The offsetting debate, US v France and fat cat pay

Upset with offsets

It’s harder and harder these days to bash action taken to address climate change. But carbon offsetting is a different matter. “Neutralising” your environmental footprint by sponsoring a carbon mitigation project is regularly savaged by critics. At best, its detractors decry it as a way of assuaging consumers’ eco-guilt. At worst, they call it a money-making scam.

This paper takes the emotion out of the argument and looks at the facts of the $331m voluntary offset market. In short, Matthew Kotchen’s answer is lukewarm: offsets may promote greater environmental awareness, but the world cannot rely on the model to reverse climate change.

For starters, offsets need far greater scrutiny and standardisation. There are 97 companies now in the global offset market, an increase of 200% in six years. Yet the market is plagued by asymmetric information. Consumers only know what offset providers tell them, allowing unscrupulous providers to go unchecked.

Secondly, the 328 projects currently supported by the global offset market are “not even drops in the bucket” of what is necessary. Offsets reduced carbon dioxide emissions in 2007 by 65m tonnes. That’s less than 2% of annual global emissions.

Why isn’t the offset market larger? Because voluntary offsets function like charitable contributions to a public good, Kotchen argues. Public goods have two defining characteristics: non-excludability and non-rivalry. The first means that public goods are freely available once offered. The second means the good is open to use by all.

Both factors open the door to the free-rider problem, ie people can enjoy the public good of emission reductions without directly contributing to those reductions themselves, thereby diminishing the incentive towards individual action. It’s a classic market failure.

To account for such behaviour, economists have coined the term “impure public goods”. The phrase refers to products or services that provide private benefits in the process of delivering public benefits. With offsetting, the benefits are mostly reputational: the carbon neutral sticker in the car window or an eco-logo on the company website. As incentives go, these are hardly planet-saving.

Consumer psychology also plays a role. It’s possible that the purchaser of offsets may change buyers’ behaviour for the good. But it’s equally feasible they might succumb to a “rebound effect” and justify more – not less – carbon-producing activity. More research is required to see which reaction is the more probable.

What to do then? Go with the advice of offset provider, Kotchen recommends: “Reduce what you can, offset what you can’t.”

“Offsetting Green Guilt” by Matthew Kotchen, Stanford Social Innovation Review, spring 2009

Mirror, mirror on the wall

Picture two widget-making firms making identical widgets. One operates in the US, the other in France. Which is more likely to fully embrace corporate responsibility? It depends on the company’s mission and values, you say. Or employee and customer expectations.

These factors certainly play a role, but thought needs to be given to the “institutional determinants”. Drawing on the latest research in comparative institutional analysis, this fascinating paper examines the relationship between a firm’s institutional context and its take-up of corporate responsibility practices.

The findings are illuminating. According to Apostolakou and Jackson, the US widget maker is the more likely of the two to adopt a formal corporate responsibility agenda. Why? In liberal economies such as the US, corporate responsibility acts as a “substitute” vehicle for stakeholder participation, the authors argue. Coordinated market economies such as continental Europe, on the other hand, have institutionalised mechanisms that do that job: employee board representation, wage negotiation, social expenditure and the like.

Another surprising finding: while companies could easily mirror institutionalised forms of stakeholder coordination within their internal corporate responsibility structure, they generally don’t. They typically prefer “implicit forms” of corporate responsibility instead.

There’s an important point here. If coordinated markets continue to deregulate – as they are – corporate responsibility could emerge as a viable alternative to traditional regulatory structures. An idea to watch.

“Corporate Social Responsibility in Western Europe: An Institutional Mirror or Substitute?” by Androniki Apostolakou and Gregory Jackson, University of Bath, Working Paper, February 2009

Erroneous slaughter of fat cats

The death of fat-cat bonuses could have arrived. Under the latest US financial stimulus bill, companies that accept federal bailout funds are prohibited from paying performance bonuses that exceed one-third of an executive’s annual compensation.

The move may be welcome, but does it get to bottom of the problem with executive pay? In this op-ed paper, the Aspen Institute’s Judith Samuelson and Lynn Stout express their doubts. Over-paying executives isn’t the root of the current economic problems, they argue. Paying them too much to do the wrong things was where it all went wrong.

Short-termism lies at the heart of the executive compensation dilemma. Business leaders take on excessive risk to hit quarterly profits. That’s partly so they can earn their bonuses. But it’s mostly because shareholders demand it. Executives need to curb their greed. But so too must shareholders.

“Are Executives Paid Too Much?” Judith Samuelson and Lynn Stout, op-ed in Wall Street Journal, 25 February 2009

Campus news

MBA students are more interested in contributing to society through their work today than they were seven years ago, according to a new survey of MBA students by the Aspen Institute.

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