Last Saturday, President Obama and President Xi Jinping of China formally committed their countries to the Paris Agreement. This accord, inked last December, aims to reduce the emissions that lead to climate change, with the first interim milestones set for 2020. That would be none too soon, if this summer alone is any indication. July and August were the warmest months on record, and as the New York Times proclaimed on Sunday, “coastal inundation” along the U.S. Atlantic and Gulf coasts has become a harsh reality with increased tidal flooding. In a recent interview, HBS professor Forest Reinhardt, founding co-chair of the HBS Business and Environment Initiative and organizer of the MBA elective Innovating in Energy that he teaches with HBS professors Martha Crawford, Joe Lassiter, and Richard Vietor shed some light on these very hot topics.
Under the umbrella of the School’s Business and Environment Initiative, which you helped found in 2010 and which is now headed by Professor Mike Toffel, you have been researching and teaching cases about climate change for several years, not only with MBA students but with executives. Last spring, for example, you held a “deep dive” on this topic for executives in the University’s Advanced Leadership Initiative (ALI), chaired by HBS professor Rosabeth Moss Kanter. What did you and your colleagues hope to accomplish with this?
And this comes to the broader question. Climate change is an extraordinarily complicated problem that we cannot solve from the narrow point of view of a particular sector of the economy or a particular academic discipline. To make sense of it, you have to understand some physics, some biology, some political science, some economics, some law, some engineering, some human psychology, and even some business administration and leadership. Our idea was to try to draw on all of those things--calling on the expertise of colleagues from around the university--to expose these participants to some of the ways in which they can try to make sense of this problem.
What were some of the topics you and your colleagues brought up?
FR: Climate change is largely seen as an energy problem, because the best known greenhouse gas, carbon dioxide or CO2, is an essential product of combustion. But many of the topics we discussed had to do with other greenhouse gases like nitrous oxide and methane as well as human activities related to energy like agriculture. And we obviously looked at both energy supply and energy demand.
What about the impact of climate change on the economy and jobs?
FR: There are two ways in which climate change is going to affect us. Given that the climate is changing and will continue to change, it will create disruptions that will lead to both opportunities and complications in the way we manage our affairs. For example, as temperatures and precipitation patterns change, some of the places where we’ve been used to growing certain crops may no longer be suitable for them but perfect for others. And while other areas may become suitable for the old crops, the infrastructure won’t be there. So as the climate changes and as we need to cope with that from an organization and infrastructure point of view, firms will have to deal with a new set of issues.
At the same time, because governments are worried about the magnitude of the negative impact, such as flooding, they are trying to introduce laws and regulations to reduce the amount of gases that we put into the atmosphere that are responsible for these things. In short, climate change calls on us to do two things: adapt by, say, figuring out how to grow crops with less water and protecting coastal cities and towns from storm surges. And mitigate by reducing emissions. We will for sure do adaptation. The Paris Agreement and the recent accord between Obama and Xi commit us to doing some mitigation so that the adaptation will be less expensive and disruptive.
How feasible is all this in the not too distant future, particularly in developing economies?
FR: The opportunities for serious transformation of the energy economy are actually greatest in countries like China, India, and Brazil. Compared to the United States or Germany, they have made, so far, fewer bets on infrastructure based on carbon-based energy sources. They also have smaller balance sheets than we do, so as they build up their balance sheets, if they build them around sensible energy prices, they can make more progress more easily than we can. The reason people think that China, India, and Brazil face big hurdles energy-wise is that these countries have expectations of much more rapid growth than we do, and growth has historically meant more energy consumption, which has traditionally led to more greenhouse gas production. But the ratio between economic activity, which you want, and greenhouse gas emissions, which you don’t want, is flexible over long periods of time, and there may well be more opportunities for more efficient behavior in China, India, and Brazil than in the developed world.
One of your sessions with the Advanced Leadership participants focused on a company in Chile called Colbún. What was the situation that case presented?
