Syllabus. ENERGY, THE ENVIRONMENT AND BUSINESS STRATEGY ECON 578 & LAW 578 Spring 2011

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1 Syllabus ENERGY, THE ENVIRONMENT AND BUSINESS STRATEGY ECON 578 & LAW 578 Spring 2011 Instructors: Professor Paul Portney Professor Stan Reynolds Class Meetings: Mondays, 3:30 6 p.m., beginning January 24, McClelland 113 Prerequisites: Economics for Managers (Econ 550), or another course in microeconomics Business Strategy (Econ 551), or another course in business management COURSE OVERVIEW This course will familiarize students with issues and ideas that cut across environmental economics, sustainable business practices, environmental innovation, operation of energy markets, and corporate social responsibility (CSR). Energy production and consumption have a major impact on the environment, so much of the course is devoted to how business firms operate in energy markets and how firms use energy. Also, government policies play a large role in the economy as a whole, and a particularly large role in energy markets and in business impacts on the environment. This course places considerable emphasis on government regulation why regulation of business is undertaken, the process through which regulations are put in place, how business firms participate in the regulatory process, and the impact of regulation on management decision-making. The standard framework for business strategy deals with the ways in which a firm can create and capture value in the marketplace. We will show how the standard framework of business strategy for effective competition in a market environment can be extended to include how firms can and do respond to non-market (e.g., regulatory, sustainability, environmental) concerns. In order to familiarize students with current issues there will be at least five guest speakers drawn from fairly high in the corporate ranks of the energy/environment industry. 1 Monday, January 17, is the Martin Luther King holiday. There are no UA classes that day. 1

2 COURSE MATERIALS A packet of readings for the course is available through the UA bookstore. The packet includes business cases, selected articles, and two chapters from Business and Its Environment, 6 th ed., by David P. Baron (2010). We will also assign readings from materials posted on Blackboard and from the web. Reading assignments are listed for each week below under Course Outline and Reading Assignments. For those of you who have not taken economics and/or business strategy - or not taken them lately - we recommend reading the following: 1) Microeconomics: Theory and Applications (10th ed.), by Browning and Zupan. Chapters 1, 2, 10, 20 2) Strategic Management, by Saloner, Shepard and Podolny. Chapters 1, 2, 3 You can check out a copy of either book from Michelle Piontek, our administrative assistant. Michelle is in room 401, McClelland Hall. You should shoot her an before coming over to check out a book - mpiontek@eller.arizona.edu You should also be able to find fairly inexpensive used copies of these books. COURSE REQUIREMENTS Grading will be based on three different aspects of your performance: Class participation 15 % Case write-ups and presentations 45 % Group project 40 % Class Participation Class meetings will be a combination of lectures by instructors, class discussion of case assignments and assigned readings, student presentations of assignments, and guest speakers. You should come to class having done the assigned readings for the week and prepared to discuss the material. We will post discussion questions prior to class meetings. Case Write-Ups and Presentations We will assign questions for the cases that are covered this semester. Written answers to questions are due on the day the relevant case is covered in class. Some of the case assignments are individual assignments and others will be group assignments. We will have groups make presentations of their answers to the class for some assignments. Each case assignment requires no more than 4-5 pages of writing. This means that your analysis must not only be sound, but must get straight to the point. 2

