Companies need financial incentives, in addition to regulation, to make transformational sustainability efforts a higher priority.
Carolyn Geason-Beissel/MIT SMR
When it comes to mobilizing the economy for climate action, most recent progress has been incremental. To come close to achieving the goals of the Paris Agreement, the pace and scale of change must be much more radical. The scaling up we need is not simply a matter of dialing up what we have already begun. What we now need is qualitatively different, and today’s approach won’t get us there.
Merely strengthening disclosure requirements on climate-related data and information could increase regulatory burdens without having a significant productive impact. Regulation needs to be partnered with industrial strategy to create the commercial demand for climate action at scale and for the sustainable finance that is increasingly available. Japan is seeking to do this with a balanced mix of sticks and carrots that is in marked contrast to the approaches of both the United States (mostly carrots) and the European Union (mostly sticks).
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Today we expect companies to act on climate change without a financial case for doing so. Their nonfinancial rationales might be to do the morally right thing, to satisfy the ESG (environmental, social, and governance) interests of investors, to instill pride and a sense of commitment among workers, or to keep their options open in the face of uncertainty. These are all sound motivations, but they rarely add up to a solid financial case in which cash investments predictably generate surplus cash returns. As a result, they drive incremental commitments but can’t drive action at scale.
Take, for example, the steel industry, which currently accounts for around 8% of global greenhouse gas emissions. There are multiple technological approaches to decarbonizing steel production, but they are all difficult, speculative, and hugely expensive. As Japan’s Ministry of Economy, Trade, and Industry (METI) observes in its technology road map for the iron and steel industry, “Replacing the existing process with a new one … will require a huge amount of capital investment, resulting in large capital and operating costs. But these additional costs are only for decarbonization and contribute neither to improving the performance of steel nor increasing its productivity.”
Driving climate action at the scale that is needed will require more than nonfinancial incentives for businesses.[
References
1. J.A. Schumpeter, “Capitalism, Socialism, and Democracy,” (New York: Harper & Brothers, 1942); and A.J. Slywotzky, “Value Migration: How to Think Several Moves Ahead of the Competition” (Boston: Harvard Business School Press, 1996).
2. E. Thurbon, S.-Y. Kim, H. Tan, et al., “Developmental Environmentalism: State Ambition and Creative Destruction in East Asia’s Green Energy Transition” (Oxford, England: Oxford University Press, 2023), 3.
