Climate Change Measures: Good or Bad for Business?

Stephen DeAngelis

December 14, 2009

Amidst the endless arguments about how to cope with climate change there are very few things that opposing sides agree upon. Some opponents of measures aimed at stopping global warming don’t even believe that global warming is happening. They were delighted when emails from researchers on the subject were posted on the Internet that seemed to indicate that researchers were cooking the books to show that global warming was real. Of course, the researchers insist that they show no such thing. I will leave those arguments for others to debate. As a businessman, I’m more interested in knowing whether measures aimed at lowering greenhouse gas emissions are going to be good or bad for business. In a post entitled Building Global Prosperity, I discussed a BusinessWeek forum called the CEO Council. That Council was decidedly cautious about the potential effects of climate-related legislation. However, John Carey, writing for BusinessWeek, believes that “progress toward a climate deal would tip the balance toward renewables and create opportunities [“Why Copenhagen Will Be Good for Business,” 14 December 2009]. He reports that when delegates to the climate summit in Copenhagen began their meetings on 7 December they had access to teleconferencing technologies donated by Cisco Systems that allowed them “to confer face to face with counterparts in 100 places around the world.” Cisco, of course, was not being entirely altruistic. Carey notes that the technology demonstrates “how Cisco’s products can substitute for business travel, slashing carbon emissions.” Maybe so, but the fact that summit is being held so that people can negotiate face-to-face demonstrates that technology has not yet replaced the importance of personal contact. Nevertheless, Cisco sees business opportunities where others see dangers to profits. Carey continues:

“Most of the attention at the climate meeting … will be focused on government negotiations. With President Barack Obama pledging that the U.S. will cut its greenhouse gas output 17% by 2020 and China agreeing to improve its energy efficiency, the summit is now expected to make progress toward global limits on emissions. Cisco’s presence, however, illustrates a powerful subtext for the summit: Putting the world on a greener path can be good for business. More than 160 companies are showcasing solar panels, green buildings, and other wares at a ‘Bright Green’ technology bazaar in Copenhagen. That includes a delegation of U.S. businesses led by Commerce Secretary Gary Locke, who hopes to raise exports and U.S. competitiveness. ‘Clean energy may be the greatest economic opportunity of this century,’ Locke says. How fast the markets grow, however, depends on government policies—and government money.”

Utility companies that supply electrical power are concerned that new measures will cut deeply into their profits and they have raised the specter of much higher electricity prices. In commercials running in the United States, they have enlisted as spokesmen small business owners who rely on affordable power to present their message that the U.S. should resist measures that could result in higher prices. The big utilities are even playing the “job card” to tap into growing U.S. displeasure with the high unemployment rate. The question is: who is right? Will Copenhagen and other similar efforts be good or bad for business? The answer, of course, depends on which business you are in. If you are in a cleantech-related business, the future may look bright. If you run coal-fired power plants, you could be looking at significant infrastructure investments in the future. Businesses that look certain to have a bright future are those related to smart grids and those that measure corporate carbon footprints (see my posts entitled Smart Grids Take a Step Forward in the U.S. and Counting Carbon). Other businesses hoping to cash in on policies that promote a greener future include those touting carbon capture and storage (which is important for countries where coal-fired plants are likely to provide the lion’s share of power for years to come) and those involved with alternative or renewable sources of energy. Carey continues:

“Solar panel companies are salivating over India’s plan, announced on Nov. 23, to install 20 gigawatts of solar power by 2022. ‘India is potentially a tremendous market that we’re working on already,’ says Steven P. Chadima, vice-president of Suntech Power Holdings. The cleantech business will get a boost from two steps expected from the Copenhagen process. First, the meetings will encourage further use of cap-and-trade systems, raising the cost of polluting. That will tip the balance toward renewable power and energy efficiency, and, thanks to trading, enable emissions reductions to be sold for revenue. The second step will be a commitment that industrialized countries will start transferring billions of dollars a year to developing nations to help them become more efficient. That could touch off a global competition to sell, say, solar panels and carbon-capture technologies to India, or wind power to Brazil.”

