The Economic Case for Climate Action

Sir Nicholas Stern and Bill Clinton both have it right. Global climate change has been our greatest market failure. Now it's our greatest market opportunity. Capturing this will require investment, management attention, and determination. When the necessity of implementing a new energy economy is understood, however, the entrepreneurial opportunities will be unprecedented. Far from the crushing cost that some have called the price of climate protection, the investments in using energy more productively, and the benefits of unleashing the new energy economy, will deliver impressive returns.

Programs to ensure that buildings use less energy, and to encourage the use of efficient cars, appliances, and machines generate immediate energy savings, but they also deliver economic development in cities and states. They create new manufacturing companies; building retrofits; new, decentralized energy systems; new farm income; etc. And they spur the creation of a dynamic, transformative clean energy economy that saves money, generates jobs, and confers economic opportunity.

The good news is that the transformation of the U.S. economy already is underway, and there is a strong business case for acting even more aggressively to protect the climate. Leading companies are cutting their costs, creating jobs, increasing profits, and strengthening shareholder value by lowering their carbon footprint.1

The Integrated Bottom Line - the Best Way to the Biggest Profit

Businesses that reduce their carbon emissions strengthen every aspect of shareholder value. The validity of this management approach is borne out by the recent report from Goldman Sachs, which found that companies that are leaders in environmental, social, and good governance policies have outperformed the MSCI world index of stocks by 25 percent since 2005. Seventy-two percent of the companies on the list outperformed industry peers.3

Shareholder value is enhanced when a company grows top-line sales, cuts its costs, better manages its risks, enhances labor productivity, drives innovation, and better manages its supply chains and stakeholders. These components of what is now known as The Integrated Bottom Line4 are all enhanced by saving energy and reducing greenhouse gas emissions.

Companies that implement climate-protection programs can enhance their financial performance by cutting energy and materials costs in industrial processes, facilities design and management, and fleet management. They can enhance core business value through sector performance leadership and first-mover advantage, gain easier access to capital, improve corporate governance, strengthen their ability to drive innovation, and improve government relations. Doing this helps companies retain competitive advantage, enhance their reputation and brand equity, and increase their ability to capture market share and differentiate their products. Such programs increase companies' abilities to attract and retain the best talent; increase employee productivity and health; improve communication, creativity, and morale in the workplace; and achieve better stakeholder relations.

DuPont found that using less fossil energy by using energy more efficiently saves money, because it costs less to implement the energy-savings measures than it does to buy and burn the fuel. In 1999, the company estimated that every ton of carbon it displaced saved it $6.

The Competitive Advantage

Wal-Mart realized that changing the incandescent bulbs in its ceiling fan displays throughout its 3,230 stores (forty bulbs per store,) could save the company $6 million a year. Said Chuck Kerby, the Wal-Mart employee who did the math, "That, for me, was an "'I got it' moment."

Managing the Risks of Climate Change

Failing to reduce energy use and tolerating carbon emissions is, in turn, a high-risk strategy for a business. Climate change will have an impact on the value of investments and could cost U.S. public companies billions of dollars from decreased earnings due to weather events, damaging storms, cleanup costs, etc.

An aggressive business posture to reduce greenhouse gas emissions is coming to be seen as a proxy for competent corporate governance. Climate protection programs can deliver better access to insurance, cost containment, legal compliance, ability to manage exposure to increased carbon regulations, reduced shareholder activism, and reduced risks of exposure to higher carbon prices. Pointing to insurance risks, in 2003, The Wall Street Journal reported, "With all the talk of potential shareholder lawsuits against industrial emitters of greenhouse gases, the second-largest re-insurance firm, Swiss Re, has announced that it is considering denying coverage, starting with directors' and officers' liability policies, to companies it decides aren't doing enough to reduce their output of greenhouse gases."6 The following years showed the prescience of Swiss Re's position as insurance companies were battered by losses from the increase in storm violence with 2005 as the costliest year on record for weather-related damage - costing insurers over $210 billion.7 Claims from weather-related disasters are now rising twice as fast as those from all other mishaps.8 The United Nations Environment Programme (UNEP) estimated that the cost of droughts, storm surges, hurricanes, and floods, and other losses linked to global warming were doubling every twelve years.

A single catastrophic event can cause insolvency in a business or a precipitous drop in earnings, liquidation of assets to meet cash needs, or a downgrade in the market ratings used to evaluate the soundness of companies in the insurance industry.9

As investors evaluate corporations on the basis of their preparedness for the associated risks and opportunities of climate change, they are increasingly recognizing that companies that do not adapt to a carbon-constrained world will be forced to compete with forward-thinking competitors ready to leverage new business models and capitalize on emerging markets in renewable energy and clean technologies. Large institutional investors are leading the way and have successfully waged shareholder campaigns urging companies to disclose climate risk and implement mitigation programs.10
The Investor Network on Climate Risk,11 for example, includes more than fifty institutional investors that collectively manage more than $3 trillion in assets. In 2007 Network members filed a petition to the Securities and Exchange Commission (SEC) asking the SEC to require companies to assess and disclose "material" financial risks from climate change. Such risks would include financial impacts from emerging carbon-reducing regulations, extreme weather, and other climate-related physical events, or growing global demand for low-carbon technologies and products.12

Another group of twenty-eight leading institutional investors from the United States and Europe,13 who also manage over $3 trillion in assets, announced a ten-point action plan in 2005 that calls on investors, leading financial institutions, businesses, and governments to address climate risk and seize investment opportunities. The plan calls on U.S. companies and Wall Street firms to intensify efforts to provide investors with comprehensive analysis and disclosure about the financial risks presented by climate change. The group also pledged to invest $1 billion in prudent business opportunities emerging from the drive to reduce greenhouse gas emissions.

