## Wednesday, September 10, 2008

### Thomas Friedman on Alternative Energy

Here's Thomas Friedman talking about his new book and his views on global warming (here's the link from Environmental Economics):

I like that Friedman makes the following points:
1. According to the best information, Global Warming is real and requires action
2. This is a problem that can't simply be solved by government throwing money at it.
3. The price of gas does not reflect the environmental impact of carbon emissions
The issue with number 2 has to do with both incentives and scale. As far as incentives go, government spending is subject to political considerations, rather than efficiency or efficacy. Government mandates and subsidies for corn-based ethanol, for example, have more to do with the political power of the argibusiness lobby than the potential for ethanol to replace petroleum. And we've all seen how that's worked out.

Beyond incentives, there's the issue of scale. Obama, for example promises to invest $150 billion of government money over the next ten years in alternative energy research. That's a good start, but it's only$1.5 billion per year. Exxon-Mobile alone invested $80 billion in oil exploration between 2002 and 2006, or$20 billion per year. There's plenty of private money out there for alternative energy research, if only there was an incentive to invest it...

That's where number 3 comes in. While the political debate has focused on the price of gas being too high, many economists and environmentalists think that the real problem is that the price of gas is to low. As the price of a commodity goes up, people use less of it, try to make more of it, and try to find a cheaper alternative. Probably the best way to make this happen is to place a tax on carbon emissions, so that the environmental impact of using fossil fuels is reflected in the price.

Politically this is a no-go. American families are hurting from inflation and what may or may not be a recession. A candidate promising higher gas prices probably would get less votes than a Mike Gravel/Dennis Kucinich ticket. However Ted Gayer, writing in the American, makes the case more palatable for voters:
The harmful effect on labor supply can be at least partially offset by using the revenues collected from the pollution tax to reduce inefficient taxes. For example, the revenues can be used to lower marginal income tax rates, or perhaps to lower the deficit (which amounts to a future income tax reduction). Economists don’t like to see benefits go to waste, which is why Mankiw’s Pigou Club Manifesto highlights the pro-growth tax component of “an increased reliance on gas taxes over income taxes.”
Revenue from a Carbon Tax could also be used to offset a reduction in payroll taxes. That way we create a disincentive to pollute and an incentive to work. This is good for the environment and good for the economy, and could be enormously popular if properly sold. Any candidate interested?