What role does marketing play in climate change?
Calculating the carbon footprint has become a standard procedure, now systematically declared by companies in accordance with international accounting standards, in order to enable consumers to make better informed purchases. Marketing can play an important role in this process, through the development of products and services with a low carbon footprint (i.e. the impact on the climate measured in carbon dioxide equivalent emissions).
Our analysis begins with the observation that reducing a product’s carbon footprint has an impact on a company’s costs, but also on demand. While greener products are often more expensive to produce, consumers tend to prefer products with a low carbon footprint.
Optimal marketing strategy
Consider a company that chooses to adapt its carbon footprint and the price of its product (or service) to meet the environmental concerns of its consumers. First case scenario: lowering its carbon footprint reduces its unit price. In this situation, the optimal solution for the company is to eliminate waste to improve efficiency. This “ecological” cost reduction is all the more interesting for the firm if the lower carbon footprint reduces its costs and increases demand (thanks to the better environmental performance of the product).
Second case: reducing the carbon footprint increases the unit price. In this case, a trade-off between the cost effect and the demand effect must be considered. Indeed, without a positive effect on demand, lowering the carbon footprint only increases the costs for the company; an ineffective strategy! But if consumers are sensitive to the better environmental performance of the product, moving to more expensive sustainable production to reduce the carbon footprint can become the optimal solution for the company.
Climate concerns reinforce the demand effect and thus the motivation for companies to engage in more expensive sustainable production. However, the cost effect also pushes firms to raise prices, which reduces demand. It is these supply and demand side effects, taken together, that determine the relative profitability of carbon footprint and price adjustment.
In a market where the effect of demand overrides the effect of cost, increased environmental concerns lead firms to design greener products with a lower carbon footprint. In practice, however, increased environmental concerns do not necessarily lead firms to offer greener products on the market, as the cost effect may outweigh the demand effect.
The optimal marketing strategy determines a firm’s overall impact on the climate: the organizational carbon footprint. This total environmental impact is the result of multiplying the carbon footprint of a product by the total number of sales.
Contrary to expectations, offering a greener product to address environmental concerns does not necessarily reduce a company’s overall level of carbon emissions. Why not? Because the demand effect of a better carbon footprint can result in increased sales… and therefore a higher organizational carbon footprint. The company that offers a greener product is a victim of its own success.
Designing greener products may then conflict with the environmental objectives imposed by law. This is a potential dividing line between the missions of the traders and those of their managers, who are responsible for reducing the company’s environmental impact.
Governments are increasingly tending to put a price on carbon emissions to force companies to pay for their impact on the climate; costs that would otherwise have to be borne by society. We have studied how caps and taxes affect optimal marketing strategy.
Cap-and-trade systems allow a company to choose between two options: adjust its marketing strategy to meet the limit imposed by regulations at the organizational level, or maintain its current marketing strategy and decisions regarding carbon footprint and pricing, and purchase carbon credits.
While a mandatory carbon cap reduces the organizational carbon footprint and corporate profits, its impact on the product-level carbon footprint remains ambiguous. Indeed, the company has an incentive to increase its carbon footprint; it writes off its carbon footprint at the product level.
While a mandatory carbon cap reduces a company’s organizational carbon footprint and profits, its impact on the carbon footprint at the product level remains ambiguous. The company has an incentive to increase its carbon footprint and voluntarily reduce sales to meet the limit (this is called “demarketing“).
Thus, carbon regulation at the organizational level can have the perverse consequence of increasing the carbon footprint at the product level. On the other hand, buying carbon credits only reduces profits and has no impact on the optimal marketing strategy.
An alternative to caps is carbon taxes, which put a price on the organizational carbon footprint without restricting overall emissions. Typically, a carbon tax reduces a company’s profits, but its impact on the organizational carbon footprint is ambiguous because sales of a product with a lower carbon footprint increase, which increases overall carbon emissions.
Encouraging the adoption of green technologies
The requirement to comply with carbon regulations could encourage investment in green technologies that allow a company to create its product with a low carbon footprint at a reduced price.
Our analysis shows that when the implementation of carbon regulations is uncertain, it is more difficult to obtain the necessary conditions for new technologies to be adopted. The mere threat of carbon regulations could therefore lead to the adoption of greener technologies, “greener” product design and a lower overall organizational carbon footprint.
There is an important political implication to this discovery: regulatory pressure can drive marketers and businesses to make the right climate decisions and offer greener products. This is the classic link between regulation and promoting innovation.
The environmental concerns of consumers and governments are driving the need to reduce the carbon footprint of products and organizations. However, in many plausible situations, increasing demand for products with lower carbon footprints can increase overall carbon emissions (traders are victims of their own success).
It is important to note that this logic applies beyond carbon emissions, for example to the impact of other pollutants on water, the plastic footprint and environmental footprints in general, all of which play an important role in managing corporate social responsibility (CSR).