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Chapter 3 Government, Public Policy, and Sustainable Business


Learning Objectives

  1. Explain how public policies and government influence markets for sustainable businesses.
  2. Explain how private businesses can influence government and public policies to serve their interests.
  3. Discuss the key influencers of public policy and why public policymaking does not always serve the public interest.
  4. Understand why public policy is important to sustainable business and business more generally.

This chapter was co-written by John Holcomb with Ross Gittell and Matt Magnusson.


Why should students study public policyThe actions and decisions taken by government in regards to a particular issue or set of issues. if they are interested in understanding sustainable business but are not necessarily interested in government? What is the role of the government in affecting the market rules and economic potential of sustainable business?

This chapter seeks to answer these questions and provide a foundation for students to understand the important and complex role that government plays with all businesses, including businesses focused on sustainability. The chapter covers the effect of public policy on business, the factors that influence public policy, the different views of the relationship between business and government, and the occurrence of market failures and the role of public policy. The chapter also provides specific examples of US and international policies relevant for sustainable businesses.

Businesses that do not understand the political and public policy contexts that they operate in and are not strategicRelating to the actions of an organization taken to help it fulfill its intended purpose. in their interactions with government are at a competitive disadvantage. For example, wind power providers have to act in the context of a very complex set of local, state, and federal governmental policies that influence their costs of providing wind energy and the price they can charge for their energy. Local zoning laws can prevent the siting of wind turbines because of environmental concerns; concerns about how the turbines will affect local habitats, including bird populations; local noise ordinances; and concerns about potential reductions in local property values due to view disruptions. State laws can determine the market for wind and other renewable energy sources through laws, such as renewable portfolio standards (RPS; see the more detailed discussion that follows), that require state-level electrical energy production to include a certain percentage of energy from renewable sources. And federal laws and programs can provide incentives for investment in renewable energy sources through tax credits and favorable types of tax treatment intended to help to reduce carbon emissions and US dependence on foreign energy sources. All of these public policy considerations and more delayed the Cape Wind Project in Cape Cod, Massachusetts, from going online. The project was first conceived in 2001, received state and local permitting in 2009 and federal permitting in 2010, and is expected to be operational in 2013 (see the following sidebar).


Cape Wind: Public Policy and Renewable Energy (See

Cape Wind (in Cape Cod, Massachusetts) will be the site of the first large-scale offshore wind farm in the United States. The private developer for the $2.5 billion project is Cape Wind Associates. The project is located on Horseshoe Shoal in Nantucket Sound, 4.8 miles from the nearest shore. One hundred and thirty wind turbines will harness the wind to produce up to 420 megawatts of renewable energy.

Because the proposed turbines are more than three miles from shore, they are subject to federal jurisdiction. However, nearshore infrastructure including roads and power cables make the project subject to state and local laws and regulations. At the state and local level, the project required a water quality certification from the Massachusetts Department of Environmental Protection; access permits from the Massachusetts Highway Department; a license from the Massachusetts Executive Office of Transportation for a railway crossing; orders of conditions from the towns of Yarmouth and Barnstable Conservation Commissions; and road opening permits from Yarmouth and Barnstable.

At the federal level, Cape Wind originally applied for a permit in 2001 from the US Army Corps of Engineers. With the passage of the 2005 Energy Bill, the federal regulatory authority for offshore energy projects was transferred from the Army Corps to the Minerals Management Service (MMS) within the Department of the Interior. While Cape Wind had expected to obtain approval quickly from the Army Corps, this transfer of authority delayed the project. At the federal level, the Federal Aviation Authority was also involved, out of concern that the turbines could cause interference with radar systems and be a hazard to aviation.

Figure 3.1 Offshore Wind Turbines

In a market economy, government exerts considerable influence on the activities that businesses undertake and on the revenues, costs, and net earnings of businesses. Government and public policies establish the legal system and also the specific rules under which all businesses operate. And government taxes businesses to reflect businesses’ use of public services and to collect revenue to fund government operations.

Businesses are creations of government. Businesses are legal entities created under laws established by government. Government impacts the market economy through not only laws that govern the private market system but also specific policies, regulationsA rule issued by an executive authority or regulatory agency of government that has the same force and effect as actual law., judicial (court) decisions, taxes, and government spending. These government actions are constantly changing and are part of the dynamic operating environment for all businesses. Public policies that address energy use and climate change in the United States and other nations impact all businesses but has specific and important impact on businesses focused on sustainability.

