Kyoto Discussion

Rick Politician, Catherine Pappas, Gabriel Scheer, Alice Snover - Assignment 3 Executive Summary The argument that reducing greenhouse gas emissions via the Kyoto Protocol would "harm our economy and hurt American workers" rests on several assumptions about the world: . The U.S. economy is a national economy in that the government controls the regulatory environment in which U.S. companies make decisions to expand or retract business operations. . American workers are better off if the U.S. remains committed to fossil fuel produced energy because of the low cost structure of that energy compared to alternatives - workers can afford energy in their homes, companies can afford energy and so do not have to lay off workers or move operations overseas, taxpayer dollars are therefore appropriately spent on fossil fuel subsidization to keep the cost of inputs low to the productive sectors of the economy. . If the U.S. were to give up its sovereignty by signing a binding agreement to pursue a reduction of greenhouse gases the immediate consequences would be a national recession due to business failures resulting in widespread unemployment. This would result from the 'strangling' of the profit potential for companies due to higher energy prices. Study of articles by Michael E. Porter, Claas van der Linde, C.K. Prahalad and Stuart L. Hart would seem to disprove these assumptions. Since reading their articles, it is our belief that current US policy towards the Kyoto Protocol is flawed and, while arguably beneficial to the economy in the short-term, has the potential to do great harm to the long-term stability, security, and economic power of the United States. The works of several authors, Michael E. Porter, Claas van der Linde, C.K. Prahalad and Stuart L. Hart, argue that the competitive advantage of U.S. businesses lies in the capacity of industry to innovate and upgrade in an environment of pressure and challenge. While Porter and Linde criticize the U.S. for allowing industries to become comfortable with their current technologies, if the U.S. government encouraged innovation through positive environmental regulations then the companies would be better positioned to take advantage of opportunities in the global market place. Prahalad and Hart's thesis on the fortune at the bottom of the pyramid similarly criticizes the tendency of U.S. based MNCs to overlook the need to innovate for overseas markets. Applying their theories to the energy sector, their projection of the vast market potential for technologies to meet the demand for primary energy may necessitate an overhaul of the assumptions underlying Bush's statement. The assumption that we are better off investing in fossil fuel technologies reflects a bias towards the major energy industries within the U.S. However, if the major energy industries in the U.S. took renewable energy more seriously, the U.S. based companies would have the ability to tap into the fortune at the bottom of the pyramid in a world of nations committed to the Kyoto protocol. Energy policy is inarguably one of the most important discussions of contemporary US policy. However, though one can easily see the underpinnings of the debate in past US practices and political decisions, the authors assert that the global economic climate is different now than at any time in the past, and accordingly, requires a different response. Oil prices are indeed historically important to the U.S. economy. The post-WWII boom period of industrialization occurred within the context of exponentially increasing consumption of oil year by year up to the 1973 OPEC crisis when oil prices tripled overnight. The stagnation of the economy and the process of de-industrialization caused political problems in Tennessee as labor unions struggled with companies moving operations overseas. Simultaneously, the petro-dollar windfall led to overspending of oil producing nations, and a global recession ensued in 1982 as confidence in the banks waned when it became clear that international debts would not be repaid due to the fall in oil prices. From this painful set of experiences, American workers, corporations, and the politicians that represent them came to believe that the price of oil is a major component of a successful economy: if the price is too high, America suffers on a macro-level scale. Globalization has created new opportunities and challenges that should be incorporated into plans for the expansion into new power generation markets. These new opportunities exist despite a U.S. domestic regulatory environment that often tends to favor innovation in the defense sector above all others. For example, in terms of renewable energy generation, if U.S. energy sector companies responded solely to U.S. government incentives and market conditions, the production of new renewable energy technologies would have the U.S. military as its sole client. Even more, if the Bush Administration had a correct view of the market and the authors of these articles were completely wrong in their assessments of changes in markets, the lack of popularity in the U.S. domestic market for environmental technologies would have caused several U.S. based renewable energy companies to go bottom up. Instead, profit from the sales of their products in foreign markets has allowed U.S. energy companies such as GE Wind to expand their business into Central and South America, Africa and Europe. While Clinton and Gore thought the Kyoto Protocol merited America's attention for economic and environmental reasons, Bush argues the economic pain that would result from following the plan under the Kyoto Protocol is an unnecessary burden for Americans to carry. The national energy plan's economic strategy for the energy sector is essentially a political answer to deal with the problem of the weakening competitiveness of American businesses in the global marketplace. The strategy relies on assumptions about the timing and pace of change in the global operating environment for energy. The worldview the Bush Administration projects differs from the worldview stated by several authors, who are focused on exposing the potential market share U.S.