中 央 大 学 経 済 研 究 所

Discussion Paper Series No.134

The Sustainable Framework of Climate Change andFinancial

Crisis 2008-09 .

Hiroshige TANAKA

October 2009

THE INSTITUTE OF ECONOMIC RESEARCH
Chuo University
Tokyo, Japan

The Sustainable Framework of Climate Change andFinancial

Crisis 2008-09 .

Hiroshige TANAKA
Professor of Faculty of Economics, Chuo University, Higashinakano
742-1,Hachioji-city, Tokyo 192-0393, JAPAN.
Abstract
The model indicates the optimal conditions theoretically that make suresustainable framework of the climate change for global multi-stakeholder
society. The conditions are decided in a given parameter such as scheme ofinternational cooperation, monitoring system, market price of carbon. Thismodel expresses the relation between economic and social activities of thecorporation and parameters regarding international public policy. We could
manage the policy instruments according to indexes funded by the optimal
conditions. This model analysis makes clear that development and decline ofglobalization is controlled by the countervailing interaction between thenegative and positive stakeholders. Proceeding to a common target of climatechange facilitates sustainability of communities economically, socially andenvironmentally. London Accord could refer some indexes presented here toconstruct efficient policy system1.
Keywords: Climate Change, Globalization, Financial Crisis, Innovation ofEnvironmental Technology.
1. Introduction
Climate change is a common challenging target for the world.
Globalization in economic and social system has been expending rapidly from1980s. The globalization causes large scale of developments, some
Corporation of London (2006), The London Accord(2007,2008,2009) publish on thisprogram. This paper develops theoretical analysis based on
Tanaka(2007a),(2008),(2009)1

1

environmental problems and enlargement of earnings differentials
simultaneously in many countries and area. As large number of people
refuse negative effects such as environmental problems and enlargement of
earnings differentials, the globalization encountered anti-globalization
movements. If the negative damage of globalization could not be mitigated,
the globalization could not be accepted as a prime principle of the world2.
So many policies of the mitigation have been proposed and executed. The
mitigation are only on the way to make some effects and have many
problems to be solved as follows. Policies on climate change sometime
intend to slowdown the economic development accelerated by the
globalization. On the other hand, the policies contribute to make sure thesustainability of the globalization in some aspects.
The world financial crises in 2008-09 made serious damage to the world
economy. Recovering the recession in the world economy could not be
achieved without the benefits of the globalization. Many policies to cope withthe slowdown of economies stems from the financial crisis of 2008 seek toprevent the total breakdown of economies. But some are targeted toaccelerate the innovation of environmental technology. US and Japanese
governments initiate industrial strategy to promote anti-carbon technology
in car and electric power industry in 2009. Without globally networking
markets any government could not execute adventurous strategy ofenvironment. In general, globalization has been increasing economic
activities all over the world. Consequently, the movement of globalization
tends to make negative effects on climate change. But anti-carbon ecological
technology innovation accompanied by competitive market mechanism ofglobalization is expected to be realized in the relief project of the world scale
recession from 2008. The expanding economies on the flag of free market or
free trade are one of the major driving forces of globalization. On the world
recession many governments intensively attempt to recover the domestic
economies so that free trade could not propel globalization powerfully. The
purpose of this paper is summarized as follows. First, employing an
integrated model this paper makes clear analytically that development anddecline of globalization are determined by the countervailing interaction
The subject regarding globalization and sustainability is discussed in
Salih(2009).Guesnerie and Tulkens(2008). Dawson,B. and M.Spannagle(2009) review
the theoretical analysis of globalization and sustainability.
22

