Trying not to oversell it

Wouldn't it be great if "green jobs" could simultaneously end the recession and prevent global warming? Of course it would. But before you sit down to your free lunch, Paul Krugman reminds us that it's not quite that simple:

"...limiting emissions would have its costs. As a card-carrying economist, I cringe when 'green economy' enthusiasts insist that protecting the environment would be all gain, no pain."

UCLA economist Matthew Kahn explains why most economists feel this way:

"Many of these ideas are very much worth pursuing for environmental reasons. But it’s doubtful they offer a double dividend of helping to jump-start the economy. For one thing, the global financial crisis is fundamentally about different issues: the popping of housing and credit bubbles from St. Petersburg to San Francisco, the associated implosion of a highly leveraged international banking sector, and the resulting fallout on real economies. These pressing problems won’t be solved by switching to hydrogen-powered cars or installing solar panels on every roof.

Second, let’s be honest: Anti-carbon regulations will simultaneously create and destroy jobs. Take the United States: Given the country’s current reliance on cheap, coal-fired power plants, carbon caps will translate into higher electricity prices. (How much higher remains an open question.) Older manufacturing firms—especially in energy-intensive industries such as petroleum and coal products, paper, cement, and primary metals—will face higher costs of doing business, and this may lead them to shut down or seek international locations where electricity prices are lower and carbon regulation is less stringent.

In the long run, a little creative destruction will likely be a good thing. The same regulations that might kill jobs in smokestack industries will act to stimulate a host of new manufacturing opportunities, ranging from energy-efficient household appliances to solar panels to energy-efficient vehicles. Even former U.S. Vice President Dick Cheney might consider buying a fuel-efficient vehicle if gas prices rose enough.

But don’t count on clean technology to pull us out of the doldrums. The green revolution won’t happen overnight."

The obvious, but important lesson to remember here is that tradeoffs are everywhere. A "green revolution" is a long-term project, and in the mean time investments in alternative energy divert investment from other projects.

But it's not all bad news. Just because green policies aren't free, we can still afford them:

"Even with stringent limits, says the M.I.T. group, Americans would consume only 2 percent less in 2050 than they would have in the absence of emission limits. That would still leave room for a large rise in the standard of living, shaving only one-twentieth of a percentage point off the average annual growth rate."

So while there are no free lunches in life, there are some cheap meals, if you know where to look.

Correction: "I really can do math" edition

I recently re-read my post "Thomas Friedman on Alternative Energy" and realized I made a careless mistake. Obama proposed $150 billion for alternative energy over 10 years, which equals $15 billion per year, not $1.5 billion, as I erroneously stated.

The point remains the same, though. $15 billion is good, but it is dwarfed by the private money out there to fund alternative energy research, if the incentives were right. Of course, it doesn't have to be either/or. We can have government AND private money funding the goal of sustainable alternative energies.

Anyway, mea culpa.

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?