Dirty SOEs

Climate change has been described as the greatest market failure ever seen, with private companies externalizing environmental costs to maximize profits. However, the explanation of climate change as only—or even primarily—a private-entity problem is incomplete and potentially misleading. Over half of industrial emissions since 1988 can be traced to just 25 fossil fuel firms, but strikingly, among the top polluters, state-owned enterprises (’SOEs’) and other government-controlled entities dominate. Only one private company, ExxonMobil, breaks into the top 10. SOEs are the biggest ‘externalizing machines’ when it comes to carbon emissions.

SOEs differ from private firms in several important ways. They are typically controlled by their sponsoring government, even if some of their shares are publicly traded. This makes them less susceptible to shareholder activism and other forms of stakeholder pressure that can influence private companies. SOEs often enjoy government protection, tax advantages, and financial support that also insulates them from market forces. While this insulation can lead to operating inefficiencies, it also allows them to operate with less regard for public opinion or environmental concerns.

The outsized role of SOEs in global emissions creates significant risks for climate initiatives focused solely on private firms. For example, divestment campaigns targeting public companies could simply shift fossil fuel assets to SOEs or private entities with even less transparency and oversight. This could reduce available information about climate risks and make effective regulation more difficult. Well-intentioned efforts aimed at private companies may have unintended consequences if they ignore the role of SOEs.

As I explain in my recent article ‘Dirty SOEs’, finding ways to engage SOEs in combating climate change is crucial. Since SOEs don't respond to the same pressures as private firms, different strategies are needed. The article considers several possible sources of pressure, including:

• Domestic influences: SOEs' home governments can mandate emissions reductions, set sustainability targets, and require investments in clean energy. Public opinion and civil society groups can also push for change, though their influence may be more limited than with private companies.
• International influences: Other countries, international organizations, and global NGOs can exert diplomatic and economic pressure on SOEs and their government sponsors. This could include trade measures, climate finance incentives, or naming-and-shaming campaigns.
• Host country regulation: Countries where foreign SOEs operate can impose environmental regulations, emissions standards, and transparency requirements. This approach can be particularly effective for SOEs that have significant international operations.
• Litigation: Human rights law may provide avenues to hold SOEs accountable for climate impacts through domestic and international courts. While this is a developing area, it holds promise for creating legal and financial risks for SOEs that continue to heavily pollute. While lawsuits against private oil companies for climate damages are increasing, pursuing only private firms while ignoring SOEs could have unintended consequences. It may give SOEs, which often face fewer regulations and stakeholder pressures, a competitive advantage in fossil fuel industries. This could lead to an expansion of SOE control over extractive industries, potentially worsening the climate impact.

The challenge of addressing SOEs' outsized climate impact is formidable but essential. Their economic power and political influence make them even more difficult to influence than large private corporations. However, given their major contribution to greenhouse gas emissions, finding ways to shift SOE behavior is crucial for effective climate action.

By employing these various levers of influence, it may be possible to harness SOEs' economic power for climate mitigation rather than continued environmental harm. Their potential to drive large-scale changes in energy systems and industrial practices could make them powerful allies in the transition to a low-carbon economy. But, of course, an increased focus on SOE pollution should not come at the expense of continued pressure on private companies. A comprehensive approach to addressing climate change must engage all major emitters, regardless of their ownership structure. The goal should be to create a level playing field where all entities, public and private, are held accountable for their environmental impact and incentivized to transition to sustainable practices.

Recognizing the role of SOEs in global emissions is essential for developing effective climate strategies. While the challenges are significant, the potential impact of shifting SOE behavior is enormous. By leveraging a combination of domestic policy, international pressure, regulation, and legal action, it may be possible to turn these ‘dirty’ SOEs into leaders in the fight against climate change. This transformation is not just desirable but necessary if we are to meet global climate goals and mitigate the worst impacts of climate change.

The author’s complete article can be accessed here.

Paul Rose is Dean and Professor of Law at Case Western Reserve University School of Law.