Climate Change and General Motors – When to Step on the Gas Pedal?
What is the role of automakers, like General Motors, in stemming the effects of climate change? Should they bear the ultimate responsibility?
As a roadmap to guide our conversation, we’ll first start with defining climate change in a broad sense and the impact is has had to date. Next, we’ll address the projected role it will play in our lives going forward based on the latest estimates. Following this overview, we will discuss the role automobile manufacturers have had in climate change, as well as the mitigating steps some, like General Motors, have taken thus far. Finally, we will consider future challenges that General Motors will face in implementing measures to further lessen its impact on our environment.
Climate change, at the most elemental level, is the respiration or combustion reaction that separates CO₂ from organic material (See Exhibit I). 
Referencing Exhibit I on the left, “when this reaction proceeds to the right, it is the fixation of carbon to organic matter by plants via photosynthesis; when it proceeds to the left, it is respiration or combustion of that organic matter.”[1] In essence, as long as we continue to produce CO₂ faster than nature can drain it away, the planet will warm.[2] As far as repercussions, “in 2016, the Earth experienced its third-consecutive hottest year since recordkeeping began[, and] there is broad consensus in the scientific community that this warming has been largely driven by increases in…carbon dioxide.”[3]
The impacts the temperature increases have had to date are far reaching and historically significant, from rising sea levels and increases in extreme weather events to pressures on food and water supply and the extinction of numerous flora and fauna. If no meaningful efforts are taken to curb the effects of climate change, the latest estimates from the Intergovernmental Panel on Climate Change predict that “CO₂ [equivalent] concentrations are likely to increase to…over 1,300 ppm by 2100. If this occurs, by 2100 the planet may experience global mean surface temperature increases of 3.7⁰ to 7.8⁰C (6.7⁰ to 14⁰ F) compared to pre-industrial levels.”[4] While these estimates are based on numerous assumptions, it does not lessen the continued significance and impact climate change will have on our natural resources.
The leading causes of climate change are diverse, but transportation accounts for 26% of CO₂ emissions in the United States, second only to electricity, which contributes 30%.[5] Automobile manufacturers have however taken steps in an attempt to mitigate the impact of their industry. For example, based on its 2015 Sustainability Report, General Motors has increased the number of electrified U.S. vehicles by 9%, added three new vehicles that can achieve EPA-estimated 40 mpg highway or better, and reduced the average tailpipe CO₂ emissions of its U.S. fleet by 7.4%.[6] General Motors has also invested in solar and wind powered manufacturing plants to further mitigate its net impact on the environment. However, General Motors and automobile manufacturers alike face increasing challenges going forward, particularly in regards to new regulatory standards as well as broad consumer purchasing behavior.
New regulatory standards in fuel economy, with a target of 54.5 miles per gallon (mpg) by 2025, place a large burden of compliance on automakers, particularly given that the average fuel economy of vehicles sold in April of 2015 was 25.2 mpg.[7] Even though the 54.5 mpg target translates to 40 mpg in terms of real world driving, it still represents an ambitious goal—a goal that will force GM and others to adopt even more aggressive carbon reducing strategies. The biggest challenge, however, may come in the form of ultimate consumer demand. The hybrid and electric vehicles market represented less than 2% of U.S. sales as of summer 2015.[8] General Motors cannot then simply produce the necessary vehicles to meet the standards, it has to sell them too—a task made all the more difficult thanks to current low gasoline prices.
As potential solutions, GM should put more effort towards educating the broad consumer market on the impacts of climate change, perhaps partnering with the regulatory bodies themselves to get across a unified message. At the same time, General Motors stands to gain by differentiating itself from its U.S. competitors by taking a strong stance in the marketplace and innovating around traditionally uneconomical vehicles such as SUVs and pickup trucks. However, given the apparent disconnect between the standards and U.S. consumer demand as it exists today, what do you think is the ultimate responsibility of automakers, like General Motors, in regards to climate change? Should they bear the burden of leading the charge for change?
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Sources:
[1] “Atmospheric and Oceanic Sciences and Center for Climatic Research”, IPCC AR4 (2007), Last accessed 1/5/2012.
[2] “The Carbon Bathtub,” National Geographic, December 2009, http://ngm.nationalgeographic.com/big-idea/05/carbon-bath, Last accessed 1/5/2012.
[3] Rebecca M. Henderson, Sophus A. Reinert, Polina Dekhtyar, and Amram Migdal, “Climate Change in 2016: Implications for Business,” HBS No. 317-032 (Boston: Harvard Business School Publishing, 2016), p. 2.
[4] Ibid., p. 3.
[5] Ibid., p. 7.
[6] General Motors, 2015 Sustainability Report, p. 56.
[7] Mike Spector 2016, “Fuel-Economy Debate Comes to a Head”, Wall Street Journal – Online Edition, 25 May, Business Source Complete, EBSCOhost, viewed 23 October 2016.
[8] Ibid., p. 2.
[9] Rebecca M. Henderson, Sophus A. Reinert, Polina Dekhtyar, and Amram Migdal, “Climate Change in 2016: Implications for Business,” HBS No. 317-032 (Boston: Harvard Business School Publishing, 2016), p. 17.
I do not think that the answer is to regulate or require the automakers to create fuel efficient/electric cars. I would instead increase the incentives for the automaker and the consumer to invest in these types of cars. The average consumer wants an affordable car that is stylish and meets their functional needs. If GM can make the electric or more fuel efficient cars that are cheaper, more stylish, with better features I think that consumers would shift their purchasing habits.
You raise an interesting question of whether GM and other automakers should bear the burden of leading change. Unfortunately for the automakers, I think the answer is yes, because if they do not, no one else will.
If you take a step back and look at the automotive value chain, clearly the major OEMs (GM, Ford, Toyota, etc.) have the most bargaining power. Upstream, the suppliers are diverse and small, and downstream, the OEMs also influence the dealers. For example, GM generated revenue of $150bn in 2015 and had a market cap of $50bn, whereas BorgWarner, a major auto supplier, had revenue of only $8bn and a market cap of $7bn.
https://finance.yahoo.com/quote/GM?p=GM
https://finance.yahoo.com/quote/BWA?p=BWA
If the OEMs only had to influence their suppliers and dealers, the challenge would be manageable, but the problem is that they must change consumer behavior, a considerably more challenging task. With hybrid vehicles representing only 2% of sales, clearly consumers present a large hurdle.
As the phrase goes, you can bring a horse to water, but you can’t make him drink. Unfortunately for GM, they need to figure out how to make consumers drink the Kool-Aid of hybrid vehicles.
While a major challenge, climate change presents large OEMs such as GM a fantastic opportunity to take advantage of scale and superior resources to differentiate on technical capabilities as smaller and less capable niche players drop out due to a combination of rising regulatory barriers and the increasing price of fuel cut out the stragglers from the market.
I really appreciate you surfacing the new regulatory standards for fuel economy by 2025. I was not aware of these measures, and, to your point, the lack of consumer awareness is a large issue for GM and other automakers. Unfortunately, GM does shoulder the responsibility for beginning to lead the charge, but this should pay off for them in the long run. Though demand may not currently be high, General Motors should take the opportunity now to invest in R&D and technologies to best position the company to reach these targets in 2025. GM has the chance to take advantage of a relatively early mover opportunity in the mass market space and should be able to crowd out companies in the future who have not been as proactive, as they will need to invest significant resources in developing these efficiencies and will likely have to pass on the cost to consumers. Additionally, GM should work on targeted advertising and promotional campaigns to raise consumer awareness of this new regulatory standard.