Question

There has been growing pressure on businesses to assume greater social responsibility in recent years. Choose one current social or environmental issue. What do you think are the desirable roles of businesses and governments in relation to the issue? Which of the tasks related to the issue should be handled by governments and which by businesses, and why? Do you think that superimposing non-economic goals on businesses and expecting them to assume responsibilities traditionally held by governments are desirable?

Chosen issue: Climate Change

Answer 1

Adaptation to climate change is currently high on the agenda of EU bureaucrats exploring the regulatory scope of the topic. Climate change may potentially bring about changes in the frequency of extreme weather events such as heat waves, flooding or thunder storms, which in turn may require adaptation to changes in our living conditions. Adaptation to these conditions cannot stop climate change, but it can reduce the cost of climate change. Building dikes protects the landscape from an increase in sea level. New vaccines protect the population from diseases that may spread due to the change in the climate. Leading politicians, the media and prominent interest groups call for more efforts in adaptation.

In many cases, adaptation decisions can be left to private individuals or firms. This is true if private sector decision-makers both bear the cost and enjoy the benefits of their own decisions. Superior insulation of buildings is a good example. It shields the occupants of a building from extreme temperatures during cold winters and hot summers. The occupants – and only the occupants – benefit from the improved insulation. They also bear the costs of the new insulation. If the benefit exceeds the cost, they will invest in the superior insulation. If it does not pay off, they will refrain from the adaptation measure (and they should do so from an efficiency point of view). There is no need for government intervention in the form of building regulation or rehabilitation programmes.

In some other cases, adaptation affects an entire community as in the case of dikes. A single household will hardly be able – nor have the incentive – to build a dike of the appropriate size. But the local municipality can and should be able to so. All inhabitants of the municipality can share the costs and appropriate the benefit from flood protection. The decision on the dike could be made on the state level if not at the municipal level. The local population will probably have a long-standing experience and superior knowledge about the flood events and its potential damages. The subsidiarity principle, which is a major principle of policy task assignment in the European Union, suggests that the decisions should be made on the most decentralized level for which there are no major externalities between the decision-makers. In the case of the dike, the appropriate level for the adaptation measure would be the municipality. Again there is no need for intervention from upper-level governments.

So what role is left for the upper echelons of government in climate change adaptation? Firstly, the government has to help in improving our knowledge. Information about climate change and information about technical adaptation measures are typical public goods: the cost of generating the information has to be incurred once, whereas the information can be used at no additional cost. Without government intervention, too little information would be generated. Therefore, financing basic research in this area is one of the fundamental tasks for a central government.

Secondly, the government has to provide the regulatory framework for insurance markets. The economic consequences of natural disasters can be cushioned through insurance markets. However, the incentives to buy insurance are insufficient for several reasons. For instance, whenever a major disaster threatens the economic existence of a larger group of citizens, the government is under social pressure and will typically provide help to all those in need. By anticipating government support in case of a disaster, there is little or no incentive to buy insurance in the market. Why should they pay the premium for private insurance, or invest in self-insurance or self-protection measures if they enjoy a similar amount of free protection from the government? If the government wants to avoid being pressured for disaster relief, it has to make disaster insurance mandatory. And to induce citizens to the appropriate amount of self-protection, insurance premiums have to be differentiated according to local disaster risks.

Thirdly, fostering growth helps coping with the consequences of climate change and facilitates adaptation. Poor societies and population groups with low levels of education have the highest exposure to climate change, whereas richer societies have the means to cope with the implications of climate change. Hence, economic growth – properly measured – and education should not be dismissed easily as they act as powerful self-insurance devices against the uncertain future challenges of climate change.

Every area of industry will be impacted by climate change. And because necessity is the mother of invention, business knows what that means. In the new climate reality, businesses that can innovate and take advantage of the low-carbon transition will be the ones that secure a sustainable future.

This reality makes sustainable development and climate change two sides of the same coin. Business has a key role to play in addressing the challenges of climate change. It is the world’s most powerful economic force, and it is responsible for the majority of spending, wealth creation and investment. Where business goes, others will follow.

Innovative initiatives from business are part of the global shift that will open the floodgates to large-scale opportunities that can combat climate change and change the lives of millions around the world. Companies around the world, have a huge opportunity to join these initiatives and bring their expertise to bear, especially those in China, who represent more than a billion people and where the government is hosting this G20 meeting.