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Chapter 21: The Good Earth

We are killing the earth with friendly fire.

It has only been a few generations since we humans moved beyond the basic struggle for survival, but the cost of winning that fight has been huge. We have used the earth’s coal and oil in such gargantuan quantities that the last three generations have now consumed more of those precious resources than all the generations that came before us.

The warning signs are clear. We need to understand what we have done and, more important, radically change what we are doing. We face serious questions that need to be answered now, and I believe entrepreneurs are the right people to wrestle with one question in particular: How do we go forward in a manner that not only creates value for ourselves and our stakeholders but is also mindful of the threat to the earth and its inhabitants?

I came to clean air first as a child, then as a parent, then as an owner of an oil refinery, and finally as a veteran of the battles that broke up our nation’s telephone and computer monopolies. As a child, I remember when it was time to give the crops their dose of DDT. “Get out of that cotton patch,” Mama would holler to me and Charles Junior, “we’re going to poison the cotton and kill the boll weevils.”

My grandfather, who was a doctor, used to say that next to penicillin, DDT did more than anything else to stop death in our swampy, mosquito-infested part of Louisiana. Today, we understand the unintended consequences.

An eye opener was Rachel Carson’s terrific book, Silent Spring. She was the canary in the coal mine that triggered today’s Green movement. President Jack Kennedy so honored her at the White House.

She warned, “The most alarming of all man’s assaults upon the environment is the contamination of air, earth, rivers and sea with dangerous and even lethal materials.” She singled out DDT and not only set Congress on the path toward banning it, but all these years later, thanks to that ban, she helped guarantee the survival of the bald eagle, our national bird. Poisonous chemicals in the food chain had so seriously depleted the numbers of our national bird that it was on the endangered species list. Once DDT had worked its way out of the ecosystem, the bald eagle’s survival rate increased and today it is no longer endangered. Closer to my home states of Louisiana and Texas on the Gulf Coast, we also saved the Eastern Brown Pelican, the Louisiana state bird.

As a parent, I was faced again with questions of environmental stewardship when my daughter Christiana, a fifth grader, asked me, “What are we going to do about toxic waste?” I have never forgotten her question, or the Bible story about seeing as a child sees. I firmly believe that education is the most important factor driving environmental awareness, and I’m encouraged that schools across our country are taking up the cause. Our children are learning about the condition of our planet, and they are challenging their parents for answers.

One of the first major problems to confront us at Earth Resources, way back in 1974, was the government mandate to take the lead out of gasoline, which we made from crude oil at our refinery in Memphis. If it had been just a bottom-line decision, there wouldn’t have been any discussion, because separating gasoline from lead simply cost too much. But my growing awareness of environmental issues led me to consider more important factors than simple costs. I was convinced that both profitability and sustainability had to be achievable.

Lead had once been considered a terrific modern advancement. But by the early 1970s there was evidence of lead poisoning from both leaded house paint and gasoline, and the Environmental Protection Agency decided that burning lead was to blame for releasing a lot of poisons into the air. The practice had to stop.

When we did the math, it didn’t look good. The capital investment required to meet the new gasoline-refining standards equaled our little company’s total net worth. Unleaded gasoline was being phased in, but it would cost consumers four cents more a gallon. No one knew if people would pay the extra four cents, or if they would just ride in the old cars longer and keep buying the less expensive leaded gasoline. So, more than thirty years ago, we faced the big environmental question that all entrepreneurs will eventually have to address: Are we willing to bet our businesses on getting the lead out?

Trying to guess how much more consumers were willing to pay back then for environmentally enlightened products was not easy. The thinking was that environmentally friendly products—gasoline, clean electricity, organic cotton, dolphin-free tuna fish, and so on—would always cost more to produce and therefore would always sell at a premium.

We’ve since learned that cost is not necessarily the only determining factor when it comes to conservation. The first person who decided to save dolphins that were getting caught in tuna fishing nets priced his tuna at 50 cents more a can than anyone else’s, and didn’t sell very many. Later, after he was able to narrow the price difference to a nickel, consumers responded with a huge grassroots effort to “save the dolphins.” People are willing to pay another nickel to do the right thing.

In our case, with leaded gasoline, it still wasn’t a sure thing. What would be the right decision, we asked ourselves, for our own Delta Refining Company on the banks of the Mississippi? Our Memphis facility had been producing a lot of “bottom of the barrel” products, such as asphalt. While making our new, legally required capital investment, our engineers recognized that we could change the mix in our refining process and start producing more “top of the barrel” products, like jet fuel. Jet fuel had higher profit margins, and, as another profit multiplier, we could also produce substantially more barrels per day. At a time when other refiners closed up shop rather than bet the money on new equipment, we were rewarded for investing in cleaner technology that produced greater amounts of higher-margin product. That meant that doing the right thing in this case carried an economic bonus. It was a win-win.

