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Op-eds & Essays Climate Change

Why Companies Need to Change Their Approach on Climate Change

The 2015 Paris climate agreement galvanized the global business community to commit to reduce its greenhouse gas emissions, and President Trump’s decision to withdraw only further fueled corporate calls for climate action.

Climate Action 100+, an investor coalition with more than $33 trillion in assets under management, is pushing companies to reduce emissions. Nearly 200 leading companies—GoogleAppleFacebook and Nike among them—have pledged to use 100% renewable electricity in their operations.

The top global investment firms now report that environment, social, and governance (ESG) issues rank near the top of their priority list. Even the world’s largest oil-and-gas companies are issuing corporate social responsibility (CSR) reports that highlight efforts to lower their carbon footprints.

Business leadership on climate change is necessary and welcome. But it will fall far short unless individual company commitments are paired with advocacy for stronger and specific climate policies.

Company commitments are voluntary, individual and, most important, do not change the underlying systemic issues with how energy is produced and consumed in nearly every aspect of our economy.

Greenhouse gas emissions reflect the collective choices of myriad individuals and firms, which, in turn, reflect the economic incentives within our current energy system. A company may want to “go green,” but not directly control how the cement and steel for its new office building are made or what fuel is used to ship its goods or transport its people around the world. Even those emissions it can control may just lead to offsetting increases elsewhere, absent systemic reform.

Changing our energy system requires policy to collectively alter the myriad choices of individuals and firms. A carbon price is key to achieve this; indeed, a $50 per ton carbon tax alone would reduce U.S. emissions 40% by 2030 relative to 2005 levels. Clean energy or energy-efficiency standards, subsidies and other instruments may also play a role.  Well-designed policy reaches into the nooks and crannies of our energy system to achieve emission reductions beyond what any given company can control because it gives all economic actors an incentive to make different choices about how to invest, consume and produce.

Individual company impact is constrained by the dynamic effects of the energy system overall. For example, companies that pledge to get 100% of their energy from solar power still must buy from the grid (usually fossil fuels) at night, while producing more energy than they may need midday. As production of renewable energy grows, without systemic changes to the grid such as increasing storage capacity, the amount of electricity produced at peak times will exceed how much electricity is actually consumed. Failing to account for the hourly mismatch between electricity generation and consumption could lead a corporation in California that buys only solar energy to overstate its greenhouse-gas emission reductions by more than 50% by 2025, according to a recent Stanford study

There are also limits to how much individual action can achieve. According to work by America’s Pledge, more than 1,300 businesses have adopted voluntary greenhouse gas targets. Even if all of them were able to somehow completely reduce their emissions to zero, that would still only reflect 14% of total 2016 U.S. emissions. 

Corporate reluctance to push for policy action is understandable, to some degree, given that major firms must be able to work across partisan lines and myriad policy issues. A technology firm may dislike Mr. Trump’s climate policies, for example, but need to maintain a good working relationship with the administration to engage on trade, privacy, tax, antitrust and other issues. Moreover, while a company may support a policy like a carbon tax in theory, actual legislative details invariably reflect choices and compromises that create winners and losers.

Some issues are of such import, however, that companies must take a policy stand regardless. Moreover, doing so can often be in a company’s best interests. Businesses need predictability to make sound investment decisions. Advocating for strong but predictable climate policy today, for example, can avoid a regulatory pendulum and more extreme government actions down the road as the impacts of climate change become more severe.

Despite all the ambition and rhetoric, CO2 emissions last year not only went up, but did so at the fastest rate since 2011. We’re still moving in the wrong direction. Achieving the goals of the Paris agreement—that so many companies claim to support—requires that emissions start falling rapidly. That will not happen without much stronger policy to transform today’s vast, dynamic, complex system of how we produce and consume energy. Leadership on climate change will involve helping to define that policy and pushing to make it a reality.

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Op-eds & Essays Climate Change

Why Companies Need to Change Their Approach on Climate Change