When Lehman Brothers consultant John Llewellyn spoke about climate change to 40 CEOs and COOs from some of the firm’s biggest clients at the Davos Economic Forum in Switzerland in January, they were rapt. A globally acknowledged expert on the subject, he warned that drastic regulation of greenhouse gas (GHG) emissions was inevitable, and they had better do something to protect and advance their companies in light of it.

“You could have heard a pin drop,” says Llewellyn. “I told them that everything was adding up to a clear, cold-blooded, unemotional cost-benefit case for their taking some action. I was struck by the intensity with which they were listening and the fact that many of them thanked me for setting up all those issues in a row.”

Like Llewellyn’s audience, more and more CEOs worldwide are finally grasping the need to deal with the bottom line of the clamor over climate change. While many remain unconvinced about what the science shows, CEOs are moving on to something more important: gauging the present and future impact of environmental mitigation on their employees and shareholders.

But even in this arena, hard, quantifiable answers remain as dicey as tomorrow’s weather forecast. The only sure things are the awesome questions: How much will global governments and societies dictate that business spend to cut carbon-dioxide emissions? Who exactly will pay for it? How? And when? The complexity of these questions may be why none of the CEOs of 15 of the West’s most important companies-ranging from the Big Three automakers to Swiss Re, DuPont and Kimberly-Clark-agreed to be interviewed for this story.

“CEOs aren’t allowed to go off half-cocked on anything because of Sarbanes-Oxley, or they go to prison,” notes David Littman, former chief economist for Comerica Bank and now with the Mackinac Center for Public Policy, a think tank in Midland, Mich. “The same thing will prove true ultimately with this rhetoric about climate change.” 

Calculating Costs

Global warming will cost business in two major ways: weathering the natural disasters attributed to climate change and mitigating it. But how much? While estimates of the true cost are all over the map, the consensus of international economists is that global GDP will fall by as much as 3 percent per year due to economic costs and drag associated with abatement efforts.

Those numbers describe an impact that could plunge the world into prolonged recession or even depression. But things could actually turn out much, much worse, according to the Malthusian forecast and draconian prescription issued last fall by Nicholas Stern, a British economist who wrote the U.K. government’s authoritative report on climate change. He believes losses may total as much as 20 percent of global GDP, forever, and that the overall economic toll of climate change could be as traumatic as that of the Great Depression or the world wars. Stern’s report is the fulcrum of the economic debate right now. (See related story, “Global Warming Guide for CEOs, page 34.)

The main factor in Stern’s extreme number is that he uses what economists call a “zero discount rate” that values the well-being of future generations as much as ours and, thus, commands us to immediate and overwhelming action for braking climate change. But most economists use discount rates ranging from 3 to 5 percent when trying to put a price tag on future damages.

And early this year, in an analysis of the Stern report, Yale University economist and climate-change expert William Nordhaus countered that Stern “magnifies enormously impacts in the distant future” and “rationalizes deep cuts in emissions, and indeed in all consumption, today,” achieving a “bizarre result.” So dire is any scenario that actually deflates the global GDP-resulting in massive unemployment and untold other types of dislocation-that many experts believe governments, business leaders and even an ecologically conscious populace simply won’t commit to it. “The odds that global-warming hysteria will transform the modern industrial economy in any significant fashion are zero,” says Jerry Taylor, a senior fellow of the Cato Institute, a libertarian think tank in Washington, D.C. “While the public increasingly thinks that something must be done about global warming, most people don’t want to spend anywhere near [Stern’s prescription] to turn wish into reality.” 

Paying the Tab

Most CEOs and economists are resigned to the imposition of a cap-and-trade system similar to the one instituted a couple of decades ago that allowed the U.S. to get a handle on the sulfur-dioxide emissions that caused acid rain. The government would set the overall allowable level of greenhouse gas emissions, and then producers would receive-and could buy-credits allowing them to pump given amounts into the atmosphere. This is the route the European Union has chosen.

Under one scheme, 90 percent of the emissions allowances would be allocated for free to various affected industries, but the proportion of allowances to be auctioned grows to 38 percent in 2030 from 10 percent in 2012. A federal climate change trust fund, capped at $50 billion, would collect revenue from the auctions and disburse it for GHG-reducing research and development.

“One reason the green movement is so fond of cap and trade is that it’s easier to hide things in schemes of trees uncut and oil unproduced and coal left in the ground,” says Kenneth Green, resident scholar at the American Enterprise Institute in Washington. “But they also know that if people got a bill and saw that the costs were 2 percent of their income each year, they would push back.”

