HENVI Workshop 2011: Why Does Society Need Environmental Research?

Environmental Decision Making - Lessons learned from the business world

Tuomas Autio, Quynh Nguyen Ton Nu,

Reija Mikkola, Tähti Pohjanmies

Table of Contents1. Introduction ...................................................................................................................................... 2 2. Corporate environmental management ............................................................................................ 2

2.1. Corporate environmentalism .................................................................................................... 3 2.2. Corporate environmental management in practice ................................................................... 4 2.3. Effectiveness of corporate environmental management systems ............................................. 4 2.4. Lessons learned ........................................................................................................................ 7

3. Stakeholders in company decision-making...................................................................................... 7 3.1. Stakeholders- who are they and what are their concerns? ....................................................... 8 3.2. Case-study and environmental lessons for companies ............................................................. 9 3.3. Potential models for company environmental decision-making engaging stakeholders and challenges ...................................................................................................................................... 10 3.4. Lessons learned ...................................................................................................................... 13

4. The role of proactiveness in “greening” business .......................................................................... 13 4.1. The power to change business ............................................................................................... 14 4.2. Classifications of companies' approaches towards handling environmental issues ............... 15 4.3. Examples of succesful proactive orientation .......................................................................... 16 4.4. Lessons learned ...................................................................................................................... 17

5. European Union Emission Trading Scheme - Experience of the Business World ........................ 17 5.1 Background of the ETS ........................................................................................................... 18 5.2. Theoretical base on “Cap and Trade” .................................................................................... 18 5.3. Basic Functioning of the EU ETS .......................................................................................... 19 5.4. The effects of the ETS - experiences from the Business sector ............................................. 19 5.5. Lessons Learned ..................................................................................................................... 20

6. Conclusions .................................................................................................................................... 21 References: ......................................................................................................................................... 23

1. Introduction

The impacts of human activities on our natural environment and the following undesirable changes

in the environment, i.e. environmental problems, have become an issue companies can not ignore.

Companies and industries perform activities that have drastic impacts on the environment. Due to

regulative legislation, pressures from environmental agencies and growing numbers of

environmentally oriented customers, business partners and other stakeholders, companies are forced

to take environmental issues into account in their decision-making processes. In order to do this

companies may implement environmental management systems.

In this report we will discuss the theoretical background of environmentally aware corporate

decision-making, corporate environmental management practices, and the main motivators behind

implementing environmental management. The role of stakeholders in companies’ environmental

decision-making is demonstrated by a case-study of Coca-Cola in India in the early 2000s. The

possibilities for companies to gain economic advantages through environmentally sound practices is

illustrated by examples of the Finnish elevator company Kone and the River Rouge Ford factory in

Michigan, US. Finally, the European Union Emission Trading Scheme is examined as an example

of public environmental policy aimed to influence companies’ environmental decision-making.

Among the main questions the report aims to answer are: What kind of qualities make up an

effective environmental management system? What can be learned from environmental decision-

making in the business world to help efforts to address environmental problems in other sectors?

The potential answers are discussed at the end of each section of the report in a conclusive “Lessons

learned” sub-section.

2. Corporate environmental management

Corporate environmental management aims to manage and reduce the environmental impacts of

business. It involves the recognition of environmental concerns in the company’s decision-making

processes and their integration into business practices. The organization of environmental

management takes many forms and the incentives behind adopting environmental management

practices may be varying. In this section we will briefly examine the theoretical background of

corporate environmentalism, corporate environmental management practices, and the effectiveness

of these practices.

2.1. Corporate environmentalism

Increased public concern over environmental problems has translated into increased awareness of

these issues within businesses. Banerjee (2002) attempts to conceptualize the increased

environmental awareness of businesses and its implications. In earlier literature examining

corporate environmentalism, or the influence of the biophysical environment on corporate strategy

formulation, he identifies three themes. These themes are recognition of ecological constraints on

corporate strategies being seen as a paradigmatic shift, a stakeholder issue, and a strategic issue.

