Essentials of consumerism (23)
By Randell Krantz
Global consumption of resources continues to grow rapidly. Over the past four years, an estimated 450 million people have been lifted out of poverty; and the number of households in the emerging and developed world living on an income of more than $3,000 per annum has increased by 28 percent. Looking ahead, more than 150 million new consumers will join the middle class each year until 2030. Despite what many see as a double-dip recession, 36 countries grew at over 7 percent last year.
As incomes rise in emerging markets, new members of the middle class demand more meat and dairy, which require more resources to produce. This generation of mostly young, urban consumers from emerging markets presents huge opportunities for social progress and markets.
These same consumers will also create new demand for products and services, and place additional strain on the planet’s finite resources. Current approaches to manage our resources are already struggling to address this additional demand.
Let’s look at the price volatility of some token agricultural crops, where the past 10 years of growth has unwound over 100 years of declining prices: Between 2000 and 2010, prices of widely-used commodities such as cotton, palm oil and cocoa increased by 75 percent, 230 percent and 246 percent, respectively. In July of last year, cotton prices were the highest they had been in 300 years.
What is sustainable consumption?
While various ideas around sustainability have been floating around for the past 40 years or so, the link between sustainability and the consumption of the products and services we use every day is a much more recent phenomenon. The conjunction of these two words risks being confusing, or even worse, a paradox.
But what does it actually mean to consume sustainably? Coming up with a technical definition for sustainable consumption can be quite a challenge. After all, what is sustainable? From whose perspective? Over what time period?
For the sake of argument, we define sustainable consumption as consumption which meets the needs of the present without compromising the ability of future generations to meet their needs. The intrinsic values of this definition are simple to understand, while the details tend to be much debated.
Sustainable Consumption is a complex issue because it encompasses the interconnected impacts from a range of environmental and social issues, including water, food, energy and climate change. A few examples illustrate the scale of the challenge:
– Water consumption already outstrips demand in many parts of the world, and analysis suggests that by 2030 the world will face a 40 percent global shortfall between forecast demand and estimates of available water supply. This is not just in arid countries or poor countries, but already evident in Australia, the U.S. and Spain. The amount of water needed in households for personal use is trivial, while the water embedded in the food and products of everyday use is substantial.
– While enough food is grown today to comfortably feed seven billion people, roughly 50 per cent of all produce grown is wasted in the EU, the U.S., and Sub-Saharan Africa, according to the FAO. In addition, experts project that annual meat production will need to rise by 75 percent – to 470 million tons – by 2050, incurring significant environmental impacts. Livestock production alone accounts for 70 percent of agricultural water use, 30 percent of global land use and 18 percent of global greenhouse gas emissions.
– As these same economies develop and population increases, energy demand is expected to increase by 40 percent by 2050. With the majority of estimated demand increase to come from non-OECD countries and 1.5 billion people worldwide still without energy access, a huge challenge presents itself as these countries cannot be denied their development rights. With advanced technologies, the role of the consumer plays an increasing role in lowering energy consumption. McKinsey estimates that customer demand response, known as “demand side management” can reduce peak energy demand in the U.S. by 20 percent between 2009 and 2019.
– The scientific consensus that we need to limit the global temperature by 2 degrees means that our current trajectory is not sustainable. Greenhouse gas emissions are generally calculated by their origin, however nearly 20 percent of China’s emissions are produced on behalf of other countries and emissions in the U.S. would be 8 percent higher when counted by consumption.
So what can we do? Traditional responses to these complex challenges tend to have two flaws: 1) they focus on a single issue which cannot be solved in isolation, and 2) they focus on the sustainable supply of resources rather than the demand that drives consumption.
If each of these issues is so complex in its own right, how can we possibly look at everything together? By taking a systems view, it can actually be simpler to look at the way each of these issues interact and manage the whole rather than the disparate parts. Let’s look at a simple system to understand how these pieces fit together.
Imagine a simple system with a city surrounded by agricultural land which generates its power from locally mined coal. Water from a lake is used for household use for citizens, cooling the power plant and irrigating agricultural fields.
