2024-04-22 16:17:28
To avoid global warming with catastrophic consequences, we absolutely must reduce our carbon dioxide (CO) emissions.2). Unfortunately, businesses and governments have so far struggled to commit to an action plan to achieve this. One of the reasons comes from what economists call externalities. Reduce your own CO emissions2 it is creating a positive externality, beneficial for all, but individually costly.
However, encouraging companies to reduce their profits in order to provide positive externalities is a real challenge. It is likely that many companies will not agree to this without pressure from the government.
One might think the government might simply resolve this situation by imposing firm restrictions on corporate carbon emissions.
In reality, the government itself is constrained. In his decision, the political actor must integrate the impact of the regulations on the economy, in particular employment, as well as the political opposition of the economic actors affected by the regulation.
Cruel dilemma
Added to this is a second difficulty. Whether regulatory bodies have the capacity to measure CO emissions2 companies, this is just the bottom line. It is much more difficult to measure actual investments in green technologies, because it takes time between the investment expenditure and the moment when it results in relevant innovations and reduced emissions.
Public sector intervention is unlikely to fully replace the lack of action by private companies. And it is also unlikely that private sector initiatives will suffice without voluntary government action. This is a serious dilemma, creating a real risk that investments in green technologies and reduction of emissions will ultimately prove insufficient. It is therefore necessary to find an efficient link between the actions of governments and businesses.
To study this problem, we developed an analytical model. This proposes possible trajectories for reducing CO emissions.2.
Two ways to be pragmatic
Governments are pragmatic. Their long-term actions are based on realistic anticipation. But what is considered a realistic future depends, in turn, on the decisions businesses make today. Businesses, too, are pragmatic, but in a different way. The decisions they make today are based on what they think will happen in the future. However, what ultimately happens depends to a large extent on the technological investment choices that have been made. It’s a chicken and egg situation.
Our analysis reveals that when it comes to the investments and innovations needed to reduce our CO emissions2, the future as companies imagine it helps shape the real future. If companies anticipate restrictive regulations in the more or less near future, they prefer to invest today in green technologies, in order to be better prepared for what awaits them. However, these investments, particularly in R&D, enable innovations and an improvement in the efficiency of green technologies, which can benefit all companies, including those which did not initially invest.
Create strategic complementarity
As a result, the decision of companies to invest upstream in green technologies can change the future for everyone, including companies that have not made this same commitment. Indeed, if green technologies become cheaper and more efficient, it becomes easier for the government to impose a reduction in emissions without fear of putting companies in too much difficulty.
But we can also imagine a completely different scenario in which companies do not expect to have CO emissions restrictions imposed on them.2. In this case, they have little incentive to quickly reduce their emissions by investing in green technologies. The government then finds itself in a difficult situation, because if it imposes restrictions that are too difficult to maintain and too costly for businesses, this leads to a fall in economic activity and employment.
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To reduce emissions, it is therefore necessary for companies to invest quickly in green technologies and for the government to impose restrictions. This is what economists call a situation of “strategic complementarity”, in which the strategies of the actors (in this case private and public) reinforce each other to create a virtuous circle.
A self-fulfilling regulation?
What will tip the scales in favor of the virtuous circle rather than the vicious circle? A government showing real political determination would play an important role in this situation, but financial actors, too, might help steer the balance in the right direction. The problem with externalities is that each actor is small compared to the overall system, and has no incentive to act when their actions have only a negligible effect. But today there are institutions or groups of institutions of truly substantial size, whose actions have a significant effect on the overall system.
This is the case for very large investment funds, such as Blackrock, which owns more than 5% of the shares of many very large companies (such as Apple, Visa, Exxon, Procter & Gamble or Tesla). If companies in which a very large investment fund holds significant shares embark on an investment policy in green technologies, this can have a significant positive effect on innovation in these technologies. Positive impacts on all businesses are then highly probable.
If the corresponding improvement in green technologies is strong enough, it can significantly reduce the economic and social cost of regulation imposing a reduction in CO emissions.2. This can make it possible to lean towards the virtuous balance, in which the anticipation of regulation aimed at reducing emissions becomes self-fulfilling.
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