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Climate bussiness. Welcome to 3.0 Economy World

21.07.2017 | By Paweł Musiałek

The in 2015 organised UN climate summit in Paris is not only the expression of a global concern for global temperature changes, but above all the flagship manifestation of the new stage of capitalism. Climate policy is becoming the best example of how the free market evolves into the market of rent- seekers.

Classical model

We all know classical business model very well. The aim of every company is to respond to the needs of its customers in the best possible way. The company which does it best, wins the competition for the customer’s wallet. The better the company adjusts the product to the consumer’s expectations, the more likely it is to sell it. That is why large companies developed a research segment that analyze the changes in preferences, so as not only to respond to the customers’ needs in the best way, but also to do it as quickly as possible. The key question was: what does the customer need and how can we deliver it? Proper adjustment to the demand made the company win thanks to “tailor-made” products, allowing it to move away from price-based competition and generate more revenue. Some time ago this classic model was reversed. It has been noted that the market should not only respond to the needs of the customer, but that, to a large extent, it is able to create these needs. That is why the largest companies started to develop not only customer research departments but also PR departments which are responsible for shaping preferences. The discovery consisted in the realisation of a simple fact – the customer does not always know what he or she wants and while making his or her decisions he or she is susceptible to the company’s suggestions. Therefore, the role of the market is to tell the customer what his or her needs are and, of course, how to satisfy them. Companies have started to think about how to create the need for a particular product. It was much more difficult than responding to customer expectations, but the potential success was also more profitable. The response to customer needs has always meant competition with other companies on the market. Creating it allowed a given company to become a pioneer and earn extra income, at least until other companies were better equipped to respond to the needs created by the innovators. For example, in the new model the entrepreneur who made shoes and came to Africa did not give up because there was no market for his products. On the contrary – he was glad that the whole market could come under his control and nobody had ever done it before. In order to succeed it was enough to “convince” local people first that they need shoes and then make them buy the product of his company.

Rent-seeking

And so we have reached the next stage of capitalism development. What is it about? In short, it consists in rent-seeking i.e. gaining profit not only through entrepreneurship, but also by gaining competitive advantage through favorable regulations. In the classical business, the company made profit by responding to the demand, at the next stage by creating the demand (and then satisfying it) and now we are seeing “forcing” the demand through appropriate regulation. An example of energy-saving fluorescent lamps, which literally eliminated the classic bulb from the market, proves that this does not necessarily have to be a metaphor. In the new paradigm, innovation is not just about creating new products or advertising, but inventing and proposing the most favorable regulations which on the one hand correspond to government-defined public objectives and on the other, give the company competitive advantage over other companies. That is why global corporations have developed not only advertising or PR departments, but above all the departments specialising in legal matters and lobbying. Their aim is to convince the authorities to adopt specific solutions which are to serve the common good. In order to reach this goal, companies present reports and data to support their argumentation and to defy the counterarguments put forward by market competitors or other institutions that do not share the opinion on the need for a specific regulations. The new strategy stems from the changes in the functioning of the state and, above all, the way it is managed. In the past, state ownership was supposed to be a guarantee of obtaining certain public goods and avoiding environmental costs. It is now widely accepted that this is not an optimal method, and it is much more effective to enforce specific actions through appropriate regulation. Thanks to that, the state creates incentives for specific actions in order to make companies function in line with the expectations of the authorities, both in the context of supplying specific goods and avoiding certain costs that could not be optimal when everything would be left to the free market. In this way, we achieve the benefits of competition between private enterprises, and we realize non-economic goals through market adjustment thanks to regulations. Rent-seeking is therefore effective in sectors with particular characteristics, which make them highly regulated. In these sectors,the competitiveness of enterprises depends largely on whether the adopted and generally enforced regulations reinforce the firm’s strengths or its weaknesses. In other words – are they cheering or are they a burden in a market race? Importantly, the same mechanism applies to national economies, especially as more and more regulations are adopted at international level and even a specific name was given to this phenomenon – “international regimes”. The strategies of the states are reminiscent of business strategies. And just as companies lobby in favor of propitious regulations in a given state, the states today lobby in their respective organizations to make them introduce legal solutions favourable to their national economies. The best example of a highly regulated sector is the energy sector and the associated climate sector, which, given the fact that the free market produces so-called external costs in the form of CO2 emissions, must be subject to regulatory constraints. For companies operating on the EU energy market, regulation is of fundamental importance and constitute a key risk in the assessment of business projects, as climate policy is one of the most dynamically developing public policies in the EU, which entails increasingly extensive regulation The scale of the phenomenon may be evidenced by the fact that in Brussels there are about 15 thousand lobbyists and about 2,500 lobbying organizations. This should not come as a surprise, as key EU regulations are being created in the EU institutions and individual countries can only influence the details of such regulations and not their general shape. The greatest number of lobbyists is present at those departments of the Commission and the European Parliament committees that deal with energy and climate policy. The more regulation, the greater the space for “extra business” or on the contrary – the greater the risk of losing competitiveness. It does not matter whether you talk about offensive or defensive – you have keep a eye on what is going on in this area.

