Regulation is Not the Answer

By Anonymous

We’ve made the argument several times in class that sustainable practices won’t become common place until businesses are required to comply by law – but I’m not yet convinced. While I understand the argument that market leaders can use lobbying and getting on the “right side of the law” as a way to build competitive advantage, I don’t believe that this practice is itself sustainable. Making someone do something – whether it’s a kid or company – can lead to a lot of resistance and not much cooperation.

My professional career prior to HBS was in the energy industry – I was a consultant to these same regulatory agencies that we argue could hold the key to sustainability. While I applaud the regulatory efforts thus far and believe that regulation will ultimately support sustainable business practices, there are several roadblocks inherent in government regulation, at least in the US, that I believe prevent regulation from being a truly successful change agent in sustainability. The following roadblocks are based on my experiences consulting utility regulatory commission across the country on matters of energy efficiency.

·         Geographic Variations – Politics and Environmental Constraints

While there is oversight at the federal level, a lot of the regulation is left to be decided by the states. This can pose unique challenges to policies regarding energy and efficiency standards. For example, energy prices vary greatly across the country and thus create various levels of commitment to efficiency practices. One of the most compelling arguments, in terms of gaining acceptance, for efficiency is the economic benefits it creates. However, the argument that efficiency saves money isn’t always true if your costs per kWh are low. Thus, the levels of efficiency “attractiveness” vary greatly with the cost of energy. This leads to inconsistent regulation at the state level which complicates the mission of overall sustainability.

Additionally, the political affiliations of elected officials further complicate the matter. I’ve consulted at both ends of the spectrum – regulators truly interested in learning about the benefits of efficiency and those that believe that there are no actual savings. The level of commitment from the regulators is reflected in the regulations that they develop. Thus, some states spend time creating comprehensive efficiency plans that benefit as many stakeholders as possible, while others merely pay lip service to the idea resulting in regulations that are ineffective and even wasteful of rate-payer resources. These inconsistencies send a mixed message of this country’s commitment to efficiency and sustainable practices.

·         Competing Objectives

Regulations can be created to protect citizens and the environment, but to those being regulated they can seem as invasive and damaging. Speaking from experience, utility companies do not like being told that they not only have to reduce sales but they have to spend money to help their customers consume less of their product. Think about it – in what other industries do you find this situation? Thus, a highly regulated environment can lead to great resistance – and a lot of wasted (people) energy and resources fighting compliance. For efficiency to work, the utility companies, or companies like Groom Energy, must find a business case in which efficiency makes sense. Simply forcing utilities to comply puts them on the defensive and creates an environment that hinders innovative solutions.

For the reasons and experiences stated above, I believe regulation is not the best way to address issues of sustainability. Businesses themselves need to take responsibility for the current situation and realize that if they want to survive they must ensure that there is an environment in which they can operate long term. Businesses have the resources and flexibility that governments oftentimes don’t have; thus business should leverage their power and find creative solutions to these issues that benefit their business, their customers, and the environment. If businesses take this upon themselves, they will have the opportunity to find answers instead of obeying laws which may work against them.

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2 Responses to “Regulation is Not the Answer”

  1. I enjoyed this post, and it’s nice to hear another supporter in the ‘regulation is not the answer’ camp. I wanted to add another note to further substantiate the point regarding geographic variability as a barrier to top down regulatory efforts in energy efficiency.

    In additional to energy price fluctuations across regions, building stock variability across regions requires a deep understanding of the interplay of the building type and systems to actually determine the ‘attractiveness’ of an energy efficiency project. Mandating a blanket x% decrease in energy usage (for example) from a federal level does not take into account a region’s energy prices (as stated), nor the difficulty some regions may have in achieving the EE reduction given the housing stock and improvement measures required to make the project’s economic model work. It’s good to have regulation to set goals/targets, but being too prescriptive on programs can inhibit the ability of localities to 1. execute projects to break even (or return) 2. actually cascade incentive funding for these programs since projects may not 100% comply with the regulation.

  2. Rebecca Henderson Reply October 6, 2013 at 3:28 pm

    I, too, very much enjoyed this post, and I think your comments about the drawbacks to regulation are very well taken. But I continue to worry about the “public goods” problem. If emitting CO2 is, effectively, “free”, will it be possible to build a case to reduce emissions once the easy efficiency improvements have been implemented?

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