The U.S. requires a strong climate bill to remain competitive
Contrary to popular belief, a strong climate bill will not harm U.S. competitiveness. Quite the reverse — it is our only hope for restoring U.S. leadership in key job creating industries such as solar energy, wind power, and automobile manufacturing, which was lost in large part because of conservative orthodoxy (see “U.S. left in the solar dust” and “Blustery irony” and below).
While the media debate over green jobs and cap-and-trade has begun in earnest (see here and here), most of it misses a key point. Action on global warming and resource efficiency is inevitable. Conservative deniers do not understand that, so they contract out for economic analyses that assume the choice is between action and inaction.
Action always has a significant cost in a traditional economic models (see “Wrong again, part 2“). And since conservatives reject science, they never bother modeling the cost of inaction, the cost of Catastrophic 5-7°C warming by 2100 on current emissions path.
That leads to truly inane results, such as the recent conservative economic analysis, “Seven Myths About Green Jobs,” which “surveyed this green jobs literature, analyzed its assumptions, and … found that the prescribed undertaking would lead to restructuring and possibly impoverishing our society.” It is staying on the business as usual path that would impoverish our society immeasurably. If “restructuring” means pursuing a low carbon, resource efficient economy and hence avoiding the inevitable collapse of our current Ponzi scheme, count me in!
More than half the time the media simple parrots the conservative perspective on climate action — some cost, no benefit — as the searing critique by leading Time magazine journalist Eric Pooley demonstrated (see here).
But there are two key issues that even the best stories tend to gloss over:
- The huge competitiveness loss from failure to act first on greenhouse gas reductions
- The inevitable collapse in all non-green employment when the global Ponzi scheme collapses.
President Obama actually understands both of those issues, for he summed up the central argument in his terrific speech yesterday better than I have seen anyone else do it:
We can let the jobs of tomorrow be created abroad, or we can create those jobs right here in America and lay the foundation for our lasting prosperity.
Let’s start with the competitiveness issue, because it is nearer term.
Harvard Business School professor Michael Porter — arguably America’s leading authority on competitiveness — explained in Scientific American way back in 1991:
The conflict between environmental protection and economic competitiveness is a false dichotomy based on a narrow view of the sources of prosperity and a static view of competition.
Strict environmental regulations do not inevitably hinder competitive advantage against foreign rivals; indeed, they often enhance it. Tough standards trigger innovation and upgrading. In my book The Competitive Advantage of Nations, I found that the nations with the most rigorous requirements often lead in exports of affected products.
Although the U.S. once clearly led in setting standards, that position has been slipping away. Until the grudging passage of the Clean Air Act in 1990, Congress had passed little environmental legislation since the mid-1970s. Today our leadership in setting environmental standards has been lost in many areas. Even Japan, a nation regarded as relatively unconcerned about the environment, has moved ahead of the U.S. in important fields.
As other nations have pushed ahead, U.S. trade has suffered. Germany has had perhaps the world’s tightest regulations in stationary air-pollution control, and German companies appear to hold a wide lead in patenting-andexporting-air-pollution and other environmental technologies. As much as 70 percent of the air pollution-control equipment sold in the U.S. today is produced by foreign companies. Britain is another case in point. As its environmental standards have lagged, Britain’s ratio of exports to imports in environmental technology has fallen from 8:1 to 1:1 over the past decade.
In contrast, the U.S. leads in those areas in which its regulations have been the strictest, such as pesticides and the remediation of environmental damage. Such leads should be treasured and extended. Environmental protection is a universal need, an area of growing expenditure in all the major national economies ($50 billion a year in Europe alone) and a major export industry.
Even in the broader economy, strict standards may actually foster competitiveness. Exacting standards seem at first blush to raise costs and make firms less competitive. This may be true if everything stays the same except that expensive pollution-control equipment is added.
But everything will not stay the same. Properly constructed regulatory standards, which aim at outcomes and not methods, will encourage companies to re-engineer their technology. The result in many cases is a process that not only pollutes less but lowers costs or improves quality. Processes will be modified to decrease use of scarce or toxic resources and to recycle wasted by-products.
Strict product-regulations can also prod companies into innovating to produce less polluting or more resource-efficient products. As a result of the U.S. proposed phaseout of chlorofluorocarbons (CFCs), for example, Du Pont and other American firms are pioneers in finding substitutes …
The strongest proof that environmental protection does not hamper competitiveness is the economic performance of nations with the strictest laws. Both Germany and Japan have tough regulations. In America, many of the sectors subject to the greatest environmental costs have actually improved their trade performance, among them chemicals, plastics and paints. Japan has become a world leader in developing pollution-control equipment and cleaner, more efficient processes.
Turning environmental concern into competitive advantage demands that we establish regulations that stress pollution prevention rather than abatement or cleanup. They must not constrain the technology, or else innovation will be stifled. Because U.S. environmental regulations have traditionally violated these principles, the substantial amount we spend on protecting the environment has not yielded the benefits it could have. The resurgence of concern for the environment, then, should be viewed as an important step in regaining America’s preeminence in environmental technology and its competitive edge in the international marketplace.
Perhaps it is no accident that the 1990s saw a record economic and job growth while environmental regulations were tightened, while the 2000s saw low jobs growth a no net wealth created while environmental regulations were loosened or ignored entirely.
Porter updated his analysis a few years later for Harvard Business Review, with “Green and Competitive: Ending the Stalemate.” [PDF] He has many terrific examples in that piece, most presciently:
It is no secret that Japanese and German automobile makers developed lighter and more fuel-efficient cars in response to new fuel consumption standards, while the less competitive U.S. car in industry fought such standards and hoped they would go away. The U.S. car industry eventually realized that it would face extinction if it did not learn to compete through innovation. But clinging to the static mind-set too long cost billions of dollars and many thousands of jobs.
This static mind set was, of course, enabled by conservatives who lined up with automakers to block aggressive efforts to strengthen fuel economy standards for nearly three decades, ultimately helping to ravage the industry (see “Is Detroit worth saving?“).
On the other hand, regulation-driven innovation can achieve remarkable benefits, when the companies being regulated have a dynamic mindset:
3M also improved resource productivity. Forced to comply with new regulations to reduce solvent emissions by 90%, 3M found a way to avoid the use of solvents altogether by coating products with safer, water-based solutions. The company gained an early-mover advantage in product development over competitors, many of whom switched significantly later. The company also shortened its time to market because its water-based product did not have to go through the approval process for solvent-based coatings
3M found that innovations can improve process consistency, reduce downtime, and lower costs substantially. The company used to produce adhesives in batches that were then transferred to storage tanks. One bad batch could spoil the entire contents of a tank. Lost product, downtime, and expensive hazardous-waste disposal were the result. 3M developed a new technique to run rapid quality tests on new batches. It reduced hazardous wastes by 110 tons per year at almost no cost, yielding an annual savings of more than $200,000.
It is worth noting what Porter says are some key features of “innovation-friendly regulation”:
- Enact strict rather than lax regulation.
- Focus on outcomes, not technologies
- Use market incentives.
- Harmonize or converge regulations in associated
- Make the regulatory process more stable and predictable.
Sounds like precisely what progressives want in a good cap-and-trade bill.
I will discuss the jobs and prosperity issue surrounding the inevitable collapse of the global Ponzi scheme in Part 2.