1 Mind over matter: greening the new economy – Digital Futures

1 Mind over matter: greening the new economy

Charles Leadbeater and Rebecca Willis

The new economy

Shawn Fanning, the 19-year-old renegade founder of Napster, is an unlikely environmental hero. Napster is an online music community, based around a technology that is simple yet powerful. It allows a computer user, armed with a modem and the Napster software, to download a piece of music – as a computer file – via the internet.

At first sight it may appear that this technology has little to do with tackling climate change or pollution. Yet, on closer examination, the environmental potential of Napster is considerable. If the entire music industry were to embrace Napster-style technology, we would be able to phase out the production of compact discs, tapes and all the materials, packaging and transport associated with these physical products. Shawn Fanning turns out to be not just a techno-entrepreneur but an environmental entrepreneur as well.

Of course, the Napster technology is not an environmental free lunch. To download a file using Napster, you first need a computer, which has to be manufactured and disposed of and which consumes electricity. The Napster story also highlights some of the difficulties this kind of innovation will face in order for its environmental potential to be realized. It will take a long time to wean consumers away from their compact disc collections. Consumers, as well as producers, will have to adapt and innovate. The mainstream media companies will not embrace the technology unless they can be sure that they will be able to charge people to listen to music and watch films – hence Napster's recent deal with Bertelsmann, the German media giant.

If the world's music industry manages to make this switch, environmental benefits will follow. Similar gains could be made in the film, television, video and even book industries if major producers and publishers shift to digital formats. The economics, technology and environmental impact of the world's entertainment and media industry could be transformed within a decade, not by new regulations or corporate research and development, but by the revolutionary ideas of a few young turks working at the margins of the law. Fanning has made it possible to imagine the world's media industry developing along entirely new lines.

In the next few years, more and more companies will face this kind of challenge as new technologies revolutionize industrial processes from top to bottom. All great entrepreneurs open up possible futures that would have remained closed off without their insight, imagination and drive. Entrepreneurship of the kind that Fanning is engaged in will be critical if we are to achieve environmental sustainability.

To explore the full environmental potential of these changes, we need to look beyond the technology. These are more than just technological breakthroughs; they open up new opportunities for our management of the entire economy. We need to look at the social and political conditions that support the Shawn Fannings of this world, and examine the environmental opportunities that emerge. In short, we need to consider the potential of the new economy.

This new economy can be defined in narrow or broad terms. At its narrowest, it is associated with the rise of information and communications technology, particularly the internet and e-commerce. A broader definition is that the new economy is not defined by any particular technology so much as the widespread capacity for innovation.

It comes in many guises: the post-industrial society, the information society, the knowledge economy. Whatever you call it, the new economy is innovation-driven. New sources of competitive advantage derived from innovation are transforming every sector, from agriculture to aerospace, pharmaceuticals to farming. As the US government's Digital Economy 2000 report puts it,

‘Three hundred million people now use the internet… [T]hese numbers do not tell the full story. We are witnessing an explosive increase in innovation… we are witnessing myriad new forms of business activity’.1

It is crucial to adopt this much broader definition of the new economy. It makes it possible to look beneath the surface of the new technologies at the underlying economic and social changes that are taking place. From these changes could emerge new ways of protecting and enhancing the environment.

In this chapter, we look at changes in the way we use and value capital, and at new approaches to consumption, production and ownership. We draw out the environmental potential of these shifts, and recommend ways to realize it.

To start with, it is worth examining some key aspects of the new economy that could present opportunities for environmental policy. First, the explosion in innovation; second, new links between economic and biological thinking; and third, the cultural differences between the new economy and the old.

Innovation

Information technology is having a profound effect on the way businesses are organized. The goal in the old, industrial economy was optimization: finding the most efficient way to make a product, given existing technology. The new economy is driven by innovation and adaptation: finding creative new ways to generate value. This provides the potential for whole systems of production to be rethought from the ground up, rather than undergoing incremental change. This kind of whole-system innovation is complex, however, and is often only realized within a much larger context of social, organizational and political change.

Yet it is whole-system innovation that will be needed to deal with the environmental challenges we face. Take car use as an example. New, more sustainable forms of car transport will require scientific and technological innovation, such as hydrogen fuel cells; but the true potential of this technology will not be realized without social innovations that create new patterns of car use and allow consumers to share cars through leasing schemes. Such a social shift requires regulatory innovations such as road pricing; these, in turn, may only be possible through the political innovation of enabling cities to control their own taxation. We need to imagine not just new technologies, but whole new social systems.

So far, though, we have not summoned up the will to do this. We are scientific and technological revolutionaries, but political and institutional conservatives. Compare this with the Victorians. The 19th century was revolutionary because the Victorians matched their scientific and technological innovations with radical institutional innovations: the extension of democracy; the creation of local government; the birth of modern savings and insurance schemes; the development of a professional civil service; the rise of trade unions; and the emergence of the research-based university. We are timid and cautious where the Victorians were confident and innovative.

