Need Growth, Think Global Warming?

Posted: May 03, 2008 12:01 AM
Need Growth, Think Global Warming?

In the “Ship of Fools”, Sebastian Brant remarked: “The world wants to be deceived”. We want perfect abs in only “5 minutes a day”. We want fat free ice cream that actually tastes good. And, in this vein, environmental activists claim that global warming regulations actually create economic growth. Such a claim simply throws common sense, and good economics, out of the window.

The most popular global warming regulatory scheme is called cap and trade regulations that limit industrial emissions of greenhouse gases. Because of our current technology constraints, limiting U.S. emissions limits our use of energy and, consequently, our economic growth.

Despite the energy constraints, a recent EPA analysis comes to a different conclusion. When evaluating the impacts from cap and trade regulations on the U.S. economy, the EPA actually claims that our economy will grow at basically the exact same rate over the next 20 years regardless if we impose cap and trade regulations or not. Other studies have gone even further. Professor Daniel Kammen from U.C. Berkely, in testimony before the Senate Committee on Environment and Public works claimed that global warming regulations would help create:

“A new wave of job growth – both ‘high technology’ and ones that transform ‘blue collar labor’ into ‘green collar’ opportunities. The combination of economic competitiveness and environmental protection is a clear result from a systematic approach to investing in climate solutions.”

Fred Krupp, president of the Environmental Defense Fund, explained the logic behind these claims in a recent Wall Street Journal editorial. According to Mr. Krupp, there is no shortage of entrepreneurs trying to bring innovative clean energy technologies to market; and these technologies are nearly ready for prime time. But, without cap and trade regulations, the financial support behind these technologies is insufficient. Once a cap and trade regulatory regime is established, billions of dollars will flow to these entrepreneurs and clean technologies will be a reality.

Krupp’s argument defies its own logic. Throughout the history of the United States, entrepreneurs have been bringing new and better technologies to market in response to consumer demands. Surely, the public would willingly purchase environmental friendly products that are of similar quality and price to our current technologies; for instance using solar energy for home electricity as opposed to using coal energy. If this is the case, then entrepreneurs and financiers have an incentive to bring these new technologies to market with or without cap and trade legislation.

Since Krupp argues that cap and trade legislation is a necessary precondition for these technologies to come to market, it must be the case that consumers are not willing to purchase electricity generated from solar energy in lieu of electricity generated from coal energy. This unwillingness must arise because solar energy is currently an inferior product compared to coal energy. Because of the economic inferiority of solar energy, cap and trade legislation is necessary to “handicap” coal energy in order to make solar energy viable in the competitive marketplace. Handicapping our use of coal energy, or the many other efficient technologies that would be impacted by cap and trade legislation, creates the very economic impact the environmentalists are claiming does not exist.

This brings us to the fundamental flaw with Krupp’s argument, the EPA study, Professor Kammen, or the many other advocates claiming that cap and trade legislation is good for the economy. Henry Hazlitt, writing in 1946, clearly laid out the errors of these arguments in his aptly named book, “Economics in One Lesson”. While a quick summary cannot do justice to the book, the book opens with the one crucial less of economics that is always forgotten: the fallacy of the broken window.

Hazlitt tells the following story: Some rambunctious teenagers throw a brick through a store front window, breaking it. At first, the crowd that gathers expresses sorrow for the unfortunate shop owner. But, then they begin to think. The shop owner must now replace the window. This creates new revenues for the window maker. Now that the window maker needs to repair the window, he needs to purchase more supplies, creating new revenues for other shopkeepers in town. Continuing with this reasoning, the townsfolk realize that the town is now better off because the teenagers broke the window.

Of course, this is ridiculous. Wealth is not enhanced by breaking windows. But, it is the same argument that environmental activists are making when they claim global warming regulations will create economic growth. Environmental activists focus on the “new green jobs” that will emerge if greenhouse gas emissions are capped. What is forgotten, and not taken into account, are all of the current jobs that are lost in order to create the green jobs as well as the jobs that will no longer be created due to the higher energy prices and reduced energy availability.

Regardless of the environmental merits, the economic impact from global warming regulations, per se, will be negative. Pretending these costs do not exist will not lead to better environmental policies; nor will it lead to better economic policies. When we make decisions based on self-deceptions, things rarely work out as planned.