World leaders and some 30,000 others from mixed interest groups will converge in Glasgow in November for the 26th annual climate summit of the United Nations, COP26 (“Conference of the Parties”).
This would be five years (allowing a Tokyo 2020-style pandemic hiatus of one year) since the 2015 Paris Agreement was adopted at COP21.
Much has been cynical about that agreement, its structure and non-binding nature. Important emitters such as China were effectively exempted from meaningful carbon-reduction commitments.
Some OECD countries (such as Canada) have paid lip service to the agreement but have done little. Still others (such as Australia) have made some progress in reducing emissions but have no long-term plans, relying instead on bumper-sticker slogans about “technology not taxing” and, more recently, dodgy Hiding behind accounting tricks.
Furthermore, it is difficult to see how the world solves – as economists say – the “coordination problem” without global agreements.
For nearly half a century, economists have been unanimous on what those agreements should include — a carbon price. The 2018 Nobel Prize in Economics awarded to William Nordhaus was delayed in recognizing this fact.
A price on carbon – in the form of a carbon tax or emissions trading scheme – is a way of harnessing the power of a market price mechanism that comes from emitting carbon (economic growth) along with the bad (climate change).
Set the price of carbon on the real social cost of carbon (taking into account all the ills from climate change) and the invisible hand of the market will balance the pros and cons. Think of it like Friedrich von Hayek meets Greta Thunberg.
But there is another, less dramatic way to harness market forces to reduce carbon emissions: disclosure.
Read more: Vital signs: a global carbon price could soon become a reality – Australia must be prepared
public disclosure act
The idea starts with this: Many consumers want to reduce their carbon footprint and are willing to pay for it. That’s why people recycle, use green energy even when it’s more expensive, buy low-carbon clothing, and drive electric cars. A bunch of people are willing to pay to be green.
The success of companies such as eco-friendly sneaker company Allbirds and electric vehicle maker Tesla is a testament to a market that meets these consumer preferences. But can we make it easier for consumers to express their environmental preferences? Can we turbocharge the market for green products?
A working paper published this month by the National Bureau of Economic Research suggests the answer is “yes.”
Written by Carnegie Mellon University economists Lavender Yang, Nicholas Muller and Pierre Xinghong Liang, the paper looks at the US Environmental Protective Agency’s greenhouse gas reporting program. Effective from 2010, it requires large carbon emitters (all power plants that produce more than 25,000 tons of carbon dioxide a year) to publicly disclose how much they emit.
The authors look at the impact of this disclosure program on the electric power industry, which accounts for 27% of all US emissions.
The result has been astounding. The plants under more scrutiny reduced their carbon emissions by 7%. Plants owned by publicly listed companies reduced their emissions by 10%. Large public companies such as the S&P500 stock index cut emissions even more (11%).
Accountability enhances environmental performance
Responding to investor concerns
The reason for this appears to be accountability to investors who want companies to be more environmentally responsible. This explains why emissions declined more for public companies, and even more so for large public companies, whose shares are more likely to be held by funds with ESG (environmental, social and governance) mandates.
Some of these investors have social preferences and want to invest their money in more sustainable companies. Others don’t care about the environment, but know that many do. Businesses that meet these consumer preferences benefit.
Read more: Vital Signs: 3-point plan to reach net-zero emissions by 2050
The dark side of this is that the decline in emissions by major plants was partially offset by an increase in emissions by plants under the 25,000-tonne limit that was not subject to disclosure.
In other words, companies responded to incentives provided by disclosure requirements. Those who could “hide” their emissions did not.
The lesson is that disclosure requirements work. They force companies to take ownership of their customers and investors, and face the reality of their emissions behavior. But we need to apply this to all companies, not just big companies.