To realize the environmental potential of the new economy we have to channel its innovative power towards the creation of social institutions that can deliver a sustainable way of life. The building societies and insurance schemes created by the Victorians had a lasting legacy, shaping the lives of millions of people over many decades. We need to design institutions that have a similar longevity and impact.

New economic insights

The new economy could change the way we think about the natural world. We are seeing the emergence of a new intellectual synthesis that applies the same principles to both the modern networked economy and to complex ecosystems. The more the economy becomes innovation-driven, the more evolutionary theory becomes relevant to our understanding of how firms succeed, and even why stock markets rise and fall.

Innovations, whether in business or ecology, are rarely the product of individual, unilateral action. Organisms evolve in their niche within the environment; a company co-evolves and declines with its customers, suppliers and partners. And as the economy becomes more networked and global, so it becomes like one of the complex adaptive systems in nature, such as a tropical forest. These complex systems are ordered without being designed. An evolutionary account of innovation and economic growth stresses the features of the economic system as a whole: the degree of experimentation and diversity; the tolerance of failure; the opportunities for co-evolution.

The US thinker Hal Varian borrows the model of ‘recombinant growth’ from the biological sciences to explain how innovations succeed by reacting with each other, as happens in the natural world. He writes that:

‘in the fertile ground of research labs and startups, people are taking apart and recombining these basic elements [of internet technology] to forge new products, services, processes and business models… a willingness to pull things apart and reconstitute them in a new form underlies the genius of these inventors.’2

Jane Jacobs, the US economist best known for her work on cities,3 recommends that we learn ways of improving our economic systems from ecology, particularly the ability to self-organize and self-refuel. She suggests we learn from the fragile but complex webs spun by spiders, or from the principles by which plants capture sunlight and turn it into energy. The attraction of these biological models is that they explain not just the force that is driving the new economy, but some of its disorderly downsides as well. The new economy is prone to bubbles and slumps because dynamic self-organization can all too easily descend into chaos.

This convergence between biological and economic thinking will not, in itself, improve the environment; but a growing intellectual synthesis could make it easier to take account of the natural world in the economic sphere. As the economy becomes more innovation-driven, it will increasingly resemble the complex and adaptive systems we see in nature. Linear, hierarchical thinking – about the economy, and about our relationship with nature – could be replaced by contingent, adaptive thinking, which acknowledges the need to co-evolve rather than control.

Cultural shifts

Both the new economy and sustainable development are creations of the last third of the 20th century. Most people 30 years ago had not seen, let alone used, a computer, and nor had they heard of climate change. The new economy has emerged alongside a growing consciousness of the environmental challenges we face.

Independent, well-educated knowledge workers who want to work in a clean environment are likely to support green ideas. California, the home of the new economy, is also home to one of the world's most assertive environmental movements (although Silicon Valley itself is a growing environmental nightmare of overcrowding and congestion). Forum for the Future's 2001 survey of new economy companies reveals that dot-com senior managers are broadly sympathetic to social and environmental issues.4 However, the survey also reveals a gulf between thought and action; only one-fifth of the companies surveyed have any systems or policies in place to measure or mitigate their environmental impacts. The spirit is willing, but the flesh is weak. This points to the need for a concerted effort to help new economy companies turn green thinking into green behaviour.

While the new economy has given rise to a new breed of entrepreneur, the environmental movement has been changing too. Environmentalism was largely a protest movement 30 years ago, providing a radical critique of modern capitalism. While protest is still an important influence, many individuals and organizations have been shifting towards a more accommodating framework, in which business is seen as a potential ally in the search for environmental solutions. This new culture of partnership was apparent in Tony Blair's recent call for

‘a new coalition for the environment, a coalition that works with the grain of consumers, business and science… that harnesses consumer demand for a better environment, and encourages businesses to see the profit of the new green technologies’.5

Similarly, the Department of Trade and Industry's latest strategy for sustainable development was drawn up in consultation with many key players in the environmental movement. It was even launched at a Greenpeace conference – a move that would have been unthinkable a decade ago. The new economy is fertile ground for these partnerships, and these twin changes in the economy and the environmental movement could create a powerful new force for sustainability. They could place the relationship between the economy and the environment on a new footing and allow us to resolve what have seemed to be intractable problems.

Of course, the mere fact that this path to a greener future is a possibility does not mean it will become reality – far from it. We must not fall prey to the over-optimism that infects so many starry-eyed advocates of the new economy, who believe that technology and free markets can solve all our problems. The political will – and intervention – that is required to steer the new economy towards sustainability should not be underestimated. Nor should we dismiss the potential for deep conflicts over values – particularly where the commercial imperatives of the global economy are concerned, as the November 1999 protests in Seattle against the World Trade Organization (WTO) showed all too clearly.

The convergence of the new economy and environmentalism will not remove hard choices, but it may make them easier to resolve. The question to which we now turn is: how can we make the most of this potential?

New approaches to capital

In industrial and agrarian economies, the material assets of land, machinery, raw materials and labour (brute power) are of paramount importance. The new economy depends instead on intangible assets like knowledge, imagination, creativity and trust; and it takes intangible forms, like brands, services and software.

