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COLUMN-Technology, not regulation, is the best way to tackle climate change

Source: Reuters - Fri, 6 Jun 2014 16:52 GMT
Author: Reuters
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(The opinions expressed here are those of the author, a columnist for Reuters.)

By Reihan Salam

June 6 (Reuters) - By all accounts, President Obama is deeply interested in his legacy. And though relatively few American voters see dealing with climate change as a top priority for the federal government, the president famously sees it as the most important issue he can address in his second term. Having failed to shepherd climate change legislation through Congress in 2009, when Democrats had large majorities in the Senate and the House, the Obama administration has shifted to using new regulations to achieve its environmental policy goals. This week, the Environmental Protection Agency introduced its Clean Power Plant Proposed Rule, a sweeping initiative that aims to reduce carbon emissions from coal-fired power plants.

The heart of the 2009 legislation - the Waxman-Markey bill - was a new cap-and-trade system, which would allow businesses to trade the right to emit a certain level of carbon. The new EPA regulations are actually much less flexible than the cap-and-trade system envisioned in Waxman-Markey, and they will reduce carbon emissions at a much higher cost to the economy.

So you might be tempted to think that we ought to embrace cap-and-trade. Conservatives often get lectured for failing to embrace cap-and-trade or stringent carbon regulation. Ezra Klein, writing for the liberal news site Vox, observes that Arizona Sen. John McCain favored a cap-and-trade system during his 2008 presidential campaign, and he takes today's GOP to task for being less enlightened.

But if anything, it is McCain who was wrong in 2008, not Republicans who balk at policies that will raise energy prices. Indeed, rather than avoid talking about climate change and the environment, the right should go on the offense. While the president and his allies back price-hiking regulation, conservatives should call for accelerating price-lowering technological innovation.

Like a carbon tax, the goal of cap-and-trade is to raise the cost of emitting carbon, and in doing so it encourages firms and households to find low-cost ways to emit less of it. If we all agree that carbon emissions are bad for the environment - and no, not everyone agrees, but let's stipulate that we do - then why not impose a government-mandated price signal and let the market figure out how best to reduce them? What could possibly be simpler? There are a few problems with this approach.

First, government-mandated price signals aren't set in stone. The carbon price that serves as the basis of a carbon tax or a cap-and-trade system is determined in part by (well-meaning, highly-qualified) government officials. But it is inevitable that democratically-elected lawmakers will get involved. And these lawmakers might want to ensure that a carbon price doesn't negatively impact, say, low- and middle-income households, so we'll need to create subsidies to protect them. They will also want to protect important industries in their districts, so we'll need subsidies to protect them too.

If the carbon price proves particularly onerous for one sector or another, it's a safe bet that the system will be "reformed." All industries will seek carve-outs and breaks, and those with the most political muscle will keep them. Suddenly a proposal that looks appealing on paper meets the realities of real-world politics, and the results are not pretty.

Consider the European Union's Emissions Trading System (ETS), an ambitious cap-and-trade system first launched in 2005. As Roger Pielke Jr. has observed, the European Union and the United States have experienced the same 6.4 percent reduction in aggregate emissions since 2000, and their paths don't appear to have diverged since the introduction of the ETS. Moreover, the U.S. has actually seen a slightly steeper decrease in its carbon intensity (21 percent) than Europe (19.5 percent). That is, Americans have reduced the amount of carbon they emit per dollar of GDP faster than Europeans in recent years. Pielke maintains that the reason the ETS appears to have failed is that it set the carbon price at a very low level.

Of course, the reason that the EU set the carbon price at such a low level is that European voters would have revolted otherwise. Even Germany, which has gone the furthest among the large European economies in pushing for renewable energy despite the resulting increase in electricity prices, seems to be saying that enough is enough. Germany's coalition government has just backed new legislation that will slow the growth of green energy. Suffice it to say, Americans are even less enthusiastic about higher utility bills than their European counterparts.

Second, even if government-mandated price signals were immune to political pressure, it's not at all obvious how we should go about setting a carbon price. In 2010, the Obama administration estimated that the "social cost of carbon" was roughly $23. The natural implication of this estimate is that measures that cost less than $23 per ton make good economic sense.

As Oren Cass, Mitt Romney's domestic policy director during the 2012 presidential campaign, has argued, however, this line of thinking neglects the fact that climate dynamics are "extraordinarily non-linear." What matters most is not the flow of carbon, but rather the atmospheric concentration of carbon. If the U.S. pursues policies that reduce carbon emissions at the margin, it won't matter much if the atmospheric concentration continues to climb because of rising Chinese and Indian carbon emissions. All we'll succeed in doing is to make ourselves poorer. I don't know about you, but I don't find that prospect terribly appealing.

Cass thus recommends a technology-first approach. Price signals are, to be sure, designed to encourage firms to develop new technologies. Yet what artificial pricing really does is encourage investment in expensive technologies that couldn't survive without an artificial leg up, and which will have a hard time spreading in the low- and middle-income countries that are quickly joining the ranks of the world's biggest polluters.

What would a technology-first approach actually look like? We know exactly what it would look like because, as Jim Manzi explains in National Review, a technology-first approach has given us a revolutionary new technology that has done much to decarbonize the American economy, and that has the potential to do the same around the world. Over the past decade, the chief driver of declining carbon emissions in the U.S. has been the rise of hydraulic fracturing, or fracking, which has led to a sharp decline in domestic natural gas prices. Though natural gas is a fossil fuel, gas-fired power plants emit less carbon than either oil or coal.

The fracking boom is not, as Manzi makes clear, a product of pure laissez-faire. The government played a large role in funding the basic research that made the fracking revolution possible. Yet private entrepreneurs played an equally crucial role in perfecting and spreading the technology at the ground-level, knowing that the tools they were building would be valuable and exportable with or without a boost from artificial pricing.

But can the technology-first approach go further still when it comes to decarbonization, or do we need command-and-control regulation to get the job done? Samuel Thernstrom of the Energy Innovation Reform Project, a new think tank, has identified a number of areas where government, working with the private sector, can make energy cleaner and cheaper, including enhanced oil recovery and advanced nuclear technologies. Robert Zubrin, an engineer, author, and entrepreneur, often touts the environmental and economic benefits of methanol as a substitute for conventional gasoline, and William Ahlgren has called for a "dual-fuel strategy" that would radically reduce American dependence on oil. The possibilities of technology-first are limitless. (Reihan Salam)

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