Good news for Earth Day: We can reduce climate pollution and boost the economy, all at once
Putting a price on carbon pollution is an important part of tackling climate change. It’s a way of leveling the playing field, removing an unfair advantage that fossil fuels have always had over clean alternatives.
Pricing carbon is not the only part of tackling climate change. It’s not even necessarily the most important part, particularly in next decade. It’s certainly the least popular part, since, at least in isolation, it raises prices for every voter and slows GDP growth (if only a little). There are other, complementary policies that have the potential to increase economic productivity, offsetting the drag of a carbon price (in part by keeping carbon prices down). A portfolio approach to climate change, which couples a carbon price with complementary policies, could yield a net benefit to the economy, and to most voters, from day one.
You’d think this would be happy news, but as I lamented here, getting economists to model or support a portfolio approach is like pulling teeth. (It is, it’s worth noting, genuinely difficult to model multiple policies and their interactions.) Partly as a consequence, the climate policy discussion is all cost, cost, cost, pain, pain, pain. The idea that climate policy could also be smart economic policy is dismissed as pie in the sky by the Very Serious. The good news remains unsung.
It doesn’t have to be this way. Let’s take a quick run through some of the win-win policies that could boost the economy while reducing emissions.
1. Utility reform
Any clean energy future — hell, any energy future — will have electricity at its core. Electrification has steadily risen for a century and most analysts believe that electricity will continue to displace liquid fuels in coming years. Yet in the U.S., electrical power is distributed, sold, and (for the most part) generated by public utilities. Currently about half of U.S. utilities are in some stage of deregulation while half remain regulated monopolies; all are subject to a tangled skein of overlapping jurisdictions and authorities.
It’s an unholy mess, as far from ideal market conditions — low barriers to entry and exit, transparent information, low transaction costs, etc. — as a market could be. Witness the fact that the overall energy efficiency of the average power plant hasn’t improved since 1960 (a fact often lamented by our own Sean Casten). It should make any economist, indeed anyone convinced of the power of markets, recoil.
How exactly to untangle the utility mess and restore some measure of competition to electricity markets is a complex subject, to say the least, and beyond the scope of this post. (For more, check out the Compete Coalition or NDN’s “Electricity 2.0.”) The point is that doing so would boost efficiency, reduce waste (i.e., emissions), and increase economic productivity — a win for both the environment and the economy.
2. Removal of subsidies
Fossil fuels, and fossil-fuel intensive industries, receive a host of explicit and implicit subsidies. These can take the form of political patronage, favorable infrastructure investments, or direct grants, but the most common form is tax breaks and loopholes. (For more on that important but often overlooked subject, see “America’s Hidden Power Bill” from CAP.) Almost all economists agree that these subsidies distort competitive markets and reduce their overall efficiency. Remove them and efficiency increases; emissions drop. Again: win-win.
Why aren’t economists united behind removing these subsidies? Why isn’t it at the top of every list of preferred climate policies? I don’t get it. Not only are economists not clamoring for this, but even a modest attempt by Obama to remove a small subset of tax breaks gets attacked, leading to surreal headlines like this: “Administration official: repeal of oil and gas tax breaks won’t hurt economy.” Uh … no sh*t!
3. Efficiency, efficiency, efficiency
Whether the cause is perverse regulation, immature markets, misaligned incentives, or the simple human weaknesses of shortsightedness, inattention, and laziness, billions of dollars of cost-effective investments in energy efficiency are left on the table. I’ve written about this many, many times, so instead of going over it all again I’ll just quote McKinsey:
If executed at scale, a holistic approach [to energy efficiency] would yield gross energy savings worth more than $1.2 trillion, well above the $520 billion needed through 2020 for upfront investment in efficiency measures (not including program costs). Such a program is estimated to reduce end-use energy consumption in 2020 by 9.1 quadrillion BTUs, roughly 23 percent of projected demand, potentially abating up to 1.1 gigatons of greenhouse gases annually.
Suffice to say, improving energy efficiency improves economic efficiency while reducing emissions. Win-win.
4. Improvement of the electricity grid
Some of the biggest surges of productivity in American history have come on the heels of large-scale public investments in infrastructure. Think of the railroads, the highway system, or the internet. Yet America’s electricity grid is a museum piece, a relic from the mid-20th century. An expanded, upgraded, intelligent grid will serve as a platform for new innovations and productivity enhancements just as the internet did; it will also serve to accelerate the integration of renewables and increase efficiency, thus lowering emissions. Win-win.
5. Sprawl busting
Urbanists are familiar with the economic efficiencies that come with density; greens are familiar with the resource efficiencies that come with density; residents of dense communities are familiar with the social and health benefits that come with density. Not everyone is as familiar with the vast network of land-use codes and regulations in the U.S. that discourage density. As much as some folks want to see sprawl as a pure expression of the consumer preference for lawns and cul-de-sacs, the fact is that policy choices drive land use. For more on this see … oh, hell, just Google “land-use sprawl.” The literature is copious.
The Institute for Local Self-Reliance has a nice list of policies that can help reverse the trend. You might also check with any of these organizations. Simply relaxing some of the restrictions on density would result in people living closer together, sharing ideas, walking more, improving their health, being more productive, and emitting less carbon. Win-win.
And so on
This is just a partial list, and I’d love to hear your ideas for what should be added. But the point is clear: there are all sorts of public policies that can reduce greenhouse gas emissions and improve economic performance. Collectively, they can offset the slight GDP hit produced by a carbon price.
So here’s your take-home message for Earth Day: A diverse climate policy portfolio can have a positive impact on the economy. That fact is obscured by the monomaniacal focus on carbon pricing that has come to characterize climate policy discussions. It would behoove economists, wonks, pundits, and ordinary citizens alike to broaden their view and rediscover this good news. Were it more broadly understood, it might help loosen the constipated politics around this subject. Heck, it might even serve as the basis of a rare bipartisan consensus. A fella can dream.