Traditional financial accounting, the foundations of which are more than 500 years old, is designed to track and record transactions involving physical property. It is not adept at measuring the value of assets that cannot be easily packaged, bought or sold. Most corporate balance sheets record the value of assets like land and buildings, but in new economy companies the most valuable wealth-creating assets go unrecorded. The difficulty inherent in valuing new economy companies is shown clearly in the volatility of their share prices. Market valuations greatly exceed the physical assets of the company, but there is no clear way of measuring the difference between physical and intellectual assets.

Innovations in accounting aim to measure these ‘stealth assets’. The US Balanced Scorecard method relates financial performance to customer and employee satisfaction. The Skandia Navigator, developed by the Swedish insurance company Skandia, is one of many tools designed to measure a company's intellectual assets. There is a growing demand for such accounting practices that acknowledge and measure intangible assets. As a recent report from the US government points out, the incorporation of intangible investments into accounting methods

‘could have significant effects on a range of measures central to our understanding of the economy… [it] would highlight the limitations of GDP as the almost-exclusive gauge of longer-term growth trends.’6

In a striking parallel, environmentalists are calling for more systematic methods of accounting for ‘natural capital’. Environmentalists have long argued that traditional measures of gross domestic product (GDP) do not reflect the true environmental costs of economic activity. The environment provides vital services to industry – such as clean air, water, raw materials and waste disposal – that are generally undervalued. As Paul Ekins points out, the underpricing of environmental functions – an atmosphere that yields climate stability, biodiversity, degradation of wastes and so on – leads to their overuse, and as a result the underlying stocks of natural capital are being run down.7 The challenge is to assess the value of these assets, and to work toward accounting for the full environmental costs of economic activity.8

Already, a good deal of progress has been made in developing environmental accounts at both the corporate and the national level. A good corporate example is provided by the carpet manufacturer Interface, which is working with Forum for the Future to calculate its ‘sustainability cost’ – the notional sum it would have to set aside to restore the environmental damage its activities cause. That calculation allows the accounts to be amended to include a figure for environmentally sustainable profits. Just as companies set money aside to modernize machinery as it wears out, Interface will set money aside to restore the environmental capital it uses. Just as profits are amended to take account of taxes and interest, Interface will amend them to take account of environmental costs.

There are similar initiatives at the national level, such as the methodology of national environmental accounting developed in The Netherlands in the 1980s. Many countries, including the UK, now have their own environmental accounts. Economists at the World Bank have gone even further, developing new tools with which to measure national wealth in terms of natural, human and manufactured capital.9

We could never hope, or want, to place a monetary value on all aspects of the natural environment. However, these examples show that methodologies for valuing environmental capital are well developed, and efforts continue apace. Processes such as the Global Reporting Initiative and the SIGMA Project are at the forefront of this trend.10 The challenge now is to integrate environmental capital and other intangible assets more fully into accounting systems. As the borders of financial reporting break down, it will become far more common for companies and nations to provide more complex accounts, which combine financial and non-financial measures of performance.

New kinds of consumption

The convergence of the new economy and environmentalism could lead to far-reaching changes in what we consume and how we consume it. There are four main ingredients to the possible new consumer culture: an emphasis on services rather than physical goods, the dematerialization of some consumer products, the virtualization of other products, and changes in consumer values and ethics.

Services

The new economy will accelerate the rise of the service economy and the shift away from manufacturing, at least in developed countries. Information technologies will continue to increase productivity in old industries and, as a result, the number of jobs in manufacturing will decline as those in services rise. By the year 2050 perhaps as little as 5 per cent of the population will be employed in the traditional industrial sphere as we know it.11

Increasingly, people will value manufactured goods, such as mobile telephones, for the services they bring: voicemail, text-messaging, internet access. The falling costs of technology will allow more people to start service businesses using computers and communications in areas such as design, marketing, public relations and so on. Moreover, as the world becomes full of more efficient gadgets, consumers will increasingly value experiences that make them feel special and leave them with a ‘warm glow’. Writers such as Joseph Pine and James Gilmore advise companies that in the ‘experience economy’ they must concentrate on making memories rather than goods. Car-makers, they argue, should focus on enhancing the all-round driving experience, furniture-makers the sitting experience, clothing manufacturers the wearing experience. Physical goods still matter, but only to the extent that they provide people with the experience they want.12

A service-based economy could be more environmentally sustainable than an industrially-based one. For example, Ireland's 1999 environmental accounts found that forestry and fishing accounted for 29 per cent of greenhouse gases while employing only 12 per cent of the labour force. The service sector, however, generated 19 per cent of greenhouse gases while employing 50 per cent of the workforce. However, a mass service economy is not without its own environmental challenges. Services are only beneficial if they are substitutes for products – and some argue that this is not happening. Jim Salzman, for example, writes that services work as ‘complements to traditional production factors such as labour and resources, improving their efficiency and leading to increased environmental impacts through greater resource flow’.13 And of course, a shift to a service economy in one country may hide the fact that the manufacturing industries have moved elsewhere – probably to developing countries – rather than disappeared.