Germany is a pioneer of the new economy

The most characteristic example of a new economic strategy is Germany’s economic policy. It is our Western neighbors who are one of the main promoters of both “ambitious” climate goals both at EU level and in the whole world. This strategy stems from the assumption that greenhouse gas emissions will be serve the German economy. Germany is a pioneer in energy transformation (called Energiewende). A few years ago Germans made the almost complete reductions in CO2 emissions their main target in the coming decades. Reaching this goal requires a complete change in the energy system by means of moving away from fossil fuels and investing in low-carbon technologies, primarily in renewable energy. The cost of this operation for the Federal Republic of Germany is huge, but Germany expects that this investment will pay off in the long run. By forcing a domestic demand for low-carbon technologies through the regulation , they create favorable conditions for the development of domestic enterprises, thus creating a new economic sector. Of course, if the change concerned only the German market, it would not be profitable because the profits would not compensate for the costs that the Federal Republic of Germany must incur as a result of the closure of coal-fired power stations or the construction of power networks capable of transmitting energy generated by RES. Interestingly, the Germans also decided to shut down nuclear power plants, which are also low-emission in order make more space for RES and to prepare national companies for foreign expansion. Therefore, the fundamental issue for German companies specializing in manufacturing of wind turbines or photovoltaic panels is to expand the market for their goods. The overall cost of producing renewable energy, which is still significantly higher than the cost of carbon or atomic energy, means that the demand for German low carbon products can only be increased if the reduction targets introduced in Germany are also introduced in other countries. Introducing “ambitious” CO2 reduction targets in the EU, and not only there, would force at least a partial resignation from coal and increase the demand for RES, including German technologies. Forcing the use of low carbon technology obviously does not guarantee that the whole profit will go to German businesses, but thanks to the introduction of Energiewende in Germany, native companies are very well prepared for expansion. For this reason, the Federal Republic of Germany is forcing an “ambitious” energy package in the EU for the next period, ie by 2030 (the previous 3×20 package will be valid until 2020). Germany expects that it will allow to either install German technologies in the Member States, including Poland, or export “ready” electricity generated from renewable energy sources in Germany. Interfering with the EU CO2 Emissions Trading Scheme by providing the European Commission with the right to administrative interference in the price of allowances, which has been sought after by the companies with low-carbon sectors is a clear evidence for the economic determinants of climate policy. The intervention took place in the previous parliamentary term of the European Parliament, although it was incidental (the so-called backloading case). In the current term of office, institutionalized interventions are being worked on. Of course, this right would be used to artificially raise the price of CO2 emissions and, consequently, to increase the quasi-tax on carbon production. Importantly, the interference occurred when CO2 emissions were reduced, ie there was no basis for interference because the system was functioning – the EU started to emit less carbon dioxide. The postulated administrative increase in prices was therefore the raising of the curtain, as it became clear that the purpose of the CO2 emissions trading scheme was not to limit the emission of this gas but to decarbonise ie limit the coal production in favour of other enery sources. Too low prices of CO2 allowances did not provide sufficient incentives to move away from this fuel, and the reduction in real gas emissions was a result of low economic growth in the EU, which resulted in low demand for energy. It enabled energy companies to produce coal without having to buy additional stock rights, which in turn caused their stock price to be low. Attempting to intervene in the emissions trading system (eg by withdrawing part of the emissions and thus raising the price) means that decarbonisation is not only a means of reducing CO2 emissions, but also a means of increasing demand for renewable energy technologies. At the same time CO2 is a convenient screen for companies in this sector (and the countries where they are based), whose aim is to artificially boost competitive advantage over coal-based companies.

Between Brussels, Berlin and Paris

Of course, if only the Germans were making money on new regulations, there would be no chance of them being introduced. Even an influential state like the Federal Republic of Germany could not convince all states to implement their private agenda. Fortunately for Berlin, apart from Germany, also several other Western European states see in their climate policy the chance to develop their own economies. Berlin’s most valuable ally is Paris, which hopes to find, thanks to climate policy, a chance for an additional outlet for atomic technologies, which are also low-emission. Among the supporters of the ambitious goals are also other EU states. It should be added that universal acceptance for restrictive emission targets is also due to the lack of raw materials in almost all EU countries. The billions of euros transferred each month to Russia and other exporters are an additional economic argument justifying the switch to renewable energy sources, which will help improve the balance of trade. In this case, the summit in Paris is an attempt to replicate the EU mechanism at a global level. It is no surprise then that the same countries that have pushed for reducing CO2 emissions in the EU through the energy and climate package are now pushing for a reduction in global emissions of this gas. Just as CO2 emissions in the EU will widen the market in the Member States, global agreement will allow the market to expand at a global level. Achieving an agreement in Paris will, however, be much more difficult than in Brussels, as many countries are aware of the fact that they are not going to benefit from low-carbon technologies because their economies do not have that potential. Many of them commonly use coal, which is still a very attractive source of energy. That is why financial and technological support from developed countries is needed to reach the group of developing countries. The key question that determines the success of COP 21 is whether there will be space between the two borders. One of them sets the amount of satisfactory compensation for the costs that developing countries will incur by reducing CO2 emissions. The other one is to set a profit for developed countries that will export these technologies. If such space arises, the achievement will be reached. Independently of the end result, one thing is certain. Polish state and Polish companies should prepare for a new stage of market competition. If our country wants to avoid the middle-income trap and gain the competitive edge resulting in civilizational progress, it must adapt to new conditions. Polish interests lie in the hundreds of minor regulations contained in technically sounding regulations. It is high time for Poland to act not only when the early warning system is on and it is too late to change the direction of regulatory changes, and when at best we can try to minimize costs. It is time to develop an offensive attitude and propose solutions that are beneficial to our economy and home businesses, but at the same time which correspond to the defined collective goals. The sooner we recognize and learn to pursue regulatory policy both at EU level and at the level of international regimes, the greater the chance that we will not play just to reach a draw – not just in Paris.

Translation: Magdalena Stawicka

International_Visegrad_Fund,_emblemo_bluaThis text was created thanks to support of International Visegrad Found.

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