South-Western College Publishing - Economics  
Firms Are Going Green Even When They Don't Have To
Subject Voluntary emissions reduction creates cleaner environment and more efficient production.
Topics Economics and the Environment; Production and Costs
Key Words Emissions, Production, Efficiency, Cost, Profit, Regulation
News Story

Firms are discovering that they can not only reduce emissions, but they can do so profitably. Aluminum Company of America (ALCOA) has reduced its emissions by almost ¼ since 1990, and has seen profitability increase. ALCOA has been busy planting groves of trees to remove carbon from the air (so-called "carbon sinks"), increasing its reliance on hydroelectric and other non-greenhouse gas producing power, as well as making simple improvements in its production processes. As a result, fewer gases get emitted by the company, and the resulting efficiencies allow the company to reduce its per-unit costs.

The Bush Administration has made it a point of opposing any particular caps on greenhouse gases, making the case that doing so actually harms the environment, preferring instead to make any reductions voluntary. The gradual guidelines set out by the Administration include a per-dollar of output emissions reduction of 2% per year until 2012, resulting in an 18% reduction overall. Given that output growth is expected to top 18% over this period, total emissions would actually increase rather than decrease.

But firms see the writing on the wall. As Paul Tebo, a Vice-President for DuPont Chemical argues, "I think it's just a matter of time before tougher goals are set." They are beginning to put in place mechanisms that will help them reduce emissions, and at less cost. In fact, a group of firms have founded the Chicago Climate Exchange, in which each firm has pledged to reduce emissions by 1% annually or to buy credits from someone who has.

The ultimate problem with a voluntary emissions credit program is its lack of enforceability. Without regulations to support it, there is little pressure on firms to participate. Further, setting regulations is difficult as well, as little is known about the true costs of global warming.

(Updated January, 2004)

Questions
1.

Voluntary emissions reductions are typically identified with a "free-rider" problem. Why is this?

2. 2. Why might it be more efficient for firms to determine the reductions than for government agencies or regulations to do so?
3. What is happening in the article to ALCOA's short-run and long-run average cost curves? Illustrate this with a graph.
Source Barnaby J. Feder, "Some Businesses Take Initiative to Voluntarily Reduce Emissions," The New York Times, 1 December 2003.

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