Climate Week NYC: CBS Experts Weigh In on Smart Incentives, Solutions in the Fight Against Climate Change

As the annual event designed to drive climate action marks its 14th year, here’s what our faculty members had to say about the most pressing issues.

New York City’s Empire State Building glows green to mark Climate Week NYC.
New York City’s Empire State Building glows green to mark Climate Week NYC.
Social Impact

As Climate Week NYC gets underway in New York, we asked Columbia Business School faculty to weigh in on the topics and issues they’d like to see discussed at this year’s gathering of government leaders, investors, entrepreneurs and climate experts.

Our discussion included:

  • Sandra Navalli, managing director of the Tamer Center for Social Enterprise,
  • Bruce M. Usher, co-director of the Tamer Center for Social Enterprise, the Elizabeth B. Strickler '86 and Mark T. Gallogly '86 Faculty Director, and professor of professional practice
  • Gernot Wagner, climate economist, Columbia Business School
  • Shivaram Rajgopal, the Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing

Here’s what they told us:

Q: What are the most challenging points of friction in simultaneously addressing climate change and protecting or advancing economic interests?

Sandra Navalli: We’re overly focused on current “flows” of emissions by countries rather than who has contributed to the overall “stock” of carbon emissions. The latter perspective provides a compelling case for why wealthier nations should fund the transition to a cleaner economy in poorer nations. The second major challenge is that the most effective top-down policy of setting a price on carbon emissions seems politically unpalatable — at least until public sentiment undergoes a major shift.

However, the timeframe for this shift is too slow. Increasingly, costly impacts of extreme weather events, sea level rise, etc., mean greater resources will be allocated to the impacts of damage caused. Prevention is cheaper overall for society, but the impacts of climate change are not borne equally by everyone.

Bruce M. Usher: Climate change is a global problem, and countries that act unilaterally risk putting their industries at a competitive disadvantage, especially when those businesses face global competition. This can be solved with carbon border tariffs, but that creates additional complexity.

Gernot Wagner: Put bluntly, the problem is about privatizing benefits while socializing costs. The solution then could take either one of two forms: socializing both the benefits and the costs or, of course, privatizing both. Climate change is such a larger problem because we have been privatizing profits while socializing the costs of carbon pollution for much too long. Every time I board a flight, I have the benefits of getting from A to B, while all 8 billion of us pay a fraction of a penny each for the costs.

The solution, meanwhile, is as obvious as it is difficult to implement: Pay for your own pollution. There, too, are fundamentally two different ways of achieving the goal: Price carbon pollution or subsidize clean alternatives. Both are necessary and important, in the most all-encompassing sense of each term.

This year, for example, Austria is joining the long list of countries that tax carbon. There might also be a right sequence to go about it: Push renewables to spur carbon pricing. The U.S. is just now entering this clean-energy race with its Inflation Reduction Act.

Q: What incentives do businesses respond to best when it comes to implementing practices or policies that are good for, or at least not detrimental to, the environment?

Sandra Navalli: Setting a price on carbon emissions would be the easiest way to align incentives for businesses to implement changes across their operations and supply chains, and to allocate capital in the most efficient way possible. Subsidies are the next best solution, though this often requires policymakers to pick a small subset of areas to subsidize. To achieve climate emissions targets, we’re going to need lots of large and small changes across every aspect of the economy, as well as new technologies and innovations — areas that legislative changes may be too slow to encourage.

Shivaram Rajgopal: Sadly, regulation — a word that has become toxic in today’s political climate. The usual responses to this are price on carbon, either via a tax or a restriction on the quantity of carbon produced. More elaborate arrangements would involve a border tax on imported carbon, for instance, but that is quite disruptive to international trade and multicountry relations.

Bruce M. Usher: Market incentives, for example, cap and trade programs, or carbon taxes tend to be more effective than regulations, as they provide an incentive for businesses to reduce emissions as quickly and cost effectively as possible.

Q: Do you think the Inflation Reduction Act (IRA) will be successful in achieving the emissions goals it hopes to accomplish? Why or why not?

