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Will Market Forces Stop Global Warming?
By James Heskett
Friday, 27th April 2007
 
The debate over global warming appears to have passed a tipping point - We can debate just when it happened. But it was probably sometime before Al Gore's film won the Academy Award.

From now on, we can expect to be bombarded with almost daily news articles about its long-term effects on those living in low-lying areas along coastlines, those attempting to grow crops in rapidly shifting climates, those living along the equator as opposed to temperate climes (being addressed by the UN's Intergovernmental Panel on Climate Change as this article hits the Internet), and even those getting ready to drill for oil in open water that the polar ice caps still cover.

The list goes on and on.

Within the past few days, Thomas Friedman, the journalist and best-selling author of The World Is Flat, intimated in an interview with Tim Russert that he is particularly excited about what may happen when the American business community and its ideas are unleashed on the problem. We may get the gist of this in an upcoming article of his that, according to him, will be titled, "Green Is the New Red, White, and Blue."

Whether or not you believe that humans are causing global warming or that it is occurring at all is beside the point. The same was true on a much smaller and less lethal scale with Y2K. But unlike Y2K, there is no date certain by which we will know whether we have won or whether we were even fighting the right battle. There is going to be a lot of money made or lost for a long time on the effort to combat global warming. It raises the question, of course, of whether the free market has the patience for investments that may not pay out for many years. The end value may be huge (even infinite?), but the discounted value of it may be modest.

One thing we do know. There is no question that when Americans put their talent, effort, and money behind an idea, remarkable things happen faster than anyone expected. Wind power (regardless of what you think of it) in Texas is a good example. In 1999, under then-Governor George W. Bush, incentives were put in place for the development of wind power with the goal of producing 2,000 megawatts of generating capacity in ten years.

The goal was achieved in five years. So Texas has renewed the incentives and raised the goal to 5,000 megawatts. I wouldn't bet against that goal being exceeded as well. Or consider Shuji Nakamura, the Japanese developer of light-emitting diodes that one day may provide energy-efficient sources of light. He moved to the U.S. where people were most interested in his work, as documented in a new book, Brilliant.

Just how should the free market be unleashed on this effort? And should business be playing a larger or different role in the debate? For example, should the Big Three argue for much higher mileage goals, however difficult they may seem at the moment to meet? After all, Toyota may owe the Japanese government a debt for holding it to stricter mileage standards than the U.S. What kind of leadership should business in America, the world's largest polluter, play in helping it catch up to or lead (depending on how you see it) other developed economies?

What kind of incentives, if any, will the free market need from government to encourage innovation and action now? Should the incentives constitute both a carrot (such as subsidies) and stick (taxes)?

Just how should the free market be put to work on the challenge? Should limits be set and a market created for tradable "energy credits," as in cap-and-trade programs for utilities and others? Should "stretch" targets for highway mileage be imposed, with auto companies or others in the industry given opportunities to trade mileage rating credits? Or should government step aside and let the market work its ways without incentives?

If so, what would happen? How, if at all, should business leadership play a larger role in shaping global warming policies and programs? Will market forces stop global warming? What do you think?

To read more:Thomas L. Friedman, The World Is Flat: A Brief History of the Twenty-first Century (Farrar, Straus and Giroux, 2006)

Bob Johnstone, Brilliant! Shuji Nakamura and the Revolution in Lighting Technology (London: Prometheus Books, 2007)

James Heskett is a Baker Foundation Professor at Harvard Business School.
http://hbswk.hbs.edu
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