by David L. Levy

Despite the mounting evidence of severe climate change, there is a funding crisis for potential solutions. The Department of Energy released data at the beginning of November showing that global emissions of CO² rose 6% in 2010, despite the ongoing economic recession. This trajectory is higher than the worst case projections from the Intergovernmental Panel on Climate Change (IPCC) in it’s 2007 Fourth Assessement Report. The impacts are already being felt. A new IPCC report concludes that climate change is causing more extreme weather, especially heat waves, heavy precipitation, and coastal flooding (though the super-cautious IPCC hedged on hurricanes).

Yet November also witnessed setbacks for two key clean energy technologies. Beacon Power, a Boston-area developer of flywheel energy storage and power management systems for the grid, filed for bankruptcy the same week that the DoE released the grim emissions data. Just a few days later, the FutureGen 2.0 project, the leading US effort to develop commercial scale Carbon Capture and Storage (CCS) technology, suffered a major setback when the Midwestern power company Ameren announced that it could not provide an old power plant for the project due to financial difficulties. (Update: While Ameren will no longer be financially involved in the project, they are currently negotiating how the power plant may still be utilized for the project).

One important lesson is that public policy must be based on a clear understanding of the challenges facing the clean energy sector and the impact of regulation and programs on investment decisions and corporate business models. In the absence of a global framework for regulating emissions, the future of the planet largely rests on choices by private firms and investors regarding which technologies to pursue and commercialize. The clean energy sector, however, faces a host of risks that make investors wary. The risk is not that climate change is going away as a long-term driver; the problem is that there are large market uncertainties regarding the future of regulation and subsidies, which technologies will emerge as large-scale, low-cost, low-carbon alternatives, how consumers will respond, and how competitors will react.

Despite the woeful underfunding of clean energy research in the US, there is still a plethora of exciting technologies being developed in the laboratories of universities, government centers, and the private sector. For more mature technologies, large subsidies are flowing to commercial installations of solar and wind, perhaps too large, according to a critical New York Times article last week. While these subsidies are reducing costs by accelerating the technologies down the learning and scale curves, they tend to reinforce the dominance of early, low-cost “winners” in the marketplace, and provide little help for less mature but promising emerging technologies, such as Solyndra’s CIGS thin film glass tubes. As a result, these subsidies also tend to suck in a lot of low-cost Chinese imports rather than stimulate US production or research.

A structural problem, as Daniel Goldman wrote in an earlier Climate Inc. post, is the proverbial “valley of death” between lab research and commercial production, where “neither government, venture capital firms nor capital markets have tended to bear the risks associated with providing equity capital, which can amount to hundreds of millions of dollars, for initial deployment of capital intensive new clean energy technologies at commercial scale – described here as “first project commercialization.”  The US venture capital model evolved primarily to support the emergence of the software industry, which has relatively low capital intensity, but there is not currently an adequate private (or public) sector solution for clean energy. It’s far too early to know whether, for example, flywheel technology is better than batteries or compressed gas for power storage – and maybe there is a role for each of them, to meet different needs in different locations. But a market-based system that relies on private sector funding is failing us if it cuts off development of promising technologies before they even reach commercial scale testing.

Beacon Power has not yet closed its doors, and is trying to continue operating under bankruptcy. Since the summer, it has been testing a 20-megawatt flywheel plant in Stephentown, N.Y., which can absorb and supply power from the grid very rapidly, and is therefore valuable in frequency regulation. Another installation is planned for Pennsylvania. The more intermittent wind and solar that is connected to the grid, the greater the need for short-term storage solutions. Flywheels are able to deal with rapid fluctuations and match supply and demand more effectively and reliably than batteries, such as those from A123, or gas-fired plants (while reducing emissions from rapid cycling of gas plants). A few of the the 200 flywheels in Stephentown have experienced problems, but the system has performed well overall.

Until recently, Beacon Power has not been able to monetize the full advantages of flywheel storage. It was only on October 20^th that the Federal Regulatory Energy Commission (FERC) approved a change in regulations that makes grid operators pay, not just for the amount of power in reserve, but also for its effectiveness in grid stabilization. According to Bloomberg, this could double Beacon Power’s revenue and make it easier to find financing. But the ruling, which has been in the works since February, was too late to keep Beacon solvent. If we are to rely on price and market mechanisms, we need to build them to serve the planet.

The lack of a clear regulatory framework has also hurt offshore wind power in the US. Even now that the 450 MW Cape Wind project is most likely moving ahead, the damage from more than a decade of delays and uncertainty, resulting in millions of dollars in costs and legal fees, have probably dampened investors’ enthusiasm. The latest delay stems from a court ruling that the FAA needs to take another look at aviation hazards. With further financing still required for the $2.6 billion project and the company still negotiating to sell half the power output, the future is not yet secure. Meanwhile, the European Wind Energy Association expects annual investments in the European offshore wind industry to triple to reach 10 billion Euros by 2020.

Given the urgency of the situation, public policy needs to shape the market context in order to steer private investment decisions. We are not heading in the right direction, however. In the short term, the ongoing recession appears to be diverting attention from the climate issue and draining government, business, and consumers of resources. A new Ernst and Young report estimates that the recession could lead governments to cut spending on climate change by tens of billions of dollars. It’s more important than ever to focus government resources, and commercialization of carbon-reducing technologies is a critical area. But in addition to financial support, the problems facing Beacon Power, FutureGen and Cape Wind highlight the importance of reducing regulatory uncertainty.

By David L. Levy

Originally published in Transparency International’s Global Corruption Report 2010: Climate Change, and reprinted by permission. This report explores risks related to tackling climate change, from international policy-making to national level mitigation and adaptation strategies,   with a special focus on the forestry sector.

A global transition to a low-carbon economy requires the large scale mobilisation of financial, technological and organisational resources, many of which are concentrated in the hands of large multinational corporations. Of the US$500 billion in annual global investment needed over coming decades to keep warming within a 2⁰ C limit, more than 80% will have to come from private sources.[1]

Climate change presents a profound strategic challenge to business, however. Measures to control the emissions of greenhouse gases (GHGs) most directly threaten sectors that produce and depend on fossil fuels, such as oil, power and transportation. Managers in energy-intensive industries, including cement, chemicals, paper and metals, have also been concerned  with the regulatory risk of higher costs for fuels and lower demand for energy-intensive products.

After years of hostility to any carbon regulation, government incentives, competitive pressures and non-governmental organisation (NGO) campaigns have led many firms in the last decade to craft business models that exploit potential market opportunities in low-carbon products and services. This shift in corporate political and market strategy has created a virtuous cycle, in which strengthened business coalitions have grown supportive of more stringent climate policy and widened the political space for action.

This cycle is fragile, however, and the momentum of this corporate conversion is already in danger of stalling. Climate change creates considerable competitive risk, as changes in prices, technologies and demand patterns disrupt traditional business models. Investing in new technologies can be a treacherous business. Automobile manufacturers, for example, find that they are dependent on existing infrastructure, creating barriers for electric vehicles, which require a network of charging stations. Multiple clean energy technologies are in competition, such as solar thermal versus photovoltaics, and ‘thin film’ versus ‘crystalline silicon’ solar cells, making it hard to pick winners.

Moreover, companies successful in one area of business cannot easily transition to new products and markets. Corporate managers know that the key lesson of business strategy is to stick to your ‘core competences’. Exxon lost money when it tried to diversify in the 1970s energy crisis,[2] and now understands that its expertise lies in geology, hydrocarbon chemistry, extraction and distribution. Rather than embrace radical change, it has enhanced its capacity in related low-carbon technologies. In 2009 Exxon announced a US$600 million algae biofuels project with a biotech company, and a US$41 billion acquisition of a major player in the shale gas sector.[3] These investments represent a better strategic fit than solar or wind, though they entail cross-industry partnerships to acquire external capabilities.

Similarly, oil and gas companies have befriended the coal industry as proponents of carbon capture and sequestration (CCS) technology,[4] as the expertise to extract fluid fuels is closely related to that required to re-inject CO₂ underground. Although many of these emerging technologies will have to be proved to be environmentally safe and financially feasible, the model for cross-industry collaboration is strong, allowing companies to share risks, gain capabilities and shoulder the fixed costs of research and development.

Climate change presents a host of strategic uncertainties regarding the unfolding science, regulation, technological developments and competitor reactions. Thus, when British oil company BP committed itself to investing in solar and wind energy in 2000, it was competing in the same global oil market as Exxon, but perceived the risks very differently. BP plotted a strategy for a world in which mandatory emission controls appeared inevitable, carbon would carry a price tag, and consumers would demand low-emission products. A decade later, though, with growing regulatory uncertainty and its solar business far from profitable, BP has pulled back from its renewable energy investments, instead increasing its investments in Canadian oil sands.[5]

National and regional authorities have a vital role to play by implementing policies that provide incentives for positive corporate action. Bolstered by tax policies in Denmark and Israel, the company Better Place is developing a national replaceable battery infrastructure for pure electric vehicles that allows consumers to pay according to driving distance.[6] The Vélib bike rental system in Paris and the US-based Zipcar car rental firm similarly engage business and government in partnerships that transform markets and overcome systemic obstacles in infrastructure, scale and incentives.[7]

These initiatives move towards a service- rather than product-based business model. Moreover, they trigger competitive dynamics with far-reaching effects. Better Place has signed a deal with Renault–Nissan to supply the electric cars, and other car companies, fearful of falling behind, are accelerating their own plans for plug-in hybrids and pure electric vehicles.

