By Forest L. Reinhardt

Which firms will gain and which will lose as governments and businesses begin to take climate change seriously? Corporate balance sheets provide a few clues: As greenhouse gas emissions get costlier, the relative value of such assets as natural gas, which produces less carbon dioxide than coal when burned, will increase. Other clues can be found in firms’ current efforts to reduce emissions: A company’s ability to analyze the trade-offs inherent in initiatives such as cutting overall transportation distances will become highly valuable in a world where the right to emit greenhouse gases is limited.

Ultimately, though, success in a carbon-constrained world will be determined not by short-term balance sheet effects or efficiency initiatives but by innovation, management acumen and leadership. The companies that have seized the big opportunities in changing economic landscapes have been those with bold visions of the future, not necessarily those whose hard assets seemed to position them best for success. Think of Toyota and Wal-Mart. No one could have guessed merely by looking at Toyota’s balance sheet in the 1940s or Wal-Mart’s in the 1960s that those firms would so successfully capitalize on globalization.

The firms that come out ahead when emissions cost money will be those that make bold moves now, refocusing strategy and operations to take advantage of the opportunities and skirt the dangers raised by the prospect of climate change. Taking bold steps doesn’t just mean chasing after what are sometimes touted as “win-win” solutions, such as quick-payback investments in energy efficiency. Moves like that are obviously necessary, but they aren’t enough by themselves. Companies need to get past the win-win rhetoric and move on to the tough trade-offs.

Many of the climate-related investments a company might make won’t pay for themselves until some other firm is making complementary investments. Alternative-fuel cars need a refueling infrastructure. Specialized facilities that liquefy natural gas for transoceanic shipment are valuable only if there are terminals for off-loading the cargo and turning it back into gas at the other end. And many carbon-reducing investments won’t deliver shareholder value until governments act to make emissions expensive.

For centuries, the North Atlantic cod fishery fed millions of people, but there were no property rights controlling access to fish in the sea, so fishermen didn’t treat the resource as scarce. In the early 1990s, the fishery collapsed. Governments have since established sensible systems of tradable catch permits that seem likely to prevent the collapse of other species, but it was apparently too late to resurrect the cod fishery.

The atmosphere’s ability to absorb emissions is now similarly limited, precisely because we thought that could never happen. A system in which we pretend that carbon emissions cost nothing subsidizes, at our children’s expense, every producer and consumer of energy today. To be efficient, we need to eliminate those subsidies. That means pricing carbon.

Business leaders must be courageous in betting on the long-term future that will benefit their companies the most—that is, on a future where governments constrain, in transparent and reasonable ways, the human impact on the climate. Firms can invest now and participate in voluntary interfirm trading systems to develop expertise in them and show governments, regulators and the business community how robust such systems can be. Companies can also lobby for governments to implement sensible systems that tax carbon emissions or that cap them and encourage the trading of carbon credits. By betting on the future they want, corporations will make that future all the more likely.

Prudent businesspeople may balk at the idea that they should stick their necks out and, in some cases, act unilaterally on climate change. But their necks are already exposed. The status quo will not persist. Inertia and incrementalism amount to big (and risky) bets, too—bets that the future won’t be much different from the present.

After World War II, the Americans advised Japanese companies to concentrate on labor-intensive, low-value products in which Japan was said to have an advantage. Instead, the Japanese invested in producing capital-intensive, income-elastic goods such as automobiles and electronic equipment, believing that a critical mass of consumers would eventually get rich enough to buy those products. Had the firms bet wrong, the strategy would have failed. But had they not taken bold steps toward the future they wanted, Japan would have remained poor no matter how the world economy evolved.

Companies that might derive short-term benefits from subsidies—for corn-based ethanol, for example, or wind-powered electricity—will be tempted to lobby for them, and the government will undoubtedly find it politically easier to pile subsidy on subsidy rather than tax emissions or establish a coherent cap-and-trade system. But subsidies won’t fix the climate problem, and any business in which subsidies drive profits is not healthy or sustainable. Strong business leaders should want a transparent system that prices the right to generate carbon emissions as though it were any other scarce resource and lets firms get on with the business of competing. 

Forest L. Reinhardt is a professor of business administration at Harvard Business School.

Place your bets on the future you want

Which firms will gain and which will lose as governments and businesses begin to take climate change seriously? Corporate balance sheets provide a few clues: As greenhouse gas emissions get costlier, the relative value of such assets as natural gas, which produces less carbon dioxide than coal when burned, will increase.

Five Questions

Restoring the fortunes of a company that has fallen on hard times often calls for bold moves, says Rosabeth Moss Kanter, the Ernest L. Arbuckle Professor of Business Administration at Harvard Business School and author of Confidence: How Winning & Losing Streaks Begin and End (Crown Business, 2004).

