Blogging about the new Elizabeth Kolbert article in the New Yorker, David writes:
But then, there's the nagging thought. Lovins can always talk and explain and persuade better than we can -- he's a friggin' genius -- but the intuitive question keeps returning: if there were so many errors, and so much benefit to be gained by correcting them, and it's all so easy ... why isn't it happening? Something doesn't fit.
Roberts quotes Kolbert expressing similar thoughts:
Lovins's promise that apparently intractable problems -- oil dependence, global warming, nuclear proliferation -- can be profitably resolved is both the great appeal of his approach and its biggest liability. Much of what he recommends sounds just too good to be true, the econometric version of "Shed pounds by eating chocolate!"
This is a good question, and one of my early posts on this blog partially answered it. Energy demand has low long-term price elasticity (PDF). (That's economic jargon for, "people tend to overlook a lot of profitable opportunities to save energy.") That, in turn, implies that Amory Lovins has spotted something real. We have overlooked, over a period of decades, profitable opportunities at market prices -- opportunities that were profitable even without carbon taxes or emissions caps. "Market failure" is not a strong enough term for a system that could consistently go so wrong.
The post I linked included partial explanations:
Split incentives: These include obvious split incentives, like insulation in rental homes, but also differential access to capital. Consumers and various industrial sectors pay differing prices for capital, but they also have varying alternative uses for it. For example, even if you offer a homeowner a low-interest loan for insulation or solar upgrades, she still may want to avoid using up so much of her credit in case she needs it for emergencies or job loss.
Still more split incentives: You can't overlook split incentives in firms. Cost accounting evolved under circumstances in which direct labor was the overwhelming cost driver. As other costs play an ever-increasing role in industry the trend is toward ABC accounting, which seeks more appropriate drivers than labor to allocate these costs. However, flow costs -- energy, water, in some cases even raw materials -- are often allocated in proportion to labor or departmental drivers. That means the person in a position to make decisions that save energy will often see the savings allocated to other departments or divisions.
Noise: When we talk about "markets setting prices" we are making a necessary simplification. You have to remember that there is a price giver and a price taker. That is, someone offers a good or service at a price they think the market will bear, and someone else decides whether to pay the price. Other factors in a purchase will affect a decision more than energy efficiency.
Think about buying a home. Good insulation is better than poor insulation. But if you are selecting between two otherwise good houses, are you going to select the one with a poor location but good insulation over the one with a good location but poor insulation? What if the problem is layout rather than location? Seldom are two homes identical, and most factors that distinguish them will outweigh insulation.
Now, this is not completely true. Builders can get a "green building" premium on the upper end. But you will note that most green homes (excluding owner-built) are in one of two sectors: upper-end or subsidized. You don't see a lot of ordinary, unsubsidized, middle-class housing with extensive green features. Home builders aren't confident they can recover the price of such changes in a mass market, even though there's little doubt such features would pay for themselves over the life of a 15-30 year mortgage
I could list micro-causes of this sort for another 30,000 words. But the ones already mentioned show a common factor -- inequality. Think of rental housing. In a situation where landlords and tenants bargained on more equal terms, tenants could be fussier, insisting on all the features they want and insulation besides. Also, in a situation of more equal bargaining power, there's more trust between landlords and tenants in existing units needing insulation; they can make deals where the landlord pays for part of the insulation because it increases the value of her property, and the tenant pays for part because it lowers her costs.
The same argument applies even more strongly to unequal access to capital. Businesses that divide income more equally between labor and capital, and pay more equal salaries, also tend to build more sense of ownership among managers and workers. Where people feel that the firm is our firm, not their firm, there is much less tendency for the "not my department" syndrome to take hold.
And that is the ultimate explanation for "why we are not doing it now." On a business level, the kind of changes needed to stop overlooking profitable opportunities requires either near-genius CEOs like Ray Anderson of Interface Carpets (not common), or a level of economic equality, shared control, and shared information among employees in a firm that runs contrary to how we structure our economy.
As Amory Lovins notes, "optimization of components in isolation from one another results in pessimization of the system as a whole." In the absence of geniuses running the place, you need to tap the knowledge and creativity of almost everybody in the company. You need to get people talking to one another, understanding the unexpected ways they affect one another. For that to happen, you have to eliminate the fear that if management understands too much about your job, someday they will use that knowledge to eliminate it, or de-skill it and lower your wages. (That is not an unwarranted fear.)
