What Global Emission Regulations

Should Corporations Support? David Burress

ABSTRACT. In their role as political actors and lob-

byists, corporations have responsibilities to help deter-

mine the existence and content of global regulations of

pollutants. The ethical nature of those responsibilities is

highly sensitive to the assumed normative framework.

This paper compares several frameworks by modeling

them as differently weighted versions of utilitarianism.

Under a strict neoclassical approach, corporations have a

narrow obligation to maximize profits, which generally

entails opposing emission regulations. In contrast, a

stakeholder approach as well as Marxian and common

ethics approaches suggest that firms have an obligation to

actively support sustainable emission regulations with the

following properties:

� major restrictions would be global rather than local

� global restrictions would apply in all cases of per-

sistent emissions

� global restrictions would apply to non-persistent

emissions as well, unless they have been affirmatively

shown to be safe using reasonably persuasive scien-

tific evidence

� safety thresholds would be set fairly restrictively,

based on administrative models and rules of thumb,

in light of existing scientific knowledge but without

requiring full scientific justification

� long-run goals would include zero emission of per-

sistent unsafe substances.

However, the stakeholder approach supports phase-in

rules to mitigate short-run compliance costs.

KEY WORDS: benefit-cost-analysis, emissions-market-

ing, emission-regulation, globalization, laissez-faire-ide-

ology, neoclassical-theory, pollution, stakeholder-theory

sustainability, utilitarianism.

ABBREVIATIONS: CO2, carbon dioxide; DNA,

deoxyribonucleic acid; GDP, gross domestic product;

DDT, dichlorodiphenyltrichloroethane; R&D, research

and development

Introduction

This essay assesses the implications of several ethical

theories for corporate responsibility in helping set

international regulatory standards, especially with

respect to emissions of harmful substances into the

environment. Emission regulations are relevant to

corporations when emissions are either side-effects

of production and distribution by corporations and

their supply and distribution chain, or side-effects of

use by the ultimate customer (Uusitalo, 1996). In at

least some situations, there is both a public policy case

and an ethical case (e.g., Koppari, 1999) for insti-

tuting such regulations at a global level. At present no

global authority can establish such regulations uni-

laterally. However, global arrangements referred to as

‘‘international regimes’’ (see e.g., Young, 1999)

including formal regulations, are increasingly being

established by means of multilateral treaties, agree-

ments, and intergovernmental cooperation.

Major corporations (or their leaders) are impor-

tant political actors in the determination of national

and international regulatory regimes. They partici-

pate in policy formation, for example, by means of

campaign contributions, lobbying, law suits, public

Journal of Business Ethics (2005) 60: 317–339 � Springer 2005DOI 10.1007/s10551-004-6942-z

David Burress is President of the Ad Astra Institute of Kansas,

a nonpartisan public policy think tank. He recently retired

from the University of Kansas Policy Research Institute,

where he worked as a Research Economist. His research in-

terests include technology policy, regional economic modeling,

environmental economics, and benefit-cost analysis. He has a

Masters in physics and a Ph.D. in economics from the

University of Wisconsin-Madison. He is on the National

Board of the American Civil Liberties Union, and a member

of the Lawrence Metropolitan Planning Commission.

task force membership, and public information

activities. The question raised here is: in the course

of their public-policy-related activities, what global

emission regulations, if any, are corporations ethi-

cally obligated to support?

If either corporations as such, or their human

decision-makers, are viewed as ethically obligated

agents, then those obligations could potentially apply

to any form of action, including action taken as a

political agent influencing public policy.1 Indeed,

given the highly significant effects of public policy

on aggregate human welfare, then, at least under

consequentialist theories, ethical rules should be at

least as binding on political actors as they are on

actors in other roles.

A distinction can be drawn between responsibili-

ties of the corporation as an institution, and those of

its leaders. Under common law for example there is a

distinction between sanctioning a corporation (with

costs borne by the shareholders) and sanctioning a

leader (with costs borne by him or her personally). It

has also been argued that only real human beings, and

not fictitious corporate persons, can have intentions

or be subject to the obligation of behaving ethically

(for a recent debate on corporate moral agency, see

Barry and McCann, 2000). In this paper I will assume

for simplicity of exposition that any motives and

ethical obligations at stake rest jointly on the insti-

tution and on its leaders; and I use the term ‘‘cor-

poration’’ to include both. For those who deny the

moral agency of corporations, my arguments would

still apply to their leaders taken alone.

It is not universally accepted that either corpora-

tions or their decision-makers are subject to any

ethical responsibilities other than profit-making.

Stakeholder theories of the corporation do in fact

imply a much broader ethical framework (Donald-

son and Preston, 1995; Freeman and Reed, 1983).

However, the predominate competing theory – the

neoclassical theory of the corporation – can be

understood in its strictest form to imply that

corporations have only a pragmatic responsibility to

make a profit.2 In this interpretation, it is the role of

private competition and public regulation, rather

than the corporate conscience, to ensure that private

profit seeking is socially beneficial. For critiques of

both theories see Humber (2002) and citations

therein. Both theories are described in more detail

below.

This essay compares implications of the two

theories for the regulation of emissions. It also makes

additional comments on the implications of Marxian

ethics as well as common ethical principles. The

several frameworks are compared by modeling each

as a differently weighted version of utilitarianism.

This embeds each framework within an economic

approach to ethics, as in Little (2002). In the eco-

nomic approach, ethics is reduced to benefit-cost

analysis – i.e. right action is that which maximizes

social benefits less social costs. While the language of

benefits and costs has a different ring from other

approaches to ethics, most benefit-cost theorists do

view benefit-cost analysis as a branch of applied

ethics – for the reason that it leads to normative

conditions for action based on the good for society as

a whole, rather than the good for anyone individual.

Using that framework, I will argue that strictly

neoclassical corporations ethically cannot support

global regulatory regimes. Rather, these corporations

are obligated in most cases to follow their profit-

making interest in opposing all emission regulations.

In contrast, stakeholder corporations, at least in

the long run, should support global emission rights,

utilizing a market solution that has some claims to be

more efficient than other methods, but which in any

case is highly compatible with corporate capitalism.

Moreover, stakeholder corporations should support

transition towards a relatively restrictive regulatory

regime3, in which:

� major restrictions would be global rather than

local

� global restrictions would apply in all cases of

persistent emissions

� global restrictions would apply to non-persis-

tent emissions as well, unless they have been

affirmatively shown to be safe using reasonably

persuasive scientific evidence

� safety thresholds would be set fairly restric-

tively, based if necessary on approximate

models and administrative rules of thumb, in

light of existing scientific knowledge but

without requiring full scientific justification

� long-run goals would include zero emission of

persistent unsafe substances.

However, most stakeholder corporations have

short-run interests that conflict with these goals.

318 David Burress

These short-run interests can be accommodated

using phase-in rules. Phase-in rules are less accept-

able under Marxian and common ethics.

Material interests, emission regulations, and

planning horizons

It is controversial whether corporations are bur-

dened only by a narrow pragmatic duty to advance

their own profit-making interests, or by broader

ethical concerns. But in either case, its narrow

material self-interest as an institution does impose

prudential responsibilities on the corporation as a

political (as well as economic) agent. In this regard,

there are distinct chasms between short-run, med-

ium-run, and long-run material interests.

The short run

In a very short run, pragmatic profit-maximization

by a corporation generally implies opposition to

any new and compulsory restrictions on its own

emissions. In some cases, however, relationships

with stakeholders (who may include workers,

customers, suppliers, and persons living in physical

proximity to production facilities) create a pru-

dential interest in restraining harmful emissions

voluntarily. In general, this will occur when

stakeholders have the power to impose costs on

the corporation in retaliation for unwanted emis-

sions. For example, stakeholders may have rights

under tort law to sue for damages. Also, workers

affected by pollution might go out on strike, while

(depending on competitive conditions) customers

and suppliers may have opportunities to withdraw

from ongoing transactions.

A corporation would tend to oppose new and

compulsory controls on its own emissions, even if,

as suggested by stakeholder theory, the corporation

has important goals that go beyond profit maxi-

mization. As long as profit maximization is one of

its important goals, voluntary restrictions leave the

corporation in a better position than compulsory

restrictions to balance profit maximization against

other goals.

In unusual cases a given corporation might sup-

port compulsory restrictions on the emissions of other

corporations, if those emissions disadvantaged the

first corporation. Nevertheless, in a very short run,

most corporations have a strong material interest in

creating and supporting a coalition of all corpora-

tions to oppose all short-run restrictions on corpo-

rate emissions.

Moreover, if such a coalition is unable to defeat

regulations outright, then the interests of its mem-

bers are to weaken the regulations as far as possible,

for example by:

� making the regulations local rather than

national or global;

� putting the burden of proof on regulators to

show beyond a reasonable doubt that each re-

stricted substance is harmful, and that safety

thresholds are scientifically justified;

� putting the burden of regulation on authorities to

measure emissions and show that emitters are in

violation of regulations beyond a reasonable

doubt.

It does not follow that short-run profit-maxi-

mizing corporations would oppose regulations of all

kinds – this conclusion is specific to the regulation of

emissions. Corporations do often find it in their

short-run interest to support regulations. For

example, regulations that create an orderly market

place may tend to expand that market as a whole,

benefitting all firms in that market. Corporations

may also support regulations in their role as a cus-

tomer of other firms. What distinguishes the regu-

lation of emissions is that firms (at least in their

profit-making role) rarely have any strong or specific

short-run interest in a pollution-free environment.