Major companies in the US power sector have adopted a more proactive position on climate change in recent years. Duke Energy, Exelon and PG&E have joined initiatives led by the US Climate Action Partnership and the Pew Center on Global Climate Change that aim at emissions reductions by deploying renewables, boosting generation efficiency and implementing demand-side management (DSM) policies.[8] These companies might anticipate a future national cap-and-trade regime and carbon price, but they face more immediate and local pressures, notably escalating renewable or alternative energy portfolio standards in more than 30 US states.[9]

US states are also attempting to restructure power markets to provide incentives for energy efficiency. Most frequently, this takes the form of small ‘benefit charges’ being added to bills, which are used to subsidise consumer efficiency upgrades.[10] Several states are also examining California’s experience with rate decoupling, which rewards utilities with higher power prices for implementing energy efficiency and DSM measures.[11]

The lesson for public policy here is the importance of structuring incentives and managing expectations to shape business models and channel corporate resources in a positive rather than counterproductive way. In the face of global policy uncertainty, a key task is to maintain momentum by creating a predictable business and regulatory environment.

Business realises the dangers of the proliferation of multiple regulations, standards and carbon trading schemes, and large firms are joining groups that press for clear, predictable and coherent climate policy. In 2007 more than 60 of the world’s largest companies, including BP, Siemens, GE and Unilever, launched Combat Climate Change (3C), with the goal of developing ‘a worldwide policy framework to replace the Kyoto Protocol from 2013 and onwards’.  In the absence of an international treaty, the onus falls on the private sector, along with local and national governments, to seek novel business models that stimulate the transition to a low-carbon future.

[2] Wall Street Journal (US) ‘Exxon chief makes a cold calculation on global warming’, 15 June 2005.

[3] MarketWatch.com, ‘Exxon Mobil lays $600 million on the line for algae fuels’, 14 July 2009; CNNMoney.com, ‘Exxon to buy XTO in $41 billion deal’, 14 December 2009.

[4] See, for example, www.globalccsinstitute.com.

[5] BusinessGreen.com (UK), ‘BP shrugs off anti-tar sands shareholder resolution’, 16 April 2010.

[6] See Betterplace.com.

[7] NPR.org (US), ‘Paris’ popular bike program may inspire others’, 15 September, 2009; Government-fleet.com (US), ‘City of Baltimore launches car sharing program’, 1 July 2010.

[8] See www.us-cap.org/about-us/about-our-members and www.pewclimate.org/companies_leading_the_way_belc/company_profiles.

[9] Pew Center on Global Climate Change, ‘Climate Change 101: State Action’ (Arlington, VA: Pew Center on Global Climate Change, 2009).

[10] Ibid.

[11] See Pew Center on Global Climate Change, ‘Decoupling in detail’, available at www.pewclimate.org/what_s_being_done/in_the_states/decoupling_detail

The Boston University Pardee Center recently released this report on Governance for a Green Economy:

by David L. Levy

A global transition to a sustainable economy requires the large-scale mobilization of our financial, technological, and organizational resources. Climate change is one of the major concerns of this century, and it has been estimated that annual global investment of more than $500 billion will be needed over the coming decades to keep warming within a 2 degs. C limit. The vast scale of these investments and the need to integrate sustainable technologies, practices, and products across the supply chains of every economic sector highlight the importance of creating governance structures that will redirect corporate resources toward sustainability.

Growing concern about an international “governance deficit” has fuelled this embrace of private resources and capacity. It is important, however, to recognize that large companies are already, de facto, highly engaged in the fabric of global environmental governance systems in their roles as polluters, investors, suppliers, buyers, innovators, lobbyists, and marketers. Private decisions over products and processes, technologies and research, and distribution and sourcing have vast environmental consequences with wide societal ramifications and broad geographic reach.1

The Complexity of Carbon Lock-In

It is our current governance systems over energy and transportation that produce carbon lock-in, the “interlocking technological, institutional and social forces…that perpetuate fossil fuel-based infrastructures in spite of their known environmental externalities.”4 Lock-in is more than an economic and technological phenomenon. Institutions such as the mass media, unions, government agencies, and professional certification bodies generate standards, rules, norms, routines and cultural practices that stabilize the dominant technologies. The automobile, for example, is intimately connected to our patterns of work, leisure, and shopping. Organizations with vested interests associated with existing technologies, such as industry associations and unions, become powerful actors who perpetuate the status quo. An understanding of the complexity, interdependencies, and inertia of the current system highlights the challenges of a sustainability transition.

Against this background, what governance institutions and mechanisms could generate change? Here we must heed Machiavelli’s warning to avoid wishful thinking and start with the world as it is. It is pointless to preach to consumers to abandon their cars and plane travel, or to admonish companies to give priority to sustainability. Economic activity is deeply embedded in economic and social institutions, and companies are constrained by corporate governance, capital markets, competition, and the wider consumer culture. It is naïve to simply specify “ideal” governance institutions that would, for example, create a high global price for carbon, mandate clean production systems, and empower non-financial stakeholders. Meaningful change requires careful study of the contested terrain of corporate environmental practice and governance, and a long-term strategy to win new allies, reframe the issues, shift norms, realign economic incentives, and craft new rules and oversight mechanisms. What we need is a strategic approach to building governance for a green economy.  

From Regulatory to Radical: Four Approaches

Four governance mechanisms can potentially shift corporate behavior toward sustainability. First, regulation can direct companies to meet specific goals, such as renewables in the power sector, or fuel efficiency for vehicles. Second, economic incentives for sustainability can be structured through taxes, subsidies, or new financial instruments such as carbon markets. Third, public pressures can lead companies to shift their norms and practices, for example, by embracing information disclosure initiatives such as the Global Reporting Initiative (GRI) and the Carbon Disclosure Project (CDP). The fourth and most radical approach is to restructure the foundations of corporate governance so that productive organizations internalize the drive to serve multiple stakeholders and goals, including the workforce, the community, and the environment.

Each of these approaches has possibilities and limitations. Regulation is the most traditional means of influencing corporate behavior, but it can face huge political hurdles, as illustrated by the current post-Kyoto climate regime quagmire and inaction in the U.S. Congress. Regulation not only generates corporate opposition but also frequently faces reluctance from politicians more concerned about competitiveness and employment than sustainability. Some have made a spirited argument for a Global Environmental Organization to overcome problems of collective action and coordinate national regulation, but others are wary of the centralization of unaccountable power.5 Providing economic incentives harnesses the private sector’s profit motive, but these incentives are often driven by political rather than environmental considerations, as in the case of ethanol subsidies. They can have unintended and perverse impacts, driving up the cost of food. They strain governmental budgets and are frequently opposed by vested interests.

The move toward social and environmental disclosure represents a form of informational governance or “civil regulation” that some herald as a new era of transparency, accountability, and stakeholder engagement.6 Critics have argued that disclosure is actually a privatized form of voluntary self-governance that protects against more onerous regulation and accomplishes little for sustainability or democratic ideals.7  Thee non-governmental organizations (NGOs) who promote initiatives such as CDP seek not only to change corporate practices but also to empower civil society actors as active partners in corporate decision-making.8 Simultaneously, business strives to promote a more corporate version of disclosure geared toward management of reputation, liability, energy costs, and investor relations.

These three mechanisms for promoting sustainability—regulation, economic incentives, and increased disclosure programs—leave intact the fundamental structures of corporate governance in which companies strive to maximize profits and are primarily accountable to capital markets. Any attempt to divert companies from this goal inevitably faces resistance, and companies are frequently able to thwart, weaken, or skirt regulation through the deployment of lawyers, lobbyists, and accountants.

Sustainability advocates enthusiastically make the “win-win” case that improving environmental disclosure and practice actually raises financial performance; indeed, the core strategy of GRI and CDP has been to enlist investors as key allies in creating a demand for disclosure. There is certainly some low-lying fruit in the energy area, but it takes considerable investment and creativity to find real win-win solutions, and they won’t fix all of the massive environmental externalities of our industrial system of production and mass consumption. Even when cost-effective solutions exist, they often face various behavioral and non-market barriers to large scale deployment.

The fourth and most radical approach is to reengineer structures of governance so that organizations internalize not just environmental costs but the sustainability mission itself. A variety of experiments are under way with organizational forms that attempt to combine the economic efficiency and market orientation of the private sector with the concern for social and environmental goals of not for- profit organizations. The Corporation 20/20 initiative has brought together a range of ideas about governance structures to promote a “Great Transition” to a more sustainable society. Marjorie Kelly of the Tellus Institute, cofounder of Corporation 20/20, has described a three-part typology of structures of “for-Benefit companies”: Stakeholder-Owned Companies, Mission-Controlled Companies, and Public-Private Hybrids. “The essential framework of such a company—its ownership, governance, capitalization, and compensation structures—is designed to support this dual mission.”9

The ambitious agenda of Corporation 20/20 hints at the hurdles it faces. Some of the organizations Kelly describes deliberately limit their dividends, profitability targets, and growth rates in order to address their goals. Building an economy based on such organizations would therefore require a revolution in capital markets. While some investment funds apply social screens, constraints on pursuit of returns are anathema to capital markets. Treating stakeholders, such as labor and environmental groups, as active participants in decisions rather than bothersome constituents to be consulted and managed, replaces shareholder supremacy with a more complex and multi-layered form of governance. The tea-party will not be happy.