3 Group Project One of the aims of this class is to provide students with experience working on real-world environmental issues faced by organizations. To that end, we have lined up several consultingtype projects with business firms. For each project a group of students will work with the firm to investigate the issues, come up with a solution/plan for addressing the issues, and produce a presentation and written report of findings. We will provide more details at our first class meeting. The final class meeting will be devoted to project presentations. COURSE OUTLNE AND READING ASSIGNMENTS Week 1 (January 24) Introduction to markets; competition and efficiency; market failure Week one provides a review and elaboration of microeconomic theory and economic efficiency. The conditions under which a market-based system will lead to economic efficiency are explained and discussed. We will discuss market failure due to externalities and public goods, the role(s) that government can play in correcting market failures, and the role that property rights can play in correcting market failures. Ronald Coase, "The Problem of Social Cost", Journal of Law and Economics (October 1960), pp (available online via JSTOR, main library web site) Stephen Breyer, Typical Justifications for Regulation, ch. 1 of Regulation and its Reform, 1982 (available on Blackboard) Week 2 (January 31) Integrating Market and Non-market Strategy Management strategy has traditionally focused on how a firm positions its products and how it competes in the marketplace. The reading by Baron describes how the standard framework of management strategy can be extended to include how firms can and do respond to non-market (e.g., regulatory, sustainability, environmental) concerns. Baron s approach draws upon the disciplinary foundations of economics, political science, strategy, and law. We will discuss the Acid Rain case, which describes a host of issues confronting a major railroad company connected to acid rain environmental legislation. 3

4 David Baron, Integrated Strategy, ch. 2 of Business and Its Environment, 6 th ed., 2010 (in packet) Acid Rain: Burlington Northern (A), HBS case # (in packet) Week 3 (February 7) Overview of Energy and the Environment Energy production and consumption have a major impact on the environment. Week 3 provides an overview of production of various types of energy and of how energy markets operate. In addition, we delve into government regulation of the environment and in particular, the evolution of federal environmental policy. Paul R. Portney, EPA and the Evolution of Federal Regulation, ch. 2 of Public Policies for Environmental Protection. 2 nd ed., by Portney and Stavins, eds., Washington, DC: Resources for the Future, 2000 (available on Blackboard) The National Academies Summit on America s Energy Future, chapters 1, 2, 4 8, The National Academies Press: Washington, D.C., 2008: (a pdf with this report can be accessed at, Week 4 (February 14) Regulating Environmental Risks This week focuses on cost-benefit analysis of environmental regulations and how business firms participate in the regulatory process. Students will present answers to case questions for the EPA Case Study on Risk Management. EPA Case Study on Risk Management DiNitro Chickenwire Case (available on Blackboard) Paul R. Portney, "Benefit-Cost Analysis." The Concise Encyclopedia of Economics Library of Economics and Liberty. 4

5 David Baron, Implementing Nonmarket Strategies in Government Arenas, ch. 8 of Business and Its Environment, 6 th ed., 2010 (in packet) Week 5 (February 21) Offshore Petroleum Exploration and Production The Deepwater Horizon disaster provided a graphic illustration of environmental risks associated with offshore petroleum extraction. This week we explore the offshore drilling process, the nature of environmental risks for firms in the energy business, and how firms manage these risks. A guest speaker from ExxonMobil will join us for the last portion of the class meeting. Chapters 8 and 9 in, The Gulf Oil Disaster and the Future of Offshore Drilling, Report to the President, National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, January 2011 (available at, sident_final.pdf) Environmental Risk Management at Chevron, HBS case number , 1999 (in packet) The Offshore Drilling Industry, HBS case # (in packet) Guest Speaker Will Jenkins, President and Managing Director of International Marine Transportation, an ExxonMobil subsidiary Week 6 (February 28) Natural Gas Natural gas has become a central component of the world energy system. For example, most of the new electricity generation capacity built in the U.S. in the last 20 years is fueled by natural gas. Natural gas is now the 2 nd most important fuel source for electricity generation, following coal. This week we examine how natural gas is produced, traded and regulated. We also look at the environmental consequences of expanding natural gas development and use. The New World of Natural Gas Forum on Global Energy, Economy, and Security, Aspen Institute Energy and Environment Program; by John Deutch (available on Blackboard) 5

