Tactical Philanthropy Podcast: Fred Krupp

Today’s podcast is with Fred Krupp of Environmental Defense Fund. Fred has been the leader of EDF since he took over in 1984 at age 30. Known for embracing partnerships with corporations and advocating market based solutions, EDF has become a powerful force in the environmental movement. Last year, Fred was named by U.S. News & World Report as one of America’s Best Leaders. Fred is co-author of the new book Earth: The Sequel, which Michael Bloomberg has said “[puts] optimism back into the environmental story”.

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Sean Stannard-Stockton: Hello, and welcome to the Tactical Philanthropy podcast. I’m Sean Stannard-Stockton, author of the Tactical Philanthropy blog and principal and director of Tactical Philanthropy at Ensemble Capital. My guest today is Fred Krupp. Fred is president of the Environmental Defense Fund. EDF uses public-private partnerships to tackle the world’s most serious environmental problems. They are known for their long success of leveraging market forces to further their mission, and their strategy of partnering with the world’s largest corporations. Fred and his co-author, Mariam Horn, have recently released the book, Earth: The Sequel. Fred, thank you so much for joining us.Fred Krupp: Delighted to be here.

Sean Stannard-Stockton: Fred, your book is full of stories about innovative ways that for-profit entrepreneurs frequently are creating powerful new business models that they believe, or that you believe, has the potential to save the planet. Why don’t you begin by telling us a story or two about some of these entities that are competing in a marketplace in a way that you think has this potential to save the planet.

Fred Krupp: Sure, Sean. We tell the story of Bernie Karl, up in Alaska, who had this for-profit idea that he could have a lot of tourists visiting his resort if he built an ice hotel. But he had a find a way to keep that ice hotel frozen in the summer. Unfortunately, he built the hotel, summer came, the hotel melted. And Forbes dubbed this the dumbest business idea of the year. But he persevered…

…He was an American entrepreneur. He was willful. He had a vision. He wasn’t going to take no for an answer. And eventually he developed a way to rebuild that ice hotel, keep it frozen all summer long, and tourists are flocking there. He’s making a lot of money. But the story doesn’t end with Bernie. He pioneered the first use anywhere of warm water, low temperature water, being used to run a geothermo generating plant. And now United Technologies, his partner on this venture, has created a whole new division and is exporting these generators all over the world.

We tell the story of solar energy. Until now, solar energy has been a bit too expensive. So there’s entrepreneurs working on getting the price down. Talk a little bit about Conrad Burke from an InnovaLight, who has developed a way to use the cheap, unrefined silicon – sand, really – to liquefy it into a paint, so he can paint solar cells onto most any surfaces, including a roof. So that, instead of having to mount an expensive glass box solar panel, it brings the cost down. All ready, in the solar industry, we have – First Solar now has a market cap of 16 billion dollars. As a matter of fact, the late philanthropist John Walton put some money in to that company, $250 million, and his estates owns now that share of First Solar, now worth 5 billion dollars. His money was multiplied 20 times over. So we see the beginnings of entrepreneurs developing clean power that the planet’s going to need.

Sean Stannard-Stockton: In your book, you talk about the potential for artificial trees that can suck carbon dioxide out of the atmosphere. That’s one of the stories that kind of resonated with me. Would you explain to the listeners how carbon trading can harness market forces to actually reward inventors of tools like artificial trees, as well reward major polluters who are able to find innovative ways to reduce their output.

Fred Krupp: Sure. You know, cap and trade for sulfur worked extremely well. And it can work, and is beginning to work for carbon dioxide. Not yet in the United States because we have not put any limits on throwing global warming pollution into the sky. But once we do that, here’s how it would work. Every company would have, either by purchase or by distribution, a certain amount of pollution they’re allowed to put in the air. Take power plants, for instance, power plants would be asked over time to cut their emissions by first, 25%, then 50%, and then a higher amount. But take the initial cut, say, of 25%. The power plants that fail to do that would have to buy carbon reduction credits from other companies. So they would be penalized for putting extra global warming pollution into the sky. They would have to pay extra for it. And they would have to pay for the amount that they’re over their limit to be reduced somewhere else.

But on the other hand, those power companies, or even people in other businesses – even, potentially, farmers – who figure out a way to take more carbon dioxide or global warming pollution out of the system, they would be earning these global warming pollution reduction credits. And they could sell into a new, green market. So while we would be penalizing those who put up more than the government wants, we would be rewarding those who drive pollution levels down. Now, in total, pollution would have to come down because the amount of pollution permits that would be given out would be declining over time. And the only way you could put out more pollution than you are allowed would be to buy a permit from someone else.

So this is the market system that has never been used for global warming pollution in the United States until now. And this is how it would create a pot of gold; create a stream of mega prizes for those who figure out how to do things, like Klaus Lackner, who’s working on this artificial tree. I don’t know if he’ll be successful or not, but I sure know, Sean, that I want him to be offered a pot of gold so that he keeps working on it, if he is successful.

Sean Stannard-Stockton: So I’m imagining the comments coming in from some of my readers. Some of which, maybe, are not as enamored with market-based solutions as you are and I am to a degree. Does using market-based solutions imply that we’ll have to focus on, kind of, cleaning up our own mess, rather than creating it in the first place. Because I’m picturing this world where all the trees are gone and free market advocates are pointing to the wonderful success of artificial trees.

