11.2 International Environmental Agreements and Business Implications
4 min read•august 7, 2024
International environmental agreements shape global efforts to combat climate change and protect ecosystems. From the to the , these pacts set ambitious targets and guidelines for nations and businesses to reduce emissions and adopt sustainable practices.
For businesses, these agreements bring both challenges and opportunities. Companies must navigate complex regulations, invest in green technologies, and adapt their supply chains. However, embracing sustainability can lead to cost savings, innovation, and improved brand reputation in an increasingly eco-conscious market.
International Environmental Agreements
Global Efforts to Address Climate Change
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- Paris Agreement, a legally binding international treaty on climate change adopted by 196 countries in 2015
- Aims to limit global warming to well below 2°C, preferably to 1.5°C, compared to pre-industrial levels
- Requires countries to submit nationally determined contributions (NDCs) outlining their emissions reduction targets and climate action plans
- Includes provisions for climate finance, technology transfer, and capacity building to support developing countries
- , an international agreement linked to the , adopted in 1997
- Set binding emissions reduction targets for 37 industrialized countries and the European Union
- Introduced three market-based mechanisms: emissions trading, the , and
- First commitment period (2008-2012) saw limited success due to non-participation of major emitters (United States) and lack of binding targets for developing countries (China, India)
Protecting the Ozone Layer
- Montreal Protocol, an international treaty designed to protect the ozone layer by phasing out the production and consumption of ozone-depleting substances (ODS)
- Adopted in 1987 and has been ratified by 197 countries, making it the first treaty in United Nations history to achieve universal ratification
- Has successfully phased out 99% of ODS, including chlorofluorocarbons (CFCs), hydrochlorofluorocarbons (HCFCs), and halons
- (2016) expanded the protocol to phase down hydrofluorocarbons (HFCs), potent greenhouse gases used as replacements for ODS
National and Regional Environmental Regulations
- Environmental regulations, laws, and policies implemented by national and regional governments to protect the environment and promote
- United States: Clean Air Act, Clean Water Act, Endangered Species Act, National Environmental Policy Act (NEPA)
- European Union: Renewable Energy Directive, Energy Efficiency Directive, Waste Framework Directive, REACH (Registration, Evaluation, Authorization, and Restriction of Chemicals)
- China: Environmental Protection Law, Renewable Energy Law, Promotion Law
Business Implications and Costs
Market-Based Mechanisms for Emissions Reduction
- , a market-based approach to reducing greenhouse gas emissions by allowing companies to buy and sell emission allowances
- set a limit on total emissions and allocate allowances to companies, which can then trade them based on their needs
- Examples include the , the world's largest carbon market, and the in the northeastern United States
- Emissions reduction targets and initiatives undertaken by businesses to minimize their environmental impact and comply with regulations
- aligned with the goals of the Paris Agreement
- Renewable energy procurement through or on-site generation
- Energy efficiency measures to reduce energy consumption and associated emissions
Financial Implications of Environmental Compliance
- associated with meeting environmental regulations and standards
- Investments in pollution control technologies, waste management systems, and monitoring and reporting infrastructure
- Costs of obtaining environmental permits, licenses, and certifications
- Potential fines and penalties for non-compliance
- , additional costs imposed on imported goods based on their environmental impact or the environmental policies of the exporting country
- Designed to level the playing field between domestic producers subject to stringent environmental regulations and foreign competitors with laxer standards
- Examples include the European Union's proposed and the United States' proposed
Sustainable Business Practices
Greening the Supply Chain
- , the integration of environmental, social, and governance (ESG) considerations into the management of a company's supply chain
- Sourcing materials from responsible and certified suppliers ( for timber, for agricultural products)
- Implementing circular economy principles to minimize waste and maximize resource efficiency (recycling, remanufacturing, product-as-a-service models)
- Collaborating with suppliers to reduce emissions and improve environmental performance (Walmart's Project Gigaton, Apple's Supplier Clean Energy Program)
Internal Sustainability Initiatives
- Emissions reduction strategies implemented within a company's own operations
- Transitioning to renewable energy sources (solar, wind, geothermal) for electricity and heat
- Improving energy efficiency through building retrofits, process optimization, and behavioral change programs
- Adopting low-carbon transportation options (electric vehicles, biofuels, teleworking)
- Environmental regulations and compliance requirements that businesses must adhere to in their operations
- based on standards
- Mandatory reporting of greenhouse gas emissions and other environmental metrics (, Global Reporting Initiative)
- and schemes for end-of-life management
- Compliance costs associated with meeting internal sustainability targets and external environmental regulations
- Investments in energy-efficient equipment, renewable energy systems, and low-carbon technologies
- Costs of employee training, data collection and analysis, and third-party verification of sustainability performance
- Potential cost savings from reduced energy consumption, waste generation, and resource use
Key Terms to Review (36)
Cap-and-trade systems: Cap-and-trade systems are market-based approaches used to control pollution by providing economic incentives for reducing emissions. These systems set a limit (cap) on the total amount of greenhouse gases that can be emitted by all participating entities, allowing companies with low emissions to sell their excess allowances to larger emitters. This creates a financial motivation for businesses to invest in cleaner technologies and adopt more sustainable practices, aligning with global environmental agreements.
