Wednesday, January 6, 2016

Can Corporations Halt Climate Change?

In an article published in Harvard Business Review, science historian Naomi Oreskes and green business advocate Auden Schendler argue that we can’t count on large, for-profit corporations to undertake meaningful climate action on their own.

One take-away from Oreskes and Schendler’s piece is hard to dispute: in order to combat climate change, a binding and meaningful international climate accord is essential. But is the authors’ pessimistic assessment of major corporations vis-a-vis the climate also warranted? That depends.

The profit motive versus the climate?

By providing an incentive for business leaders to respond to the forces of supply and demand in the marketplace, the profit motive plays an integral role in all capitalist market economies.

In theory, robust demand for a given product or service causes its price to rise, which motivates businesses to supply more. Firms that respond nimbly to consumer demand are rewarded with increased profits. In the world of natural resources and commodities, scarcity drives prices higher, which encourages investment in research and development, and drives the search for alternative fuels and material inputs. In a competitive marketplace, consumers theoretically gain access to innovative, high-quality goods and services at the lowest feasible cost.

The idea that the pursuit of self-interest is conducive to the collective welfare of society has a long history, with famous exponents including Adam Smith, Ayn Rand, and Milton Friedman. Large corporations of the present day generally adhere to a similar principle; in fact, courts in the U.S. and other countries have ruled that publicly traded businesses have a fiduciary responsibility to pursue profit on behalf of their shareholders. This framework saddles the state with enforcing laws and regulations, deterring and prosecuting crimes, dealing with externalities, and generally safeguarding the public interest.
Whither externalities?      

Externalities are costs or benefits that are not embodied in the market price of a good or service. Industrial belching of greenhouse gases into the atmosphere contributes to the negative externalities of pollution and climate change. Health care, by contrast, yields positive externalities by promoting a a more salubrious society. As long as they remain external to market prices, externalities can seriously undermine the ability of our economic system to advance human welfare.

Governments can partly redress climate externalities by taxing or regulating polluters, and providing incentives for non-polluters. But since there is only one atmosphere, and climate change is occurring at a global scale, policies of this kind must be internationally harmonized in order to be most effective.

Moreover, governments are never disinterested actors; they are subject to lobbying by various parties and interest groups (including major corporations with significant investment in the status quo). The appropriate price of carbon emissions, for example, is a contentious issue. No government is omniscient, and uncertainty invites differing perspectives, interpretations, and geopolitical tensions.

For instance, U.S. representatives might argue that meaningful progress can’t occur on the climate file without hefty emissions reduction commitments from China. China’s representatives might retort that relatively inexpensive Chinese manufactures benefit western corporations and consumers—so the developed world shares partial responsibility for greenhouse gas emissions in China. Both arguments contain a kernel of truth, and there is no simple way to ascertain which kernel deserves more weight.

The “free” market

Even the most elementary functions of government influence private market interactions. There is no such thing as a “free” market.

By levying taxes, the state encourages its citizens to change their behaviour in order to avoid those taxes. By commissioning the construction of roads and highways, it facilitates private automobile transport, and in turn, props up the automotive industry. With its police force and judiciary, it enforces private property and enables accumulation. Through public education, it contributes to the productivity of private enterprises. Unemployment insurance programs enable risk-taking and entrepreneurship by mitigating the costs of failure. Every successful capitalist economy has included significant government intervention, and public policy is thoroughly enmeshed in market dynamics and outcomes.

In a sense then, “Can corporations help solve climate change?” is the wrong question. Instead we should ask “Can the world’s governments structure market incentives so as to internalize externalities, and make fossil fuel combustion less profitable?” As long as cutting greenhouse gas emissions is more expensive than continuing to emit them, profit-seeking corporations will be unreliable partners (at best) in the campaign for a stable climate.