A well-intentioned policy to lower carbon emissions might easily end in a vicious cycle which upsets our simple system. Let’s say that citizens vote to lower emissions by co-firing biomass to replace 25 percent of the coal at the coal-fired power plant and a policy is implemented to promote the use of biomass in the coal plant and corn ethanol for cars. This in turn will promote cultivation of fast growing biomass stocks such as alfalfa for biomass pellets and additional planting of corn.
Between land use displacement and direct use of existing corn supplies, food prices suffer drastic swings, while increased irrigation creates challenges to the water supply, which both the citizens and the power plant suffer from water scarcity. Lowered agricultural yields can then exacerbate the issue, as will the potential for deforestation and longer term climate change.
This need not be the case, as a better set of policies could help drive a much more virtuous cycle. Recently, there has been a rush to look at the way some issues interact in groups, such as the “water-food-energy-climate nexus” as promoted in a recent book by the World Economic Forum.
Imagine the same simple system in which the drive to remove emissions is addressed via the demand for electricity, rather than the supply. Educating citizens and placing price premiums on overuse of energy can easily yield a 20 percent reduction in household and industrial electricity use. This not only saves emissions, but also money, as less fuel is required to meet the energy needs of the city. Additional energy supply could come from wind turbines which take only limited land from agricultural production. No-till farming can reduce the emissions from agriculture, while reductions in food waste reduce in the value chain and in the home demand on the agricultural system.
A win-win-win for water, food and energy is indeed possible. It does however require more thorough thinking about the impacts of each action and reaction, as well as tracking of indicators across more than one part of the system.
Within our above example, we can see that the systems solution needs to look beyond just the supply of energy food and water. In fact, the demand of these resources, and the associated waste along the way, presents a huge opportunity for net benefits at reduced costs.
Survey data repeatedly shows that moral or ethical arguments will only drive 10-15 percent of consumers to make more sustainable choices, even while more that 50 percent state that they are doing “everything they can” to protect the environment.
There is an opportunity to explore the role of other tools to catalyse consumer change. These tools range from strict regulations which drive a specific behavious such as mandated recycling (often referred to as sticks), to more creating incentives and a more enabling environment for consumers and citizens be rewarded for making decisions that ultimately use fewer resources such as a reward scheme for increased recycling, (referred to as carrots).
One tends to assume that the power of these carrots and sticks lies in the hands of policymakers and governments, but this need not be the case. Companies can also engage on changing consumer behaviours. Indeed, retailers and manufacturers do just that every day. A retailer which stops selling a product as incandescent light bulbs (a process known as choice editing) is effectively having the same impact as a government regulation that bans their sale. Meanwhile in-store promotions can send price signals to the consumer to change their buying habits.
It is now increasingly common that consumers will be influenced by combinations of carrots and sticks, and most recently, it is "nudges” which are influencing consumer behavior. A nudge is a policy or small incentive which can cause a bigger change in consumer behavior. If we think of our simple system above, how might carrots, sticks and nudges encourage consumers to use less energy and water?
A stick approach might cap the energy use of any given household, or more likely, a tiered pricing model for both electricity and water will encourage consumers to use less of both. In this case, a designated amount of water and electricity required for everyday living can be offered cheaply, subsidized by higher prices paid by those who want to consume over a certain threshold. Such an approach would require measurement of water and energy use so that the consumer can have feedback on their use and adjust it accordingly.
There would also need to be educative campaigns put in place to explain the new system. The nudging part would be offering more information to households in a digestible way. People may not know what a kilowatt-hour is, but if they are consuming more electricity than their neighbor, they will redouble efforts to reduce their consumption.
Across each of these changes, the role of technology plays an increasingly important role. Using smart meters and communications with the citizen, it is ever easier to give feedback to the consumer. Smart phones and apps can provide this information and suggested behavior changes in real time.
Personal technology also enables us to go beyond efficiencies of our existing system to explore new business models which might need far fewer resources.
