Do Climate Regulations Work?

Are we in the business of counting emissions, or reducing them?

Here is the theory behind corporate sustainability regulations. If you make companies tell investors, regulators, and the public how much carbon they emit, they will feel pressure to improve and, maybe, they'll emit less.

This is the general idea behind the European corporate sustainability regulations, widely seen as the world's most advanced sustainability regulation, and the California climate rules, which apply to any company over a certain revenue threshold that does business in California. In other words, a lot of U.S. companies. The concept is If we measure it, we can fix it.

But there is disconnect in the relationship between filing paperwork and, say, generating more solar power or reducing waste.

And now, these regulations are getting weaker. The EU is watering down its rules, scaling back how many companies are required to report. In the U.S. the Securities & Exchange Commission's climate rule is effectively dead with the change in administrations. If regulations are supposed to drive climate action, this seems like bad news. But is it?

The Weight of Compliance

One point of view on these regulations is that they create a big compliance burden, particularly for smaller companies.

Think about how much time it takes to organize and file your taxes every year. Now imagine there's a new "personal sustainability disclosure" form you have to fill out, where you tell the government how many flights you took, how much energy your apartment used, and more, and then convert all of that into a carbon emissions equivalent. And you have to pay someone to verify those numbers.

After all that effort, you might think, "Well, I've done my part for climate action."

This may be happening at the corporate level, too. Companies spend a lot of money on consultants, lawyers, and reporting teams to ensure their sustainability disclosures are done properly. This is very complex and useful work, but completing a disclosure does not automatically lead to the development of a solar power project to provide electricity for your HQ.

If the goal is to reduce emissions, build renewable energy, and reduce waste, does making companies file more reports actually get us there?

What Actually Works?

Consider how much money is spent on sustainability compliance - legal fees, consulting firms, audit processes, ESG reporting software.

And then there are the ESG reports that most companies already publish. 96% of the largest 500 U.S. companies release ESG reports, often 50+ pages long, professionally designed, and completely optional.

Some policies do reduce emissions because they don't just require disclosure, they target incentives.

• The Inflation Reduction Act (IRA) in the U.S. is moving hundreds of billions of dollars into clean energy projects all across the country. An analysis by the Rhodium Group and MIT analysts reported 77% of pending U.S. investment in clean energy projects is allocated for Republican congressional districts. The IRA has been successful not by mandating action, but by making it more profitable.

• The EU's Carbon Border Adjustment Mechanism (CBAM) makes it more expensive for companies to pollute by adding a tax on imports with high carbon emissions. If you want to sell in the EU, you have to clean up your supply chain, or pay a price.

If climate disclosure rules keep getting rolled back, does that mean we're losing ground? Or does it mean we need better regulations, ones that focus on actually reducing emissions rather than just reporting them?