In response to critics who say that such schemes could cripple economic recovery and increase the unemployment rate, Gregory H. Kats, senior director of cleantech investor Good Energies, asserts, “It will be pretty hard to argue that emission caps will tank the economy and hurt business when there are a lot of companies saying this is a huge business opportunity.” Obviously what you see depends on where you sit. Regardless of what happens in Copenhagen, the debates are going to continue. As Nobel laureate Paul Krugman writes:

“So, have you enjoyed the debate over health care reform? Have you been impressed by the civility of the discussion and the intellectual honesty of reform opponents? If so, you’ll love the next big debate: the fight over climate change” [“It’s Easy Being Green,” New York Times, 24 September 2009].

Krugman agrees with Carey that measures aimed at improvement the environment will be good for business. He continues:

“It’s important … to understand that claims of immense economic damage from climate legislation are as bogus, in their own way, as climate-change denial. Saving the planet won’t come free (although the early stages of conservation actually might). But it won’t cost all that much either. How do we know this? First, the evidence suggests that we’re wasting a lot of energy right now. That is, we’re burning large amounts of coal, oil and gas in ways that don’t actually enhance our standard of living — a phenomenon known in the research literature as the ‘energy-efficiency gap.’ The existence of this gap suggests that policies promoting energy conservation could, up to a point, actually make consumers richer. Second, the best available economic analyses suggest that even deep cuts in greenhouse gas emissions would impose only modest costs on the average family. Earlier this month, the Congressional Budget Office released an analysis of the effects of [the proposed] Waxman-Markey [bill], concluding that in 2020 the bill would cost the average family only $160 a year, or 0.2 percent of income. That’s roughly the cost of a postage stamp a day. By 2050, when the emissions limit would be much tighter, the burden would rise to 1.2 percent of income. But the budget office also predicts that real G.D.P. will be about two-and-a-half times larger in 2050 than it is today, so that G.D.P. per person will rise by about 80 percent. The cost of climate protection would barely make a dent in that growth. And all of this, of course, ignores the benefits of limiting global warming.”

Krugman goes on to discuss the dire predictions one hears about the economic effects of climate change legislation. He concludes that most of those predictions are absurd or rely on a campaign of lies. He cites a claim, for example, by Glenn Beck who claimed that the Obama administration had buried a “study showing that Waxman-Markey would actually cost the average family $1,787 per year. Needless to say, no such study exists.” Krugman concludes that “the truth about the economics of climate change is that it’s relatively easy being green.” One thing that most people can agree on is that the most accessible low-hanging fruit is simply using energy more efficiently [“Everyday efficiency seen as key to cutting carbon,” by Fiona Harvey, Cynthia O’Murchu and Simon Briscoe, Financial Times, 3 December 2009]. The authors report:

“Governments around the world could make rapid, substantial and relatively cheap cuts to carbon emissions by pursuing energy efficiency in place of more ambitious, but expensive, technological solutions, says a study. The analysis, based on data provided to the Financial Times by McKinsey, the consultancy, identifies more energy-efficient cars, lighting and buildings as the ‘low-hanging fruit’ in the global warming battle. … The McKinsey analysis says that, for the US, the initial upfront expense of buying an electric or hybrid car would be rapidly offset by lower fuel costs, which result in lower emissions per vehicle. It estimates a saving of €79 ($119, £52) for every tonne of carbon dioxide mitigated by 2030 through greater vehicle efficiency. For lighting, the saving is €50 and €44 for buildings.”

The accompanying graphic demonstrates where McKinsey determined the greatest savings would be.

Energy Savings through efficiencies

The most important lesson from the graphic is that countries, corporations, and individuals shouldn’t ignore the significance of doing things more efficiently in hopes that alternative and renewable energy sources will permit them to proceed in a “business as usual” manner. The lesson that shouldn’t be drawn from the graphic is that technology doesn’t matter. In another report, Harvey concludes that cleantech has come of age [“Business is a vital part of the solution,” Financial Times, 24 November 2009]. She writes:

“Clean technology has come of age. Low-carbon industries have overtaken aerospace and defence combined to become one of the biggest sectors of the global economy, according to research from HSBC bank.”

