The Cooperatition Incubator

INTRODUCTION
When a business seeks to implement an ethical change in what it is doing (where ‘ethical’ connotes some public policy/sustainability objective) then there will be some different types of economic impact that it will experience. In summary some key elements of these delineations include:

1. Win-win versus non-win-win (i.e. whether, at the same time as the public policy objective ‘wins’, the business(es) and consumers can also do so, or whether consumers and possibly the business(es) will be out of pocket).
2. Within non-win-win (which implies that consumers will now be paying more for their products), those situations where businesses can keep their profit margins intact versus those situations where those profit margins dip.

WIN-WIN VERSUS NON-WIN-WIN SITUATIONS
Win-win situations are on the face of it straightforward for business as ethical and profit considerations are aligned.   We would argue this is where most progress has been made by voluntary Corporate Responsibility initiatives over the past 25 years.

However, situations that are win-win in the long-term may be non-win-win the short-term. This creates a tension between the interests of those involved in the business (investors and employees) on long-term versus short-term bases.

There may also be a necessity for joint research by businesses to achieve the public policy objectives on a win-win basis (which if not handled carefully could come up against competition law information exchange restrictions).

ELASTICITY WITHIN NON-WIN-WIN SITUATIONS
Non-win-win situations are less straightforward than win-win ones. This is because it may or may not be possible for businesses to pass costs onto consumers, depending upon considerations of the price elasticity of demand. We need to consider two situations:

• In some situations (where there is ‘price inelasticity of demand’ (for example for absolute essentials such as mains water or insulin for diabetics (ignoring NHS provision effects here) and other examples, noting the ranges for elastic and inelastic businesses can pass on costs to consumers without consumption dropping and profits thereby being dented. So business, if acting together across a market sector for public policy objectives (enabled through much clearer support from the competition authorities), will have the ability to pass on price increases without their businesses suffering. This means that they will require little or no additional incentive to make such changes.
• In other situations (‘price elasticity of demand’: leisure air travel, spirits, coca-cola, cars (see the list above)) businesses are likely to have trouble passing on costs to consumers. For example for leisure air travel, price elasticity of demand means that if prices are increased then people will curb their holiday plans. So business comes out a loser – which means voluntary agreements likely to have a less favourable reception. Furthermore competition law as it is presently regulated in the UK and EU would be a barrier to the collaboration.

It is for this reason that in such circumstances co-regulation would be necessary – either from traditional regulatory sources, or increasingly from e-democratic/internet-based mechanisms.   Changes in the regulation of competition law will be required, as well as either pressure from above (government promoting a co-regulatory initiative) or perhaps e-democracy (see below).  There are other levers of change too (e.g. media/NGOs) but these are potentially less significant.  The media/NGOs could of course be important contributors to future platforms for e-democracy.

OVERALL IMPACTS OF SUCH INITIATIVES
Of course, the overall effect of our thinking is the internalisation of externalities throughout the economy, which means a ‘bad news message’ for the economy overall – certainly if you are looking at things in a short-term, profit-based manner. Similarly this is a ‘bad news message’ for any area or nation that has previously had the ability to externalise costs to other areas or nations.

However, our thinking is a ‘good news message’ inasmuch as it represents the emergence of an economy with the facility to prioritise in a balanced way objectives of all kinds. Furthermore, although the project outlined here can be seen in isolation as one entailing overall the internalisation of externalities and therefore decreasing global productivity, the picture is different when one factors-in ongoing technological advancement and innovation (including that enabled by information technology (IT) that allows much of the change we advocate) and the resulting growth. With that wider picture then the outlook can still be for growth, just in a newly responsible fashion.

Notes

1) It is worth pointing out the implausibility that all positive social and environmental agendas in life might correlate to positive profit outcomes, amongst all the other possibilities. Therefore there will have to be a balancing between profit and other objectives in numerous areas.

2) It seems likely that trends would emerge: for example essentials would be less affected by the introduction of the mechanisms we suggest than (short life) luxuries.

3) Elasticity considerations tie in very powerfully with market definition. The first thing any businesses need to do when thinking about a voluntary agreement is think about who they need to reach agreement with (this essentially should identify/deal with problems of elasticity before it arises). In particular, if they do not have enough market players at the table then any agreement they make is going to run the risk of driving their customers away to nearby products/services. Consider this list of determinants when thinking about these questions.

4) It may be beneficial for markets to work together if they currently share the same environmental/social harm or can achieve the same benefit.