The first view calls for re-evaluation of neoclassical economic paradigms, changes in managerial

and policy mindset, and development of definitions for ecologically sustainable organizations. The

second, stakeholder perspective of corporate environmentalism identifies the natural environment as

one of the company’s stakeholders and therefore holds the company accountable for its impact on

the environment. It also involves recognition of other stakeholder groups’ environmental concerns.

The third stream of research examines environmental issues that influence companies’ strategies by

affecting their competitiveness and profitability. The significance of the ensuing change in the

company’s environmental impact is not of interest by itself, but the fact that environmental issues

are integrated to the company’s strategy and the extent to which this is done. Strategic corporate

environmentalism may arise from environmental regulations or attempts to attract new customers,

improve product quality or develop company image. (Banerjee 2002.)

Banerjee develops a definition of corporate environmentalism in accordance with this third stream

of research as such: “Corporate environmentalism is the organization-wide recognition of the

legitimacy and importance of the biophysical environment in the formulation of organization

strategy, and the integration of environmental issues into the strategic planning process” (Banerjee

2002, p. 181). The concept is further broken down to corporate environmental orientation and

environmental strategy focus. Corporate environmental orientation is a corporate value that

manifests itself as internal standards of ethical behaviour as well as statements given to external

stakeholders. A company’s internal environmental concerns may then be translated into strategy.

Environmental issues may be integrated into strategy formulation at different levels, from enterprise

strategy to functional level. Based on a review of literature, Banerjee concludes that companies with

a higher level of environmental strategy focus achieve higher competitive advantage from

environmental improvements. (Banerjee 2002.)

2.2. Corporate environmental management in practice

In practice, there is a multitude of ways of institutionalizing environmental management. Often it is

created as a separate internal group within the business (Schaltegger et al. 2003). The objective is

for environmental management to become an integral part of strategy formulation in other areas.

Among the strategic actions influenced by environmental concerns may be new product

development, research and design investments, technology development, changes in product and

process design, and supplier selection and evaluation.

Environmental management systems offer management tools for integrating environmental issues

into strategy formulation and business practices. They guide organizations in institutionalizing

environmental management and continuously evaluating their practices in order to improve their

environmental performance. One of the best known and widely used guidelines for developing and

maintaining an environmental management system is the ISO 14001 standard. (Gibson 2005.) The

focus of ISO 14001 is creating an environmental management system that is capable of identifying

and addressing environmental impacts which are the most significant for the individual company

(ISO 2011).

2.3. Effectiveness of corporate environmental management systems

Corporate environmental management systems aim to reduce the undesirable environmental

impacts of businesses. In reality, how effective are they in doing this? More specifically, is their

main goal ensuring a company meets regulatory requirements, or is it reducing the company’s

environmental impact below levels required by compliance?

Based on a review of studies conducted in the U.S., Gibson (2005) concludes that environmental

management system implementation in effect does not automatically lead to a better rate of

regulatory compliance compared to companies that haven’t implemented an environmental

management system or the company itself before the environmental management system

implementation. Signs of companies moving beyond compliance in their environmental protection

as a result of their environmental management system were therefore even harder to see. (Gibson

2005.)

Schaltegger at al. (2003) and Gibson (2005) identify isolation from the company’s other functions

and lack of funding, support or involvement of different stakeholder groups as some of the main

issues that may undermine the effectiveness of an environmental management system.

Organizational structures that allow for the integration of environmental management practices

throughout the business should be in place (Schaltegger et al. 2003). According to Gibson (2005)

the effectiveness of environmental management systems improves when they are implemented by

the people who are responsible for the company’s compliance to environmental regulations, when

they include incentives for all the stakeholders, and when they are subjected to regular audits and

improvements. Banerjee (2002) considers the integration of environmental concerns into the

company’s strategy, i.e. identifying ways to improve the company’s profitability through eco-

efficiency, a framework that offers potentially effective ways of dealing with environmental issues.

In fact, from a review of previous studies Gibson (2005) also found that incentives for

implementing an environmental management system arising from market pressures had a greater

influence on companies than incentives created by the threat of liabilities. Reducing costs,

conforming to customers’ and investors’ preferences, and improving public image are among the

main motivations to implement a highly developed environmental management system, especially

for companies and industries with high environmental impacts (Gibson 2005, Banerjee 2002).

