The Green Economic Revolution: Will it Destroy Our Economy?

By Charles Kirchofer, April 4th, 2009

Barack Obama and other world leaders have been talking a lot about a sort of green industrial revolution. The hope is that this will create new, high tech jobs, reduce the US and other western countries' dependence on foreign oil and energy supplies, and, of course, help the environment by curbing greenhouse gas emissions, along with other environmental benefits. These benefits, it is hoped, will outweigh the costs. Sure, some jobs will be destroyed by higher energy prices and/or taxes, but these will be replaced by a plethora of jobs in green energy and in other areas that benefit from the technology developed in the green energy sector. The reductions in greenhouse gas emissions will benefit the world by saving it money on things like building dikes and levees and transporting water to newly dried out regions, not to mention the benefits received by the world's poorest, who will all too often be unlikely to implement such measures to protect themselves from climate change. The benefits to security and political stability are clear: the US will enjoy greater security and independence, fights over oil will be less likely and will open the door to fair negotiations on peace in the Middle East, or so it is hoped.

But will all that is hoped for really happen? I think this depends more on the way the plans are enacted than on whether they are enacted. There are good ways and bad ways to do just about everything. Unfortunately, from what I've heard so far, Congress is looking to do it the bad way, although there is hope that a more pragmatic Obama may lead them to better decisions.

Cap and trade: Why it's a good idea
An externality is something a company produces that it cannot charge for (or is not charged for). They can be positive or negative. For example, an externality of Coca-Cola advertising for its products is that some people might to be enticed to buy cola in general, but not necessarily Coke. In this way, Coke's advertising provides a service for all cola producers that they don't have to pay for - a positive externality. Pollution is a perfect example of a negative externality. Companies (and people) produce it, and the cost is spread around to everyone. Negative externalities are examples of market failures, areas where the market does not provide the best result for everyone. In these situations, government must step in. No one would argue that the government should let companies dump toxic chemicals into our water supplies, etc. All right, but the way government steps in is perhaps more important than whether it does.

CO2 production is a perfect example. It costs everyone, but the costs are not immediate and are not felt by its producers. There are two ways to make the costs more immediate: a carbon tax and a cap-and-trade system. Though it is more complicated, I prefer a cap-and-trade system because it encourages carbon emitters to either reduce or balance their emissions, both of which can be beneficial. With a carbon tax, this flexibility does not exist. The great thing about the balancing is that companies would then have an incentive, for instance, to buy up plots of rainforest and protect them. This is a double-edged sword of adding value to rainforests and natural lands (which are valuable, but their monetary value is generally underpriced) and increasing the immediate costs of releasing carbon. The flexibility would also allow companies to decide themselves the best way to invest money: buy more carbon credits, reduce carbon emission by increasing efficiency or changing energy supplies, or acquiring more credits through the purchase and maintenance of natural areas, which would allow them to "grow" their own carbon credits. In the future, some companies might exist only on the basis of "producing" carbon credits through conservation. The number of credits in the system would be reduced each year in such a way that the price of carbon rises at a somewhat faster rate than inflation, but not so fast that it kills industry.

Cap and trade: Difficulties
Cap and trade is not without its political difficulties. Aside from cost concerns (which can be continually adjusted, by the way), senators from states that rely heavily on coal and other carbon-intensive industries don't like the idea. Cap and trade would hurt their states more than others. This is where the inefficient politics of earmarks comes in. It might be necessary to divert some of the proceeds from the cap-and-trade system back to the very states that pay most in the form of subsidies. This is perhaps not such a bad idea as long as the subsidies aren't flowing back into the very industries that are paying most. That would obviously be pointless. Instead, the money should be used to help states adapt. Besides, it is still unlikely that the demand for coal is just going to disappear - the carbon credits should not be so extreme. They should encourage a sustainable shift to greener methods. After all, we can't move away from coal if we have nowhere to move to. Coal will be made more expensive, but consumers will still pay for it until other possibilities arise. But those subsidies might help to make the shift for workers in those states affected easier.

This would still be OK. It is my feeling, however, that that should be the end of the subsidies. Once the market failure of negative carbon emission externalities is removed by the cap-and-trade plan, private investment will be able to provide the green solutions we need (after all, "necessity is the mother of invention"). I simply do not believe the government is good at picking the winning technologies. I also think private funds, not public ones, should be risked on the project. Big investments in infrastructure (like direct current transmission wires), due to their massive scope and scale, are an exception, as such a project can only succeed with government assistance. This doesn't mean that the government shouldn't help green technologies in other ways, for example by creating legislation conducive to the types of development needed (making it easier to get permits for windfarms and to use government land for them, for example). This way, the private sector can be steered to produce the technologies we desire, but will be encouraged to find the most efficient and cost effective technologies. This is something that happens less often when politicians, wedded to specific ideas and special interests, get involved. When a politician hears about something and turns it into a pet project, he or she is much less likely to abandon that project when it becomes apparent that it is destined to fail. CEOs are less sentimental.

Although Barack Obama might agree with the above plan (although he also plans to spend a lot more on subsidies than I would like), Congress looks set to mire the entire project in earmarks and subsidies that would drive up the cost of curbing emissions dramatically. In the end, such acts could end up getting repealed as their costs are seen. That would give green ideas in general a bad name, and that would be a real shame.

Oh yeah, and it's also time to divert agricultural subsidies into this project. They are not needed and they are hurting the poorest in developing countries. Agricultural subsidies currently cost more than a solar "Grand Plan" would cost. They are politically popular, but hurt many and are a total waste of money and a misallocation of resources. Get rid of them!


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