Four Ways of Looking at Global Warming Policy*

Rent-seeking, taxes, economic growth, or an energy revolution?

Assume man-made global warming is a big problem. What should we do about it? The four general policies currently in play are (1) cap-and-trade; (2) carbon taxes; (3) encourage economic growth and allow richer future generations to deal with any problems; and (4) massive government-funded low carbon energy research. Of course, these policies can be mixed and matched in various ways, but all involve the invention and deployment of new low-carbon energy technologies. The first two proposals do it by raising the price of carbon-based energy relative to low-carbon energy technologies. The third one implicitly melds the two-century-long trend toward progressive decarbonization of our energy supplies with a strategy of adaptation. The fourth one aims to accelerate technological innovation by stimulating the research and engineering pipeline.

These policy alternatives came into better focus for me this past week after I participated in the Exploring Breakthroughs in Entrepreneurship and Public Policy conference sponsored by the Foundation for Research on Economics and the Environment (FREE) in Bozeman, Montana. The FREE conference concentrated chiefly on the ideas proposed in the book Break Through: From the Death of Environmentalism to the Politics of Possibility (2007) by self-described progressives Ted Nordhaus and Michael Shellenberger. The FREE conferees included Democratic Party activists, libertarian and conservative think tankers, and academicians spanning the ideological spectrum from right to left. In general, Shellenberger and Nordhaus are proponents of a crash program of government-funded low carbon energy technology research as the chief way to respond to the challenges of man-made global warming.

In June, Americans were treated to the spectacle of Congress trying to pass the Lieberman-Warner Climate Security Act, which would have established a cap-and-trade program to limit the emissions of greenhouse gases. Under a cap-and-trade scheme, the government sets an overall limit to the amount of greenhouse gases—chiefly carbon dioxide released from burning fossil fuels—that can be emitted. Under the Lieberman-Warner proposal the emissions cap would decline 70 percent by 2050. Emissions permits would be divvied up among emitters and those that can more easily reduce their emissions would have leftover permits that they can sell to companies that find it more difficult to cut. The idea is that this "market" in emissions would set a price for carbon dioxide that would encourage entrepreneurs and inventors to develop new low-carbon energy technologies.

When climate push comes to shove, politicians prefer cap-and-trade schemes. Why? Because they don't have to explicitly tell voters the bad news that they are raising the prices of electricity, natural gas, and gasoline. Senators and representatives instead cloak this mandated energy price increase in the virtuous language of the market, disguising the fact that cap-and-trade is really a hidden tax.

Issuing emissions permits is like coining money. If the denizens of Capitol Hill decide to auction the permits,it will provide a vast new revenue stream with which members of Congress can play. On the other hand, if Congress decides to give away emissions permits, members can reward favored corporate constituencies, producing all of the usual problems associated with campaign-financing and post-government service rewards. In other words, carbon cap-and-trade proposals are a magnet for rent-seekers, groups lobbying government for taxing, spending, and regulatory policies that provide financial benefits at the expense of taxpayers and consumers. Some savvy corporations are already jockeying for Congressional cap-and-trade favors.

What about carbon taxes? Many economists regard this option as the most transparent and effective policy. The idea is that such a tax would be ramped up in a predictable way over time to achieve the desired emissions reductions. Ideally, the money raised by the new carbon tax would be used to cut other taxes so as not to increase the overall tax burden. I have generally been in favor of a carbon tax because of its transparency and the possibility of reducing taxes on productive activities. However, during the FREE conference, Shellenberger and Nordhaus very persuasively argued that the very transparency of a carbon tax makes it a political non-starter. It is hard to imagine an American politician telling voters he is going to double the amount they pay for electricity, natural gas, and gasoline.

On to the third policy: encourage economic growth and future adaptation to whatever climate change happens. People have been moving from fuels with higher carbon content (wood and coal) to fuels with lower or no carbon content (natural gas or nuclear power) for the past two centuries. However, the pace of decarbonization is not moving fast enough to have much effect on whatever trajectory man-made global warming will take. The International Energy Agency projects that by 2030 overall energy demand will rise by 55 percent and 84 percent of that increase will be supplied by fossil fuels. Greenhouse gas emissions will grow by 57 percent by 2030.

