On the other hand, free-markets do an exceptional job of finding solutions to economic problems. Productivity growth is not simply being able to produce more goods with the same amount of labor. Productivity growth also includes being able to produce more goods with the same amount of energy. Over the years, the United States has been exceptional at reducing the amount of energy it needs relative to the amount of goods that it produces. Based on data from the U.S. Department of Energy, every year the U.S. economy becomes more energy efficient. On average, each and every year since 1990 it has taken 1.9 percent less energy to produce the same amount of output.

Of course this rate has not been constant throughout time. During the late 1970’s and early 1980’s our energy efficiency increased to an average of 2.7 percent a year in response to the oil supply shocks of the 1970’s. When oil prices stabilized and subsequently fell to very low levels in the late 1980’s through mid 1990’s, our energy efficiency similarly fell. During these times, our energy efficiency increased by an average of only 0.9 percent a year.

The experiences of U.S. energy efficiency and Danish economic growth teach several important lessons with respect to good energy and global warming policies. First and foremost, economics matters and people respond to incentives. As a consequence, energy efficiency does not require a government decree. Businesses and families have an incentive to appropriately economize on their energy use when energy is scarce or expensive.

Second, government decrees that interfere with the market process, such as the government programs in Denmark, do not come without a cost. Forcing businesses and families to change their behavior based on uneconomic justifications, leads to uneconomic outcomes – slower growth, declining relative wages, and declining relative productivity growth.

Lastly, but perhaps most importantly, the key to successful global warming policies is to ensure that the global warming polices are also successful economic policies. In so doing, both economic growth and optimal energy consumption can be achieved.