The medium run

In a medium run, however, an anti-regulatory

coalition of firms is likely to be unstable. A cor-

poration’s short-run interest in opposing new reg-

ulations is largely an artifact of sunk costs in

investments not adapted to those regulations. Once

existing capital has been replaced by new capital

adapted to the regulations, economic theory sug-

gests that (with other factors held constant) profit

margins will be as they were before, while the

incentive to oppose regulation will either be

What Global Emission Regulations should Corporations Support? 319

reduced or eliminated. In equilibrium, there is no a

priori reason why well-designed emission regulations

should affect the aggregate profitability of the cor-

porate sector one way or the other – efficiently

chosen emission regulations create as many new

investment opportunities as they destroy.4 If regu-

lations are long-standing, or if the substance of

future regulations is known far in advance (so that

all investments are adapted to those regulations),

then corporations have no collective interest in

opposing them.

That is not to say that individual corporations will

have no incentives to bend or relax long-standing

regulations. Indeed, there will always be incentives

in individual cases to cheat or to lobby for changes.

But at the same time, other businesses have made

investments adapted to the existing regulated envi-

ronment and have offsetting incentives to police

cheating and to oppose changes in regulations.

Consequently there is no collective interest in

opposing existing regulations.

The long run

By ‘‘long-run interest’’ we mean the goals the cor-

poration holds today when planning for a very long

time horizon. The over-riding long-run goal of a

corporation (if it has one; see below) is, arguably,

simply to survive. Corporations, unlike human

beings, have no natural limit on longevity. Hence

they potentially have a super-human incentive to

take a very long view. While corporations can adapt

over time, survival in a recognizable form is condi-

tioned on survival of an environment conducive to

the corporate form and its associated legal and social

structures. Survival of that environment in turn is

conditioned on reasonably efficient regulatory pol-

icy. Consequently, each corporation arguably has a

long-run material interest in the existence of sus-

tainable public regulatory policies.

Sustainability has several aspects. Biological sus-

tainability implies that regulations should be

designed to preserve human life, as well the exis-

tence of an ecology which can support that life.

Social and technological sustainability implies that

regulations should not merely protect human life in

a minimal form, but rather preserve a basis for a

high civilization. Political sustainability implies that

both the content of regulations, and their process of

adoption, should support, or at least not significantly

undercut, the legitimacy of the existing political

order.

Ideological interests

Corporations have an actual and perceived collective

interest in supporting pro-business attitudes in the

policy-making sphere. For example, U.S. corpora-

tions and their owners have historically made dis-

proportionately large campaign contributions to the

Republican party and to candidates who support

deregulation and other laissez faire policies. Many of

these political investments seem intended to advance

a general ideology rather than opposition to any one

specific regulation.

Ideological investments of this type are directed to

medium-run and long-run goals. They are ineffec-

tive as a short-run tactic because it takes time to

establish an ideological regime, because the rein-

forcement of an established ideology has little short-

run payoff to a firm seeking particularized action,

and because ideological investments create collective

or public goods.5

Laissez faire ideology is not the only possible

ideology, and not necessarily the best possible ide-

ology, for supporting medium- to long-run business

interests.6 However, analyzing the political and

economic efficacy of various business ideologies

would take us beyond the scope of this essay. Instead

I will abstract away from ideological interests.

Reconciling interests

These considerations suggest many theoretical

questions. How can short-run and long-run interests

be reconciled? Are these various pragmatic interests

determinative, or are there broader ethical require-

ments? If there are competing ethical requirements,

are special incentives needed to lead corporations to

override their pragmatic interests?

While it can’t completely avoid these general

questions, this essay is concerned with a more spe-

cific application. Should corporations support, op-

pose, or take no position on regulation of emissions?

What form should the regulatory regime supported

320 David Burress

by corporations take? In particular, what is its geo-

graphical scope (local, national, regional, global)?

Who bears the burden of proof for applying

restrictions (are emissions innocent until proven

guilty, or is there an affirmative obligation to dem-

onstrate safety prior to production of emissions)?

Who bears the regulatory burden (measurement by

each producer, or burden on regulators to demon-

strate a violation)? How will distributional effects of

regulation be handled (in particular, who receives

the initial emission rights)?

Incorporation and obligation

This paper is part of a more general conversation on

corporate responsibility – a conversation on actions

that corporations ought to perform. Corporate actions

subject to ethical responsibilities could potentially

include actions in the political sphere intended to

affect the legal and regulatory regime.

‘‘Responsibility’’ includes legal responsibility,

contractual responsibility, and ethical responsibility.

Before we discuss detailed responsibilities concern-

ing emissions, we need to ask what the two com-

peting theories of the corporation imply for these

three forms of responsibility in general.

Empirical versus normative theories of the corporation

Theories of the corporation are of two types:

empirical or descriptive theory – how do corpora-

tions actually behave? – and normative theory – how

should they behave? Our concern here is with

normative theory, but we do need to take empirical

behavior of the firm into account.

Stakeholder theory is generally presented as hav-

ing both empirical and normative versions. In con-

trast, neoclassical theory originated as, and still is

most often presented as, a purely empirical theory in

economics (e.g., in the microeconomic text by

Varian, 1992). Some economists however do make

openly normative arguments. For example, it is

commonly argued that corporate leaders who fail to

maximize profits waste social resources, which is

ethically undesirable (Friedman, 1962).7 It will also

be apparent from even a cursory reading of editorials

in publications such as The Wall Street Journal that, in

practice, variants of neoclassical theory are widely

accepted as normative theories within the business

community.8 Finally, it has also come to receive

substantial attention in academic studies of business

ethics.9

‘‘Strict’’ neoclassical theory

‘‘Neoclassical’’ is a general term sometimes equated

with mainstream Anglo-American economics as a

whole. Because that tradition is so broad, it tends to

lack unified normative implications for particular

cases. In this essay I intend a much stricter definition.

In this strict theory, corporations both as an empir-

ical fact do, and as a normative principle should, act

solely so as to as to maximize profits. Strict neoclas-

sical theory addresses many possible limitations or

constraints on profit maximization, but in general

these constraints are taken to be external rather than

internal. In particular, corporations may face tech-

nological restrictions, capital restrictions, market

restrictions, legal and regulatory restrictions, cost of

obtaining external information, cost of transacting

with other agents, and so on. However, the corpo-

ration itself is assumed to be unitary, to know its

own mind, and to make decisions without incurring

internal cost of information and transaction.10

‘‘Profit maximization’’ refers to maximizing the

expected net present value of the firm’s future cash

flow stream (see e.g., Malinvaud 1987). Discounting

future profits to the present provides the basis for

reconciling short-run and longer-run interests of the

corporation. The discount rate used for calculating

present values is based on market rates (see note 17

for further discussion).

Normative neoclassical theory encourages the

firm to engage in (internally unconstrained) profit

maximization. The ethical basis for this theory rests

on the ‘‘invisible hand.’’11 In particular, under cer-

tain assumptions (including competitive markets and

government regulations that prevent market failures)

profit maximization leads to maximization of a

particular aggregate of everybody’s utility.

In some contexts (e.g., note 14), we will need to

describe the behavior of individual employees. In

the strict neoclassical theory, employees are moti-

vated by a simple desire to maximize their own

material consumption. Moreover, the corporation

What Global Emission Regulations should Corporations Support? 321

has full information about each employee’s actions

and motivations. Consequently the corporation can

always control their behavior fully by manipulating

their material incentives. These assumptions on

worker behavior add nothing to the definition of the

unitary profit maximizing corporation; they simply

spell out some logical implications of assuming a

unitary corporation.

‘‘Semi-strict’’ neoclassical theory

In all probability, few people accept neoclassical

normative theory in the stark or extreme form as-

sumed here. Economist for example use economic

models in a flexible fashion, such that the particular

assumptions are adapted to the particular circum-

stances. If strict neoclassical theory leads to unac-

ceptable ethical positions (as I will argue it does),

then most people will feel free to modify the

empirical or normative assumptions as needed to

avoid reaching those positions.

That is not to say that analyzing the strict neo-

classical firm is a useless straw-man argument. By

pointing out implications of the strict neoclassical

theory, we can suggest why that theory is norma-

tively unacceptable, and also inform the search for a

better theory. If, as almost everyone seems to agree,

the world is more efficient if corporations internalize

at least some ethical principles (beyond profit-max-

imizing) than if they do not, then all normatively

acceptable corporations are stakeholder firms in

some degree; the only question is how far to take it.

A common proposal for relaxing the strict theory

adds a single condition (in addition to profit maxi-

mization) stating that firms should obey the law.

This relaxation turns out not be helpful. The

immediate problem for our analysis is that there

seems to be no reasonable version of utilitarianism

that leads to lawfulness but not other conditions.

More importantly, imposing lawfulness does not

relevantly change corporate goals – law-abiding

firms would be just as vocally opposed to pollution

regulation as law-breaking firms, since nothing in

current law discourages self-interested behavior in

opposing regulation. (Law-abiding firms would no

doubt use less ruthless methods to seek those goals

than law-breaking firms, but choice of lobbying

methods is outside the scope of this paper.)

A more interesting suggestion is Friedman’s more

general proposal that corporations should obey ‘‘the

rules of the game … engag(ing) in open and free

competition …’’ While this is far from clear language,

it does suggest that firms might have obligations not to

take advantage of certain market failures – but infer-

ring implications for regulatory lobbying would not

be possible without more detailed specification.