How much wealth will people in 2050 have at their disposal for adapting to whatever climate change may happen? A crude estimate derived by calculating a compounded average economic growth rate of 3 percent per year from now until 2050 projects that the world's $47 trillion economy will grow to $163 trillion. Today, the global average income per capita is $7,200. In 2050, assuming 10 billion inhabitants, average income will more than double to $16,300. If efforts to slow global warming reduce economic growth rates by half of a percent, total world product would drop to $133 trillion and average incomes would be $3,000 less. One stab at determining whether or not it is worth slowing down economic growth to prevent climate change is to ask if global warming is expected cause more than $30 trillion in economic damage each year by 2050.

Finally, what about fostering an energy technology revolution? Shellenberger and Nordhaus assert that the old "pollution paradigm" of environmentalism is played out because it frames the climate change and energy challenges "as a forced choice between poverty and environmental ruin." What we need now, they argue, is an explicitly pro-growth, pro-prosperity politics for the 21st Century. So they are advocating a ten-year $300 billion energy research program as the way to address climate change. "The goal of the program," they claim, "is to bring the price of clean energy down to the price of coal and natural gas as quickly as possible." Another advantage is that emissions from rapidly developing economies like China and India could be cut if low carbon energy can be made as cheap as fossil fuels.

As models, Shellenberger and Nordhaus pointed to government programs that funded the first transcontinental railroad, the Manhattan Project, the Interstate Highways, massive Defense Department purchases of microchips, and the Apollo moon shot. Shellenberger and Nordhaus favor a modest carbon tax which would both fund the research and encourage companies to adopt the new low carbon energy technologies. Shellenberger and Nordhaus are not alone in pushing this idea. Skeptical environmentalist and head of the Copenhagen Consensus Center Bjorn Lomborg also favors a massive government-funded energy R&D program.

At the FREE conference my role was to be the skunk at their energy research garden party by pointing out the poor record of Congress and federal bureaucrats in picking research winners and losers, e.g., the ignominious end of the Synfuels Corporation, various automobile technology fiascos, the bankruptcies of the subsidized transcontinental railroads, and so forth. In addition, I and other conference participants argued that members of Congress would be happy to fritter away $30 billion annually by earmarking it for projects in their states and districts regardless of scientific and commercial merit. Shellenberger and Nordhaus countered that I was discounting the learning that entrepreneurs gained from government-subsidized failures which led to more productive research paths later. Perhaps.

Cap-and-trade is a rent-seeking disaster, carbon taxes are a political pipe dream, and furthering economic growth and adaptation doesn't require any specific global warming policy. Is there a way to make government-funded energy research less prone to rent-seeking? American Enterprise Institute fellow Steven Hayward suggested that the bipartisan Base Realignment and Closure Commissions (BRACs) might serve as a model for insulating an energy research program from Congressional and bureaucratic meddling.

BRACs were created because whenever the Defense Department wanted to close a military base, the locals would petition their representatives and senators to prevent it. In the 1980s and 1990s, these commissions made recommendations to close nearly 100 military bases as a package on which Congress could vote only yes or no. Similarly, an energy research commission could be set up to devise a package of $30 billion annually in energy research grants for which the Congress could only vote to approve or disapprove as a whole. Would this work? The example of the National Institutes of Health (NIH)—which is supposedly insulated from political meddling—suggests caution. The NIH peer review system which annually distributes $15 billion in research grants suffers chiefly from a lack of bureaucratic imagination.

Shellenberger and Nordhaus want to dedicate the revenues from a modest carbon tax to funding their low carbon energy research scheme. As an alternative, National Center for Policy Analysis senior fellow Sterling Burnett proposed a twofer—would they support oil drilling on the outer continental shelves? Drilling could supply energy in the short to medium term while leasehold monies and royalties could be committed to low carbon energy research. Let's just say that they took Burnett's proposal under advisement.

During one of the breaks, I suggested to Nordhaus that a Machiavellian chief executive might cynically come out in favor of their proposals as a way to derail, at least temporarily, much more expensive cap-and-trade and carbon tax schemes. Which of the four policies is likely to be adopted? Given that both John McCain and Barack Obama favor cap-and-trade, get ready for an orgy of rent-seeking on Capitol Hill in '09.

*Apologies to Wallace Stevens.

Ronald Bailey is reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.