The Public Policy

Economic Climate Changes

When it comes to tackling global warming, innovation trumps regulation.

By 7.10.07

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Congress is considering global warming legislation to require substantial cuts in emissions of carbon dioxide (CO2), the inescapable byproduct of the fossil fuels -- coal, oil, and natural gas -- that supply 85 percent of the world's energy. China, India, and every other developing country refuse to limit their emissions because they fear CO2 controls more than global warming. What do they know that our lawmakers don't?

National Review's Jonah Goldberg notes that that Earth warmed about 0.7 degrees Celsius in the 20th century while global GDP increased by some 1,800 percent. For the sake of argument, he says, let's agree that all of the warming was anthropogenic -- the result of economic activity. And let's further stipulate that the warming produced no benefits, only harms. "That's still an amazing bargain," Goldberg remarks.

Average life expectancies doubled during the 20th century. The world's population nearly quadrupled, yet per capita food supply substantially increased. Literacy, medicine, leisure, and "even in many respects the environment hugely improved, at least in the prosperous West."

This suggests a thought experiment that I recently posed to Chairman Barbara Boxer (D-CA) and her colleagues on the Senate Environment and Public Works Committee:

Suppose you had the power to travel back in time and impose carbon caps on previous generations. How much growth would we be willing to sacrifice to avoid how many tenths of a degree of warming? Would humanity be better off today if the 20th century had half as much warming -- but also a half or a third or even a quarter less growth? I doubt anyone on this committee would say "yes." A poorer planet would also be a hungrier, sicker planet. Many of us might not even be alive.

So, how much future growth are Boxer and company willing to sacrifice to mitigate future warming? That is not an idle question. Some people believe we're now smart enough to measurably cool the planet without chilling the economy. But Europe is having a tough time (PDF) meeting its Kyoto commitments, and Kyoto would have no detectable impact on global temperature.

Three of the main climate bills introduced in the Senate this year would require CO2 emission cuts of about 60 percent (PDF) by 2050. Yet the Energy Information Administration (EIA) projects that in 2030 U.S. emissions will be about 33 percent above (PDF) year 2000 levels. Nobody knows how to meet the targets in those bills without severe cuts in either economic growth or population growth.

But won't the bills' carbon penalties make deep emission reductions achievable by spurring technological change? Don't bet on it.

European countries have been taxing gasoline for decades at rates that translate into carbon penalties of $200 to $300 per ton of CO2. (A $1.00 a gallon gasoline tax roughly translates into a $100 per ton CO2 penalty, and Europe taxes gasoline at rates of $2.00 to $3.00 (PDF) a gallon or more.) Where in Europe is the miracle fuel to replace petroleum? Where are all the zero emission vehicles? Europe is not one mile closer than we are to achieving a "beyond petroleum" transport system. On the contrary, European Union transport sector CO2 emissions in 2004 were 26 percent higher than in 1990.

The EIA analyzed the market impacts of the relatively modest -- $7 per ton -- CO2 emission cap in "discussion draft" legislation sponsored by Sens. Jeff Bingaman (D-NM) and Arlen Specter (R-PA). The bill's proposed cap would cut projected investment in coal generation by more than half (PDF). However, it does not make carbon capture and storage (CCS) economical. Would a bigger regulatory hammer do the trick? No, it would just drive more investment out of coal generation.

An MIT study (PDF) finds that it will take billions of dollars over a decade to find out whether CCS is economical under a $30-per-ton CO2 penalty. Note that even if CCS is determined to be "economical," the MIT study estimates that coal generation over the next five decades grows by less than 20 percent of what it would in the absence of a carbon penalty.

Regulatory climate strategies put the policy cart before the technology horse. Not until markets are capable of producing vast quantities of affordable energy without emissions would it be reasonable for Congress to consider mandatory emission cuts.

Policy makers concerned about global warming should do three things. First, as Danish statistician Bjorn Lomborg recommends (PDF), encourage worldwide R&D investment in non-carbon-emitting energy technologies. This -- not tougher CO2 controls -- should be the focus of post-Kyoto diplomacy.

Second, eliminate tax and other political barriers to innovation and capital stock. A recent study (PDF) by the American Council for Capital Formation shows that the United States lags behind many of our trading partners in capital cost recovery for investment in electric power generation, transmission lines, pollution control equipment, and petroleum refining capacity.

Third, as economist Indur Goklany recommends (PDF), for a fraction of Kyoto's cost, target international assistance on those threats to human health and welfare where we know how to do a lot of good for each dollar invested. This would not only save millions of lives today, it would also help developing countries become wealthier and less vulnerable to climate-related risk.

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About the Author

Marlo Lewis is a Senior Fellow at the Competitive Enterprise Institute.