Market Based Approaches to Combating Climate Change

Sustainability has woven its way into market mechanisms and it is changing business models. Almost a dozen stock exchanges around the world now require sustainability risk disclosure from listed companies and around 7,000 companies now produce annual sustainability reports through GRI. Carbon pricing, the long awaited holy grail of market based change is slowly becoming a global reality. Both to capitalize on opportunities and to mitigate against risk, sustainability is now a strategic imperative that no business can afford to ignore.

Transitioning to a low carbon economy may present challenges but it is also rife with opportunities and benefits. Leading companies are already moving away from fossil fuels and in the US they are supporting a White House initiative called the American
Business Act on Climate Pledge.

There are tremendous opportunities to innovate and capitalize on the growth of the green economy. “[I]nnovation is already playing a major role in bringing about new potential solutions to the climate crisis,” Al
Gore said. Companies are tapping into a host of green benefits and they are forging powerful new business models.

Businesses want regulatory clarity from government, however, it is hard for them to respond in the absence of clear policies.
As reported in the Huffington Post, a representative of the CDP said, “Contrary to conventional belief, companies would welcome regulatory
certainty and are planning for mandatory emissions limits in the
future.”

At the end of 2014 the President of Ceres Mindy
Lubber wrote, “there have been notable — often underreported — big capital market breakthroughs on climate change, water protection and other sustainability fronts. Stock exchanges requiring company disclosure on sustainability risks or bonds backed by electricity payments from solar rooftop panels may not at first glance seem compelling, but these are the mechanisms that move markets and help build a more sustainable future.”

Putting a price on carbon is a market based game changer and as Gore said, “it’s undeniably clear that there will be a price on carbon one way or the other.” The Huffington Post reported that three times as many companies are putting a price on their own carbon emissions in 2015 compared to 2014.

China is now among a number of countries that have imposed carbon trading programs. China has announced a national
cap and trade program that is scheduled to come online by 2017. The carbon trading initiative will reduce emissions from major industries and help expand investments in China’s already considerable renewable energy market.

“If China follows through in its stated intention to move its cap-and-trade pilot program into a nationwide program in two years, then we’ll see a new center of gravity in the global energy marketplace that will accelerate the shift towards a market-based set of policies that will speed up the phase-out of coal-based electricity.” Gore said.

A commonly heard concern is that countries that impose a carbon price will be less competitive than countries that do not. However, there are ways of leveling the playing field. The World Trade Organization rules explicitly allow the recapture of carbon taxes at the border, very much like a value-added tax. So even if there are no carbon taxes in a given country, those taxes could be imposed when a good is shipped abroad.