Carbon border adjustment mechanism (CBAM): The carbon border adjustment mechanism (CBAM) is a policy tool that aims to level the playing field for domestic industries by imposing a carbon price on imported goods based on their carbon emissions during production. This mechanism helps to prevent 'carbon leakage,' where companies relocate production to countries with less stringent environmental regulations, thereby undermining climate efforts. By linking trade policy with climate goals, CBAM aligns with international environmental agreements and addresses business implications related to sustainability and competitiveness in a global market.
Carbon Disclosure Project: The Carbon Disclosure Project (CDP) is a global organization that supports companies and cities in measuring, managing, and reporting their environmental impact, particularly related to greenhouse gas emissions. It encourages transparency and accountability in environmental reporting by providing a standardized platform for organizations to disclose their carbon footprint and climate-related strategies. This initiative aligns with international environmental agreements by pushing businesses towards sustainability and responsible environmental practices.
Carbon footprint: A carbon footprint is the total amount of greenhouse gases, primarily carbon dioxide, that are emitted directly or indirectly by an individual, organization, event, or product throughout its lifecycle. This concept emphasizes the impact of human activities on climate change and highlights the need for businesses to assess and manage their environmental impacts.
Carbon trading: Carbon trading is a market-based approach to controlling pollution by providing economic incentives for reducing greenhouse gas emissions. Under this system, companies are allocated a certain number of carbon credits, which represent the right to emit a specific amount of carbon dioxide. If a company emits less than its allowance, it can sell its excess credits to others that exceed their limits, creating a financial motivation for emission reductions and aligning business practices with international environmental agreements.
Circular economy: A circular economy is an economic model that emphasizes the continual reuse and recycling of resources to minimize waste and environmental impact. This approach contrasts with the traditional linear economy, which follows a 'take, make, dispose' model. By promoting sustainable practices, a circular economy fosters innovation and aligns business strategies with public policy goals aimed at environmental protection.
Clean Competition Act: The Clean Competition Act is a piece of legislation aimed at promoting fair competition in business while ensuring that environmental standards are upheld. This act seeks to eliminate practices that unfairly disadvantage businesses adhering to environmental regulations, thus fostering a level playing field where all companies can operate sustainably and competitively. It highlights the interplay between environmental responsibility and economic viability, addressing the implications for businesses that strive to comply with international environmental agreements.
Clean Development Mechanism (CDM): The Clean Development Mechanism (CDM) is a market-based mechanism established under the Kyoto Protocol that allows developed countries to invest in emission reduction projects in developing countries as a way to meet their own greenhouse gas reduction targets. This approach aims to promote sustainable development while helping industrialized nations to achieve their climate goals through cost-effective means, fostering a collaborative relationship between nations in addressing climate change.
Compliance costs: Compliance costs refer to the expenses incurred by businesses to adhere to regulations, standards, and laws set by governments or regulatory bodies. These costs can include direct expenses such as fees for permits and licenses, as well as indirect costs related to employee training, legal consultations, and modifications to business operations. Understanding compliance costs is essential as they impact a company's financial performance and strategic planning, especially in relation to regulatory compliance and international agreements.
Corporate Social Responsibility: Corporate social responsibility (CSR) is a business model in which companies integrate social, environmental, and ethical considerations into their operations and interactions with stakeholders. This concept emphasizes the importance of businesses taking responsibility for their impact on society and the environment, fostering positive relationships with various stakeholders while aligning business goals with societal needs.
Ecological economics: Ecological economics is a transdisciplinary field that focuses on the relationships between ecosystems and economic systems, emphasizing sustainability and the importance of natural capital. It integrates ecological and economic principles to assess how economic activities impact the environment and to promote policies that align economic growth with environmental conservation. This field is crucial for understanding how international environmental agreements affect business practices and the implications of sustainability on economic decision-making.
