Say one day you notice some water damage to the ceiling and wall in a room in your house. You call two contractors to come out and take a look. Mary says the problem is your roof is nearing the end of its life – she can repair it for $1,000 and you can probably go another year or two, or she can replace it for $10,000. Don doesn’t do roofs, but for $500 he’ll repair the damage to the room and repaint it to look good as new.
What you decide depends on what the house is worth to you. If it’s your asset to protect for yourself and your children, you think of it as an investment and you probably replace the roof. If you don’t have a vested interest in the house, say if you can sell it without the purchaser knowing about the leak, you might try to minimize your costs.
Importantly, while both are obviously competing for your dollars, they aren’t really “competitors.” Don’s service is purely cosmetic. In fact, by letting the leak go on unaddressed Don’s services are, on net, destroying more value than they provide. Mary, on the other hand, is creating value by actually addressing the underlying problem and making your house better.
But, what if no one can see the difference in the inherent value of Mary and Don’s services? Not only does Mary have a tough time competing with Don’s far cheaper prices, there’s no reason for competitors to enter her segment and drive innovation and cost reduction. Now, we all suffer because we don’t get the benefits of a competitive marketplace for a valuable service.
The same applies when talking about climate change and energy technology and, whether we want to take the responsibility or not. In this case, there’s no actual debate about whether or not the roof is leaking. The only questions are how bad is it, and how much time do we have to affect repairs before the costs of the damages overwhelm us?
As with Mary’s business, creating a valuable product is always going to be more expensive than creating the appearance of value. Unfortunately, almost none of our markets are set up to actually recognize this critical fact.
In cars, for example, the upfront cost of the car represents only a fraction of the lifetime cost, in fuel and repairs, of ownership. And, the cost to all the rest of us in human and environmental damage from the pollution it emits isn’t reflected anywhere at all. In fact, in the case of diesel engines, the costs were deliberately obscured as manufacturers designed the cars to fool tests and appear cleaner than they actually were. All of this is before we even reach the fact that fuel itself doesn’t reflect any of the expense, both in conflict and dollars, of keeping oil flowing from the volatile Middle East.
With the real value of a cleaner, more efficient car obscured to the consumer and the social value of avoiding consuming oil (itself heavily subsidized) hidden behind the tragedy of the commons, why should manufacturers make cleaner cars? Without standards, they simply don’t. Not because they are evil but because there’s no reason to innovate in the fundamental technologies that make cars better — their value just isn’t recognized in the marketplace.
Technology standards, like the ones President Trump has recently proposed to rollback, try to recognize some of this inherent value. In many ways, they still fall short of revealing the true value of disruptive technologies. What fuel economy (and air pollution) standards do, in essence, is make sure that companies are competing on more or less the same playing field. And in the international arena, they make sure our manufacturers don’t become niche players that produce inefficient, dirty cars that only U.S. consumers (whose markets mask the true costs) are willing to buy.
We flirted with this exact disaster 10 years ago and only made ourselves internationally relevant again by instituting new standards. Rolling them back now, just as the rest of the world, particularly China, is upping their technological game, is disastrously short-sighted.
Only someone with no vested interest in the future would go with Don’s solution to pretend the problem away. Common sense says that spending money on a new coat of paint while the underlying structure rots is just throwing money away, and it’s most likely your money. Maybe you stay in the house longer than you expect, or the ceiling falls in as you’re showing it to a prospective buyer, or the next house you buy turns out to be one of Don’s clients. One way or another, the bill always comes due.