So while various sorts of "team building" schemes can work in the short run, in the long run you need real powersharing -- the kind that gives people some guarantee that sharing knowledge and skills is not a form of economic suicide. As long as you have the three-way tug of conflicting interests between owners, managers, and workers, profitable opportunities will be overlooked.
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Comments
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GreenEngineer Posted 6:08 am
30 Jan 2007
I work in green building design, and I see this all the time. The client and architect can't figure out what they want at first, but once they decide, they want it yesterday. The simple reality is that good green design takes time: you need familiarity with the design context (site, climate, etc), you need to consider and trade among options (e.g. better windows, or a more efficient mechanical system), you need time to model performance. This is compounded by the fact that green design is a relatively young science, so the tools really aren't up to snuff and the knowledge base is not well established.
There are two really critical time periods in the design process of a green building (likely the same is true for a green industrial process too):
The first of these is right at the beginning, when you need to get the entire design team to sit down together with the client and agree upon goals. That almost never happens in practice, leading to slapdash approach as the design moves forward.
The other time is after the design is mostly done, but before it's built, which is when you model performance and look at final tradeoffs between design features. Unfortunately, this time period is very small to nonexistent on most projects. Instead, the design is rushed to completion to hit deadlines and schedules. Then, more often than not, the building proves too expensive, so essential components are "value engineered" out (a oxymoron if ever there was one) during the construction process. The result is (sometimes) staying near to schedule and budget, but suffering with crappy performance for the entire life of the building.
This is one of the reasons (aside from those mentioned above, which are all valid as well) why the greenest homes (footprint aside) are often the very super-premium ones: the owners are involved in the design process, have an incentive to see it done right, and have the luxury of taking their time.
This problem will be somewhat alleviated as green design becomes more standard, and the tools and techniques become better known and understood. However, fundamentally, you're up against the basic conflict: "You can have it right, or you can have it now. But you can't have it right, right now." Our culture values speed over quality. Until that changes, we'll continue to miss easy opportunities for savings.
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GreenEngineer Posted 6:13 am
30 Jan 2007
To say that we're "missing opportunities" is to put it too mildly by half. Instead, picture someone walking around an orchard, carefully stepping and dodging to avoid bumping their head on low-hanging fruit. It's sitting there, ripe and juicy, but it's too much time and trouble to pick.
Energy efficiency in buildings, and process efficiency generally, is a sterling example of the maxim that progress is not so much about having a good idea as it is about ceasing to have a bad one: a "sudden cessation of stupidity".
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AndyFrank Posted 6:29 am
30 Jan 2007
http://www.rmi.org/images/other/Climate/C97-13_ClimateMSM...
On another note, I think that this problem will only be solved when you have entrepreneurs who are taking advantage of these arbitrage opportunities. In other words, turn the energy saved into a commodity and have it be bought and sold. That takes it largely out of the hands of the (inefficient) consumer and into the hands of a sophisticated (efficient) financial market.
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claxton6 Posted 9:03 am
30 Jan 2007
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Gar Lipow Posted 1:12 pm
30 Jan 2007
Arbitrage: - why isn't arbitrage done more? Again perverse incentives from inequality. Take the case of split incentives between landlords and tenents. One solution would be for the utility to lease efficiency improving equipment. The problem here is that up to a point the utility may want to save energy - enough to avoid overloading equipment, avoid requiring more peaking plants, avoid increased maintence. Beyond that saving energy divides fewer sales of kWh among the same capital equipment. So they don't want to save too much. 3rd party leases? You want to sign a long term lease on energy saving equipment with a guy who used to sell vinyl siding door to door?
Perverse incentives: a lot of those are there as a side effect of control mechanisms. We don't need some magical utopia. But if you look carefully at the Amory's list almost every one of them springs from inequality. (Even regulatory failures spring mostly from what is called "regualtory capture" meaning the regulators are controlled by the (rich) regulated.)
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GreenEngineer Posted 7:40 am
31 Jan 2007
It seems to me that you are trying to find a way to explain all these phenomena through a single lens, that of inequality.