between negative and positive stakeholders. Second, proceeding to acommon target of climate change facilitates sustainability of communities
economically, socially and environmentally3.
The construction and main results of this paper is sated as follows. In thesection 2, the model analysis of corporate social responsibility(Tanaka(2004)) is applied on the globalization4. In the section 3 makes clear
the theoretical relation among climate change, globalization and financial
crisis. The section 4 focuses on the influence that the positive andnegative stakeholders affect in the cycle of globalization. The section 5
develops incentive analysis on the market price of carbon. The section 6
states the conclusion. We state main result briefly.
Proposition 1 demonstrates the reason that we should make an effort toinduce the corporation to commit the community more positively in theprocess of globalization. Proposition 2 proves the following three results.
First, the international agreement or standard construction for the climatechange restores the sustainable management of corporation. Second, the riseof carbon market price, lowering emission upper limits of emission,
strengthening monitoring standard make the corporation more positive
toward the climate change. Third, those policies initiate to stimulateinnovation of environmental technology. Proposition 3 proves the mechanismof globalization is explained by comparing the evaluations in the both thenegative and the positive stakeholders. The section 6 make clear the relation
between the market price of carbon and the environmental effort of thecorporation.
2.The theoretical model of multi-stakeholders communities
We consider the sustainable management of corporation in the context ofclimate change. Multi national corporations could not be protected by only asingle state and must be accepted by global communities. Since thecorporation is supposed to perform sustainable management, it seeks not
only the private activity such as production to attain the profit, but also the
public activities such as observance of regulations, CSR( Corporate Social
Responsibility). x denotes the total amount of outputs. Each corporation
Dawson and Spannagle(2009),Guesnerie and Tulkens(2008) and Stern(2007) offer uscomprehensive information of climate change.
4 Tirole(2001)develops theoretical foundation on corporate governance.
33

performs managements based on internal and external evaluation. Many
indexes or methods on the evaluation of management are developed largely.
The private net benefit such as profit, market share and financial
performance is evaluated by the method adapted by the corporation andrepresented by  (x) .
We assume that corporations make decision in the multi-stakeholders
community 5 . The stakeholders receive some benefits or costs from thecorporation. When consumers are not satisfied with prices or quality of the
product, they will not buy the products of the corporation. Depending on
their valuation the stakeholders might change the relation with thecorporation. The corporation researches requests or satisfaction levels of
consumers in many ways. Shareholders make benefits from theimprovements of the performance indexes to influence the stock market price.
Shareholders are interested in the evaluation of management performances.
Each stakeholder makes an evaluation of the corporation in their interests.
The stakeholders depict the various evaluations of the corporation. The wellknown theory of principal and agency economic model assumes asymmetric
information between the corporation and stakeholders. The corporation
could influence the evaluation of stakeholders by employing effective means.
The corporation pays t i such as benefits for employee, environmental costs
and contribution to the local communities for stakeholder i to survive inwell managed relationship between n stakeholders. So many types ofinvestments are not expected to increase the amount of sale or profit directlyin the large scale. However, such investments might obtain effects toimprove evaluation of consumers and investors. The investment in advanceis necessary for corporations to perform sustainability management. In thispaper by developing the model initiated in Tanaka (2004) we make clear
theoretical relationship among the financial crisis 2008-09, the innovation oftechnology on climate change and the recent trend of globalization. The
investment to delete CO2 emission raises the expectation or evaluation of thecorporation by governments, habitants and shareholders deeply interested
with environment. This type of investment to accrete environmental
innovation is dented by t i . Although so many types of payments t i should
be investigated, we consider mainly investment for environmental

5

Nyssens(2006) discusses

multi-goal and multi-stakeholder organizations.
4innovation6. Total payment for stakeholders t is defined bynt   ti .
i 1

Stakeholder i observes the influence of the firm and evaluates Vi ( x, ti ,  )for the production activity x and payment t i for stakeholder i . The modelis revised by adding parameter  reflecting expectation. The asymmetric
information assume that the corporation could not obtain the accurate
information of evaluation Vi ( x, ti ,  ) by i . We refer Vi ( x, ti ,  ) for a pair
( x, ti ) to external evaluation by stakeholder i . In particular, when theshareholder is denoted by j, the shareholder value is represented by aV j ( x, t j ,  ) . To simplify the analysis we employ the following notation.

The

investment of environmental innovation is exhibited by t i . The innovationinfluences on l stakeholders such as the shareholder, governments, suppliers,
residents. When the effects of the innovation is denoted by t j1 ,  , t jl , it isassumed that the equationt i  t j1    t jl
is satisfied. The payment for stakeholder i t i is not necessary to correspondto a single term, but integrated by multiple terms.
The total value of external evaluation is expressed byn V ( x, t ,  ) .
i 1

i

i

It is assumed that the payment t i improves external evaluation
Vi ( x, ti ,  ) by stakeholder i. Vi ( x, ti ,  ) is monotonously increasing witht i .The inequality

Vi
0
ti

is satisfied. It is supposed that the stakeholder isets ideal evaluation value Vi * and that this higher target value could not be
achieved. This assumption is expressed by
Vi *  Vi ( x, ti ,  ) .