Stakeholder theory

Stakeholder theory is generally discussed using lan-

guage common to fields such as public administra-

tion, business administration, or sociology, often

based on a Kantian perspective. I will define it in-

stead using utilitarian language taken from the public

finance and social choice branches of mainstream

economics. This language supports a cleaner con-

frontation with neoclassical theory.

Stakeholder theory (in my model) assumes that

the corporation both does and should follow rules

of behavior that are expected to maximize a social

welfare function (i.e., a weighted aggregation)

over the utility functions of ‘‘stakeholders.’’ Or in

alternative language, a stakeholder corporation

pursues a ‘‘common good’’ for its stakeholders

(Argandona, 1998), based on some reasonable

operationalization of the idea of a common good.

‘‘Stakeholders’’ are defined to include all persons

directly affected by actions of the corporation.

Strict neoclassical theory could be thought of as a

special case of stakeholder theory in which utility

weights are zero for all persons except sharehold-

ers; therefore we can distinguish stakeholder the-

ory by assuming that utility weights are positive

for all directly affected persons.

Note however, that I will define ‘‘strict neoclas-

sical theory’’ as act-utilitarian (agents directly maxi-

mize social welfare ¼ profits), while ‘‘stakeholder

theory’’ is rule-utilitarian (agents choose ethical and

pragmatic rules that are believed likely in the long

run to maximize social welfare ¼ common good).

This distinction might seem to stack the deck (e.g.,

when I argue below that stakeholder corporations

should be more willing than neoclassical corpora-

tions to obey established laws), but I believe it cor-

responds to a real distinction in how the two

theories are presented and used.12

To formulate a complete stakeholder theory, we

would need to specify detailed features of the theory:

322 David Burress

� how to distinguish which persons ‘‘count’’ –

for example, persons directly affected by the

corporation, as opposed to persons indirectly

affected;

� what the relative utility weights are or how

they should be determined;

� what are the external and internal constraints

on action by managers of the corporation.

(See Kaler, 2003 for a relevant discussion.) How-

ever, these issues aren’t central to my argument and

won’t be addressed here.

Theories of the firm also need to specify what

assumptions are being made about individual

utility functions – i.e., what is assumed about

human nature. I will discuss this further below,

but in practice neoclassical theory simply equates

the utility of shareholders with the profits they

receive – a ‘‘thin’’ goal equivalent to maximizing

material consumption – while stakeholder theory

assumes that humans have complex or ‘‘thick’’

goals that cannot be equated with maximizing

consumption. In particular, human beings have an

innate ethical sense.

Other theories

While I will not dwell on them extensively, two

other ethical approaches of particular interest are

Marxian theories, and the generally a-theoretical

observed facts of practical ethics that we might call

‘‘the common ethics.’’ For purposes of this discus-

sion, both can be modeled as rule-utilitarian theories

that assume humans have ‘‘thick’’ goals. In the

‘‘common ethics’’ model, rules are assumed to be

chosen to maximize an aggregate of utilities that

gives equal weight to each human being. In a (highly

oversimplified) model of ‘‘Marxian ethics,’’ rules are

chosen to maximize an aggregate of utilities, giving

equal weight to each worker, and zero weight to

each shareholder.

Legal responsibility

All theories imply that corporations should gen-

erally obey the law, but for different reasons, and

with differing degrees of conviction. Stakeholder

theory is fairly unequivocal about the obligation of

the corporation to obey the law. Law abiding

behavior is in the interests of stakeholders not

merely because law breaking is risky to the cor-

poration, but more significantly because human

beings are conceived of as agents with goals that

include a desire for self and others to behave

ethically.

‘‘Strict’’ neoclassical theory tends to support

obedience to the law, solely because obedience

often tends to be a profit-maximizing strategy. In

general, strict neoclassical theory necessarily implies

that corporations should violate the law whenever

they can predicably profit from it. Defenders of

neoclassical theory list numerous external forces

implying that breaking the law usually wouldn’t

maximize profits – i.e., reasons why corporations

could not expect to ‘‘get away with it’’ These

forces are simply the costs that various stake-

holders can impose on a law-breaking corpora-

tion: loss of patronage, civil suit, criminal

penalties, and so on. Whatever the merits of these

arguments – and there are obvious exceptions to

each of these claims – this style of argument

implicitly grants that external force is needed at

all times to keep each neoclassical corporation in

line.

Academic theories of law-abiding behavior

almost universally agree that external pressure

from law-enforcement alone is not enough to

create a law-abiding society. 13 It is also necessary

that most people tend to prefer to obey the law

for its own sake. This argument can be made in

terms of information costs and transactions costs,

but other language says it more succinctly: qui

custodiet custodies? In a corrupt society, uncor-

rupted government won’t survive to ride herd on

society, or, should it somehow survive untainted,

manage the overwhelming task of tracking every

aspect of an entity (the entire society) which is

much larger than itself. 14 Or to put it more

bluntly: there is neither empirical nor theoretical

evidence that law-abiding behavior is a stable

equilibrium absent individual conscience. As

Adam Smith (1759, 1976) was well aware, there

is no invisible hand enforcing law and order – it

cannot descend like manna from heaven to re-

ward the innate virtuousness of a world run on

pure greed.

What Global Emission Regulations should Corporations Support? 323

Some neoclassicists have also argued that law-

breaking need not be bad; for example, that firms

engaging in illegal bribery can increase social welfare

(e.g., Thursby, et al., 1991). Since the law by and

large criminalizes actions judged likely to reduce the

general welfare, such arguments are an inadequate

normative defense for lawlessness.

The main question to be addressed here is not one

of obedience to the law, but rather, the corporations’s

role in formation of the law. However, attitudes

toward obedience to law do foreshadow attitudes

towards the ethical content of law-making.

Contractual responsibility

‘‘Contractual responsibility’’ refers to obligations

accepted by prior agreement To the extent that the

contract is clear, the nature of the contracted obli-

gations is simply a matter of fact. In normative

theory there is always a separate ethical question as to

whether an agent should or should not actually fulfill

its given contractual obligations. Here again, all

theories tend to imply an obligation to fulfill con-

tractual agreements, but with differing degrees of

conviction.

In stakeholder theory, contractual partners are

among the stakeholders whose utility is of positive

significance. (In Kantian terms, they are owed the

ultimate respect of being treated as ends and not

means.) It follows that there is an obligation to obey

contracts even when it becomes inconvenient to do

so. Such an obligation is not absolute, but it is an

important ethical consideration that in particular

cases may or may not be in competition with other

ethical considerations.

In neoclassical theory, there is a purely instru-

mental relationship between the parties. Contracts

are followed only so long as considerations of con-

tractual gain and future reputation outweigh any

potential gains from reneging or hold-up.

Ethical responsibilities of the neoclassical firm

In the short and medium runs, a strictly neoclassical

corporation is obligated only to make a profit. For

the long run, I will argue it has no practical interests

or obligations at all.

Neoclassical corporations are assumed, however,

to maximize present values of cash flow streams that

last over a potentially unlimited horizon. In other

words, the corporation has a positive interest in

gaining an additional dollar at any time, no matter

how far in the future it will be received. However,

that is very far from saying that in practice such a

corporation would take a significantly long-run

view, because any profits in the distant future are

discounted in the extreme.

In particular, profit maximization specifically

implies that for any given fixed annual real profit

continuing over an infinite horizon, there is a finite

sum of money large enough that the neoclassical

corporation would prefer to receive that amount of

profit today, pay it out in dividends, and then go out

of business, as opposed to obtaining that stream of

profits forever. 15 In itself, that does not necessarily

distinguish the neoclassical corporation from the

stakeholder corporation. Almost any utilitarian actor

is willing to contemplate an acceleration of its own

eventual demise, if the stakes are high enough. 16

What distinguishes the neoclassical corporation is the

extremely low value it places in practice on the

moderately distant future – distant events of a

magnitude up to and including its own destruction

are simply not appreciably significant.

It is important to quantify this point. Major cor-

porations have high internal discount rates, typically

well in excess of 10% per year in real terms.17 At

such rates, standard discounting formulas show that a

dollar expected to be received just 7 years in the

future is worth much less than half of what a dollar is

worth to the firm now. Similarly, a dollar expected

to be received in 70 years is worth very much less

than 1/1000 of what a dollar received today is

worth.

Moreover, the present value today of the entire

market value of any firm as it will be valued in 50 or

100 years is tiny in comparison with just one year’s

profits received today. 18 (The sole possible excep-

tion would be cases where the firm is expected to

grow exponentially for a prolonged period at a

growth rate comparable to or greater than the dis-

count rate. Historic data on the growth of major

corporations imply that expectations of sustained

long-run growth at such high rates can never be

justified. Indeed, such growth implies that the firm

would eventually exceed the entire economy in

324 David Burress

size.) Consequently, in practice, a profit maximizing

corporation should be quite willing to accept its own

certain destruction in 50 or 100 years, in return for

an increase by a small percentage in just one year’s

profits today. Such a firm cannot be said to have

appreciable long-run interests.

Ethical responsibilities of the stakeholder firm

In contrast, the stakeholder corporation does place

an appreciable value on events expected 50–

100 years in the future. This follows from the fact

that the corporation values the utility of its stake-

holders, who are viewed as real human beings rather

than abstract profit-maximizers. In particular, I take

it as a primitive sociological or ethical fact that real

human beings on average do place an appreciable

value on protecting the environmental condition of

the world their children and grandchildren will live

in.19 Since the stakeholder corporation is motivated

by, and solely by, the goals of its stakeholders, it must

be appreciably motivated by that particular goal.20

We should not paint a Pollyanna picture of the

stakeholder corporation. Human beings have

unethical motives as well as ethical motives. The

actions of a stakeholder corporation could reflect

both kinds of motives. What distinguishes the

stakeholder corporation is its potentiality for doing

the ethically right thing, even in the absence of any

external pressure. The strictly neoclassical corpora-

tion has no such potentiality.