A Strategic Shift is Necessary

Even if many more organizations become environmentally aware and follow best practice, there is no guarantee that the global economy would be sustainable at a planetary level. As John Ehrenfeld, sustainability scholar and current executive director of the International Society for Industrial Ecology, has described, sustainability is a systems-level phenomenon based on the balance of human activities and the earth’s natural processes.10 The sum total of global production and consumption, from cars and planes to food and energy, puts an intolerable strain on the earth’s capacity to provide fresh water and absorb carbon dioxide and other pollutants. This is becoming strikingly clear with the rapid industrialization of China, India, and Brazil.

Moreover, the redesign of our cities, transportation systems, and energy infrastructure requires such a massive scale of investment and regional planning that individual business organizations, however well intentioned, cannot meet the challenge. Given these challenges, we need to move aggressively, but pragmatically and strategically, on all these modes of governance to create pressures for change. We need sectoral, national, and global institutions, bringing together business, government and civil society, that can play a role in planning, coordinating, and financing the transition.

1 Levy, D. L. and P. J. Newell (eds.). 2005. The Business of Global Environmental Governance. Cambridge, MA: MIT Press.

4 Unruh, G. C. 2000. Understanding carbon lock-in. Energy Policy, 28(12): 817-830.

5 Bierman, F. 2001. The emerging debate on the need for a World Environment Organization. Global Environmental Politics, 1(1): 45–55.

6 Florini, A. 2003. The Coming Democracy: New Rules for Running a New World. Washington D.C.: Island Press.

7 Gupta, A. 2008. Transparency Under Scrutiny: Information disclosure in global environmental governance. Global Environmental Politics, 8(2): 1–7.

8 Levy, D. L., H. S. Brown and M. de Jong. 2010. The Contested Politics of Corporate Governance: The Case of the Global Reporting Initiative. Business and Society, 49(1): 88–115.

9 White, A. (Ed). 2009. Paper Series on Restoring the Primacy of the Real Economy. Boston: Corporation 20/20, Tellus Institute, p.36. Available at http://tinyurl.com/restoringtheprimacy.

10 Ehrenfeld, J. 2009. Sustainability by Design. New Haven: Yale University Press.

Can capitalism effectively respond to climate change? This is the timely and critically important question posed by Peter Newell and Matthew Paterson at the beginning of their book, Climate Capitalism. It’s the same question that motivated me to focus my own research on the topic of business and climate change nearly fifteen years ago.

Unlike other environmental issues, such as ozone depletion or acid rain, climate change represents a far more systemic challenge to the contemporary path of capitalist development, which is premised on ever increasing production, consumption, use of natural resources, and disposal of waste. The development of modern industrial societies has relied on fossil fuels as cheap sources of energy for their transportation, manufacturing, and energy systems, and a host of important economic sectors from agriculture to chemicals and construction are also heavily dependent on these fuels. In the last decade, rapid growth in China, India, Brazil, and elsewhere has brought a carbon-intense lifestyle within reach of several billion of the world’s population, who aspire to own cars and electronic appliances, live in spacious  homes with heating and cooling, and fly on vacations.

Climate Capitalism examines whether capitalism can survive the challenge of addressing global warming induced by emissions of greenhouse gases (GHGs). Can the market and private capital develop new governance mechanisms, such as carbon trading, and deliver new low-carbon technologies that will decarbonize the economy while ensuring growth and full employment? As the authors note, these are complex, ambitious questions. Given the scale of the economy-wide transformations required and the absence of a simple “silver bullet” solution, major institutional innovations are necessary. But capitalism is not going to quietly disappear. Indeed, the system has historically demonstrated remarkable resilience, flexibility, and pragmatism in responding to past challenges, from wars to the Great Depression. The impacts and responses to climate change will have differential impacts across economic sectors, countries, and labor markets, so the issue raises “questions of strategy, politics, and power” (preface: ix).

Posing these questions leads the authors to adopt a political economy approach that locates climate change as a problem rooted in the way our production is organized, our economy is structured, and our patterns of growth and consumption. Overall, the result is an excellent review of the shifting business response to climate change and the emergence of market-based efforts to address GHG emissions. It does so in a style that is lucid, informative, and relatively free of jargon, though with enough detail (and comprehensive glossary) of the multitude of organizations and initiatives that it can serve as a guide to “speaking carbon”. Colorful vignettes, such as the climate awakening of parcel delivery company TNT’s CEO Peter Bakker, help make the book more accessible and lively, breaking up the sometimes dense description of market instruments. Though there is not a lot new here for those already steeped in the topic, it’s a valuable contribution to the sparse literature on the political economy of climate change and would be very appropriate for undergraduate or graduate university classes. In fact, I will assign it for my upcoming MBA course on Business and Climate Change.   The process of contesting the reality, meaning, and appropriate response to climate change has sharpened the ideological distinctions among political camps, who have sought to mobilize the issue (or deny it) to further their agendas. Some environmentalists see climate change as the embodiment of an inherent contradiction between capitalism and environmental sustainability, and hence as a crisis that can catalyze a profound reorientation of our economy toward more egalitarian, participative, and local processes.

If capitalism succeeds in confronting climate change, it would not to be celebrated from this perspective, but rather be viewed as a waste of a crisis. In a parallel manner, carbon-intense sectors such as coal and oil have tended, at least until the early 2000s, to view climate change as a mortal threat, and thus resorted to denial.

For neoliberals, climate change presents a welcome, if extreme, test of the efficacy of markets and private capital in addressing a seemingly intractable environmental problem, one that has defied conventional state-led efforts to develop a binding international treaty. An increasing number of people from business and finance are expressing confidence that a price on carbon can send appropriate signals across the economy, guiding consumers toward low-carbon choices and manufacturers toward carbon management systems that reduce costs and risks. Venture capitalists and entrepreneurs are expected to redirect their resources and creativity toward low-carbon innovation. Politicians at every level find this market-based approach attractive, as it promises to attract investment, create “green jobs”, and improve regional competitiveness without the political or financial costs of major regulation or subsidies.

For supporters of a European-style mixed economy, or liberals in the American context,   climate change highlights the negative externalities of GHG emissions and the failure of markets to plan for the longer-term and invest in the major structural economic changes needed. The issue therefore creates an opportunity to pursue “climate Keynesianism”, a new era of government activism and intervention to regulate emissions and stimulate investment and innovation, in addition to stronger oversight over carbon markets. Climate Keynesians also recognize the importance of overcoming collective action problems and building stronger institutions of governance at multiple levels, from cities to the international arena.

Newell and Paterson do not adopt an explicit stance in the book, but they demonstrate a grudging embrace of carbon markets, despite acknowledging their many flaws, with a good dose of climate Keynesianism to ensure their effectiveness. The authors bring a realpolitik sensitivity to climate change; if we are to address climate change in a meaningful way within the necessary timescale, carbon capitalism is the only game in town that can galvanize a powerful network of actors with the potential to take serious action. They stress that carbon capitalism offers the opportunity to successfully mobilize the resources, energy, and political support of key sectors of business and finance, as well as policymakers. Carbon markets offer strategic flexibility for manufacturers, new market opportunities for traders and financial firms, and a source of capital for developing countries. Capitalism can be bent and shaped to this task, but fundamentally we are relying on existing systems of financial and corporate governance. Nevertheless, success is far from assured.

The book’s discussion of the political economy of the emerging carbon governance system highlights that it is far from a unified rational structure designed by a benevolent planner. Rather, the actual carbon system is a messy, fragmented outcome of a contested, dynamic political process. For example, carbon markets have been shaped by the protests against them, so that accounting standards and verification of carbon reductions have been tightened up in response to criticism. Competition among suppliers of carbon credits has also led to the strengthening of certification standards. Establishing the rules and conventions of carbon markets entails conflict and collaboration among states, business, and NGOs, but there are considerable differences in interests, goals, and ideologies between the European Union and the United States, between rich northern countries and the poorer countries of the south, and across industrial sectors and NGOs.

The most functional elements of the carbon system arise out of the convergence of powerful interests. The book describes, for example, how the Clean Development Mechanism suits the US desire for flexibility and markets, and the desperation of poorer countries for foreign investment. Yet the authors caution that even the CDM is not necessarily delivering much in the way of carbon reduction nor development. One reason is the uneven playing field in the establishment of these programs, in which environmentalists have been relatively weak partners compared with business and finance.

The story of the dramatic transition in the business stance toward climate change in the latter 1990s, from denial and conflict over the science and economics to a more accommodating and engaged position, is by now well known. Newell and Paterson provide a solid overview, and emphasize that this was not just a matter of industry waking up to climate as a real problem and figuring out the right thing to do. Indeed, there was no major breakthrough in the science during this period. Rather, the perceived balance of costs and benefits, of risks and rewards, shifted as many companies began to see the inevitability of carbon regulation, the threats of higher fuel costs, reputational loss, and technological obsolescence. Simultaneously, the rise of new business groups such as the US Climate Action Partnership highlighted the opportunities in new product markets and from energy savings, and created competitive and normative pressures for companies to follow suite. Most firms were not ready to radically change their core strategies, but were willing to hedge their bets and make some modest investments in measuring their carbon footprint and exploring low carbon technologies.

