Why we must think beyond GDP for sustainability

Geoffrey M. Heal teaches at Columbia Business School. Speaking to Srijana Mitra Das, he discusses the clean energy transition, why environmental credits work — and sustainable businesses succeeding nancially:Q. Which industries will climate change most powerfully impact? A. It will impact the utility industry. The generation of electricity, one of the biggest sources of greenhouse gases, will have to move from coal and gas to wind, solar and hydro. It will also affect the transportation business — most transport is based on jet fuel, gasoline, etc. This will have to be fuelled by nonpolluting sources, so there’s a big transition there. Buildings will have to be retrofitted with new technologies for heating and cooling. Construction will also be i m p a c t e d — making concrete is a lead ing source of CO2 emi s sions . Several companies are now working on green concrete, made by technologies which don’t add CO2 to the atmosphere. Q. Will climate change impact industry supply chains? A. We are already seeing this. Some years ago, floods in Thailand disrupted supply chains for several electronics industries. Bangladesh and Vietnam, which cater to the global clothing and electronics industries, are both vulnerable to climate change. A business with a global supply chain must diversify much more across locations now. Q. Which businesses are noticeably transitioning already? A. Quite a few utilities are investing heavily in renewable energy which is cheaper now than coal or gas. The automobile industry is transitioning — most of the big automakers worldwide are beginning to produce cars fuelled by non-polluting batteries or hydrogen. Tesla was the first but General Motors, Ford, Nissan and others are doing so too. Q. What are the key economic aspects of this energy transition? A. It will require a lot of capital. While renewable energy is less expensive than fossil fuel energy, it is more capitalintensive. When you build a wind turbine or a solar power station, all the costs are upfront. You have the capital costs of building this but no operating costs due to no fuel and little labour. You pay all the costs for the plant’s lifetime upfront — this means more capital which capital markets should raise and move about. 85907944Q. Decarbonisation means more electrification — how does that impact electricity pricing? A. This is a very important issue. We need to price electricity at close to cost — the marginal cost of electricity from renewable energy is very low. We should price electricity at that level. Currently, what I pay for electricity includes its actual generation, the cost of the grid and the cost of transporting power — I pay 20 cents per kWh while the actual cost is five cents. We need to separate the price of electricity from these other factors which could be charged through taxation. People should pay closer to the marginal cost. That’ll make it more attractive to electrify multiple systems. We must rethink how power is priced. Q. Are sustainable companies also doing well financially? A. Tesla is a good example — it produces clean cars and is among the most valuable automobile companies in the world now. Its stock market valuation is quite extraordinary. Some companies producing wind turbines, solar panels and clean energy batteries have also done extremely well over the last decade. Q. How do you define what you call ‘weak and strong sustainability’? A. All our prosperity comes from capital like physical, intellectual and natural capital. Sustainability means managing your capital in a way that you don’t deplete your assets excessively. Weak sustainability means we’re preserving enough of our total assets, so that our living standards won’t fall. We might be depleting natural capital but accumulating intellectual capital faster to compensate in terms of income generated. Strong sustainability means we’re keeping natural capital intact. However, we’re actually depleting natural capital excessively now. Climate change ref lects this as the climate system is part of our natural capital. Q. Do we need to think beyond GDP for encouraging sustainability? A. GDP is a flow. We need to also think about stocks. To understand a company’s financial situation, we examine its income statement or the flow of monies. But we also look at its balance sheet or the stock of its assets. GDP is a flow but there’s nothing equivalent to a balance sheet when we look at national accounts. We need national balance sheets to measure our capital stocks. Doing so will help us understand the state of natural capital and drive measures for sustainability. The OECD has recommended this.Q. You helped develop the pathbreaking REDD project offering carbon credits for maintaining forests — what were your key insights? A. Forest conservation is essential to balance the climate system. It is also relatively cheap because the economic uses of tropical forests are limited. You can’t really convert these to good agricultural land, so the opportunity cost of maintaining them is quite low. We offered credits over measures like taxation because that’s the only thing that will work. There are huge tropical forests in countries like Indonesia. You can’t punish these nations for deforestation. It’s far more effective to use positive incentives with the international community helping them maintain forests which maintain climate stability. (Views expressed are personal)

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