Will the market fill in where Waxman-Markey fails?

Kevin Wilhelm

As the Congressional debate over a greenhouse gas cap-and-trade scheme heats up, sustainability advocates are becoming increasingly anxious over what the final bill will look like. 

The American Clean Energy and Security Act (ACES) was intended by authors representatives Henry Waxman (D-CA) and Edward Markey (D-MA) to be our country’s first step towards solving climate change, but it falls furiously short of what we need, and what President Obama promised during the campaign. 

While failures in leadership like this are disappointing, I’m still hopeful. That may sound like twisted logic, but I’m hopeful because I’m betting that even if Congress and President Obama pass weak legislation, the market will step in to pick up the slack.

The crux of the problem with the current cap-and-trade legislation is the way it allocates emission permits. Instead of requiring a 100% auction (of which the Congressional Budget Office predicts would raise $650 billion), ACES only requires that a paltry 15% be auctioned off, with the lion’s share of emission permits given away for free.

This bill comes up well short of what science demands will reverse climate change. A 100% auction offers two key advantages:

1. It will speed the transition to a low carbon economy. Free permits are just another taxpayer subsidy to polluting industries.  A 100% auction removes this market distortion and lets the market set the true price of carbon.
2. An auction could create public financing for clean energy solutions and help low-income families cope with rising energy costs.

So what happens if Congress and Obama pass this anemic climate legislation? There is still reason to believe that all is not lost, because the market is already sending signals on climate change on its own, and business is feeling the pressure to respond, whether it gets free permits or not.

Regulation is important—and don’t get me wrong, if we fumble on this cap-and-trade bill, we’ll be facing an even greater challenge—but business solutions to climate change need to come from all angles, and there are many factors that influence the market, not just federal policy. And this is where I hold hope.

We’re seeing these market signals in several different aspects of business: insurance, financial markets, energy prices, marketing and corporate social responsibility (CSR) reporting. Here are some examples:

Financial markets: For years institutional investors such as CalPERS and Socially Responsible Investment (SRI) firms have been putting screens on corporate activities. However, more recently, Wall Street has been looking at environmental, social and governance (ESG) performance of companies as an indicator of financial performance. In fact, AT Kearney reported that companies that had ESG policies averaged a market cap of $650 million more than companies that did not—even after the market collapsed. Compelling data such as this could very likely fuel a trend among analysts and investors to pressure companies to create policies and take action on climate change.

Insurance: Insurers who’ve taken a bath in recent years due to weather-related losses attributed to hurricanes, floods, drought, forest fires, etc. are moving aggressively to reduce their climate risk exposure. Some companies have seen premiums increase dramatically while others have watched their executive and officers insurance renewals freeze until they come up with a climate policy. Others are offering new products for customers that are committed to energy efficiency and green building.

Moreover, this spring the National Association of Insurance Commissioners agreed that insurance companies with more than $500 million in assets must disclose their climate risk starting in 2010. You can bet insurers will be leaning on businesses and policyholders to not only disclose, but to reduce climate risk, to lower the insurers’ exposure.

Energy prices: Businesses that burn a lot of gas may be breathing a sigh of relief at the prospect of getting free permits; but they shouldn’t be. Energy prices remain highly volatile. In the past six weeks, we’ve watched the price of oil start to go back up to more than $70 barrel, and Goldman Sachs reported in early June that it now believes oil will once again go above $85 barrel by the end of 2009.

Marketing: Several recent studies indicate that younger Gen X, Gen Y and Millennial consumers care much more about the environment and climate change than our aging Baby Boomer generation. Even in the absence of regulation companies will be in trouble if they continue with business as usual, because when price, performance, and quality are the same, the deciding factor for this fast-growing segment of conscious consumers is sustainability, not celebrity endorsements or flashy commercials. 

CSR reporting: More and more companies are publishing CSR reports, and what I’ve witnessed through my consulting work is that companies are already starting to jockey for leadership within their respective industries. Companies are raising the bar and those that want to keep up with—or beat—the competition now must set aggressive carbon-reduction goals and take bold action on climate change.

While I don’t want to underscore the disappointment I and others in the sustainable business community have felt over the abandonment of a 100% auction within the Waxman-Markey bill; but hope still exists. The most important thing about this bill is that it opened a national dialogue, got businesses moving and regulation started. But even without strong regulation, the markets are already speaking and let’s hope they continue to exert even more influence going forward.

Kevin Wilhelm is the CEO of Sustainable Business Consulting and the author of “Return on Sustainability: How Business Can Increase Profitability & Address Climate Change in an Uncertain Economy.”