Those oil refineries that shut down rather than make the necessary capital investment, seeing only the dangers of change and its initial costs, became progressively more negative, created self-fulfilling prophecies of doom, gloom, and failure. Perceive dead ends and you’ll find what you perceive. That’s why entrepreneurs are by nature optimists.

Fast-forward three decades and, today, everyone knows that cars create air pollution. Most people do not know, however, that the greatest source of industrial pollution comes from the making of electricity. It accounts for the majority of three major pollutants: 85 percent of nitrogen oxide, which contributes to smog; 97 percent of sulfur dioxide, which contributes to acid rain; and 99 percent of mercury, which is associated with many health problems.

For seventy years, the electricity monopolies in this country had a free ride. This has allowed dirty old coal plants to pump pollution into the air without factoring the environmental damage they do into the cost of doing business. In my mind, this is trespassing on the rights to clean air of all the rest of us who live on this small planet.

And that is why, in 1997, I decided to get to work and become a major investor in the clean-air revolution. I began what would become a $150 million investment in a little company called Green Mountain Energy, whose slogan is, “Choose wisely. It’s a small planet.”

The fundamental concept that brought me to this conviction is an inescapable fact of human behavior, known as “the tragedy of the Commons.”

Over two thousand years ago, Aristotle observed, “That which is common to the greatest number has the least care bestowed upon it.” The tragedy of the Commons is, simply, that free access and unrestricted demand create abuse. The classic example is a spot of “common” ground owned by the villagers, each of whom has a cow grazing there. Because it is free, one person decides that instead of one cow, he can graze two and then three cows. When he does, everyone else brings more cows to the Commons, and before long there’s no grass left for any of them.

The same is happening to our air and water. It’s a Commons. There is no charge to use it. There is no ownership. Our market system is based on the idea that somebody owns something, but the Commons is outside the market system.

Consider the amounts of carbon dioxide that we are throwing into our air and atmosphere. Over 70 million tons a day. That is unsustainable. Our small planet cannot cope with this much poisonous gas for much longer.

Al Gore’s An Inconvenient Truth, and Leonardo DiCaprio’s The 11th Hour speak the truth. Gore has played a valuable part for over thirty years in educating the public, but his film sells more fear than hope and solutions. Leonardo’s lesser known film is one-third diagnosis of the ailment and two-thirds treatment. I like the hope, the solutions, and the answers. Our company motto at IBM was, “Answers are our products.”

Our recent presidents and Congress have been hiding behind a false economic argument, saying that protecting the environment is going to hurt the economy. They got it wrong. I’ve grown convinced that moving toward a carbon-free economy will create good jobs and stimulate economic growth. Entrepreneurs—green entrepreneurs—will lead the charge and find ways to get clean air and water. Their investment in technology will result in economic growth.

It will take not only political consensus but also politicians’ courage to put tough caps on emissions—to limit the number of cows that can graze on the Commons. Some European countries have already taken action. Somehow we in America have to come from behind and lead by example and persuasion, to get all the nations of the world to negotiate emissions caps for coal plants, cars, and planes. With only 5 percent of the world’s population, America produces 30 percent of its pollution, and yet it still has not signed up for this mission.

Even better than caps on emissions would be a carbon consumption tax. This stops polluters from externalizing their costs and instead imbeds the cost of the carbon dioxide in the cost of goods and services they produce. That cost would translate into higher prices for the consumption of those products produced from oil and coal energy. The tax can be stepped up gradually to require polluters to recognize the costs of their products over time.

A companion tax, a tariff, needs to be applied to imports. This will place American workers and companies in a fair fight with overseas competition. We have incentivized energy-intensive production to move to China and elsewhere overseas. The carbon consumption tariff will give incentive to those foreign producers to generate energy in an earth-friendly way in order to reduce the tariffs on their goods at the borders of the United States, Europe, and Japan.

Global agreements need to be created to standardize tariffs on imports. The Montreal Protocol can be used as a model. “Globalized” success in the control of ozone depletion was achieved under U.S. leadership by Secretary of State George Shultz during the Reagan presidency at a world meeting in Montreal. America now needs to duplicate this on a more grand and noble scale so as to eliminate our addiction to oil, and to cut back enough on the poisonous greenhouse gas all countries are creating to make the world safe and secure for our children and grandchildren.

But I wouldn’t stop there.