6

Other types of payments t i are discussed by Tanaka(2005) ,(2006),(2007a)and (2007b).
5

As the value of Vi*  Vi ( x, ti ) increase, stakeholder i will require thecorporation to improve Vi ( x, ti ,  ) more positively by using effective means.
If the corporation does not make better i ‟s evaluation, it might suffer social
sanctions such as suit by the residents, boycott of the consumers andenforcement of a tightened regulation by the authority. Vi*  Vi ( x, ti )indicates the social cost evaluated by i . The social cost should be sharedwith the corporation and stakeholders. The allocation of the social cost isdetermined for a long term verification and bargaining. The firm is obliged
to pay a part of social cost as ci (Vi*  Vi ( x, ti ,  )) with a positive coefficient ci .
ci means a forced cost for the management and is refer as a risk indicatorof sustainability for i .When Vi*  Vi ( x, ti ,  ) means emission beyond thelower target to emit CO2 , the corporation must purchase the emission
permits by price ci . The emission tax for is explained similarly by ci . As
ci increases, the corporation becomes to suffer greater risk for sustainable
management regarding to i . We confirm straightforwardly that

ci Vi*  Vi ( x, ti ,  )c V i i 0ti
ti
is satisfied. The corporation decreases the social cost and the risk with iby payment t i . We conclude that organizing scheme or standard to induce
firms to increase t i is an appropriate method to promote CSR. Maintainingt i appropriately makes effort on sustainable management for many
corporations.
Stakeholders have complicated interests with the corporation.
Stakeholders are classified into two types. The stakeholders whose
evaluation is increasing function of x are named as positive stakeholder.
In many cases employees and suppliers might be classified in positive
stakeholder. On the contrary, the negative stakeholders are defined to havedecreasing functions of x . The environmental NPO is the representative ofnegative stakeholder for manufactures. The corporation could obtaincommon interest with positive stakeholder relatively easy. It sometimes
conflict with negative stakeholders.
The corporation seeks to obtain accurate information of the total value of6

external evaluation for sustainable management. It must pay large amountof costs and efforts for this purpose. As many parts of the external
evaluation are obtained by stakeholders, we construct communication
mechanism, such as monitor, audit, between the firms and stakeholders.
Well maintained communications prompt sustainable management. The
firm could estimate  percentofn V ( x, t ,  ) .
i 1

i

i

Although  does not

improve it‟s profit directly,  implies the function of communication
between the firm and stakeholders. As the corporation involves to improvethe external economies,  is supposed to increase.  is referred toaltruistic coefficient in this essay.  is an efficient indicator for sustainable
management7. In the network community, each stakeholder i contributes
y i to improve the altruistic coefficient  8 . The total contribution isrepresented by y ( y1    y n ) .  is increasing function of y ,d 2 ( y )d ( y )
 0.
 0,
(1)
dy 2
dy
It is assumed that y i is determined by outside organization i to influence

the consideration of the firm to externality. When a fund of SRI k isrepresented by y k 9,the fund makes effort to induce other stakeholders to
persuade the corporation moving into sustainable management. It is
assumed that for the stakeholder j agrees with the SRI to move towards
sustainable community, the inequality
dy j
(2)
0.
dyk
is obtained. For stakeholder j who is indifferent to the SRI fund theequality
dy j

dyi

0

(3)

is satisfied. To simplify the analysis we consider the communities ofindifferent stakeholders in the following section.
3.Climate change, globalization and financial crisis
The climate change requires a cooperative global framework.

The object

Barrow(2006) offers us fundamental information of environmental management forsustainability.
8 Tanaka(1998) considers operational aspect of altruistic concept.
9 Tanaka(2005) attempts to apply the CSR model of Tanaka to financial projects.
7

7

function of net social benefit for sustainability is written byn ( y ) Vi ( x, ti ,  )  yi .

