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COPYRIGHT 2002 Journal of Business Administration
INTRODUCTION
Much has been said and written about a new business ethic of sustainability in which corporations voluntarily assume responsibility for shifting our economy to a trajectory that has lower environmental impacts and less environmental risks. As a basic principle, this is easy to agree with. Businesses can and should do more.
But what does this mean for public policy? Should government simply step aside, becoming in essence a facilitator, information provider and cheerleader? More specifically, what does this mean when shifting to a more sustainable trajectory is costly? Can and should we rely on business to lead the way? What should be the role of government? What should be the policy position of corporate leaders?
In 1992, the Canadian government signed the United Nations Framework Convention on Climate Change and set a target to reduce Canada's greenhouse gas (GHG) emissions back to their 1990 levels by the year 2000. To this end, the federal government launched in 1993 the National Action Program on Climate Change, which included the Voluntary Challenge and Registry (VCR). Corporations in the VCR were asked to submit an action plan for GHG reduction and provide regular progress reports, all on a voluntary basis. By 2000, the VCR had 757 action plans from firms covering more than 50% of industrial GHG emissions.
The impact of the VCR on GHG-related business decisions is in dispute. During the period 1993--2000, emissions of several industrial sectors increased only marginally, although those of the fossil fuel production and electricity generation sectors grew significantly. In a recent report, the Analysis and Modelling Group (1999, 43)--an entity of the National Climate Change Process created in 1998--estimated that the VCR and related initiatives had reduced national GHG emissions by 35 megatonnes (Mt) of carbon dioxide equivalent [(C[O.sub.2]e).sup.2] from what they otherwise would have been on an annual basis over the period 1993--98 (a 5% decrease). The method used to estimate this effect was not explained. In contrast, the Pembina Institute (Bramley, 2002) suggested that the VCR had little effect, a conclusion based on the evolution of aggregate industrial emissions (24% increase in the period 1990-2000), lack of program coverage (less than 55% of total industrial emissions), and case studies of the target setting and emission accounting practices of some individual firms.
In addition to the VCR, the National Action Program on Climate Change included a package of voluntary GHG reduction programs directed at providing information and inducements to consumers and businesses. While these programs have not been assessed for their individual impacts, the national GHG trend has not been encouraging. Figure 1 shows that from 1990 to 1999, Canada's total C[O.sub.2]e emissions grew by 20%, from 607 to 726 C[O.sub.2]e (Environment Canada, 1999; Environment Canada 2002). Ironically, even though there were no voluntary GHG reduction programs in the previous decade, GHG emissions grew by only 6% between 1980 and 1990. The dramatic increase in the period 1990--2000 was driven in part by the preference of consumers for less efficient vehicles and greater vehicle use. But it was also caused by corporate investment decisions resulting in substantial expansion of the oil and gas sector, a greater use of fossil fuels in electricity generation, stable or slightly increasing emissions in some other industrial sectors, and massive marketing expenditures to promote energy intensive products such as sport utility vehicles.
More recently, Canada negotiated in 1997 a Kyoto Protocol target of reducing national emissions by 2010 to 6% below their 1990 level. Current projections, however, anticipate emissions in 2010 at about 240 MT above this target (Figure 1), meaning that a reduction of 30% from the business-as-usual trend is required within less than 10 years (Government of Canada, 2002). The Kyoto Protocol does not require that Canada achieve all of its reduction through domestic actions; it can purchase credits from other signatories whose emissions are below their commitment. But the Kyoto Protocol was intended as an initial step toward the larger goal of reducing global GHG emissions over the next several decades (in order to stabilize atmospheric concentrations of GHGs), meaning that substantial domestic reductions must eventually be considered. This dramatic reduction in GHG emissions is a major challenge given the strong current trend of the economy toward ever-higher emission levels.
Many policy analysts and business leaders have begun to believe, therefore, that GHG reductions of this magnitude, even with a longer timeframe than 2010 for implementation, will be difficult and costly to achieve. If this is true, what is the potential contribution, if any, of the new business ethic of sustainability? Will businesses be willing to incur substantial extra costs voluntarily to reduce GHG emissions in their production processes, or forego profits from the sale of goods and services that cause higher GHG emissions? Will all businesses agree to this and act accordingly, or will some free-ride on the efforts of others? What are the appropriate roles for business and government when sustainability is expensive?