The significant role of government in the private market economy was recognized and highlighted by one of the most frequently mentioned supporters of the capitalist system, Adam Smith. Smith was an eighteenth-century Scottish philosopher and political economy professor. He was the author of The Wealth of Nations written in 1776. In The Wealth of Nations, Smith highlighted the essential role government plays in creating the legal structure, which defines the rules for business transactions, enforces contracts, and grants patents and copyrights to encourage inventions and new products and services.Adam Smith, The Wealth of Nations (New York: Modern Library, 1937),

Smith also highlighted the key role government plays in providing for the public goodsA good where individual consumption does not reduce its availability to others and no one can be effectively excluded from its use (i.e., clean air to breathe). and infrastructure required by all businesses. Smith highlighted the need for common physical infrastructure built with government funding, such as roads and bridges. Public goods extend beyond roads and bridges, there are other public goods shared by all businesses and society more generally including clean air, water, and soil and a sustainable environment for natural resources that businesses depend on.

Many public goods would not be available if their existence depended only on individuals or individual businesses and private markets. For example, it would be too costly for any one business to build an interstate highway to transport its goods or to build and maintain the Internet or to be responsible for protecting the natural environment.

The private market system in general works well to ensure efficient use of limited resources, with efficiency defined as ensuring the best, most highly valued by society, use of resources. But the private market system is not perfect and does not always ensure the best use of society’s resources. The market on its own (without government) works best—and makes the most efficient use of society’s limited resources—when public goods and externalities (see the more detailed discussion that follows) are not involved. It also works best when near perfect information about how private market activities affect so-called third parties (those who are not directly involved in the market activities) is readily available. For example, if full information was available about the risks involved in British Petroleum (BP) offshore operations in the Gulf of Mexico, BP might, for investor, consumer market, and public relations purposes, have not assumed the operational risks that they did prior to the Gulf oil spill. When market and information failures occur (see as follows for more discussions), governmental intervention can help to facilitate a more efficient private market economy.

The US and other governments are also important in efforts to ensure an overall strong and resilient economy. A key part of a resilient economy is one based on stable, safe, and secure forms of energy. The attention of government and governmental leaders to a new (what has been called) energy economy is reflected in US Secretary of Energy Steven Chu’s May 2010 commencement speech at Washington University:

In order to meet the energy and environmental challenges we face, we will need nothing less than a second industrial revolution. The first Industrial Revolution supplanted human and animal power with machines powered by fossil fuel. Today, we use the power of two horses to dry our hair. We go to the local market under the pull of hundreds of horses, and fly across our continent with a hundred thousand horses. A second industrial revolution is needed to provide the world’s energy needs in an environmentally sustainable way. America has the opportunity to lead in this new industrial revolution and build the foundation of our future prosperity. Alternatively, we can hope that the price of oil will return to $30 a barrel and that climate change is not a serious threat. If we are wrong, we will be importing the new energy technologies developed by Europe and Asia.


Energy Volatility

Energy volatility is a major source of concern for all businesses. In March 2011, the price of a barrel of oil was up to $115 a barrel. This is significantly higher than prices even just five years ago when they were closer to $50 a barrel and ten years ago when oil traded at around $20 per barrel.

In the United States, macroeconomicActivities and interactions of the entire overall economy as opposed to individual business activities. efforts are primarily influenced by the executive branch of government, which includes Secretary Chu’s US Department of Energy and the Federal Environmental Protection Agency (EPA) and also includes the Office of the President, the Departments of Treasury and Commerce, and the Federal Reserve System.

An example of a US government initiative to bolster the general (macro) economy is the 2009, $787 billion economic stimulus plan, also known as the American Recovery and Reinvestment Act of 2009 (ARRA). The ARRA was approved by federal legislation acted on by the US Congress and supported by President Obama. This stimulus plan sought to stabilize employment and encourage business investment and household spending. It included more than $80 billion to support the generation of renewable energyEnergy produced by natural resources that are replaced relatively quickly. Renewable energy resources include biomass, hydro, geothermal, solar, wind, ocean thermal, wave action, and tidal action. In 2009, approximately 8 percent of all energy consumed in the United States was from renewable resources. sources; energy efficiencyTechnologies that reduce the energy required to perform the same level of output.; expanding manufacturing capacity for clean energy technologyA consumer-friendly term for technologies that produce energy with no or reduced pollution emissions. This includes renewable and energy efficiency technologies.; advancing vehicle and fuel technologies; and building a bigger, better, smarter electric gridElectricity distribution system that uses real-time useful (smart) information to influence the use of energy. The goal is to minimize peak demand and overall energy use..

The American Recovery and Reinvestment Act (ARRA) provided all US states with funds for energy efficiency, renewable energy, and weatherizationModifying a building to reduce its energy consumption through energy efficiency technologies. This includes improved insulation and sealing drafts to increase airtightness. programs. These were one-time funds to be spent or committed within two years. The short-term goals for this funding were to create and retain jobs, to achieve energy savings and greenhouse gas reductions, and to encourage energy efficiency improvements in all sectors of the economy. The long-term goals were to strengthen energy efficiency and renewable energy infrastructure, reduce barriers to increasing efficiency and renewable energy, build professional capacity, educate the public, and lay the groundwork for transforming markets so that energy efficiency and renewable energy efforts would be sustained after the ARRA funding was spent.


