The days in which institutions could ethically overlook the negative externalities they inflict on society have long since vanished with the introduction of a scientific consensus on anthropogenic influences and the effects they have on the health of the planet. The principle-agent argument, such as what Milton Freedman and others have proposed, is not able address the exponentially growing complexities that arise when trying to steer humanity towards a path to a sustainable future.
Before embarking on a discussion of the state of corporate leadership in regards to their considerations of externalities, it is prudent to be clear about what the concept of externality actually entails. One definition of externality is as follows:
Externalities are indirect effects of consumption or production activity, that is, effects on agents other than the originator of such activity which do not work through the price system. In a private competitive economy, equilibria will not be in general Pareto optimal since they will reflect only private (direct) effects and not social (direct plus indirect) effects of economic activity.[footnoteRef:1] [1: (Laffont)]
The key components stated in the definition provided are that it is an indirect effect, either positive, negative, or both, and that it also represents a something less than an optimal state in most efficiency models.
Some examples of types of negative externalities are readily available by various forms of pollution; sight, sound, water, and air pollution. Sight or visual pollution can be thought of as something that detracts from the inherent beauty found on various landscapes; a billboard advertisement in the middle of an otherwise scenic park could be a representative example. Sound pollution is fairly self-explanatory; for example, an airport constructed in a residential area would surely be a source of sound pollution to those living nearby. Furthermore, an example of water pollution can be easily illustrated by the BP's deep sea well disaster in the Gulf of Mexico in 2010 which will have implications for the region indefinitely[footnoteRef:2]. [2: (Flaherty)]
However, above all other forms of pollution, air pollution, more specifically, the emission of greenhouse gases into the atmosphere represent the most complex and most troubling threat. Whereas other forms of pollution are generally localized or distributed in some regional proximity to their source, greenhouse gas emission threatens the longevity of populations, literally billions of people worldwide. Although some areas of the world are predicted to have substantially better climates like Canada and Russia, no one will be immune from the greater spread of diseases, migrations of displaced populations, as well as the conflicts or wars over key resources such as water.[footnoteRef:3] [3: (Dyer)]
The previous paradigms that addressed externalities and socially conscious decisions considered them as mostly a failed proposition; unless of course they also translated into profit directly. Milton Freidman, for example, acted as sort of a trend setter for the entire business community for no less than a couple decades. He argued that CEOs and chief executives should have no real concern for society, outside of direct stakeholders, because they only represented agents (employees) to some principle or set of principles (owners)[footnoteRef:4]. Furthermore any action of the executive that considered anything other than the pure profit motive would represent a tax to the company's investors. It is also both interesting and ironic to note that in Freidman makes multiple claims to the advantage to be found within a "free society" yet through his theory he proposes that individuals should not be free to choose anything other than what the principles order, at least at work; which is where most people spend a majority of their time. [4: (Friedman)]
Even beyond the ideological concerns associated with externalities, there is another problem that is more pragmatic in nature. Externalities that are derived from pollutants are difficult to identify, quantify, and distribute any monetary compensation to those who suffer the effects. Using the example of greenhouse gases, the countries that face the most risk are those who are not developed enough to take substantial adaptive measures; these societies are also least responsible for the problem since they have not contributed much in the way of emissions.
Furthermore, the countries' most responsible for the problems are also face issues in determining how to compensate, even if the will exists. For example, the major emitters would most likely be from a previous generation of citizens but the compensation would have to funded by a new generation of individuals who less liability in the matter, though they are in the same country. Whatever the case, it is easy to see how greenhouse gas externalities can be considered the most complex form of externalities ever faced by civilization.
The Polluter Pays
The current atmospheric concentration of carbon dioxide is 391.19 parts per million[footnoteRef:5]. Many scientists including James Hansen, for example, believe that the level in which a sustainable future is possible is no higher than 350 ppm[footnoteRef:6]; a level we have already surpassed. Furthermore, a consensus on climate change has been reached by nearly every scientific body in the world[footnoteRef:7]. Therefore, even by conservative analysis, it safe to say that greenhouse gas emissions are contributing to a form of air pollution that will affect future generations. Thus some form of policy should address the costs of the externalities related to this pollution. [5: (Mauna Loa Observatory)] [6: (Hansen)] [7: (Oreskes)]
The polluter pays principle served the United States as a cornerstone of its environmental policy for over twenty years[footnoteRef:8]. The Environmental Protection Agency (EPA) set up a trust fund for each potential polluter, mostly involved within the chemical industry, which operated within the U.S. If the polluter failed to clean up their waste properly, the EPA stepped in and used money for the trust fund to clean it up; with money added for fines and penalties. Thus this provided some incentive for polluters to monitor their own pollution externalities. [8: (Browner)]
Emissions policy is substantially more complicated than chemical policy. The effects are arguably less visible and hard to detect than a site that has been chemically polluted; plus the bulk of the negative effects are predicted to occur in the future. However, one method has been in place in Europe for some time now and has been proposed in the United States[footnoteRef:9]. The system utilizes market mechanisms to allow pollution rights to be bought and sold between corporations. One drawback to this system however, is that it promotes what is referred to as carbon leakage. Producers could move capital and production capabilities to another country that does not impose the same restrictions. Thus the net effect is the same or in some cases even worse. [9: (Lee)]
Given the sense of urgency associated with environmental concerns that plague society, there has been some momentum generated by corporate social responsibility (CSR) advocates. This momentum is generated on three fronts. The first type of pressure stems from internal employees. Since the environmental externalities are becoming more deeply engrained in the social consciousness, employees are demanding that their organizations be more sustainable.
Another form of pressure that is being felt by corporations is consumer driven. Consumers are becoming more aware of how corporations are operating and using this information to determine which products they purchase. Several organizations are now reviewing the levels of social responsibility that corporations are operating under. These organization make this information public so that consumers can decide what to purchase with a knowledge of the companies CSR performance included in the decision making process.
The final source of pressure that is being imposed on corporate entities comes from regulatory agencies. Nearly all countries in the world have enacted some form of climate regulation. In fact, the United States was the only industrialized country not to be a signatory to the Kyoto Protocol[footnoteRef:10]. However, at the current rate of emissions, science dictates that the regulations are not meeting the challenges in which they are intended to address. [10: (Karon)]
The primary ethical consideration that is prevalent in this situation regards what rights should future generations be entitled to; or at the present rate of environment derogation, even the children that are alive today. Most people intuitively believe that future persons should be entitled to live on a planet that resembles the one that previous generations got to experience. However, the argument is not that clear and widespread. Even though individuals may be concerned about the future, their behaviors represent some other belief. A belief that resembles that of Freidman's argument that proposes that we should not concern ourselves with considerations of our externalities, whether by corporations or consumers, and that profits are more important than future generations.
If we consider the rights of future generations in our ethical belief systems, then ignoring the environmental externalities produced by corporations is no longer permissible. The layer of complexity that environmental consideration adds to the mix is no longer able to be accounted for using…