Private Climate Action Needs Government Leadership to be Truly Successful

The private sector’s role in addressing climate change has attracted significant attention in recent years, particularly as an alternative force amidst the volatility of governmental climate policies in democracies. Frequent shifts in climate priorities between administrations have intensified the search for more consistent and long-term efforts, elevating private actions to a prominent position in combating climate change. Indeed, largely driven by profit incentives, the private sector often demonstrates a sustained commitment to climate change mitigation. However, this profit-driven nature also reveals the inherent limitations of private climate actions, which cannot replace the comprehensive leadership and regulatory capacity of governments. To achieve transformative and widespread climate goals, government intervention remains indispensable, pushing efforts beyond the upper limits of private sector initiatives and ensuring maximum effectiveness in addressing the climate crisis.

Private climate action refers to the proactive and voluntary sustainability measures undertaken by private entities beyond mandatory governmental regulations to mitigate climate change and adapt to its impacts. These efforts have achieved notable progress in addressing climate challenges and often include setting voluntary targets for carbon neutrality, transitioning to renewable energy sources, and reducing emissions across supply chains. For example, the Science-Based Targets initiative (SBTi), a corporate climate action organization, has validated more than 4,000 companies and financial institutions, including leading global firms, on their commitment to reduce greenhouse gas emissions. Some companies have also made their individual pledges. Microsoft has promised to become carbon negative by 2030 and has invested in technologies like carbon capture and renewable energy development. Similarly, IKEA aims to rely 100% on renewable energy by 2030.

Nevertheless, it has to be mentioned that these commitments are typically rooted in economic incentives such as saving energy costs, enhancing brand reputation, and aligning with investor and consumer expectations for sustainability. The success of private climate actions is inherently tied to their profitability. For example, according to a Bain & Company’s report, a paper manufacturer could save €10-15 million in energy by reducing emission by 20%. Also, a significant portion of institutional investors—almost over 70%—now integrate ESG factors into their investment decisions.

Therefore, since businesses are naturally driven by financial objectives, their willingness to invest in sustainability wanes when the costs outweigh the benefits. This limitation is particularly evident in industries with high decarbonization costs, such as cement, steel, and aviation, where voluntary actions may result in competitive disadvantages unless universally adopted. A study shows that while adopting multiple decarbonization strategies can allow cement production to reach net-zero emissions, it may lead to a 29% increase in cement costs. In this case, excessive environmental commitments can render a company less competitive if competitors—whether domestic or international—do not follow the same climate protection procedure that generates similar pressures or costs. This creates a fragmented landscape where progress in combating climate change occurs unevenly across sectors and regions.

In addition, even industries that undertake climate protection actions together often face an upper limit due to collective action problems. A company might hesitate to take bold climate action if it perceives that others in its industry or supply chain are not doing the same because businesses will act only to the extent that their economic interests are preserved.

Given these constraints, it is evident that private climate actions alone are insufficient to drive the transformative changes needed to mitigate climate change. Government policies have to remain to address the gaps that the private sector cannot fill. The government needs to regulate, guide, and even offer financial support or incentives to ensure that all businesses operate within a framework that prioritizes environmental sustainability without significantly undermining individual competitiveness.

Governments can play a pivotal role by establishing binding standards and creating a level playing field for all actors. Regulatory measures such as carbon pricing, emissions caps, and mandatory reporting requirements compel businesses to align with broader climate goals. For example, China launched its national carbon market in 2021, as detailed in the Ministry of Ecology and Environment report. This market, the largest of its kind globally, initially targets the power generation sector, covering over 5 billion tons of CO₂ annually. It requires high-emission enterprises to purchase allowances for their emissions, creating financial incentives for efficiency improvements and emission reductions. The market is also further expanding its scope to include more enterprises, paving the way for broader industrial participation. 

Besides regulation, governments can play a critical role in facilitating the transition toward sustainability by offering financial support. For example, subsidies for renewable energy, tax incentives for energy-efficient technologies, and grants for research and development have proven effective in reducing the costs associated with compliance and fostering innovation. Among these efforts, China has achieved notable success in advancing climate protection initiatives. The Chinese government has historically provided substantial financial support for renewable energy development, including feed-in tariffs and targeted funding for solar and wind power projects. Furthermore, China has made and is continuously making significant investments in electric vehicles. Collectively, these efforts aim to substantially reduce greenhouse gas emissions and position China as a leader in the global clean energy transition.

While domestic policies can address local challenges, they also raise important questions about their impact on international trade. Stringent domestic regulations often lead to concerns about reduced competitiveness in global markets, particularly when trading partners operate under less stringent standards. Indeed, mechanisms like the Carbon Border Adjustment Mechanism (CBAM) aim to ensure that imported goods meet comparable environmental standards, protecting domestic industries from being undercut by regions with weaker policies. However, without comprehensive international standards, countries would also face collective action problems like private owners, as some may avoid stricter climate policies for short-term economic gain. In this case, international cooperation is crucial to harmonize policies, prevent trade conflicts, and ensure that climate goals are achieved equitably on a global scale.

Major economies such as the United States, the European Union, and China should play a leading role in shaping the global response to climate change. Effective cooperation among these countries could pave the way for uniform climate standards, fair carbon pricing mechanisms, and shared commitments to phasing out high-carbon technologies. Such collaboration would not only create a more equitable framework for addressing climate change but also enable private actors within each country to compete and innovate on a level playing field, fostering mutual benefits and fairer outcomes globally.

However, full international climate cooperation is currently still lacking. Major countries are able to shape the rules and standards on relevant international cooperation, ensuring that their leadership and interests, as well as the common interests shared by all, are best represented. Nevertheless, if some countries choose to abstain from international cooperation, they risk being sidelined when others implement these standards and use them as leverage. Once globally recognized CBAM-style climate measures are established, rejecting or criticizing them becomes increasingly difficult, as they are justified as essential for global climate protection. Countries that remain on the sidelines may find themselves facing significant disadvantages in international trade and negotiations. Moreover, addressing climate change is becoming both a moral imperative and a strategic priority in contemporary international relations. Beyond its practical necessity, meaningful engagement in climate action offers nations an opportunity to define global leadership, shape the future of international governance, and strengthen their influence and credibility on the world stage.

Private climate actions have made significant progress, but their limitations further highlight the irreplaceable role of government leadership in addressing climate change. Ultimately, voluntary corporate initiatives, while impactful, cannot substitute for the regulatory and financial frameworks that only governments can provide. Furthermore, the balance between domestic policies and international cooperation will be crucial in determining the trajectory of global climate action. Whether climate standards become a unifying force or a source of division will depend on the willingness of global leaders to navigate these complexities with a spirit of collaboration.