One of the great ironies of investor-owned utilities in the era of climate change is that the incentives are entirely backward: utilities earn money by selling electricity. The more they sell, the more they earn. This has the unfortunate consequence of increasing the emission of greenhouse gases and other pollutants such as mercury and sulfur dioxide. And because utilities are required by law to maximize profits for their shareholders, it isn’t surprising that they have dragged their feet for decades on the issue of reducing emissions from power plants.
Recently, some utilities, such as Duke Energy, as well as numerous other large corporation, have begun calling for federal climate change legislation. The reason behind this change is not that the boards of directors of these companies have come to care about global warming; rather, they have come to see that this issue will not go away, and they will be better positioned to deal with it if there is clear, national legislation regulating the emission of carbon dioxide. As things stand now, states are beginning to take the lead, but unfortunately for the utilities, different states are adopting different legislation, creating a patchwork of regulation that is not desirable from the perspective of the utilities.
Even without federal legislation, however, there are policy tools that enable utilities to make money while selling less electricity. One such tool is known as decoupling. The concept is simple: instead of earning profits based on how much electricity they sell, utilities are allowed to earn profits based on how much electricity that don’t sell as a result of investing in end-use energy-efficiency. California was the first state to adopt such legislation, and the result has been impressive: while per capita electricity consumption has been increasing all over the country, in California it has stayed the same for three decades.
As I was thinking about this issue of mismatched incentives, wherein a corporation is driven –and sometimes required–to earn money by engaging in activities that are detrimental to society, it occurred to me that the concept of decoupling could be applied to other endemic problems in society. For instance, let’s take the health care crisis. One of the fundamental arguments against private health insurance is that the insurers have a strong disincentive to pay for costly treatments, exams and medicines. The more money they pay out for such things, the lower their bottom line. In order to keep costs low, companies like Blue Cross actually have full-time employees whose job it is to find ways of denying people’s claims.
This model may help Blue Cross earn a healthy return for its shareholders, but it does nothing for the health of its customers. Michael Moore’s recent documentary, Sicko, as well as numerous television and newspaper reports about the state of our health care system, have highlighted the problem we face, and brought the concept of universal health care to the fore. Both Sens. Barack Obama and Hillary Clinton have plants for universal health care that are central to their campaigns.
I am not an expert on health care. I don’t know the details of either of their plans, beyond the fact that they are very similar save for a few minor points. But what I do know is that there are a lot of people in this country, and around the world, who do not trust the government to provide health care. The argument is that government is too inefficient to provide high-quality health care. That may or may not be true. I imagine that universal health care would be implemented in the form of a public-private partnership, in such a way that the best of the private and public sectors are brought into the fold. But universal health care would undoubtedly be expensive, and would encounter tremendous opposition from republicans and health care providers.
I am currently reading Banker to the Poor, the autobiography of Muhammad Yunus, the founder of the Grameen Bank. In it, he argues that the public sector has failed to tackle the fundamental issues of poverty, health care, environmental degradation, and so on. While recognizing that the private sector is often greed-driven, he posits that with the right incentives (that is, the right structural changes), socially minded business can compete with greed-oriented businesses. He calls this the socially conscious sector.
Decoupling is one example of a structural change that can enable socially minded business to take place. Another, given by Mr. Yunus, is that of welfare. He points out that, as things stand now, in many developed countries welfare discourages entrepreneurial activity among the poor, because by trying to start a business, welfare recipients are in danger of losing their benefits. Furthermore, welfare recipients are often forbidden from receiving loans, even if they are merely micro-loans, meaning that the poor are left with two choices: either they remain unemployed and continue collecting welfare checks, or they take a low-wage job and lose their benefits. Simple changes in the structure of welfare could ensure that the unemployed have a safety net, but at the same time encourage them to get back on their feet as quickly as possible. Tomas Friedman, in The World is Flat, spends an entire chapter arguing that in our globalized world, an effective social safety net is essential, but it must be designed so as to provide job training and other incentives to get people back in the work force.
In Freakonomics, a fascinating, unconventional look at economics, co-authors Stephen Dubner and Steven Levitt argue over and over that people respond to incentives, plain and simple. The point is that with the right incentives, private enterprise can be a far more effective agent of change than governments.
That is why I want to pose the following question: what if decoupling were applied to the health care system? That is, what if health care providers earned money based on some metric of how much health they provided to their customers? Under this model, they could receive government funds for going into low-income communities and starting health clinics, for example. They would earn money by treating as many patients as possible; by practicing preventative medicine; by sponsoring early detection programs from cancer and diabetes; by sponsoring sex-ed programs; and so on.
All of a sudden, the employees of Blue Cross would be inspired to do positive work. Rather than spending time finding ways of denying coverage to people that need treatment, they could spend their time finding creative ways of treating more people more effectively. The shareholders would be happy. The employees of Blue Cross would feel more engaged in their work. And society would benefit, too. Of course, there would still have to be a mechanism in place to ensure that all Americans have access to these services. Perhaps universal access to health care should be built around a decoupling model that lowers overall health care costs and guarantees that those who currently do pay for health care actually receive proper care.
In fact, why can’t the decoupling model be applied elsewhere? Why can’t we stop measuring economic progress by how much crap we sell (GDP) and instead start measuring progress by how much healthier, happier and safer we are than the year before? This is not a new concept. It’s known as the Genuine Progress Indicator (GPI) and is defined as “an attempt to measure whether or not a country’s growth, increased production of goods, and expanding services have actually resulted in the improvement of the welfare (or well-being) of the people in the country.”
Ultimately, what the decoupling model allows, regardless of where and how it is implemented, is for all of the benefits of free-market capitalism, without the pitfalls. Decoupling can help reduce carbon emissions, improve our health care system, and ease the tension between “big-government Democrats” and “small-government Republicans.” After all, both sides are talking about solving the same problems. Decoupling is a language that people of all political orientations can speak.