CSR and Global Warming Economics

Posted: Mar 10, 2007 12:01 AM
CSR and Global Warming Economics

Well, either you're closing your eyes

To a situation you do now wish to acknowledge

Or you are not aware of the caliber of disaster indicated…

While Harold was talking about the perils of a pool table in River City, today the “Music Man” would be talking about the perils of global warming. In fact, these lines could easily appear in the musical sequel to “An Inconvenient Truth” – sung by Al Gore of course. But just as Harold was a con-artist, the global warming activists have their own cure-all scheme that warrants the same skepticism given to the snake-oil salesmen of old.

The global warming scam has nothing to do with the science behind global warming. It has everything to do with the economics. Oil, coal, or any other energy source is an economic good that is no different than any other product or service. Issues of supply and demand dictate the quantity and price of current energy sources as well as the incentive for suppliers to create viable energy alternatives.

Then there are externalities. An externality is defined as a cost (or benefit) that is imposed on somebody that is neither the seller nor the purchaser of the product or service in question. The pollution and greenhouse gases emitted from energy use are negative externalities. However, the economic growth, wealth, and poverty reduction that individuals leverage from energy use are a positive externality. Perhaps more importantly, economic growth and pollution are inter-twined in complex ways. There is ample evidence from recent history that greater economic growth, past a certain threshold, can actually reduce the amount of pollution a society creates.

Appropriately incorporating these externalities is no simple affair. Blind demands to force nations and companies to exclusively focus on reducing the negative externality, while politically popular, may cause more harm than good.

Despite these complexities, the business leaders embracing the Corporate Social Responsibility (CSR) movement are getting into the act. Several of these executives are supporting global warming regulations through a movement called the U.S. Climate Action Partnership (USCAP). The USCAP alliance boasts major corporate members such as GE, Alcoa, BP, Caterpillar, DuPont, Lehman Brothers, and PG&E. One of the basic principles of the alliance is to encourage the U.S. to impose a carbon emissions cap and trade scheme.

Because major corporations, under the guise of CSR, have joined the alliance, there is a false impression that the free-market system has given the new regulatory regime its blessings and that the economic costs from capping carbon emissions is small. According to the USCAP report, “In our view, the climate change challenge, like other challenges our country has confronted in the past, will create more economic opportunities than risks for the U.S. economy.”

Espousing such “cost-free” rhetoric is the essence of the global warming scam. Perhaps man-made global warming requires drastic action. Nevertheless, these actions will not come without economic consequences and attempting to sell the regulations as if they “create more economic opportunities” than costs is disingenuous.

Energy use and economic growth go hand-in-hand. Carbon-based energy still supplies the vast majority of our current energy needs. Restricting our energy options by meaningfully capping the amount of carbon the U.S. emits will raise the country’s energy costs, at least in the short-run. As the recent rise of oil to over $80 a barrel attested, higher energy costs impose a net cost on our economy, and can be particularly painful for poorer families that are already having a difficult time making ends meet.

The Carbon emission regime could also backfire. Even if the U.S. implemented a carbon cap, worldwide carbon emissions may not be reduced; instead, the likely outcome is that carbon emissions will be simply redistributed from the U.S. to places like China and India. The economic costs borne by U.S. residents will consequently be borne in vain as there would be no net positive impact on the environment from the carbon cap policy. In fact, to the extent that the industrialized countries use cleaner technologies, the regulations could actually have a net negative impact on the environment.

In order to ensure that there is not a net negative impact on the environment, it will be necessary to impose carbon emission caps on the developing countries as well. Such a policy endangers the economic growth these countries so desperately need. China is a classic example. China’s economy has been growing at a furious pace. As a result, millions of people have been lifted out of desperate poverty. Capping emissions in China jeopardizes its economic growth and with it the country’s ability to further reduce the extreme poverty that still afflicts far too many of its citizens.

These trade-offs must be a central part of any global warming debate. Simply advocating for emissions caps while ignoring the real economic costs the caps create will not lead to sustainable environmental or economic policies. CSR is dangerous in this realm because it provides a credibly-viewed messenger that we can cap our carbon emissions without cost. We cannot.

Instead, we must ask some fundamental questions about our environmental policies: What is the problem? What are we asking for? Does this make sense? What are the implications? Are the tradeoffs worthwhile? With such basic questions answered, we will be empowered to intelligently design environmental and economic policies that do the most good. However, just as the typical “snake oil” customer discovered, if we don’t ask the right questions upfront, then we shouldn’t be surprised when the product fails to deliver on its promises.

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