Schaltegger and Figge (2000, p. 30) argue that in the markets “only economically oriented, i.e.

efficient, environmental protection will prevail”, whereas environmentally friendly endeavours that

don’t take economical success into consideration will eventually fail. Corporate environmental

management should therefore focus on systematically pursuing ways to integrate environmental

protection and economic success within all areas of the company’s activities. Schaltegger and Figge

conclude that corporate environmental protection may improve or reduce a company’s economic

success, but neither end result is guaranteed. The manner in which corporate environmental

management is practised may greatly affect the economic consequences of environmental

protection; specifically an environmental management system that accurately incorporates the

shareholder value concept may help avoid conflict between environmental and financial objectives.

(Schaltegger and Figge 2000.)

Wagner (2005) compares the traditionalist and revisionist view of the relationship between

environmental and economic performance. According to the traditionalist view, improving

environmental performance only increases costs and reduces profits for a company. The revisionist

view, then again, considers it possible for there to be win-win situations where improving

environmental performance is profitable. It can be represented as an inversely U-shaped curve (see

image). The most rational actions for companies depend on whether the link between environmental

and economic performance follows the traditionalist or the revisionist perception, and whether

regulations are weak or strict. But companies may not be able to recognize between traditionalist

and revisionist-type relationships, and mere compliance can therefore seem like the safest choice.

According to Wagner, however, companies may be able to create unique competitive advantages

from their environmental improvements through strategic choices. For example, plain compliance

to emission regulations may lead to introduction of end-of-pipe techniques that involves large

investments, whereas a further developed, integrated pollution prevention strategy may not require

additional investments and may lead to improved efficiency and reduced costs. (Wagner 2005.)

The relationship between environmental and economic performance (Wagner 2005).

The underlying assumption in the environmentalism-as-strategy stream of research described above,

and represented by Schaltegger and Figge and Wagner, is that corporate environmentalism can

provide competitive advantage and improved profitability (Banerjee 2002). The other two views

(environmentalism as a paradigmatic shift, environmentalism as a stakeholder issue) are both based

on a normative set of notions, translating into, for example, requiring ethicalness of business

managers’ mindsets and actions. They both also raise criticism for questionable compatibility with

doing business in the real world. On the other hand, the environmentalism-as-strategy position “is

open to criticisms from environmentalists who claim that it is not always possible to have win–win

situations in corporate environmentalism and that the needs of the corporation come first” (Banerjee

2002, p. 182).

2.4. Lessons learned

Banerjee (2002) calls for more research on the processes of integration of environmental concerns

into business practices within companies, and emphasizes the potential benefits of this research. Of

great importance to the manifestations of corporate environmentalism are the individual decision

makers’ interpretations of the relationship between the natural environment and their organization.

Understanding business managers’ perceptions of environmental issues may help develop more

fruitful collaboration between private and public sector agencies. Understanding the processes of

corporate environmentalism can also help formulate more effective public policy initiatives for

reducing the environmental impacts of businesses. (Banerjee 2002.) Schaltegger and Figge (2000)

bring up market-based public environmental policies as an example of ways to reduce companies’

inner conflicts between environmental protection and economic success. We will look at the

European Union Emission Trading Scheme as an example of market-based public environmental

policy towards the end of the report.

3. Stakeholders in company decision-making

In the previous section the view of corporate environmentalism as a stakeholder issue was discussed

briefly. The different stakeholder groups of a company, however, naturally have importance also in

the profitability-oriented environmentalism-as-strategy approach. This part will discuss the role of

stakeholders to company environmental decision-making process by examining the environmental

concerns of stakeholders and the concerns of the companies when planning their business activities.

The meeting point of these concerns would suggest the importance of stakeholders’ role in directing

companies to a sustainable way of development.

3.1. Stakeholders- who are they and what are their concerns?

A primary question for the theme of integrating environmental issues to decision-making is “Who

are involved in the process and why?”. The answer in the case of company decision making is they

are the key stakeholders directly or indirectly affected by the business activities such as “creditors,

customers, directors, employees, government (and its agencies), owners (shareholders), suppliers,

unions, and the community from which the business draws its resources.” (BusinessDictionary,

2011). To the extent of social acceptability and environmental responsibility of business activities,

it is relevant to examine the roles of customers and local community where factories are located.

