on debt allows a corporation to grow. Debt is available to larger corporations at a cheaper price, creating an advantage for large corporations while squeezing out smaller ones. When corporations with lots of debt become very large, they can be “too big to fail” because they pose a systemic risk to the economy. As we saw in the financial crisis, the government may have to prop up a failing big corporation – another benefit of size.

Save the World (photo credit Victor Grigas)

Advertising “converts wants into needs, sometimes creating new needs that are nothing more than brand desires, with no functionality.” Even though advertising makes up a relatively small part of global spending, it has an enormous impact on creating demand for consumer products. Greater consumption, in turn, puts more pressure on natural resources.

Last, corporate lobbyists persuade government to create preferential laws, regulations, taxes, and public investments; the goal is to realign public institutions to benefit private interest. For example, when the Waxman-Markey “cap-and-trade” climate change bill was being considered by Congress, energy-intensive industries spent over $100 million on public relations and hired 2,340 registered lobbyists to protect the fossil-fuel industry. A watered down version of the bill was able to pass the House, but not the Senate. Lobbying in natural resources sectors is a clear case of redistributing public goods to private interests; in the United States, mining companies are given rights to mining resources at below market rates.

When a corporation is large, it has advantages in leverage, advertising, and lobbying. This creates a positive feedback loop where the efficiencies and power of a large corporation allow it to become even larger. As a corporation grows and grows, it has (in most, but not all cases) larger and larger negative externalities. The legal structure of the modern corporation and the tools it has to make profits are incompatible with addressing environmental crises.

So what’s to be done?

Greenpeace.svg

A big part of Sukhdev’s message is how and why corporations voluntarily reduce the negative externalities associated with their business. One of the largest destroyers of tropical forests in the world, the Indonesian pulp and paper company APP, announced a new “no deforestation” policy. The commitment came after a long campaign by Greenpeace successfully vilified APP. APP saw that the costs to its brand name and reputation were greater than the benefits from continued deforestation. APP is one of many companies that have taken steps to reduce its environmental impact in order to improve its public image.

Asia_Pulp_&_Paper_logo

Other corporations are taking a more holistic perspective and starting to account for the damage they do to the environment. In 2011, PUMA, the shoe company, measured their supply chain’s impact on water, land-use change, air pollution, and climate change. These negative externalities were valued at $188 million and were concentrated early in the company’s supply chain. PUMA says it will use this information to reach its goal of reducing its impact across its supply chain by 25 percent by 2015. Measuring externalities is the first step for companies to reduce them – “you cannot manage what you do not measure.”

However, shaming companies into better behavior and improved environmental accounting tools will only get us so far. Sukhdev argues that “despite the correlations between sustainability and corporate success, endogenous change (the idea that corporations can and should drive sustainability ‘from within’ because it is good for them) may not be enough.” The raison d’etre of a corporation is to make its shareholders profits, regardless of other costs.

Sukhdev calls for a number of solutions. Ending subsidies for companies that do environmental harm is a first step towards leveling the playing field. Next, taxing goods according to the damage they do to society would discourage harmful economic activities. A coal power plant, for instance, would have to pay for the social cost of the carbon emissions (amongst other damages) associated with power production. Finally, Sukhdev makes the case that the structure and objective of a corporation needs to be completely reformed. Rather than pursuing profit for shareholders, corporations should serve the public benefit – a social corporation. Increased regulation and creative taxation can help to reduce corporations’ impact on the environment, but Sukhdev argues that current corporate model is fundamentally incompatible with sustainability.

While I mostly agree with Sukhdev, he doesn’t provide a convincing road map of how we’re to get from the shareholder, profit-driven model of the corporation to his social corporation. As Corporation 2020 recognizes, large corporations have an enormous amount of economic and political power that they are unlikely to give up voluntarily. In addition to increasing a corporation’s size, advertising and lobbying also give it immense influence. Bold leadership, both in the public and private sectors, is a good start, but won’t be enough to get to the radical changes that he is proposing. My feeling is it will require pressure from millions of people who have never heard of Sukhdev or his book.

Unknown Amount of Wealth Extracted from Public Land

By Nick Cunningham

The following was cross-posted with the Public Education Center's D.C. Bureau, which you can find by clicking here.

Uncle Sam gets Nothing

The U.S. government controls an enormous amount of land, particularly in the western half of the country. The Department of Interior’s Bureau of Land Management (BLM) manages an estimated 700 million acres of public lands, with much of it open for development by oil, gas, mining, and renewable energy development. When these various industries come into conflict, hardrock mining interests – gold, silver, copper, and other minerals – have traditionally won out due to laws favoring them, which date back to the 19th century.

