Can’t pass a carbon tax? Demand transparency, say economists


Transparency alone can motivate companies to deal with their impact on the climate, and it can also motivate other incentives like a carbon tax, according to a panel of economists and business leaders convened by the Booth on Wednesday. School of Business at the University of Chicago.

“No business wants to be the dirtiest in the neighborhood,” said Mili Fomicov, researcher at the Center for Climate Finance & Investment at Imperial College Business School, “and when you have very consistent data across all industries and you then create an appropriate benchmarking, the role of competition can be extremely powerful.

Transparency could do part of the job of a carbon tax, said Sir Ronald Cohen, an investor and philanthropist knighted for pioneering venture capital in the UK. The carbon tax is widely adopted by economists as a way to motivate companies to account for their externalities – the damage they inflict on society but do not pay off – but carbon taxes have been politically unpopular in many countries until now. ‘now.

“An incentive can be taxation, but I actually think transparency provides a massive incentive, if there is indeed a correlation between impact performance and company valuation,” Cohen said. “Transparency itself would create a race to the top. “

Cohen and Fomicov agreed that a “dispersion” has already appeared in the markets between companies that are ready for a cleaner economy and those that are not. It’s more evident in the energy sector, Fomicov said, but appears in all markets, Cohen said.

“In many industries you are now seeing a correlation between higher pollution and lower stock values,” he said. “Thus, the weight of ESG money affects the valuation of companies. And so, unsurprisingly, regulators are focusing on transparency of impact. “

Transparency could also make a carbon tax more politically viable, added Lars Peter Hansen, winner of the 2013 Nobel Prize in economics, because it would expose polluters that cost the rest of society.

“I certainly agree that transparency can open the door to better tax systems, that’s for sure,” said Hansen, “and we’re still struggling to find ways to implement taxes on carbon in a way that might be politically feasible, and it is entirely possible that transparency can help us achieve this. On that, I would be completely.

Cohen worked with Harvard Business School to assess the climate impact of businesses and found that many produce more environmental damage than profit.

“In recent years, most of the major international airlines have reported good profitability. But our calculations show that it is a mirage ”, according to one article 2020 in the Harvard Business Review. “In the case of Lufthansa and American Airlines, for example, accounting for their environmental costs of $ 2.3 billion and $ 4.8 billion, respectively, would make both companies unprofitable.”

Harvard’s Impact Weighted Accounts initiative assessed approximately 1,700 companies and found that 15% of them produce environmental damage that exceeds their profits. Another 32 percent produce damage exceeding a quarter of their profits.

“Together they cause $ 4 trillion in environmental damage in a single year,” Cohen said.

To achieve transparency, markets need consistent data across all sectors, Cohen said, this is where governments might need to step in.

“The crucial step we must take now is for governments to impose transparency of impact,” he said. “We need data consistency, and only governments can demand it. “

He imagines the generally accepted impact principles (GAIP) of the order of generally accepted accounting principles (GAAP) to which companies have complied for decades.

“This is going to be parallel to what the Roosevelt administration did in 1933 and 34 when investors realized they had no transparency on profits because there were no accepted accounting principles, no of listeners. Companies could put some of their profits in hidden reserves without telling shareholders, and we’re at a similar crossroads today. “

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