That’s why CEOs shouldn’t necessarily write off the possibility of seeing the other approach: outright taxes on GHG emissions. “You can’t capture regulating all energy use with a cap-and- trade system,” notes John Fahsbender, of counsel with McMahon DeGulis, a Cleveland corporate-law firm. “People automatically recoil at the thought, but the argument is growing that it’s more equitable and there are fewer transaction costs.”

Green has proposed a dramatic overhaul of the U.S. tax system that would be “carbon-centric,” shrinking existing taxes on income and corporate profits, for example, in favor of taxing carbon-based energy use. “It’s revenue-neutral and would shift taxes in the economy to focus on creating incentives to drive down the cost of energy,” he says.

In any event, some of the cap-and-trade bills now being considered in Congress call for the stabilization of global GHG at 450 ppm of carbon dioxide, slightly more than the current level of 430 ppm. To get there, they call for reduction of GHG from the U.S. of about 60 percent below business as usual by 2030. Under one bill, the U.S. Energy Information Administration calculated that the cap-and-trade permit price in 2025 would be about $11 per ton of carbon dioxide-how GHG abatement is being measured-corresponding to an emissions reduction of 10 percent.

A $45-a-ton price would be required to achieve a 22 percent reduction in GHG emissions. Today’s prices of carbon “offsets” on the informal market are about $5 to $6 a ton. 

Gradual Approach

Despite Stern’s clarion call for drastically reining in economic growth today to make things easier for future generations, most CEOs and economists expect the costs of climate-change mitigation to be sustained gradually.

There’s also little doubt that, ultimately, consumers and taxpayers will bear the costs and that corporate shareholders, per se, will feel little of the pinch.

But every player also expects the price of stemming global warming to accelerate significantly in the decades ahead. “As the world economy grows,” explains London-based Llewellyn, “it wants to be emitting more carbon, so you need a progressively higher price for the most efficient way of dissuading people from doing this.”

Economists also warn CEOs not to assume they’ve got a lot of lead time to deal with this issue. Llewellyn compares it with demographic aging, which Western companies and governments saw coming for decades but whose effects, including staggering pension and health care costs, have begun weighing down corporations and national economies. 

Hard-Hit Industries

The big losers, of course, will be electric utilities, oil and gas companies, automakers and other stalwarts of our 150-year-old, carbon-based economy. Also clearly under strain will be CEOs of other big industrial enterprises ranging from aluminum smelters to manufacturers of construction supplies to papermakers, as they cope with higher costs for energy and raw materials-and with pressure to reform their own practices. But not all the potential losers have been fully identified yet. For example, airline CEOs so far have fallen under little pressure to demonstrate responsiveness about emissions because what their planes give off amounts to only a tiny percentage of the globe’s output.

“But now there are suggestions that, because most of their emissions are at 35,000 feet, they have a disproportionately greater impact on climate change,” says Craig Smith, a senior fellow at London Business School. “If that’s shown to be scientifically correct, the pressure on airlines could be very huge-and very sudden.” 

Winners in Warming

Some “rent-seeking” companies obviously stand to gain much by developing and supplying technology and systems to help other companies meet emissions-reductions mandates. These include General Electric, which wants to sell nuclear plants and windmills, and Toyota, whose pole position in harnessing hybrid autos has benefited from substantial federal tax credits for consumers who purchased them.

Other early movers in disparate industries also could gain by way of public support, handy templates, carbon credits and other monetizable chits. S.C. Johnson, for example, devised its Greenlist system in 2001 to apply a green philosophy to its raw-materials procurement, and now it has begun licensing the process-royalty-free, for the time being.

And Wal-Mart CEO Lee Scott made a splash in April by announcing a major environmental overhaul across its stores and supply chain that presumably soften its hard-edged reputation in social-change circles. Yet, it also could cut costs, allowing the retailer to reap significant gains in this discipline just as it has in pioneering discount pricing and efficient logistics. Variables on the Horizon

One big remaining issue, for instance, is whether the Western world can count on China and India to join them in a single abatement scheme. Future emissions by those two growing economic powers easily could eclipse the combined output of the North American and European economies. “But the only way to get them to make stronger commitments is for historical large emitters, like the U.S., to take the first step,” says Truman Semans, an executive of the Pew Center on Global Climate Change, in Arlington, Va.

The ultimate answers to all of these questions bear the potential to reshape the global economy and life as we know it. But even as CEOs continue to influence the scientific, political and social debate over climate change, their primary responsibility will remain making sure that their own companies come out with their heads above the ever-rising seawaters. And that will be challenge enough.