Researched by Tom Linton and edited by Andrew Dakers.

The final report of the Open Planet Economy Network “OPEN EU Action Plan for EU and EU National Governments” in October 2011 included the recommendation that:

“In accordance with existing EU Court case law, DGComp should launch a specialist unit to assess the public benefit of voluntary agreements that enable organisations to take collaborative action to internalise external social & environmental costs.  When the benefits of such cooperation agreements that cross-European national boundaries outweigh the costs of reduced competition the agreements should be formally authorised by DG Comp.”

BACKGROUND

The Cooperatition Incubator has worked closely with the OPEN:EU project over the past two years.  We believe the EUREAPA tool  provides a useful evidence base to inform and underpin future environmental voluntary agreements.  It breaks down territorial emissions into 57 GTAP sectors and 9 less detailed industry grouping (for example, agriculture, food manufacture, services). It breaks down consumption emissions into impact from consumption from the 57 GTAP sectors and 6 less detailed consumption themes (for example, food, transport, services).   Note however that the GTAP sectors are not detailed enough to assess the impact of individual products – only of a sector.

When users create scenarios themselves in the tool, they can change the total expenditure, the proportion of this expenditure on each consumption themes (e.g. food, transport) and also the proportion of expenditure on the more detailed sectors within each theme (e.g. meat, dairy, vegetables).

The scenarios the project team created were  constructed in the same way, with changes in consumption from each sector being estimated and used to calculate the corresponding reduction in environmental impact.  The scenarios were developed via a back-casting exercise on the basis of stakeholder input provided during a two-day workshop in September 2010. The four scenarios created were:

• Scenario 1 – Clever and caring – a future with a quality driven mindset towards development with dynamic technological innovation.
• Scenario 2 – Fast forward – a future with a quantity driven mindset towards development with dynamic technological innovation.
• Scenario 3 – Breaking point – a future with a quantity driven mindset towards development with technological stagnation.
• Scenario 4 – Slow motion – a future with a quality driven mindset towards development with technological stagnation.

The majority of the scenarios include policy interventions to internalise the cost of environmental harm, but there is not detailed analysis of the impact of this on business competitiveness. OPEN:EU discuss the high level business strategy likely to prevail in the narratives, but do not quantitatively analyse the cost implications of the scenarios.  This was outside the scope of the current project.

The final OPEN:EU quantification report leads us to the plain fact that we are all in this together and that simply working on a domestic approach (e.g. national or European) is not enough. All of these options also need to be replicated outside of the EU.

OUR REFLECTIONS

The focus of the EUREAPA tool/project is strongly on consumption and production efficiency.  This seems to leave very little room for ‘substitution’ – where, for example, one chemical input is substituted for a slightly more expensive one that is much more environmentally friendly.

In terms of the EUREAPA tool (providing scenarios on different sectors) it is useful in terms of providing information around environmental cost ‘per unit’ of that sector’s output.

The trouble with EUREAPA is that it does not seem to give much by way of solutions. Specific mechanisms are needed beyond just cutting consumption.

It’s not a viable solution just to say that only a certain amount, say, of perfume can be produced/purchased.  It seems like an extreme example of non-free-market behaviour, akin to the prohibition?

What is needed are ways of internalising the externalities through regulation or self-/co-regulation. Doing it that way means policy makers are not telling people they can not produce something, only that if they do then they will have to meet certain standards.

EUREAPA data will help target the most important areas.  What EUREAPA will not do is help target the most important areas where there are also good fixes that ‘substitution’-type solutions (which are clearly going to be more popular) instead of reduction-in-consumption-type solutions (gloomier). That additional research is important, because if we can get close to One Planet Living that way then it would be good to avoid too many drops in consumption (though of course they will be needed).

Of course, the GTAP sectors are obviously far wider than the ‘markets’ that stakeholders will ultimately be interested developing new voluntary agreements to cover.

(To check: Do EUREAPA sectors overlap? (e.g. food will incorporate transport costs). Perhaps SEI have somehow made them independent?)

Writing for the Guardian Sustainable Business Andrew Dakers, founder of The Cooperatition Incubator, said:

“Many corporations have discovered that [weak global governance] leads to a “race to the bottom”. That can be to their detriment as natural resources and the ecosystems on which they depend continue to be depleted. Filling the vacuum is a vast spectrum of voluntary corporate responsibility initiatives and standards from Community Mark to Investors in People and ISO 14000.

