The New Normal — The End of Green Premiums
In the 2021 book How to Avoid a Climate Disaster, Bill Gates makes the green premium central to his book. Gates defines the green premium as the difference in cost between a product that involves emitting carbon and an alternative that does not. One example he provides is with cement manufacturing, a process that emits a significant volume of carbon. “The best we can do is to capture it once it has been released and stash it away permanently, a process that adds between 75% and 140% to the cost of cement. Few construction firms would be up for absorbing such a price increase in any competitive market.”
Larry Fink, Chairman and CEO of Blackrock, also weighs in on the necessity of bringing down the green premium if we are to achieve our climate goals. As to be expected and in line with Gates, Fink focuses on investment and technology as the drivers to make innovation more financially attractive for financiers to absorb the risk of the “…$50 trillion in capital needed before 2050. We need capital to both scale the solutions we have and speed up and commercialize the breakthroughs we need.”
Consumer Sentiment
It seems never a week goes by without some consulting firm or another presenting yet another survey gauging consumer sentiment to purchase sustainable products.
Surveys can be notoriously misleading as there is often a disconnect between a survey response and consumer action. Each survey or consumer analysis attempts to present its findings in a unique way. Unfortunately, Gates, Fink and consumer surveys are still mired in ‘linear thinking’ (no relation to the circular economy). Dr Jane Davidson, pro vice chancellor for sustainability and external engagement at the University of Wales, explains it much more succinctly,
“Green premiums are the wrong answer to the wrong question. We need a new value system that drives climate and biodiversity-led action and drives out fossil fuels, waste and obsolescence.”
What Could This New Value System Look Like?
Sainsbury, the second largest supermarket in the UK, recently issued a press release explaining their commitment to fairer trade by paying thousands of workers a living wage and supporting the future of banana growers in Cameroon, Colombia, the Dominican Republic and Ghana. Ruth Cranston, Sainsbury’s Director of Corporate Responsibility and Sustainability, said, “Bananas are our bestselling fruit, and by improving wages on this product, we can positively impact the lives of thousands of people in the countries we source from.”
A portion of the premium being paid goes towards helping the environment by supporting the banana growers to implement sustainable farm practices, such as capturing carbon, reducing water footprints and improving biodiversity and soil health. Sainsbury is not just rewarding banana workers, they are future-proofing the supply of their bestselling fruit.
Providing a living wage to workers across a supply chain is the ‘S’ in ESG and is slowly becoming a global standard for companies that prioritise sustainability beyond ESG. However, it is not just paying a living wage that shifts our value system. It is the frustration of reducing everything to a business model.
In 2022, a researcher was working with a major public sector organisation to realise, accelerate, and scale up existing knowledge on circular economy practices in order to achieve systemic change. The project began with a co-creation session, including experts from the research community, government, and business. Interestingly, despite beginning with functional questions such as “How can we design an ecologically and socially sound solution?” the practical starting point of the discussion quickly became: “What is the business case for this project?” In spite of the participants’ noble intentions, this setup was immediately destined to fail to reach the goal of systemic change. As the researcher argued in his paper, starting with the necessity for a business case inevitably leads to solutions within the system rather than solutions that change the system.
The Law of Supply and Demand
Like physics, there are some things that are impossible to change, such as the law of supply and demand. Green premiums depend on supply-demand balance since they require a lower supply of green materials than demand. For example, in the past decade high-quality recycled plastics reached an average premium of up to 60% over virgin plastics, depending on the product.
In this video, Maurtis Dolmans, a competition lawyer, positions himself as a responsible entrepreneur who wants to stop using cheap raw materials that emit lots of GHG. He also hopes there may also be markets where consumers are willing to pay a green premium for sustainable production and quality improvement.
In the case where consumers may not be so willing to pay and where there are a number of market failures, the only way to overcome these failures is for businesses to collaborate. Unfortunately, competition laws in most countries prohibit the type of collaboration necessary to pursue sustainability goals which may reduce a green premium.
Conclusion
The realisation of just how much has to change in order to preserve all life on planet Earth is just starting to emerge. Over time, the term ‘green premium’ will slowly slip away as an expense; instead, it will be overtaken by the cost of valuing natural capital, fair labour, sustainable materials, regenerative agriculture, water management, biodiversity loss, and resource scarcity, to name a few. The days of ‘cheap’ is surely coming to an end.
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Ms Adrienna Zsakay is the Founder and CEO of Circular Economy Asia Inc, and this article represents her opinions on the circular economy.
References
‘Introducing the Green Premiums’ by Bill Gates, 29 September 2020, from Green Notes, a blog published by Bill Gates.
‘Bringing Down the Green Premium’ by Larry Fink, Chairman and CEO of Blackrock, published on LinkedIn, 21 September 2021.
‘The Pros and Cons of Bill Gates’ Green Premiums’ by Oliver Pickup, published by Raconteur, 07 April 2021.
‘The Green Divide’, published by Nielsen IQ, 2023
‘Sainsbury’s Invests in Living Wages for Banana Workers Three Years Ahead of Industry Commitment’, press release published by IDH, 12 February 2024.
‘Markets and the Future of the Circular Economy’ by Thomas Siderius and Trevor Zink, published in Circular Economy and Sustainability, 2022.
‘Capturing the Green-Premium Value from Sustainable Materials’ by Marcelo Azevedo, Anna Moore, Caroline Van den Heuvel and Michel Van Hoey, McKinsey, 28 October 2022
Originally published at https://www.linkedin.com.
