Wharton's Eric Orts and Erwann Michel-Kerjan and Fr. James Martin discuss recent calls for action on climate change.

Climate change and pollution have been the subjects of increased debate over the past two weeks in the wake of a papal call, a court ruling and a government report. Pope Francis on June 18 called for global dialog and action on climate change, and asked businesses to look beyond the profit motive and think of the impact of their actions on the poor. On June 22, the U.S. Environmental Protection Agency (EPA) weighed the benefits of the U.S. taking action on climate change, and also the costs of failing to act. On June 29, in a narrow 5-4 ruling, the U.S. Supreme Court struck down an EPA regulation aimed at curbing emissions of mercury and other toxic pollutants from coal-fired power plants.

The distilled takeaway from those debates for businesses is to take proactive measures ahead of the regulatory curve. For consumers, it’s a collective call to change their lifestyles, say experts from Wharton and the Catholic Church.

“The Pope is looking at the subject [of climate change] from a spiritual and religious point of view,” said Father James Martin, a Jesuit priest and editor-in-large of the Catholic magazine America. Recalling the message “Till the earth and keep it” in Genesis 2, he added, “We’ve done a good job of tilling it, but not such a great job of keeping it.”

“ is aimed more broadly to look at your own behavior,” said Wharton professor of legal studies and business ethics Eric W. Orts. If it results in changes in consumer behavior and preferences, those actions would affect demand and businesses would have to respond accordingly, he added. “This is about market-driven change, where consumers decide what they want.”

“Many times we think of environmental problems as one of the government. This [call by the Pope] is aimed more broadly to look at your own behavior.”–Eric W. Orts

If the debate on climate change prompts changes in consumer behavior, companies will have to redesign their business models, according to Erwann Michel-Kerjan, executive director of Wharton’s Risk Management and Decision Processes Center. He said CEOs of companies would begin to consider how they could even increase their revenues by changing their ways. “You have two choices,” he said, addressing businesses at large. “You wait for regulators to come to you or you start to work together to change the standards.”

Martin, Orts and Michel-Kerjan discussed the importance of the developments affecting climate change and pollution on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Call to a Broader Audience

According to Orts, Pope Francis is clearly targeting a broader audience beyond Catholics with his message in his encyclical (the Pope’s letter to bishops). “While there are sections that are clearly speaking to the faithful, it also has many important issues [relating to] consumer lifestyles,” he said.

“It’s not simply a call for social change, but also a call to personal conversion,” added Martin. “He is appealing to people on a personal level to change the way that they make decisions, change the way that they look in the environment and remember how our decisions affect the poor.”

Businesses are clearly in the Pope’s sights, and his encyclical is full of exhortations, such as this: “Caring for ecosystems demands far-sightedness, since no one looking for quick and easy profit is truly interested in their preservation,” Pope Francis wrote in his encyclical. “We need to reject a magical conception of the market, which would suggest that problems can be solved simply by an increase in the profits of companies or individuals.”

“It’s not simply a call for social change but also a call to personal conversion.”–Fr. James Martin

In asking businesses to rethink their goal of profit maximization, the Pope is calling upon them to think of how their actions affect the poor, said Martin. “They [the poor] are a stakeholder in creation in the world, so can you bring those people to the table?” is the question he felt the Pope is asking of businesses.

Orts noted that the Pope has also suggested that perhaps carbon trading is not ethical or effective, and called for a rethink. He expected the Pope’s call to have an effect on the political debates “and maybe take it out of the Left vs. Right rut that we have gotten into unfortunately [on this issue].”

Orts expected Pope Francis to raise those issues when he visits the U.S. later this year, especially in his planned address to a joint session of Congress. “He is going to talk about both climate change and the poor, the right to life, the economy, the consumers’ culture,” he said. “I would imagine both sides of the aisle are going to be squirming in their seats, which is what the church is supposed to do. The old saying is ‘Comfort the afflicted but afflict the comfortable.’” Michel-Kerjan noted that the timing of the Pope’s call is significant, with the United Nations climate change conference set for November-December this year in Paris.

A ‘Disturbing’ Decision

In the case of the Supreme Court ruling on mercury pollution, Orts said he found it “a little disturbing” that the EPA was faulted for deciding to regulate the emissions before conducting a cost-benefit analysis. “The EPA repeatedly went through a cost-benefit analysis and found that regulating mercury emissions would have brought up to $90 billion in annual benefits, in addition to up to 11,000 fewer people dead each year from respiratory ailments, 4,700 fewer fatal heart attacks [and] 3,000 fewer visits of children to hospitals for asthma,” he noted. “The court just came in and said, ‘You did that later, not before.’”

The two sides in the case also had “very different understandings of the costs and benefits involved,” according to a New York Times report. While industry groups said the government had imposed annual costs of $9.6 billion to achieve about $6 million in benefits, the EPA claimed the costs yielded tens of billions of dollars in benefits, the article noted.

“How can this be possible that you would have five votes against it?” asked Orts of the EPA’s regulations in this case. He felt the case reflected a larger debate about “regulation vs. no regulation” relating to large environmental problems like climate change and other issues. “There is not a really good debate and dialog going on between the two sides, and this is one of the reasons we have this really large conflict in the political system in the U.S.,” he said.

“You wait for regulators to come to you, or you start to work together to change the standards.”–Erwann Michel-Kerjan

Divide over Regulation

Referring to the EPA report on the benefits of global action on climate change, Orts said, “we have clear evidence coming in that [climate change poses] major risks [and] major costs and there is no way to avoid the issue.” It is imperative for businesses “to step up,” he added.

In that vein, businesses have to reconsider their views on environmental regulation, said Orts. “Traditionally there has been a view that business should do what it does best — which is maximize returns — figure out how do that and do that within the constraints of regulation,” he said, adding that businesses are generally against regulation. “When we see these environmental problems coming up, it doesn’t work that way. There has to be some kind of a regulatory response and many forward-thinking businesses are trying to get ahead of the issue and saying, ‘We recognize this is a problem but let’s do this rationally in a way that is not going to knock our business out.’”

In order to buttress his point, Orts pointed to one aspect of what climate change could mean if corrective action is not taken. “Predictions are we can hit nine degrees Fahrenheit warmer in 2100 if we do nothing,” he said. “Think about what that means: On a normal summer day of 90 degrees it will be 99 degrees. People don’t like to think about it, but the risks that we are running are real.”