How Should a Corporation Think of Global Warming?

With global warming having become Topic No. 1 of so many discussions, to me the big question is the degree to which behavioral changes are produced on three separate levels:

1. The individual level — where change seems well underway, but probably won’t amount to all that much without major institutional/structural changes.

2. The governmental level — where change will be talked and talked about, and even enacted, but if the past is any teacher, such changes will not necessarily be hugely efficient or even sensible.

3. The corporate level — where change will be produced as a result of both individual pressure (consumers clamoring for green products and procedures) and the governmental level (with new regulations).

The changes at level No. 3 will be a good indicator of just how well markets work. How will firms balance the extra costs of green behavior with the demands of consumers and government?

Jack and Suzy Welch, writing in their BusinessWeek column, give a really interesting answer to a question on this subject. They were asked by a reader how they felt about the realities of global warming, and what firms should do about it. Here, in part, is their reply:

We believe that, whether the impact of global warming ends up being mild or severe, companies have to adopt a “here it comes” mind-set and mount a well-reasoned plan. Any other response would be bad business.

Our reasoning is hardly original. It’s the same as Pascal’s Wager. Back in 1670, basically using game theory, the French philosopher argued that it was a better bet to believe in God because the expected value of believing is always greater than the expected value of not believing.

The same goes for global warming. If you accept it as reality, adapting your strategy and practices, your plants will use less energy and emit fewer effluents. Your packaging will be more biodegradable, and your new products will be able to capture any markets created by severe weather effects. Yes, global warming may not be as damaging as some predict, and you might have invested more than you needed, but it’s just as Pascal said: Given all the possible outcomes, the upside of being ready and prepared for a “fearsome event” surely beats the alternative.

The perfect analogy is globalization. Thirty years ago, rumbling began about the coming world marketplace where costs would migrate to the lowest bidder. Some companies put on blinders and insisted that their quality would prevent competition from the likes of Mexican and Asian factories. Eventually, of course, many of these companies got religion and changed their practices. But years of progress, profits, and jobs were lost in their delay.

Only time will tell if global warming will be minor or catastrophic; if it can be mitigated or will destroy the planet. … But one thing is certain. Companies shouldn’t wait to find out.


grabowcp

I don't see how this is analogous to Pascal's wager. If global warming turns out to be a non-event and there are no new markets created then your investment in new products was a waste and both a disservice to your competitiveness and stockholders.

Presumably if there are advantages to using less energy then companies should be doing it already. If there is a cost savings to be had then companies should be pursuing them regardless of the global warming debate. If they aren't pursuing these savings then there must be a reason.

mgroves

This makes a lot of sense, as "The Environment" is basically a religion already.

spot

If Pascal's wager were such iron clad logic then a lot more adults would still believe in Santa Claus.

pjc

I would start by asking how insurance companies think of global warming.

I don't know much about the insurance industry, but I suspect they are in charge of large amounts of capital and thus have influence as investors, and also have a vested interest in the more tangible outcomes of global warming, such as floods, storms, and such.

Does anyone on this list have the gumption that answer this question:

What are the big insurance companies doing about global warming?

double d

I have not seen Levitt comment on global warming. It looks like the perfect example of misapplied science or overinterpreted causal relationship.

demecj02

The insurance industry has an incentive to convince everybody -- especially competitors -- that global warming is real (which leads to higher policy premiums), regardless of the true probabilities.

eric1g

This may be off topic, but has anyone thought that bio-degradable packaging is exactly what we don't want to stop global warming?

Think this through, if we put carbon-heavy plastics into packaging, and then add tricky enzymes and bacteria to "eat" the plastic packaging, doesn't that carbon go back into the atmosphere? Shouldn't the anti-Global Warming crowd actually call for heavier less degradable plastic packaging as a form of carbon sequestration?

jenn

RE *8 - I believe a shift to biodegradable packaging is a shift away from oil based products and plastics in packaging, to materials made from other sources such as corn, agricultural waste, etc. By not using a carbon source that had previously been locked away for millions of years, one is not introducing new carbon into the carbon cycle. Yes, biodegradable things do degrade releasing CO2, and I think one would have to do a lifecycle analysis to determine the exact ratios of greenhouse gases emitted from each process to see what net CO2 is emitted from each process, but remember to make the non-biodegradable plastic, a certain amount of energy (the crude oil to supply the materials) had to be burned and refined as well. At least this way biodegradable materials use carbon that is already cycling through plants and the air in the carbon cycle. Not only that but then you have the added benefit of not destroying ecosystems by having critters choke on plastic bags and such, so I doubt the "Global Warming Crowd" has a big issue with biodegradable packaging.

