Monday, April 28, 2008

The Economy Suffers Under the Proposed 80% Emission Reduction

The article, The Real Cost of Tackling Climate Change, was published in the Wall Street Journal on April 28, 2008.

By Steven F. Hayward, who is a fellow at the American Enterprise Institute and the author of the annual "Index of Leading Environmental Indicators," from which this article is adapted.

For those of you who do not have access to this article, I outline Mr. Hayward’s findings:

  • Both Hillary Clinton and Barack Obama push an 80% across the board reduction in human-made emissions by the year 2050. John McCain pushes a 65% reduction. Both are unrealistic and unattainable.
  • In 2006, the Department of Energy (DOE) estimates U.S. emissions at 5.8 billion metric tons of C02 (20 tons per person).
  • From 1990 levels, an 80% reduction puts the emission levels at 1 billion metric tons in 2050.
  • The above level of emissions was last seen in 1910 (days of Henry Ford’s “new” assembly line technique).
  • An 80% reduction will result in not enough to: heat the average size hot water tank, run plasma TV set, heat food in a microwave, dry clothes in a dryer.
  • Substituting to natural gas won’t solve it – would still have 50% of the target to go.
  • Renewable energies can likely only produce 20% of our energy needs.
  • If everyone across the country drove a Prius, still be over the transportation abatement target by 40%.

So, where does this leave us? In order to reach the audacious target of 80% emissions reduction, one of two things needs to happen:

  1. Use abatement technologies and renewable resources to get to that level.
  2. Produce at that level.

Regarding point 1., the article clearly states that given our current available abatement technologies, the target is unrealistic. Unless there is a large and unexpected technical shift (which can happen), the target is simply not feasible, leading us to point 2.

Driving economic production back to Henry Ford’s era in order to meet 1910 production and emission levels will result in negative economic growth! Yes, the air will be much cleaner, but will it be worth it because income per person will revert to 1910 levels. Many of the goods and services that we are accustomed to were not available in a more recent year, 1980. The biggie is the internet, a device that has changed the front of production and the flow of information. Digital cameras were unavailable, the latest medical techniques were archaic compared to today’s standards, life expectancy rates were lower, no microwaves, no iPods, no VCRs. Average income per person in 1980 was $22,666 in current dollars, which is just 60% of that in 2007, $38,289. The figure below illustrates the sharp reduction in quality of life that would result from a drop to 1929 production levels.

Pushing aside the obvious limits of realistic emission abatement clearly outlined by Mr. Hayward, all three Presidential hopefuls suggest the policy du jour to tackle emissions by implementing, a tradeable permits program. Under the tradeable permits system, a market for emissions is created, where firms buy or sell the right to emit. The government generates the appropriate number of emitting permits, which are traded by the firms. Sounds great, but the program is riddled with problems. Look at Europe, where the tradeable permit system was implemented. Emissions rose, rather than fell, 1.1% last year.

Tradeable permits are fundamentally flawed, and in fact, the best way to force firms to abate is to place a tax on emissions. Firms will reduce accordingly (because the cost of production just rose), reaching a sensible target (something much less than 80%). The biggest problem is the monitoring of emissions, which is costly.

Again, Presidential Candidates list a slew of policy changes with no merit, let alone probability of success (see related article, Clinton and Obama simply can’t have it all!). Climate Change is a problem that must be corrected at the household and firm level. Today, when I get home, I will think of a new way to conserve energy on my own.

I am interested to hear your comments, please note them below. Nontruths

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