“These have made great strides. They provide companies with a fairly rapid return on their investment – perhaps through increased resource efficiency or better people management – and the wider community often benefits too. The same cannot be said, however, when a business has substantial external social and environmental impacts – a “non-win-win” situation.

“The latest government-sponsored voluntary agreement, the public health responsibility deal, has received a distinctly mixed response, largely due to this problem. The British Medical Association and the Royal College of Physicians complain that substantial external impacts of business, such as alcohol misuse and obesity, have been ignored.

“Research by Business in the Community and the Cooperatition Incubator over the past three years has revealed that competition law is a substantial barrier to companies collaborating on voluntary standards that would deliver greater public benefit. Given the increasing levels of regulation already around climate change – at least in the UK and EU – this is preventing new voluntary agreements that internalise external costs on social issues and natural resources.

“More meaningful agreements have the potential to increase costs to producers, suppliers and consumers. To develop substantial self-regulatory changes might involve competitors in a given sector discussing pricing and coordinating the timing of a step-change in improvements. Companies taking part in such discussions risk being accused of collusion or price-fixing by the UK Office of Fair Trading (OFT), despite the public benefit they are seeking to achieve.

“Tesco has promised to review its alcohol pricing if its rivals do the same; it believes it would be commercial suicide to act alone. But Tesco points out that it is trapped by an approach to competition law regulation that prevents competitors discussing anything to do with price…

“Despite [the Office of Fair Trading introducing Short Form Opinions], Robert Peston said on his blog in November 2010 that the problem remained: “Britain’s biggest banks are talking to each about whether and how they can reduce the total amount of bonuses they would pay in the upcoming bonus season . . . [Yet] one great fear of bankers is that they’ll be seen to be colluding on a competitive issue and could be prosecuted by the Office of Fair Trading.”

“The prime minister, David Cameron, responded: “I get the message loud and clear, and we will do everything we can to tackle those barriers head on – whether it is the red tape you face, whether it is being able to collaborate as businesses without having the competition authorities throwing you in jail. I understand the barriers. We are going to work with you to get rid of them.”

“Work is now under way on the problem between Business in the Community, the Department for Business, Innovation & Skills and the OFT.

“For too long corporate responsibility has focused on the laws governing individual company practices. By revisiting how competition authorities regulate public interest collaborations between firms, the UK has the potential to become a global exemplar. Reform in this area will build the solid foundations for the new people and planet-friendly era in capitalism we need.”

Read the full article…

Jason Clay, senior vice president of market transformation at WWF, has written on Guardian Sustainable Business the issues arising from consumer goods giants Procter & Gamble and Unilever being fined €315.2m (£280m) by the EC on 13 April 2011 for breaching competition law in the laundry detergent market in eight countries.

“Here lies the challenge in defining what is precompetitive versus what is collusion. While the companies crossed the line of the EC’s antitrust rules, they also accomplished much in reducing the impact of producing, delivering, selling, using and disposing of their products.

“The firms were motivated by shifting the market to greater sustainability, while making it easy for consumers to choose a sustainable product. The new products were better because they were concentrated and worked in cold water. But both of these traits were in conflict with consumer perceptions. Most consumers, for example, think that more detergent means cleaner clothes, and that hot water is more effective for washing laundry than cold.

“This posed a dilemma for manufacturers. The companies believed that if any one of them introduced concentrates independently they would risk losing market share. A consumer confronted with a choice between a 5kg box of powder at €10 and 2.5kg box of a concentrated version at the same price is going to be tempted to go for the big box.

“To avoid this first mover “disadvantage,” the companies co-ordinated the timing of their launches so that all the new product formulations would arrive on the market at the same time. They did this without publicly stating the virtues of one product over another.

“The moral of this story is that such initiatives are essential, but caution must be exercised. As an environmentalist, I applaud companies that work together to put better products on the shelves and take away the ones with the worst impact…

“We can better understand the complicated balance between what is precompetitive behaviour addressing legitimate sustainability issues, and what is collusion around fixing prices or market share. The key component to striking this balance is multi-stakeholder participation. The project should be inclusive of other stakeholders, including regulatory officials and perhaps even NGOs, many of whom don’t have a direct financial interest. This is how successful global sustainability round tables have avoided these issues.

“In light of more companies working together in a precompetitive fashion to improve sustainability, wouldn’t it be forward-thinking for regulators in the EU and elsewhere to invest in the creation of a legal group that defines boundaries? It would be money well spent, because precompetitive sustainability is working, and it’s essential to market transformation.”