Increased trade and international travel may exacerbate the problem. The search for new consumer experiences – the latest foods, the most exotic destinations – is rarely environmentally friendly. Take the hotel complexes which ring the Indian Ocean island of Mauritius. These vast hotels welcome hundreds of guests at a time, mainly flown in from Europe and South Africa. They manufacture an experience for their guests – not the experience of being on the island of Mauritius, but of lying on a palm-tree-lined, silver beach, bathed in a blazing sunset. Not only do these experience factories consume large quantities of energy, water and cleaning materials, but they also depend on global air travel. Tourism, the leading experience industry of the new economy, accounts for about 11 per cent of world GDP. This share is projected to rise above 20 per cent by the year 2008, when it will be worth more than $7.5 trillion.14 Just 20 years ago, roughly 280 million people took international trips each year; today this number has doubled, and the growth shows no signs of abating.

So the service sector will itself need innovation if it is to realize its environmental potential. As a first step, hotel groups such as the Inter-Continental and the Taj Group in India have pioneered waste-saving programmes, to recycle materials and water. In the long term, innovations in aerospace, such as hydrogen-powered planes, will be needed to create more sustainable forms of long distance travel. Above all, greater innovation in policy is needed to reduce environmental impacts to a minimum. This means, for example, shifting the tax burden away from labour and services towards materials, energy and consumption.

Dematerialization: the great energy debate

The new economy generates more value than the industrial economy, and uses less energy and fewer materials per unit of output. Physical products are becoming lighter and incorporating more intelligent software. Toyota, for example, estimates that software and electronics will account for 30 per cent of the value of the average car by the year 2005. The laptop computer used to write this chapter weighs about the same as the older model it replaced; both contain similar amounts of plastic, gold, silicon and other metals. Yet this newer laptop is perhaps five times more powerful than the old one. This difference is entirely due to the way in which the same physical ingredients have been minutely rearranged according to a new recipe. The improvements in power and performance are due to human intelligence rather than additional materials.

The combination of information technology and communications has created the potential for e-commerce to reorganize physical retailing. Banks used to measure their market share by the total length of all the counters in all their branches, up and down the country. These days most banks are investing in electronic services delivered to their customers over the internet and digital television. These cost less, are less energy intensive, and do not require customers to make a physical journey to a bank. According to one study by US energy expert Joseph Romm, the ratio of energy used per book sold between a traditional bricks-and-mortar store and Amazon.com is 15:1.15

At this point, though, the rebound effect rears its ugly head. As computers and other electronic devices become cheaper, so we will use more of them, more of the time. The internet is set to create a 24/7 economy in which the lights and the computers are always on. In the Leadbeater family home, there are four kids, five computers, three mobile telephones, four landlines, two televisions, a microwave, an electric kettle, a washing machine, a dryer, a dishwasher, and two ovens – as well as numerous CD players, Walkmans and radios. Compare that with the Leadbeaters just two generations back; they had neither a television nor a car, their kettle went on the gas hob, and they used their single telephone as if it were a luxury.

That our use of energy and resources is becoming more efficient is not in doubt. What is questionable is our ability to turn this into environmental benefit, rather than gobbling it up through more consumption – and this takes us into the realm of politics, not technology. In the US, this political battle is being fought hard. At the extreme, there are those who reject any attempt to curb energy use for environmental ends in case it damages the digital economy. Supporters of the US coal industry, such as Mark Mills, say that coal is needed more than ever to power the computer networks that are the backbone of the new economy. In a notorious Forbes article, ‘The Internet Begins with Coal’,16 he claims that the internet accounts for as much as 8 per cent of US electricity consumption. According to Mills, ‘no energy policy, including and perhaps especially the anti-electricity aspects of the Kyoto Protocol [on climate change], should be considered without passing it first through a digital sanity test.’17

So for Mills the choice is stark: save the economy or the climate. However, this argument is both irresponsible and inaccurate. First, it ignores the immense potential of renewable energy to generate electricity; the internet does not have to ‘begin with’ coal, it could begin instead with wind turbines or solar panels. Second, it ignores the potential of new technologies to increase productivity. The internet can help to reduce waste and improve energy efficiency. As Joseph Romm observes, ‘In the very near future the internet will itself be used to save energy directly… many utilities have begun exploring internet-based home energy management systems’.18 This suggests that regulation of the energy market could make the new economy more, not less, competitive.

In direct contrast to Mills's pessimism, Romm estimates that e-commerce could reduce overall US carbon dioxide (CO2) emissions by up to 2 per cent per annum between 2000 and 2007.19 Yet this will not happen without a concerted effort to maximize the environmental potential of new technologies.

Virtualization

The Encyclopaedia Britannica, once a badge of respectability to be found on all middle class bookshelves, used to run to 30 hardback volumes, at a cost of more than £1000. Today, it is only available on the web – for free. This is an example of virtualization at work. Whereas dematerialization means doing more with less resources, virtualization describes the emergence of entirely intangible products – entertainment, information and software – that can be delivered in the form of computer files. These virtual formats involve none of the physical manufacture, storage and travel impacts of physical products, and they create different cultures of consumption. A computer file can be endlessly replicated at little cost and with few extra resources.