For example, the custom home builder can afford to walk away from a job, because he charges a premium and has a reputation to protect. But he can charge that premium only because his clientele has the money (and thus time) and desire to demand above-average work; i.e. because of the economic inequality between the customer-builder's client and the average homeowner.
My point is not that you're wrong. I think you have correctly identified one of the causes of this phenomena. What I'm objecting to is your insistence that it is the only significant cause. In my experience, phenomena in complex systems rarely have single causes or single effects.
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Gar Lipow Posted 7:51 am
31 Jan 2007
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GreenEngineer Posted 12:50 pm
31 Jan 2007
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djackson Posted 2:59 pm
31 Jan 2007
I've been thinking a lot about this lately, the division of knowledge that comes when participants in an organization are disempowered, when they don't literally own the thing. An organization of one leader and ten lackeys will necessarily perpetuate mediocrity; and all the management-speak about teams and goals mean nothing if workers and consumers tied to an organization have no reason to believe their opinions will matter when they go outside the box of their job requirements.
Business in America rewards certain types of unorthodox thinking within firms, but only that in line with the basic priorities of management at the moment. It doesn't create a climate in which workers or customers feel empowered to act or work towards new goals independently.
Recently in Argentina, when many factories were abandoned in the economic meltdown, workers from many factories sought to gain employee ownership. They succeeded in thousands of cases. I was watching a documentary about it, and a few workers being interviewed about their management explained that they had introduced major productivity-enhancing and waste-reducing measures in the first month of employee ownership. They had always known they could be fixed or improved, but they never worked to make them happen because
*they had no real incentive to, it wouldn't benefit them in any way
*more importantly (to the workers interviewed) they knew their opinions didn't matter, and they wouldn't be taken seriously precisely because they weren't coming from the top-down.
Now one question that arises for me from your post is this: given managements focused on short-term profits that enact major changes sloppily in moments of crisis, and given the growing disempowerment of American workers in many or most industries, how can all the observational, analytic and intuitive knowledge of all participants in a business be utilized for rapid yet stable change? If most managements close themselves off to real input from workers (by flat ignoring them, demeaning them, outsourcing them, or simply failing to provide real incentive or trust), and if such input is necessary to really change business culture in America, what do you do?
My suggestion would honestly be to break out of the box that holds solutions will come from centralized managements.
Instead, look to organization among employees. We could see the birth of a new form of labor union, based precisely around basic values of participants. For instance, we could see a variety of caucuses among existing unions networked with minority unions in unorganized shops, focused around ecological reconstruction, and using that as a theme of their organizing and action, tied to consumer organizations.
Such organizations would focus on democratizing their workplaces as a means to the "end" of enacting a social value, i.e. ecological sustainability. This would mobilize all that stored up creativity and energy that goes to waste in most firms.
It's interesting, unions have for so long focused on day-to-day material struggles that they have neglected the basic truth, power precedes prosperity, and shared power precedes shared prosperity. You have to be able to speak at the table before you can garner a fair slice of the pie.
Anyway, might be a pipe dream, but as long as we're talking big I figure 21st century labor organizations should be brought into the picture.
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Gar Lipow Posted 12:05 am
01 Feb 2007
GreenE
>You did give me that impression, though I understand that was not your intention. For what it's worth, I've gotten this impression off of your writing before.
I think it could be, because I while I don't think it the only cause, I think the most neglected cause. Also I think it is a bottleneck - that it is very hard to move any of the others without paying attention. So it is not a big misunderstanding: I really am focused on equality. I just have to learn to convey nuance better, because even if I want to focus on equality, I should not give the impression that it is some sort of sole cause of the problem.
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GreenEngineer Posted 2:52 am
01 Feb 2007
Large organizations doing stupid things because the guys in charge don't know what's going on, and the guys on the ground don't care.
Management doing unethical things in response to pressure from the stockholders, who are most often faceless mutual fund managers. The responsibility for decisionmaking goes: management -> board -> shareholders. When the shareholders are just an investment holding, there's a disconnect at the top of the chain. Employee ownership would change that.
The perrenial conflict between labor and management, which wastes enormous energy and often leads to inefficiencies designed to protect jobs in the short term, at the price of long term prosperity.