(4)

i 1

The first order optimal condition of y i* is expressed byd n Vi ( x, t i ,  )  yi*   ( y * )  0 .
dy i 1(5)

Considering that (5) is rewritten by ( y )1
 n,
 ( y)
 Vi ( x, ti ,  )  yi 

(6)





i 1

d

and that the left side of (6) is decreasing with regard to y ( ( y ) ( y)dy 0 ), wecould conclude the following results.
Figure 1. Construction of global framework for the standard.
A

B

C

1

D
n

 V ( x, t , )  y n V ( x, t ,  )  y 
i 1

E

i

i

i

i 1

F

i

i

i

G

 ( y ) ( y)

Hy0
Proposition 1

As the diversity or externality of multi-stakeholder

8communitynenlarges  Vi ( x, ti ,  )  yi  in the process of globalization, wei 1should make an effort to induce the corporation to commit the community
more positively.
The expression (6) is depicted in the figure 1. As the number of stakeholdernincrease in the globalization, total external evaluation  Vi ( x, ti ,  )  yi  alsoi 1raises. The left side of (6) is expressed by the line AH. The right side is drawn
by the line BD and EG. The globalization and climate change moves the line
corresponding to the right side BD to EG. The solution of (6) is shift frompoint D to point E. The optimal y is increasing in the process of globalizationand climate change. It becomes more effective means in our global
communities to make clear the total external evaluation by forming
communication among stakeholders. We must have the systematic approachfor the policies to improve y. It is difficult to construct social framework toarrange y. But some efforts such as the conventions of the climate change
seek to influence y.
The formulation defined by Tanaka (2004) is applicable to investigation on
globalization and climate change. The object function for sustainable
management is expressed by
n

n

i 1

i 1

NB   ( x)   ( y ) {Vi ( x, ti ,  )  yi }  t   ci (Vi*  Vi ( x, ti ,  )) , 1    0 .

The firm seeking sustainable management determines(7)

x, t1 ,  , t ntomaximize the Net Benefit (NB). The first order conditions of maximization
are written by10n
V ( x, ti ,  )   (  ci ) i,
x i 1x
1  (  ci )i  1,  n,Vi
, i  1,  , n.
ti

(8)

(9)

Equations of (8) show that the share of positive and negative stakeholders
could influence the activity of the corporation. The two types of stakeholders
The optimal conditions (8) and (9) are referred as the basic conditions in many papers.
For example, (6) and (7) of Tanaka (2006) correspond the conditions.
109

have different roles in the communication of global communities. We
Figure 2.

Control policies of economic performance by the negative
stakeholders.

B

A

C

 , ci n  (  c )
i

i 1

D
E

Marginal ProfitVi ( x, ti ,  )
x

d
dx

F

0

x

Figure 3. Communication between firm and stakeholders.

AB , ci 1  ci

F

G

C

E

D

Vi
t i
H
0
10

ti

consider the mechanism of communication later. Let us investigate
implications of (9) first. Notice that (9) is transformed intoV1
 i , i  1,  n,(10)
  ci tiandVi
is supposed to be decreasing with t i . (8) and (10) are depicted by
t i

Figure 1 and Figure 2. It is concluded that an increment of risk indicator ci
or altruistic coefficient  increase the right side of (8) and lowers value of(10) for negative stakeholder i and increases payment t i for positive andnegative stakeholder i . The well known Coase theorem implies theeffective approach of communication between the corporation and negative
stakeholders. But the investment for environmental innovation appears
as a cost at the present. But it is evaluated by the shareholders as thepromising profits for the future and by green consumers as an effective
contribution for climate change. In the context of the climate change theproposition 2 obtained.
Proposition 2 First, the international agreement or standard construction
for the climate change restores the sustainable management of corporation.
Second, the rise of carbon market price, lowering emission upper limits ofemission, strengthening monitoring standard make the corporation morepositive toward the climate change. Third, those policies initiate tostimulate innovation of environmental technology.
4.Mechanism of globalization and common target for climate change
Stakeholders are assumed to be divided into positive and negative
stakeholders. The globalization from 1980‟s and financial crisis 2008-09 areinvestigated appropriately by properties of the two types of stakeholders.
P indicates the set of positive stakeholders. N expresses the set of negative
stakeholders. The summation of number of P and N is equal to n. (8) istransformed intoV ( x, ti ,  )V ( x, ti ,  )   (  ci ) i   (  ci ) i.
(11)
x iPx
x
iN
The first term in the right side of (11) is negative and the second term of it
is positive. When the evaluation by the positive stakeholders increases
relatively in comparison with the second term in the right side of (11),11the value of (10) decreases. On the contrary, increments of relativeevaluation by the negative stakeholders raise the value of (11). Since themarginal profit of the output


