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Ethics, economics and incentives

by mel starrs on May 10, 2006

in Economics

David Jeffery, at Oikos (an Australian based blog) has managed to articulate something I have been musing on for some time. As luck would have it, I have also just read the first chapter of ‘Freakonomics‘ which examines incentives (I’ll do a proper review of Freakonomics when I finish it). Anyway, David’s argument stems from why we should be cutting carbon emissions, and he reasons it is not for economic reasons:

Now please don’t misunderstand my argument. I’m not saying we shouldn’t unilaterally cut our emissions. On the contrary, I believe we should – for moral, ethical and political reasons. In my view, these massively outweigh the short-term economic considerations.

Unfortunately, we operate in a commercial environment where morals and ethics are often sidelined (for a variety of reasons, but I suspect mainly because they are not easily quanitifiable by numbers). Conventional wisdom leads us to believe that the best way to persuade someone they should build sustainably is to demonstrate the economic benefits to them.

However there may be a flaw in this plan. Ignoring the possibility that the client may not be the end-user and could possibly be looking at the short term gains to be made from their investment in building the property, let’s instead look at the consequences of basing the decision to build sustainably on economic grounds from Levitt and Dubner’s point of view.

Their premise can be summarised as follows:

An incentive is simply a means of urging people to do more of a good thing and less of a bad thing…There are three basic flavours of incentive: economic, social and moral.

Levitt and Dubner examine a case where a daycare centre decided to charge parents a fine if they turned up late for their kids. The outcome was that parent’s guilt (a social/moral incentive to pick the kids up on time) was assuaged by paying the fine (an economic incentive) and in fact their behaviour worsened.

So, if we apply this principle to sustainable construction and for example the Carbon Change Levy (which has been in effect since April 2001), have we really set up a system which provides an adequate incentive to cut carbon emissions, and build sustainably? Or have we merely provided the salve by which companies can release their moral and social duties without consequence? It’s a depressing thought, but it could explain why the CCL has not generally been considered a huge success.

I believe the ultimate solution will lie in David’s third reason – politics – which I guess falls under the class of social incentive in Levitt and Dubner’s argument. This may be stretching the definition of social incentives, but the consequences of trying to explain why you don’t build sustainably when everyone else is doing it will potentially hurt your bottom line a lot more than the economic benefit of doing it will improve it.

Don’t get me wrong – I believe we should all be building sustainably anyway, but I think the tide of opinion is gathering pace and we are moving away from innovators and early adopters, pulling more and more people with us into what in marketing lingo is called the ‘early majority‘ of the lifecycle curve. We may not have persuaded the majority for what we might believe are the ‘right’ reasons, but I’ll not argue about the semantics if action is happening.