Yet the extent and permanence of this revolution is somewhat overstated. The authors observe (p. 36) that “it may seem hard to believe today, but there was once a time that business denied there was such a thing as climate change”. It’s true that during mid-to late 2000s, it appeared that business had called a ceasefire in the carbon wars and was willing to accept a weak carbon regime as part of a grand “Carbon Compromise”. Like a monster that refuses to die, however, climate denial keeps coming back from the dead. Climategate and a couple of unusually cold winters in Europe and the eastern US have helped fuel the climate backlash, leading to a dramatic rise in climate skepticism in public surveys. The ground had been well prepared, however, by business groups. In 2009, Energy Citizens, a US-based group set up and financed primarily by the American Petroleum Institute (API) with support from the National Association of Manufacturers, staged about 20 large rallies against carbon regulation. This was complemented by a massive increase in lobbying efforts by the fossil fuel industry. Private foundations such as those controlled by the billionaire Koch brothers, have also poured many millions of dollars into organizations engaged in climate denial and lobbying against regulation.

The core of book discusses the awakening of financial actors to climate change and the development of financial markets and instruments, from catastrophe bonds to the European Trading System. This is climate capitalism at work, and the authors cover the complex ground admirably. Insurance companies, pension funds, and banks began paying attention in early 2000s to climate risks, including physical damage from hurricanes and flooding, the business risks facing carbon-intense firms from higher fuel prices or from technological obsolescence, and reputational and legal risks. The rise of information governance systems such as the Carbon Disclosure Project (CDP) are traced to the UNEP Finance Initiative and usefully placed in the context of heightened investor activism in the wake of corporate governance scandals at Enron and elsewhere.

A few key players, such as Cantor Fitzgerald and Deutsche Bank, were central figures in forging the carbon markets, and not surprisingly, they shaped the rules and processes to suit their capabilities and interests. The strategic agency of these actors highlights a core theme, that carbon markets are political and institutional constructs, relying on a vast legal and accounting infrastructure to commoditize carbon; to establish property rights, count and certify tradable units, and to enable exchange across different jurisdictions and gases. Yet the agency of environmental NGOs in leveraging investors is perhaps underplayed. The CDP is described as a consortium of investors, but like the Global Reporting Initiative, it functions (and is perceived) more like an NGO trying to shift corporate behavior by enlisting investors to demonstrate their concern for climate change and the value of information disclosure. Moreover, investors increasingly appear rather dubious about the value of carbon disclosure in assessing risks and asset values.

Overall, Newell and Paterson provide a mixed and cautious assessment of this brave new world of carbon capitalism. While they recognize the power of galvanizing the financial sector, they describe free market advocates as naïve and irresponsible for failing to recognize that markets can fail due to fraud, speculative bubbles, and lack of information and oversight. They pay less attention to other problems of carbon capitalism. Despite the rapid growth of venture capital and entrepreneurs pursuing opportunities in the clean tech sector, the scale of private investment in research and development is puny and faltering. Unlike the IT industry, scaling up projects to demonstrate commercial viability faces a gaping “valley of death”, as risk-averse investors shy away from the large-scale investments required. More fundamentally, a price on carbon is a weak tool with which to overcome the inertia of “carbon lock-in”, the intertwined economic, technological, cultural and political systems that constitute our carbon-intense economy and lifestyles.

The climate change field is so fast moving that even a 2010 book can quickly seem dated. Where climate regulation and a carbon price were once seen as inevitable, there is now uncertainty and confusion. Where denial was passé, has now revived. Characterizing the current prospects for climate capitalism is not easy. Since the collapse of international negotiations in Copenhagen in December 2009, two large oil companies, BP and ConocoPhillips, along with Caterpillar, manufacturer of heavy industrial machinery, have pulled out of the US Climate Action Partnership, the leading business organization in the US promoting cap-and-trade legislation. There is little chance of the US instituting any kind of carbon market at the national level in the near future; indeed, the EPA and US states are instead turning to more traditional command and control style regulatory approaches.

The book concludes with a number of provocative scenarios. In the neoliberal utopia of carbon capitalism, carbon markets and venture capitalists facilitate a smooth transition to a low carbon-economy. Yet if this vision of ecological modernization is to be realized, economic growth must be delinked from carbon, as growth itself is sacrosanct. The challenge requires further scrutiny, because of the enormous hurdles regarding population growth, dematerialization of output, energy efficiency and renewables. Stagnation is a more pessimistic, though increasingly likely, scenario. The authors sketch out a world in which the failure of international negotiations combined with limited and poorly functioning carbon markets leads to cynicism and fatalism, with rich countries engaging in large scale adaptation and the poor left to fend for themselves. A third scenario is decarbonized dystopia, in which geo-engineering, biofuels, nuclear power, and carbon sequestration provide technological fixes but with high risks to our health, food supply, or unexpected side effects. Climate Keynesianism is the fourth scenario, entailing stronger governmental supervision of markets and systemic investments in transportation and energy infrastructure.

Missing here is the dystopia of stagnation and delay followed by emergency conditions that provoke more urgent, authoritarian and intrusive response by states. Governments faced with the need for urgent adaptation and rapid emission cuts could well resort to wartime measures such as rationing and direct control of investment and production in key sectors. Economic dislocation could generate widespread unrest, and the security implications of climate change, from refugees to water and food shortages, are just beginning to be appreciated. The outcome, however, could well disappoint those who expected the climate crisis to usher a new era of a flourishing civil society and egalitarian harmony. Capitalism may yet survive the climate crisis, but in a form that is barely recognizable.

by David L. Levy

Brian Flannery, chief climate strategist for ExxonMobil, recently circulated his rather depressing report from the UN climate August negotiations in Bonn regarding the future of the Kyoto Protocol. After the failure to reach agreement last December at Copenhagen, the plan was to encourage countries to sign up to the bare-bones Copenhagen Accord and build momentum for a treaty this December in Cancun, Mexico. But according to Flannery, “Governments and the Secretariat have been lowering expectations for a legally binding agreement, or even substantive progress, at CoP 16 in Cancun. Attendees were well aware of setbacks to climate legislation in Australia, Japan and the USA. The Bonn meeting continued to dampen expectations.” Flannery observed that the discussions continue to be deadlocked over fundamental issues, and that the consensus is that “Cancun at most will produce CoP decisions, not a legally binding treaty”. There even seems to have been some backsliding regarding REDD (forests) and the Technology Mechanism, while “the status of CDM going forward may be questionable”.

This news comes at the end of a summer that has seen record temperatures in the Eastern US and Europe, floods in Pakistan, and an iceberg four times the size of Manhattan breaking away from the Petermann ice shelf on Greenland. Global average temperatures in 2010 are on track to be the highest ever, and the Arctic is melting at an unprecedented pace, stirring fears of major shifts in the jet stream and global weather patterns. How can we square the ever-mounting evidence of climate change with national and global policy paralysis?

During the 1990s, it was easy to blame business lobbying and public misinformation campaigns for US inaction. But this explanation seemed less tenable after the Global Climate Coalition (GCC) collapsed in early 2000 (see my earlier post). Some former GCC companies have since joined more progressive organizations that espouse sustainability and support action on climate, such as the Pew Center Business Environmental Leadership Council and the US Climate Action Partnership (though there have also been some recent high level defections). I suggested that business had called a ceasefire in the carbon wars and was joining the grand “Carbon Compromise”. A weak carbon regime would not threaten core business operations in the short-to-medium term, leaving adequate time and resources for longer-term strategic repositioning as the climate issue plays out.

Even Exxon, historically the strongest opponent of mandatory carbon controls, has shifted its stance, and now calls for a carbon tax (instead of a cap-and-trade system) while investing heavily in biofuels. Flannery’s report from Bonn was not celebrating the political quagmire; at this stage, big business is looking some regulatory predictability, so that it can plan investments. Flannery commented that:

By and large business groups would like to see focus on some issues, such as the Technology Mechanism and Finance, if only to build trust and create some tangible progress.  Business is also involved in a dialog session… to explore establishing a recognized process for formal business input to the UNFCCC.

Conventional wisdom holds that the political stalemate over climate stems in large part  from the dramatic rise in populist climate denial and opposition to any policy measures that would raise fuel prices during a tough recession. Public opinion polls in the US and the UK show a dramatic jump in the last year in the percentage of people who don’t think that climate change is a priority issue. Climategate and last year’s unusually cold winter in Europe and the eastern US fired up the rhetoric of climate deniers, and their voices have been channeled to mass audiences through the tabloid press and talk radio.

The populist climate backlash is not, however, a purely organic movement driven from the grassroots. Rather, it’s been organized and nurtured through a carefully crafted and well funded strategy. This second wave of corporate opposition emanates more narrowly from the oil industry. As I discussed in Carbon Wars II: The Sequel, last year the industry front-group Energy Citizens contracted with a professional events management company to plan about 20 large rallies against carbon regulation during August 2009, with a focus on energy producing southern states such as Texas and Louisiana. Member companies encouraged their employees to join in. Energy Citizens’ website proclaims that it is “a nationwide alliance of organizations and individuals formed to bring together people across America to remind Congress that energy is the backbone of our nation’s economy and our way of life.” In fact, Energy Citizens was set up and financed primarily by the American Petroleum Institute (API), with support from the National Association of Manufacturers and other groups. This project complements a massive increase in lobbying efforts by the fossil fuel industry in the last six months. 

The groundwork for the climate backlash had been well prepared. Jane Mayer describes  in the New Yorker how the billionaire brothers David and Charles Koch (pronounced ‘Coke’) have for decades funded organizations fighting regulation and taxes. Mayer’s article has caused quite a stir (see here and here), and anyone who wants to understand the flows and contours of power in the US and the rise of tea party politics should read the full version. Particularly remarkable is the Koch brothers’ focus on environmental regulation and climate change, and the way they have stitched this campaign into the broader right-wing agenda to attack the Obama administration.