Thus, stakeholder corporations in practice will

occasionally face situations where the material utility

of their stakeholders could be increased by acts that

violate either Marxian ethics or ‘‘the common eth-

ics.’’ These cases arise, in particular, when there is an

opportunity to make additional profits in a way

commonly viewed as unethical, albeit the profits

could be shared across all stakeholders.21 (These

situations are quite similar to, but presumably less

common than, the situations that would lead neo-

classical corporations to behave contrary to common

ethics.) Note that, in such cases, if the stakeholder

corporation is ethically required to maximize

aggregate utility of its stakeholders, and if its stake-

holders do not place a high-enough utility value on

ethics, then the firm is ethically required in these

cases to act against common ethical views. This is a

clear weakness in stakeholder ethical theory, at least

as it is modeled here.22

The simplest resolution would entail redefining

stakeholders very broadly to include all directly and

indirectly affected persons. In a rule-utilitarian

framework, common ethics consists simply in those

rules of behavior which tend to maximize an

aggregate of every person’s utility. If we defined

stakeholders broadly enough, then stakeholder ethics

would become identical to common ethics.

This is not a very satisfactory resolution, however.

In particular, there is no evidence that firms actually

do accept all humanity as their stakeholders. (E.g.,

existing evidence for the empirical version of stake-

holder theory is based on a narrower definition.)

If the normative theory differs too drastically

from the empirical reality, then in the name of ethics

we are calling on all corporations to make major

changes in their modes of operation. Preaching

radical ethical change to corporations seems vacuous.

Corporations are a successful form precisely because

they almost single-mindedly follow their own

internal dynamic.

A more realistic approach is to simply accept that

normative stakeholder theory is incomplete. In

cases where stakeholder theory reaches counterin-

tuitive ethical results, it will be necessary both to

rely on the consciences of individual whistleblowers

to resist corporate temptation, and also to assume

or hope (similarly to neoclassical theory) that

external pressure can contain corporate misbehav-

ior.23

Ethical criteria

Sustainability

It is widely argued that corporate environmental

behaviors should be sustainable (e.g., DesJardins,

1998), but ‘‘sustainability’’ is an increasingly con-

tested concept. There are disagreements both over

what it should mean in theory to be sustainable, and

over how in practice it can or should be accom-

plished. For purposes of this essay, I will assume a

definition similar to one put forth by some neo-

classical economists. They focus on ‘‘sustainable

development’’ rather than ‘‘sustainability.’’ A

development regime is said to be sustainable if and

What Global Emission Regulations should Corporations Support? 325

only if the resources left to each generation allow it

to achieve a higher general standard of living than its

predecessors. The concept of resources includes

knowledge and technology and social capital as well

as material resources, so the concept is one of ‘‘dy-

namic sustainability’’ in which (sufficiently large)

increased stocks of knowledge are assumed able to

substitute perfectly for any non-renewable resources

used up by a given generation.

This is the most elastic and least restrictive def-

inition of sustainability I am aware of. In the form

stated above, it is subject to serious challenge. For

example, it downplays many problems related to

uncertainty,24 and in particular may not be consis-

tent with the Precautionary Principle.25 At the

same time, using a lenient standard of sustainability

lends rigor to ethical arguments: if a regulatory

action is required by this standard, then it is likely

to be required by any reasonable standard of sus-

tainability.

Stakeholder firms should tend to support long-

run policies that are sustainable, because individual

stakeholders tend to support such policies. Indeed, I

am not aware of any literature other than nihilism

that overtly opposes a sustainability ideal. However,

neoclassical firms have no particular reason to support

sustainability.

Fairness between nations

Treating people fairly is generally viewed as an ethical

requirement, which it is. In the context of distribu-

tional effects of global regulation of emissions, it may

be more helpful to view it as a political requirement. In

particular, global perceptions of fairness are pragmat-

ically needed in at least some degree in order to reach

global agreements on regulation of emissions.

For example, consider the case of greenhouse gas

emissions, especially carbon dioxide. There is sci-

entific agreement that anthropomorphic emissions

are substantially contributing to an increase in the

earth’s temperature, and that climatological, eco-

nomic and social effects will be large, costly, and

partly unpredictable.26 Cutting back on CO2 emis-

sions is also costly. A majority of the emitted CO2

mass currently comes from rich industrialized

countries. Those countries are demanding large

emission quotas in order to preserve their existing

standard of living. But poor countries also demand

large quotas, so that they can develop their econo-

mies and catch up with rich countries.

Small poor nations, including most African na-

tions, probably can be coerced by major patron states

into agreements they perceive as unfair. Large poor

nations like China and India are much harder to

coerce. Enforcement is also problematic if the

underlying agreements are perceived as unfair.

Emission controls would fail to contain greenhouse

gases adequately if just one of the large nations failed

to conform. Especially given the internal political

difficulties of imposing controls, some large poor

nations are likely to insist on quid pro quos for

controlling emissions. Once one poor nation opts

out or receives special preferences, other poor na-

tions are likely to follow. Hence unfair agreements

have a propensity to collapse.

The natural market solution is to grant CO2

emission rights on some basis mutually accepted as

equitable27 (or on a basis of quasi-equitable com-

promise), and then let rich countries buy some of

those rights back from poor countries. The dollar

transfers that result would likely be much larger than

existing flows of international foreign aid, so the

negotiations over quotas would be very difficult.28 A

negotiated basis might include some combination of

weighting based on numbers of persons, and

weighting based on current GDP.

Because of its interest in having a viable world, the

stakeholder corporation should support concessions

to poor nations in order to achieve global controls, at

least in the long run. Because of its essentially short-

run orientation, the neoclassical corporation should

oppose both concessions and controls.

Fairness between economic actors

Most people believe they have a right not be subjected

to unexpected harm resulting from the actions of

others, and the laws in all democratic countries accept

this principle as important, though not always deter-

minative. In some cases individuals have rights to be

free not merely from harm, but also from threats of

harm. Clearly there are and must be limits to such

rights – if every person in every action took every

possible precaution against every possible harm, the

economy would grind to a halt.29 However, in

326 David Burress

definable cases of substantial harm in which the cause

can be traced to a specific polluter, both law and ethics

may hold the polluter liable for tort damages.

Tort actions create an incentive against pollution.

This incentive constitutes an addition to, but not a

sufficient substitute for, any incentives provided by

global regulation. In cases regulated globally, there

will generally be multiple emission sources for any

given pollutant, and also multiple pollutants that can

cause any particular harm, so that the specific causal

relationship needed for tort action usually cannot be

established.

Tort action is generally related to a local event that

can be handled under local law. However, there are

some tort issues that require global attention. First,

some torts will concern pollution spilling over na-

tional boundaries. There is a need for agreed inter-

national procedures in those cases. Second, when

multinational corporations cause great loss of life and

health, as in the Bhopal disaster, compensation for

loss may be utterly disproportionate depending on

income and national location of the victims. These

outcomes violate popular ideas of fairness.

Perceptions of fairness are important to the legiti-

macy and stability of a political regime. This is espe-

cially the case for democratic regimes. Therefore the

sustainability of a global political order hospitable to

corporations, is likely to depend on ordinary people

not believing that order grossly unfair. Tort law may

play a rather limited role in feelings about fairness of

the international regime (the cultural resonance of the

Bhopal disaster however could suggest otherwise). In

any case, legitimacy is built up based on many small

governmental decisions over time. Tort law includes

some of those decisions. Presumptively, stakeholder

firms should support globally fair tort laws. Since

fairness is a long-run social investment, neoclassical

firms should oppose any global tort laws that placed

them at significant expected short-run risk.

Benefit-cost analysis

Utilitarian judgements are couched in the language of

‘‘efficiency.’’ Therefore in this paper, ‘‘efficient’’ has

approximately the meaning ‘‘ethical’’ or ‘‘virtuous.’’

Concrete utilitarian calculations are usually opera-

tionalized as a monetized comparison of costs and

benefits to society as a whole. For convenience, these

calculations are normally based on the ‘‘one dollar one

vote’’ assumption – in other words, a dollar’s worth of

benefit or cost has the same social value whether as-

signed to rich or poor. It is significant that nearly all

benefit-cost theorists agree this standard is ethically

flawed – i.e., most agree that a dollar is socially more

valuable when received by poor persons than by the

rich (reviewed in Burress and Rich, 1997 ). However,

for uses made in this paper any conclusions reached

under the ‘‘one dollar one vote’’ standard would be

even more strongly justified under a more pro-poor

standard. Also, ‘‘one dollar one vote’’ arguably does

approximate the utilitarian weighting actually used by

stakeholder corporations. Moreover, by definition it

reflects the weighting used by neoclassical corpora-

tions. Therefore this paper assumes a ‘‘one dollar one

vote’’ standard throughout.30

Internalization of costs and benefits

The benefit-cost approach implies a fundamental

moral axiom: under ideal circumstances, human af-

fairs should be organized in such a way that each

decision maker will pay the full or ‘‘social’’ costs, and

also enjoy the full social benefits, that result from

each action he or she performs. This axiom follows

rigorously from two assumptions:

� ethical outcomes consist in maximizing social

utility or welfare, defined to equal the sum of

all benefits less all costs of all actions.

