Last month I shared my picks for the top sustainability stories of 2012; I also reflected on the predictions I made at the beginning of last year, summarizing what happened on the items that I saw, and adding a number of other items that I had missed.

Here are my picks for the top sustainability stories on the horizon for 2013.

Defense drives
The U.S. Department of Defense is emerging as a major driver of sustainability initiatives in the U.S., driven by a very steely-eyed assessment of national security considerations.

In September, Defense Secretary Leon Panetta said that military reliance on fossil fuels creates significant risks and costs on both tactical and strategic levels. The Defense Department (DoD) is looking at the impact both on military capacity — measured in dollars, mission effectiveness and lives — but also the impact on the national security of the country and the vulnerability of the country to unreliable fossil fuel supplies and climate disruption.

As a result, DoD has been a major player in the new energy economy, both as investor and as market maker. How important is this? Well, the past few times they tried it, we got transistors, the semiconductor industry and the internet.

The realism at DoD stands in stark contrast to the ideological blinders at the House of Representatives, where some conservatives have slammed DoD for investing in biofuels, renewables and energy efficiency. Though long seen as knee-jerk advocates for military spending, they act as though blind to the $400 a gallon to move diesel fuel to troops “in theater,” and to the harsh but real DoD’s key performance metrics: the number of lives list per thousand gallons of diesel delivered.

I’m betting that realism will trump ideology — at least here.

Fossils dig in
In other surprising institutional news, the International Energy Administration — which has been a major international source for the fossil fuel industry since it was formed in the early 1970s — reported that in order for there to be a sliver of a chance with keeping climate change less than two degrees Celsius, two-thirds of the global reserves of fossil fuels ― two-thirds of everything that we know exists under Saudi Arabia and the United States, under China ―has to be left in the ground not to blow out the climate.

This is a staggering finding, both because of the scale of it and because the real challenge it raises. The fossil fuel industry will of course fight to the death to prevent that from happening; how often do you hear of companies walking away from assets?

Yet every other indicator on the planet, from climate issues to national security to the cost of specific disruptions, argues in favor of willfully and intentionally stranding those assets. Even if that point of view were to prevail, the mechanics of how to make it feasible for a massive global industry to walk away from assets is not clear challenge.

A few years ago, I constructed a thought experiment: If you company had a division that ate cash annual equivalent to four times its actual value, what would you do? Both business people and environmentalists give the same answer, unhesitatingly: You shut it down. You take the loss. To put it another way, for the annual public subsidy to the coal industry, we could shutter the industry, remediate the mines, redevelop the communities, retrain the workers, invest in renewables and have change back on our dollar.

That would be rational. But the world isn’t rational, nor is economics. Unless someone can orchestrate a buyout or pay to not have the resources exploited (as we’ve seen to some degree in the utility industry), this will play out as a clash not of ideas, but of powerful interests: national, international and biological interests on one hand and the fossil fuel industry interests on another level. We’ve seen a prefiguring in California’s Prop 23 in 2010, where significant business interests lined up against the fossil industry in support of the state’s world-leading climate policy, and, as noted above, we may have a powerful new ally in the Defense Department. But in the end, it will not be governments or activists alone that drive this. It will be Wall Street.

Climate Culture Shock
We saw the it with Superstorm Sandy right after the election, with a rapid realization across the country that something is up. President Obama, who didn’t mention climate during the campaign, began talking explicitly about climate change. The news media, which have barely covered the issue in the U.S. over the past few years, interviewed zero scientists on Sunday morning shows over the past four years. But recently, they made a few meager attempts at expanded coverage (while the venerable New York Times eliminated its environment desk, but that’s a sad story for another time).

The damage estimates are staggering ― $50-100 billion for a single storm. What happens if, or when, we get three of them or five of them in a row? In addition to the massive economic impact, which is finally starting to sink in enough to get the attention even of some skeptics, I expect to see a growing cultural and psychological impact as well: a deep upset and sense of dislocation that will arise in the population at that point; a “sudden” realization of what how bad a mess we are in, and at what cost; demands for action that will be too late and too expensive; blame and repercussions at those who did not act, despite the signs in front of us, to deal with that.

This is a realm for sociologists more than folks like me, but I’ve been smelling something very disruptive there for a while. The trigger may very well be a string of super storms. Maybe they’ll be around the world, or maybe in one country. But no matter where they’re located, they will have a massively dislocating impact culturally and psychologically — as well as physically and economically.