is decreasing, the evaluation of thexnegative stakeholders affects to decrease production and the evaluation of
positive stakeholders make effect to increase production. Suppose that thecorporation is a representative one in the global economies. This paper
makes clear that the balance of evaluations in the two types of stakeholders
could explain the mechanism of global economies between the globalizationfrom 1980s and financial crisis 2008-09.
Figure 4 depicts the relation expressed by (11). One of the outstanding
features of the globalization is increase of numbers of stakeholders n. In
particular, enlargement of stakeholders in the global economies reflects thefoundation of G20 in addition to G7 from 1999. On the upward stage ofglobalization increase of n and minus impacts of the first term in the rightside of (11) make effects relatively. Consequently, in this stage (11) tends todecrease and approximately corresponds to the lowest line 0G. At the boomof the globalization the solution of (11) is indicated by the point H and showsthe enlargement of world economies. The globalization makes market frailer
in large scale especially differentiations of incomes and global
environmental problems. In this stage evaluation of negative stakeholder isincreasing. The financial crisis of 2008-09 adds abrupt shrinkage ofevaluation in positive stakeholders to the downward moving fundamental
trend of (11). By employing parameter  , the relation is stated by thefollowing inequalities.  1 and  2 indicate increasing and decreasing stage
each other.
Vi ( x, ti , 1 )
Vi ( x, ti ,  2 )
>
>0
x
x

0>

Vi ( x, ti , 1 ) Vi ( x, ti ,  2 )>x
x

for i  P
for i  N

(12)
(13)

Summing up (12) and (13), the inequalityV ( x, ti , 1 )
V ( x, ti , 1 )
 (  ci ) i   (  ci ) i

x
x
iP
iN
   (  ci )iPVi ( x, ti ,  2 )V ( x, ti ,  2 )   (  ci ) i
x
x
iN

12

(14)

is satisfied. Remindingdin (11)dx

is decreasing with x, the following

proposition 3 is ensured from (14).
Proposition 3. In the initial stage of globalization economies tend to enlarge
excessively by the evaluation of positive stakeholders and increase of
stakeholders. But in the latter stage of globalization economies are
depressed by revising evaluation in the both the negative and the positive
stakeholders.
Considering policies to maintain or to improve global economies, we should
recognize the effects of those policies on evaluations of stakeholders.
Figure 4 shows the implication of Proposition 3 by graphical consideration.
Figure 4. Financial crisis 2008-09.
B
C

A

E
n

  (  c )
i

i 1

F

Vi ( x, ti ,  )xGHMarginal Profit
K

0

d
dx
x

The solution of (11) in the initial stage of globalization is denoted by point H.
Point E is the solution of latter stage. The globalization expands
economies from the point F to the point H. After the boom revise ofevaluation of stakeholders bring economies from the point H to the point E.
The financial crises which occur in the latter stage of the globalization
sometimes amplify shrinkage of economies in the large scale. The crisis of13

2008-09 might be remembered as a representative example of the
proposition 3.
When we concern the positive stakeholder only, (8) is depicted by Figure 4.
Reminding that Figure 2 is the counterpart of Figure 4, risk indicator ci or
altruistic coefficient  represents reverse policy implication between the
two types of stakeholders.
It is concluded that an increment of risk indicator ci or altruisticcoefficient  decrease the first tern in the right side of (8) for the positive
stakeholder i and raises the economic activity. Improvement of evaluation ci
and increase of  byfounding global standard stimulate the corporation to enlarge economic
activities. Figure 5 depicts the above relation in community composed bypositive stakeholders only . Increase of ci or  shifts the point B ofsuch as shareholder value and market credits

solution (8) to the point D in this figure and encourages the economies.
Figure 5 Positive stakeholders and global economies
A
Marginal Profit