All the cash that’s raised from the carbon consumption tax and tariff would be given back to the people, exclusively to reduce the Social Security taxes paid on up to about $100,000 of earnings. That would keep it from being a regressive tax: You would shield the lowest-paid Americans while those who chose to consume more with big houses and big cars would pay more. In fact, I could argue that a carbon tax and tariff is a progressive tax. The definition of “progressive” is “making progress; advancing to something better.” This tax would bring with it huge entrepreneurial opportunities, motivating innovation and the marketing of products and services to foster efficiency.

This arrangement would reward every company that reduces its pollution. By cutting their carbon consumption tax, they would simultaneously trim costs and boost profits. By taking advantage of incentives to invest in new technology—to clean up coal plants and make cars run like hybrids—forward-looking companies would become more competitive. Make products with less carbon and the better they will sell, and the more profits you’ll earn.

Along the same lines, alternative sources of energy would also enjoy incentives. Not just wind and water and sun, but atomic, too. The French and the Japanese have done a great job cleaning up some of their emissions by going heavily nuclear. Nuclear power is safe and it seems to me to be very low risk. We have never lost a life in America due to nuclear generation. Chernobyl was a result of bad engineering and the Stalinist stupidity of giving their engineers no safety goals, only production goals. Yet the fear generated from Chernobyl and Three Mile Island has resulted in no new nuclear construction since 1973.

Whole Foods is a great example of a company that has positioned itself well to flourish in a carbon-regulated world. Their corporate mission already includes stewardship of the earth. Sustainable agriculture and other wise environmental practices are part of their core values—this means organic, natural, and locally grown products. Whole Foods has found that their customer will pay more for green products and Green values.

A different example of what I mean by forward-looking companies that are making more conservation happen is Wal-Mart.  Though Wal-Mart is a low-price retailer, they have found that they can reduce costs by going green.  And they have told their suppliers in China, India, and everywhere, “We are going to sell green products in the huge American market”—which, by the way, is 30 percent of China’s world market—“but we are only going to buy from suppliers who produce them in a clean way.”

I was first drawn to invest in what became Green Mountain Energy by the Vermont name. Its origins come from Ethan Allen and the cussedly independent militia of settlers in southwestern Vermont. They organized themselves in the 1760s to keep the British in New York from claiming sovereignty over them and that’s how their name, the Green Mountain Boys, came to symbolize a fearless stand for right over wrong.

Green Mountain Power was a tiny, four-county electric utility based in Burlington, Vermont. It had been sleepily around for 100 years when Kevin Hartley, a freethinking soul, began promoting the idea that Americans should have the choice to buy “clean” electricity to help save our planet. By 2004, my Green Mountain had joined the Chicago Climate Exchange (CCE), the first global marketplace for trading emissions offsets in all six greenhouse gases. It’s a free-market solution, and a simple one at that. Companies that reduce their carbon emissions can sell credits to polluters, who buy them in the open market to offset their greenhouse emissions. In other words, polluters pay for their polluting by rewarding companies that have reduced their carbon emissions. The idea is to create a situation, through the markets, of “carbon-neutral” companies. Green Mountain may have been one of the smallest electric utilities in America, but Kevin’s grand vision convinced me that the nation’s electric utilities would be deregulated. When that happened, I knew Green Mountain could become a national player.

Back in 1997, their sales pitch to me had been pretty clever. They said, “Sam, because you battled long and hard to bust up the phone monopoly, you may be the only entrepreneur in the country who understands what we hope to do and who isn’t afraid to help us do it.”

They were talking about selling clean electricity and getting there, first, by monopoly busting. This naturally stirred not just my environmental consciousness but also my David-versus-Goliath competitive juices and my fond memories of surviving against the IBM and AT&T monopolies.

Essentially they were saying, “Now it’s time to Beat Dirty Power.”

I found myself thinking that if Americans were actually given a choice between buying dirty or clean electricity, many of us would choose clean, even if it cost a bit more. I imagined a future where the price of clean electricity would drop as oil and natural gas became increasingly scarce and more costly, as they recently have. At the same time, we could find cost reductions through increased volume and better technology.

Also, I thought, there would ultimately be a change in the law that would penalize companies externalizing the costs of air pollution and climate degradation. When that happened, the comparative costs of clean versus dirty electricity would change in favor of clean.

I itched to do it.

But my battle with AT&T buzzed before my eyes. Going through that again—working eight years and losing $100 million—was not exactly at the top of my entrepreneurial to-do list. On the other hand, I had helped break up the most powerful monopoly in America, the old AT&T, and if anything I had done in my life had earned me a footnote in America’s economic history, surely that was it.