Indeed, customers’ preferences are the most important figures for companies to continuously

consider in order to succeed in their business operation. The companies’ turnover depends much on

the customer consumption of their products or services. The demands for product’s quality and the

choice of product use by customers are various. Nevertheless, they become more convergent in the

age of globalization and changing climate when there have been many discussions at all levels

talking about environmental issues such as climate change, natural resource scarcity in the World.

Along with the trend of increasing environmental concerns all over the World, there are more and

more customers who pay much attention to the environmental impacts of business activities. In

other words, they are “green customers” who have had a habit of “green consumption”. The

concept of “green consumption” has emerged as an idea to protect environment in this new era.

Customers nowadays are more aware of the environmental effects by the production of industrial

products they buy. People are more encouraged to “choose green products that are unpolluted or

good for public health, wastes are to be treated under special surveillance to avoid pollution”.

(China.org.cn, 2007). It is these changes in purchasing attitude of customers that significantly

influence the decision-making concerning environment protection of many business corporations.

Another group of stakeholders important for the sustainable development of business operation is

local community which is even larger in number than the amount of customers one company may

have in one region. They are crucial to the survival of companies because they have the right to give

companies permission to exploit the natural resources, the environment or use fresh water in the

areas they are living or not. This is a vital factor to companies who wish to develop a long-term

strategy for their business operation. Let’s have a clearer image of how important customers and

local communities are important to companies as stakeholders by taking a closer look to a case-

study of Coca-Cola in India in the early 2000s.

3.2. Case-study and environmental lessons for companies

Coca-Cola had a bad reputation to Indian customers for being found by the Centre for Science and

Environment (CSE) in New Delhi that they let too high level of pesticide in the water used to

produce Coca-Cola soft drinks in 2003. Moreover, Coca-Cola was also accused of making aquifer

dry up in the regions their factories were located and this forced the local farmers to relocate. The

end of Coca-Cola in India at regional level was “In March 2004, local officials in Kerala shut down

a $16 million Coke bottling plant blamed for a drastic decline in both quantity and quality of water

available to local farmers and villagers”(Wikipedia, 2011)

Coca-Cola crisis in India, 2008 (Indybay.org)

The example illustrates clearly the norms and values of customers and communities for their

livelihood that any business activities that affect the existing ecological environment would be

resulted in a sad ending like Coca-Cola. As mentioned in the previous section, attempting to

conform to customers’ preferences and to improve public image are among the main motivations

for a company to integrate environmental concerns into their business strategy.

Parched Village Sues to Shut Tap at Coke (http://www.mindfully.org/Water/2005/Coca-Cola-

India6mar05.htm, 2005)

In this case Coca-Cola clearly failed to identify the preferences of its Indian customers and predict

the severe consequences of exploiting fresh water from local communities to its image and

reputation. Integrating the concerns of these stakeholder groups better into the planning of their

activities in India could have prevented the damages.

3.3. Potential models for company environmental decision-making engaging

stakeholders and challenges

It has been clear that key stakeholders to Business Corporation such as customers and communities

should be involved in the decision-making process of the companies, especially in the area of

environment preservation. Then there should be some models for companies to adopt to get

effective results. In the article “A Phase-Wise Development Approach to Business Excellence”, the

authors present a model introduced by EFQM (European Foundation for Quality Management) in

1991 called The EFQM Excellence Model as visualized in the following graph

The model emphasizes some factors such as People, Policy and Strategy and Partnership and

Resources that could be the determinants for the expected results of companies through a process of

implementing, innovating and learning as the cycle for the improvement of business performance.

