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Economic Incentive for Environmental Regulations and Products within Companies

November 04, 2018
The debate over climate change and what (if anything) should be done about it has plagued the politics of the 21st century. These debates manifest themselves along partisan lines and different economic beliefs. For example, the Paris Climate Agreement has not proven to have lasting effects due to the absence of actionable agreements regarding contribution in funding and guidelines between the participating countries, mostly based on monetary concerns.[1] Another international agreement touching on the subject in a distinct way has been the Trans Pacific Partnership (TPP). The agreement, while rooted as a free trade agenda, acknowledged and laid out guidelines for environmental governance in the public as well as the private sector to break the cycle of government inaction. Unlike its predecessors, the language encouraged governments to develop “voluntary mechanisms” that “are truthful…and take into account scientific and technical information… [and] if applicable…are based on relevant international standards”, however, these notions have not been implemented.[2] Both of these agreements are examples of the relative failure of the current political order in addressing environmental governance.

An emerging concept to address this is to convert the root of the controversy, the economically focused mentality that dominates many opponents, into a strength in using economics as an argument for environmental standards. One way to move forward with the environmental agenda is to focus on room for private sector involvement and to discuss the economic drivers for industries to spearhead environmental initiatives and innovation. Private environmental governance encapsulates the actions taken by private actors, from internal environmental standards to implementing certain market-based pressures. They “reduce negative environmental externalities, manage common pool resources, and affect the distribution of environmental amenities.”[3] Recent studies, such as those by Sarah E. Light, describe the increasingly important role private industries should take in leading policy experimentation due to the slow progress of government policy experimentation, as some examples stated above.[4] Private Environmental Governance is an attractive theory because it can help create achievable environmental standards and better mechanisms of enforcement.

Private Environmental Governance not only be pursued in an ideal, isolated economy, but it should be utilized currently because it creates market opportunities for businesses. BP and Microsoft are two examples of companies capitalizing on internal promises to environmental regulation. As discussions began in the 1990s for heightened government involvement in greenhouse gas emissions, BP adopted an internal emissions trading system to reduce their own emissions. BP terminated the program in 2002 after exceeding its savings target by many years.[5] Furthermore, BP reported that their efforts created $650 million in value and made the company a key influencer in public policy, thus making them a more profitable company.[6] While not all assessments of the policy were positive because the motives seemed to be self-interested, this is irrelevant as the effort resulted in lowered emissions in one of the world’s biggest producers of greenhouse gasses. In 2012, Microsoft began an internal emissions fee approach, and by June 2013, reached its goal to become carbon neutral in several areas such as data centers and offices.[7] In addition, Microsoft created a viable product to further capitalize on this energy saving program they were undertaking. They created a service in which they would create and then sell business models with the help of various Microsoft software products to firms adopting similar processes in waste reduction.[8] By reevaluating procedures within their companies in the context of environmentally minded goals, these companies created new value. This shows that a shift in mindset from an environmentally friendly agenda to be motivated can also be fiscally attractive.

Image: Prices of pollution, Source: CDPImage: Prices of pollution, Source: CDP

Dissimilarly, rather than pursuing internal environmental company successes, Elon Musk has developed Tesla Inc. based on the marketing of environmental friendly innovation. One example that goes even beyond entering the market with an environmentally sound product is seeking out the market that is in need of it. In the wake of a declining manufacturing industry, Southern Australia has recently jumpstarted a revitalization effort to become an energy and technology hub.[9] This in combination with a blackout problem in the area encouraged Elon Musk to pledge that “Tesla will get the system installed and working 100 days from contract signature or it is free”. Tesla built the largest Lithium-Ion battery in Australia to conserve enough back up solar and wind power, thereby not only converting the energy system to a sustainable one, but also saving the region money and resources. The entire project is also economical to Tesla because if it proves to be successful, Tesla engineered energy methods may be implemented in many other areas of the world.[10]

These examples demonstrate the growing presence of private environmental governance and the economic opportunity present for businesses that adopt environmental agendas. As Sarah Light discusses in “The Insider Trading” private sector driven efforts can have a drastic effect (potentially more than certain governments) in her environmental focus, reducing emissions.[11] As explored in the examples of Microsoft, BP, and Tesla Inc., economic success is also a very possible outcome of these efforts if they are done innovatively. While there may be costs to these projects, and higher ones in certain industries, if more companies engage in these types of ventures they will drive competition in this field and only encourage more progress. The global economy allows for big companies to have large amounts of influence when applying these principles even compared to governments, and if they decide to engage with the movement, it will not only solve many decades of environmental concerns but also present new opportunities for growth.

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  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.


  [1]Sushanta Kumar Mahapatra and Keshab Chandra Ratha, “Discussion, Paris Climate Accord: Miles to Go”, Journal of International Development, 2017. https://proxy.library.upenn.edu:2894/doi/epdf/10.1002/jid.3262

  [2]Steph Tai, “Private Environmental Governance and he Trans-Pacific Partnership”, Georgetown Environmental Law Review, 2016. http://www.law.georgetown.edu/academics/law-journals/gelr/index.cfm

  [3]Sarah E. Light & Michael P. Vandenbergh, “Private Environmental Governance” (Encyclopedia Chapter), Environmental Decision Making, Encyclopedia of Environmental Law, 2015. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2645953

  [4]Sarah E. Light, “The Role of Universities in Private Environmental Governance Experimentalism”, May 8, 2018. http://journals.sagepub.com/eprint/fjNWFZk6PQ2GPufWt7MV/full

  [5]Sarah E. Light, “The New Insider Trading”, Stanford Environmental Law Journal, 2015, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2591875


  [7]Amy Cutter et al, “Fulfilling the Rio +20 Promises”, Natural Resolution Defense Council, 2013.

  [8]Sarah E. Light, “The New Insider Trading”, Stanford Environmental Law Journal, 2015, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2591875

  [9]Mike Montgomery, “Why Elon Musk Chose South Australia for his New Battery Project”, Forbes, 2017. https://www.forbes.com/sites/mikemontgomery/2017/07/07/why-elon-musk-chose-south-australia-for-his-new-battery-project/#7c43b459347a

  [10]Katherine Hignett, “Elon Musk Renewable Energy : Largest Ever Lithium-Ion Battery Switched on in Australia”, Newsweek, 2017. https://www.newsweek.com/elon-musk-largest-lithium-ion-battery-switched-728065

  [11]Sarah E. Light, “The New Insider Trading”, Stanford Environmental Law Journal, 2015, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2591875


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