Environmental Impact Assessment (EIA): Environmental Impact Assessment (EIA) is a systematic process used to evaluate the potential environmental effects of a proposed project or development before it is implemented. It aims to inform decision-makers and stakeholders about the likely impacts, allowing for better planning and the incorporation of measures to minimize negative effects. By integrating environmental considerations into project design, EIA contributes to more sustainable development and aligns with international agreements and corporate responsibilities.
Environmental Management Systems (EMS): An Environmental Management System (EMS) is a structured framework that organizations use to manage their environmental impacts and improve their environmental performance. This system helps businesses comply with regulations, minimize waste, and reduce their carbon footprint while promoting sustainability. By integrating EMS into their operations, organizations can align their activities with international environmental agreements and enhance their reputation among stakeholders.
European Union Emissions Trading System (EU ETS): The European Union Emissions Trading System (EU ETS) is a market-based approach to controlling greenhouse gas emissions by providing economic incentives for reducing pollution. It operates on a 'cap-and-trade' principle, where the EU sets a limit on emissions for various sectors and allows companies to buy and sell emission allowances, thus promoting cost-effective reductions in overall emissions.
Extended producer responsibility (EPR): Extended producer responsibility (EPR) is an environmental policy approach that holds producers accountable for the entire lifecycle of their products, including take-back, recycling, and disposal. This concept encourages manufacturers to design products with sustainability in mind, fostering a circular economy where waste is minimized, and resources are reused. EPR shifts the financial and operational burden of waste management from governments and taxpayers to producers, promoting responsible production practices.
Fairtrade: Fairtrade is a global movement aimed at ensuring that producers in developing countries receive fair prices for their goods, promoting sustainable practices and improving social, economic, and environmental conditions. It connects consumers with producers through ethical sourcing, ensuring that workers are treated fairly, and encouraging responsible business practices that consider the welfare of communities and the environment.
Forest Stewardship Council: The Forest Stewardship Council (FSC) is an international non-profit organization established in 1993 to promote responsible management of the world's forests. It sets standards for forest management that ensure environmental, social, and economic benefits are balanced, fostering sustainable practices in forestry. The FSC certification helps businesses and consumers make informed choices about forest products, supporting responsible forestry and reducing deforestation.
Green tariffs: Green tariffs are import duties imposed on goods based on their environmental impact, particularly to encourage sustainable practices and reduce carbon emissions. These tariffs aim to create a financial incentive for businesses to adopt greener technologies and practices by making environmentally harmful products more expensive, thus promoting the consumption of eco-friendly alternatives.
Greenwashing: Greenwashing refers to the practice of misleading consumers about the environmental practices of a company or the environmental benefits of a product. This often involves exaggerating or falsely presenting a company's commitment to sustainability and environmental responsibility, in order to improve their public image and appeal to eco-conscious consumers. Companies engaging in greenwashing aim to capitalize on the growing demand for environmentally friendly products while not genuinely implementing sustainable practices.
ISO 14001: ISO 14001 is an international standard that specifies requirements for an effective environmental management system (EMS). It provides organizations with a framework to enhance their environmental performance through more efficient resource use and reduction of waste, ultimately leading to better stakeholder engagement and compliance with regulations. By integrating ISO 14001 into their business strategies, companies can not only measure their corporate social responsibility initiatives effectively but also navigate the complexities of international environmental agreements.
Joint implementation (JI): Joint implementation (JI) is a mechanism that allows countries to collaborate on projects aimed at reducing greenhouse gas emissions. It enables developed countries to invest in emissions reduction projects in developing countries, helping them meet their own environmental targets while fostering sustainable development. This approach promotes technology transfer and capacity building, making it a critical tool in international environmental agreements.
Kigali Amendment: The Kigali Amendment is a crucial international agreement that amends the Montreal Protocol to phase down the use of hydrofluorocarbons (HFCs), potent greenhouse gases used in refrigeration and air conditioning. This amendment, adopted in 2016 in Kigali, Rwanda, aims to combat climate change by reducing HFC emissions, which are thousands of times more powerful than carbon dioxide in terms of their global warming potential. The agreement highlights the connection between environmental protection and business practices, as companies must adapt to new regulations and innovate towards sustainable alternatives.
Kyoto Protocol: The Kyoto Protocol is an international treaty that commits its parties to reduce greenhouse gas emissions, based on the premise that global warming exists and human-made CO2 emissions have caused it. Adopted in 1997 and entered into force in 2005, the protocol plays a crucial role in shaping international environmental policies and influencing business practices regarding sustainability and carbon emissions.