Mining on public lands is principally governed by the General Mining Law of 1872. Back then, the U.S. government actively supported the settlement and development of public lands in the largely unpopulated western United States. The General Mining Law allowed for private citizens to lay claim to public lands for mining prospects, with the intent of protecting an individual’s gold or silver prospects from being taken by others. It essentially allowed a free-for-all: once someone staked a claim on a parcel of land, they could gain ownership. The law would protect that claim from being taken by anyone else.

While that may have made sense in the 19th century, the General Mining Law has not been substantially updated since President Ulysses S. Grant signed it into law. There have been legislative tweaks since then, but mining companies still enjoy essentially free access to the nation’s public lands.

On two fronts, however, mining interests may begin to lose that advantage: royalty payments and the preferential treatment given to mining on claiming public lands.

One relic of outdated mining laws is the lack of royalties. Mining companies do not pay federal royalties for extracting hardrock minerals on public lands. In contrast, oil and gas companies pay a 12.5% royalty rate.  Giving away public assets to mining companies for free is a significant corporate subsidy.

Senator Tom Udall (D-NM) has supported implementing royalties on hardrock mining. “It’s astounding in this time of trillion-dollar deficits that we aren’t looking more closely at revenue off of public lands,” Sen. Udall stated in January, as reported by Bloomberg. He went on to say, “It’s a lot of money that’s on the table, and it’s money that we should have been getting a long time ago.”

Along with Congressman Raul Grijalva (D-AZ), Sen. Udall sent a letter to the Government Accountability Office (GAO) in 2011, requesting a review of the amount of minerals extracted from public lands. GAO issued a report in November 2012, but could not determine how much mining companies are taking from public lands because the data are not collected –in part because the government does not assess royalties on mining. At the same time, GAO stated that royalties paid by oil, gas, and coal operations amounted to $11.3 billion in 2010.

Senate Majority Leader Harry Reid (D-NV) has been a roadblock to mining reform because his state is home to large mining operations. A spokesperson said that he remains open to reform, but only if revenues collected from royalties are shared with the states.

Senator Tom Udall (D-NM)

Congressman Raul Grijalva (D-AZ)

Senator Harry Reid (D-NV)

While the lack of royalties on hardrock mining is an anachronism – and evokes a kind of robber baron-era way of managing resources – another major problem with mining governance is how companies gain access to public lands.

BLM recently finalized an interim rule already in place that attempts to level the playing field for renewable energy on public lands. The rule, called the “Segregation of Lands-Renewable Energy,” blocks mining claims to public lands if renewable energy applications are under review.

Prior to this rule, if a specific tract of land was in the review process for a renewable energy project, a mining company going after hardrock minerals could still stake a claim on that land, and wouldn’t need BLM approval. The renewable energy projects would not get priority, even if their applications were filed before the mining claim.

This special treatment for mining interferes with renewable energy development. BLM stated in the Federal Register that mining companies often file claims on land under review for renewable energy not because they wish to mine the land, but only with the intent to “compel payment” from the renewable energy company in exchange for relinquishing the claim.

The new “Segregation” rule attempts to prevent resource conflicts by blocking mining claims if a “right-of-way” application is under review. The need to implement such a rule is illustrative of the outdated nature of U.S. mining laws.

There is no indication that Congress is willing to bring mining law into the 21st century. While levying royalties on the extraction of minerals from public lands faces an uphill battle in the Congress, hopefully BLM’s recently issued rule can begin to roll back the long established preferential treatment for hardrock mining on public lands.

The Expanding Sahara: Desertification in Morocco

by Duncan Gromko

The following was cross-posted with the Public Education Center's D.C. Bureau, which you can find by clicking here.

In Morocco and elsewhere, growing environmental challenges are likely to decrease standards of living, particularly for the poor. Among the harmful impacts of climate change is increased desertification – the expansion of deserts. Globally, climate change will increase average precipitation, but in certain areas, rainfall will decrease. Because of changing precipitation patterns, the Sahara Desert is likely to expand into bordering countries, reducing their agricultural productivity. In many countries, this global change is in addition to local environmental pressures, quickening the growth of the Sahara.

The Sahara Desert (Source: Enviro-Map)

The Atlas Mountains of Morocco have always been a marginal environment, as poor soil quality has hindered productive agriculture. Living in those mountains for two years, I experienced the negative impact that desertification is having on people’s lives. Poor and rural people are more dependent on the environment for generating incomes; 47% of the “GDP of the poor” comes from natural resources. Since the environment is fragile, even small changes in climate or use of resources can result in noticeable declines in standards of living.

Industrial logging, expansion of agriculture, extension of grazing land, and collection of firewood put increasing pressure on the forests of the Atlas. Economic growth and growing populations mean that Moroccans are extracting more and more from the forests that support the country. As a whole, the country loses an average of 30,000 hectares of forest per year.  Fewer trees mean weaker root systems to protect soil. Erosion rates in both the Atlas and Rif mountains are among the highest in the world.

