Analysing the role of decision‐making economics for industry in the climate change era

Abstract

PurposeThe purpose of this paper is to illustrate how project economics and decision making in industry can be affected by global climate change. When assessing the sustainability of any design or project, one of the key emerging considerations is the potential for the decision to contribute to greenhouse house gas (GHG) emissions. Changes in climate may also lead to new project risks with further economic implications.Design/methodology/approachExamination of the wider social economic implications of climate change provides the basis for considering individual projects within the context of the social costs of carbon emissions, the prospect of the gradual internalisation of those costs, and the costs and benefits of adaptation to protect against the impacts of global change on the project.FindingsEmissions of greenhouse gases, still widely not priced in many parts of the world, drive the emerging observed and predicted effects of climate change on the planet. This damage has real value and can be monetised, allowing a notional social cost of carbon to be estimated. As climate change continues to manifest itself, societies start to react, constraining emissions and creating a market price or tax for carbon. If economic analysis for project decision making includes an explicit consideration of the likely future trajectory of carbon prices, and also examines the wider external social costs of carbon, the benefits of early adoption of revenue‐positive measures to reduce emissions are revealed. In the same way, the financial costs of procrastination are made increasingly evident as regulatory and economic baselines shift. Designing for inevitable climate change will also help industry future‐proof their operations.Practical implicationsAt present, relatively few organisations examine the financial and economic implications of carbon emissions or the effects of a changing climate on their operations. To avoid unnecessary costs, and maximise benefit for stakeholders, decision making for business and government needs to incorporate an explicit economic treatment of the current and likely future implications of operating in a climate‐constrained and climate‐impacted world.Originality/valueBy conducting the kind of analysis proposed, organisations can not only help to reduce GHG emissions, but can also improve their own financial performance. The value of this analysis will only increase over the coming decades of the climate‐change era.