6 E.P.A. Considers Risks of Gas Extraction, By Tom Zeller Jr., New York Times, July 23, 2010 (on Blackboard) Week 7 (March 7) The Electricity Industry We discuss the vertical and network structure of the electricity industry. State and federal policies play a major role in the industry. The industry exhibits an interesting mix of highly regulated markets and highly competitive markets. We will discuss the restructuring of the industry that has taken place in many parts of the U.S. and abroad, and the business opportunities associated with restructuring. We will also discuss how the changing landscape of the industry is creating new business opportunities in renewable energy and in energy conservation. The guest speaker is chief operating officer of an electric public utility that operates across several states in the Midwest. Edison Electric Institute, Electricity 101, 'The Fox Islands Wind Project', HBS case # , 2010 (in packet) Guest Speaker Brad Beecher, COO of Empire District Electric, Joplin, Missouri Spring Break: March Week 8 (March 21) Motor Vehicles Reducing greenhouse gas emissions in the transportation sector is an integral part of any comprehensive program to address climate change. This week we examine government regulations of emissions and efforts of business firms to reduce emissions in the transportation sector. FedEx and environmental defense: building a hybrid delivery fleet, Stanford Business School case (HBS SI-82), 2007 (in packet) Guest Speaker Rob Draper, COO of O Reilly Motors 6

7 Week 9 (March 28) Solar Energy Solar power holds great promise as a source of renewable energy and a means to reduce greenhouse gas emissions. And energy production from solar power has been growing fairly rapidly in recent years. Yet solar power still represents a minute fraction of overall energy production. This week we examine regulatory, business, and environmental issues related to solar power. The Suntech case deals with the development of a solar panel manufacturing company in China. Robert Glennon is a UA law professor, and his co-authored piece on solar energy highlights a variety of important practical issues that must be overcome if solar is to become a major energy source. The guest speaker is an executive from Solon Corp, a major world-wide producer of solar photovoltaic panels. Suntech Power Holdings (A): the pre-ipo years, Stanford Business Case, HBS Case # E347- A, 2010 (in packet) David MacKay, Solar, ch. 6 in Sustainable Energy: without the hot air, Robert Glennon and Andrew M. Reeves, Solar Energy's Cloudy Future, Arizona Journal of Environmental Law & Policy, vol. 1, 2010, pp (available on Blackboard) Guest Speaker Bill Richardson, Solon Corp Week 10 (April 4) Energy Efficiency Efforts to reduce energy use, dependence on foreign oil, and environmental impacts date back (at least) to Jimmy Carter s presidency in the wake of OPEC s oil embargo and oil price hikes. More recently, energy efficiency has emerged as a central component of environmental policy, with a variety of state and federal programs designed to spur energy conversation. The EnerNOC case deals with an energy services company whose primary business is providing energy-saving services to large energy-using customers and delivering energy savings to public utilities. The guest speaker is an Eller alum who is the CEO of WattStopper, a company that sells energy efficient light bulbs and other electronic equipment (control systems, etc.). 7

8 EnerNOC: Turning Energy Savings into Sales, Babson Business School case, HBS case # BAB152, 2009 (in packet) Guest Speaker Jerry Mix, CEO of Wattstopper Week 11 (April 11) Green Buildings A critical part of energy efficiency is energy use in buildings. There are many issues, including building design, heating/cooling systems, lighting, building certification (e.g., LEED), etc. Readings Buildings and Energy, HBS Case # , 2008 (in packet) Building the Green Way, Harvard Business Review, June 2006 (available online via UA library) Guest Speaker Robert Bahl, Vice President, Engineering at Marriott International Week 12 (April 18) CSR and Sustainability This week we examine corporate social responsibility from a variety of perspectives. Milton Friedman, The Social Responsibility of Business is to Increase its Profits, The New York Times Magazine, September 13, 1970 (available on Blackboard) Paul R. Portney, The (Not So New) CSR: An Empirical Perspective, Review of Environmental Economics and Policy, July 2008 (available on Blackboard) Starbucks and Conservation International, HBS Case # , 2004 (in packet) Week 13 (April 25) Climate Change: Policy Dimensions and Business Opportunities 8

9 The Carbon Productivity Challenge, McKinsey & Company Report, 2008 (available at Week 14 (May 2) Group Project Presentations 9