The Koch brothers own Koch Industries, a Wichita, Kansas based private conglomerate  with annual revenues of around $100 billion, including a number of oil refineries and thousands of miles of pipelines. The brothers have a combined personal fortune of about $35 billion, a little behind Bill Gates and Warren Buffett, but more than enough to support a range of right-wing libertarian organizations. It was the Kochs who funded the 1977 launch of the Cato Institute, a think tank that has risen to prominence in the media as a source of anti-regulatory comment. According to Mayer, since 1980:

they poured more than a hundred million dollars into dozens of seemingly independent organizations. Tax records indicate that in 2008 the three main Koch family foundations gave money to thirty-four political and policy organizations, three of which they founded, and several of which they direct. The Kochs and their company have given additional millions to political campaigns, advocacy groups, and lobbyists….. So far in 2010, Koch Industries leads all other energy companies in political contributions, as it has since 2006.

The focus on the environment isn’t surprising, as a report earlier this year from the University of Massachusetts at Amherst’s Political Economy Research Institute named Koch Industries one of the top ten air polluters in the United States. A Greenpeace report from this spring provides details on the Kochs’ funding of climate denial organizations, and “showed that, from 2005 to 2008, the Kochs vastly outdid ExxonMobil in giving money to organizations fighting legislation related to climate change, underwriting a huge network of foundations, think tanks, and political front groups.” In addition to high profile think tanks such as Cato and Heritage, The Kochs have funded more obscure organizations, such as the Independent Women’s Forum, which Mayer states, “opposes the presentation of global warming as a scientific fact in American public schools.” Some of these groups have played a key role in hyping the “climategate” affair regarding leaked emails from climate researchers.

Other foundations such Olin and Richard Mellon Scaife, have been funding right-wing think tanks for years, helping to seed and legitimize these ideas in policy circles and the media. The Koch brothers were pioneers, however, in grassroots organizing, or at least the appearance of it. In 1984, they created Citizens for a Sound Economy, in 1990 Citizens for the Environment (which claimed that most environmental problems are myths), and in 2004 Americans for Prosperity Foundation, which has played a key role in the rise of tea party politics. To some degree, these organizations are astroturf front groups, run by lawyers and PR companies, with very few real citizens. But increasingly they are engaged in “grasstops” organizing as well, which involves recruiting and training thousands of people at the local level who are or can become leaders in their churches and communities. Mayer interviewed Matt Kibbe, the president of FreedomWorks, a Tea Party advocacy group, who said the mission:

was to take these heavy ideas and translate them for mass America. . . . We read the same literature Obama did about nonviolent revolutions—Saul Alinsky, Gandhi, Martin Luther King. We studied the idea of the Boston Tea Party as an example of nonviolent social change. We learned we needed boots on the ground to sell ideas, not candidates.

The Americans for Prosperity Foundation has held more than eighty events targeting climate legislation, complementing the work of Energy Citizens, and similar actions against health care reform. According to Grover Norquist, also interviewed by Mayer, these events have had a cascading impact:

last summer’s raucous rallies were pivotal in undermining Obama’s agenda. The Republican leadership in Congress, he said, “couldn’t have done it without August [2009], when people went out on the streets. It discouraged deal-makers”—Republicans who might otherwise have worked constructively with Obama. Moreover, the appearance of growing public opposition to Obama affected corporate donors on K Street. “K Street is a three-billion-dollar weathervane,” Norquist said. “When Obama was strong, the Chamber of Commerce said, ‘We can work with the Obama Administration.’ But that changed when thousands of people went into the street and ‘terrorized’ congressmen. August is what changed it. Now that Obama is weak, people are getting tough.”

Tea party activism has elevated climate change to the status of a litmus test of cultural politics in the US, up there with abortion, guns, god, gays, immigration and taxes. A local Tea Party Group in Erie County, Ohio, recently sent candidates for this November’s elections a 15-point questionnaire to help identify the true believers, on which question 2 reads: “The regulation of Carbon Dioxide in our atmosphere should be left to God and not government and I oppose all measures of Cap and Trade as well as the teaching of global warming theory in our schools.”

The success of anti-climate politics illustrates the dynamic complexities of power in our society. Money is important, of course, but so is the effective molding of ideas. Crucial as well is building organizations and alliances that can mobilize people’s energies, generate resources, and influence policy. In my academic work, I’ve built on the work of Niccolò Machiavelli and Antonio Gramsci and developed the concept of ‘strategic power’, the ability to study a political arena and deploy resources in a way that integrates economic, cultural, and political forces to create real change. For Gramsci, political struggle takes place largely in the realm of ideas and culture, which in turn are rooted in the mass media, people’s daily lives at work and play, and civil society organizations such as the church and community groups. Ideas are powerful when they become part of “common sense”, when they are linked together in a way that appears coherent and to carry moral and intellectual authority. This linking together of ideas as part of a broader ideology also serves to glue political alliances together.

The Koch brothers obtain their legitimacy, in part, through their generosity to cultural and medical causes, particularly in New York. David Koch recently donated $2.5 million toward the upcoming season of the American Ballet Theatre, and in 2008 gave $100 million to modernize and rename Lincoln Center’s New York State Theatre building. Illustrating Gramsci’s point that culture and politics are inseparable, David Koch has given $20 million to the American Museum of Natural History, on which he also serves as a trustee. According to Joe Romm, the David Koch Hall of Human Origins spins climate change as a purely natural phenomenon that has stimulated the evolution of humans into the smart, adaptable strategists we are. This might be amusing were the human race not displaying such collective inertia in the face of potentially catastrophic climate change.

Perhaps the greatest success of anti-climate politics has been to weave a discourse that resonates with broader cultural-political themes dominant in the US, such as individualism and consumerism, suspicion of government and foreigners, hostility to taxes, and antagonism toward scientific, political, and financial elites. Especially in the current recession, there is good reason for many people to feel angry about bank bailouts and nervous about higher fuel prices when they are losing jobs, even their homes. But as Thomas Frank has explored in What’s the Matter with Kansas?, the right have been able to reframe blue-collar concerns in ways that support a low-tax, anti-regulation agenda, despite the most glaring contradictions.

Americans for Prosperity has been training tea party activists do the same thing with climate. Mayer describes how a training session for Tea Party activists in Texas was shamelessly cast as a populist uprising against vested corporate power. “Today, the voices of average Americans are being drowned out by lobbyists and special interests,” it said. “But you can do something about it.” Tim Phillips, the head of Americans for Prosperity, went to the UN climate summit at Copenhagen in December 2009 to stage a protest, where he declared: “We’re a grassroots organization. . . . I think it’s unfortunate when wealthy children of wealthy families . . . want to send unemployment rates in the United States up to twenty per cent.” These messages are amplified and endlessly repeated through the Murdoch media empire, from Fox News to the New York Post, Wall Street Journal, and Glenn Beck.

Politics is a complex and uncertain multi-level chess game, and Koch’s money does not assure a victory for groups opposing climate regulation. The tea party is a tiny and extreme movement, though it seems to inspire fear as the vanguard of a much larger populist backlash. The alliance among elements of the oil industry, the tea party, and the religious right on climate change is somewhat tenuous and full of contradictions. The oil sector is largely owned and managed by wealthy elites, relies heavily on science and technology, receives huge governmental subsidies, and depends on open borders for trade and investment.

Environmental and progressive business groups have also been active trying to stitch together their own ideas and coalitions, not without some success, around win-win approaches to sustainability. The appeal to mobilize innovation, entrepreneurship, venture capital and carbon markets as a means to reduce carbon emissions, revitalize the economy and generate ‘green jobs’ has proven attractive, helping to forge a loose alliance of business, regulatory agencies, scientists, and the financial sector. We are now at a critical juncture, as this alliance appears in danger of collapsing. Perhaps the elements of US business that have tentatively embraced the clean energy economy now see a larger opportunity to roll back the regulatory state. It’s now more important than ever to develop a climate strategy that reconnects with the needs and fears of business as well as ordinary people battered by the recession.

Last week, the Financial Times reported that two large oil companies, BP and ConocoPhillips, along with Caterpillar, manufacturer of heavy industrial machinery, pulled out of the US Climate Action Partnership (USCAP). USCAP, which still has 23 members paying $100,000 a year for the privilege of membership, is the leading business organization promoting cap-and-trade legislation in the US, and many of its members have also been active on the international scene, advocating for a coordinated global approach to emissions reduction. BP’s action is particularly significant because it has long been an industry trendsetter – it was the first oil major to acknowledge climate change and to leave the Global Climate Coalition, and it was a founding member of USCAP in 2007.

Even as BP and Shell were retreating from renewables during 2009 and moving Back to Petroleum, the oil industry still appeared to be part of the grand Carbon Compromise, pursuing a strategy of “hydrocarbon neutrality.” The industry realized that it was not mortally threatened by a flexible carbon regime with low carbon prices; indeed, it could even prosper as demand for liquid fuels for transportation grows, especially in India, China, and Brazil. The industry is also repositioning itself with major investments in relatively low-carbon natural gas. A weak carbon regime would not threaten core business operations in the short-to-medium term, leaving adequate time and resources for longer-term strategic shifts as the climate issue plays out. The Carbon Compromise would also help industry avoid paying the political or public relations price of fighting emission controls, such as the embarrassment caused by CEI’s 2006 risible advertisement Carbon Dioxide: They Call it Pollution, We Call it Life.