Again though, there is a need for some qualifications. The benefits of virtualization will not flow quickly, because consumer preferences take a long time to change. What's more, virtualization is less likely to displace the real economy of goods than to enhance and complement it. The rise of the home video industry helped to increase the number of people visiting cinemas. Newspapers that publish online editions find that sales of the physical version rise. The same is probably true of communication. The internet allows more people around the globe to communicate electronically. As a result, more want to meet face to face. Global communications will encourage global trade and travel. In addition, a proper assessment of the environmental benefits of virtual products needs to take into account the entire system used to produce and distribute them. Consumers may choose in future to download books from the internet, but if they then print them off at home onto high quality paper, the environmental gain will be negligible, or even negative.

Nonetheless, given the right policy framework, the environmental potential of virtualization is considerable. Governments could help to encourage the spread of virtual music, film, television and books by designing internet taxes carefully to reward e-commerce that reduces resource use.

Consumer values

The new economy is rich with information, including information about where and how products have been made. Increasingly, production systems will generate this information as a matter of course, and consumers could have ready access to it through the internet, providing the basis for electronic eco-labelling. Such initiatives already exist. The shop at Doncaster's Earth Centre allows customers to obtain further information about the social and environmental impact of their products by scanning a bar code into a computer. This sort of technology could one day be in place in every supermarket, giving consumers as much or as little information as they want.

The internet is creating many new ways for people to aggregate their buying power in consumer clubs. Environmental consumers could form such clubs to give their combined buying power the weight it lacks in the traditional high street. These innovations are likely to emerge from ethical internet portals like oneworld.net, which are already starting to explore e-commerce. The new economy also has the potential to forge links between local communities. If people can buy, sell and barter through a local network, this will reduce the environmental impacts of shopping, as well as promoting local regeneration. The research by Alex MacGillivray and David Boyle of the New Economics Foundation examines some of these opportunities (see Chapter 5).

However, whatever the efforts to encourage local initiatives, the new economy will also extend the reach of consumerism. The global communications revolution amounts to a globalization of desire. Consumers everywhere now have access to the internet, and through that they can be reached by advertisers and marketeers. Also, the culture of much e-commerce – epitomized by lastminute.com – is immediate, impulsive and not at all conducive to careful consideration of the implications of spending decisions for sustainability.

New kinds of production

As well as reshaping what we consume and how we consume it, the new economy will reorganize the ways in which we produce goods and services.

Local or global?

The falling cost of technology could make it economically viable for more people to work at home. This would mean fewer journeys, less commuting and less use of inefficient office space. In the same way, as MacGillivray and Boyle demonstrate, the internet could allow local, small markets to flourish.20 However, the new economy is also propelling a process of globalization and consolidation, and the effects are far-reaching. E-commerce allows the creation of far more dispersed and opaque production networks. In the old industrial economy, it might have been possible to identify the factory that made the goods and emitted the pollution. These days, most manufactured products – shirts for example – are made by complex, elongated networks. Identifying the person who bears responsibility for pollution in these networks is difficult, especially when the basic material might be woven in one east Asian country, dyed in another, finished in another and packaged in Hong Kong, before being shipped to retailers in Europe. This can be overcome, to a certain extent, by better information flows; but the sheer volume and scale of transactions complicates things greatly.

Intelligent production

New technology should allow companies to make far more efficient use of physical capital. Better monitoring of the operation of processes – from running chemical plants to cleaning cars – should allow companies to eliminate waste and use capacity more efficiently. As a result, the yield from a fixed sum of capital should go up, replacement costs should go down, and waste should be minimized.

Manufacturing companies have long recognized that increasing the productivity of existing equipment reduces the need to invest in costly new plant. Texas Instruments, the semiconductor manufacturer, estimated back in the 1980s that small improvements to quality in its existing chip plants had increased yields to such an extent that it was the equivalent of building an additional plant. As the research by Peter James and Peter Hopkinson shows (see Chapter 7), the efficiency of freight distribution could also increase significantly. Web-enabled systems allow an increased use of existing capacity, for example by making sure that lorries are full on return journeys. An example of such a system is the US-based National Transportation Exchange (www.nte.net).

The same argument applies to the transport system as a whole. Public transport could be a major beneficiary of better information systems. One of the main disincentives affecting the use of public transport is the time it takes to transfer between trains, taxis and buses. On some estimates, up to 50 per cent of journey time can be taken up with changing between modes of transport. Better information and planning should make it easier to plan a journey from beginning to end, and so make public transport more attractive.

Simply having the information is only the first step; what policy makers and managers do with it is what counts. Real gains may only come when this flow of information is used to underpin new approaches to road and journey pricing, which in turn will require both political and social innovation.