Big companies going bankrupt due to bad management and/or liability lawsuits. The guys that get hurt aren't the decision-makers, but the workers who are now unemployed. If the workers were the decisionmakers, this disconnect would be closed.
In the category of "while we're dreaming", I'd like to see an issuance of majority stock to the employees become a requirement of taking a company public. That way, the IPO can still be used to raise money, but doesn't involve giving control of the company to investors who care more about short-term return than long term prosperity.
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robinhoodstfrancis Posted 3:03 am
01 Mar 2008
Thank God you're alive, and maybe already contributing to progressive alternatives. It's ironic that modern activism builds on Christ's teachings, no?
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amazingdrx Posted 3:21 am
01 Mar 2008
Take the consumers revenue stream back from corporate greed, that's our cash, consumer's money. We ought to keep it circulating in the local economy for as long as possible, through worker owned small businesses, farms, rooftop home solar panel investors, local wind farms, and local farm/landfill biogas backup fuel cell generation.
Make the old powerplants and food system obsolete.
Free the grid, free the chickens (and other animals), free the soil (from chemical death), free the people. Cooperatively, peacefully.. a nonviolent re-evolution, Ghandi with a solar panel and a smart grid chip.
http://amazngdrx.blogharbor.com/blog
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amazingdrx Posted 3:37 am
01 Mar 2008
The public needs to see solar panels and so forth, whole Lovins style homes, smart grid connected, maybe 100 homes like the Excel project in Colorado.
When they can visit and look at energy bills, mortgage payments, the whole cost picture for the family. When that is all verifiable for people in the market for homes or renewable energy retrofit of their homes (with plugin hybrid cars) with utility bills included, then mass media reporters will cover it.
Lovins could have a hypercar plugged in, get his whole project up and running for internet demonstration 24/7, that would be a great start.
Go for it Grist. Actual internet interactive media. An interactive column. Amory live.
He could have influential visitors, Gore, Clinton, Barack... call me if you need a producer. Hehey.
http://amazngdrx.blogharbor.com/blog
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Pangolin Posted 10:36 am
01 Mar 2008
While we're doing this check out the North Carolina Green Building Database which is shockingly complete. Plus too much information about straw bale houses.
Put the Carbon Back
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bookerly Posted 11:03 am
01 Mar 2008
Hi Gar,
I don't understand the split incentives program you are talking about. Here is my scenario, if you have a chance, please tell me where I missed the boat!!
There is a problem with the idea of tenants sharing the costs of insulation with the landlord. Any such costs are a capital improvement, deductible by the landlord (the tenant gets better insulation, but only that).
A landlord can borrow the money and pay it back over an extended period of time. With the right tax incentives, and assuming it adds to the capital value of the property (not a good assumption today!), it can indeed pay for itself.
For the tenant, if they live in the same place for a long time, the savings in heating costs will pay for themselves. But, they have to put out their share of the money immediately, with no tax deductions (not that one would help if your income is in the lower 60 percentile). Or they have to borrow at what are likely higher rates than the landlord (with interest costs that are not deductible, unlike the landlords).
And finally, they are then prisoners of the landlord, locked in to the same rental unit by the need to recover their outlay, if they leave, someone else benefits, but they still pay.
And of course, absent rent control (which mostly doesn't exist anymore), this kind of being locked in isn't very helpful.
The landlord can just raise the rent, force the tenant out, then rent the newly improved property (partially paid for by the tenant) at a higher rate!! WooHoo!!! Great for landlords.
patrick in Beijing
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Pangolin Posted 7:40 pm
02 Mar 2008
The obvious solution to the split or perverse incentive problem is to assign the costs to the party in the split with the most likelihood, and resources, of fixing them. Force all landlords to pay all the utility bills of the buildings they rent. As an addendum they may only dun the tenants for that part of any months bill that exceeds the yearly average by say 2/5ths.
Instantly landlords everywhere will scramble to install efficiency measures.
Put the Carbon Back
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bookerly Posted 8:51 pm
02 Mar 2008
And it would work. Otherwise, they'd just raise the rent. Alas, as far as I know, except for NYC and a few minor towns, rent control is pretty much dead (or at least been eviscerated, much like welfare.
When will the sheep look up?
patrick in Beijing
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