Sunday, August 6, 2017

Private Firms and Climate Change

         In this essay, I mean private firms as opposed to public organizations like Department of Energy and the United Nations, not private firms versus publicly traded firms.  The point of the essay is to argue that private firms should not attempt to react to climate change in setting their corporate policies.  This has become a point of contention because private firms have been under pressure by both sides of the spectrum to make business decisions with an eye toward their impact on the environment and the climate.  In my opinion, that is not wise for two reasons.  First, climate issues are immensely complex involving aspects of fundamental science, economics and statistics.  Second, and even more importantly, climate policies by their nature involve tradeoffs among a large number of competing groups of people.  For instance, requirements that a certain fraction of energy come from renewable sources tends to benefit the rich at the expense of the poor who may not be able to pay for more expensive power.  These tradeoffs involve not only people alive today, but many future generations. 

            The simple fact is that private firms, even the most sophisticated private firms, have neither the knowledge nor the standing to make decisions based on their impact on climate.  Attempts to do so, beyond engaging in public relations efforts to appear green, are almost certain to be counterproductive and unfair to various groups of people.
 
            Only national governments, or international organizations have the knowledge and the proper standing to determine climate policy.  They do so by setting the rules of the game through regulations and impacting market prices through taxes and subsidies.  Private firms, in turn, should take those rules as given and do the best they can for their investors and customers.  If it is concluded that under a certain set of rules insufficient effort is being made to limit the production of greenhouse gases, then the rules need to be changed to produce different incentives.  Private firms could then react to the new rules.  However, private firms should not base decisions on their perceptions of how those decisions will affect the climate.  If they did so, the result would be a hodge-podge amalgam of idiosyncratic decisions made by people not adequately trained and without the proper authority to make them.

            More specifically, climate policy depends on the answers to four groups of questions – none of which private firms are in a position to answer.

1.  Does human activity have an impact on the accumulation of greenhouse gases?

2.  Assuming the answer to question one is yes, what will be the impact of the human caused increase in greenhouse gases on global temperatures going forward?

3.  What will be the costs and benefits associated with rising global temperatures?  How will those costs and benefits be distributed across groups of people alive today and across future generations?

4.  What will be the costs of policies designed to combat rising temperatures?  Who should bear those costs?

            Questions one and two are difficult ones that require scientific specialists that virtually no private firms employ.  Questions three and four are exactly the type of questions that private firms should not be trying to answer.  Trading off the welfare across diverse groups of people is an issue that can only be tackled by governments, to the extent it can be tackled at all.  Asking private firms to address it through their climate related decisions is not only folly, it is altogether inappropriate.

            Finally, I claim that my conclusion is independent of views regarding the appropriate climate policy.  Both those who believe that aggressive steps must be taken to combat global warming and those who feel the problem is no more than a minor annoyance should agree that the debate requires a public forum and should not be held in the boardrooms of private firms.

1 comment:

Jean-Florent Rérolle said...

All this makes a lot of sense ! Is the essay you mentioned at the beginning of this post is the post itself or have you written a longer piece ? Thanks