One new business model which is making waves is that of "collaborative consumption”or fractional ownership through which citizens do not own a product outright, but use it when they need it. While this may not make sense for a phone, it certainly does for a car, which might only be required once a month. Car sharing platforms such as Zipcar, enabled by connective technologies, allow cars parked around a city to be unlocked and used by subscribers.
Some retailers are getting into the game by leasing white goods, so you never need to own the latest refrigerator which will soon be outdated, but rather you can lease the latest model, to have it upgraded when a more efficient one comes out. Your old refrigerator can then be redistributed or retired by the retailer who may be working with the utility to cut down on electricity consumption.
Some retailers are increasing their efficiency by getting rid of the store altogether. While Internet shopping is no longer new, it was Tesco who pioneered the idea of a subway supermarket in Seoul, giving shoppers the benefits of a familiar shopping experience and the visual cues they are used to with the simplicity of home delivery. Through its subway shopping system with a custom smart phone app, Tesco has made shopping easier for commuters while delivering goods directly to their homes to increase convenience. Meanwhile, the retailer saves money on energy, logistics and eventually retail space, while increasing consumer loyalty - the aspiration for any retailer.
Pulling it together
The World Economic Forum has been working with businesses, NGOs and experts to explore the sustainable consumption issue for the past four years. At the Annual Meeting in Davos in January, it was agreed by consumer industry CEOs that a fruitful area of focus would be the juncture between consumers, new social media, emerging cognitive and behavioural work on consumer behaviour, and sustainability.
Several general levers through which citizens can be influenced on sustainable consumption can be identified:
―Pricing: Honest price signals, price on the costs of pollution and constraint natural resources
―Education: Needs to be a significant effort to combat extrinsic consumption messaging
―Metrics: Measurement of consumer product impacts and simple communication of this information
―Choice Editing: Regulation of harmful products by companies or policies and standards
―Aspiration Tuning: Shaping cultural norms and desires with marketers and cognitive scientists
―New Business Models: Moving beyond efficiency from volume to value, from products to services
Collectively, these levers have the potential to change consumer behaviours across the full systems of water, food, energy and climate.
A new project at the World Economic Forum exploring how to engage “Tomorrow’s Consumer” has been kicked off to explore this interconnected area. The project will bring together Chief Marketing Officers, Chief Sustainability Officers and other executives from media and communications, technology, and consumer industries. Working with psychologists, cognitive scientists and sustainability experts, the new project will explore how to close the intention-action gap to take us one step closer to sustainable consumption.
Today’s consumption is undermining the environmental resource base. It is exacerbating inequalities. And the dynamics of the consumption-povertyinequality-environment nexus is accelerating. Will the trends continue without change? Not redistributing from high-income to low-income consumers, not shifting from polluting to cleaner goods and production technologies, not promoting goods that empower poor producers, not shifting priority from consumption for conspicuous display to meeting basic needs? Today’s problems of consumption and human development will worsen.
The real issue is not consumption itself but its patterns and effects.
Inequalities in consumption are stark.
Globally, the 20 percent of the world’s people in the highest-income countries account for 86 percent of total private consumption? The poorest 20 percent a minuscule 1.3 percent.
More specifically, the richest fifth: Consume 45 percent of all meat and fish, the poorest fifth 5 percent.
Consume 58 percent of total energy, the poorest fifth less than 4 percent.
Have 74 percent of all telephone lines, the poorest fifth 1.5 percent.
Consume 84 percent of all paper, the poorest fifth 1.1 percent.
Own 87 percent of the world’s vehicles, the poorest fifth less than 1 percent.
Randall Krantz is Director, head of Sustainability Initiative at the World Economic Forum in Switzerland. Building on a technical background in the energy sector, Randall joined the Forum in 2005 to help promote the foundations of a nascent climate change initiative. As head of Sustainability Initiative at the Forum, Randall works with business leaders and experts to explore the transformational changes required to decouple consumption of energy and resources from environmental degradation.