On July 26, 2021, the Luohan Academy convened leading economists as well as representatives from the public and private sectors for a discussion on how digital technology can contribute to the global goal of net-zero carbon emissions. The Academy's 6th Frontier Dialogue was moderated by Columbia Business School Professor Wang Neng. Speakers and discussants focused on a range of topics from regenerative business models to sustainable investing to technological demilitarization in the context of how to mitigate growing riks from planet's rising temperature.
The first presenting speaker was Nebojsa Nakicenovic, a Chief Scientific Advisor to the European Commission, who addressed how business and consumer behaviors may need to evolve in the future, particularly in light of the European Commission's new proposed legislation to cut greenhouse gas emissions by 55% by 2030. He pointed out that continuing convergence of technologies means consumer gadgets will take less energy to produce and to use. New digital business models focused on sharing and usership, rather than ownership, can also help the world achieve carbon neutrality by the middle of the century, Nakicenovic said.
Businesses built around co-ownership was also highlighted by session discussant Long Chen, president of the Luohan Academy. Companies that facilitate circular and regenerative economies of the future could represent trillions of dollars in new business, Chen said. As an example, he noted Idlefish, a Chinese marketplace for second-hand products, which has 300 million users participating in "re-commerce."Other changes in consumer behavior can be facilitated by effective mechanism design, based on green measurements that the public can trust. The Ant Forest mobile application, which has more than 560 million users, rewards conscientious consumer behavior with the physical planting of trees.
In the next session, Microsoft Azure's Chief Economist Amit Gandhi presented Microsoft's comprehensive sustainability strategy and why it aligns with the company's business objectives. Microsoft has pledged to be carbon-negative by 2030 and to remove all of its historical emissions by 2050. This includes direct emissions, emissions from its electricity consumption, and critically, the emissions of its entire supply chain. The company considers the planet itself as one of its business stakeholders. These moves will be a long-run differentiator for Microsoft, Gandhi explained, as we move into a future where every detail of how a product was produced will be transparent to end-users.
Discussant UC Berkeley Professor of Economist Steve Tadelis raised questions around how much tech companies can actual do vis-à-vis governments and whether it might be harmful to set too-ambitious of sustainability goals, particularly if the targets aren't particularly achievable. Tadelis also raised the question of what happens when wealthier tech companies and individuals transition to greener technologies, leaving the cost of legacy infrastructure for poorer groups to shoulder.
An exploration of what happens when governments fail was explored in the next session on sustainable investment mandates. Columbia University Professor of Finance Harrison Hong argues these mandates are the financial sector's answer to government's failure to pass carbon tax legislation. In a recent study, Hong and his co-authors look at the mechanisms for how more sustainable firms will receive lower cost of capital, which ultimately pays for their decarbonization efforts. Based on a growth model that focuses on decarbonization versus productive capital, Hong et al conclude that $34.5 trillion ($3.86 trillion in annual spending) is needed on decarbonization capital stock, and institutional investors may have to forego about 3.25% to 3.5% of expected returns if 20% of wealth eventually gets indexed to sustainable firms.
Discussant Lars Peter Hansen, Professor of Economics at the University of Chicago, framed Hong et al's paper as presenting a potentially very important quantitative model for determining what amount of productive output should be invested in climate mitigation. He raises a critique that environmental externalities should be linked to probability levels of disaster or damage and not just to the ratio of decarbonized capital to productive capital. Hansen acknowledged inherent difficulties in linking carbon emissions to temperature change and then to actual damage, and suggests ways to deal with uncertain outcomes. Lastly, he raises the question of how enforcement of sustainability mandates can be meaningful.
The theme of dealing with uncertainty in climate risk measurement was picked up by Columbia Business School Professor Patrick Bolton in his discussion of central banks and how they account for climate change risk when backward-looking risk assessment models are inadequate. Bolton suggests forward-looking analysis must work with scenarios and uncertainty, particularly in the deployment and effectiveness of new technologies. He cites the Bank of England's implementation of institutional stress tests as a way to facilitate transition planning. Finally, Bolton argues for an efficient global market for carbon offsets and incorporating digital technologies to bring transparency to the emissions of not only publicly traded but also privately held companies.
In his discussion, Harvard University Professor of Economics and Mathematics Eric Maskin suggests the world of business and finance is ready to show they are serious about climate change, even in the absence of a carbon tax or efficient carbon markets. He pointed to the ESG investing movement as a signal that shareholders do care about what firms do in a social context, despite what Milton Friedman said on the topic in earlier decades.
In the final session, UN Sustainable Development Solutions Network President and economist Jeffrey Sachs stressed the urgency of achieving net-zero or net-negative carbon emissions, and suggested China may be able to achieve net-zero 10 years ahead of its pledge of 2060. Digital technology is an "ace in the hole,"according to Sachs, who added that the digitalization of most services, commerce, and transport could present a big opportunity for poor, developing world to leapfrog over developed world. Sachs said the current trend of the U.S. of making China out to be the source of all its ills is unwise considering how much cooperation is needed on climate, land use, supply chains, cybersecurity, and 5G.
Discussant London School of Economics Professor and labor economist Christopher Pissarides continued with the theme of government leadership, suggesting that sustainability education and environmental instruction are key components in these changing times. Relatedly, government-led decarbonization, e.g. waste management or sustainability projects, could actually serve a dual purpose in current times, which is to create jobs. The developing world is in need of infrastructure while many workers are struggling to regain their footing in the wake of the Covid-19 pandemic, Pissarides argued.
During the open-floor Q&A part of the gathering, Imperial College London Professor of Finance Marcin Kacperczyk suggested digital technology should be harnessed to make information about the carbon footprint of companies easily accessible to the public. It can also help private firms reduce the cost of gathering information about their emissions, particularly in their supply chains.
European Commission advisor Nakicenovic raised the question of social steering on digital technology and what form cyber treaties might take in relation to technologies, whether they would cover nonproliferation of autonomous and digital weapons, or whether they would more broadly prohibit the dual-use of key technologies.
The UN's Sachs replied that one basic issue is that the U.S. Pentagon should stop effectively making private American technology companies government agents through their contracts, so that civilian use of key technologies can continue. Treaty actions have worked in the past and could work on cyber as well, he said. To Kacperczyk's point about information asymmetries, Sachs suggested one bright spot is that we are approaching a time when satellite technology will be able to monitor carbon emissions almost in real time.
The Luohan Academy's Dr. Chen closed with a parting thought that common threads from the discussion were that measurement of green behavior and green premiums or disincentives for emissions are needed. In addition to a carbon tax and carbon trading markets, there are also market-based approaches that can align the behavior of hundreds of millions of consumers and businesses with climate-change goals, Chen said.