Investors Drive Climate Change Protection

Even as early as 2005, such investor intervention and persuasion contributed to decisions by a number of large companies (Anadarko Petroleum, Apache, Chevron, Cinergy, DTE Energy, Duke Energy, First Energy, Ford Motor Company, General Electric, JP Morgan Chase, and Progress Energy) to make new commitments such as supporting mandatory limits on greenhouse gases, voluntarily reducing their emissions or disclosing climate risk information to investors.

Since 2002, the British NGO the Carbon Disclosure Project (CDP) has surveyed the Financial Times 500, the largest companies in the world. Initially, perhaps 10 percent of the recipients bothered to respond. In 2005, 60 percent responded. In 2006, 70 percent participated, and in 2007, 77 percent answered the survey. Ford Motor Company produced a major report detailing its emissions. Why the change? The liability threat of the Sarbanes-Oxley Act, which makes it a criminal offense for the board of directors of a company to fail to disclose information, including such environmental liabilities as greenhouse gas emissions, clearly played a role, but, perhaps more significantly, the CDP represents institutional investors with assets of over $31.5 trillion, up more than $10 trillion since 2006 and now representing almost a third of all global institutional investor assets.

In September 2007, the CDP released its fifth annual report. It found that the world's major companies are increasingly focused on climate change and that many see it as an opportunity for profit. The report noted, however, that U.S. firms tend to view climate change as a risk to their bottom line.

Nearly 80 percent of respondents around the world considered climate change a commercial risk, citing extreme weather events and tightening government regulations. Some 82 percent said they recognized commercial opportunities for existing or new products, such as investments in renewable energy. Overall, 76 percent said they had instituted targets and plans to reduce emissions, a jump from last year's 48 percent. Only 29 percent of U.S. respondents had implemented greenhouse gas reduction programs with timelines and specific targets.

Least Cost Energy: Solving the CO2Problem

The most effective way to reduce greenhouse gas emissions is energy efficiency. Every competent analysis has shown that efficiency costs far less than new supply. This conclusion was recently reaffirmed in a report by researchers from the U.S. Department of Energy, Oak Ridge National Laboratory, and Lawrence Berkeley National Laboratory. The study analyzed results from four recent engineering-economic studies of the potential for energy technologies to reduce greenhouse gas emissions, including a sector-by-sector assessment of specific technology opportunities and their costs, as estimated by the Five National Laboratories, the Tellus Institute, The National Academy of Sciences, and The Office of Technology Assessment.

It found that large carbon reductions are possible at marginal costs that are lower than the value of the energy saved. The report concluded that energy efficiency remains underused in every sector of the economy and is by far the cheapest option. New renewable supply, it found, has a net cost, but when combined with efficiency, can deliver climate protection at a profit. "In combination," the study concluded, "large carbon reductions are possible at incremental costs that are less than the value of the energy saved." It called for an aggressive national commitment involving "some combination of targeted tax incentives, emissions trading, and nonprice policies as needed to exploit these carbon reduction opportunities."15

Unleash the New Energy Economy

Combining efficiency programs with renewable energy enables companies to achieve truly large reductions. This combination is also key to unleashing the new energy economy of clean manufacturing and good jobs.16 Over 43,000 firms in the United States today are manufacturing and assembling renewable energy technologies. If the United States used renewable energy to stop global warming, such firms would create over 850,000 new, high-tech manufacturing jobs.

Renewable options are now the fastest-growing form of energy supply around the world, and, in many cases, are cheaper than conventional supply. Solar thermal is outpacing all conventional energy supply technology around the world. Modern wind machines come second, delivering over 15 gigawatts of new capacity to the United States in 2007, or three times what nuclear power did at the peak of its popularity. In 2006, researchers at the University of California showed that investing in renewable energy technologies results in ten times the job creation of investments in fossil or nuclear technologies.18 An analysis sponsored by the American Council on Renewable Energy found that in addition to eliminating the need for new coal or nuclear power plants over the next twenty years, renewable energy technologies could create $700 billion of economic activity and 5 million high-quality jobs by 2025.19 The Apollo Project, a coalition of environmental, business, and labor organizations, contends that an investment of $300 billion in federal funding for low-carbon energy, infrastructure, and urban development practices would add more than 3.3 million jobs to the economy, stimulate $1.4 trillion in new GDP, save $284 billion in net energy costs, and repay taxpayers in ten years.20

Meeting our needs for energy services with ample and affordable supplies is a challenging task, but it offers unparalleled opportunities. Americans balk at rules, taxes, mandates, and bureaucracy, but they rise to entrepreneurial opportunity. Investing in energy efficiency and renewable energy will generate economic development in companies and will generate new manufacturing businesses, jobs retrofitting existing buildings, opportunities to build and manage the new decentralized energy system, the ability to revitalize farm income from biofuels, wind farms, etc.

Traditional economists who use straight-line projections to claim that acting to protect the climate is costly should be challenged to show how they are not misleading the country and supporting policy that is as dangerous to business as it is to the climate. Unleashing the new energy economy will not only protect the climate at a profit; it will, as former President Bill Clinton asserts, be the greatest economic boom since World War II. There has never been a greater opportunity for America's entrepreneurs to do well by doing good.

*Footnotes