Pollution Management: Who Pays For Corporate Emissions?

The world is currently grappling with the costs of climate change, from natural disasters to lost productivity. A significant contributor to these costs is corporate carbon emissions, with just 100 companies responsible for over 70% of worldwide emissions from 1988 to 2017. While some companies have committed to net-zero emissions, others continue to profit from non-compliance with environmental regulations. This has prompted discussions on how to hold polluting companies accountable, including through punitive measures, incentives for green technologies, and carbon pricing. Studies estimate that if companies had to pay for the damage caused by their carbon emissions, it could wipe out trillions in financial gains, equating to 44% of corporate profits.

The cost of carbon emissions

The social cost of carbon (SCC) is an estimate of the cost, in dollars, of the damage done by each additional ton of carbon emissions. It is also an estimate of the benefit of any action taken to reduce a ton of carbon emissions. The current central estimate of the social cost of carbon is over $50 per ton in today's dollars. While this is the most robust and credible figure available, it does not yet include all of the widely recognized and accepted scientific and economic impacts of climate change. For that reason, many experts agree that this is far lower than the true costs of carbon pollution. The official estimate from the Biden administration is $51, but in November 2022, the EPA proposed a nearly fourfold increase to $190.

The SCC is used by policymakers to weigh regulatory proposals that may increase or curb carbon emissions. For example, if a policy to prevent one ton of carbon emissions costs less than the SCC, then the benefits of the policy outweigh the costs and it pays for itself in the long run. If the policy is more expensive than the SCC, the costs outweigh the benefits. Currently, the federal governments of the US and Canada, as well as several states, use the SCC when considering policy options. The SCC has been used to determine fuel economy standards in the US, and five states require electric utility companies to consider the SCC in their operations.

Carbon pricing is an instrument that captures the external costs of greenhouse gas (GHG) emissions—the costs of emissions that the public pays for, such as damage to crops, health care costs from heatwaves and droughts, and loss of property from flooding and sea level rise—and ties them to their sources through a price, usually in the form of a price on the carbon dioxide (CO2) emitted. A price on carbon helps shift the burden for the damage from GHG emissions back to those who are responsible for it and who can avoid it. Instead of dictating who should reduce emissions where and how, a carbon price provides an economic signal to emitters, and allows them to decide to either transform their activities and lower their emissions, or continue emitting and paying for their emissions.

There are several approaches to carbon pricing, including an emissions trading system (ETS), a carbon tax, results-based climate finance (RBCF), and internal carbon prices set by organizations. An ETS is a system where emitters can trade emission units to meet their emission targets. To comply with their emission targets at the least cost, regulated entities can either implement internal abatement measures or acquire emission units in the carbon market. By creating supply and demand for emissions units, an ETS establishes a market price for GHG emissions. A carbon tax, on the other hand, guarantees the carbon price in the economic system against an uncertain environmental outcome.

In addition to carbon pricing, there are other ways to hold polluting sectors accountable for the climate crisis. For example, the Inflation Reduction Act in the US includes hundreds of billions of dollars in tax subsidies for wind and solar power, electric vehicles, heat pumps, carbon-capture technologies, and other innovations. Lowering the cost to go green will make polluting less attractive by comparison, and the market will naturally adapt. Another way to hold polluting sectors accountable is through corporate support of a "just transition" for both the workers of polluting industries and the frontline communities most affected by climate breakdown.

Incentives for companies to adopt green technologies

The current global dependence on non-renewable energy requires various incentives to push heavily polluting industries to adopt green technologies. Governments offer incentives for behaviours they want to encourage, such as environmentally friendly activities. Here are some examples of incentives for companies to adopt green technologies:

Government subsidies

Some governments provide subsidies to consumers who invest in solar panels, electric vehicles, and the like. For example, the Investment Tax Credit (ITC) provides credits for up to 30% of overall investment expenses for businesses operated out of the home that invest in solar energy. The Business Energy Investment Tax Credit (ITC) is another option, with a base credit of 6% to 30% for businesses investing in renewable energies like wind or solar power.

Tax incentives

Businesses investing in energy-efficient technologies can receive corporate income tax deductions and tax credits. For instance, companies that install electric vehicle charging stations may qualify for a federal tax credit. Carbon credits issued by the American government create monetary incentives for companies to reduce their carbon emissions.

Grants and certifications

Government incentives can also take the form of grants, such as those offered for data centers that use green practices like liquid immersion cooling. Additionally, sustainable businesses can qualify for industry certifications and benchmarks, further improving their reputation and attracting environmentally conscious customers.

Industry collaboration and demand stacking

According to Dominic Waughray, senior advisor to the CEO of the World Business Council on Sustainable Development (WBCSD), industry collaboration and "demand stacking" are key to holding companies accountable for carbon pollution. Mechanisms such as carbon pricing and transparent emissions reporting through high-quality data are also important.

Overall, these incentives not only benefit the environment but also improve the revenues and efficiency of businesses, making them profitable ventures.

The economic benefits of non-compliance

While there are significant costs associated with corporate climate pollution, companies may seek to avoid these costs by not complying with pollution regulations. This non-compliance can have economic benefits for the companies involved. Firstly, by avoiding the costs of pollution abatement and control measures, non-compliant companies can save money in the short term. For example, US manufacturers' pollution abatement spending in 2005 accounted for less than 1% of the value of the goods they shipped. While this may seem insignificant, it still represents billions of dollars that companies could save by avoiding pollution control measures.