Erosion in the Atlas Mountains (Photo credit: author)

The people I lived with felt the immediate consequences of the creep of the Sahara in several ways. The most obvious impact was the decrease in supply of fuel wood. Although most of Morocco is warm, the Atlas Mountains are at high altitude, creating the need for wood to heat homes during the winter. Large snowstorms often hit my village, dumping more than a foot of snow at a time. In one nearby village, the small forest cover had been completely removed; people were reduced to burning scrub bushes to keep warm. In my village, the nearest remaining trees were over an hour away by donkey ride. Every week, my host father would go out to collect firewood to heat our home. He would ride his mule for an hour to the west, where the forest still grew, to find a tree and cut down its branches to bring back home. My host father was 73 years old and the weekly wood collections tested his health and physical abilities. One day he was several hours late coming home; my host mother and I went out into the darkness, yelling his name until we found him, limping and delirious with exhaustion.

Another obvious impact of desertification is the decline in productivity of agriculture and grazing. Many people in the Atlas Mountains rely on raising goats and sheep for income. Herders feed animals in the mountains and bring them to cities to sell to bigger markets. However, as the soil runs off the mountains and into the rivers, grass does not grow as quickly and the land cannot support large herds without further expanding grazing areas.

Reduced forest cover also increases the frequency and severity of floods since rainwater runs directly off of the soil into riverbeds instead of slowly percolating through ground cover. Even mild rainstorms lead to significant floods. Several times a year, floods would make roads impassable, isolating our mountain communities from the rest of the world. Floods would also wash out fields and damage farmers’ crops.

The people of the Atlas Mountains and Morocco can contribute little to mitigating climate change.Morocco ranked 71st in greenhouse gas emissions in 2010, responsible for about 0.1% of global emissions.

If Morocco is to adapt to climate change and the expansion of the Sahara, it must invest in natural ecosystems that can reduce its impact. Instead, a growing population and standards of living are putting increased pressure on the environment, escalating its degradation. For instance, the price of meat is high, creating an incentive for herders to increase the size of their flocks.

As a Peace Corps volunteer, I was tasked with finding solutions to my communities’ problems and environmental concerns. As much as people wanted to protect natural resources, they depended on activities that harmed the environment for their short-term well being. There were also significant problems organizing collective action. Even if my host family reduced the size of their flock or the amount of wood they harvested for fuel, these sacrifices would mean nothing if others did not make similar commitments. Without strong environmental institutions, it is nearly impossible to change behavior.

Another Peace Corps volunteer and I worked on reducing deforestation driven by local businesses. Public baths – hammams – were responsible for approximately 30% of deforestation as they used wood to heat their water. This may seem like a lot of wood just for public baths, but hammams are an important communal institution in Morocco.

We tried to appeal to the economic interests of the hammam owners. An ultra-efficient boiler developed by the Germany Agency for Technical Cooperation would reduce fuel wood consumption by up to 80% compared with existing hammam boilers. Since fuel wood was expensive relative to the cost of the boiler, we estimated that hammam owners would recoup their investment within 6-12 months. This seemed like a winning strategy for reducing pressure on forests, but we had a surprisingly hard time convincing hammam owners that they should invest in the efficient boilers. There was skepticism over the new technology and, as already successful businessmen, hammam owners had little incentive to upset a profitable business model. After a year of talking with owners, we convinced one hammam owner to purchase the boiler as a demonstration project for other owners.

It was a start, but hardly a solution. I am not optimistic about Morocco’s ability to improve environmental management and respond to desertification. With its already fragile environment, it is particularly vulnerable to the changing climate. Increasing local pressures will only exacerbate the problem. To really respond to this challenge, Morocco will need to increase the capacity of the institutions that manage natural resources; without collective action, private, short-term interests will continue to drive desertification and undermine the country’s long-term viability.

Brazil’s Atlantic Forest Faces Many Environmental Challenges

by Duncan Gromko


The following was cross-posted with the Public Education Center's D.C. Bureau, which you can find by clicking here.

Ask Americans to name a Brazilian forest and most would say, “the Amazon.” But the Atlantic Forest – or Mata Atlântica as it is known locally – stretches from southern Brazil up along the Atlantic coast as far as Rio Grande do Norte and Piauí. This southern Atlantic coast of Brazil is home to large population centers, including mega cities Sao Paulo and Rio de Janeiro. Roughly 62% of the nation’s population lives in the Atlantic Forest biome, accounting for 80% of its GDP.

Rich in biological diversity, the Atlantic Forest is one of the world’s top four biodiversity hotspots. The forest has numerous endemic species – species that are found nowhere else – including the charismatic Golden Lion Tamarin. In addition to supporting flora and fauna, the forest has supplied key resources to Brazil’s growing economy.