The news is surprising since, Harvey reports, investments in that sector are down.

“After four years of stellar growth, new investment in clean energy alone – the bulk of the sector – plunged from $41bn in the final quarter of 2007 to $13.3bn in the first quarter of 2009, according to New Energy Finance, a consultancy. Clean technology was beset with problems. The recession meant investment tailed off, and the credit crunch meant the loans this capital-intensive sector relies on were in short supply. Further, weakening economic activity meant the oil price plunged, which made clean energy look much dearer than conventional fossil fuels. Add gloom over the prospects of climate change regulation by governments, and the lack of confidence in green energy hardly comes as a surprise.”

Harvey doesn’t mention the food crisis that was exacerbated by an increase in biofuel production which caused a lot of people to reconsider the future of consumer crops as source stocks for biofuel production. Harvey goes on to explain why she asserts that the cleantech sector has come of age.

“The bounceback, too, reflects a range of factors. First was the economic stimulus that governments put in place. Many saw the stimulus as an opportunity to put their economies on a path of low-carbon growth, and create millions of ‘green’ jobs. According to HSBC, more than $500bn of the global stimulus was earmarked for ‘green’ schemes, from high-speed rail in China to the insulation of homes in the US. Jens Peers, head of KBC Asset Management’s environmental strategies team, which this year launched a global environmental fund, says: ‘We see the US stimulus giving a strong boost to wind and solar stocks, in particular.’ Lord Stern was one of the most prominent proponents of turning the stimulus green. The former chief economist at the World Bank and author of the landmark 2006 study of the economics of climate change that found taking action on emissions now would be less expensive than dealing with the effects of climate change later. He recommended that at least 20 per cent of stimulus spending should be green, a target that some countries – including South Korea and, by some estimates, China – appear to be meeting. The massive investment by governments, in turn, stimulated more private investors to take an interest in clean technology, and helped free some funding from banks. Another important factor was that the oil price plunge did not last. As conventional energy prices regained lost ground, alternative sources of energy started to look attractive again. Finally, governments also signalled their determination to regulate greenhouse gas emissions.”

Although governments are playing a big role in the bounceback, the future really depends on businesses if the movement is going to be sustainable. She writes:

“Businesses will be at the heart of this effort, and clean technology providers hold the key. ‘Governments have a central role to play, ensuring regulations are enforced, putting public stimulus funds into green technologies and investments, getting the tax system right, providing incentives and securing global co-operation,’ says Lord Smith, chairman of the UK’s Environment Agency. ‘But business has to be part of the solution too, and for that to happen the leaders of the world have to recognise that so long as it’s cheaper to pollute or to emit carbon, the greener, more sustainable options won’t be chosen.'”

Although most people think about smoke-belching power and manufacturing plants when they think about the need for cleantech, Harvey reminds us that the sector is larger than that.

“Clean technology is a highly diverse sector, encompassing activities from waste recycling to water filtration as well as the renewable energy and nuclear industries. The non-energy sectors of clean technology are also set for a boost. Water shortages are worsening around the world, in face of the demands of agriculture, industry, and a growing population. Technologies that help in recycling water, filtering it or in improving the efficiency with which we use it will be vital in making the most of increasingly limited supplies. Waste, too, is coming under the spotlight. In the European Union, for instance, the landfill directive means governments are under pressure to find new ways of dealing with their waste, which boosts the market for recycling and for large scale composting, and technologies for generating energy from waste. If markets, analysts and government leaders are to be believed: the future is bright, the future is green.”

In other words, whether you believe that climate change is happening or not there are plenty of reasons for you to support cleantech companies in their efforts to clean up the environment and keep the planet livable for generations to come. If enough people start thinking green, it could be good for business as well as the environment.