This model is relevant for the community-based decision making process because the participation

of the “People” is assertively addressed in the model from the very beginning of the cycle that it is

one the “enablers” to be processed to achieve the final results. Another graph illustrating the issue

should be paid attention when engaging community to the process of company environmental

decision-making is that

Key issues in managing stakeholder processes (Yosie & Herbst, 1998)

In this approach, some key factors are mentioned to achieve good process results such as assessing

the attitude of conveners, clarifying the roles of scientists and stakeholders or matching the right

stakeholders to the identified problems. These factors are also the possible challenges for companies

when making their business plan with the involvement of other stakeholders. The environmental

problems that each company has to identify are various due to the nature of their production. For

example, the environmental problems companies operating in the field of textile are different from

the ones which processing food. Textile industry is claimed to pollute the environment by expelling

chemical additives waste water into outside while in food processing industry, the environmental

concerns related to food waste and plastic bag used for packing released into environment. Each

company has their own environmental issue to deal with and each group of customers, communities

have their own perspectives and knowledge about the issue which need to be explored for a

successful negotiation.

3.4. Lessons learned

The environmental lesson companies could learn from the case of Coca Cola in India based on

Banerjee’s theory of “corporation environmentalism” is that companies should be responsible for

their product’s quality and environmental impacts of their production activities toward the

environment from within. In other words, the incentive for company to be accountable for their

activities should originate from their internal ethic. By that way, companies could be able to

develop a long-term strategy which helps them gain both economic benefit and environment

protection.

In short, it is clear that customers and communities as stakeholders are significant factors for all

companies to take into account when planning their business activities. Customers are those who

can choose which companies they would like to buy products from and which brands they want to

boycott for not meeting the customers’ norms and values. To the extent of long-term development,

a stable location for factories to be located is important for long-run business strategy formulation.

Therefore, the concern of local communities on environment preservation should be included in

business plans.

Community-based approach in decision making is not a new one but has been always significant for

issues related to the whole society, particularly speaking, to the environmental decision making of

Business Corporation. The final purposes of running a business is not only to make profit but also

to benefit the society. Therefore, developing a suitable model for decision making involving

community is a necessity for companies to achieve their sustainable development goals.

4. The role of proactiveness in “greening” business

In the previous sections of the report we discussed the relationship of environmental and economic

performance of a company, the possibilities of win-win situations in this relationship, and whether

it is more economical for companies to only comply with regulations or go beyond compliance in

their environmental protection. In this section we will further examine these topics by looking at

theoretical classifications of companies’ environmental approaches and by presenting two examples

of companies being proactive in integrating environmental concerns into their activities.

4.1. The power to change business

For a long time, companies have controlled consumption to guarantee better profits. One example

of this is called planned obsolescence. It relates back to the days when light bulbs where first made

to last around 2500 hours. In 1924 a worldwide cartel was established to control the global light

bulb markets. This cartel established a 1000 hour limit to light bulb lifespan in order to increase

sales. The limitation was carefully monitored by the cartel and producers were fined if they didn't

obey it. In the 1940's, 1000 hours became the standard lifespan. Since then there have been designs

of light bulbs that could guarantee the life span of up to 100 000 hours, but they have never entered

the markets. (Dannoritzer 2010)

Brook Stevens, one of the most important developers of planned obsolescence defines it as

”instilling in the buyer the desire to own something a little newer, a little better, a little sooner than

is necessary”. This is the very core of consumerism. Of course times were different back in the days

when this sort of thinking first started. Resources weren't seen as finite. However, now we live in a

time when we have more knowledge and we are in fact reaching the limits of our resources. Oil is

getting more and more expensive and scarce and some third-world countries are drowning in waste

dumped there by industrialized countries. It is time for companies to start taking the initiative in

renewing their strategies. History shows, that they have the power and possibilities to do so.

(Dannoritzer 2010)

Magnus Enell is a professor at the University of Lund and environmental consultant. He specializes

on corporate responsibility. He explains that before, company governance systems have mostly

involved the economy and finance aspects of risk management, but through time, environmental

performance and social responsibility have come more and more into play. Instead of the old

dynamics of social and environmental fairs, where companies were in the middle, they are now one

of the players. Enell states that it is in the company's own interest to act towards sustainable

development, since it enhances risk identification and handling, brand reputation, the well-being of

present employees and therefore the incorporation of new ones. He also emphasizes that

environmentally sound business can save money. (Enell 2009)

4.2. Classifications of companies' approaches towards handling environmental

issues

According to Enell there are three kinds of approaches for companies in moving towards

environmental sustainablitity.