Extent of the Mata Atlantica
(Source: Encyclopedia of the Earth)

But Brazil’s economic growth has also almost decimated the forest. Exploitation of the forest began in the 16th and 17th centuries, with Portuguese colonization, and continues to this day. It once covered 120 million hectares, but is now reduced to fewer than 10 million hectares. Even more problematic for animals still living in the biome is that, of the remaining forest, more than 80% is contained in forest fragments smaller than 50 hectares. Animals have a difficult time surviving in such small habitats.

This degradation has taken place despite environmental regulations that prohibit deforestation. Brazil’s Forest Code – most often in the news for its impact on the Amazon – also governs the Atlantic Forest biome. The Code previously required that property owners maintain natural forest on all riparian areas and preserve an additional 20% of their land. Controversialchanges to the Code have reduced the amount of land that a landowner has to retain as natural forest, reforms seen by many as concessions to the country’s powerful farm lobby.

Obviously, if less than 10% of the original forest remains, the Code is not being strictly enforced. If it were, landowners would be forced to reforest their property to meet the minimum requirements.

By far the greatest use of land in the biome is cattle grazing, which occupies an estimated 30.5 million hectares – an area greater than the state of Nevada. The primary driver of deforestation has been the expansion of agriculture. Soy, sugarcane, coffee, bananas, cassava, and other crops have competed with the forest for land. Extraction of timber and plantations to support pulp and paper operations are other important contributors to deforestation.

While protecting the existing forest is a clear priority for Brazilian environmental officials, forest restoration has also emerged as a primary concern. The Pact for Restoration of the Atlantic Forest – or PACTO – was established to increase forest cover in the biome. PACTO is a group of nongovernmental organizations, academic institutions, private companies, and local governments committed to restoration of the Atlantic Forest.

In most cases, reforesting land used for productive agriculture provides the owner with much less financial return, making forest restoration costly. However, in the case of the Atlantic Forest, there are opportunities that would make the cost lower. Cattle grazing, as practiced in the Atlantic Forest and throughout much of Brazil, is inefficient, with an average of only 0.82 cattle per hectare. This represents a very low economic return: only $70-100 per hectare per year. Since forests provide a number of non-market benefits (water regulation, carbon sequestration, nutrient cycling, etc.) there is a strong case for restoring forests, especially on land used so unproductively.

But there are other obstacles that add to the costs. In the Northeastern United States, forests have made a significant come back without active restoration. As the Midwest and the Great Plains became the bread basket of the United States, fields became fallow and the forest has naturally returned. In the Atlantic Forest, however, natural restoration is almost impossible. Several invasive species, in particular an African grass species of the Brachiaria family, has come to dominate the biome. These species were introduced to the Atlantic Forest because they provide cattle with a fast growing food. They spread like weeds and the grass grows high and crowds out native species

Golden Lion Tamarins (Source: stvehdc)

Ecologists trying to encourage restoration are forced to actively destroy the grasses using lawn mowers and herbicides. Herbicide is often applied several times throughout the restoration process. Local tree species are grown in nurseries and then transplanted to restoration sites. While this method has proven effective, it is also expensive. Restoration costs range from $3,000 to $20,000 per hectare. Under current incentives, these costs are prohibitively high for the widespread adoption of forest restoration. Without change, restoration will likely remain restricted to small areas.

Surprisingly, a conservation law may be discouraging forest restoration. The Atlantic Forest law, enacted in 2006, restricts harvest of native timber species. It was designed to halt deforestation. Many native Atlantic Forest species, such as the Pau Brasil, are extremely valuable for their timber. Without this law, one can imagine landowners planting native species with the intent of harvesting them in the future. But the law has also slowed forest restoration. Because of the law, only exotic species can be planted for timber harvest. As a result, much of the landscape is dominated by monoculture eucalyptus plantations. In a properly managed situation, the profit from harvest would lead to partial forest restoration.

Large companies are responsible for supporting the largest areas of forest restoration. While large businesses have played a role in deforestation in the past (and continue to do so in other parts of the countries), that is no longer the case in the Atlantic Forest. Pulp and paper companies, which harvest eucalyptus, are more visible than small to medium landowners. A higher profile brings both more scrutiny from regulators enforcing the Forest Code and the financial resources to respond. Companies like Veracel and Fibria have made significant investments in restoration in order to be incompliance with the Forest Code. Veracel has committed to restoring 400 hectares per year, while the larger Fibria has committed to restoring 23,000 hectares by 2023. In these cases, environmental regulations seem to be driving positive changes.

The Atlantic Forest is in need of continued protection and increased restoration. Under business as usual, it is difficult to imagine a significant comeback for the forest. Without restoration, there are continuing threats to biodiversity and important ecosystems that support Brazilian population centers. Floods and mudslides have recently demonstrated the dramatic human consequences of environmental degradation. However, by tweaking a few laws and enforcing others better, significant progress could be made in restoring this critical ecosystem.