Life Cycle Assessment (LCA): Life Cycle Assessment (LCA) is a systematic method for evaluating the environmental impacts of a product or service throughout its entire life cycle, from raw material extraction to disposal. This approach helps organizations measure the ecological footprint of their products, promoting sustainability by identifying areas for improvement across the 'cradle-to-grave' process, thereby linking environmental concerns to economic performance and social responsibility.
Montreal Protocol: The Montreal Protocol is an international treaty established in 1987 aimed at phasing out substances that deplete the ozone layer, such as chlorofluorocarbons (CFCs). This agreement has been crucial in the global effort to protect the environment and human health by reducing the use of harmful chemicals, which has significant implications for businesses that rely on these substances.
Paris Agreement: The Paris Agreement is a landmark international treaty aimed at addressing climate change by limiting global warming to well below 2 degrees Celsius, with efforts to limit the temperature increase to 1.5 degrees Celsius above pre-industrial levels. This agreement encourages countries to set their own nationally determined contributions (NDCs) and requires them to report regularly on their progress, creating a framework for international cooperation and accountability in reducing greenhouse gas emissions.
Power Purchase Agreements (PPAs): Power Purchase Agreements (PPAs) are contracts between a buyer and a seller of energy, where the buyer agrees to purchase electricity at a predetermined price over a specified period. These agreements play a crucial role in facilitating investments in renewable energy projects, providing financial security for developers while ensuring a stable supply of power for buyers. By locking in prices, PPAs help mitigate market volatility and encourage the growth of clean energy technologies.
Product Stewardship: Product stewardship is an environmental management approach that holds all parties involved in the life cycle of a product responsible for its environmental impact. This means manufacturers, retailers, consumers, and waste managers all share the duty to minimize negative effects on the environment, from production through disposal. It emphasizes sustainable practices and encourages innovation in product design to enhance recyclability and reduce waste.
Public-Private Partnerships: Public-private partnerships (PPPs) are collaborative agreements between government entities and private sector companies aimed at delivering public services or infrastructure projects. These partnerships leverage the strengths of both sectors, combining public oversight and resources with private sector efficiency and innovation to achieve common goals.
Regional Greenhouse Gas Initiative (RGGI): The Regional Greenhouse Gas Initiative (RGGI) is a cooperative effort among several U.S. states to reduce greenhouse gas emissions through a market-based cap-and-trade program. By setting a cap on CO2 emissions from the power sector, RGGI aims to lower overall emissions while generating revenue for clean energy programs. This initiative represents an important step in aligning regional climate goals with broader international environmental agreements and has significant implications for businesses operating in these states.
Renewable energy adoption: Renewable energy adoption refers to the process of integrating and utilizing energy sources that are naturally replenished, such as solar, wind, hydroelectric, and geothermal energy. This shift is crucial in reducing reliance on fossil fuels, lowering greenhouse gas emissions, and combating climate change. The adoption of renewable energy is influenced by international agreements that set targets for emissions reductions and promote sustainable practices among businesses and governments.
Science-based targets (SBTs): Science-based targets are greenhouse gas emissions reduction goals that are consistent with the level of decarbonization necessary to keep global temperature increase within 1.5 to 2 degrees Celsius above pre-industrial levels. These targets help businesses align their climate strategies with scientific recommendations, ensuring that their actions contribute effectively to the global effort against climate change.
Stakeholder Theory: Stakeholder theory is a concept in business ethics that suggests that organizations should consider the interests of all parties affected by their actions, not just shareholders. This theory emphasizes the importance of balancing the needs and concerns of various stakeholders, including employees, customers, suppliers, and the community, fostering a more inclusive approach to corporate decision-making.
Sustainable development: Sustainable development is a holistic approach to growth that seeks to meet present needs without compromising the ability of future generations to meet their own needs. This concept emphasizes a balanced relationship between economic growth, environmental stewardship, and social equity, recognizing that business activities should align with public policy goals for long-term viability.
Sustainable Supply Chains: Sustainable supply chains refer to the management of supply chain processes in a way that minimizes environmental impact while promoting social responsibility and economic viability. This involves integrating eco-friendly practices, ethical sourcing, and social equity into all stages of the supply chain, from raw material extraction to product delivery. By doing so, businesses can align their operations with international environmental agreements and ensure compliance with regulations that promote sustainability.
United Nations Framework Convention on Climate Change (UNFCCC): The United Nations Framework Convention on Climate Change (UNFCCC) is an international treaty established to address the global issue of climate change by promoting sustainable development and reducing greenhouse gas emissions. This convention serves as the foundation for subsequent agreements, including the Kyoto Protocol and the Paris Agreement, and aims to foster cooperation among nations to combat climate change and its impacts.