Wade Armstrong

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California's New Environmental Regulations: Good for (Visionary) Businesses

Posted Friday September 8, 2006 in Business

New environmental legislation in my home state has brought down hundreds of column-inches of punditry, and public displays of righteous indignation from businesspeople, all parroting the same fears: business will leave California, consumers’ costs will go up, the sky is falling. Now, regulation can be costly to business, it’s true; but business shouldn’t fear California’s new environmental regulations. In fact, business should welcome them, because it is policies like these that will keep our state on top in innovation and job creation in the new century.

Regulation can impose new costs, but a quick overview of history shows that, sometimes, regulation drives new profitability and success. A good example of just this kind of regulation is the US’s auto safety laws, laws that were passed starting in the ’70s and which were ahead of most of the world at the time. Did these laws help American automakers? You bet. Remember Renault, the maker of the cute (and cheap) Le Car during the late ’70s and early ’80s? They left the market because they couldn’t comply with American safety and emissions laws. And, as other countries have instituted safety requirements (like the strict safety ratings now in EU countries), American companies have had a fairly easy time complying — because our automakers already knew how to make crumple zones and side-curtain air bags. These regulations help US and European automakers today, because the Chinese have a hard time selling their cheap and not-yet-safe cars to American and European consumers. Best of all, consumers benefit from these regulations, by not dying in auto accidents.

US Auto safety regulation is an example of regulation that helps companies, in the end. It:

• Created a local market that had the attributes (safety) that global markets would later require
• Created that market early enough that local businesses could learn and be ready to compete globally, when these attributes were required
• Created a market large enough that it was profitable for local businesses to focus on it

California’s new environmental regulations do just these things.

Global Markets Will Require “Green” Business Practices

Other countries are, in fact, already starting to encourage Green business practices. Many have signed the Kyoto treaty; many, especially in Europe, have large numbers of environmentally-conscious consumers; and, even in Asia, government and market forces are driving towards various forms of state- and self-regulation on environmental practices. As climate change accelerates, which most credible members of the scientific community believe it will, consumers and government will expect even more Green behavior.

There is (Briefly) Time to Learn These Business Practices

Companies, even in Europe, are just beginning to get the hang of being Green. While market and government forces evolve, businesses have the chance to learn how to be Green, without tremendously serious consequences for missteps along the way. But, as time passes, a higher level of execution will be expected of companies. Companies that move to try out Green activities now have the chance to gain skill at being Green at very low risk, compared to going through the same learning process in ten or fifteen years.

California is a Large Market

If California were a country, it would have the fifth biggest economy in the world. Sure, businesses talk about leaving, but who actually wants to go next door to Nevada, with less than 5% of California’s population? Las Vegas is booming, but that’s a big trade-off to make. California has a wealthy, diverse population that is often at the front of trends, and most businesses want to sell to consumers just like those. Avoiding California is a bad economic choice for most firms.

There is a Downside for Business That Ignore Environmental Issues

Of course, the size of California’s market is not automatically sufficient to justify the cost of investment in new Green infrastructure and practices; any reasonable business will consider not bearing the cost of engaging in environmentally-sound behavior. Unfortunately for companies that choose this course of behavior, there is precedent to suggest that the cost of delaying Green behavior for too long may be serious.

In his latest book, Collapse, Jared Diamond talks at length about the metals mining industry and its decline worldwide. Most metal mining companies have long ignored the environmental consequences of their activities — as anyone who’s spent any time in any of the Rocky Mountain states can attest — and, as a consequence, really can’t do business in most developed countries at all. In fact, many developing countries are resisting the opening of new mines because of the abysmal environmental record of most metals mining companies. In contrast, petroleum companies are so worried about spills that one of the largest, BP, shut down the Trans-Alaska pipeline just because a spill might happen — they learned from past spills, including a series of spills from drilling rigs off the coast of California that so outraged my state’s citizens that all new offshore exploration is banned in our waters, that environmental stewardship is essential to their continued operations. Few metals mining companies earn an attractive return on equity. Virtually all of the major oil companies are making money hand over fist. Sure, there’s a shortage of oil but there’s also a shortage of copper, so it’s not supply alone; metals mining companies are dying because they can’t operate in new areas and they can’t raise capital from consumers who resent and fear their activities.

It’s simple, really — if a company loses the trust of consumers, consumers will stay away. Arthur Andersen folded because its customers lost trust in it; it’s becoming increasingly clear that consumers judge businesses on their environmental record as well. If climate change proceeds apace, then it seems likely that companies who can be blamed for environmental disasters will receive the same sort of “market death penalty” that Andersen got.

With all of this — the positive effects of doing business in an environmentally-regulated state, plus the possible negative effects of behaving in an environmentally-unsound way — it’s clear that only a short-sighted business would oppose California’s new laws. It’s time for all of us to embrace the future, and that future is Green.