Innovation in production

The traditional view is that regulations to improve environmental performance are bad for competitiveness. Firms make choices about their optimal production strategies and environmental regulations simply add costs to them. In the knowledge-driven economy, however, environmental regulation could have a new role. Open markets and tough environmental standards, when combined intelligently, may be the best way to spur innovation that simultaneously improves competitiveness and helps the environment. Environmentalists such as Amory Lovins argue that production processes can be made more efficient by redesigning them from scratch. This whole-system-redesign approach is one example of how we can generate win–win economic and environmental innovations.21

What is the realistic scope for such innovations? Take pollution as an example. Pollution is a form of waste; it is the unnecessary or inefficient use of materials. Waste is the result of poor process control and design. The best way to reduce pollution is not to treat is as it emerges from the process, but to redesign the process itself. That means making production more knowledge-intensive: by embedding knowledge in the process at the outset, improving design, and building in better information gathering so that the process can be monitored and controlled more accurately.

When the Massachusetts jewellery company Robbins was facing closure for violating waste discharge regulations, it developed a new system that purified wastewater and reused it. The water that came out was 40 times cleaner than that which had gone in through the city's pipes, and helped to improve overall water quality as well as reducing discharges to zero. As a result, Robbins saved more than US$115,000 a year in water, chemicals and disposal costs, and reduced water usage from 500,000 to 500 gallons per week. The capital cost of installing the new water recycling system was $200,000. A conventional treatment plant that enabled Robbins to comply with the waste discharge regulations would have cost $500,000.22

There is a role for both market competition and demanding regulation in promoting environmental innovation. This mixed approach works with the grain of the knowledge-driven economy, not against it.

New forms of ownership

The new economy allows us to think differently about ownership. In the industrial economy, ownership of physical products and assets is essential. Owning a car or a stereo is a badge of honour for young people. In the new economy, outright ownership of physical products may come to matter less, as consumers and companies start to value assets more in terms of the services and experiences they produce.

Knowledge-intensive products, like software and recipes, never cease to be the property of the owner when they are transferred to another user. A recipe does not stop being Delia Smith's when it is used by a cook at home. In the same way, computer users increasingly download software from the internet as and when they need it. The pure knowledge products of the knowledge economy are not consumed and owned in the way that physical products were; they are licensed, leased and shared.

Companies and consumers will increasingly seek to minimize the costs of owning assets that they do not need all of the time. They will want access to products as and when they need them. Take cars as an example; in the future, consumers might be more interested in how to complete a journey in the most efficient way, rather than in buying a car which might sit outside their home most of the time without being used. Rather than owning a car, people might become increasingly interested in a ‘journey service’, which would allow them to lease or borrow a car only when they needed it.

The environmental potential of this shift from ownership to leasing, borrowing and sharing has been highlighted both by Amory Lovins and Jeremy Rifkin.23 Rifkin reports that in less than 18 years, non-commercial auto leasing has risen from obscurity to a point where one-third of new vehicles in the US remain the property of the car-makers or dealers who lease them to the customers. In the UK, Mercedes Benz runs a leasing scheme through which customers can lease whatever car they want, when they want it, within an agreed price range. Were a family to need a people carrier for their annual holiday, they could get one, return it after they had used it and then get a saloon for the rest of the year. According to Helmut Werner, Mercedes Benz’ chairman, ‘We do not want to just sell another car but rather offer a complete package of transportation services.’

The same changes in ownership patterns are underway in the corporate world. Increasingly, companies do not want to own assets that are not core to their business or which they have no particular expertise in managing. As Stan Davis and Christopher Meyer argue in their book Blur: ‘We need to walk away from the idea that owning or even controlling capital is a necessary resource for fulfilling market need.’24 Davis and Meyer argue that in a fast-paced economy, ownership of fixed assets and equipment can hinder a company's ability to move from one business to another. Their maxim for fixed assets like land, offices, computers and machinery is ‘Use it, don't own it.’ Knowledge-based companies need to own and retain their real assets: their people and the culture which binds them together. The offices, furniture, cars and machinery can be bought in from elsewhere.

This shift from outright ownership to leasing could result in significant environmental gain. Leasing means that producers retain ownership and ultimate responsibility for the product. That gives the manufacturers an incentive to make the product as robust and durable as possible, extending its life. The manufacturer has a far greater incentive to design using materials that can be easily recycled, thereby minimizing waste.

Changes in ownership structures could also have profound implications for energy use. In 1999, the companies Ocean Spray and Owens Corning decided to outsource their power needs, handing responsibility for lighting, heating, cooling and motors over to the energy company Enron. If they had retained control over their energy use, it would not have been economic for them to invest in energy efficiency measures with a long payback period. However, because Enron had ownership of the company's energy needs through a long-term contract, it could justify much longer-term investments in efficiency, to the benefit of the environment. Much the same shift is increasingly envisaged for domestic energy; an energy supplier could sell a ‘warm homes’ service through investment in insulation and efficient heating appliances, rather than selling extra megawatts of energy supply. This example, and many others, illustrate that when better information about yields from capital equipment is combined with the shift to leasing and outsourced ownership, it can lead to dramatic environmental improvements.

Assessing our chances

Our tour through the capital, consumption, production and ownership of the new economy shows the potential for real environmental improvement. Learning to value knowledge and innovation could go hand in hand with a better valuation of natural capital. New websites could make it easier for people to buy green. Better information could radically increase manufacturing productivity. And new forms of ownership could prompt firms to take responsibility for the full life cycle of their products, from cradle to grave. The potential is there.

