On Sunday, 300,000 activists took to the streets of New York for the People’s Climate March, the biggest climate protest in history, and the United Nations on Tuesday held the Climate Summit. In the spirit of Climate Week, we present insights from members of the Harvard Business School Business and Environment Initiative. The common theme: Why business leaders need to address the stubbornly touchy topic of climate change.
BY FOREST REINHARDT
You sometimes hear people say things like, “I believe in global warming” or “I don’t believe in climate change.” It seems odd to approach climate change in this way, as though it were a question of belief, like religion.
Most of the time when we confront uncertainty in life we think about hedging our bets, or buying insurance, or educating ourselves about the risks so that we can make better-informed decisions in the future. We use these approaches because they work. And in dealing with climate change we would have more sensible conversations, and more sensible actions, if we checked our ideologies at the door and approached the topic as we do any other topic involving investment under uncertainty.
We don’t know exactly how fast we are changing the climate. We do know that we are treating the atmosphere as though it were free. This used to be a reasonable way to behave: our numbers were small enough, and our technologies sufficiently primitive, that we could have no meaningful effect on the carbon cycle. Now, apparently, we do. The atmosphere’s ability to process our exhaust gases, once abundant, is scarce.
Scarcity isn’t a bad thing. Almost everything is scarce. That’s why for almost everything we have systems of property rights to give people the incentives to use the things—cows or houses or cars or computers—wisely. We don’t currently have anything resembling property rights for the ability of the atmosphere to absorb our carbon dioxide. But we should. If we priced that resource we would use it more sensibly.
We’ve been through transitions like this before with other natural resources. At one time we didn’t have markets for fish in the sea or trees in the woods: there were few of us and many of them, and it didn’t matter which of us owned them. That’s not true anymore, so we have markets for fish and timberland. The establishment of markets like these isn’t initially popular with everyone, but we quickly come to regard them as normal and to appreciate the benefits that they make possible.
Business has a critical role to play here, as the source of a lot of the innovation that improves people’s lives. But businesses cannot by themselves set the rules of the game. They face short-term economic pressures just like households, and their ability unilaterally to change their behavior is limited by dysfunctional governmental structures, and by the preferences of their customers. At the same time, sensible business people value risk reduction and predictability. They should want to empower governments to take sensible steps toward the establishment of institutions that put a price on the carbon dioxide.
Energy production and consumption, which are some of the most consequential human activities for climate, are the perfect arenas in which to unleash the innovative forces that are triggered by markets and prices. That’s because practically no one says, “I want to buy 50 million British thermal units.” Instead, she might say something like, “I want to go to Montana and take my family to Glacier Park.” She needs some energy for the plane tickets and the car (or the shuttle buses that the park service operates), but unless she has very unusual preferences she doesn’t want the energy itself-she just wants the services that the energy provides. So if we can figure out how to get her to Glacier using less energy, or make the energy she uses cleaner, she is just as happy.
And the way we will figure out how to get our work done with less energy, or to clean the energy we use, is by allowing businesses and individuals to figure out how best to do it. Top-down centralized government programs are a poor substitute for private and public innovation. But the innovation will be motivated only if prices reflect the true state of the world.
We are subsidizing our own consumption of fossil energy because we are unwilling to acknowledge to ourselves the full cost of that energy. The people paying these subsidies are our descendants. If they could vote in Senate elections or in shareholder meetings, they would fire us.
About the author: Forest L. Reinhardt is the John D. Black Professor at Harvard Business School.