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Management in Practice

Is Climate Change Too Big for Business?

Investors are starting to see opportunities in efforts to combat climate change, but markets may not provide the incentives for the needed transformation of the economy. Frances Beinecke, the former president of the National Resources Defense Council, argues that while every sector will be involved in curbing carbon emissions, public policy must set the right framework.

The agreement reached at the UN climate talks in Paris is widely seen as historic—the first commitment by world nations to lower greenhouse gas emissions and limit climate change. But for the pledges made by each nation in Paris to become reality, an unprecedented transformation of the economy will be required, starting with technological breakthroughs and huge amounts of investment.

According to Fred Pearce, writing in Yale Environment 360, the most desirable outcome of the Paris agreement would be to “unleash the forces of capitalism in the name of fighting climate change and achieving a low-carbon economy. It could eventually make national targets and policing them almost irrelevant.” Edward Cameron of Business for Sustainable Development told Pearce that certainty around a shift to a low-carbon economy would "unlock trillions of dollars" from private investors ready to create that new global economy.

And perhaps that is starting. Bill Gates pledged $1 billion and raised another $1 billion from other businesspeople to fund a public-private effort to spur R&D into new green technologies. Michael Bloomberg is leading a taskforce aimed at clarifying the financial exposure of companies in the face of climate change.

But many observers think that the Paris agreement’s flexible framework of pledge and review doesn’t offer the level of certainty to fully unleash the forces of capitalism. Elon Musk, chairman of Solar City and CEO of Tesla Motors, is in that camp. He is pushing for a global tax on carbon, arguing that the current system incentivizes bad behavior. Forbes quotes Musk as saying, “It’s kinda like if we had high taxes on fruits and vegetables, and low taxes on cigarettes and alcohol. That wouldn’t make sense. That’s sort of what we have right now with respect to energy.”

Academics are making similar arguments. In the New York Review of BooksYale economist William D. Nordhaus wrote, “Global public goods differ from national or local public goods because there are no mechanisms—either market or governmental—to deal with them effectively. The fundamental reason for the lack of progress is the strong incentives for ‘free-riding.’” Nordhaus believes that a universal carbon price of $40 per ton is the way to overcome that free-riding.

Yale Insights talked with Frances Beinecke, the former president of the National Resources Defense Council and a scholar at Yale, about the roles for each sector. She said, “Climate change is, I think, the most urgent issue of our time because it will affect literally every person on the planet.” She added, “In order to address the problem it really requires everyone who is a leader in every sector.”

Beinecke pointed to one industry as the key. “What we really need is a transformational change in the way energy is produced and used throughout the world.” Beinecke sees a greener energy sector coming, predicting that between 2020 and 2030 renewable energy implementation will accelerate significantly. “Both solar and wind are competitive with fossil fuel energy sources at this time,” she said. On top of that, prices for renewable energy infrastructure are coming down even as efficiency increases.

However, Beinecke said, governments must set rules to spur the necessary changes. “This is so fundamental that it cannot be done company-by-company in a voluntary way. It’s just not going to work,” Beinecke said. “Fundamental business design has not changed yet. I think that will come as a result of public policy both at the international level and at the country level.”

Beinecke sees a crucial psychological shift starting to take place. For a time, business only saw climate change as a problem. “It is a problem, but it is also an opportunity,” she said. “There is a lot of enthusiasm for figuring out what are the solutions and putting them in place.”