Winning: Boardroom benchwarmers

Q:  I sit on a board with two members who, for the past year, have said and done very little. Regardless, both were just reelected unanimously with the support of the nominating committee. What’s your take? Name withheld, New York 

A: So, two seat-warmers on your board were just reelected unanimously, you say? Doesn’t that mean you voted for them, too? If so, don’t worry. You’re definitely not the only board member in history to endure an ineffective or otherwise dysfunctional fellow director.

Cyber Ed, Thai Style

The advent of the Internet has brought many wonders to people’s lives. One of them is education. Through the Internet, educators have been able to widen their reach to cover far-flung places that used to have limited access to learning tools.

Moral? Revolution?

SOMETIMES we must listen to our political leaders even if they give us the feeling that they are just leading us by the nose. We may even take them seriously, if only because we have no choice: we elected them. But first we must unravel the meaning of their words when they seem to speak earnestly and dramatically. At this time, the words are Moral Revolution.

After Wolfowitz

WASHINGTON—If one thing has become clear since Robert Zoellick became World Bank president three months ago, it’s that he isn’t Paul Wolfowitz.

Commentary: Will the ‘bottom billion’ ever catch up?

The World Bank’s new president, Robert Zoellick, passed a major milestone: his first time leading the bank’s annual meetings. As the world’s finance and development ministers descended on Washington last week, Zoellick established himself firmly at the head of the most important agency designed to ensure that globalization does not leave people behind, mired in desperate poverty. But he faces a planet that has changed far more rapidly than his institution has.

What makes change happen?

You have been charged with implementing a significant new initiative. Perhaps your company has defined a new competitive strategy and you need to align your group behind it. Or maybe you’ve identified stubborn problems in your unit that need solving.

If you’re not at the table, you’re on the menu

When the companies of the United States Climate Action Partnership (USCAP)—businesses including GE, Alcoa, DuPont and PG&E—announced their call for federal standards on greenhouse gas emissions in January 2007, The Wall Street Journal castigated these “jolly green giants” for acting in their own self-interest in promoting a regulatory program “designed to financially reward companies that reduce CO2 emissions, and punish those that don’t.”

ValueIT

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Winning: Key lessons for new leaders

Q: What are the keys to insuring a strong start in a leadership position? Christopher Finlay, Chicago

A: You could fill a book—in fact, you could probably fill dozens—with all the ways to get off to a good start as a leader.

Going paperless

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The forbidden fruit

SHIFTEE Velasco is one of those who are itching to try the Apple iPhone, which combines a mobile phone with the company’s iconic iPod music player, even before its debut next year in Southeast Asia. “I just want to be a braggart,” he says blithely.

Making gender issue history

FIRST of all, let me thank the Economic Journalists Association of the Philippines (Ejap) for this privilege to speak before a distinguished group of journalists, people from government and from business.

Passport to success

AMERICANS, the joke went, spent millions of dollars to produce a pen astronauts can use in space; the Russians, on the other hand, used pencils.

Selling beauty

Another cosmetic surgeon battles it out in crowded market

The current rage for beauty and wellness has led to an assortment of clinics offering surgical and nonsurgical procedures to make clients look good and feel good.

Winning: Competence trumps corporate bias

Q: I am seeking a rewarding career, having recently completed my bachelor’s degree in management. What obstacles will I likely need to overcome in the corporate world being an older, five-foot tall, African-American woman? Name Withheld, Houston 

A: When we first received your letter, we put it into a file labeled, “How To Succeed In Business While Looking Different.”

Looking backward

At a union hall in Detroit packed with 800 members of the AFL-CIO and their families, Democratic presidential candidate and New York Senator Hillary Rodham Clinton promises to break the mold on trade.

It’s Greek to me

NO one in the UN picked a quarrel with President Gloria Macapagal-Arroyo when she told that great assembly that the Philippines is the most democratic nation in Asia. It would have been pointless; the UN is not the forum for a debate on political theory and practice, but over here, there were some voices which greeted the President’s boast with not much enthusiasm.

Best teachers, worst practitioners

EIGHT executive directors of the World Bank were here in the Philippines on the very first day of the Senate hearings into the national broadband network/Zhong Xing Telecommunications Equipment Co. Ltd. (NBN/ZTE) contract. The executive director for the Philippines, a Brazilian national, was part of the team. They were here to learn about World Bank projects in the Philippines.

Are you delegating so it sticks?

You know that a key part of any executive’s or manager’s job is helping subordinates develop professionally—including honing their problem-solving and decision-making powers.

How to teach pride in ‘dirty work’

Managers in occupations that the public considers repellent can use an array of techniques to help their employees cope with and indeed feel proud of their work, according to a study that drew on interviews with 54 managers in 18 stigmatized occupations, including exterminator, “exotic” entertainer and prison guard.