Back in August 2009, the oil industry was fighting a rearguard effort against cap-and-trade legislation in the US. The industry front-group Energy Citizens contracted with a professional events management company to plan about 20 rallies, with a focus on energy producing southern states such as Texas and Louisiana. Member companies encouraged their employees to join in. Energy Citizens’ website proclaims that it is “a nationwide alliance of organizations and individuals formed to bring together people across America to remind Congress that energy is the backbone of our nation’s economy and our way of life.” In fact, Energy Citizens was set up and financed primarily by the American Petroleum Institute (API), the US oil industry association, with support from the National Association of Manufacturers and other groups. This project complements a massive increase in lobbying efforts by the fossil fuel industry in the last six months.     

At the time, the oil industry campaign seemed like an anachronistic, even quaint echo of the carbon wars of the 1990s. In hindsight, it appears to be a prescient strategy that would help prepare the ground for the coming climate backlash. This backlash has been spurred by a confluence of seemingly unrelated events. Climategate broke just before the Copenhagen negotiations became hopelessly mired. An unusually cold winter in Europe and the eastern US, together with record snow in Washington DC has fired up the rhetoric of climate deniers, and their voices have been amplified and channeled to mass audiences through the tabloid press and talk radio. It was not cold everywhere, of course – for the planet, the decade 2000-2009 was the hottest on record. But it was cold where it mattered, for the media and climate policy. Public opinion polls in the US and the UK show a dramatic jump in the last year in the percentage of people who don’t think that climate change is a priority issue.

The loss of Ted Kennedy’s Massachusetts senate seat to Scott “the truck guy” Brown deprived the Democrats of their supermajority and made them even more dependent on Republican votes. As the Obama administration has tried to redirect its attention toward unemployment and the economy, healthcare reform has stalled and climate has fallen even further down the priority list. Business senses the vulnerability of the Democrats and is shifting campaign money to Republicans, who could recapture the Senate in the mid-term elections. In Europe as well as the US, concern about budget deficits is constraining ambitious clean energy agendas.

The resurgence of climate denial and the woes of the Obama administration are not unrelated. Like the global climate, the political, social and economic system is a dynamic system with complex feedback loops. The confluence of a few minor developments can cascade into a major shift in direction. The climate deniers and right-wing “tea-party” activists in the US are successfully tapping into populist anger rooted in economic insecurity and a perception that policy elites are out of touch. A recent study from Northeastern University pointed out that unemployment amongst lower income households is now higher that at the depth of the Great Depression of the 1930s. The ideological machine of the tabloid press, talk radio, and Fox News has successfully woven climate change into a populist cultural politics that fuses anti-government, anti-tax sentiment with a reassertion of masculinity. The Superbowl ads for Dodge and Audi perfectly capture this spirit, explicitly connecting environmental concerns with submissiveness to nagging women and the overreaching intrusiveness of the “green police” nanny-state.

It is against this backdrop of shifting cultural politics that Scott Brown’s unlikely victory in Massachusetts and developments in the oil industry can be understood. Back in August 2009, I suggested that there were three possible ways to understand the oil industry’s pullback from renewables and increasing hostility to cap-and-trade:

1. A “Back to Petroleum” product strategy needs a new political strategy. Political and product strategies need to be coherent and integrated. Corporate strategy resembles a multi-dimensional chess game, in which players seek advantage by repositioning themselves in product and political space. When oil companies were investing more heavily in clean energy, they also needed to invest in political strategies that would support markets for these technologies and products. Now that these companies are refocusing on their core products and competencies, they are returning to the corresponding political strategies they used in the mid-1990s to preserve the value of their fossil fuel assets and capabilities. The reputational value of proactive corporate action on climate is declining along with public support for aggressive climate policies.

2. A sectoral struggle over implementation: From this perspective, the Carbon Compromise is still on, but the current battle is about the allocation of costs and benefits across sectors. In many ways, Waxman-Markey and the proposed energy legislation are generally pro-business: a flexible market-based approach with plenty of offsets to help keep carbon prices low, 85% of carbon allowances are given away rather than auctioned to industry in the early phase, and there are plenty of subsidies to sweeten the medicine. The US oil industry, however, sees itself carrying an unfair burden. According to ConocoPhillips, the oil industry would receive just 2% of free allowances, while the electric power sector would receive 35%. The New York Times cited Gerry Waldron, the former staff director of the House select climate panel, arguing that groups like USCAP representing industries with different interests have a hard time finding common ground on the details of legislation. “They’re very effective at the framework level, at the 50,000-foot level,” Waldron added. “But when you get down to the messy business of making laws and the sausage making, it’s going to be hard to keep those people together.”

3. The Carbon Compromise was only a second best option: The preferred course for energy intense industries during the 1990s was voluntary measures. Mounting regulatory and public pressure, the strengthening of climate science, and the need to operate in carbon-constrained markets in Europe have led US business to acquiesce unenthusiastically to mandatory emission controls. A growing number of firms are waking up to opportunities in clean energy, efficiency, and carbon trading, but these are still niche markets. The shifting political winds and public sentiments have opened a window of opportunity to weaken or delay regulations for several years.

BP’s public statement regarding its exit from USCAP supports the second interpretation, that the oil industry is seeking a better deal rather than to kill carbon regulation outright:  ”We will continue to work for passage of federal legislation that . . . is environmentally effective, reduces emissions across the US economy in a measured and affordable way and which treats all energy consumers and producers in a fair and equitable manner. We don’t believe legislation currently pending in the Congress achieves these objectives.”

But the reality is that all three factors are playing something of a role, and business can sense the shifting winds, even if it cannot yet know the endgame. Just as the US Chamber of Commerce and its climate stance survived the exit of several high profile companies last year, so USCAP could survive the exit of three companies. Indeed, several new companies, including Honeywell, have joined USCAP in recent months. Yet surely BP’s action signals deeper tectonic shifts taking place in the cultural, economic and political spheres, with deeply unsettling implications for climate action and for the planet.

On January 27, 2010 the SEC voted to issue interpretive guidance on disclosure requirements of climate risks in SEC filings. The SEC stressed that the interpretive releases do not create new legal requirements but are intended to provide clarity and enhance consistency on existing requirements. Nonetheless, the issuance of guidance indicates the growing focus of the SEC on climate change disclosure and the need for companies to expand and improve their environmental disclosure.

Till now the SEC had not called for any specific disclosures regarding climate change nor provided interpretative guidance regarding the application of existing disclosure requirements for “material risks” to climate change-related matters. The SEC sent a signal that it was preparing for future action when in a briefing released July of 2009 it included “Environmental, Climate Change and Sustainability Disclosure” on the list of possible refinements of the disclosure regime for the Investor Advisory Committee.

As the SEC explains in its release, existing regulations require a company to disclose information related to risk factors and call for management discussion and analysis. The new guidance on those rules emphasizes that when assessing potential risks, companies should consider the impact of existing climate change legislation and regulation, international accords or treaties on climate change, indirect consequences of regulation or business trends, for example new risks for the company created by legal, technical, political and scientific developments, and the physical impacts of climate change. This appears to be an impressively comprehensive assessment of investor risk associated with climate change.

Ceres proclaimed this action to be the “the first economy-wide climate risk disclosure requirement in the world”. The guidance follows a petition sent to the SEC in 2007 by a group of investors, state agencies and environmental advocates, led by Ceres, urging the SEC to issue guidance on climate-related impacts. Ceres has long pursued a strategy of exerting leverage on companies by institutionalizing information disclosure of value to investors. Ceres initiated the Global Reporting Initiative and, more recently, the Investor Network on Climate Risk. The Carbon Disclosure Project (CDP) mechanism has become the most prominent mechanism for corporate carbon disclosure, though the value of the information to investors is unclear.    

Moreover, CDP-style data has not been integrated into formal SEC reports. According to two major studies released last year by Ceres, Environmental Defense Fund (EDF) and the Center for Energy and Environmental Security (CEES) climate-related disclosure “continues to be weak or altogether nonexistent in SEC filings of global companies with the most at stake in preparing for a low-carbon global economy.” The SEC initiative responds to repeated investor requests for formal guidance on the climate-related disclosure companies should be providing in securities filings.

SEC Commissioner Elisse Walter commented that the decision “is designed to improve the quality of disclosures filed by U.S. public companies for the benefit of investors.”. She mentioned that she does not consider “that public companies today are doing the best job they possible can do with respect to their current mandated disclosures.” The SEC guidance thus represents an endorsement for more stringent and meaningful carbon disclosure, and moves it beyond a voluntary “social responsibility” type of activity into the regulatory realm.

Some critics have argued that the guidance will not lead to meaningful change in corporate reporting. Zac Bissonnette from DailyFinance writes that “the absolute best thing that will come of this policy is that some public companies will add a few lines of boilerplate that no one reads to the risk factors section of the 10-Ks they file with the SEC.” Others argue that some of the terms used are unclear. As an example, the guidance states that “when assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material.” Jane Wells of CNBC questions “what constitutes material”. Julie Gorte, a senior VP for sustainable investing at mutual fund company Pax World Management LLC, suggested that corporate officers would still have considerable discretion in deciding what constitutes a “material risk” that must be shared with investors.

The guidance is likely, however, to prompt companies to increase climate disclosure or face the threat of legal action for failure to disclose required information in light of the 1933 Act. In his blog, John Shideler makes the case that “the SEC’s action should prompt more companies to collect, analyze and report on climate change information. Companies that do not do so face added risks of litigation or regulatory action if future developments show that management failed to disclose material financial impacts linked to climate change.”