� individuals, whether or not they intend to act

ethically, as an empirical fact do act so as to

maximize the benefits, net of costs, that they

privately face.

In other words, if private net benefits equal social

net benefits, then rational individuals will automat-

ically maximize social welfare.31

This axiom remains abstractly true no matter how

we decide to define benefits and costs. But to apply

it, we have to define what counts as a social cost or

benefit. The definitions are different in each of the

four normative theories. However in each case they

consist in the sum of dollar values placed on all

outcomes by all individual persons, multiplied by

weights for each individual (using weights that are

different for each theory).

What Global Emission Regulations should Corporations Support? 327

This axiom has important and direct implication

for deciding who should bear the costs of regulation.

Under the common ethics, the full costs of regu-

lating emissions should be usually be borne by those

enjoy the benefits of producing the emissions. Un-

der competitive market conditions, the only way to

ensure that is to place the full burden initially on

those who decide to produce the emissions. (The

costs will then be passed on to the ultimate benefi-

ciaries through normal market process.) Those costs

include:

� the costs of deciding which emission to regulate

� the costs of determining an allowed level of

emission

� the costs of measuring actual emissions

� the costs of enforcing the limits.

Marxian ethics reaches a similar conclusion.

Stakeholder ethics would generally agree, except

that the stakeholder firm should seek phase-in rules

as described below.

Neoclassical ethics places no value on cost or

benefits that accrue to any individual other than

shareholders of that particular firm. Accordingly it

should support externalization of all costs of pro-

duction to the maximum extent possible.

Technical and legal criteria

Emissions

Here I will define ‘‘emission’’ very broadly as any

existing physical substance, matter, or form of energy

producedor causedorutilizedby abusiness orfirmand

no longer under direct control of it or its customers or

supply or distribution chain.32 However, the discus-

sion will mainly focus on chemical substances.

Not every emission constitutes an environmental

problem, but every type or species of emitted matter or

energy constitutes a potential problem. The difference

between problematic and benign emission rests en-

tirely on the quantity or aggregate density of the

emittent at a sensitive location, in relation to the level

of hazard presented by that emittent. Thus, oxygen

and nitrogen are naturally occurring substances nec-

essary to dominant forms of life, yet huge emissions of

either can cause a local problem. (Concentrated

oxygen is chemically risky to life forms, and can also

cause explosions. Concentrated nitrogen is suffocat-

ing.) Conversely, even the most deadly toxin is

harmless if released in sufficiently minute quantities.33

Persistent emittents

It follows that persistent emittents are a much more

serious problem than degradable emittents. To the

extent that a substance persists in the environment

and is continuously created, it will build up without

limit. And if it builds up without limit, then even-

tually it will become a nuisance. Moreover, if the

degree of nuisance builds up without limit, then the

costs it imposes also build up without limit.

Therefore, in the extreme case of perfect persis-

tence (or perfect non-degradability), the only per-

manently sustainable level of emission is zero.

It does not follow that use of such substances should

be banned, only that they should not be continuously

released into the environment in non-diminishing

amounts. In practice, however, nearly all uses of

material substances do entail some degree of release

into the environment. A purely theoretical exception

consists in substances used in highly controlled pro-

duction processes and never released into the envi-

ronment. As far as I know, there are no practical

examples of perfectly contained production processes.

There is also the theoretical possibility of releasing

a persistent emittent for a temporary period, until a

certain threshold is reached, and then ceasing forever

to use or release it.

In practice, no emittent is perfectly persistent.

However, there is a strong long-run case for banning

emission of any highly persistent substance. In or-

dinary language, persistence is a relative notion; a

substance is environmentally persistent if both:

� the processes of degradation operate more

slowly than the processes of emission, and

� the level of emission is high enough to cause a

hazard.

It is always the case that a sufficiently high rate of

emission could in principle overwhelm the degrada-

tion process and cause a hazardous level of an emittent.

Therefore ‘‘persistence’’ is a notion that has to be

328 David Burress

operationalized administratively, in the light of actual

conditions of production volume and use.

Consequently, under any administrative defini-

tion of persistence some emissions classed as non-

persistent will still constitute nuisances. Thus, even if

a substance degrades rapidly in the natural environ-

ment, it can still constitute a nuisance if it is suffi-

ciently hazardous and sufficiently mobile, or is

delivered in inconvenient locations.

Degradation

Degradation of a pollutant occurs when the pollutant

is broken down into other substances, or when it is

permanently removed from the active biosphere.

Both concepts are problematical.

The break-down of a hazardous pollutant often

produces other hazardous pollutants. Therefore

degradation should not be viewed as complete until

all hazardous byproducts of all generations have been

degraded below an acceptable level of hazard.

Moreover, breakdown in the natural environment

proceeds variably, and does not generally mimic

breakdown in the laboratory. It follows that envi-

ronmental break-down of a particular emittent for

regulatory purposes will have to be defined admin-

istratively, in the light of available scientific knowl-

edge but with a necessary degree of arbitrariness.

Similarly, permanent removal from the biosphere

is a relative concept. For example, because of pro-

cesses such as erosion, solution, and evaporation,

substances buried in the earth are generally not

permanently removed from the biosphere. Also,

procedures such as launching radioactive materials

into outer space may permanently remove a potential

emittent, but they run the risk of failing disastrously.

Again, administrative definitions will be needed.

Mobility

If an emittent remained forever where it was emitted,

it would not present a global problem. However,

substances that are airborne or waterborne or soluble

or biologically active do not remain in one place. Also,

complex substances such as trash include components

that fall into all of these categories. Moreover, in some

cases human agency moves otherwise immobile

materials; for example radioactive metals have been

unknowingly reclaimed from waste dumps and

recycled by scavengers.

Even relatively slowly dispersing substances will

eventually cover the globe if they are sufficiently

persistent. Therefore immobility by itself should

rarely be a sufficient reason to avoid global regula-

tion of an emittent. In the long run, low mobility

should be administratively significant only when

combined with low persistence and low hazard.

Interactions among emissions

It is possible for various species of emission to

potentiate each other, or work jointly to increase the

level of hazard, or interact chemically to create new

hazards (as in smog). The simplest situation is one

where multiple species have essentially the same

effects (hormone mimickers and estrogen disrupters

are possible examples). In that case all of the similar

species need to be regulated as a unit, so that their

total environmental load does not exceed regulatory

limits. Because some hazards involve non-linear ef-

fects (e.g., doubling the concentration might more

than double the harm; Goldstein and Goldstein,

2002, pp. 77–79), setting appropriate joint limits can

be technically complicated.

A larger problem is that most of the possible

interactions among different species are not known

in advance. Moreover the number of possible

interactions is increasing explosively (it increases

with the square of the number of species). Assuring a

reasonable level of safety would require extensive

and systematic technical analysis. At present no

country is attempting such an analysis, either before

or after emissions are permitted into the environ-

ment. Because of the sheer size of the research

problem, administrative rules will be needed that

define various classes of possible interaction, some of

which are presumptively innocuous.

The political economy of global regulation

If hazards from a particular pollutant are known to

have a purely local incidence, the case for regulating

it globally is rather weak.34 Also, there is an

important distinction between hazardous local con-

What Global Emission Regulations should Corporations Support? 329

centrations of an emittent, versus a hazardous aver-

age global level.35 I will assume that global regula-

tion is concerned with the average global level of

emittents, and that other problems can be handled

locally. Presumably, local regulation will assist the

global regulation effort, but the two efforts have

different goals and standards.

However, even in cases where pollution has a

global incidence, in principle its regulation could be

accomplished through independent but parallel

national or local regulations that covered the globe.

In practice, parallel regulation is very likely to fail

because of free rider problems. In particular, when a

given locality regulates a global pollutant, the costs of

regulation are borne locally, while the benefits are

shared globally. While local regulation may pass

ethical tests, it does not pass a locally oriented ben-

efit-cost test. Because of free rider problems, local

voters are unlikely to support restrictive regulations

they do not significantly benefit from. For these

reasons, political economy models (such as Oate’s

‘‘fiscal federalism’’ model, 1972) suggest that regu-

latory systems should have authority over at least the

same geographical range as the hazard that is being

regulated.

Consequently, if truly global emission problems

are not regulated globally, whether through inter-

national agreements or by independent international

agencies, they not likely to be regulated successfully.

Hence stakeholder firms short support global regu-

lation, at least in the long run.

Globally distributed emittents

A detectable level of emittents from a given release

event will spread out over a region that depends on

quantity, detectability, degradation rate, and mobility

of the emittent, and also on wind and water currents

and on the period of time between emission and

detection. However, any persistent and moderately

mobile emittent released in sufficient quantity will

eventually be detectable everywhere on the globe.

DDT, for example, is still detectable everywhere on

the globe now, several decades after its production was

banned in the U.S. (for citations, see Schafersman,

2000). Morever, any persistent emittent released

cumulatively in quantities that are large enough in

relationship to its level of hazard, will eventually cause

damage throughout the globe. DDT, for example,

which is believed to cause egg shell thinning that re-

duces the survival rates of certain bird species, is still

being found in the tissues of those birds.

It follows that every persistent emittent poses a

global regulatory problem. While it is possible that

cumulative production quantities and hazard levels

are and will remain low enough for a particular

emittent that it need never be regulated, there is no

way to know whether or not that is case prior to a

careful regulatory examination. Therefore, in order

to successfully manage pollution as a global problem,

every persistent emittent should presumptively be globally

regulated, at least up to the point of determining from

time to time that no limits are currently needed.36

Some non-persistent emittents will also present

global problems because of a combination of high

mobility and high hazard. These emittents should be

regulated like persistent emittents.

