Why Bush's climate change policies will never work

Given that today the President offered up yet another ineffectual "plan" for combating climate change it seems appropriate to highlight this piece which seeks to explain why our current policies do not (and will not) work by exploring the economics of the issue.

Written by Dartmouth professor Karin S. Thorburn and entitled "The Fatal flaw of U.S. climate change policy" the analysis (published late last night) seems especially prescient. Once again the President's "policy" calls for voluntary measures backed by incentives. Professor Thorburn explains why, economically, these voluntary measures will never work,

In joint work with Karen Fisher-Vanden, I examined the positive net present value assumption underlying the U.S. policy for climate change (Fisher-Vanden and Thorburn, 2008). Specifically, we studied the stock market’s reaction when companies joined Climate Leaders, a voluntary government-industry partnership in which firms commit to a long-term reduction of their greenhouse gas emissions. Importantly, when the firms announced to the public that they were joining Climate Leaders their stock prices dropped significantly. Controlling for general market movements, the average abnormal stock return was -0.9% over a three-day window and -1.5% over a five-day window around the announcements. For the 46 sample firms that joined Climate Leaders, the total loss in market value was $16 billion. The stock price decline was smaller for firms in carbon-intensive industries, where regulatory action is more likely (and thus partially anticipated in the stock price), and greater for high-growth firms, suggesting that the green investments crowd out growth-related capital expenditures.

Firms joining Climate Leaders conduct a careful inventory of their greenhouse gas emissions before they subsequently announce a reduction goal. The average firm in our sample set a goal to cut its total emissions of greenhouse gases by 17%. Interestingly, the stock price plummeted even further (on average -1.3%) when the greenhouse gas goal was announced, and the more aggressive the goal, the greater the price decline.

Officers of corporations have a legal fiduciary duty to act in the best interest of their shareholders. The immediate negative economic impact of "going green"( and the uncertain future impact of the decision) conflicts with this duty. Consequently we see few companies agreeing to participate voluntarily.

Thorburn continues,

So what does this all mean? In a nutshell, it suggests that the federal government’s reliance on voluntary measures to reduce greenhouse gas emissions will likely prove unsuccessful. The success of voluntary programs depends on their ability to achieve meaningful corporate participation. Such participation will ultimately depend on the payoff to shareholders. Our research shows that shareholder value declines when companies join Climate Leaders and pledge large cuts in their carbon footprint.

One has to wonder though if this lack of participation is a bug of the Bush "policy" or if it is actually a feature.