Going green pays dividends for business

In tackling climate change, much of our attention has focused on what households can do to eliminate harmful greenhouse gas emissions.

For example, action by individual households investing in energy-efficient homes and changing to public transport or electric cars will play a big role in reducing such emissions.

Carbon taxes have an important role to play in incentivising households to make climate-friendly choices by ensuring these are the more economic option for households to pursue. However, as consumers, our behaviour is driven by more than just price, and climate policy needs to use all the levers, including price, to push us towards choosing cleaner options.

It’s also important to look at what businesses can do to reach carbon neutrality by 2050.

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The non-farm business sector, which covers a diverse range of activity, accounts for just under a quarter of our harmful emissions. In principle, this sector should be much more responsive to price signals than households. Joint research by the ESRI and UCD shows that, in manufacturing, a 1 per cent increase in the price of energy will cause demand for energy to decrease by 1.5 per cent.

However, much of the manufacturing sector is not affected by the domestic carbon tax, instead being part of the EU-wide emissions trading system where companies have to buy pollution permits to cover their activities.

To date, this system has not worked as expected, resulting in much too low a price for carbon and too weak a signal to business. Hopefully, the major revamp of EU climate policy, reflecting much tougher EU-wide decarbonisation targets for 2030, will cure this problem.

Nevertheless, like the household sector, we probably need additional measures to complement what changes can be achieved by taxing polluting activities if business is to maximise its contribution to reaching our climate goals.

One of the continuing concerns is that policies designed to eliminate carbon emissions from business could make Irish-based businesses uncompetitive in a global world. Operating costs can be affected by the different instruments involved, be these Irish carbon taxes, the pricing of greenhouse emissions under the EU’s carbon trading scheme, or regulations that are designed to further national climate policy.

Recent research by the ESRI’s Iulia Siedschlag suggests the competitiveness concerns about vigorously tackling climate change are probably overdone.

Whatever the motivation, it has to be good news if firms who pursue a green image undertake real climate measures

She shows the positive effects for businesses of a greener stance, and that, in the medium-term, green investments have significant positive effects on companies’ performance. The beneficial effects are larger for foreign-owned companies, those that are more productive, and for low-tech industries.

Corporate citizens

Her research also finds that innovations induced by environmental policy could be beneficial in making firms more internationally competitive and increasing their participation in export markets. So getting firms to think about how they could do their business better by reducing emissions can have a wider positive impact on business success.

There is a growing importance for business in how they are perceived by the wider public, as responsible corporate citizens. We have seen not only that many high-tech firms operating in Ireland are aiming to be carbon-neutral in the immediate future, others are also taking the issue seriously. We see companies keen, among other things, to buy renewable energy or signing up to certification schemes. These actions go beyond the traditional concentration on short-term profitability.

While these companies are certainly driven by enhanced social responsibility concerns, they are also concerned about their wider image.

There is also evidence of peer effects, so that once one business burnishes its green image, neighbours may also feel the need to make some changes. Reputation is an important business asset, and negative perceptions, once established, are hard to shake off.

Although companies that have only a shallow commitment to climate-friendly behaviour are often accused of “greenwashing”, nevertheless, whatever the motivation, it has to be good news if firms who pursue a green image undertake real measures to tackle climate change.

The cement industry is one sector where decarbonisation raises trickier problems. In the first instance, it uses a lot of fossil fuels to generate the heat needed to make cement. Secondly, the manufacturing process itself generates a lot of emissions. A three-pronged approach may be required.

First, replace the heavy energy requirements with cleaner energy, such as green hydrogen. Second, capture the carbon dioxide emitted through the manufacturing process by pumping it into permanent storage underground. Third, reduce our dependence on cement for building, by switching from concrete block construction of housing to the timber-framed method which is the norm in many other western economies.