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Straight Outta Edmonton: The Market is the Solution

The Canadian Oil Sands Innovation Alliance (COSIA) is about collaboration. In a bid to meet public expectations and improve the industry’s image, 12 of the largest oilsands producers are teaming up, sharing information and intellectual property relating to environmental stewardship. By harnessing their collective strengths, they hope to improve the industry’s environmental performance and image.

. . . → Read More: Straight Outta Edmonton: The Market is the Solution

Straight Outta Edmonton: The Market is the Solution

The Canadian Oil Sands Innovation Alliance (COSIA) is about collaboration. In a bid to meet public expectations and improve the industry’s image, 12 of the largest oilsands producers are teaming up, sharing information and intellectual property relating to environmental stewardship. By harnessing their collective strengths, they hope to improve the industry’s environmental performance and image.

Though well intentioned, collaboration is not the best way to improve environmental performance. The market is.

It’s easy to acknowledge the power of the market, and market competition specifically, in influencing firm behavior. If there is market incentive for a firm to behave in a certain manner, firms will do so, as their primary interest is profit maximization. Firms would also divert resources to behave in that certain manner in order to maximize that market incentive and gain competitive advantage, such as investing more in research and development.

Market incentives would drive behavior, leading to competition, which would lead to better ways to engage in that behavior.

This logic could apply to the oilsands. If there was strong market incentive for producers to engage in better environmental performance, they would compete with each other, developing better methods to outperform their market competitors. Invariably, producers would divert more resources into research and innovation, developing better methods of reducing their environmental impact individually, and the industry’s as a whole.

Currently, there is no such incentive.

In fact, by collaborating, industry confirms that there isn’t strong market incentive for them to develop better environmental practices individually. Rather than use their own resources to develop better environmental practices, companies are looking to work together, each benefiting from the other’s work. Though they recognize a problem, it isn’t impacting their bottom line enough to come up with solutions themselves.

Collaboration is hardly an environment for innovation. It runs the risk of firms taking environmental practices from others, instead of developing their own. There is even incentive to do this, as taking is free while developing one’s own practices requires resources that could be allocated elsewhere.

Creating strong market incentives for companies to improve their environmental stewardship will lead to better environmental performance.

One possible incentive might be linking resource royalties to environmental performance. For example, if companies hit certain government directed environmental benchmarks (emissions, pollutants, area of wet tailings, etc) they pay less. If they exceed them, they pay more.

As oilsands producers are generally price takers, this is perhaps the best way to introduce competition among them, and direct it towards addressing environmental issues and the industry’s negative perception.

Obviously though, this would require governments to get involved. Fortunately, both levels of government have long endorsed, and defended, a market dictated approach to oilsands development.

Why not the same for environmental stewardship?

. . . → Read More: Straight Outta Edmonton: The Market is the Solution