Green wheels of industry

Eco-efficiency means producing a product, providing a service, meeting a need with the least amounts of energy and materials. While its advocates tend to think of it as a new concept, it is, of course, centuries old. Every economics textbook speaks of technical efficiency, not using more resources than are needed to meet society's demands for those resources. The novelty in the concept lies more in the very recent realisation by industry that it usually makes business sense to pursue eco-efficiency. In itself, this may seem odd. Surely, any business person practices efficiency in the use of resources - otherwise they put profits at risk. Surprisingly, not that many firms know their energy and materials bill, partly because accounting practices do not identify them, partly because of the feeling that these costs are not significant.

Two developments have changed this neglect. The first has been the increasing tide of environmental regulation that has imposed costs on industry, costs that some, including governments, fear might impair competitiveness and reduce economic development. Eco-efficiency makes good sense as a means of complying with regulation. The second development is perhaps more interesting and it concerns the emergence of "green commitment" on the part of industry. Green commitment means going beyond compliance, and even beyond actions designed to head off future regulatory actions. It means reducing environmental impact because it is good in itself. Firms now out-compete each other in green commitment, advertising their products and services in terms of their low environmental damage, their suitability for recycling, their reduced use of natural resources. It is true that green commitment becomes merged with the use of environmental performance as a marketing tool, but the risks in green marketing are such that we cannot explain what is happening unless there is a strong degree of moral concern for the role of business in environmental destruction.

While the authors, Livio DeSimone and Frank Popoff, list seven guidelines for eco-efficiency, they all reduce to the definition above, that of minimising ecological impact per unit of value-added economic activity. Interestingly, they combine this simple message with the underlying philosophy also indicated previously, namely that of reducing the interventionist nature of government in environmental regulation. This they do on the basis that interventions tend to constrain the freedom of choice for industry to achieve environmental standards. Unnecessary costs are imposed because of the failure to recognise that industry knows best how to manage its resources. There are echoes here in the theories of asymmetric information, whereby regulators are assumed to know less than polluters about how to control pollution. Sending only minimal signals to industry and leaving it to get on with adapting becomes the defined role of government.

The virtues of the book, however, lie in the sequence of examples of where companies have cut costs, improved competitiveness and provided better services for customers by espousing eco-efficiency. The mechanisms for doing this are often simple - making sure vans and lorries going out with full loads do not return empty; energy efficiency measures; re-using waste materials and waste water. But some of them are less obvious: product redesign for reduced ecological impact; providing incentives for employees to use public transport; and "full cost" accounting whereby environmental damage is explicitly included in company accounts, either in physical terms or, more adventurously, in money terms. Other mechanisms are more ingenious and include, for example, "joint implementation" whereby one company improves the energy efficiency of a company in a developing country, thereby reducing carbon dioxide emissions which may then count as "credit" to the initiating company. Such credits will be crucial if the carbon dioxide reduction targets agreed in Kyoto last December are to come about.

The authors have few illusions. Understandably, they focus on the good news, but they are aware that there are huge obstacles to changing the wider mindset of industry and, for that matter, consumers. Efforts to be eco-efficient can be destroyed by the incentive to be eco-inefficient as, for example, the price of crude oil tumbles.

David Pearce is professor of environmental economics, University College London.