MQUESTIONS are in the minds of business leaders as they approach the UN‘s COP26 climate summit from October 31 to November 12. For CEOs making the trip to Glasgow, they range from the mundane (traveling by train? eating only plant-based foods?) to the deep (why am I going there in the first place?). The most important question, however, is hardly asked: what if governments, sooner or later, accept commitments serious enough to limit global warming to 1.5-2.0 ° C above pre-industrial levels, as stipulated in the 2015 Paris climate agreement? This question has an answer that most multinationals avoid. It would send shockwaves through all of their business models.
Generally, companies don’t like to be forced to do anything. They prefer to make voluntary gestures, just enough so that governments are not on the back. Right now, they are throwing out promises to reduce carbon emissions to “net zero” like confetti, on the grounds that such promises attract investors, employees and customers. It is a step in the right direction. And yet some of these promises are thin as paper. Out of more than 4,200 companies in gIn the club of large economies that have unveiled their climate ambitions, only a fifth have committed to so-called scientific goals that would keep the world on track to achieve the goal of the Paris Agreement. This forces companies to start cutting emissions within years, not decades. For large emitters, this poses an immediate threat to profitability. It is forcing credulity to think that altruism is enough to convince companies to act. Governments will have to apply the thumbscrews.
Even business people are realizing that the best way to exert pressure is to impose a global system of carbon taxes, with some form of redistribution to ease the pain of poorer thumbs. The problem is that only about a fifth of global emissions are covered by a carbon price. As a result, the world average price is only $ 3 per tonne of carbon dioxide. To meet the ambitions of the Paris Agreement, the IMF says the global carbon price must rise to $ 75. Others think it should be almost double. For some large emitters covered by the European Union Emissions Trading System, it is already over € 60 ($ 69). In the new (limited) pattern of China, on the other hand, this is laughable. America has no federal regime of any kind.
A higher world price would affect all businesses, albeit unevenly. For now, it is considered too long to be taken seriously. But let’s assume for now that this actually happened.
The first important thing would be to separate the big emitters from the rest. The first to adopt bold emissions targets come from industries such as retail, where reduction is relatively easy. In countries like Great Britain, where the grid is decarbonizing quickly anyway, this may not require any independent effort on the part of energy users. A small number of sectors responsible for the bulk of listed company emissions – electric utilities, oil and gas companies, steel and cement manufacturers – face a much more difficult challenge. As the demand for carbon-intensive products collapses, they are expected to find new ways to generate cash flow. Some are getting into renewable energies. Some see a future in plastics and low carbon materials. But if they can’t turn them quickly into huge sources of income, they’d better shut down and give money back to shareholders. Western companies can hope to sell their dirtiest assets to state-owned companies in the developing world. However, these would also be subject to a real global carbon tax. For some, the sooner they start to lighten their carbon load, the better.
For a larger set of companies, supply chains would be the main problem. Standard Chartered, a bank, says nearly three-quarters of multinationals’ emissions come from their suppliers. Tackling these issues is a huge task. Take the coal-rich China, where many of them are based. Guido Giacconi of the EU The China Chamber of Commerce says that although the country invests heavily in renewable energy, it is “difficult, if not impossible” to ensure that a company’s energy use is coal-free, due to the opacity from the electrical network. This makes it difficult for companies like Apple to certify that their supply chains in China (where iPhones are made) are carbon neutral. If its Chinese suppliers were therefore subject to a carbon tax, it could have to increase the prices of iGadgets.
There would also be costs associated with moving supply chains out of China. In some Asian alternatives, such as Vietnam or Indonesia, fossil fuels are more common than in China. In emerging markets with a lot of clean energy, like Brazil, the costs of poor infrastructure and bureaucracy are unattractive. Relocation is unpleasant for many Western companies; the rich world’s labor costs are just too high.
This fuels a third problem: consumption. A high carbon tax is sure to push up prices, which will change the behavior of consumers, especially among the most modest. The tourism industry, for example, should be less dependent on customers arriving by cheap flights. Supermarkets should provide more local food. People could start to track the carbon of certain things they buy, creating headaches for retailers like Amazon.
The flip side would be more innovation. The International Energy Agency, which represents energy-consuming countries, said last year that investments in low-carbon research and development had barely budged since 2012 and accounted for a fifth of that. that was spent on health and defense. It is pitiful. A carbon tax would change that. Think of hyperboucles for long-distance transport; eat insects, algae, and laboratory-grown meat; an endless stream of virtual reality entertainment, as people stay at home rather than consuming goods that become less affordable due to the carbon bill.
Inevitably, some businesses that don’t see the writing on the wall will die. But others will soon realize that the future is “adapt or perish”. It’s not a mantra CEOs will sing to COP26. It should be. When it comes to acting on the climate, they are too eager to show their halos. The knurled screw is a less attractive accessory, but much more necessary. ■
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This article appeared in the Business section of the print edition under the title “The Suppression of the Carbon Tax”