The burden of proof for global regulation

Thus there is a threshold problem of deciding

whether or not a given emittent requires global

regulation. In some cases, global regulatory agencies

might be able to settle this issue categorically. For

example, substances that naturally occur in human

environments in significant quantities could be

presumed not to be global nuisances until there is

evidence to the contrary. However, in the case of

new artificial substances, categorical rules will usually

be unhelpful. The choice finally comes down either

to burdening the regulator to show potential haz-

ardousness – ‘‘innocent until proven guilty’’ – or else

to burdening the producer to show probable

innocuousness – ‘‘guilty until proven innocent.’’

Also, once a decision has been made to impose

global regulation, we must assign the burden of

proof for determining acceptable rates of emission

(or whether any level of emission is permissable).37

Thousands of new artificial chemical are invented

each year, and the rate keeps increasing.38 A rather

substantial fraction of those new chemicals are likely

to be hazardous in various ways.39 Flooding the

environment with new and untested chemicals

would in effect (and at present actually does) use all

human beings as involuntary test subjects. Ordinary

people overwhelmingly report in public opinion

330 David Burress

polls that they oppose involuntary applications of

untested artificial chemicals to human beings (e.g.,

Morris et al., 1993). The stakeholder corporation,

though not the neoclassical corporation, should have

a long-run interest in supporting regulations that

respect those views.

At the same time, the introduction of new tech-

nology has always used human beings as partially

involuntary test subjects. Moreover, new technology

has great benefits to ordinary people. I am aware of

no attitude surveys weighing trade-offs between the

benefits of new technology and the costs of serving

as involuntary guinea pigs. It is not feasible to test all

new technologies perfectly before they are intro-

duced into the human environment. Presumably,

there is some positive level of risk that average

people would be willing to accept in order to enjoy

the general benefits of progress and a steady stream

of new technology. The problem lies in setting an

appropriate level of risk.40

Assignment of the burden of proof has strong

implications for the level of risk imposed on the

public: risks will be substantially higher if govern-

ment regulators accept the burden than if private

innovators accept it. Regulators (like government in

general) have relatively fixed and limited budget

constraints, so the studies they are able to fund and

instigate on their own will normally leave large gaps

(e.g., as in U.S. Labor Department studies of

workplace safety). If the burden rests on the inno-

vator then there will normally be no gaps (e.g., as in

FDA approvals of new drugs).

Arguing from an oversimplified model of inno-

vation, the axiom of cost internalization implies it is

socially efficient to place the full costs of safety

analysis on the producers of a new technology. In

particular, if innovators can use patents and other

devices to recapture the full social benefits of inno-

vation in the form of profits, then they will enjoy the

full social benefits of any innovation. If they bear the

full social costs as well, then they will make socially

optimal investments in innovation. Therefore the

innovating firm should accept the main burden of

showing that global regulation is not needed, or if it

is needed, that some particular level of emission is

safe.41

Under more realistic models of innovation, firms

are likely to underinvest in innovation, mainly be-

cause of ‘‘spillovers’’ – i.e., some benefits of inno-

vation are absorbed by customers, suppliers,

competitors who mimic the innovation, future

innovators, and government taxation (Jaffe, 1998).

Consequently, achieving socially optimal innovation

generally requires a degree of public subsidy.

Assuming no better form of subsidy is available,

one possible form consists in shifting the burden of

proof from innovators to regulators. This reduces

costs to innovators, but at the social cost of a higher

level of public risk.

However, it already the case that a wide variety of

direct fiscal subsidies are available for innovation in

the U.S. and elsewhere. These fiscal subsidies in-

clude government grants, use of spinoffs from uni-

versity research, R&D tax credits, and numerous

state and local economic development programs in

every state of the union.42 If existing fiscal subsidies

aren’t high enough, they could be increased. There

are many policy reasons for preferring fiscal subsidies

over the socialization of risk: fiscal subsides are more

transparent (it’s easier to measure the amount of

money involved); they are openly adopted in a

democratic manner on a case-by-case basis; they

seem more fair to ordinary citizens than risk subsi-

dies; (in my view most importantly) fiscal subsidies

are paid in fungible dollar terms, while risk subsidies

are paid in the nonfungible coins of environmental

loss, bad health and death.43

Transparency, the first of these policy reasons,

cuts both ways. Fiscal subsidies, like all government

programs, are limited by the government’s budget

constraint. Government programs are typically un-

derfunded, in the sense that the marginal benefit

from a dollars’ program expenditure usually exceeds

a dollar in social value.44 Hence fiscal subsidies to

innovation are likely to be underfunded. As with any

subsidy, its supporters will look for an off-books way

to increase the subsidy. Shifting the burden of proof

is one such way.

Government programs are generally kept on-

books and visible for a very good reason: citizens

want to maintain oversight. The stakeholder cor-

poration should support fiscal subsidies to innova-

tion, while keeping the burden of proof on

producers of new emittents. The neoclassical firm

should attempt to externalize cost whenever possi-

ble, hence should support putting the burden of

proof on regulators (even if it leads to negative

externalities that are ‘‘unfair’’ or socially inefficent).

What Global Emission Regulations should Corporations Support? 331

Implications of dynamic sustainability

Any emittents generated today could potentially be

cleaned up using tomorrow’s more effective tech-

nologies. Therefore any given future effect of pol-

lution can conceivably be ignored. This argument

probably implies no particular change in the

threshold question of whether to trigger global

regulation, but it does suggest change in the level of

control. I will argue, however, that any such changes

would be slight.

Let us imagine, for example, that a technology for

cleaning up a given substance emitted today is ex-

pected to exist tomorrow, such that:

� expected costs of cleanup tomorrow, when

discounted to the present, are less than the ex-

pected benefits of relaxing emission regulations

today;

� the costs of developing the new cleanup tech-

nology will be borne by producers of the

emittents;

� the two previous conditions are known to true

with high reliability and relatively low risk;

� the costs of establishing truth of the two previous

conditions are borne by producers of the emit-

tents.

Then it would clearly be justified under all

four ethical theories to base emission controls on

current nuisance levels only, while ignoring future

nuisance.

However, if any one of the above conditions fail

to hold, then relaxing the level of control is not

justified (except under neoclassical ethics). If for

example we allowed extra emissions based on the

mere plausibility of future cleanup, then in most

cases emission controls would have to be relaxed,

because future techniques may plausibly exist to

clean up any global pollutant at low cost.45 Our

historic experience however has been that ex post

cleanup of pollution is immensely expensive, so

mere plausibility of cheaper cleanup in the future is

an unsatisfactory basis for imposing high costs on the

next generation. Moreover, efforts (including formal

efforts) to forecast technology have historically been

unreliable and nearly always over-optimistic.46

While continued technological progress could

eventually produce almost any imaginable miracle,

most of the hoped-for miracles won’t happen soon

enough to help the next generation.

Phase-in rules

Stakeholder corporations (like all corporations) have

strong short-run interests contrary to regulation of

their currently existing emittents. To advance those

interests, they should support well balanced transi-

tion rules that put some costs of regulation off into

the future. For example, all new chemical species

introduced after a certain date could be subject to

full regulations, while existing species could be given

special status for a limited period of time. Special

status might warrant temporarily shifting the burden

of proof to regulators, allowing temporarily higher

levels of hazard, or initially assigning some emission

rights to producers.

In this regard, it should be noted that corporate

stakeholder ethics are different from common and

Marxian ethics. Average people would benefit much

less from short-run corporate profits than would

corporate stakeholders. Consequently both the

common ethics and Marxian ethics would be much

less favorably inclined to support phase-in rules.

Neoclassical corporations, on the other hand,

should support the most dilatory phase-in rules that

are politically achievable.

Conclusion

Stakeholder corporations have an affirmative ethical

obligation to lobby for strong and uniform interna-

tional controls over emissions. Their obligation is

not merely to refrain from opposing regulation. In-

stead, there is an affirmative obligation to support

regulation. This obligation flows primarily from

long-run a concern for the well-being of its stake-

holders, coupled with the unique position of the

firm in providing relevant information to legisla-

tures. This obligation does not preclude advocacy for

transitional rules intended to protect short-run

profits.

Stakeholder firms should also support careful

attention to the detailed design of regulatory

mechanisms from the point of view of social effi-

ciency, regulatory effectiveness, and fairness (topics

332 David Burress

on which there is a large literature). In the long run,

optimal designs are likely to include features such as

free trading of emission rights; fair and efficient

initial distribution of emission rights; globally de-

fined tort rights; innovation subsidies to help offset

impacts of regulation on technological progress; full

public accounting for all material inputs and outputs

of each enterprise; organizational approaches to

speed up regulatory action.

In contrast, strictly neoclassical corporations are

bound by profit maximizing interests. Consequently

they have no ethical duty to support regulation. On

the contrary, their duty to maximize profits generally

obligates them to oppose all regulation of emissions,

at least in the short run.

A case can be made that lobbying behavior of

actually existing international corporations generally

resembles the neoclassical standard and is far re-

moved from the stakeholder standard (e.g., Beder,

1997). Corporations often lobby against environ-

mental regulations, while there are few cases of

corporations supporting them.

Assuming that corporations have the power to

influence regulations and not merely to obey or

disobey them, we should ask whether strict neo-

classical theory is an appropriate ethical theory at all.

