New Bottom Line Volume 6.9 – An Economic Approach to Slowing Global Climate Change

April 24, 1997

It’s not that I like to play the “my experts can lick your experts” game that so often characterizes public debate on technical issues — least of all on the question of global climate change. (See Weather or not: Risk and the physics of climate change (NBL 5.15, July 11, 1996) for a focus on scientific fundamentals.)

Nor do I have much truck with the all too common devolution of the environmental debate into a “quality of life” vs. “economic reality” slugfest. So it’s refreshing when analysis surfaces that links the two — recognizing, quite rightly, that we can settle for nothing less than both…and that the challenge of leadership is to find, or invent, a path that meets both needs

The fresh perspective comes this time from economists and engineers, not environmentalists.

According to Union of Concerned Scientists, “No sooner was it announced that the US would pursue legally binding commitments to reduce heat-trapping gas emissions at the international climate change talks last July, than the Administration’s position was attacked by industry and science skeptics who benefit from the status quo. One of the critics’ main arguments is that taking action to reduce greenhouse gas emissions is too costly — our economy will be seriously harmed, they argue; the American standard of living will be lowered; and untold numbers of people will be thrown out of work.”

How satisfying, then, that 2000 prominent economists — including six Nobel Laureates — have signed on to a “Economists’ Statement on Climate Change” (released in February 1997), noting that “As the climate debate unfolds, it is imperative that public policy be guided by sound economics rather than misleading claims put forward by special interest groups.”

The statement asserts that greenhouse gas reductions are feasible without harming the American economy, and recommends market-based policies:

“I. As economists, we believe that global climate change carries with it significant environmental, economic, social, and geopolitical risks, and that preventive steps are justified….

“II. Economics studies have found that there are many potential policies to reduce greenhouse-gas emissions for which the total benefits outweigh the total costs… without harming American living standards, and these measures may in fact improve U.S. productivity in the longer run.

“III. The most efficient approach to slowing climate change is through market-based policies… such as carbon taxes or the auction of emissions permits. The revenues generated from such policies can effectively be used to reduce the deficit or to lower existing taxes.”

A recent analysis by Stanley J. Feldman, Peter A. Soyka, and Paul Ameer of ICF Kaiser International, Inc. asks a related question of more immediate concern: “Does Improving A Firm’s Environmental Management System And Environmental Performance Result In A Higher Stock Price?” Based on applying their model to more than 300 companies of the Standard & Poor’s 500, they conclude that “adopting a more environmentally proactive posture has, in addition to any direct environmental and cost reduction benefits, a significant and favorable impact on the firm’s perceived riskiness to investors and, accordingly, its cost of equity capital and value in the market place.”

The ICF Kaiser model considers environmental activities, environmental performance, communication to investors and others, the firm’s riskiness, and its cost of equity capital. The authors assert that “investments in environmental management and improved performance can be justified, in many cases, on purely financial grounds…that firms will increase shareholder value if they make environmental investments that go beyond strict regulatory compliance.”

Their language is cautious, yet compelling: “Our work suggests that environmental improvements such as those we have evaluated might lead to a substantial reduction in the perceived risk of a firm, with an accompanying increase in a public company’s stock price, of perhaps five percent….If the initial capitalization of the company were $1 billion prior to the environmental improvement, after such improvement, stockholder wealth could increase by as much as $50 million.”

There is of course no single cookie-cutter approach suitable for all firms, and implementation of change strategies is inevitably challenging. But what CEO can turn away from low-risk opportunities to increase shareholder value?

For information about the Economists’ Statement, contact: “Redefining Progress” at 1 Kearny Street, 4th floor, San Francisco, CA 94108, telephone: 1-415-781-1191 fax: 1-415-781-1198, email: [email protected]. For the ICF Kaiser report, click here or call 1-703-934-3669.

(c) 1997 Gil Friend. All rights reserved.

New Bottom Line is published periodically by Natural Logic, offering decision support software and strategic consulting that help companies and communities prosper by embedding the laws of nature at the heart of enterprise.

Gil Friend, systems ecologist and business strategist, is President and CEO of Natural Logic, Inc.

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