The following is an extract from my recently published book “Through the Detox Prism”, (pages 61, 62) where we explored some examples of how one might set about to change some of our corporate habits. I have pulled it out here (and done some slight adaptation and editing) because it illustrates an important concept that Charles Duhigg develops in his book “The Power of Habit: Why we do what we do in life and business”. In this book, Duhigg develops a 3 step model of cue, routine, and reward for better explaining habits (and how to adapt/develop them). If you are interested in mastering your habits, this is definitely a book you will want to read cover to cover.
In our “Detox Prism” book, we explored this model to help us better understand why we have seen such spectacular success recently with the pricing of plastic bags at grocery stores, and how we might leverage those insights into driving more effective externality pricing for businesses.
It is important to realize that the small experiment with charging a trivial price for plastic bags has been successful, not only because of the immediate trigger of pricing, but because externality pricing has been underpinned by 20 years of sensitization about the environment. In fact, the overall change in consumer behaviour – based on only a small pricing change and limited public service announcements – has been remarkable, and has been consistent across various jurisdictions and cultures. Chinese shoppers – the number one consumers of plastic bags in the world – reduced their consumption of plastic bags by half when stores were forced to charge consumers for the bags. In Ireland, studies record a reduction in use of up to 90 percent.
Can this behavioural change argument be extended to businesses? Charles Duhigg postulates that before anyone can change their behaviour (habits) they must first be conscious of their current behaviour, and then look to change that by first understanding the cue, routine and reward stages of their particular behaviour. In the case of charging for plastic bags, the explicit question by the grocery clerk (“Do you want plastic bags? They are $0.05 each.”) is the formal trigger that forces the consumer to make a conscious decision about what behaviour they want to exhibit. Regardless of the price set for the plastic bags, the consumer’s decision-making process is now a conscious act; the actual price charged for the bags is less important than the fact that a price is explicitly featured. The consumer has been made conscious of a pending decision and will now decide the action they will take. And because of the fact that, for the past decades, we have been increasingly conditioned to make “environmentally aware” choices, it now becomes reasonable for the consumer to make a different choice (not using the plastic bags) than in the past, as they have been somewhat educated as to the impact of their choice. And as a consumer is routinely put through this conscious decision-making process, it becomes easier and easier for the consumer to form a new habit of carrying their own reusable bags and forgoing the plastic bag experience. Their reward from their new habit is to feel good about the choice they made by being – at least in a small way – more environmentally benign.
There are good reasons to believe that the concept of carbon pricing might not be that difficult to implement in a business setting. But it should be clear that it would be wrong to assume that it is a matter entirely ascribable to non-zero pricing. What the non-zero price did for shoppers was to act as a trigger for consumers to force the next decision (bags or not?) into their conscious decision-making process. In the case of business, the price signal must be significant if it is to make a difference in their own scoreboard – their financial spreadsheets. Once there is visibility of some significant non-zero price for carbon emissions on their books, the natural and immediate tendency of all profit-seeking businesses will be to seek to understand their exposure and to mitigate their current and future financial risk by seeking to reduce their emissions, and thus reduce their costs. Essentially, the existence of their estimated carbon dioxide externality, shown as a cost input on their financial models, will force the explicit discussion at the management table: is this a big enough risk that we should worry about it? If so, how much should we worry, and what can we do about it in terms of reducing our risk exposure? Some firms – specifically large emitters – will immediately start to drive changes in their behaviour because, even with only a nominal price now being visible. They will ultimately decide that the risk inherent in the price rising over time will at some point become material to their business, and they will immediately begin to explore more aggressively mitigation/reduction strategies and technologies that they can marshal in their operational efforts to reduce their costs – by reducing their emissions. Indeed, we are seeing some examples of this in the business environment today, although it is very early days still.