Even though this SEC initiative provides “guidance” rather than create new legal requirements, its impact could be very far reaching. SEC enforcement and legal challenges will gradually clarify the detail and form in which companies have to assess and disclose climate-related risks in their filings and improve their climate related disclosure.

By David L. Levy

(This is an updated version of an earlier posting)

President Obama’s decision to speak at the COP-15 climate summit in Copenhagen in December 2009 cannot have been easy. Obama surely did not want to invest his shrinking political capital in backing the doomed international conference, but at the same time wanted to reassert US leadership after decades of denial and obstruction have cost it dearly in international credibility and influence. President Obama announced his decision to attend Copenhagen just as I was leaving the city after attending a conference on business education and climate change. Perhaps the President was inspired by our effort at Copenhagen Business School to infuse climate change into the business school curriculum, but I surmise that he had other strategic calculations.

Copenhagen was rebranded from a somewhat sleepy European capital to Hopenhagen,  the shiny new star on the global climate stage, showing off its clean tech sector with Vestas ads on every metro train. The conference I attended was, of course, also timed to cash in on the climate cachet of the city. I met a staff person from Copenhagen Capacity, whose organization is trying to attract clean tech investment to the region, and hoping for a boost from the media-grabbing climate conference. The city’s green credentials do not just rest on high tech renewables but on decidedly low-tech bicycles – Copenhagen is the biking capital of the Western world, with nearly 40% of commuters, many dressed in suits, pedaling to work through cold and rain. Whether they are motivated by environmental enthusiasm or the 200% tax on cars is hard to say.

Unfortunately, the Copenhagen brand is looking tarnished and, as the talks collapsed, many observers quickly renamed it Brokenhagen. The estimated 40,000 delegates, observers, and assorted groupies who descended on Copenhagen were unable to produce a binding treaty, despite the cost of more than $62 million borne by the Danish government, according to the Guardian in a special 10-page Copenhagen supplement. The Guardian noted that the delegates would emit more than 40,000 tons of CO2 during their travels and travails, which now looks like a rather bleak investment from a climate perspective. At least it must have been boom times for the retail carbon offset business.

Despite last minute by Obama and Chinese premier Wen Jiabao, the conference only generated a vague declaration of principles the Copenhagen Accord, which sets a goal of limiting global temperature rise to 2°C and recognizes that all nations need to work to that goal. A key part of the draft, a pledge to cut carbon emissions by 50% by 2050, was removed at the last minute, apparently under pressure from China. Yet even this watered down accord didn’t win broad endorsement (Click here for a Dr. Seuss-style satirical summary from the BBC).         

The Copenhagen debacle has been endlessly dissected and analyzed. Many blame the Chinese for thwarting an agreement, while some blame the US for lack of leadership and bullying developing countries. Both countries are wary of multilateral agreements that might infringe on sovereignty. The main stumbling block was the distribution of economic costs and benefits, with the axis of contention being the divide between rich and poor countries. Developing countries demanded emissions cuts in the industrialized world of around 40% below 1990 levels by 2020, while the “offers” were in the 15-25% range with various baselines (not to mention flexibility from offsets). Developing countries also argued that any new regime maintain the Kyoto principle that only industrialized Annex I countries have legally binding emissions targets, while the US and Europe demanded that a new agreement include binding and verifiable targets for the larger developing countries, especially China and India. China’s total GHG emissions edged past the US in 2008, to reach 6.1 GTonsC02e. Developing countries also demanded up to $200 billion a year in aid designated for mitigation and adaptation. Industrialized countries did finally promise short term funding of $30 billion over the next three years, mainly for adaptation in vulnerable developing countries, as well as longer term funding of around $100 billion a year from 2020.

Observers are not optimistic about the prospects for completing a binding treaty at COP-16 in Mexico at the end of this year. Most countries are filing their GHG targets by the Jan. 31 2010 deadline, though some are vague ranges. The problem is that country negotiators more closely resemble corporate managers concerned with “competitiveness” than adverse impacts from climate change. Moreover, the financial crisis has weakened national treasuries and resource constraints are stark. Fundamentally, collective action is very difficult when there are so many actors with divergent interests.

What might happen in the absence of a binding global deal? The failure to achieve a binding treaty could well send a negative signal that stalls momentum on climate action. The prospect of a strong global emissions agreement has provided the political and economic context for the beehive of climate activity in recent years, from carbon footprinting to voluntary offsets, from Walmart’s supply chain initiative to BP’s investments in renewables. According to the Financial Times, “The private sector investment needed to tackle climate change will not be made without a binding international deal on carbon emissions.” Lars Josefsson, chief executive of Vattenfall, a Swedish power company, and chairman of Combat Climate Change, a group of 60 large companies that includes BP, GE, and Unilever, stated that: “The necessary investments will only be made when you have a binding treaty and legislation. Of the money required to implement a deal, the vast majority – about 80% – will come from the private sector. That can only come when there is a stable legal framework….It is very important to get business more engaged, because they have the knowledge of the market economy and how investment decisions are made.” Wulf Bernotat, CEO of the power company Eon, has made it clear that accelerating emission reductions requires a strong global framework.

The more optimistic camp argues that the climate bandwagon will lumber on regardless. Just as a weak Kyoto, without the US or China, was not the primary motivator for a host of corporate, NGO and governmental initiatives, so a non-binding Copenhagen declaration of good intentions will have little relevance. Mat Hoffmann at the University of Toronto is researching how decentralized local initiatives can evolve into effective forms of governance even in the absence of global authority (see his blog). Climate change science remains a key driver; NASA just announced that 2000-2009 was the hottest decade on record. Action will continue to bubble up from a host of organizations, and business will pursue low-carbon investments because they recognize the longer term strategic dynamic and will be seeking profitable new markets and efficiencies. Concerns about the rise of China in clean energy technologies appear to be driving a new dynamic of competitive investments and incentives, as states strive for national competitiveness in the rapidly growing cleantech economy.

One positive sign is that the stalemate at Copenhagen did not appear to dent the value of cleantech shares. The chart below shows the value of PBD, a clean energy ETF from Powershares (in blue) over the last two years, through Jan. 12. 2010. It clearly tracks the NASDAQ closely (red line) but is also influenced by the price of oil (yellow line). The collapse of talks in Copenhagen at the end of December had no noticeable impact.

In the US, climate regulation is moving forward even without a national cap-and-trade system. The EPA has mandated that suppliers of fossil fuels, manufacturers of vehicles and facilities that emit 25,000 metric tons or more per year of CO2e are required to collect data and submit annual reports to EPA. The new rule, effective in 2010, will apply to nearly more than 12,000 facilities which account for about 85% of US emissions. The EPA also ruled in December 2009 that greenhouse gases pose a threat to human health, which enables the agency to use the Clean Air Act to regulate GHG emissions directly without legislation. This “endangerment finding” eases the path to stronger regulatory control of emissions from autos, power plants, buildings, appliances and factories. Finally,in late January, the Securities and Exchange Commission announced that publicly held companies should warn investors of any potential effects from climate change on their bottom lines.

Increasingly, business is realizing the dangers of the proliferation of multiple regulations, and standards emanating from various regions and states, and is lobbying for simple, transparent, predictable, and coordinated frameworks. General concern with the cost of carbon regulation has been replaced by fears of the compliance costs and uncertainties of trying to cope with a chaotic and fragmented climate regime. Energy intense business sectors are particularly concerned at the prospect of EPA regulation of GHGs – they would much prefer the flexibility and low carbon prices of a cap-and-trade regime. The Financial Times reported that large US-based companies are warning “that they will face a heavy regulatory burden should US Congress fail to pass climate change legislation,” as EPA and individual states develop a patchwork of regulations and measures. Peter Molinaro, head of government affairs at Dow Chemical, the largest US chemicals group, told the Financial Times that the proliferation of such initiatives would present “an enormous administrative burden” for companies that operate across different regimes. “Manufacturers are having enough trouble in this country competing with foreign companies,” Mr Molinaro said. “We’d be adding administrative and cost burden where we shouldn’t.”

The concerns regarding patchwork regulations are even more acute at the international level: Alison Taylor, vice-president of sustainability for the Americas at Siemens, the German engineering group, said businesses needed to know the price of carbon for planning reasons. “How do you have one price of carbon if you’ve got four or five different regimes?” she said. These concerns have played an important part in building corporate support for an international agreement and driving the recent defections from the US Chamber of Commerce. A string of high-profile companies including Coca Cola, GE, Microsoft, Cisco, DuPont, Johnson Controls and Nike tried to make the case at Copenhagen for a global agreement. But the business community is still far from reaching a consensus view, and the Chamber of Commerce and National Association of Manufacturers remain opposed to pending US climate legislation. Until mainstream business organizations become more coherent in their support, the prospects for meaningful national regulation in the US or for an international treaty remain dim.

The country faces a serious long-term strategic threat from climate change. The largest population centers are along the coastal plain, just a few meters above sea level, and regional projections point to a decline in winter precipitation of 10-20%, increasing the likelihood of severe droughts. Although more than half the population considers climate change to be a serious threat, there has been little governmental attention to emissions until recently, and even the McKinsey report neglects the potential physical impacts of climate change.

During my visit to Israel in December 2009, I gave a talk at the Hebrew University, Jerusalem, on climate governance (drawing from A Tale of Two Meltdowns), and my Israeli colleague from the university organized a meeting with the Minister of Environmental Protection, Gilad Erdan, and several of his staff, to talk about Israel’s plans for reducing GHG emissions and ways of engaging Israeli industry. Historically, environmental protection has been a relatively low priority in Israel, in light of more pressing security and economic development concerns. Israel has a standard of living approaching European levels, yet because it’s still classified as a developing country in the climate regime, it did not have binding obligations under the Kyoto process. Nevertheless, Erdan has been pushing for the country to adopt aggressive emissions targets, and is seeking ways to get the government as well as industry on board.