In this paper, we explore these questions by examining Canada's prospects for reducing GHG emissions in the coming 10-20 years. We start with an estimate of the costs of reducing GHG emissions using the Kyoto target as a reference. Estimates indicate that the costs of achieving Kyoto domestically are substantial given current technologies and the current preferences of consumers. Because of this high cost, it is difficult to envision a scenario in which the Kyoto target, even if the target is extended over a longer timeframe, can be achieved by the voluntary actions alone of businesses and consumers. We then assess the potential for technological innovation and shifting consumer preferences over a 20-year period, and conclude that substantial decreases in the cost of GHG reduction are achievable. This begs the question, however, of how to induce the necessary technological innovation and shift in consumer preferences. We evaluate the policy options, including voluntarism, and then focus on a promising approach--sector-specific, market-oriented regulations--that we suggest might be explored and even advocated by corporate leaders as part of a new ethic of sustainability.
IS GHG EMISSION REDUCTION EXPENSIVE?
To the casual observer, estimating the cost of GHG abatement might not seem complicated. Costs are part of our everyday lives. A closer look, however, reveals several dimensions that render the costing exercise anything but simple (Jaccard, Nyboer and Sadownik, 2002, 25-48).
* We require a business-as-usual forecast. If this forecast shows society naturally evolving to a lower GHG intensity, it will estimate much lower costs of reaching a given reduction target than if it shows the opposite. Over the last decade, each new forecast of Canada's GHG emissions in 2010 has projected them to be higher than the previous forecast. In 1999, for example, the government projected that its Kyoto target required a GHG reduction of 180 MT C[O.sub.2]e per year by 2010, but this was revised upward just two years later to 240 MT C[O.sub.2]e. Costs estimates have risen accordingly.
* Cost estimates depend on assumptions about external factors. What will be the international price of oil? What effort, if any, will the U.S. make to reduce GHG emissions and how will that affect the cost of commodities that compete with Canadian producers? How much international trading of emission permits will be allowed and what will be the price of such permits?
* The pace of technological change can affect costs. If technologies that reduce GHG emissions become available quickly and cheaply, the cost of achieving a given GHG target can fall significantly.
* The secondary benefits and costs of GHG reduction must be accounted for. Some studies include a monetary estimate of the local air quality improvements resulting from GHG reduction. But the value of these improvements is highly uncertain, leading to a wide range of cost estimates.
* Interest group advocates and even expert analysts do not agree on the definition of costs. Some focus only on anticipated financial costs of changing technologies while others add to this a value for welfare losses due to the intangible preferences of consumers.
In our view, this fifth factor--the dispute over the definition of cost --has been the key cause of the widely divergent estimates for GHG reduction costs throughout the world. We therefore explain this is in some detail.
A methodological schism divides costing experts into bottom-up and top-down camps. Bottom-up analysis, applied frequently by engineers, physicists and environmental advocates, explicitly estimates how changes in the energy efficiency, fuel type or emission controls of equipment, buildings, infrastructure and land use might lead to different levels of GHG emissions. Technologies (furnaces, light bulbs, electric motors, cars) that provide the same energy service (space heating, lighting, industrial motive force, personal mobility) are generally assumed to be perfect substitutes except for differences in financial costs, energy consumption and GHG emissions. (3) When their financial costs (capital and operating) in different time periods are converted into present value using a social discount rate, many current and emerging technologies available for reducing GHG emissions appear to be profitable or just slightly more expensive relative to existing equipment. Bottom-up analyses often show, therefore, that substantial GHG emission reduction can be profitable or low-cost were these low-emission technologies to increase from their small market share to achieve market dominance (Lovins and Lovins, 1991; Brown et al., 1998).
Many economists criticize the bottom-up approach for its assumption that a single, ex ante (anticipated) estimate of financial cost differences...
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