Orientation Attitude Role of

environmental

work

Environmental

reporting

Focus

Reactive Fulfills customer

requests and

laws.

Separate from

other work

No reporting Direct impacts

Active Environmental

management

system

established.

Separate from

other work

First step in

reporting

Direct and

indirect impacts

Proactive Holistic

approach.

Taking action is

seen as

profitable.

Integrated in

other work

Externally

verified reporting

Indirect impacts

and supply chain

are taken into

acount

The proactively oriented companies have an integrated, holistic approach which takes into account

the economy, the environment and social aspects. Indirect impacts and also the supply chains are

taken into account. Corporate responsibility is externally verified. Sustainability is seen as a

profitable opportunity with many benefits. (Enell 2009)

Jukka Kurttila, a representative of the business world from the marketing field (Bob Helsinki), has a

similar approach. He lists three stages in business corporations' reactions to environmental

problems. The first stage is denial, in which the company tries to lobby its way out of the situation.

Doing so, the company wastes money. The second one is forced acceptance of the situation, in

which the company tries to buy its way out by greenwashing the environmentally unfriendly

activities and maybe making some donations to non-governmental organizations. This way,

according to Kurttila the company ends up stuck with the problem, since nothing is been done to

solve the actual source of it. (Kurttila 2009)

In Kurttila's classification, the third stage is for the company to decide whether it wants to be a

winner or a loser in the game. The winners are the ones who see the opportunity that comes out of

dealing with the current environmental problems. He states that in an uncertain situation like

climate change, the biggest loss will happen if we don't act and the worst case scenario happens to

come true. According to Kurttila, business will change. On the macro level it will concentrate more

on quality instead of quantity. It will be a matter of redistribution, not loss. As a speculates on the

possibility of a more local-scale production system. On the micro level companies need to rethink

their products and services. Scenarios need to be built from the point of view of sustainable

development. Possibilities must be recognized and innovation is needed. (Kurttila 2009)

4.3. Examples of succesful proactive orientation

According to both of the views presented here, a wave of change is in fact going on in the business

world. It seems that companies can make profit from sustainable practices and become successful

by being proactive in the change. Next we will present some examples of such success. One way to

go is shifting from selling product to selling service. A good example of this is the Finnish elevator

company Kone. Already in 1995, more than half of its turnover came from maintenance and

modernization. This was not originally something that was done as a measure of moving towards

sustainable practices, yet the company is one of the leading examples in sustainable business today.

(Hukkinen 1995)

Interestingly, in addition to Kone, there are quite a few companies of heavy industry that are doing

well in being proactive in the change to more environmentally friendly business. Enell has made a

list of the leaders and laggards in the issue. According to him, the top league consists of pulp, steel,

metal and mining industries. Right behind, are manufacturing, retail, building and construction,

chemistry and pharmaceutics companies. Then come banks, services, medical technology, IT,

telecom and real estate. At the very bottom are oil and gas companies, and finance. (Enell 2009)

Some companies have moved to more sustainable business with help from the outside. Chemist

Michael Braungart and architect William McDonough have been involved in redesigning many

businesses. They think it is all a question of design, and it should be based on a principle of the

maximum amount of material and energy going back into the natural recycle without downgrading

it. Instead of products going from cradle to grave, they should go from cradle to cradle, which is

the name of their design concept. One of the largest scale operations made with this approach has

been the remake of River Rouge Ford factory in Dearborn, Michigan. (Braungart and McDonough

2008)

The factory was built in the 1920’s as an icon of the Industrial Revolution. It was one of the largest

industrial complexes on the planet with a hundreds of acres’ area and about seven thousand workers

in the end of the century. The goal was to create a factory area that would be safe enough for the

employee’s own children to play. The eco-effective approach that was taken cleans the water and

the air, provides habitat, and enhances the beauty of the landscape. According to one estimation, it

saved the company 35 million dollars. Here the holistic approach, that also Enell talked about, can

be seen. The design takes into account the environment, creates healthier and cleaner working

surroundings as the social aspect, and doing it was profitable. (Braungart and McDonough 2008)

4.4. Lessons learned

We have seen examples, both in theory and practice, that companies have the means to be

environmentally friendly and make profit at the same time. This suggests that the win-win situation

speculated by Banerjee (2002), Wagner (2005) and Schaltegger and Figge (2000) and discussed in

the first section of the report, is indeed possible. Dealing with environmental issues is no longer a

matter of losing money while having to handle an uncomfortable problem.

