Tag: climate change

The Potential Long-run Impact of California’s Cap-and-trade Plan

California’s first auction of greenhouse gas pollution credits is a landmark effort to combat emissions, says Wharton legal studies and business ethics professor Eric W. Orts. The auctions will be held quarterly and are aimed at reducing California’s greenhouse gas emissions by 30% — to 1990 levels — by 2020. The state expects to cut emissions to 80% below 1990 levels by 2050.

“This is a serious program with potentially large long-term implications,” notes Orts, who is also director of Wharton’s Initiative for Global Environmental Leadership. “It is the next biggest experiment in this area behind the European Union’s program.”

Wednesday’s auction by the California Air Resources Board is the culmination of efforts that began in 2006 to put in place a cap-and-trade mechanism to reduce emissions. Under this plan, the state sets a cap on total emissions and enables polluters to meet individual targets through a market to trade in pollution credits. The effort has overcome numerous legal challenges from businesses over the years, including a last-minute lawsuit from the California Chamber of Commerce to stop the auction. Opponents say the auctions are unfair to large businesses and a threat to jobs.

Major industrial facilities — including cement plants, steel mills and refineries — filed bids at the auction, according to a Los Angeles Times report. Results of the auction will be announced Monday. Polluting entities will initially receive 90% of their credits for free to help the businesses meet the costs of compliance. The auctions enable the firms to buy the rights for every additional metric ton of emissions at a floor price of $10 each.

The Golden State’s experience with the program could have “long-run influence,” although it may not prompt other states or countries to follow its path, says Orts. Several U.S. states have mechanisms to tackle emissions. They include the Regional Greenhouse Gas Initiative (RGGI) in the Northeast, involving nine states. By 2018, the RGGI aims to cut carbon dioxide emissions by 10% in the power sector through auctions of “emissions allowances.”

California’s auction may bring some pressure on the Northeast program “and perhaps arguments for a convergence of the two over time will occur,” Orts notes. But the main outcomes he envisions include increased pressure to create a federal climate change program to preempt state programs, and potential changes in business attitudes toward federal regulation.

To sufficiently incentivize businesses to curb emissions, much more than the California experiment will be needed, it appears. “Businesses need to get off the sidelines and engage proactively with government to address climate change in a rational, pragmatic, and efficient manner,” says Orts. “Piecemeal approaches are likely to be worse for business in the long run.”

Orts worries that the risks of climate change may not provide sufficient political incentive for legislative action. Environmental legislation has traditionally required a clear “disaster” or “crisis,” but climate change doesn’t have “easily identifiable disasters,” he notes. He points to fires caused by pollutants in Ohio’s Cuyahoga River in the late 1960s, and the Niagara Falls Love Canal scandal in the 1970s, in which toxic pollutants caused birth defects, nervous disorders and cancers. The Cuyahoga scare led to the creation of the federal Environmental Protection Agency in 1970 and the Clean Water Act in 1972, in addition to other such measures.

However, climate change analysis can help predict long-term increases in temperature or the potential for even larger and more frequent storms, according to Orts. “The very severe weather experienced in the U.S. in the past year just might provide sufficient political incentive and motivation to do something positive legislatively,” he says. He would like to see the federal government move toward adopting a “climate tax” or “climate charge” to address emissions control. A climate tax would provide flexible funding for measures related to both mitigation (e.g., investment in long-term alternative energy technology) and adaptation (e.g., the construction of sea walls to protect New York City and other vulnerable coastal cities), he notes. “Perhaps the time is right for compromise on this issue. Hurricane Sandy has perhaps provided a sufficient object lesson in the kinds of risks that ‘doing nothing’ will have for our long-term future.”

The budget deficit and need for revenue may also provide an opportunity “to move the ball forward” in emissions control, Orts suggests. California, for example, is expected to raise about $1 billion through its cap-and-trade auctions in the first year.

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Innovation and Climate Change: Will the Two Ever Meet?

What have scholars and business leaders learned about creating the right environment for technology to evolve? According to several speakers at the 11th Wharton Technology Conference, the last few decades have taught us plenty. But Rebecca Henderson, a professor of environmental management at Harvard Business School, challenged industry leaders to stop looking backward and tackle an important piece of technological innovation in real time. The pressing need: addressing climate change.

During a panel discussion titled, “Technological Change and Industry Evolution,” Henderson noted that the basics of developing a system to dramatically reduce pollution from greenhouse gases — finding the right price, managing the necessary research and development, and assembling an “eco-system” where all this innovation can best take place — are highly doable. The problem, she said, is that “the energy incumbents sit on top of this system, politically and structurally. We need to find a way to get through them.”

Addressing her fellow panelists, Henderson added: “We have a place to stand, to speak on this debate. We have expertise; we have understanding. This innovation theme plays extremely well with businesses and with firms…. We have a duty to be engaged.”

Henderson said that her main academic obsession in recent years has been understanding how the accumulated knowledge about entrepreneurship can be applied to the groups of scientists and others seeking to discover and then implement solutions to manmade climate change.

“Some of the models suggest that what could happen is very nasty,” she noted, referring to data that show greenhouse gases from human activity warming the planet at a rapid rate. That could lead to rising sea levels, more frequent natural disasters and lowered food production. The problem is a classic case of risk management, except that the threats are not concentrated within a company but spread across society. “But if we really get moving, I bet we can de-carbonize the economy for much less than people say.”

That is much easier said than done, she acknowledged – in part because there are large legacy companies in fields such as oil and other fossil fuels that have powerful economic incentives to thwart any radical changes in the way that energy is produced and consumed.  The way around that, she said, involves building on the knowledge that experts like those at the Wharton conference have developed about innovation. The challenges and opportunities for groundbreaking research in global warming mitigation are enormous because so many sectors are involved – not just energy but transportation, real estate and agriculture, among others, Henderson noted. “These are amazing opportunities to study really interesting stuff.”

“Relational contracts” between employees and their firms could also play a significant role in promoting better entrepreneurship on climate change, Henderson said. Traditional business theory — especially within the high-tech industry that developed at the end of the 20th century — says that companies agree to take care of the financial (and other) needs of key employees in return for their commitment to groundbreaking work. But Henderson believes it’s much more complicated than that.

“Economics is still dominated by people who fundamentally believe that … incentives are just a matter of getting the contract right around the qualitative metrics…. But this is a huge issue — it’s one of the reasons why we had the financial crisis.” A focus on short-term incentives can bring negative consequences, she said. Innovation in the technology world is more likely to come from employees who share a stronger bond and a personal commitment to the long-term goals of the company.  Knowledge about how these relational contracts really work could help encourage the innovation needed to tackle global warming.

What’s lacking, she added, is a better academic understanding of where this critical trust and commitment to long-term goals comes from, and how it can be better fostered. “We need to find ways to motivate [employees for the] public good, or at least a longer-term type of view. This focus on short-term, instantaneous optimization is really destructive when we look at some of these big problems,” such as climate change. “And I think it’s really destructive inside firms.”

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