I would argue that it is not – i.e., that the recom-

mendations of strict neoclassical theory violate most

people’s sense of what the primitive ethical facts of

the case are.

According to the neoclassical thesis, social welfare

can be maximized if production is performed by profit

maximizing firms that are constrained by competition

and by appropriate government regulation. If corpo-

rations have some degree of market power and are in

the position of choosing their own governmental

constraints, this thesis makes no sense. Profit maxi-

mizing corporations that can set their own rules will

simply set them so as to maximize profits. This would

generally imply, for example, no controls at all on

corporate emissions. Such an outcome does not

maximize welfare (if, as it is commonly understood,

welfare means an equally weighted aggregate of

everyone’s utility). This violates the underlying pre-

mise that maximizing private profits simultaneously

maximizes social welfare. Thus, if corporations have

the power to set, or even to seriously influence, the

rules under which they operate, the ethical premises of

neoclassical theory are void.

Corporate managers no doubt have different

exigencies than other stakeholders. Perhaps the

question is fundamentally one of incentives. For

example, corporate managers have short-run

employment contracts that may impose a short-run

view. If their incentives were changed, corporate

behavior might change towards stakeholder norms.

One kind of countervailing incentive can be

simple public recognition of moral obligation – i.e.,

jawboning and moral suasion. If corporate leaders

are faced with clear social messages that their existing

behavior is wrong, then voluntary change may be

possible. And if there is social agreement but no

change in behavior, then stronger sanctions are

possible.

Taking such steps depends on reaching social

agreements. The purpose of an essay such as this is to

provoke negotiations toward social agreement on

what obligations corporations should actually have.

Acknowledgments

This work was supported by the University of Kansas.

The author received helpful comments from participants

at the Multidisciplinary Conference ‘‘Corporate

Responsibility: The Global Environment’’ at the Thun-

derbird American Graduate School of International

Management, Glendale AZ, October 11, 2002; and from

two anonymous referees.

Notes

1 A point made previously in the corporate citizenship

literature. Thus Derber (2003) argues that corporations

should lobby for law changes to support a stakeholder

approach; Paladino and Willi (2002) say that corporations

do and should exert ethically guided political leadership.

This point is beginning to work its way into accepted

standards; thus the 5th general policy principle of the

OECD Guidelines for Multinational Enterprise (OECD,

2000) states that multinational companies should ‘‘refrain

from seeking or accepting exemptions not contemplated

in the statutory or regulatory framework related to

environmental, health, safety, labour, taxation, financial

incentives, or other issues.’’2 Friedman (1962, 1970) is the seminal source, but his

approach is not quite ‘‘strict’’ – see footnotes 7 and 11

below. As Friedman insists, profit maximization is an

ethical principle, owed by managers to shareholders.

What Global Emission Regulations should Corporations Support? 333

3 Similar conclusions are reached more informally by

California Global Corporate Accountability Project

(2002).4 Particular emission regulations tend to reduce private

productivity in the regulated industry while increasing

social productivity. The aggregate of all regulations could

conceivably either reduce or improve average private

productivity of firms. However, it is not obvious what

effect either direction of change would have on the

average rate of profit. The rate of profit is related mainly

to the distribution of income between capital and other

factors of production, rather than to private or social

ability to produce that income.5 In the sense of Olson (1971). In particular, the effects

of an ideology are shared broadly across many policies

affecting many interests, while the costs of establishing an

ideological regime are generally large in comparison with

the benefits for any one political actor.6 Corporate support for laissez faire ideology is not

consistent with the goals of the stakeholder corporation

as developed below. It can be consistent with goals of

the strict neoclassical corporation, but supporting other

ideologies can also be consistent, depending on empir-

ical conditions. For example, neoclassical corporations

might reasonably focus solely on maximizing profits and

take no stand on ideological issues, because doing

otherwise would not benefit the firm (e.g., because of

free rider problems). Alternatively, a very large neo-

classical firm might have a medium-run motive to

support regulations maximizing social welfare because it

is positioned to share in global increases in welfare.

Since profit-making is its only standard, the ideology

supported by a neoclassical firm does not have to be

either ‘‘true’’ or consistent with normative neoclassical

theory. And in particular, laissez faire ideology is not

consistent with the ‘‘invisible hand’’ underpinnings of

neoclassical theory – except under unpersuasive eco-

nomic assumptions such as zero transaction costs and

absence of externalities. Thus, in a realistic model that

includes market imperfections, laissez faire policies do

not maximize welfare – hence strictly profit maximizing

behavior can be normatively justified only in a

regulated environment. It has been argued to the

contrary that neoclassical ethics and laissez faire ideology

can be jointly justified by theories of government

failure. These arguments are unpersuasive. To say that

firms ethically should maximize profits, and also should

support laissez faire policies, even in the face of known

market failures, is to assert that all efforts to remedy

those failures will predictably decrease welfare, whether

those efforts consist in intervention on the part of

government, or in particular ethically motivated behav-

iors on the part of the corporation. Such an assertion

has no basis either in evidence or in generally accepted

economic theory.7 However, Friedman’s normative theory does include

certain ethical standards in addition to profit maximization:

‘‘there is one and only one responsibility of business – to use

its resources and engage in activities to increase its profits, so

long as it stays within the rules of the game, which is to say,

engages in open and free competition, without deception

or fraud.’’ (Friedman, 1962, p. 133). (But why just these

particular standards? Also, exactly which ‘‘rules of the

game’’ should the corporation recognize?)8 Thus the Business Roundtable (1997, p. 3), an organi-

zation of CEOs of major corporations, recently declared

‘‘the paramount duty of management and the board is to the

stockholders; the interests of other stakeholders are relevant

as a derivative of the duty to stockholders.’’ That describes a

perfectly strict neoclassicism.9 Fleming (1987) found that Friedman was the most

widely cited authority in business ethics, with both

approval and disapproval. However, I have not found

a thorough appraisal or synthesis of that discussion.10 Modern empirical theories of industrial organization

relax these assumptions, for example, by introducing

agency and information costs within the firm. Any such

relaxation apparently opens the door to empirical and

normative considerations paralleling stakeholder theory.

Thus there is a sense in which strict neoclassical theory

and stakeholder theory bracket all possibilities that occur

in recent mainstream economics literature.11 Or more specifically on corollaries of the First

Theorem of Welfare Economics (see e.g., Little, 2002,

Chapter 3). The competitive equilibrium maximizes a

‘‘one dollar one vote’’ welfare function, i.e., an

aggregate of individual utilities in dollar metric (with

the equilibrium prices used as reference prices to

normalize the dollar metric). Friedman (1962, 1970)

makes a number of normative arguments in addition to

the invisible hand argument, but none of them seem

compelling if the invisible hand theorem fails. In

particular, if in fact the world would be a better place

if shareholders required their managers to obey specific

ethical rules, then most people would say that share-

holders do have some degree of obligation to impose

those rules, and managers to follow them.12 Smart (1967) points out that the Kantian categorical

imperative can usefully be viewed as a form of rule-

utilitarianism concerned with ideal rules in an ideal

society (as contrasted with practical rules in an existing

society). Hence stakeholder theory might best be sum-

marized as a form of ‘‘ideal-rule-utilitarianism.’’13 For a survey of theories of crime, see Vold and

Bernard (1986). The sole near-exception is that rational

choice deterrence theory treats conscience and social

334 David Burress

pressure as exogenous or random uncontrolled variables.

The empirical successes of deterrence theory are far from

overwhelming (e.g., Leamer, 1983).14 Of course this oversimplifies a complicated issue. For

example, in face-to-face societies law-abiding behavior

can be enforced through social pressure. However, by

assumption the strict neoclassical corporation can select,

acculturate, associate, and reward its employees appro-

priately so as to overcome any aversion they may have to

external disapproval. Also, it is certainly possible to have

social structures based on terror in which each individual

monitors the good behavior of every other individual.

The collapse of the Soviet empire showed us once again

just how unstable such arrangements are.15 The argument is presented here as if in a world of

perfect certainty. Risk and uncertainty strongly reinforce

the same conclusions.16 In particular, nothing abides forever. To a utilitarian,

the point of maintaining existence during the period

between now and inevitable doom is to enjoy some

quality of experience that could happen in that interim.

The enjoyment of experience is variable. The ultimate

utilitarian measure of the value of a positive increment in

that enjoyment would be the degree of willingness to

sacrifice part of the later period of survival in order to

obtain it now.17 Studies suggest that a diversified portfolio of stocks can

be expected to have a long-run real return of 8% or 10%

per year. (Even in the recession year 2001, the median

return on equity of Fortune 500 companies was 10.4%;

Fortune, 2002.) Since market stock investments are always

available to the firm, the market rate of return creates a

hurdle that any internal investment must meet. The

internal discount rate substantially exceeds the market rate

because of taxes, risk aversion, and capital constraints that

prevent funding all available projects.18 With a market discount rate of q, profit growth rate of

g, and profit rate of pegt, the market value at time t is (p/(q) g)) egt. If the internal discount rate is r, then the internal

present value at time 0 of the firm’s market value of time t

is (p/(q -g))e)(r)g)t. If for example r)g > q)g > 0.08/year

and t > 70 years, then the ratio of that present value to

current annual profit [i.e., (1/(q)g))e)(r)g)t] is consider-

ably less than 0.1.19 That this is a fact can be empirically supported in

numerous ways. For example, willingness-to-pay studies

using ‘‘contingent evaluation’’ or ‘‘conjoint analysis’’

methods find substantial verbal expressions of support for

sacrifice now to preserve the future ecology. Also, the

substantial popularity of environmental preservation laws

strongly suggests a general interest in future generations.