-based MNCs might gain by revising business strategies for global markets. If applied to the energy sector, this logic reveals immense potential for international competitiveness concurrent with maintenance of sovereignty over energy legislation. Bush's logic places the social benefits from environmental restrictions as counter to the economic benefits of low prices and U.S. international competitive advantage on the other. He further asserts that when the U.S. government approves laws that require businesses to curb the emission of greenhouse gases, businesses' costs rise and they become less competitive in comparison to foreign businesses. Although this trade-off between ecology and economics is often not true in other countries, due to some flaws of American policy that discourage innovation, this relationship exists in the U.S. One contributing element to this situation is the logic of political economy: lobbying by fossil fuel based energy industries reinforces the renewal of government subsidies yet it is the relationship between policymakers and favored economic actors that discourages innovation in the market. U.S. businesses spend more money on lobbying, advertising and bringing suits against environmental laws then on creating solutions. This dramatically reduces the benefit of the environmental laws for consumers, the economy and the environment. A strict cost/benefit analysis, conducted with fossil-fuel based energy producers in mind, finds the Kyoto protocol much more costly than beneficial for the U.S.; however the benefits here are skewed to a few players in the energy market. In support of Bush's statements, continued U.S. subsidization of energy would keep energy prices low relative to the rest of the world. Meanwhile, if other nations move ahead with changes in keeping with the Kyoto Protocol, they will in effect pay more for energy through their involvement in the Kyoto Protocol. The beneficial impact on American businesses in the short run will lead to the ability to undercut competitors in international markets due to the differential price of a critical input in the manufacturing process. Those who want to market non-fossil fuel based energy in the U.S. and abroad disagree with the political prioritization of the Bush Administration by arguing that government involvement in the energy sector should at least level the playing field between RETs and fossil fuel based technologies in order to allow consumers to choose between products based on economic logic and the maximization of utility. It should be noted, however, that many environmentalists disagree with this judgment because the costs associated with the externalities of burning fossil fuels are not factored into the price of these forms of energy. Globalization has shifted the rules of the game such that the three assumptions underlying Bush's argument may be affected by contingencies in the new global energy market. According to Prahalad and Hart's article, "The Fortune at the Bottom of the Pyramid," U.S. based multinational corporations stand to gain from expanding into Tier 4 markets (the 4 billion people who live on less than $1 a day). If MNCs adopt a "new lens of inclusive capitalism" and focus on providing technologies that allow green products to 'leapfrog' others, the potential benefit for corporations and societies would vastly outweigh the costs involved in changing business strategies. Prahalad and Hart site the following as compelling reasons for MNCs to enter the Tier 4 market: . the superior resources available to MNCs to create infrastructure for distribution channels, communication networks and research; . the ability to transfer knowledge from one market to another (leverage); . best positioning to unite the range of actors required to develop the Tier 4 market (bridging); and, . the ability to transfer innovations up the tiers from the 'testing ground for sustainable living' of Tier 4 to the resource and energy intensive markets of the developed world (Prahalad and Hart, 2002, p.11). The rules of the game now necessitate that MNCs conduct R&D focused on the poor, build local bases of support, form new alliances, increase employment intensity, and reinvent cost structures to create buying power among Tier 4 consumers. These principles, if translated to the energy market, would reinforce the argument that RETs deserve prioritization by the US R&D knowledge centers. Three elements form the foundations of the new global energy environment: the new context of global economic integration of the energy sector, the cost competitiveness of environmental technologies providing energy from renewable sources in countries committed to the Kyoto Protocol, and endless fluctuation in oil prices. Bush's beliefs in regards to the Kyoto protocol are part of a larger, implicit U.S. government policy towards the established, profitable industries. This policy is based on the belief that new environmental protection laws addressing these industries will only raise their costs and decrease their international competitiveness. Ironically, allowing these industries to remain in their current forms reduces the competitive pressures that could push these U.S. industries into developing first-mover advantages. Instead of creating regulations that only force U.S. businesses to clean up their waste, the government could create regulations that encourage businesses to innovate, which lower costs and increase productivity. This is the main argument presented by the article "Green and Competitive: Ending the Stalemate." Environmental regulations can be the means by which the U.S government develops an innovation focus in the nations industries. Wastes produced by these industries are inefficiencies of production. Every element of waste produced reveals an opportunity for a company to lower costs by eliminating the waste. Every hazardous material stands as an opportunity to push U.S. businesses to invent something cheaper and more environmentally benign. Foreign governments, especially those in Germany and the Scandinavian countries, use environmental policy to drive their businesses to develop new technologies. Globalization enables these countries to import resources they lack and use less expensive labor from other nations. This means countries with substantial factor endowments, such as the United States and Russia, are losing their competitive advantages. The U.S. must let go of their implicit anti-competitive policy and embrace the idea of innovation and competition to remain the world's economic leader in the years to come.