The latest Economist is all about business and climate change, and particularly exciting given the possible business and public policy outcomes from this week’s G8 summit. Here’s the article from the issue that kicks off the series of ~15 articles. Before the intro article, I’ve included 1-liner argument summaries for the first few articles in the issue.
Article #1 – “Everybody’s green now” => Many companies have gone from resisting climate change in the 1980s to exploring its economic and moral opportunities in the 2000s.
2. “Trading thin air” => Carbon markets only work if credits are few enough to stimulate behavioral change.
3. “Irrational incandescence” => Regulations must be tightened globally to encourage change-averse consumers and builders to adopt money-saving solutions. (that’s right – the evidence points to people currently not wanting to save money when given the option!).
4. “Fairfield v. the valley” => Because new energy technologies are capital intensive, startups may provide the spark but large companies can allow the clean energy flames to roar.
> Example: new silicon valley ventures compared to GE’s Ecomagination.
SURVEY: BUSINESS AND CLIMATE CHANGE
May 31st 2007
From The Economist print edition
Business is getting down to cutting carbon, but needs more incentives to make much difference to climate change, argues Emma Duncan
WHEN the notion of global warming first seeped into public consciousness in the 1980s, business took a dim view of it. Admitting that human activity was changing the climate would involve accepting some responsibility, which was likely to mean coughing up cash. So, in 1989, shortly after the establishment of the Intergovernmental Panel on Climate Change, the body set up under UN auspices to establish a scientific consensus on the issue, the big carbon emitters set up the Global Climate Coalition (GCC). It cast doubt on the science and campaigned against greenhouse-gas reductions.
The GCC folded in 2002. Its line of argument enjoyed a final flowering last year, in a startlingly inane television commercial put out by the business-funded Competitive Enterprise Institute (CEI). It showed pictures of trees (breathing in carbon dioxide) and a happy little girl blowing dandelion seeds (breathing out carbon dioxide). The punchline was: “Carbon dioxide: they call it pollution; we call it life.”
These days very few serious businessmen will say publicly either that climate change is not happening or that it is not worth tackling. Even Exxon Mobil, bête noire of the climate-change activists, has now withdrawn funding from the CEI and appears to accept the need for controls on carbon emissions.
Businesses in every sector boast about their greenness. Annual reports elaborate on investments to offset companies’ emissions. Of course the companies that do this tend to be those with few emissions, such as banks and retailers. Some oil companies do it too, but they offset only the greenhouse gases that they emit in producing petrol, not the emissions from the petrol itself. Power generators, which emit CO2 on a huge scale, do not do it.
Yet the corporate world’s sudden conversion to greenery is not just fluff. Big emitters are beginning to price carbon into their investment plans, and to alter them accordingly. As a result, wind and solar energy are getting an enormous boost, the price of electricity produced from renewable sources is dropping fast and a flurry of projects to sequester carbon emissions from power generation is beginning to get under way. On the transport side, money is flowing into biofuels and electric cars.
Energy has become the hot new area for venture capitalists and universities. MIT‘s president, Susan Hockfield, has started an “energy initiative” to promote research into alternative sources, storage and cleaning up conventional sources; and student enrolment into energy-related courses has tripled over the past five years. In 2003, the most recent year for which figures are available, America’s power-generation industry spent less on R&D as a proportion of turnover than did the country’s pet-food industry, which suggests there is scope for more investment.
What is driving this shift towards cleaner energy? First, moral pressure. Thanks to a potent combination of science, Hurricane Katrina, a heatwave in Europe, Al Gore’s admonitions and starving polar bears, the fight against global warming has acquired the force of a religion enhanced by celebrity endorsement. Climate change has gone from being dull and marginal to cool and core. Businessmen, like everybody else, want to be seen to be doing the right thing, and self-interest points in the same direction. Firms that seem to be on the right side of the argument have a better chance of pulling in clever, idealistic young people to work for them.
Second, there is economic pressure. Governments increasingly accept the need to put a price on the damage carbon does, and make polluters pay that price. Fears about energy security mostly push in the same direction as those about climate change. Many governments are keen to reduce dependence on Middle Eastern and Russian oil and gas. That means encouraging energy efficiency and promoting domestic energy sources—which, aside from coal, tend to be the clean sort, such as solar, wind and biomass.
Europe already puts a price on carbon, through its Emissions-Trading System. The chances of a similar scheme being adopted in America rise with every passing hurricane. There is a plethora of subsidies on both sides of the Atlantic for clean-energy alternatives. Direct controls on emissions, for instance through vehicle fuel-efficiency standards, are being tightened around the world.
Yet emissions keep on rising. If greenhouse-gas concentrations are to be stabilised, then the carbon price or the support mechanisms for clean energy, or both, will have to rise or be adopted worldwide, or both. And if that happens, the returns on clean-energy investments will increase even further and the companies that have already invested in such businesses will have a head start over those that have not.
Moral and economic pressures have become intertwined, driving investors to push managers to go for cleaner investments. The Carbon Disclosure Project allows companies to report their emissions—and thus allows investors to see which companies don’t. A group of investors, organised by Ceres and the Investor Network on Climate Risk, wielding $4 trillion and including powerful funds such as CalPERS, the Californian public employees’ pension fund, and CalSTERS, the Californian teachers’ pension fund, discriminates in favour of cleaner firms. The recent buy-out of TXU, Texas’s main power-generator, led the company to abandon eight out of 11 planned coal-fired power stations because the private equity firm concerned, Texas Pacific, wanted to square the environmental movement.
Yet the shift towards greenery is also driven by more positive factors. For some huge firms, such as GE, Alstom and Siemens, a move towards clean energy spells opportunity. They sell power-generation equipment and aircraft and train engines. New regulations requiring companies to adopt cleaner processes will mean that capital equipment is replaced more quickly, to the benefit of such companies.
Even their customers increasingly realise that although climate change may push up their costs, it will also provide new opportunities—new markets, new technologies, new businesses and new money to be made. This could be disruptive. If carbon controls are tightened, the companies that will flourish are those that have positioned themselves well. In power generation that means companies such as Exelon and Pacific Gas & Electric, which have invested heavily in nuclear or renewable energy, whereas coal-heavy ones such as AEP will suffer. In the petroleum business, the winners will include BP, with its enthusiasm for renewables, and the losers Exxon Mobil. In the automotive industry, producers of fuel-efficient cars, such as Toyota, are more likely to do well out of carbon constraints than companies such as BMW.
Technological change may also allow some parts of the energy and transport business to invade each other’s turf. The power utilities hope to gain from the enthusiasm for plug-in electric cars, which could spell trouble for the oil companies. Biofuels, too, are a potential threat to them, not only because every farmer and forester may build a cellulosic ethanol plant in his backyard, but also because companies such as DuPont may prove better at making the fuels of the future. The power utilities, in turn, may suffer if fuel-cell technology turns cars into net producers, rather than consumers, of electricity. But these things will happen only if carbon constraints are tightened.
This survey will examine how climate change is affecting business, and how business can affect climate change. It will concentrate on industrial emissions rather than on agriculture and deforestation (which produce lots of carbon dioxide without involving business much) but will leave out air travel, on which this newspaper will publish a survey in two weeks’ time. It will examine what is driving change in the sectors responsible for most emissions, the nature and extent of that change, and its likely impact. It will argue that business has changed nothing like enough to have a chance of averting global warming—but that, given the right incentives, it can. Whether that happens or not will be largely determined in America.