FR: It encapsulates the tradeoffs involved in trying to reduce carbon emissions from the supply side of the energy economy, focusing on electricity. The case is about an electricity producer that is trying to figure out how to satisfy Chile’s increasing demand for electricity. The choices are the familiar ones--gas, coal, nuclear power, and hydroelectric power. Some of these technologies, like nuclear power and hydro, are very capital intensive but have low variable costs. Others, like gas, are very cheap to install, but then have high and maybe volatile fuel costs. The question is: What’s the best thing for this company to do? Obviously it depends in part on what its leaders think will happen with different input prices, including gas, coal, and CO2.
An electric power station produces something we like, electricity, using things we’d rather not have to pay for, including gas, and producing things we’d rather not produce, like CO2. The company currently doesn’t have to pay to emit CO2, but its executives can certainly imagine a world where one day CO2 will be priced. Which means gas may become less expensive than coal, because gas is a less CO2 intensive fuel than coal. The CO2 price doesn’t have to be very big to start affecting relative overall costs and, accordingly, the optimal decisions for the firm.
What lessons did the participants come away with when they left that class?
FR: One of the important lessons of that case is that if you don’t think about energy and climate holistically, you’ll make bad decisions. And business and government leaders have often allowed themselves to do that. Some people say they don’t like nuclear power, because it might be dangerous. Others don’t like wind, because it’s unsightly and intermittent. Others aren’t fans of dams. If we allow ourselves to make a series of yes/no decisions like this without thinking about the broader context, we end up with the things that we’re used to, even though they might be undesirable. Consider that thousands of people die every year because of the non-CO2 effects of coal pollution--the soot, the particulate matter that gets into people’s lungs. If we don’t think about the big picture, we end up forcing ourselves into the same boxes from which we’re trying to escape. We can think of something we dislike about any change. It would be fine to have no change if the status quo were acceptable, but it isn’t.
Your colleague Mike Toffel did a session on the “boundaries” of corporate sustainability initiatives. What does that mean?
FR: Mike’s case was about the Aspen Skiing Company. The alpine ski industry has already been adversely affected by the changing climate--warmer temperatures mean fewer days that are optimal for skiing. Needless to say, Aspen wants to preserve the experience it can offer to its customers, who come a long way for a particular kind of snow and are less happy if they don’t get it. On the other hand, this is an operation whose activities are fairly carbon intensive--the ski resort with its lifts and the customers themselves, who often log considerable air miles to get to Aspen. At the same time, people go there because they want to have fun and enjoy nature and the outdoors, not because they want to be reminded of the bad things they’re doing to the environment. So it’s difficult to position an organization like that when it comes to climate change.
The firm has been very aggressive about acknowledging the social problem and taking steps to improve its own operations. But there are limits to what it or any other individual firm can do. The ability of the atmosphere to absorb waste gases is the ultimate public good, since all seven billion of the Earth’s inhabitants share it, and there is a global concentration of carbon dioxide concentration that impacts every one of us, no matter where the emissions take place. So the case explores whether the firm should take action beyond its own property line to spur broader solutions to climate change. Should it pressure suppliers to change their behavior or lobby for a government solution or both? This is the “boundary” question Mike discusses--how far companies ought to go to try to spur solutions to climate change.
Unilateral action by individual firms will not by itself bring about meaningful reductions in greenhouse gas emissions. There has to be some role for government in the solution of such problems. That certainly doesn’t mean that the government has to write rules about what kinds of barbecues people can have or how many briquettes they can use to cook their steaks. That’s a false fear. But climate change is a real one, a real problem that shouldn’t be ignored and put on the back burner for another decade or two. Working together, sooner rather than later, companies and countries should create a sensible property rights system for CO2 to control pollutants being emitted into the atmosphere. Otherwise we’ll do too little mitigation and end up with potentially enormous costs to adapt to the climate change we are creating.