Climate Change The Private Sector Acts While Trump Holds Fire

Lookin’ for love in all the wrong places. That’s what we economists have been doing to cope with the possibility, some say certainty, that the planet is heating up in response to human activity. We have been asking politicians to support a carbon tax which many of their constituents are loath to bear, and the benefits of which will not be realized until long after the politicians have retired from public life. In the process we are warning Americans, many of whom say they prefer socialism to capitalism, to fear the alternative of regulation and bigger government. They don’t. Silly us.

We have forgotten F.A. Hayek’s admonition that “nobody can be a great economist who is only an economist …the economist who is only an economist is likely to become a nuisance if not a positive danger”. As “only economists” we have become a bit of a danger by focusing policy debates almost exclusively on taxes that would induce consumers to curtail purchases of products associated with high levels of CO2 emissions. Although more and more politicians are giving us a serious hearing, few are willing to risk their futures by raising taxes, especially in the US, where the President is unalterably committed to the proposition that global warming as a result of CO2 emissions is “a hoax”, perpetrated by “perennial prophets of doom and their predictions of the apocalypse” as he put it in Davos.

Trump did agree to have America participate in the planting of 1 trillion trees, but not to reduce climate change. Rather, to conserve “the majesty of God’s creation…”. As Marc Benioff, co-founder of Sales Force,put it, “the tree is a bipartisan issue. No one is anti-tree.”

Secretary Steve Mnuchin suggested Greta Thunberg take lessons in economics. The teen Swedish climate activist is as certain we are heading to global catastrophe as Trump is that climate change is a hoax. Such dueling certainties make the development of sensible public policy difficult.

Governments, however, are not the only players in this game: private-sector players, acting in the jobs, capital and product markets matter. “We believe industry can deal with this issue on its own,” says Mnuchin, and perhaps it can, although what BlackRock CEO Larry Fink calls “realistic carbon pricing” would surely help.

Start with the jobs market. Americans not only buy stuff, they sell their labor. And they are increasingly unwilling to sell that labor, especially when it has a high skills content that gives them bargaining power, to companies that do not have strong programs that somehow comport with their “values”. Buyers in the tight and competitive labor market cannot ignore the preferences of the employees they seek to hire. Competitive pay and opportunities for growth, of course. But many tell interviewers they also want to feel good about what they are doing.

Which might well be one reason Microsoft, whose CEO Satya Nadella says, “Our employees will be our biggest asset in advancing innovation,” announced aggressive plans to become carbon negative — remove more carbon than it emits — by 2030 “both for our direct emissions and for our entire supply and value chain,” funded by an expansion of the “internal carbon fee” adopted in 2012. The company will deploy $1billion of its own capital to develop new technologies “to help us and the world become carbon negative”. There’s more. Microsoft hopes “to remove by 2050 all the carbon the company has emitted … since it was founded in 1975.” Come work for us: we offer more than massages, ping pong tables and 24-hour healthy cuisine.

The market for capital is another in which concern about rising temperatures is now a factor. Fink has announced that BlackRock, which has $7.43 trillion under management, “will exit investments” that “present a high sustainability-related risk,” and vote against managements and boards insufficiently attentive to these risks. Whether he really believes such divestment creates “little downside” risk for BlackRock’s portfolio, or is merely “virtue-signaling,” we cannot know. Let’s hope it is the former. “I have never known much good done by those who affected to trade for the public good,” wrote Adam Smith 244 years ago.

But we do know three things.

  • Some companies might possess assets that future regulations or taxes will sharply reduce in value. Others are exposed to severe weather and other events alleged to be the result of global warming. If investors are underpricing those risks, divestment is in Fink’s clients’ economic interests.
  • BlackRock’s plan to divest holdings in companies for which thermal coal production accounts for more than 25% of revenues exempts such large, diversified coal producers as Anglo American and Glencore. Coal divestments, reckons The Economist, come to less than 0.1% of BlackRock’s assets.
  • Fink can’t count on help from most bankers. They want no part in telling client-borrowers what environmental policies they should adopt in order to obtain loans.

We might add that we also know, or think we do, that hard-headed clients that entrust their money to firms such as BlackRock are concerned about the sustainability of the value of those investments. Fink is not alone in thinking that. Stephen Schwartzman, founder and CEO of the Blackstone Group, which has $554 billion under management is reviewing the private equity firm’s portfolio to take account of sustainability. “Ironically, it ends up being good economics,” he told reporters in Davos.

In addition to labor and capital markets, consumer preferences might be operating against purchases of emissions-heavy products. Too much salt, or sugar, or fat has prompted consumers to boycott a product. Many CEOs worry that association with a heavy carbon footprint will become a similar flashpoint, especially for climate-concerned millennials, who will pay more for a cleaner product even as they resist paying more to cover the cost of a carbon tax. To an economist who is only an economist this seems irrational; to a social scientist not so much.

In short, private-sector labor, capital and product markets are doing some of the job economists have assigned to carbon taxes. This does not mean abandoning efforts to increase support for carbon taxes that confront consumers with the social costs of their consumption decisions. It means supplementing advocacy for that tax with policies that make labor, capital and product markets even more effective in forcing reductions in emissions. Fink, Nadella and their peers can use all the help they can get.

That help will, of course, not be forthcoming from the government if, as the odds now suggest, Trump’s lease on the White House is renewed. But despite the apocalypse-now crowd, this is a long battle. It is worthwhile gathering support for carbon taxes and banking it for later use, at which time the political class is likely to be in search of an alternative to both inaction and the spectacularly costly Green New Deal. This most efficient and least government-swelling of tools to cope with the risk of climate change would be on the shelf and ready for use.