At the same time, a new synthesis is emerging from the convergence of the new economy and the environmental movement. Thirty years ago, both were on the margins of the economy, politics and society. These days the new economy and the environment combined exert a huge influence on how our societies develop. This convergence will not solve our environmental problems in and of itself; it is far from being a magic bullet. However, it has created an opportunity.

The new economy will only develop along more environmentally sustainable lines if technological, social, organizational and political innovations work in combination. Governments at local, national and international levels have critical roles to play in stimulating innovation. They can help to create capabilities through investment in science and research; they can stimulate linkages between science and business that will exploit new technologies; and they can promote innovation in consumer markets by setting standards and encouraging competition. The potential will only be realized through policy that works with the grain of the economy and the environment. Policies that have hitherto been experimental and hesitant – valuing intangible assets, providing incentives for innovation, encouraging new forms of ownership – will need to become mainstream and bold. We will need creativity and determination on the scale of the Victorians. Have we got what it takes?

The opportunity

How green the new economy ultimately becomes depends on the decisions we make now. Below, we offer some suggestions as to the way forward.

Valuing the intangible

Government, working with accounting bodies, should develop and reach a consensus on new measures of economic activity, bringing assessments of the value of intangibles and assessments of environmental impact together. These new measures should operate at the national and corporate accounts level, to provide a more rounded assessment of the total costs of individual products and services.

Encouraging the virtual

Government should carry out a thorough assessment of the impacts and benefits of the shift from physical to virtual products, such as MP3 files and other computer formats. This should in turn influence tax and regulatory policies. For example, it may be that the environmental gains from a rapid uptake of virtual formats could justify differential taxation and approaches to regulation.

New green consumerism

The green movement should be at the forefront of attempts to create a green consumer culture on the internet. It should create green consumer clubs to aggregate buying power, and encourage companies to provide more online environmental information to consumers.

Promoting innovation

Government should review products and process regulations so that they better promote innovation, which is good for both competitiveness and the environment. This means shifting the basis for regulation away from best available technology (BAT) towards targets and outcomes. Governments should set ambitious targets for energy and resource productivity that can only be achieved through radical innovations in the way we work, produce and consume.

Innovation and clusters

Most innovation takes place within clusters or networks of companies, often linked to a university that provides a knowledge base. Silicon Valley in California and Silicon Fen around Cambridge are well known examples. To foster environmental innovation we need a ‘green valley’ initiative, aimed at creating two or three regional centres of excellence in environmental technologies.

Environmental entrepreneurship

Government should investigate how to promote new breeds of environmental entrepreneurs. These would not be confined to developing businesses around environmental technologies. Most would be like James Dyson, the household appliance innovator, who regards the environment as a vital ingredient in mainstream product and process design.

The way forward

There may be a new way forward for the economy and the environment; a way forward in which innovation can feed competitiveness, environmental efficiency and, ultimately, sustainability. We will only get there with new ways of thinking, new technologies, new approaches to regulation, and a great deal of knowledge-sharing.

It would be a mistake to naively believe that we have entered a promised land in which the interests of business can be magically reconciled with the interests of the natural world. However, it would also be a mistake to turn our backs on the territory opening up before us – territory that did not exist 30 years ago, in which the interests of the new innovation-driven economy and the environment may converge.

Notes and references

1 Economics and Statistics Administration (2000) Digital Economy 2000, US Department of Commerce, Washington, June

2 Varian, H (2000) ‘The Law of Recombinant Growth’, The Industry Standard, February

3 Jacobs, J (2000) The Nature of Economies, Modern Library, New York

4 Wilsdon, J (2001) Dot-com Ethics: E-business and Social Responsibility, Forum for the Future, London, January

5 Prime Minister's speech to Green Alliance/CBI, 24 October 2000; see www.green-alliance.org.uk for full text

6 Economics and Statistics Administration (2000) Digital Economy 2000, op cit

7 Ekins, P (2000) Economic Growth and Environmental Sustainability: The Prospects for Green Growth, Routledge, London

8 See, for example, Hawken, P, Lovins, A B and Lovins, L H (1999) Natural Capitalism: The Next Industrial Revolution, Earthscan, London; Ekins, P (2000) op cit

9 See, for example, Dixon, J and Hamilton, K (1996) Monitoring Environmental Progress: Expanding the Measures of Wealth, World Bank, Washington

10 The Global Reporting Initiative (www.globalreporting.org) is an international effort to create a common framework for voluntary reporting of the economic, environmental and social impact of organization-level activity. The SIGMA Project (www.bsi-global.com/sigma) is a UK-based initiative to create a sustainability management system, based around the valuation of natural, human and financial capital.