Texas Department of Housing and Community Affairs (TDHCA): Weatherization Assistance Program (

The Texas Department of Housing and Community Affairs (TDHCA) operates the Weatherization Assistance Program with funds from the US Department of Energy (DOE) and the US Department of Health and Human Services’ Low Income Home Energy Assistance Program (LIHEAP). WAP is designed to help low-income customers control their energy costs through installation of weatherization materials and education. The program goal is to reduce the energy cost burden of low-income households through energy efficiency.

The main US federal government agency involved with protecting the environment is the EPA. The EPA’s priorities as of 2012 included taking action on climate change, improving air quality, ensuring the safety of chemicals, and protecting America’s waterways ( The US Department of the Interior is also involved in protecting the environment and managing the nation’s environmental resources.

Many of the US states, and in particular California and Massachusetts, have also been very active in energy and environmental policies to address climate change. Colorado became the first US state to create a renewable portfolio standard (RPS) by ballot initiative when voters approved Amendment 37 in November 2004.“Colorado,” DSIRE, The original version of Colorado’s RPS required utilities serving forty thousand or more customers to generate or purchase enough renewable energy to supply 10 percent of their retail electric sales. Eligible renewable energy resources include solar-electric energy, wind energy, geothermal-electric energy, biomass facilities that burn nontoxic plants, landfill gas, animal waste, hydropower, recycled energy, and fuel cells using hydrogen derived from eligible renewables. As of 2011, thirty-nine states had mandatory renewable or alternative energy standards or goals in place. These typically require or target a certain percentage of energy be procured from renewable sources. This expands the markets for renewable energy providers. States also are involved in environmental protection, with most states having an agency dedicated to protecting the environment, such as Florida’s and Massachusetts’ Departments of Environmental Protection.

Ten states in the Northeast are participating in the Regional Greenhouse Gas Initiative (RGGI), the first regional initiative to reduce carbon emissions from power generation. RGGI institutes a cap-and-trade system for greenhouse gas emissions from power generators and uses funding from the selling of carbon allowancesPermits to generate pollution. Typically, they are in increments of one ton of pollution and most often pertain to air pollution. to promote energy efficiency. And there are similar regional efforts starting in other parts of the nation.

Also some local governments in the United States stand out with regards to policies to address climate change and protect the natural environment. Portland, Oregon, was named the Greenest City in the nation in 2008.“America's 50 Greenest Cities,” Popular Science, February 8, 2008, The city’s policies encourage renewable energy usage, support public transportation and biking, and require building’s with low environmental impact. These policies have resulted in half the power used in the city coming from renewable sources; a quarter of the workforce commuting by bike, carpool, or public transportation; and thirty-five buildings certified by the US Green Building Council.

Commuting by bike.

European nations have been more active than the US federal government in the establishment of comprehensive policies to address climate change, and this has implications for sustainable businesses (see more discussion with examples as follows). In Europe, national governments have guaranteed prices for energy from solar and wind. Germany, Spain, and other European nations are now among the leaders in global exports in renewable energy, wind power, and solar power technologies. And recently, China has emerged as one of the most attractive markets for investment in renewable energy.Ernst & Young, Renewable Energy Country Attractiveness Report (2010).

There are “winners” and “losers” with all public policies. In many US states with increased governmental requirements for the use of renewable energy (such as wind and solar power), incentives and financial support has led to new investment in renewable energy and energy efficiency, which increases business opportunity for companies providing clean technology products and services that enhance energy efficiency benefit. All the while generators of electricity using nonrenewable sources, such as coal, natural gas, and other fossil fuels, have experience decreased sales, increased costs, and declining profits as a result of the same policies.

Key Takeaways

  • Government creates, defines, and regulates markets, including the private market economy overall and the market for sustainable goods and services.
  • Government, at all levels, national (federal), state, and local, can exert considerable influence on the activities that businesses undertake and on the revenues, costs, and earnings of sustainable businesses.
  • Government impacts the market economy through laws, regulations, judicial decisions, taxes, and government spending.
  • Government actions at all levels are constantly changing and are part of the dynamic environment for sustainable businesses.
  • The US government and the governments of many other nations are increasingly focused on policies to reduce energy use and business activities that damage the environment. These policies include targets for use of renewable energy, programs to enhance energy efficiency, and regulations to reduce environmental damage. These all can provide expanded markets and business opportunities for sustainable businesses and can impose additional costs on other businesses and reduce the market demand for some businesses that are not providing sustainable goods or services.
  • There are business “winners” and “losers” on different public policy issues. On the same policy issue, there will be businesses in favor and against the policy.


  1. Find a recent article or web posting about a clean energy technology or other sustainable business company that has been affected by a government public policy. What was the policy, and how did the government policy affect the profitability (positively or negatively) of that company?
  2. Research the federal government policies that might influence US oil prices and discuss what (if anything) the US government should be doing to try to mitigate the fluctuations in the price of oil. What are some possible actions that the government could take and what would be the market implications for sustainable businesses?