How to involve business in climate change?

Heleen de Coninck, Radboud University

It is often said that business and industry, or “the private sector”, is a key actor in addressing climate change. The private sector is where much of the incremental innovation – leading to cost reductions in low-carbon and adaptation technologies – is taking place. The private sector has the capital to make the necessary investments to transform our climate-unfriendly energy system. And if the private sector does not transform its production processes, reaching the 2˚C target will be impossible.

If it is key to involve the private sector, how can it be done in a party-driven process like the United Nations Framework Convention on Climate Change (UNFCCC)? Currently, as in earlier meetings, COP20 is struggling to respond to the needs of the private sector without compromising the public interest of addressing climate change, while at the same time finding more meaningful ways to engage businesses than just having businesses in these meeting rooms.
This question is particularly relevant for new institutions such as the Green Climate Fund and the Technology Mechanism. The Kyoto Protocol’s Clean Development Mechanism (CDM) has been successful in engaging the private sector and financial sectors in climate change mitigation and could provide lessons to be learned. But the big draw of the CDM was its carbon price; and notwithstanding the calls for carbon pricing and some national initiatives, it seems unlikely that the success of the CDM can be replicated in the institutions that will be formed under a Paris agreement.

One of the problems that the UN climate negotiations face when engaging the private sector is the heterogeneity of the business community. Although treated as one voice in the climate negotiations, the private sector in fact represents numerous actors with very different interests. Specific to mitigation, it is clear that some business actors have an existential interest for delaying action on climate change. Clear examples are the coal and oil industries. While other business actors, such as renewable energy technology manufacturers, actually depend on a sustainable energy transition happening.

However, most companies are relatively oblivious to the outcome of the climate negotiations, even when the outcome determines the way they do business. The finance sector and project developers are willing to invest in climate-friendly projects, but they will only do so if risks are manageable and revenues are good. Energy-intensive industries use fossil fuels, but could switch to other sources of energy, as long as their competitors – especially those in other countries under different regulatory regimes – are also told to do so. Car manufacturers would like to see rising car ownership, but are willing to invest in low-carbon technology as long as competitors face similar challenges. Such industries just need a strong and globally consistent push.

It is evident that each business actor should be approached with appropriate policies. Companies with business interests aligned with climate change action need to be enabled, for instance by lowering investment risks so that capital can be more readily accessed against favourable conditions. Energy-intensive industry and manufacturing will need a level-playing field and a strong push for radical, climate-friendly innovation. If this is not provided through carbon pricing, then sectoral agreements, for instance through industry-specific standards and regulation, in combination with public-sector support for new technology, could be considered.

The fossil fuel industry, with interests diametrically opposed to reducing fossil fuel use, will have to be lured into action through investment in CO2 capture and storage (CCS), potentially in combination with regulation. CCS is the only option that makes this industry part of the solution to climate change and not only part of the problem. The petrochemical sector could be stimulated to do CCS as well, and transition towards using bio-fuels rather than fossil-based resources to produce their products.

A one-size-fits-all solution to involving business in low-carbon innovation is bound to fail. The continued treatment of business as a homogeneous entity is exactly why the debates on how to involve business in climate change action have delivered little more than talk. The UN climate negotiations should use its critical mass to make a strong push to those companies that need it to do more, and should enable those that have an inherent drive for action. It is key that the Parties are aware of specific interests of specific sectors in business and respond to them, but without letting them off the hook when action hurts.