5. European Union Emission Trading Scheme - Experience of the Business World

In this section we will discuss the European Union Emission Trading Scheme (ETS) as an example

of public environmental policy aimed to reduce environmental impacts of companies through

market mechanisms. We will briefly go through the basic functioning of the ETS and discuss

experiences of the system from the European business sector.

5.1 Background of the ETS

European Union has been trying to take a world leading role in the development of the new, greener

economy. The environmental issues have taken over more important role in the European Union

level decision making. In order to achieve this role of a leader, EU has actively given environmental

guidance to its member states. The golden rule of these EU-level environmental policies is to find

the most cost efficient solutions by using the market mechanism (Raunio and Saari 2006, 189).

Through the binding nature of EU-legislation, decisions at the EU-level also affect the legislation of

the member countries.

The main policy instrument to reduce greenhouse gas emissions and to meet goals under the Kyoto

Protocol, the European Union Emission Trading Scheme (ETS) was launched in 2005. EU ETS is

the first and the world's biggest emission trading system that covers some 11,000 power stations

and industrial plants in 30 countries. The goal of the EU ETS is to lower industrial green house gas

emissions with 21% by 2020 compared to level in 2005 in Europe (European Commission 2010).

Because of the exceptional size of the new market and the amount of businesses involved, the EU

ETS have been called a “New Grand Policy Experiment” (Kruger and Pizer 2004). It can be seen

as a EU-level attempt to make it possible for businesses to gain economic profit from “being

green”.

The launching of the ETS was especially interesting from Finland's point of view because a great

share of the Finnish Exports come from energy oriented industries. It is said Finland is the country

the most harshly affected by the ETS when two thirds of its industries are involved in the system

(Kuntsi 2004).

5.2. Theoretical base on “Cap and Trade”

The theoretical base of the Emission Trading System is in the theory of ”cap and trade”. It is a

theory about reducing emissions by setting a cap for the total amount of emissions allowed. Then a

smaller amount of emission allowances are distributed to the markets. The trade of the allowances

is dependant on the opportunity cost of a company to reducing emissions. To put it simple, those

companies whom it is easy to reduce emissions, in other words, who have small opportunity cost of

emission reduction, would end up reducing emissions and getting profits from selling their emission

allowances. At the opposite, firms with higher opportunity cost of reducing emission than the price

of an emission allowance, would end up buying emission allowances and so they would ”pay for

polluting”. To achieve the reduction of the total amount of emissions, it is essential to make

allowances scarce which means sharing them less emission than the (total) amount of expected

emissions. (Stavins 2001.)

5.3. Basic Functioning of the EU ETS

The basic idea of the EU ETS follows the theoretical concept presented above. A cap on the

emissions of certain industries is set by EU authorities. The ones who over their limit need to buy

emission allowances (EA's) and the ones who go below the cap can sell their allowances and so get

economic gains from lower emissions. The price of an emission allowance is set up by the markets.

In practice it means that, for example the increase of total emissions strengthens the overall demand

of the allowances and raises the price. This makes it even more reasonable to reduce emissions. The

original way to distribute EA's was to share them to national governments who would decide about

the allocation in the national level. A significant change was made for the scheme in summer 2010

when the EC decided to start sharing them straight to the industries.

5.4. The effects of the ETS - experiences from the Business sector

Since its adaption, the EU ETS has had some significant effects on European industry scene. The

key question is if it has it reduced greenhouse gas emissions. The evidence shows that the ETS led

from the expected 1-2% increase of emissions in to a small decrease in 2006-2007 (Grubb et al.

2009). This would mean that ETS has actually created an incentive to lower emissions.