Sandra Navalli: Yes, the 50 percent reduction target by 2030 is achievable, though much more needs to be done. I’m an optimist, and from the vantage point of what we see in business education and across other disciplines, the greening of business and the economy will attract the best and brightest talent to solve this climate crisis. The history of technology and innovation in areas like solar, wind power and batteries shows we’ve consistently underestimated how fast costs have come down and capacity has expanded.

I’m an optimist, and from the vantage point of what we see in business education and across other disciplines, the greening of business and the economy will attract the best and brightest talent to solve this climate crisis.

Shivaram Rajgopal: Yes, we’re better off with it than without it. Whether the money will achieve environmental impact is something we should watch carefully. The IRA is projected by many models to reduce greenhouse gas emissions by 40 percent from 2005 levels for the U.S.  The act does this by decarbonizing transportation and industrial energy uses, as well as by providing incentives to transition our energy production and transmission to cleaner and more renewable sources.

But the IRA also commits $9 billion in residential tax credits, rebates, and other investments for building new electric and energy-efficient homes, replacing fossil-fuel-reliant systems in existing homes with electric equivalents, and training a workforce for the jobs required to do so. Whether these projections come to pass is of course unknowable now, but things should be clearer in five years or so.

Critics have also complained that the IRA is not as strong at curbing oil and gas production as it could be; it could do more to connect clean energy to the grid, and it does not cut emissions by half by 2030 as promised. However, given the poisonous political climate in the country, this is as good as one could have hoped.

Bruce M. Usher: I think the IRA will accelerate the development of renewable energy projects, and the sale of electric vehicles but not immediately. Unfortunately, there are supply chain bottlenecks that are slowing the growth in both industries.

Gernot Wagner: The Inflation Reduction Act is certainly not only tackling inflation but also carbon pollution. And the two are very much linked, at least in the long run: European Central Bank executive board member Isabel Schnabel memorably coined the term fossilflation, and she is right. A significant part of U.S. and global inflation is driven by the rapid rise in fossil fuel prices. Getting off fossil fuels, thus, is inherently anti-inflationary. And yes, getting off fossil fuels is priority one for tackling carbon emissions.

A number of analyses have put the Inflation (and Carbon!) Reduction Act's impact at cutting U.S. carbon dioxide emissions by around 40 percent by 2030, measured against its peak in 2005. It's also important to note, though, that U.S. carbon emissions have already declined by over 30 percent since that peak. How? The reductions, at least in the first decade after the peak, can be split roughly into thirds across three categories: the coal-to-gas switch, the rapid deployment of renewables, and demand-side efficiency measures.

The coal-to-gas switch in the power sector has led to its own climate impacts from methane leakage. There, the Inflation Reduction Act adds a direct cost of $900 per ton of methane released. All told, the Inflation Reduction Act alone is far from enough, but it's an important first step that is helping to jump-start a clean-energy race across the world.

Q: To what extent, if at all, do businesses respond to public opinion on environmental considerations? Are there factors that contribute to the degree in which they are responsive?

Sandra Navalli: Discerning a generally accepted point of view of public opinion on specific or complex topics can be difficult in such a polarized political environment. But businesses respond to certain subsets of public opinion, especially if they are customers or employees. Attracting and retaining both groups are directly tied to the bottom line. Also, recent analysis shows that full decarbonization in areas like food, fashion, electronics, and automotive has around a 1 to 4 percent impact on end prices for customers, which is a relatively small impact in exchange for more sustainably produced purchases

Shivaram Rajgopal: They respond to what employees and customers think more than what the general public thinks. Businesses could always formally and informally survey their employees and customers. Look at where your quitting employees go and where you hire from — are they going to companies with stronger stated and lived-out corporate mission/purpose statements than yours? Look at what potential competition offers, by way of products and services, here and especially in Europe.

Bruce M. Usher: Businesses respond to their stakeholders, which include customers, employees, and investors, in addition to the government and communities. Public opinion isn’t a stakeholder and, therefore, I think has little influence on businesses. But to the extent that public opinion reflects the beliefs of specific stakeholders, especially customers and employees, then it will affect businesses.

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