[Co-authored with David Saddington]
In the closing moments of 2015 an 'historic' deal was brokered in Paris which not only set about limiting greenhouse gas emissions but also set about changing the fundamental ways in which we do business. Free market solutions are to play a pivotal role within the low carbon future sketched out in the Paris Agreement.
Twenty years after Michael Porter wrote about how being green can make businesses more competitive, we are now seeing the early adoption of these ideas. But despite this new "Green Capitalism", the question still remains: can business adequately address climate change?
Displacing the now tarnished concept of Corporate Social Responsibility (CSR), Green Capitalism goes further by welding together greenness and profit through efficiency and innovation. Harnessing this opportunity, pioneering firms are progressing beyond the static mindset of green compliance towards on-going sustainability dynamism, continuously re-assessing business conditions and the opportunities they offer. That includes seeing tighter regulations not as a threat but as an opportunity. As Porter explains:
"Static thinking causes companies to fight environmental standards that actually could enhance their competitiveness. Most distillers of coal tar in the United States, for example, opposed 1991 regulations requiring substantial reductions in benzene emissions. At the time, the only solution was to cover the tar storage tanks with costly gas blankets. But the regulation spurred Aristech Chemical Corporation of Pittsburgh, Pennsylvania, to develop a way to remove benzene from tar in the first processing step, thereby eliminating the need for gas blankets. Instead of suffering a cost increase, Aristech saved itself $3.3 million"
In this new configuration sustainability - including tighter regulations - becomes profitable, and most of it is common sense. Pollution = inefficiency, so going green means less waste, less cost, and more profit and competitiveness. Businesses are adapting to this new economic landscape, re-framing climate action though a lens of risk and opportunity. Innovation like this is the beating heart of capitalism, but is even this enough to stave off the worst effects of climate change?
The best regulation, according to Porter, starts off with looser standards but with a clear message that tighter regulation will follow. Although not legally binding, the Paris Agreement follows this approach, specifying reasonable emission reduction targets supported by a mechanism to ramp up ambition every 5 years. This creates an immediate imperative for action to drive down emissions and get ahead of the field.
"Fair enough," one might say. But how long is all this going to take? The problem is that Porter's approach is necessarily gradualist. Governments, he says, should; "Develop regulations in sync with other countries or slightly ahead of them. It is important to minimize possible competitive disadvantages relative to foreign companies that are not yet subject to the same standard."
The hope, of course, is that the Paris Agreement will cause all nations to move together, so avoiding any competitive disadvantages. But the non-binding nature of the Agreement almost certainly means that governments will remain extremely cautious. Fearing for the competitiveness of their industries, they'll effectively be restricted to only incremental regulatory moves. The problem, then, is that the potentially disastrous effects of climate change, moving at a much faster pace, will still likely outstrip them. And it's here that Green Capitalism runs aground. The dilemma between going green and staying competitive has not gone away because of the factor of time - time we do not have.
How, then, could governments introduce tough regulations that meet the fast pace of climate change, without harming business competitiveness?
Achieving this inevitably means governments must go well beyond incremental regulation - and that will mean that business can only innovate itself out of some of the costs. But the key to making the remaining costs acceptable is for governments to ensure a level playing field for all businesses globally: an unprecedented level of international cooperation is required.
Helping governments impose higher costs on business may, for business, sound like a pathological form of self-harming! But if those costs are borne by all businesses globally and so do no harm to any business's competitiveness, do they really matter? Especially if it means a sustainable planet for business to thrive in the long-term?
Creating this global level playing field need not be far-fetched if governments take a different approach to international climate negotiations. Rather than cooperation being arrived at under duress, a way needs to be found to make cooperation in every nation's self-interest. Do that, and nations will also have an interest in making any agreement legally binding too. But how?
Instead of the present single-issue approach which deals with carbon emissions alone, governments could take a multi-issue approach which would permit trade-offs to be made. If, for example, a global Currency Transactions ('Tobin') Tax were included alongside a carbon emissions agreement, the vast proceeds from the tax could be used to compensate nations that might lose out on the climate part of the agreement. All nations would win and businesses in those nations could in turn be compensated. In that way, immediate and drastic action to reduce emissions could be achieved, the agreement would be binding, and no nation or business would suffer a competitive disadvantage. Yes, business costs would be marginally higher, but no one would suffer a competitive disadvantage since all businesses globally would be on the same level playing field.
Enhanced global cooperation of this kind would be far from easy. What seems clear, however, is that the present single-issue approach fails to deliver sufficiently rapid action on climate change - the Paris Agreement, although a diplomatic break-through, still puts the planet on track for over 3 degrees C of warming.
Certainly, Green Capitalism is a step in the right direction, but without substantive multi-issue international cooperation it's likely to be too little too late. Too much faith is being put in the free market. Businesses should call upon governments to move swiftly towards win-win multi-issue international negotiations. It's time for business to demand that governments design international climate negotiations for success rather than failure.