But did I really want to play this monopoly-buster role again? My answer was yes. Whatever the investment outcome, I knew we could at least push the markets forward by helping to educate people about clean electricity and give them the power to choose. It would be a long and risky road ahead, but I was at a place in my life where I could afford to take a loss. Even if that happened economically, I would still win in a very real and spiritually satisfying way. I would just not be using economic success as the way to keep score. I would adopt a different and perhaps more important report card.

So, with ultimately a $150 million investment and a partnership with British Petroleum and Nuon, the Dutch electricity utility, I committed to Green Mountain and started looking for a good chief executive and a capable team of managers. Then we moved the company to Austin, Texas, because, as states decided whether or not to deregulate electricity, Texas went into a free-market mentality and Vermont was still in the monopoly mode.

I believed that as energy markets began opening up, environmental issues would play an increasingly important role in the new players gaining acceptance with consumers. Mind you, this was more than ten years ago, before the New York Times was running daily articles on the environment and clean power. Environmental awareness still seemed limited to a few “alarmists” and leftover hippies. So that made Green Mountain unique. We would be the only player in those new markets offering customers a choice. We created demand for cleaner energy by going after customers who valued clean air. We were educating voters who have the power to change national policy from its focus on fossil fuels to a new emphasis on renewables.

Green Mountain’s focus was initially only residential. The American electricity market was around $300 billion in annual revenue, with residential accounting for about one-third of that. Our research showed that 20 percent of U.S. consumers were willing to pay a small premium for environmentally friendly electricity. So our potential market was huge.

Originally, we lobbied state governments to write laws to support competitive markets. Then, when those states opened up, we went in to compete with the former monopoly. We thought it would take just a few years to get into the fifty states.

There I was, being the optimistic entrepreneur all over again.

California was the first state to change, and the Sacramento lawmakers did it all wrong. Instead of deregulating, they took one bad law and replaced it with another bad law. Then along came the California price spike, already teed up by California lawmakers who didn’t understand Economics 101, the basic law of supply and demand. Then there was the Enron scandal, which was totally irrelevant to the price spike, but got blamed for it by politicians and the media. That threw an old monkey wrench into the process, across the country. Jeff Skilling, Enron’s CEO, can be blamed for other things (for which he’s now doing twenty-five years), but California got it wrong! Period.

That experience caused us to do some rethinking. We had gotten into some states, as planned. Now we decided to turn to states where the door was still closed but where we could find a way to collaborate with the monopoly utility, partnering with them to bring a green product to market.

For instance, in Oregon, which is a regulated state, our partner today is Portland General Electric. We are also in Florida, another state that prohibits competition, working with Florida Power and Light.

We sell wind, solar, hydro, geothermal, and efficient natural gas power, and everything we sell is cleaner than the monopoly power grid mix. I would love to sell renewable power exclusively, but that’s simply not possible yet. The cost of wind power and its transportation to market still varies too much around the country. We do sell wind and sun in Texas—and the wind doesn’t blow there all the time and the sun doesn’t shine every day—but we are changing the world. And for the average household, buying clean electricity from Green Mountain does as much good for the environment as not driving your car 21,000 miles a year.

We got into Texas by taking on the state monopolies and beating them. George Bush was the governor and, although he wasn’t the greenest guy in the state, he was green enough that his door was open. His knowledgeable staff worked step-by-step with Steve Wolens, the Democrat’s tiger in the House, who led the charge. Republican Senator David Sibley brought the state Senate along and the result was that Texas got it right.

It wasn’t so much that George the Younger wanted to make the state greener, although it was okay with him, in part because the green Wylys were long-term, clannishly loyal backers of his dad and him. More important to him was using deregulation to create a competitive market in electricity. So Texas created the opportunity, and Texas has now passed California in building windmills.

We had suffered through some real financial disasters in California, Pennsylvania, and Ohio before Green Mountain’s breakthrough and triumphs in Texas, Oregon, and Florida and on the Internet.

As we’d anticipated, the price of cleaner electricity started coming down. The price of wind, compared to the alternatives, has come down dramatically, but it is still not cheaper than coal. As long as coal can externalize its costs on the rest of us without having to pay for cleaning up the air it pollutes, it will seem the “cheaper” alternative.

Today, Green Mountain is nicely profitable and growing fast, thanks to a few early believers, stubborn persistence, and a ten-year investment in hoped-for clean air through clean energy. The world has changed in those ten years and, in our own small way, we’ve helped. Green geopolitics is now a rising tide. People I meet tell me how they have just bought a car that gets an extra 5 miles to the gallon, or how they are installing a solar roof on their house, or that they have just put in insulation. We are all learning to conserve.