d
dx
0

V ( x, ti ,  ) (  ci ) i

x
iP

B
D

 , ci 

F

x

C

E

A significant driving force of globalization is the enlargement of economies
in expanding process of global markets. On the contrary, in the decreasingstage of global markets the driving force loses the dominant power. It
appears to be reasonable that the benefit of globalization could not sustain
for a long period. It is becoming much more important to make clear the14

sustainability of the global economies.
Proposition 3 implies that the process of globalization cloud not be
expanding for a long time and that the mechanism are controlled by thecountervailing functions of the positive and negative stakeholders. It argues
also the possibility that the balance of the two powers triggers excessive
contraction of global economies such as financial crisis 2008-09. We should
prevent great fluctuation in global economies and societies to attainsustainability. The net benefit of the multinational corporation is exhibitedby (7). The global framework to increase  raise the relative value ofn ( y ) {Vi ( x, ti ,  )  yi }  ti 1

and could mitigate fluctuations occurred by the market economies
in the global communities. To share a common target for climatechange in the world make the effect to improve  . Proposition 2
implies that the target gives impulse to accelerate investment
for environmental innovation.
5. Incentive and index for the climate change
The incentive analysis focuses on the effect of environmental policy
instrument considered in the previous sections. The theory explains that thecreation of market price increases the deletion of carbon as follows.
It is assumed that firms perform two types of activities, the ordinary
economic activity and environmental activity. The environmental activity
seeks largely to reduce emission of CO2 . The level and price of ordinary
economic activity are denoted by y and p. The ordinary economic activity
uses input x1 with price r1 ，and makes effort e1 . In the environmental
activity the market is not established well. The firms must seek economic
rationality. Without output and value in environmental activities the firms
could not perform rational management. The firms are supposed to manage
to evaluate the values from the markets. Although the firms are sure perfectevaluation of the values, we assume that the evaluations are derived fromthe market information. Since imperfect information might mislead thedecision of the firms, estimating the most appropriate estimation for theenvironmental management is important theme. Since q is assumed to bemarket valuation of the environmental activity, we refer q as the rate of15

environmental earning11. We have the approach to estimate that deletion ofemission and market price of carbon, are expressed by z and q. In this paper,q means the market price of carbon and grant of government for the deletion.
The environmental activity uses input x 2 with the price of r2 ，makes effort
e 2 . The two types of activities are exhibited by，y  f ( x1 , e1 )(15)
z  g ( x2 , e2 )(16)
Total amount of efforts are constant E. The equation E  e1  e2 . Firms spend
r2 x2 to achieve emission regulation as a sunk cost. Firms make effort
e 2 voluntarily beyond the level of regulation.

Financial constraint ofenvironmental activity is expressed byqz  e2  0 .

(17)

Net benefit is defined by  py  qz  r1 x1  r2 x2  E .

(18)

The optimal condition of production is derived from Lagrange expression
L  pf ( x1 , e1 )  qg ( x2 , e2 )  r1 x1  r2 x2  E   (qz  e2 ) .
(19)
 is Lagrange multiplier. The first order condition is obtained bydifferentiating partially (19) with regard to x1 , e1 , e2 ,  . To consider incentive
effects of carbon market, we investigate voluntary variable e 2 . It is assumed
that e 2 is positive. Regarding e 2

e2

L
g
 (q
 1)(1   )  0
e2
e2

(20)

L
g
 e2 (q 1)(1   )  0
e2
e2

(21)

hold. (1   ) >0 is supposed to be satisfied. When t is equal to zero in (21), e 2
is equal to zero at the same time. From (20) and (21), it is assured that
q

1
g
e2

(23)

is satisfied. Employing (23) we could estimate the incentive effects of carbon
market. In other words, (23) explains the relation between market price ofcarbon and effort to reduce carbon emission.
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Tanaka(2000) explains theoretical framework on the earning rate of environment.
The empirical researches of this rate are developed such as Tanaka(2006).
11

16

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Acknowledgments
I note that this essay is a result of „Advanced Professional Educational
Program of Managing Public and Private Partnerships towards Vitalizationof Communities ‟in “challenging project on innovating reform in high quality
method and program of university education” by Japanese Ministry of
Education, Culture, Sports, Science and Technology 2008-10. . I acknowledge
Mr. Simon Mills, Sustainable Development Coordinator in the City of
London, and Professor Michael Mainelli of Z/Yen for offering current
materials of sustainability program developed by the City of London .

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