Other evidence can be found in substantial bodies of

fictional and reportorial literature, in the very substantial

membership rolls of environmental action groups, and in

substantial formal academic work on environmental ethics.20 It might be countered that, since utility functions are

heterogeneous, the preferences of stakeholders in some

particular corporations might not happen to place any

substantial value on the welfare of future generations.

There are two objections to this argument. First, in a

major corporation, most stakeholders are not personally

known to managers of the corporation, so it is necessary

to make decisions based on average utility functions, and

average utility functions do in fact place a positive value

on future generations. Second, stakeholder theory is

rule-utilitarian, not goal-utilitarian. The manager’s prob-

lem is to formulate procedural rules that are likely to

maximize utility on average, rather than to hyperop-

timize using all the available information about specific

cases.21 In addition we must assume that the stakeholders’

utilities can increase even when they are benefitting from

unethical acts, and they know it. That seems entirely within

the realm of human possibility.22 Moreover, this problem cannot be resolved adequately

by appealing to rule-utilitarianism. In principle, there

could exist distinguishable classes of situations for which

the welfare maximizing rules under stakeholder theory

require the firm to act against common ethics. Perhaps a

more Kantian approach could address this problem by

requiring the stakeholders themselves to express only their

higher ethical nature.23 It might also be argued that stakeholder theory

simply does not fit comfortably into a utilitarian

framework. While that may be true, no other frame-

work leads to equally crisp predictions. In the Kantian

framework, for example, it is hard to determine exactly

what concrete obligations might be imposed by the

principle of equal respect for others.24 For example, if our generation exhausts certain scarce

resources while leaving a bundle of new knowledge, but

that knowledge turns out to be less useful than was

anticipated, then future generations could be severely

disadvantaged. It is certainly possible to leave an exces-

sively large bundle of new knowledge as a kind of

insurance policy against this sort of risk. It does not seem

possible however, to place great confidence in our ability

to predict the level of risk. For example, how much and

what kind of technological insurance policy can or should

we leave against the possibility of a global ecological

collapse? It is not sufficient to argue that the best scientific

information predicts no such collapse, first, because

science could be wrong, and we need to insure against

that possibility; second, because in fact some scientists do

predict a collapse; third because that outcome is highly

sensitive to future political decisions whose rationality

What Global Emission Regulations should Corporations Support? 335

cannot be guaranteed. I am not aware of economic

models that have addressed this question seriously.

Moreover, that is not the only hard question that can

be raised. For a discussion of much more stringent

definitions of sustainability that nevertheless attempt to

appeal to scientific principles, see The Mundi Club

(2002).25 The Bergen Declaration (1990) summarizes the Pre-

cautionary Principal, in part, as: ‘‘where there are threats

of serious or irreversible damage, lack of full scientific

certainty should not be used as a reason for postponing

measures to prevent environmental degradation.’’

According to the Commission of the European Com-

munities (2000), ‘‘this principle has been progressively

consolidated in international environmental law, and so it

has since become a full-fledged and general principle of

international law.’’ For a critical response see Katz (2001).26 The literature denying these facts is also substantial, but

that they are facts has been supported in statements by

essentially every relevant scientific organization. The

leading summarization is by the Intergovernmental Panel

on Climate Change (2001).27 Singer (2002, chapter 2) proposes equal per capita

allocations, on loosely argued utilitarian grounds.28 E.g., the U.S. has recently spent under 0.1% of GDP

on non-military foreign aid (United Nations, 2001, p. 3),

but over 5% of GDP on carbon-based fuels (U.S.

Department of Energy, 2003). At present, substitutes for

carbon-based fuels are considerably more expensive than

carbon-based fuels.29 As reflected for example, in the classic (and utilitarian)

legal decision on the tradeoff between potential damages

and mitigation costs, given in Hand (1947): mitigation is

required as a matter of equity only when expected

benefits exceed expected costs.30 Note in particular that income redistribution is

somewhat difficult (though not impossible) to justify

under a ‘‘one dollar, one vote’’ ethical standard. For that

reason, the preceding arguments on fairness appeal to the

political economy of perceptions, rather than to the ethics

of income redistribution.31 This statement follows conventional practice in gloss-

ing over two technical points. First, private net benefits

are different kinds of things from social net benefits; to

make them comparable, you need special assumptions on

how both measured. Second, it is sufficient for welfare

maximization that merely the signs of changes in private

and social net benefits be equal.32 While unwanted emissions do not constitute the only

possible class of environmental threats, they constitute

one of just two major classes. The second class consists in

the over-exploitation of natural resources: animal and

plant species that are driven to extinction, habitats that are

destroyed, non-renewable resources that are used up,

renewable resources that are exploited past the point of

peak production. Problems of emission could formally be

viewed as a subcategory of over-exploitation, in which

opportunities for free disposal have been over-exploited;

but in practice the regulatory methods for the two classes

are entirely distinct. Emission is a putting into the

environment, which needs to be regulated at the loci of

production and consumption. Exploitation is a taking

from the environment, which needs to be regulated at the

loci of the environmental taking. This essay is concerned

only with emissions.33 That is, I know of no substances for which a single

molecule released into the public environment consti-

tutes a nuisance. At the same time, even small numbers

of unwanted molecules can be problematic within

certain controlled high tech production processes. Also,

very small numbers of certain viruses can constitute a

threat.34 Arguments for global regulation of local pollution

could still be made however, for example, on grounds of

administrative efficiency, environmental justice, or equi-

table competitive advantage, but those issues are too

complicated to analyze here.35 Also, there is a distinction between local concentration

at the point of emission, and local concentration occurring

elsewhere due to natural or artificial processes of accu-

mulation (e.g., concentrations of DDT in fat cells that

increase up the food chain). To simplify the discussion I

will abstract away from non-local accumulations.36 This point is both key and highly controversial. The

discussion above is only a sketch of the full analysis that is

needed. In particular, an effort should be made to place

lower bounds on the probabilities of catastrophes of

various sizes, based on cases already uncovered (such as

ozone depletion and egg shell thinning) in relation to

numbers and mass of chemical species already released

into the environment. It is also relevant that large

numbers of artificial chemical species are now being

found in human bodies (Environmental Working Group,

2003); see footnote 39 for a presumption that many of

these species are hazardous.37 There is also a separate question of the required level of

proof in each case – for example, beyond a reasonable

doubt, substantial persuasion, or preponderance of evi-

dence – which we will not analyze here. However, risk

aversion combined with the explosively increasing num-

bers of novel substances being invented suggests that a

strict standard will eventually be needed.38 About 75,000 chemicals are presently licensed for

commercial use; over 2000 new synthetic chemicals are

registered every year; the Environmental Protection

Agency has tallied close to 10,000 chemical ingredients

336 David Burress

in cosmetics, food and consumer products alone (Envi-

ronmental Working Group, 2003). However, the vast

majority of chemicals synthesized in laboratories are never

registered. Computerized indices list millions of described

entities; for example, GenomeNet (2002). Also, all

chemicals have multiple break-down products, most of

which are never registered.39 Merck (2003) describes some 10,000 important chem-

ical entities and closely related classes. A hazmat guide by

Patnaik (1998) describes some 1500 seriously hazardous

chemicals. The ratio suggests that some 15% of described

chemicals may be seriously hazardous.40 There is also an ethical problem in imposing any given

level of risk on a minority which doesn’t agree to it.

Certainly, a degree of involuntary risk imposition is

inherent in the fact that we all occupy the same world.

Still, there is a moral asymmetry between bearing

involuntary risks and receiving voluntary net benefits,

which suggests we should adopt an extra degree of risk

aversion in determining our techno-social experiments,

going beyond that degree of risk aversion held by the

average person with regard to risks to him/her self.41 This approach can be viewed as an application of the

Precautionary Principle. It has actually been written into

law in embryonic form in California (1986), which

requires the governor to create a list of potentially risky

environmental chemicals that have not been shown to be

safe. Earlier, the 1958 Delaney Clause had already taken

the next step of preventing distribution of substances not

shown to be safe, but it is limited to cancer risk in foods.42 E.g., for a very detailed description of numerous state

and local R&D subsidies available in six Midwestern states,

see chapter 3 of Buress, Oslund and Middleton (2003).43 Nonfungibility implies the social cost from socializa-

tion of risks is considerably higher than the social cost

from providing direct subsidies of equivalent value.44 That outcome is likely because the social cost of raising

a dollar in revenue generally exceeds a dollar – i.e., there

is an ‘‘excess burden’’ of taxation due to compliance costs,

price distortions, etc. To the extent that government is

reasonably efficient, the marginal social benefit of each

program equals or exceeds the marginal social cost of

raising revenues to support it (hence the ‘‘excess benefit’’

of services offsets the ‘‘excess burden’’ of taxes).45 For example, a generalized ‘‘nanotechnology’’ in

which tiny self-replicating agents accomplish practically

any task that can be broken down into small segments is a

future technology sufficiently plausible to be discussed

seriously in Scientific American (2000). Such technologies

could arguably clean up any pollutant (other than self

replicating ones) at a low cost. Nor is setting a higher

standard than mere ‘‘plausibility’’ a particularly useful

device, as argued below.

46 See for example, the 1964 Rand Delphi forecasts of

technology reported by Cetron (1969, p. 93). A

substantial majority of innovations predicted as likely to

occur at various times between 1965 and 2000 have not

happened yet, and most others happened much later than

expected.

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