The Externalities of Climate Change

January 18, 2010

Climate changing emissions are the granddaddy of negative externalities, those costs that business foists off—on to society. Foisting permits charging less for products. A result is that less sustainable products often squeeze more sustainable items out of the market.

Few people in the United States may have noticed, but for the past several months, the eyes of the world have been on the issue of climate change. This attention led up to a meeting last month in Copenhagen. The nations of the world gathered there to agree on a plan to combat climate change. The methods to be used were essentially those discussed each month in this column … limiting climate change by incorporating its costs into the prices of goods.

The meeting was a failure. No such plan was agreed to. The government of the United States had itself been unable to agree on anything meaningful in this regard—how could the world community be expected to?

Scientists have long observed an upward trend in land and water temperatures around the world, but became particularly concerned about this in the 1980s. The most authoritative source of climate change information is the Intergovernmental Panel on Climate Change. The Panel, formed by an agency of the United Nations in 1988, is made up of the world’s leading climate scientists. The Panel has published four formal assessments of the causes and consequences of climate change.

The most recent assessment was issued in early 2007. This assessment concluded, for the first time, that global warming is “unequivocal� and that human activity is, by a likelihood of over 90 percent, the biggest cause of the temperature increases since 1950. These assessments have been buttressed over the years by numerous other studies carried out by scientists around the world.

As early as the summer of 2005, the national science academies of the world’s eight leading industrial nations, plus Brazil, China and India, sent an open letter to the world’s top political leaders, urging them to take concerted action on this matter. Others have done so since. Last year, United States agencies, including the Environmental Protection Agency and the United States Geological Survey, issued dire warnings concerning impacts on the country’s mid-Atlantic states.

Other scientists—at Oxford University and at Germany’s Potsdam Institute—have made calculations of a different kind, but they’re not encouraging either. These studies indicate that even the most drastic emission cuts presently being discussed will not be sufficient to avoid catastrophic impacts to the planet.

If the ultimate concerns about climate change come about, major cities around the globe—many of which are at sea level—could be threatened. Rapid adaptation of agriculture could be necessary and difficult. A three-year study by a group of scientists in India, for example, has indicated that climate change there will mean lower rice and wheat yields, coastal flooding, more cases of malaria and longer periods of drought.

What is it that causes climate change and what, if anything, can be done about it? The evidence of science—the only significant evidence we have—is that carbon dioxide and other gases in the air create a greenhouse effect. They trap heat. The human role in climate change consists primarily of burning carbon-based products that release carbon dioxide into the air. Chief culprits include power plants fired with carbon products and vehicles powered by petroleum derivatives. The effects of greenhouse gases are offset by vegetation that “breathes� carbon dioxide. But, unfortunately, even as the use of carbon products increases, plant life is in decline as we turn rain forests into cattle ranches, make farms into Wal-Marts and add lanes to our freeways.

These causes of climate change get us to the heart of the political problems in dealing with it. The United States, although about to be passed by China, is the world’s largest producer of greenhouse gases. It has the world’s largest economy, it runs largely on carbon-based fuels and its people have a long-standing love affair with the private automobile. Moreover, it is home to several large companies engaged in the production and/or distribution of petroleum products, carbon-based electric power and gasoline-powered vehicles.

Then, there are China and India. China, we just noted, is—if not already—about to become the largest emitter of all. India has a considerable and growing economy. These countries generate great volumes of warming emissions because, among other reasons, they have taken on more and more of the world’s manufacturing and they have invested less in technological and other measures to alleviate the problem. The emissions of both, however, are far less than those of the United States on a per capita basis.

And, not surprisingly, the United States, China and India have been the greatest roadblocks in dealing with climate change. Key leadership in the United States has a history of denying the problem, but even if this were not the case, it would take uncommon political courage to take on the industries affected, as well as citizens with their private cars.

China and India argue, not unreasonably, that the developed countries became developed by creating greenhouse gases and that it would be unfair to them if the rules are changed before they, too, achieve that status. As a late 2005 New York Times article put it, “The developing countries have repeatedly refused to commit themselves to greenhouse-gas limits until the established industrial states make progress; and the United States, the biggest source of the heat-trapping gases, insists on movement from the emerging economic competitors before it considers cuts.�

On a microeconomic level, we can again relate this to our usual designated example Coca-Cola. The company obviously doesn’t have climate change issues to the extent of an automaker, a carbon-based energy company or a carbon-based power plant. Nevertheless, climate change concerns Coca-Cola enough for the company to mention it three separate times in the Risks section of its most recent Annual Report on Form 10-K to the Securities and Exchange Commission. Interestingly, these risks are couched in terms of the potential loss of profits if governments around the world force the company to do something about the causes of climate change. In the language we have been using, Coca-Cola’s concern is about having to internalize costs that, to date, the company has managed to externalize.

Particular aspects of Coke’s product life cycle that contribute to its carbon footprint include industrial agriculture, which we’ve discussed before, packaging, transportation and refrigeration.

Industrial agriculture is involved in the climate change issue in at least two ways. First, land that may serve as a carbon sink is often cleared for agricultural purposes. Then, production itself involves the intensive use of carbon fuels. Michael Pollan, in his book “The Omnivore’s Dilemma,� says, “We seldom focus on farming’s role in global warming, but as much as a third of all the greenhouse gases that human activity has added to the atmosphere can be attributed to the saw and the plow.�

Substantial portions of Coca-Cola’s products are delivered in aluminum cans and plastic bottles. Both of these consume carbon-based energy in their production. This consumption can be greatly reduced through recycling and—prompted by environmental activism—recycling of these containers has in fact increased. But the company has strongly resisted measures, such as container deposits, that would require it to play a direct role in bringing this about.

Who knows the impact of transportation? Coke trucks are ubiquitous in every city and town in the world. The company has recently moved to electric trucks in a few locations, but the efficacy of this depends primarily on the source of the electricity involved.

And, who knows the impact of refrigeration at the point of sale and on consumers’ premises? The vast majority of soda machines—the big ones where you put money in and remove the product from a slot at the bottom—are particularly problematic. There are tens of thousands of them and they emit a gas that is over 1,000 times more potent than the carbon dioxide we usually worry most about.

From information Coca-Cola has recently released, it appears that its greenhouse gas emissions are in the range of 20 million metric tons per year. Some three-fourths of this comes from refrigeration. But, it appears that these figures do not include the emissions associated with the agricultural products it buys, and it is unclear how far down the product life cycle the figures go.

Can anything be done? Probably not. Think Washington last fall where the legislative and executive branches of government were nominally in the hands of people who wanted to do something. Think Copenhagen last month where, again, the majority of those in attendance claimed to be keen on making a deal. Sure, we can drive small cars, ride bikes and perform other acts of personal piety, but to what end? This is a public policy issue and needs to be dealt with as such. Cap-and-trade or carbon taxes would be a start toward getting this under control. But, where’s the will?

After careers in public and private accounting, James Donovan joined the business faculty at the University of the Incarnate Word, San Antonio, Texas, in 1982. Having served at UIW for 27 years, at present he is a senior adjunct and teaches the Sustainability Performance and Reporting course to graduate students of accounting and business.
Editor’s note: James is also a former director of the Socially Responsible Investment Coalition and is still very active in their mission. For more information about SRIC, visit www.sric-south.org. James and his wife Wanda are frequent visitors to New Mexico, especially Taos.