Monday, October 19, 2009

Businesses operate in the real world

I have quite a problem with the latest press release from EECA.

For the avoidance of doubt I am not criticising EECA's objectives, intent nor the value of what they are trying to achieve. My problem is that idealogical arguments are not, in and of themselves, useful in isolation of all the real world complexity of running a business.

The EECA media release implies that energy consumption does not constitute a supply in the same way as other supplies. Even more bizarre is the way that they conducted the survey behind the media release. Energy management was added as a category in its own right compared to such categories as customer and supplier relationships, competitiveness and profitability. Energy management is a component of these major categories not a category in its own right. Telecommunications management would be a legitimate major category under this system. No-one can be surprised that Energy Management scored the lowest of all of these categories as it is a subset of some of them. No subset can be more important than the superset it is from. Actually, Energy Management scored extremely high in this context.

EECA go on to make a vexatious argument, based on the global benefits of energy saving, that each business should pursue energy efficiency. The global benefits for energy saving may be very large but clearly, at the level of each business, the benefits are small. Such is the nature of a tragedy of the commons [1], although its not actually that clear that such a tragedy exists in this case. It seems to me that EECA are implying that businesses are not acting in their own best interests. This will not be true. Business, in aggregate, will be responding correctly to their incentives.

To be fair to EECA they face an unenviable task. They are tasked with very challenging targets for energy efficiency with little in the way of real resources or policy levers. Nevertheless, ideology, by itself, will usually be ineffective. If ideology is effective, in isolation, it can also be very dangerous. There are always externalities and practicalities that must be taken account of.

Notes [1] a tragedy of the commons exists when all individuals would benefit from cooperating in saving a resource but only if everyone cooperates. Usually, without a coordinating body or external interference, there is no cooperation because an individual can benefit from consuming first and fast.