People have a choice today. Everyone can go to www.Be GreenNow.com and sign up to offset their carbon footprint from their cars, planes, and houses. That represents people taking action and making choices. A recent Gallup poll says 84 percent of Americans want to take action to clean the place up, yet in the U.S. it is still illegal in most states to sell alternative energy to homeowners.

Illegal!

Sweeping deregulation of electricity markets simply has not come to pass. By and large, the state monopolies have held on to their power with real tenacity. Fighting many entrenched electricity monopolies in fifty statehouses across the country has turned out to be harder than beating a single gigantic nationwide telephone monopoly like the old AT&T. And, more important, it is not just a matter of getting people better phone service or data transmission. It is more vital than that. We’re talking about giving people clean air so all the world can breathe.

Ever the optimist, I firmly believe a clean energy revolution is starting to gain traction. And I believe that the key is replicating the success of the digital telecommunications revolution. The question is, Will it happen quickly enough to prevent a global climate tragedy?

Despite the fact that deregulation of the U.S. energy markets did not happen as I’d hoped, I am not part of the doom and gloom brigade. I look at the overall positive trends. For starters, I believe that protecting the earth and the life it supports must become a primary goal of every business. “Value” must include the cost of having clean air and clean water. “Profit” must include a protective or restorative component. We must recognize these essential costs of doing business, of producing and consuming our goods and services.

I find the notion that we ought to use nature itself as our model for creating sustainable enterprises highly compelling. It calls for differentiation between an “extractive economy” and a “restorative economy.” In the former, businesses are created to make money. In the latter, a business’s ability to grow is determined in part by how well it succeeds in mimicking the cyclical aspect of nature—in other words, how well it manages to avoid waste and provide replenishment.

This is exactly the approach we’ve been taking with Green Mountain. And today, I am encouraged by the fact that we are not alone.

More and more companies, from Whole Foods to Texas Instruments, are operating this way. British Petroleum is being transmogrified into Beyond Petroleum, investing $8 billion over five years in alternative energy. At Starbucks, managers have a triple bottom line of sustainability—people, planet, and profit—and try to deal directly with co-ops and small farmers who produce coffee using sustainable methods, like composting and rotating crops. In 2004, FedEx introduced an environmentally superior delivery truck. And in many of its locations, IBM is investing $1 billion a year to conserve electricity in its data centers and has invented an energy-saving microchip. Like our happy band at Green Mountain, these companies recognize that we do not have enough environmental capital to continue behaving badly. We must make the tough choices.

For us all, the environmental answers are obvious: education, liberty, good government, and making daily decisions to choose wisely. Yet two billion people on the planet still do not have access to any form of electricity. That kind of deprivation reminds me of when I was five and my dad ran a line over the chute to our cabin so we could read at night and listen to the radio. Our house was no longer lit only by fire.

Liberty comes from the freedom to choose and to innovate, and without it there is not much point in having a planet to live on.

Good government accepts the task of setting the standards that the corporations and the individuals within their nations follow. Lawmakers have to lay down good laws. We are fortunate in the United States that our laws often allow us great latitude, and we must—especially now—make personal decisions that are forward-thinking and responsible.

The time has come for tough laws on clean air and clean water and conservation and sustainability. We, the people, must mandate the political will to arrest, reverse, and heal negative climate change. We need to do with CO2 just what we did with cigarettes. When we came to understand that smoking was bad, we changed, and we no longer see doctors in white coats on TV pitching Lucky Strikes or Camels. Education helped Americans realize that tobacco was one of the ways we can poison ourselves, more addictively self-destructive than alcohol or drugs.

That’s one of the reasons we created BeGreenNow.com.

Through this innovative Web site, anyone, anywhere in the world can become “carbon-neutral,” by buying renewable energy credits from us. BeGreenNow.com helps consumers anywhere, not just in deregulated electricity markets, to calculate their carbon footprint, then to buy carbon offsets so that any individual or any business can reduce their impact on global warming in a convenient, flexible, and innovative way. Those credits go to fund capital investment that cleans up dirty coal plants and other sources of greenhouse gases that cause global warming.

It’s clear to me that the Web can democratize us, educate us, and help bust up monopolies. Utility lobbyists and their bought-and-paid-for state senators prevented us from bringing Green Mountain and clean electricity to all fifty states. But with BeGreenNow.com we’ve found a way to marry Adam Smith to Rachel Carson, and bring the entire planet to clean energy.

Albert Einstein once said, “The significant problems we have cannot be solved at the same level of thinking with which we created them.”

So here’s my question to everyone running a business, to all you entrepreneurs and budding entrepreneurs: What does it take to be a great company in this day and age?  

Copyright © 2008 Sam Wyly