Does Business Need Government to Incentivize the Green Economy?

The business community is driving sustainability forward in response to market incentives. The question is how far can the private sector go in the absence of responsible leadership from government?

Businesses are leading first and foremost because they are looking to reduce costs and capitalize on opportunities. Other factors are also at play. Publically traded companies are beholden to shareholders and as such, they have a fiduciary responsibility to address threats. Investors are calling for nonfinancial information and shareholder resolutions are demanding more disclosure and actions to mitigate climate change as well as adaptation strategies to protect against potential risks.

We are seeing promising signs from a number of corporations that are engaged in climate action and seeing benefits from doing good. Businesses have extracted value from embracing facts and pursuing science-based goals and objectives. Well-positioned businesses are able to adapt to threats and take advantage of major trends. The economic case has been made repeatedly,  sustainability is a boon and the climate crisis is both a serious threat and a real opportunity. Both CEOs and shareholders have a vested interest in avoiding obstacles and exploring opportunities.

Financial inducements have also advanced sustainability. Incentives make sustainability compelling to business owners and stakeholders. This has augured action independent of an organization’s understanding of climate science or concerns about the ways their business activities contribute to environmental degradation.

Profit is an inducement to action. There is arguably no faster way to hasten the spread of sustainability than through incentivizing action from the business community. This can go a long way to encourage responsible action. Some businesses, particularly small businesses often see sustainability as a daunting challenge. For these organizations, we need to speak the language of short-term self-interest. This moves us in the right direction and offers measurable benefits.

People sometimes argue that the cost of action is prohibitive. However,  cost-benefit analyses must factor micro and macroeconomic realities. So for example, climate change disrupts supply chains and environmental degradation imperils economic prosperity. According to a slew of studies, the benefits of action far outweigh the costs of inaction.

“Climate change poses a severe risk to global economic stability,” said World Bank Group President Jim Yong Kim in a news release, adding, “We believe it’s possible to reduce emissions and deliver jobs and economic opportunity, while also cutting health care and energy costs.”

We cannot afford to deny the costs of climate change. A cost-benefit analysis demonstrates the value of climate action. Simply put the longer we wait the more it will cost. If we wait too long we risk horrific consequences and we may surpass tipping points from which we cannot recover.

Failure to act on climate change makes us vulnerable to a wide range of serious and potentially existential risks. Sustainability affords powerful benefits that include everything from future proofing to safeguarding supply chains. The World Bank is behind one of the many studies that emphatically make the point that acting on climate change is in our best interest.

“Climate inaction inflicts costs that escalate every day,” World Bank Group vice-president Rachel Kyte said, adding its study “makes the case for actions that save lives, create jobs, grow economies and, at the same time, slow the rate of climate change. We place ourselves and our children at peril if we ignore these opportunities.”

The Risky Business report came to a similar conclusion, saying, “The U.S. economy faces significant risks from unmitigated climate change.” Henry Paulson, is a Republican and one of the authors of the report, he served as treasury secretary under George W. Bush and he has called for climate action including a carbon tax.

“That means the decisions we’re making today — to continue along a path that’s almost entirely carbon-dependent — are locking us in for long-term consequences that we will not be able to change but only adapt to, at enormous cost,” Paulson argued in the New York Times. There are some who are optimistic even as we are forced to contend with profoundly irresponsible governments.

“Let me be very clear about it: all the progress made in the green economy over the last few decades is here to stay. While the changing political administrations are likely to bring some sort of change to the green economy, other factors are taking hold outside of public policy and regulation to cement the green economy as an indelible fixture of the business landscape,” Yaniv Vardi argued last year.

While sustainability is indeed an “indelible fixture of the business landscape” it is simply not enough. Mark Foster, Chairman of the IBLF Board of Trustees and former Group CEO, Accenture said in 2011, “It will be companies, not governments, which will engineer the quantum leap in how to manage the earth’s finite physical and financial resources…It will be companies that will bring under control the cost to society of lax corporate governance, dubious financial schemes, and outright corruption. Where a stable regulatory framework is absent or unstable, companies which will voluntarily regulate themselves, and work with governments to create a regulatory environment which incentivizes efficiency, integrity, and social equity.”

While Foster can be criticized for being overly optimistic, he is correct in saying that things like the cost savings achieved through efficiency and profits derived from innovation are powerful drivers. However, we have not seen the kind of progress that is capable of meeting the challenges we face.

Despite the prodigious activity in cleantech, we are not seeing the level of growth required to keep us within the upper-temperature threshold limit of 2 degrees Celsius. Led by price declines we have seen tremendous advances in solar, wind, and other renewable sources of energy. However, far more activity is required if we are to quickly scale clean power and replace fossil fuels with renewables within the coming decade.

The window in which we can safely burn fossil fuel is rapidly closing. If we continue down this road we do so at the expense of our long-term prosperity. The price we pay for dirty energy is considerable. It takes a toll on human health and ultimately risks destroying the natural systems upon which our economy depends.

While business can play an important role governments are required to provide incentives just as they have done for almost every major new technology and just as they continue to do for fossil fuels. Governments need to prioritize cleantech in the same way that they prioritize other sectors of the economy.

Governments in countries like Spain, Costa Rica, and even the United Arab Emirates are working to end their use of fossil fuels. State governments like California and national governments like France and Germany have demonstrated that there are tangible benefits associated with climate action. The governments of many European nations along with the governments of Asian countries like China, Japan, and South Korea have all supported cleantech research and development. However, for businesses that have to contend with upfront costs and uncertain profit horizons this patchwork of government action is insufficient to keep us within the upper threshold temperature limit.

Governments also have an essential role to play in enacting regulations, levying taxes, and passing legislation. They are the only body that can hold polluters accountable with national strategies like carbon trading schemes. Incentives are even more important than disincentives. Governments can incentivize the green economy through a policy mix that includes direct investments, tax breaks, and loans in support of renewable energy, energy efficiency, low carbon transport, and green buildings.

Businesses see the costs that they create yet do not have to bear as an “externality”. Carbon pollution that causes climate change is a good example. Only governments have the power to make an organization internalize these so-called externalities. Governments are instrumental in the widespread commercial development of low carbon technologies. The market is doing some of the work on its own, but only government can provide the kind of incentives that are capable of driving the green economy into high gear.

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