• 06 Apr 2007
  • What Do You Think?

Will Market Forces Stop Global Warming?

HBS professor Jim Heskett sums up many creative responses from readers on the role of business in combatting global climate change. Online forum now closed.
by Jim Heskett

Summing Up

Debate on this month's questions occurred on at least three levels. Is global warming occurring? Do humans (primarily through CO2 emissions) have much to do with it? Should we rely on market forces to provide appropriate responses, or will this require incentives provided by government?

Clearly, my effort to frame the discussion around just the third question failed. As George Olsen said, "A lot of the people posting to this discussion appear to have missed the point." But responses have prompted me to wonder whether they did or not.

The focus of comments was on questions two and three. Some respondents don't believe that global warming has much to do with humans. John Kurywchak commented "The chief contributor of CO2 into the atmosphere is the world's oceans…" (regardless of) "industrial activity." Paul Sweeney added, "I don't believe mankind is looking at the actual cause right now, and consequently that human innovation is not focusing on solving the right problem." Others were concerned about the consequences of responses based on imperfect information. P. T. Gibbons said, "If we were successful in 'stopping' global warming, I suspect there would be some nasty unintended consequences for our weather and our world." Leading from this line of reasoning, Phil Jackson advises us "we would be better (off) investing in the resources to handle whatever global warming throws at us." But most assumed human involvement, and commented on the role of market forces.

A number of you expressed the hope that the private sector can provide adequate response to a problem that is either real or increasingly perceived to be so. Commenting that "Heating costs go up, the consumer insulates," C. J. Cullinane concludes that "Industry and the individual consumer will have to be the driving force for this change." Edward Hare comments that "Given history, government will most likely get things wrong. A 'free' market will do better…albeit more painfully to too many of the world's six billion residents…." More were skeptical of this view, suggesting that either subsidies or taxes or both will be required to: (1) raise market prices for carbon-based energy in developed countries, (2) encourage the development of new innovations to lower the cost of energy worldwide to what is becoming referred to as the "China price," or (3) a combination of both. As Nancy Sullivan said, "Business will not do it without government. Government will not do it without business."

The discussion also turned to one of timing, with Chris McFadden teeing up the issue by saying, "Global warming will not 'stop'…until all accessible hydrocarbons have been consumed. Our present day efforts only affect rate, not the final inevitable steady state." Several concluded that whatever change in markets and innovation is contemplated will take place faster, for better or worse, with government intervention. Mehmet Genc pointed out that "Markets can correct the situation if these costs (of CO2 emissions) can be internalized, but government has to help…." But several suggested that government intervention has to occur on a global basis. As Ulysses U. Pardey put it, "When companies have to play by the same rules, then fair competition can take place…terms and conditions…for all concerned industries worldwide seems to be a must."

The one question that is within the realm of management is what role, if any, business leadership should be playing in this debate? Should it be arguing for government to step aside and let free markets prevail? Or should it be asking governments to set the rules of competition on CO2 emissions sooner rather than later so that businesses can plan and react accordingly? What do you think?

Original Article

The debate over global warming appears to have passed a tipping point. We can debate just when it happened. But it was probably sometime before Al Gore's film won the Academy Award. From now on, we can expect to be bombarded with almost daily news articles about its long-term effects on those living in low-lying areas along coastlines, those attempting to grow crops in rapidly shifting climates, those living along the equator as opposed to temperate climes (being addressed by the UN's Intergovernmental Panel on Climate Change as this article hits the Internet), and even those getting ready to drill for oil in open water that the polar ice caps still cover. The list goes on and on. Within the past few days, Thomas Friedman, the journalist and best-selling author of The World Is Flat, intimated in an interview with Tim Russert that he is particularly excited about what may happen when the American business community and its ideas are unleashed on the problem. We may get the gist of this in an upcoming article of his that, according to him, will be titled, "Green Is the New Red, White, and Blue."

Whether or not you believe that humans are causing global warming or that it is occurring at all is beside the point. The same was true on a much smaller and less lethal scale with Y2K. But unlike Y2K, there is no date certain by which we will know whether we have won or whether we were even fighting the right battle. There is going to be a lot of money made or lost for a long time on the effort to combat global warming. It raises the question, of course, of whether the free market has the patience for investments that may not pay out for many years. The end value may be huge (even infinite?), but the discounted value of it may be modest.

One thing we do know. There is no question that when Americans put their talent, effort, and money behind an idea, remarkable things happen faster than anyone expected. Wind power (regardless of what you think of it) in Texas is a good example. In 1999, under then-Governor George W. Bush, incentives were put in place for the development of wind power with the goal of producing 2,000 megawatts of generating capacity in ten years. The goal was achieved in five years. So Texas has renewed the incentives and raised the goal to 5,000 megawatts. I wouldn't bet against that goal being exceeded as well. Or consider Shuji Nakamura, the Japanese developer of light-emitting diodes that one day may provide energy-efficient sources of light. He moved to the U.S. where people were most interested in his work, as documented in a new book, Brilliant.

Just how should the free market be unleashed on this effort? And should business be playing a larger or different role in the debate? For example, should the Big Three argue for much higher mileage goals, however difficult they may seem at the moment to meet? After all, Toyota may owe the Japanese government a debt for holding it to stricter mileage standards than the U.S. What kind of leadership should business in America, the world's largest polluter, play in helping it catch up to or lead (depending on how you see it) other developed economies?

What kind of incentives, if any, will the free market need from government to encourage innovation and action now? Should the incentives constitute both a carrot (such as subsidies) and stick (taxes)? Just how should the free market be put to work on the challenge? Should limits be set and a market created for tradable "energy credits," as in cap-and-trade programs for utilities and others? Should "stretch" targets for highway mileage be imposed, with auto companies or others in the industry given opportunities to trade mileage rating credits? Or should government step aside and let the market work its ways without incentives? If so, what would happen? How, if at all, should business leadership play a larger role in shaping global warming policies and programs? Will market forces stop global warming? What do you think?

To read more:

Thomas L. Friedman, The World Is Flat: A Brief History of the Twenty-first Century (Farrar, Straus and Giroux, 2006)

Bob Johnstone, Brilliant! Shuji Nakamura and the Revolution in Lighting Technology (London: Prometheus Books, 2007)