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anothersteve

This whole debate sort of reminds me of the year 2k bug. The desired outcome of combatting the problem is to see no problem in the future. So when the desired outcome is realized, you can't be sure that the work actually did anything in the first place. The only difference is that with year 2k there was a defined date.

What bugs me though is that people seem to be treating this like Global warming is the only side-effect of putting waste in the atmosphere. While Global warming is a plausible side-effect, there are many other real side-effects that impact everybody such as smog and asthma.

frankenduf

I worry about the corporate level subsuming the governmental level- multinational corporations can functionally ignore governmental regulation simply by moving production overseas- and corporations can simply buy favorable regulation- just look at all the corporate cronies running the Bush administration

pparkman

anothersteve has it right; global warming is just a marketing concept that attempts to encapsulate the problems of overpopulation in a simplistic horror story that the "average" person can grasp. But, if it's effective in getting us to mitigate our bad behaviors and improve the sustainability of our society, I say, more power to it!
Anyone who has raised small children can attest to the power the Santa Claus myth has; we need a Santa Claus story for grown-ups because they certainly don't act sensibly without it.
Other comments in this thread illustrate the folly of believing in the perfection of markets. Markets are "good" in proportion to the freedom of the information that runs them. When pertinent information is unavailable or withheld (see Bush administration), the market must act sub-optimally. As we get better information about the effects of overpopulation, a free market will respond to make things better. But we will never have perfect information, and, therefore we will never have perfect markets. In the meantime, who do you think provides better information: scientists or economists?

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Paul Clapham

anothersteve has it totally wrong about the Y2K bug, though. I worked on that problem for about three years for the company I work for. It wasn't just a matter of closing our eyes and assuming things would work out. They wouldn't have worked out. And I am sure that the changes we made to our computer systems did make a difference. Other people in other companies did a lot of remediation too. So it really irks me when people who weren't involved just pretend it was a non-problem all along.

double d

Over population? Look out the plane's window next time your flying from NY to LA. Six billion people could live in Texas, and every hypothetical family of four would have 1/8 of an acre. A little more than 5,000 square feet. That would leave the rest of the planet for waste disposal and food and other resources. We've got room.

anothersteve

I sure hope I'm not implying that I think Y2K was a non-problem. The consequences of Y2K was just overly exaggerated, and there was little evidence in early 2000 to prove that a "non-believer" in 1999 was wrong.

anothersteve

I propose we put all our waste in double d's backyard.

mnestheus

As in Pascal's day, the inquisition does not lack for familiars , but this time they tortuously insist that it is their opponents who are consumed by zeal.

http://adamant.typepad.com/seitz/2007/03/which_way_would.html

nphebel

Individuals and companies will (and should) only change their habits when additional costs are imposed on them (a tax on negative externalities like CO2). $3/gallon isn't enough to push people out of SUVs. $10/gallon? maybe. Take the tax revenues and reduce income taxes accordingly so those who drive less (or not at all) will make money from doing so. Companies will do the same on their level. A CO2 cap and trade (or tax) will help companies plan for power plants in the future.

Trying to guilt people into reducing emissions won't work on a large scale, government must impose to assess the costs of emitting to the emitters. We already do so with NOx and SO2.

The only problem is that whole international thing...

Pretinieks

what is the expected value of believing that a twenty-dollar bill is lying on the sidewalk just around the corner?

coolhandluke

The problem with pascal's wager is that pascal only considers the infinite consequences of his own particular religion. There are lots of religions that have infinite consequences and not believing in them could also be as infinetely disastorous.

That being said, the "infinte consequences" argument is much more convincing in the case of global warning.

The only problem with Jack and Suzy Welch's argument has to do with whether the pollution amounts of various businesses are normally distributed, and the responses of businesses.

Take the average amount of carbon that a business produces and the random sample of 1000 of their pollution amounts and place them on an imaginary scale. Now put the 5 biggest polluters on the scale with them. If the average is vastly affected by the five, the 1000 businesses will have little or no effect on changing the amount of pollution in the air. You really have to get the 5 biggest polluters to change.

If the five have no effect then pollution amounts are normally distributed, and the only way any of them can affect change to the system as a whole, is if they take part in a collective action, either voluntary or forced by the government.

My gut instinct is that government action is required, and that those who voluntarily reduce emissions will do so at a high cost, and will not affect change to the system as a whole.

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Aristotle

Corporations could respond to global warming in various ways. If they believe it is a certainty they could taks steps to reduce carbon emissions. They could consider which costs would increase or decrease as a result of global wamring when they develop their business plan.

But they could also respond with "green" marketing. Products and/or add campaigns that would appeal to those who are concerned about climate change.

From a political perspective, there is not a governmental entity on the planet with both the power to enforce the drastic changes needed to mitigate global warming and the desire to do so. You heard it here first.