The center shifts
China will continue to surge as a sustainability leader, as well as an economic geopolitical giant. And Africa will awaken.

China, granted, is a mass of contradictions. It’s building a coal plant or two a week, even while coal is on decline in the United States, but it’s also investing aggressively in renewables, and seems to be eating the American solar industry for lunch (in part due to massive subsidies from the Chinese government). In addition, China passed the National Economic Policy for Cyclical Economy in 2009, casting the national policy to closed loop production processes.

Will they get there? Will they get there quickly or efficiently? Can a closed loop economic system, and the massive innovation needed to enable it, flourish in a closed society? I don’t know. It’s certainly a possibility. The commitment, the momentum, the scale of resources and the scale of technology available could make China be a very serious contender.

That’s both good and bad news for us, and for the U.S. Anything that contributes to a more sustainable global economy is good for everyone, but if the United States stays asleep at the wheel and China maintains its sustainability momentum, that will be another factor in shifting global leadership, economic power and geopolitical power across the Pacific,

I’ve also got my eye on Africa. The growth rates in east Africa have been as high as they have been in China ― 8-9 percent per year in Kenya and other countries. A growing portion of the population is highly educated and technically sophisticated. The region has enormous untapped capacity for solar resources as well as, great mineral resources (and rapidly eroding biodiversity). There’s potential for big economic breakout in Africa ― if corruption and tribal warfare get brought under control ― in a way that provides additional market scale for the sustainable economy to help accelerate its growth and reduce its price differentials.

Getting the prices right
This theme been central to my thinking for the past 40 years, and I’m pleased to see some movement and perhaps even momentum on this pivotal question: How do we remove the market distorting and environmentally damaging subsidies and unmonetized externalities that make it impossible for an intelligent person to make a rational economic decision in the marketplace, because the prices don’t tell the truth?

The answer includes: growing challenges to these subsidies, the “ecological P&L” work by Puma and others, and increasing discussion about tax shifting. The revenue neutral tax shift was proposed decades ago, and has been tested in Austria, British Columbia and other regions. The logic is simple: if we want more prosperity and less environmental damage, then why not tax environmental damage instead of prosperity?

Carbon taxes are arguably the place to start: they could increase the cost of greenhouse gas emissions, and bring revenue into governments which could use that revenue to reduce income taxes on individuals and businesses. Lo and behold, you’ve not only shifted market incentives — you’ve opened up a potential political alliance between typically left-of-center environmental forces and typically right-of-center pro-business forces.

Even Grover Norquist and several tea party Republicans have suggested they would consider a revenue neutral carbon tax. They’ve backpedalled, for now, but fact that this is on the table at all is an indication that we might see some very different policy conversations in the coming year.

The Political Crystal Ball Remains Cloudy
President Obama, on the other hand, remains a mystery, and I find it hard to separate my powers of foresight from my wishful thinking.

His record is mixed. While he has done far more good for the environment then he’s given credit for ― in his appointments, in his investments, in his policy moves and his support for EPA (which have been under massive attack) ― he has been far from strong enough on climate, and has not stepped out into the leadership that we all hoped to see from him on this issue.

On the other hand, he spoke out forthrightly and encouragingly in his second inaugural address, and one can expect John Kerry as Secretary of State to be strong on these issues. But it remains to be seen: Is President Obama still committed to his “all of the above” energy strategy, or to a clean energy future? Will his appointments to Energy and EPA match the quality of State? Will he focus federal investment on nurturing new technologies and new industries, or will he continue subsidies of fossil and nuclear industries that should have ended decades ago?

The upside grows
These challenges present massive upside opportunity as well.

In a recent blog post, “Is Your Value Stream Leaking?”, I described an engagement in which we examined the cradle-to-cradle value chain for a large, integrated global manufacturing company. The questions we asked: “Where is there value leakage ― value that dribbles away uncaptured and unrealized? And what might be the value of capturing it?” The answer: “About the same order of magnitude as our total global revenues.”

Though I’ve asserted for years that the sustainability revolution will be the biggest business opportunity of the 21st century, I’ve come to the conclusion that I was too conservative. I understated it. The scale of potential impact―if you adequately map the potential value opportunities and capture a even percentage of them―is staggering.

This massive opportunity requires a design revolution―what we are calling systems design―systematic innovation at every level from products to production processes, to business relationships, to how we measure value.

The doorway into this opportunity that we that we have been offering our clients is a simple question: What is the biggest brand promise that your company can make around sustainability?

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