One of the consistent claims made by those opposed to policies to reduce greenhouse-gas emissions is that the cost will be prohibitive. I have always been somewhat suspicious of this claim, however. When I started graduate school in 1988, the Montreal Protocol had just been signed. It required industrialized countries to significantly reduce the production of chlorofluorocarbons within a decade or so (the exact schedule of production reduction depended on the particular molecule).
At the time, there were all sorts of apocalyptic claims being made about the costs and impacts of the Montreal Protocol: It will bankrupt us, it will force us to give up our refrigerators, millions of people in Africa will starve because of lack of access to refrigeration, etc.
In the end, none of this was true. The cost of compliance was so low, in fact, that I’ll bet most of you didn’t even realize it when our society switched over from chlorofluorocarbons to the replacement molecule, hydrochlorofluorocarbons, in the mid-’90s.
A few days ago, I came across a nice article from 2002 in The American Prospect by Eban Goodstein on this question of cost estimates:
In July, Carol Browner, chief of the Environmental Protection Agency, issued new regulations reducing permissible levels of smog and particulate (fine soot) pollution. The political battle leading up to the decision was fierce, even within the administration. One staff member on the Council of Economic Advisors maintained that the regulations would cost a whopping $60 billion — a figure quickly seized upon by industry opposition. The EPA’s own cost estimate was much more modest, between $6 billion and $8 billion. In making her case for the new regulations, however, Browner publicly disavowed even her own agency’s cost estimates. She argued that industry would find a way to do it cheaper.
Whom to believe? Confronted with conflicting estimates, most lay people either throw up their hands or choose sides ideologically. But history provides a basis for evaluating these estimates. Not only do industry lobbyists wildly overestimate the costs of proposed environmental regulations. More surprisingly, academic and government economists consistently do too — and for an equally surprising reason. When forecasting the costs of new environmental regulations, economic analysts routinely ignore a primary economic lesson: Markets cut costs through innovation. And innovation can be promoted through regulation. This history is worth bearing in mind as we approach the most important environmental controversy to date — how to deal with the crisis of global warming.
As Goodstein shows, if history is any guide, and it usually is, the people forecasting economic doom from policies to reduce greenhouse-gas emissions are almost certainly wrong. More surprisingly, perhaps, is that those with the optimistic estimates of costs may also be overestimating the costs.