Fred Krupp: Well, artificial trees is just one example. Whatever fixes we use have to be ecologically sound. We don’t want to be compounding a problem by creating another problem. But the mere – the fact of the matter is it’s our market system that got us into this mess. It’s the profit motive and greed that have caused global warming because people are allowed to dump this global warming pollution into the air without any limit. So I know it seems counterintuitive to say that the profit motive that got us into the fix can get it out of – can get us out of this fix, but here’s why. We live in a society where entrepreneurial capitalism is the most robust force we have that drives the economy. So when we flip the economic incentives, that are all wrong now for the planet, when we flip those incentives on their head, suddenly we can harness entrepreneurs and engineers, inventors, businesses large and small to reduce their pollution. And even invent things to take carbon dioxide out of smoke stacks, to change farming practices so we build up organic matter in the soils and thereby are taking carbon dioxide out of the air. It’s when we fundamentally changed our flawed market systems and align the economic signals with the values we need to have a future that we secure the future.

Sean Stannard-Stockton: Let’s take a step back for a minute from environmental policy, and talk about the broader potential of market-based solutions to problems traditionally attacked using philanthropy or government dollars. So the field of philanthropy seems to operate largely outside of market forces, some of which is good, but in many cases that lack of market forces doesn’t encourage philanthropy to move forward to create new, effective ideas. So whether a donation produces any social good or it does not, doesn’t always affect the viability of a donor continuing the same practice. So drawing on the lessons you’ve learned from working at EDF, how do you think that foundations or other funders or non-profits can leverage market forces in their own work?

Fred Krupp: That’s a great question, and of course, I’ve given a lot more thought to global warming and environmental pollution than I have to the extension of these principles generally, but I’ll take a crack at your question, Sean. I would say a couple of things. One, I think it’s important that foundations offer prizes and incentives to those NGOs who are most effective. So I would like to see, as much as possible, foundations move – and we’re already seeing them move in this direction – but I endorse the movement toward, kind of, performance-based philanthropy, where there’s accountability among the grantees. And the grantees that really get the job done are rewarded for their results. And where just fighting the good fight, or putting out a good effort isn’t what drives philanthropists, but grant-making is, instead, really driven by performance metrics, and even prizes for innovative ideas.

One thing, Sean, Matthew Bishop from The Economist said to me the other day that not only has he seen a lack of accountability in the nonprofit sector, but sometimes he sees nonprofits in the education and other social arenas with very good ideas, but without the drive to take those good ideas to scale the way a for-profit would have. And I would say this is something, I think, that grantors should play a constructive role encouraging nonprofits that have breakthrough capital to really take those ideas to scale. And, you know, that is another specific way.

The last answer to your question, and the most complicated one, of course, is for many social problems, actually having NGOs remake the economics of our society so that there are incentives to solve some problems we have in the education arena, or creation of jobs, or housing arena. This is, I think, you know, where a lot of breakthrough intellectual capital is. And I’m convinced that, although it won’t work for every social problem, it can work for more problems than we’ve currently imagined.

Sean Stannard-Stockton: Sure. That makes a lot of sense to me. We have time for one more question here. EDF is known for partnering with corporations like McDonald’s and Fed Ex to help those companies reduce their environmental footprint, while also lowering their expenses. This kind brings to mind, to me, the concept of carrots and sticks, and what is the better way to effect change? So why do you favor, really offering carrots, to polluters or to anybody else, rather than threatening bad actors the way that many other environmental groups do? I’m interested in the answer specifically in a broader sense of affecting social change and using carrots or sticks, and how you can be most effective.

Fred Krupp: Well, Sean, first of all, I do want to point out that EDF does continue to take lawsuits. It’s now less than 5% of what we do, but we’ve got some fine environmental lawyers, and we’ve litigated all the way up to the Supreme Court against, say, Duke Power. We won a case last year by a vote of nine to nothing from the Supreme Court on air pollution, even at the same time as we were partnering with Duke Energy on the United States Climate Action Partnership. So we have all the tools in the toolbox at the ready.

But I do think, you know, if we’re going to move America, we have to move American business. And American business, in fact global business, has tremendous market pull. Think of Wal-Mart and all their suppliers. And Wal-Mart’s ability to phase out selling energy-hog TVs, and phase in selling super-efficient flat screen TVs. So that as America moves to more and more flat screens, the amount of energy wasted can be minimized. There’s enormous ability to effect change that companies have. Let me give you an example.

Most people know that EDF kind of pioneered the use of these partnerships; first with McDonald’s on helping them find other answers to packaging their hamburgers besides the Styrofoam box. But more recently, in the last few years, we partnered with McDonald’s again on the use of antibiotics in poultry. And McDonald’s specified to all their suppliers that they no longer wanted chickens routinely fed antibiotics, just as growth promoters, to — all the chickens were being fed this, not to treat any disease, but just a way to make the chickens grow faster. Once McDonald’s put that new rule into effect, the biggest poultry operations in the United States all phased out of doing this, not only for McDonald’s, but for their businesses in general. And this is a big deal because most antibiotics in America — believe it or not, 70% — are used on farm animals, not people. And yet people suffer the ill effects because the stuff that’s used on farm animals creates bacteria that are resistant to antibiotics, so that when we’re sick, increasingly, sometimes the drugs of last resort don’t work.

So I know this is a bit of a complex anecdote, but having McDonald’s agree to change its practices was able to change this in a way, much more quickly and effectively than a multi-year campaign to get Congress to change the rule. Congress should specify that these practices haven’t been ended. But here we were able to change American business practices in a speedy, efficient, effective way. And it’s one of the reasons I think that by helping companies do the right thing and praising them for doing the right thing, giving them that carrot, many times we can move faster than with any other technique. Not all the time. Sometimes we have to go to court, as we did with Duke Energy.

Sean Stannard-Stockton: Well, Fred, thank you very much for joining us today.

Fred Krupp: Thank you, Sean.

Sean Stannard-Stockton: This has been the Tactical Philanthropy podcast. You can visit us at tacticalphilanthropy.com. And you can learn more about Fred Krupp and the Environmental Defense Fund at edf.org. Thank you so much for listening.