Secondly, non-compliance with pollution regulations can allow companies to maintain higher profit margins by not having to internalize the costs of their carbon emissions. A recent study estimated that if companies had to pay for the damage caused by their carbon emissions, their profits could plunge, potentially wiping out trillions in financial gains. This calculation was based on an estimated cost to society of $190 per ton of carbon emissions. By avoiding these costs, non-compliant companies can maintain higher profits.

Thirdly, in the absence of strong enforcement and penalties, non-compliance can allow companies to delay or avoid investing in green technologies and innovations. While some governments offer incentives for companies to adopt more sustainable practices, such as tax subsidies for wind and solar power, electric vehicles, and carbon-capture technologies, non-compliant companies may choose to postpone such investments to preserve their financial resources. This is especially true for companies in hard-to-abate sectors, where transitioning to cleaner technologies can be more challenging and costly.

Finally, non-compliance with pollution regulations can allow companies to maintain their market position and competitiveness, especially in industries heavily reliant on non-renewable energy sources. By avoiding the costs and challenges associated with transitioning to cleaner technologies, non-compliant companies can continue to operate with lower overhead and maintain their market share. This is particularly advantageous for large, established companies in industries with high barriers to entry, as they can deter new competitors by making it more financially challenging to enter the market.

However, it is important to note that the economic benefits of non-compliance are often short-lived and come at a significant cost to society and the environment. Pollution has severe consequences, including damage to crops and timber yields, health issues, and environmental degradation. Additionally, non-compliant companies may face legal consequences, fines, and reputational damage if their actions are discovered. Therefore, while non-compliance may provide temporary economic benefits, it is not a sustainable or ethical strategy in the long term.

The role of divestment in holding companies accountable

Divestment, or the withdrawal of investments from companies involved in unethical practices, has emerged as a powerful tool to hold companies accountable for their environmental impact. By divesting from polluting companies, investors are sending a strong signal that they do not support their practices and are instead choosing to invest in more sustainable alternatives. This can have a significant financial impact on these companies, potentially reducing their access to capital and increasing their cost of capital, thereby incentivizing them to improve their environmental practices.

A notable example of divestment in action is the fossil fuel divestment movement. Educational institutions, such as Goddard College, Green Mountain College, and the University of Glasgow, have led the way by divesting their endowments from fossil fuel companies and investing in fossil fuel-free accounts or clean energy alternatives. Additionally, initiatives like the Lofoten Declaration have called for fossil fuel divestment and a just transition to a low-carbon economy.

The impact of divestment extends beyond financial consequences. It also carries a symbolic value, sending a message to companies that their actions are being watched and that there are repercussions for unethical behavior. This can influence corporate behavior and encourage companies to adopt more sustainable practices to maintain their social license to operate.

However, divestment alone may not be sufficient to hold companies fully accountable. It should be coupled with other measures such as industry collaboration, policy incentives, carbon pricing, and transparent emissions reporting. Additionally, there is a risk that divestment could lead to the transfer of ownership of non-renewable assets to less scrupulous firms. Therefore, divestment should be strategically employed as part of a broader strategy to drive systemic change and hold companies truly accountable for their environmental impact.

Reparations and the idea of a just transition

The idea that companies should pay to manage pollution is gaining traction, with some calling for fossil fuel companies to pay reparations. A recent study in the journal Science estimates that if companies had to pay for the damage caused by their carbon emissions, their profits would be significantly impacted, with trillions of dollars in financial gains potentially wiped out. This calculation was based on an analysis of almost 15,000 publicly traded companies worldwide and used the Environmental Protection Agency's estimate of $190 per ton of carbon emissions.

The concept of reparations and a just transition is closely linked to addressing the historical and ongoing injustices of racialized expropriation and exploitation. Scholars argue that the emerging policy conversations around just transitions must recognize the long-lasting impacts of plantation slavery, Indigenous genocide, and racial capitalism. Reparative principles, as articulated by global reparations movements, can provide critical insights for just transition proposals. For example, the Cochabamba People's Declaration in Bolivia (2010) and the Black Hive's Black Climate Mandate in the US (2022) offer insights into the kind of reparative work needed to address racialized discrimination.

Aaron Tanaka, from the Center for Economic Democracy, emphasizes the need for reparations and shifting funds to communities harmed by historic extraction. This includes supporting Black and Indigenous organizations leading reparations campaigns and helping these communities reorient their relationship with capital and break free from the extractive economy. Vanessa Daniel of the Groundswell Fund and Jennifer Near of Shake the Foundations echo similar sentiments, calling for the disruption of cycles of white supremacy and the liberation of philanthropic practices to support the economic power of marginalized communities.

To hold polluting sectors accountable, Dominic Waughray of the WBCSD suggests industry collaboration, demand stacking, policy incentives, carbon pricing, and transparent emissions reporting. While punitive action may be necessary in some cases, focusing on these strategies can more effectively nudge heavily polluting industries towards adopting green technologies. Additionally, corporate support for a "just transition" should extend beyond workers in polluting industries to include frontline communities affected by climate breakdown.

In conclusion, as the world transitions towards a regenerative economy, addressing the legacies of racialized exploitation and oppression is crucial. Reparative principles and demands articulated by various movements and scholars provide a critical framework for guiding this transition towards a more just and equitable future.

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