The key to advancing the climate agenda in this particular environment is to link it to other national priorities, in order to elevate its strategic significance and build the political coalition needed for action and investment. The Environment ministry recognizes this, and the McKinsey report notes four benefits that would accompany climate action:

An important motive for Israel’s ambitious GHG goals is to graduate from developing to developed country status, with a view to joining the OECD. This would offer broader economic benefits through trade and investment as well as improved international legitimacy. Israel’s active engagement in promoting clean development regionally and supplying critical technologies for global emissions reductions would also bolster its international status, enhance exports, and potentially provide a source of carbon credits.            

Energy security is clearly an important goal, as Israel is almost completely dependent on imported fossil fuels, including natural gas from Egypt. Yet current thinking is that energy security means independence through greater reliance on local renewables, primarily solar. My own view is that energy security can be linked to national security and pursued through regional energy collaboration, primarily with Egypt and Jordan. Though the McKinsey report lists solar power, both CST (concentrating solar thermal) and PV as the single largest contributor to Israel’s GHG reduction potential, the reality is that suitable land is quite limited, even in the southern Negev desert. Collaboration with Egypt and Jordan would open up the possibility of developing a regional grid drawing from large-scale CST in the Sinai desert, southern Jordan, even perhaps northern Saudi Arabia. Moreover, the intermittency of solar can be somewhat offset when complemented with wind power, which has very limited potential in Israel (McKinsey estimates at around 600MW), but is far more abundant in neighboring countries.

Of course, Israel does not want to be dependent on its Arab neighbors for energy. A regional grid would provide security through interdependence. Israel could be a key supplier of technology, as well as a conduit of power between Egypt and Jordan. Economic and technological collaboration on the scale required would also, one hopes, improve political relations. During the 1950s and 1960s, Israel made considerable diplomatic gains in Africa and parts of Asia from its contributions to international economic development. More ambitiously, if a Mideast regional grid were tied into the proposed Desertec supergrid, European participation would provide a strong political guarantee of supply security, as well as smoothing out supply intermittency issues (update: PWC released a report in April 2010 with a roadmap to 100% renewable power based on an integrated Europe-N. Africa supergrid).

Israel has a strong clean tech sector as part of the larger high-tech cluster and entrepreneurial culture in the country (see Start-up Nation: The Story of Israel’s Economic Miracle). The solar thermal and PV clusters are particularly well developed, and the country is home to major firms in water purification and desalination, geothermal energy, and other areas (see here and here, and Jonathan Shapira’s excellent blog on Israeli clean tech). The internal market, however, is far too small to benefit very much from Israel’s own emissions reductions efforts. The large economic payoff will come from exports, technology licensing, and international joint ventures in which Israel is the source for R&D, software, and high value components. BrightSource Industries Israel, for example, a descendent of the CST pioneer Luz, is now a subsidiary of California-based Brightsource Energy, and supplies R&D, engineering services, and key components for the company’s global markets. In fact, the Israeli tech sector is remarkable for its success despite the absence of advanced local markets – during my MBA at Tel Aviv University, I wrote some case studies on how Israeli companies operated within virtual clusters, with their major markets and sources of capital in Europe and the US.

Israel’s Greenhouse Gas Reduction Potential

Though Israel’s total emissions are tiny in global terms, at 71 MtCO2e in 2005, they are growing rapidly, and expected to double by 2030 in a “business as usual” scenario. Emissions per head are already 10.2 tons, about the European average, and expected to rise to more than 14 tons by 2030. The structural reasons for this relatively high and growing carbon footprint are the country’s dependence on coal for power, under investment in public transportation, weak building standards, and high rates of economic and population growth. The country is also committed to energy gobbling large-scale water desalination projects.

The McKinsey report estimates that implementation of abatement measures could reduce emissions by about 45 MtCO2e, corresponding to 2/3 of the expected GHG emissions growth and about 1/3 of total expected BAU emissions in 2030. Behavioral changes, such as reduced air conditioning and greater use of bikes and public transportation, could reduce emissions by a further 7 MtCO2e. With characteristic optimism, McKinsey suggests that the net cost would be zero, with negative cost activities such as efficient lighting and car engines offsetting more expensive measures such as solar power. McKinsey’s estimates for large quantities of solar PV at a cost of under €10/tCO2e seems unduly sanguine.

Ten measures account for about 2/3 of the reduction potential:

As always, the core question is how to implement these measures. Just because more than half the abatement potential can be achieved at negative cost does not mean that it will occur spontaneously, due to the multitude of market failures and institutional hurdles (see McKinsey’s Expanding Free Lunch Program). McKinsey recommends four rather uninspiring steps for the Israeli government to consider:

1. Establish ambitious national GHG abatement goals as government policy.
2. Formulate Israel’s Low Carbon Growth Plan (LCGP) defining the mechanisms and timing of implementation.
3. Translate the national abatement plan into detailed operational measures including ways to finance the upfront investment.
4. Establish a central body to monitor progress in implementation.

What is really needed, in Israel and elsewhere, is a much broader mobilization of the public, government agencies, and business to position climate change at the top of the agenda as the critical strategic threat of the century. At the same time, it offers unprecedented potential for innovation, economic transformation, and regional collaborations. Outside the clean tech sector, Israeli business does not yet take climate seriously – my own research shows that the best way to shift perspectives is to engage people with leaders in the field. In addition to the targets and implementation plans, the Israeli government could partner with charismatic climate champions such as Shai Agassi and local clean tech companies to promote the issue and organize a high profile conference of international businesspeople, policymakers, and experts to jumpstart the process and generate local commitment.

The Financial Times reported some intriguing new McKinsey data this week on carbon mitigation costs across sectors and countries. The data indicate that there are substantial differences in costs, and predictably, that building efficiency, lighting, and HVAC are the low-hanging fruit available at negative cost. The implication is that US companies should look to efficiency measures at home before buying international offsets, though international offsets might be preferable to renewables in the US.

The surprise in the data is that mitigation costs for most efficiency measures in the US appear to be substantially below those in Europe, China, and India. The cost per (metric) tonne of CO2 saved approaches €50 (Euro) in the US for these efficiency measures, while in Europe the saving is about €25 Euro. In India and China, there is a positive cost to these measures. The exception is lighting, for which the cost saving in Europe, China, and India is €60-90/tonne. Even more surprising is McKinsey’s estimate of mitigation costs from cleaner vehicles (hybrids and pure electrics), at negative €79 in the US and about €35 in Europe (i.e. net savings).

The Financial Times does not give the basis for these calculations, and the estimates are projected for 2030. It’s unclear if McKinsey is estimating real resource costs, or the costs as viewed by consumers or manufacturers, taking subsidies and taxes into account. Perhaps McKinsey is factoring in much higher fuel prices and lower battery costs by 2030, but these values are highly speculative. I looked at buying hybrid Prius last year, which cost about $6000 more than the Mazda 6 I finally settled on. I would have to drive about 15,000 miles a year for 10 years, with fuel at $3/gallon, to break even (and that ignores discount rates for future savings). My actual mileage is only around 7,000 miles a year, which is why I don’t feel too bad about not buying a hybrid. It’s also unclear why the savings in the US, with it’s cheap gasoline, are more than double those in high-cost Europe. Perhaps its because Europeans are already driving lightweight high-efficiency diesels.   Another mystery is why renewable power is so much cheaper in China and India compared to Europe and the US. Most of the cost in solar and wind is in manufacturing, which is already dispersed through a complex global supply chain. So those costs should be the same wherever the renewables are installed. Installation and maintenance will rely on local labor, which is much cheaper, of course, in developing countries (but might be expected to rise quite sharply over time).

The availability of free carbon lunches has been discussed before on Climate Inc. Mark Sarro and Jurgen Weiss urged caution regarding the hidden costs of energy efficiency, while I noted that the low-hanging fruit might be locked up or hidden away behind misaligned incentives, inertia, and market barriers. Indeed, he fact that negative cost (i.e. profitable) opportunities to reduce carbon are not being exploited points to the importance of these hurdles. Because these barriers are frequently organizational, behavioral, and institutional, putting a price on carbon is not the best way to move ahead: a price high enough to be effective would be politically infeasible.

To repeat what I said in the earlier post: Most companies have traditionally paid little attention to potential energy savings because nobody was paid to do so. Once companies assign managerial responsibility for the task, measure the savings, and evaluate performance accordingly, they start finding a lot of low-hanging fruit. Many of the barriers are more complex, and require restructuring markets and institutions – California is famous for paying utilities to save energy, not sell it. Utilities are also finding that they can nudge consumers in the right direction with non-price signals, such as comparisons with their neighbor’s bills. The booming field of behavioral economics points to all sorts of low-cost ways of shifting behavior.

Of course, these solutions are not cost free – they involve managerial time, some capital, and transaction costs. Some of the barriers are complex and would require large scale institutional restructuring, requiring government-business collaboration. But one person’s transaction costs are another’s business opportunity (the transaction costs of carbon markets will keep financial firms smiling). The key point here is that there are creative organizational and managerial approaches to unlock the doors to low-cost or even negative-cost carbon reductions. The carbon price is, by itself, an inefficient and ineffective tool.