From the point of view of the businesses, ETS it has created both direct and indirect effects. The

main direct effects are the costs and profits from trading emission allowances. In addition, it has

caused some indirect effects that result in costs and complicate the long term planning of the firms.

These indirect effects can simply put in two:

1. the ETS effects on businesses through electricity prices

2. the difficult predictability of the future emission allowance prices

The first part, the ETS has both increased and caused greater volatility on electricity prices (EK

2009; Elfi.fi 2010). This will eventually effect especially those industries strongly dependant on the

use of electricity as a factor of production. The strong volatility and the increase in electricity prices

can be seen as a one factor in the decision of relocating production outside Europe. This

phenomenon, called ”carbon likeage”, is a negative consquence of the ETS and one of the most

common critics towards the system. The relocation of the production also has a negative effect on

European emplyment.

Another indirect effect ETS industries has faced is the increased uncertainty. This appears through

the difficult predictability of the price of future emission allowance. It causes problems for both

those who reduce emissions and those who increase them (we can say for both buyers and sellers of

the EA's) because it makes it difficult to foresee the future costs or incomes. The uncertainty is

problematic especially when the businesses affected by the ETS are many times heavy industries

with where investment decisions and strategies should be made long term. The unattended

sctructural changes made in the ETS, such as the abandonment of the national action plans (NAP's)

last summer has also decreased the stability and the predictability of the ETS.

5.5. Lessons Learned

The experience from the ETS so far could be summarized as following: it works but several

inefficiencies remain. To better develop the existing system, as well as developing new market tools

for environmental protection, some lessons could be learned from the ETS. First, from the business

point of view, even though ETS does create an incentive to reduce emissions by offering possible

economic gains, at the same time it brings in more uncertainty and can be a threat for the

competitiveness of the European industries in the world markets. These things together can lead to

“carbon leakage” which heavily fights against the goals of the emission trade system. To overcome

this kind of inefficiency, the system should be improved. One solution could be finding ways for

better inclusion of the stakeholders to the development process of the system. For example, as

suggested by the Finnish Energy Industry (ET), the reporting from actors involved in the ETS

should be made more often than once a year as it is made at the moment (2008). This could help in

improving the dynamics of the system through more feedback from the field. Also, making

impulsive structural changes should be avoided to make the system more predictable.

Intensification of the EU interior markets could help to the competitiveness problems businesses

face in the world markets. To reduce the problem of free riding, a clear long term goal should be a

world wide emission reducing system that would make it more difficult to chase competitive

advantages through lower environmental laws.

Unfortunately, the stagnant situation in the global climate negotiation tables does not give reason

for too much optimism for the expanding of the system. To help improving the existing emission

trading system, as well as developing new tools, the academic world should definitely do its share

in the field of research.

6. Conclusions

In conclusion, the paper tries to address the impacts of environmental issues on the process of

decision making among companies which are expected to adapt to environmental problems: how

companies have engaged environment factors into their long-term development strategies and pose

some questions concerning the dilemma of achieving an effective policy for both company

development and environment protection when it comes to practices. These are considered crucial

parts to the sustainable development of companies.

The findings from this work conclude that it is important for companies to seriously take their

stakeholders’ voices into account in the environmental decision making. The companies should be

more directed to a proactive attitude towards environmental issues. There are uncertainties for

companies which take part in the EU system of ETS. Then the answers for questions of who

involve in the environmental decision making are all the stakeholders; including the local

communities, the customers, the shareholders who decide which path of development companies

are going to take and the authority whose environmental regulations have great impacts on the

provision of companies for their development strategies.

However, there are some questions that remain open for discussion. Such as which are the main

incentives for companies to take environmental action and should they merge from within the

company or from external forces? The research revealed that it is problematic for companies to

efficiently integrate environmental protection to economic growth. What do the companies need

in order to make the change? What works better as a motivator, the chance to gain more profit if

they act, or the risk to lose profit if they don't act? What are the roles of regulations, incentives and

the pressure from consumers, in the shift towards more sustainable business?

Multinational companies operate in countries where environmental regulations that make taking

environmental issues into account profitable do not exist. What kind of environmental responsibility

and accountability can be expected from these companies?

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