Finance
Council Post: The Inflation Reduction Act Shows The Way Forward On Climate
Published
1 year agoon
By
James White
Sadek Wahba, PhD is the Chairman & Managing Partner of I Squared Capital and a member of the Council on Foreign Relations
It was a worthwhile experience to attend COP27, the 27th United Nations Conference of Parties on climate change, held in Sharm el-Sheikh, Egypt. I had a chance to see the event’s widely recognized challenges firsthand.
Those challenges are perhaps unsurprising at an event with over 45,000 registrants. Like many events that have grown to unsustainable size, it was quickly overwhelmed by extraneous matters. These included a legion of consultants offering their wares: for example, proprietary tools and metrics for organizations looking to report on their ESG performance. While of some value, time should be spent on reaching a consensus on what we should be measuring for the environmental “E” let alone the social “S” or the governance “G.” On a positive note, the “Integrity Matters” report issued at the conference is a notable step toward reliable reporting standards.
Also in evidence, of course, was the brand of political and economic conflict that has derailed past COPs. After much debate, an agreement was reached to create a “loss and damage fund” to compensate low- and middle-income countries for the cost of climate-related damage and climate change mitigation efforts.
The challenge is that these funds rarely reach their announced target funding and are light on specifics. The COP27 agreement left open the critical questions of which countries will contribute to the fund, the source of the funds or which countries will benefit. Also unaddressed were safeguards to ensure that the funds go to projects that reduce carbon emissions (and not into the black hole of government coffers).
In addition, the conference, like last year’s COP26, failed to set a target for phasing out fossil fuels. It repeated the “phase-down-of-coal” language, without specifics. It did address methane emissions. But nothing was said about the elephant in the room: the critical role of natural gas in the energy transition phase, a phase that has been fundamentally altered by the Russia-Ukraine war.
The most critical question remains: How to implement these recommendations? That is in large part because implementation is not in the purview of the COP. Instead, it is left to every government to act on its interpretation of what the COPs recommend. The need for immediate, actionable solutions suggests it is time to involve private actors in leading the implementation phase.
This is a pragmatic and not an ideological stance. The climate crisis has public impact and demands a public response. The U.N., through its Framework Convention on Climate Change, from which the COPs emanate, has played a key role in galvanizing global actors to understand and address climate change. So have multilateral institutions and government agencies by spotlighting climate issues, conducting research, setting goals and targets, and creating regulatory frameworks. All of this is essential.
But it is not sufficient. As the climate crisis worsens, the critical question becomes not what to do but how to do it.
Answering that question is where the private sector excels.
Private companies are agile and technologically adept—exactly the qualities needed for climate action. And because they must be immediately responsive to stakeholder pressure, they are in important respects ahead of policy and regulation. A case in point: U.S. regulators are tolerant of landfills. The U.S. Environmental Protection Agency’s website tells us right at the outset that “modern landfills are well-engineered facilities” before noting they “must be designed to protect the environment.”
But companies including Subaru and Unilever, among many others, have moved ahead of regulators and taken zero-landfill pledges or created waste-reduction initiatives, streamlining their operations and finding new uses for recycled waste. Almost two decades ago, BMW began to extract methane from landfills for use in manufacturing. Citing figures from the original landfill gas project at its Spartanburg, South Carolina, plant, BMW says it generates 40% of the plant energy requirements from methane, reducing CO2 emissions by 92,000 tons per year and saving an annual average $3.5 million in energy costs.
And there is the answer to implementation in a nutshell. Forced to answer to investors, communities and employees, and incented to improve performance, private companies invent, innovate and solve. Concrete action on climate is the result. And while it’s true that corporate “greenwashing” has been too much in evidence, the standards set forth in the “Integrity Matters” report promise to greatly improve reporting standards (though the involvement of experts with industrial experience should help that process).
The most pressing and the most promising climate policy question of the moment is how to spark private-sector innovation and how to accelerate it. In this regard, the U.S. Inflation Reduction Act of 2022 provides a model. This climate-focused Biden Administration initiative has not received nearly enough attention—overshadowed, perhaps, by 2021’s landmark infrastructure bill, the $1.2 trillion Infrastructure Investment and Jobs Act.
But the IRA is arguably more forward-looking. While providing some direct funding, it relies largely on incentives and tax credits to provide its total $370 billion support designed to engage the private sector in climate projects. Those include the improvement and deployment of wind farms, solar arrays and high-capacity batteries, programs to reduce greenhouse gas emissions and the development of new clean energy projects including clean hydrogen extraction and storage.
In its reliance on incentives, the IRA is responsive to political realities. In our polarized political environment, a direct funding program on the scale of the IIJA is unlikely to be repeated anytime soon. With its focus on the private sector, I believe the IRA provides a go-forward model.
A role will remain for direct government funding, of course, and regulatory frameworks are essential (provided they are not intrusive or distortive, such as subsidizing energy prices generated from coal). There is a role for the COPs, as well, and the data, insight and calls to action they generate. But when it comes to actually taking action, the IRA—and the private sector it empowers—are the future. COP28 hosted by the UAE this year can play a critical role in bridging the gap.
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
Source: Forbes
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