Does the private sector need government to manage climate change?

Can the private sector lead the way to a net-zero carbon future? Can it develop the investments, policies, and collaboration that will be necessary in adapting to the manifold impacts of a changing climate? The thesis of this piece is that it cannot. This is not to say that the private sector does not play a critical role in meeting the challenges of both mitigation and adaptation. It will. Yet the private sector cannot get us there on its own, for four reasons:

• The costs of greenhouse gasses are not reflected in the market costs of carbon-based fuels and damages they cause.
• There are few incentives for the private sector to invest in public goods—those for which the private sector cannot commercialize a good or service and gain a return on investments.
• Managing the causes and effects of climate change demands a great deal of coordination. It is hard to imagine how this would occur without governments around the world playing a role.
• Climate change is a global collective action problem. Governments represent countries at an international level. Although there are flaws in the current global climate regime, a turn to entirely private actors constitutes a major loss in mitigation and adaptation capacity. In addition, many state-owned enterprises are themselves major course of emissions.[1]

Accounting for the Social Costs of Greenhouse Gases

Central to the environmental movement in the second half of the last century was the role of government and public policy. Environmentalism was equated with demands that somebody do something, and that somebody was government. The reason, of course, was that the private sector on its own did not bear the costs of the harms—air pollution, water pollution, chemical risks, and eventually climate change—it was foisting on society. The response from government in most industrial nations was regulation, which required industry to adopt technologies for controlling pollution.

Climate change is more complex than previous pollution problems, one less amenable to technology mandates. Yet the defect remains the same: that individual actors lack motivation to change technologies, practices, and behavior because the price of externalities is not factored into markets. Governments must do that. They are now, but not aggressively enough. The World Bank finds the average price of sixty or so carbon pricing programs globally as insufficient to achieve the Paris Agreement’s goals (World Bank 2022). Although internal and voluntary carbon pricing exists, that is unlikely to get the world to where it needs to be.

Needed Investments in Public Goods

With the right incentives, the private sector is clever at developing products and services that deal with environmental problems. That is much of what we expect tools like carbon taxes to do. Yet there are investments where the results cannot be commercialized. One example is basic science and technology. Recently-publicized breakthroughs in nuclear fusion technology were funded by governments. Much of the early research on solar photovoltaics was as well.

In addition to basic science and technology are required investments in infrastructure. Can we count on the private sector to lead efforts to build the massive amounts of infrastructure that is needed to enable the transition to clean energy?

Coordinate the Many Moving Parts

Both mitigation and adaptation are complex problems requiring lots of coordination and direction. Although public-private partnerships are essential to both sides of the climate coin, the reliance on the public part of the equation is indisputable. In addition to investing in infrastructure, government will play a central role in making decisions about building and linking the many parts. Grids will have to be redesigned, supply chains revised, digital technologies introduced, and much more. It is hard to imagine how this could happen without government playing a central role. 

At times, this need for coordination reaches almost mundane levels. Grist (2022) recently ran a story about the number of electricians that will be needed to meet needs for electrification, which is a pillar of a clean energy transition. Especially in states like California, where incentives and mandates are prominent, there simply are not enough electricians to build up capacity, such as installing electric vehicle chargers.

Leading the International Climate Regime

Climate change is a huge, global collective action problem. Organizations and institutions interact in planning investments, proposing and ratifying policies, and coordinating action. That will continue. But national governments are the critical actors in developing national policies, making international commitments, and reaching agreements. Although it is wise to expand non-governmental opportunities for interaction and cooperation, national governments remain critical to global progress. When it comes to establishing legitimacy and delivering on commitments, governments at all levels are essential.

In Summary

Government is necessary for mitigating the causes of climate change and adapting to its effects. It must put a price on carbon, methane, and other pollution; invest in public goods; coordinate the moving parts; and engage in international problem-solving. This is why many of us have stressed the need for effective governance, strong political institutions, effective legal systems, economic fairness, and other aspects of good governance (Fiorino 2018).

At the same time, the private sector is critical for addressing the causes and effects of climate change. This is where most decision-making related to emissions occurs, political pressures are applied, products and services are delivered, and by far the most investments are made. The private sector and civil society are important, and their actions are vital to meeting the climate challenge, but government plays a necessary role in managing the climate crisis.

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By Daniel Fiorino, Director for the Center for Environmental Policy at American University.

If you would like to read further articles in the 'Governance and Climate Change' series, click here 

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