Analysis: The private sector and climate change

With the future of the Kyoto Protocol uncertain, and pressure mounting on the world’s governments to slash their greenhouse gas emissions, the role of the private sector in combating climate change is becoming ever more relevant.

Technology, innovations and green entrepreneurs are increasingly part of the solution – but they cannot survive in a vacuum. In the first of a three-part series, sustainability analyst Kentaro Ide reflects on the Marketization of Climate Change.

“In this time of government failure and media inattentiveness to climate issues, leadership is coming from the private sector,” says one speaker, addressing her full audience of businesspeople.

It is the second and final day of Energy Solutions 2011, a buzzing expo of 300-plus exhibitors and numerous seminars, and the speaker is hardly alone in her enthusiasm for the potential of the private sector in addressing climate change.

Faith in the market as a channel for developing and disseminating technologies (a broad definition of which includes business processes and tacit knowledge) to combat climate change is nothing new.

The UNFCCC has devised its own market-based mechanisms, such as emissions trading and the Clean Development Mechanism (CDM), to spur private investment and R&D in “green” technologies.

Likewise, the RTCC policy manifesto highlights the importance of private enterprise and technological innovation in creating a low-carbon economy.

Within London alone, expos like Energy Solutions or the Carbon Show (along with the countless organizations that recognize and reward private innovations) illustrate the growing market for technologies ranging from hardware for voltage and/or current optimization to consultancy services for greener business operations.

Furthermore, new movements such as social entrepreneurship and impact investing are seeking to create alternative models for financing and promoting innovation by applying business strategies to meet social and environmental objectives.

From traditional businesses pursuing green profit opportunities to new enterprises prioritizing their social mission over profit maximization, many of these actors share a sense that the private sector is “picking up the slack” in tackling climate change.

This is particularly true among proponents of social entrepreneurship, who cite government failure as a key reason for seeking private-led solutions to social issues.

Even among traditional businesses, some UK firms marketing solutions for voltage optimization, for example, claim that their business models can remain profitable even without further regulations on energy efficiency.

Public Policy and Private Enterprise

However, despite this increasing faith in the potential of private enterprise, public policy remains a foundational element in shaping incentives to tackle climate change.

For example, while several exhibitors at Energy Solutions 2011 describe their services as “win-win solutions” for themselves and their customers, many of the businesses at this expo focus almost exclusively on the UK and European markets.

Without more effective policies to facilitate trade and incentivize international investments, these businesses will cluster in advanced markets and fail to address the technology needs of developing countries.

Private initiatives and market-based approaches also raise questions of equity and accountability.

Regarding the former, analysts such as Bradley C. Parks and J. Timmons Roberts argue that existing global economic regimes, such as the World Trade Organization, prevent developing countries from pursuing policies that would allow them to benefit fully from technology transfers.

For example, without the ability to protect infant industries or require foreign multinationals to transfer technologies and knowledge to local businesses, developing countries may find it difficult to move beyond importing solutions to foster indigenous innovation.

Role of Government

As providers of public goods, private actors may also lack the legitimacy and accountability of governments. There is a growing market for standards for measuring environmental impact and engaging stakeholders in business decisions.

But many of these standards are themselves defined and implemented by private organizations, whose own legitimacy stems from their reputation within specific market sectors.

Policymakers still have an important role in enforcing accountability over questions such as which projects get promoted, who benefits, and how impact is assessed to ensure that private initiatives provide maximum social returns.

The following articles in this series will continue to examine the interface between public policy and private enterprise in promoting innovation to combat climate change.

Part 2 will look more closely at issues of accountability in relation to trends such as Corporate Social Responsibility (CSR) and social entrepreneurship.

Part 3 will cover the challenges to innovation and technology transfer posed by intellectual property rights and corporate legal structures.

Kentaro Ide is a London-based analyst specialising in sustainability and export controls. 

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