Business and

Environmental
Sustainability
Week 11

Lecture
Environmental challenges always create a burden on business and that
environmental and business interests are always in conflict.

While environmental regulations can add costs to business operations

and restrict business choice, environmental considerations can also
provide opportunities for business.

government-mandated restrictions on
fuel efficiency standards pesticide use

burden on
opportunity opportunity
large sport-
to market to market
utility burden
fuel-efficient organic
vehicles
hybrids products
(SUVs)
Key environmental challenges
Climate Change: Rising temperatures and extreme weather
Biodiversity Loss: Extinction and ecosystem disruption
Pollution: Air, water, and plastic pollution
Deforestation: Loss of forests and ecosystems
Water Scarcity: Shortage of clean water resources
Overpopulation and Resource Depletion: Overuse of resources
Ocean Acidification: Harm to marine life from increased CO2
Unsustainable Agriculture: Soil degradation and pollution
 Triple Bottom Line

The sustainability paradigm sees environmental

responsibilities as a fundamental part of basic
The Natural Step’s Funnel

Environmental sustainability must accompany financial

sustainability for business to survive in the 21st century.
 Which values and decisions are supported by a concern with the
natural environment?
Why should we act in ways that protect the natural environment from
degradation?
Why should business be concerned with, and value, the natural world?

Increasing population and limited resources

Ways to protect natural environment

There is broad agreement on the self-interested need to protect the

environment, particularly as humans have a fundamental right to be
shielded from undue environmental harm.
This basic ethical stance drives much of the discussion around
environmental sustainability.

- Market-Based Solutions
- Government Regulation
Pigouvian tax - a tax imposed on
activities
that cause negative externalities
A Pigouvian tax is a tax imposed on activities that create negative externalities (like air
pollution or groundwater contamination) in order to correct the market's failure to
reflect the full social costs of those activities. The tax is intended to internalize the
external costs—meaning that the business or individual responsible for the pollution
would bear the cost of the damage they cause to others and to society.
In the context of pollution:
Without a Pigovian tax, businesses or individuals may not consider the negative impact
their pollution has on society (e.g., health costs, environmental damage).
With a Pigovian tax, the price of the polluting activity rises, encouraging businesses and
consumers to reduce pollution, find cleaner alternatives, or adopt more environmentally
friendly technologies.
This ensures that the cost of pollution is reflected in the market price, ideally leading to
a more efficient and socially optimal level of pollution.
The tragedy of commons
The tragedy of the commons is a concept that describes a situation in
which individuals, acting in their own self-interest, overuse and deplete a
shared, limited resource, leading to harm for the entire community or
ecosystem.
Overfishing - If everyone fishes as much as they want from a shared body
of water without restrictions, fish populations may become depleted,
harming both the environment and future fishers.
Air Pollution - If companies and individuals pollute the air without
regulation, the collective damage to the atmosphere could result in
climate change, which affects everyone, even those who are not directly
involved in polluting activities.
 The tragedy of commons