11 Rifkin, J (2000) The Age of Access: The New Culture of Hypercapitalism, Where All of Life Is a Paid-for Experience, Tarcher/Putnam, New York

12 Pine II, B J and Gilmore, J H (1997) The Experience Economy, Harvard Business School Press, Harvard

13 Salzman, J (1999) ‘Facing the Challenges of an Evolving Economy’, Environment, Science and Technology, December

14 Figures from the World Travel and Tourism Council, www.wttc.org

15 Romm, J (1999) The Internet Economy and Global Warming: A Scenario of the Impact of E-commerce on Energy and Environment, Center for Energy and Climate Solutions, Washington

16 UK Department of Trade and Industry (2000) DTI Sustainable Development Strategy, London, October

17 Mills, M and Huber, P (1999) ‘The Internet Begins with Coal’, Forbes Magazine, May

18 Statement of Mark Mills to the Subcommittee on National Economic Growth, Natural Resources, and Regulatory Affairs of the Committee on Government Reform, US House of Representatives, www.house.gov/reform/neg/hearings

19 Statement of Joseph Romm to the Subcommittee on National Economic Growth, op cit

20 Romm, J (1999) The Internet Economy and Global Warming, op cit

21 Hawken, P, Lovins, A B and Lovins, L H (1999) Natural Capitalism: The Next Industrial Revolution, Earthscan, London, op cit. See also Porter, M and van der Linde, C (1995) ‘Toward a New Conception of the Environment–Competitiveness Relationship’, Journal of Economic Perspectives, vol 9, no 41

22 Porter, M and van der Linde, C (1995) ‘Toward a New Conception of the Environment–Competitiveness Relationship’, op cit

23 Rifkin, J (2000) The Age of Access, op cit

24 Davis, S and Meyer, C (1999) Blur: The Speed of Change in the Connected Economy, Capstone, Oxford

Response

by Evan Davis

From Evan Davis <evan.davis@bbc.co.uk>
Subject Mind over matter: greening the new economy

It is seductive to believe that the new economy will somehow allow us to reconcile our demand for greater consumption with the demands of environmentalists for a sustainable economy. That we will increasingly dispense with clumsy hardware, like CDs and Encyclopaedia Britannica, and consume greener formats, like MP3 files and online books. And it's surely true that technology and innovation – digital or otherwise – will continue to improve resource productivity, just as technology has a long and distinguished record in improving the productivity of labour and capital. Technology certainly does give us a greater material-consumption bang for a given number of resource-depleting bucks. But can we rely on that improvement to reconcile the conflict between material living standards and a sustainable economy? Alas, I suspect not.

‘Can technology reduce environmental degradation?’ is the wrong question. The relevant question is whether we will in fact choose to exploit technology for environmental gain, or whether we will simply exploit it to increase our material living standards. As far as this is concerned, there is little room for complacency. Our experience so far suggests that the benefits of technology are typically directed towards making us richer, rather than greener.

For example, although technology delivers cars that are more efficient, we have not chosen to drive cars that use less fuel. To date, the digital age has not been one of low consumption Minis obtaining 80 miles to the gallon; it is the age of the sports utility vehicle, obtaining 25.

Indeed – according to the Union of Concerned Scientists – in spite of cleaner-burn engine technology, the average new vehicle from every car manufacturer, except one, generates more greenhouse gases today than ten years ago. These early years of the digital era hardly promise a new green dawn. Nowhere is this more apparent than in the hub of the digital age, California. A state of big cars, big air-conditioners, cheap fuel, and long commuting distances.

Why does the economic system deliver this outcome? Because the price of fuel is adjusted to prevent total demand dropping too much. So, for example, if new technology improves efficiency and reduces the demand for fuel, then the price of fuel falls, which promotes an offsetting rise in demand again. Moreover, as technology increases living standards generally, it tends to make fuel more affordable. In short, technology can make it easier to consume fuel more carelessly.

Even if you do not accept this argument, it should be clear that new technology creates new demands for consumption, rather than just depressing old demands. The development of television undoubtedly reduced the number of journeys to cinemas that people took; but at the same time, it stimulated and fuelled consumption, by tantalizing us with pictures of experiences to which we had not been previously exposed. It fostered a demand for journeys that may previously not have existed. The internet will do the same. As fast as email depresses our need to travel to meet existing friends, it will empower us to make a wider circle of new friends to whom we wish to travel. It will reduce the need for us to drive three blocks to visit our near-neighbours, but increase our desire to fly to Australia to meet our newly acquired pen-friends.

This argument may sound unduly pessimistic. Perhaps it is based on a general degree of scepticism about whether the new economy is quite the shift in economic and cultural paradigms that some have suggested. But lest it appears gratuitously negative, let me stress again my agreement with one conclusion of the new-economy optimists. Technology does have the potential to enable us to live more comfortably and sustainably. That is not as much a new economic phenomenon as a continuation of the old economy trend towards more productive use of resources. If we are worried about resource use, let us be clear that technology is a potential ally, so long as we can find ways of effectively deploying it to that end. Thus, as Charles Leadbeater and Rebecca Willis argue ,‘the mere fact that this path to a greener future might be a possibility does not mean it will become reality. Far from it… The political will – and intervention – required to steer the new economy toward sustainability should not be underestimated.’

On that, we can surely all agree.