Do we want an economy that’s a bit more Belgian or Belgian Congo?
A simple syllogism to expose the flaws in our GHG debate:
- Fossil fuels cost money.
- When burned, fossil fuels emit CO2.
- Therefore, burning less fossil fuel saves money and CO2.
The logic is impeccable (even if not quite as entertaining as Lewis Carroll’s syllogisms). And yet our entire GHG debate continues to be framed as those who would damn the economy against those who would damn the environment. The debate is false, and it’s time to get beyond it.
That said, there are two ways this logic potentially breaks down, with significant ramifications for long-term employment and economic growth.
First, there is the question of practical limits. How much fossil fuel can we pull out of the economy without causing economic pain? Purists may argue that the goal is zero fossil fuel, but us non-Luddites have a hard time imagining a world without steel, silicon, ethylene, fertilizer, or any number of other products that require fossil fuel to produce.
Setting aside that argument though, there are still practical limits set by economics and thermodynamics. We can’t get more energy out of a system than we put in, and we can’t transfer energy from cold bodies to hot bodies. And economically, there is the reality of diminishing returns (e.g., it’s always cheaper to recover the first 80 percent of wasted energy than it is to recover the last 20 percent).
Someday, perhaps, we will reach those thermodynamic and/or economic limits. Suffice to say that today, we aren’t even close. Energy is easily the most regulated sector of our economy, with numerous barriers to profit-maximizing (e.g., energy conserving) capital allocation. I have personally never been to a steel mill, chemical plant, paper mill or other large, energy-consuming industrial that didn’t have high-return investment opportunities in their plants that would lower their fossil energy use. And we shouldn’t lose sight of the fact that the electric sector today is less fuel efficient than it was in 1910.
But there is a second, more awkward way in which the GHG syllogism can fail us: if our economy is significantly dependent on fuel extraction. When energy costs rise, energy consumers — home owners, truck drivers, manufacturers, etc. — all feel the pinch. But folks who dig coal or drill oil benefit. (A political point not lost on any politician who has ever stood in front of a group of coal miners to roll out their energy policy.)
So let’s look at the numbers. The Bureau of Economic Analysis and the Bureau of Labor Statistics keep exhaustive data on the U.S. economy, by sector. I’ve separated below by looking on the one hand at the two sectors of the economy that are most adversely affected by higher energy costs (manufacturing and transportation) and on the other hand at those sectors of the economy that most benefit from higher energy costs (oil & gas extraction and coal mining).
Minor caveat 1: clearly, energy users are also adversely impacted by higher costs, but they don’t separate from the data as cleanly, and I was reluctant to include economic data from service sectors that are only indirectly affected by energy costs. To the extent this understates the impact, the conclusions below are all the stronger.
Minor caveat 2: coal mining is actually not broken out as a separate category, but it is lumped in with other ores. The data is what it is — but again, this error, if corrected, would make the conclusions stronger.
Let’s look at the numbers.
Manufacturing and transportation employed just over 1.8 million people in the U.S. as of June 2008. Oil, gas, and coal extraction employed 231,000. In other words, for every one job that is adversely affected by lower energy costs, 46 benefit. Put another way, there are more votes lost by politicians who let energy costs rise than fall.
Now let’s look at dollars, value-added by sector. Manufacturing and transportation created $1.8 trillion of economic value-added for the U.S. economy in 2006 (the most recent year for which a full data set is available). Coal, oil, and gas extraction created $202 billion of economic value added. So, for every $1 of U.S. economic activity that is put at risk by lower energy prices, $8.87 stands to gain.
Why does this matter? Because an energy policy based on drilling or mining our way out of our energy problems creates way more losers than winners, in terms of both employment and economic activity. The same is true for one that is focused only on the most expensive means of CO2 reduction — from carbon sequestration to photovoltaics.
A policy focused on energy efficiency, by contrast, will not only lower energy costs but also provide net growth in jobs and GDP. If the best we can do is to “drill baby, drill” we will create massive unemployment and economic dislocation.
The international view
One last interesting nugget. This cool website allows you to look at a map of the world on the basis of its rate of raw material extraction per dollar of GDP, per capita, or on any of several other metrics. (Units are in kg, so we can’t quite do the dollar per dollar or job per job comparisons as in the U.S., but it’s not a bad surrogate.) By comparing the U.S. to other countries — since we know that the U.S. is a net beneficiary of an efficiency-based energy policy — we can figure out where the geopolitics of a more responsible GHG policy ought to lie.
Qualitatively, I rather doubt anyone needs further proof that the Belgian economy is better than that of the Belgian Congo, and therefore it’s better to be focused on value-added manufacturing and services than resource extraction. But let’s still look at the numbers.
The U.S. in 2005 extracted 0.653 kg of fossil fuel from its territory per dollar of GDP. This is on a par with our major trading partners: China (1.849), Japan (0.007), U.K. (0.186), Canada (1.468), Mexico (0.500), and Germany (0.985).
Now let’s look at the countries that are heavily dependent on extractive industries. The top five (with the exception of Australia) are uniformly crummy places to live: Mongolia (25.37), Kazakhstan (18.23), North Korea (15.96), Serbia and Montenegro (14.48), and Australia (13.51). More Belgian Congo than Belgium.
Now let’s ask the interesting geopolitical question. Of the leading world economies in the G8 — all of which ought to be at the forefront of GHG reductions — the average extraction rate is just 1.505 kg/$. (But for the Russian Federation at 8.723, the figure would be just 0.473.) Alternatively, if we look at the average extraction rate of the top 10 CO2 emitters — who, in aggregate are responsible for 67 percent of all global GHG emissions — the average is just 1.81.
In other words, a GHG policy focused on energy efficiency — a.k.a. profitable GHG reduction — would benefit all of the world’s industrial powers and all of the major emissions sources. The idea that the developed world can’t afford to reduce its CO2 emissions is pure bunkum.
Moreover, China’s incentives are not that different from our own. (Indeed, the only country on both lists that is significantly dependent on fossil extraction is Russia, which is rather interesting in light of current geopolitical tensions.)
All of which raises an interesting question for our political candidates: Do you speak for the majority of Americans who depend on cheap energy, or for the minority of Americans who benefit from expensive energy? A GHG policy focused on efficiency benefits the majority. A GHG policy focused only on the most expensive solutions — or worse, a policy that puts the interests of coal miners above the environment — benefits the minority.