Imagine a group of herders who share a common pasture (the "commons") for grazing their cattle.
Each herder acts in their own self-interest, trying to maximize the number of cattle they can graze
on the land. Since the pasture is shared and no individual herder owns it, they don't directly bear
the full costs of overgrazing.
How the Tragedy Unfolds:
Overgrazing - Each herder reasons that adding one more cow to the pasture benefits them
personally, without directly hurting them because the negative effects (like soil degradation or
plant loss) are shared by everyone.
Depletion of Resources - As each herder continues to add more cows, the land becomes
overgrazed and the pasture’s ability to regenerate diminishes.
Long-Term Harm - Eventually, the pasture can no longer support the cattle, and the resource (the
land) is depleted, causing harm to all herders, not just those who overgrazed. The long-term
consequences, such as soil erosion or reduced crop yields, affect the entire community.
Solutions? regulation, privatization of resources, or cooperative agreement.
Market-Based Solutions: Proponents of this approach argue that
environmental challenges are fundamentally economic problems.
Markets are seen as efficient mechanisms for allocating scarce
resources, whether those are nonrenewable resources like fossil fuels or
the earth’s capacity to absorb pollution (e.g., CO2 emissions). According
to this view, businesses should focus on maximizing profits within
market systems, and the market will guide the efficient use and
conservation of resources.
Government Regulation: Alternatively, supporters of government
regulation argue that environmental problems may be too complex or
widespread for markets to address effectively on their own. Regulations
ensure that businesses adhere to clear rules designed to protect public
health and the environment, promoting accountability and ensuring
that environmental degradation is avoided or minimized.
 Challenges to the Market-Based
Approach
Externalities: The costs of pollution are often borne by parties outside of the economic
transaction.
For example, air pollution or groundwater contamination affects people who aren’t directly
involved in the industrial activities causing them. Since these costs are not reflected in the market
price, markets may not solve environmental problems efficiently.
Public Goods and Market Gaps: Some environmental goods (like clean air, biodiversity, or
endangered species) are public goods that don’t have a market price. As such, they may be
overexploited or under-preserved because there is no market incentive to protect them.
For instance, black markets for rhino horns or logging of endangered trees demonstrate how
valuable resources can be exploited without proper regulation.
Individual Decisions vs. Social Consequences: Markets often fail to account for the aggregate
impact of individual decisions.
For example, a single consumer’s decision to buy a large SUV may seem trivial, but if everyone
makes the same choice, the collective impact on global warming could be significant. This
tragedy of the commons illustrates that what may be rational for individuals may not be optimal
for society as a whole.
Business’s Environmental
Responsibility:
The Regulatory Approach
In the 1970s, a consensus emerged in the U.S. that unregulated markets were
inadequate to address environmental challenges, and government regulations
became the preferred approach. Significant laws like the Clean Air Act, the Clean
Water Act, and the Endangered Species Act were enacted to shift the burden of
environmental protection from those affected by pollution to those causing it.
These regulations established minimum standards for businesses, such as air and
water quality and species preservation, they were limited by jurisdictional issues.
Economic growth is ethically and environmentally mild, but different approaches
to profitability can have very different environmental consequences. Thus,
regulations only set minimum standards, and businesses can still pursue profits
in ways that may cause significant environmental harm, as long as they stay
within legal constraints.
Business’s Environmental
Responsibilities:
The Sustainability Approach
The concept of sustainable development became widely known after
the Brundtland Commission (1987) defined it as "development that
meets the needs of the present without compromising the ability of
future generations to meet their own needs." This emphasized long-
term thinking about economic, environmental, and social development.

The Circular Flow Model

A Model of the Economy (or Economic System)
as a Subset of the Biosphere (or Ecosystem)
Circular Economy
Sustainable Economy
• sustainability is a prudent long-term strategy
• the huge unmet market potential among the world’s developing
economies can only be met in sustainable ways
• significant cost savings can be achieved through sustainable practices
• competitive advantages exist for sustainable businesses
• sustainability is a good risk management strategy
 Principles for a Sustainable Business
eco-efficiency - doing more with less
biomimicry (“closed loop” production) - seeks to integrate what is
presently waste back into production in much the way that biological
processes turn waste into food
cradle-to-cradle responsibility - holds that a business should be
responsible for incorporating the end results of its products back into the
productive cycle
service-based economy - interprets consumer demand as a demand for
services rather than as a demand for products
 Greenwashing - ?
A box of aluminum foil is labeled with the claim “recyclable,” without
further elaboration. Unless the type of product, surrounding language,
or other context of the phrase establishes whether the claim refers to
the foil or the box, the claim is deceptive if any part of either the box or
the foil, other than minor, incidental components, cannot be recycled.
A trash bag is labeled “recyclable”” without qualification. Because trash
bags will ordinarily not be separated out from other trash at the landfill
or incinerator for recycling, they are highly unlikely to be used again for
any purpose.
 Greenwashing - ?
An advertiser notes that its shampoo bottle contains “20 percent more
recycled content.” The claim in its context is ambiguous. Depending on
contextual factors, it could be a comparison either to the advertiser’s
immediately preceding product or to a competitor’s product.
A product label contains an environmental seal, either in the form of a
globe icon, or a globe icon with only the text Earth Smart around it.
Either label is likely to convey to consumers that the product is
environmentally superior to other products.
Earth Hour in Uzbekistan
 Home reading
Business Ethics by Hartman – Chapter 9