Good. Baker’s ideas of what money should be spent on to reduce Green House Gases are debatable. More important is the issue of how much could be redirected to this from subsidies for fossil fuel.
Dean Baker is a Senior Economist at the Center for Economic and Policy Research (CEPR)
Cross-posted from Dean Baker’s Beat The Press Blog
In debates over protecting the environment, and especially global warming, it is standard practice to refer to the pro-protection side as being in favour of government regulation and the anti-protection side as being pro-free market. This is nonsense and it is nonsense in a way that strongly benefits the enemies of environmental protection.
There is a simple way to think about environmental protection. If I build a home and want to dispose of my sewage in the cheapest possible way, I will just dump it on my neighbour’s lawn. Environmental regulation means having the government say that I can’t do this.
It is bizarre that somehow the prohibition of dumping my sewage on my neighbour’s lawn is treated as government regulation interfering in the market. The government is protecting my neighbour’s property. Prohibiting me from dumping sewage on her lawn is not really different from prohibiting me from building an addition that takes up half of her lot. In both cases, the government is not acting to interfere with the market, it is acting to protect the property rights that are the foundation of the market.
Somehow this basic logic has gotten lost in discussions of environmental regulation and in particular with respect to policies designed to curb global warming. The right routinely gets away with the idea that its opposition is grounded in a commitment to the free market and that those who want to protect the environment are proponents of big government bureaucracy telling everyone what they can and can’t do.
At this point, the fact that greenhouse gas (GHG) emissions are warming the planet and leading to a wide variety of disastrous climate outcomes is no longer debatable. The decision by some politicians to insist ignorance on the issue changes nothing. We know that spewing greenhouse gases into the atmosphere is imposing damage on people in the present and will do much more in the future. Restricting these emissions is effectively telling people that they can’t dump their sewage on their neighbour’s lawns.
In this context, there is no defense to regulations restricting GHG emissions. There are no philosophical or ideological points at issue. The only question is how best to limit GHG emissions and how much we should be willing to pay to do so.
In terms of how much we should be willing to pay, a recent analysis from the I.M.F. not usually known as a place for whacky tree-hugging environmentalists, placed the global cost of the implicit subsidies for fossil fuels at 6.5 percent of GDP in 2017. That would come to around $5.7 trillion this year. You can retrofit a huge number of buildings, build many million electric powered cars, and install an awful lot of solar and wind power for $5.7 trillion.
Just as an example, if an electric powered car costs on average $40,000, we can build more than 140 million cars with this money. That is twice the world’s annual production. And this figure is an annual figure, the study projects that the size of the subsidy is growing year by year.
In fairness, there is a huge amount of uncertainty around the estimate produced in this study. It is certainly plausible that it could be $2 trillion a year lower. Of course a plausible estimate could put the subsidy $2 trillion higher as well. The point is that we are incurring massive costs in the form of rising oceans, droughts, floods, and other extraordinary weather events as a result of GHG gas emissions. This occurs because we don’t require the emitters to pay the price of the damage they are doing to the planet.
There is another important point in the debate on global warming that is largely absent from current discussions. It is widely accepted, even by many proponents of aggressive steps to reduce GHG emissions, that the effort will impose an enormous economic burden. (I’ll qualify this discussion shortly.) Clearly the money needed on a worldwide basis to quickly reduce GHG emissions through energy conservation, clean energy production, and electric vehicle production is substantial. An effort on the scale of the problem will almost certainly require at least 2.0 percent of world GDP ($1.8 trillion in 2019), and possibly quite a bit more.
While many are quick to pronounce this an unaffordable burden, it is worth noting energy prices have fallen sharply in recent years. As a result, we are paying far less for energy today than was generally predicted ten or fifteen years ago.
For example, in 2010 the OECD projected that the price of oil today would be close to $120 a barrel in 2009 dollars. That would come to more than $140 a barrel in current dollars. With oil at less than $60 a barrel and world oil consumption at more than 93 million barrels a day, the savings between the oil price projected from 2010 and the actual price of oil today comes to more than $2.7 trillion a year. If we add in savings from lower priced natural gas and coal, which would be at least comparable, the total would be in the neighbourhood of $5.4 trillion a year.
The reason this number is significant is because it shows the savings relative to a baseline that our major economic forecasters were expecting that we would be spending on fossil fuels in 2019. All of their growth projections from 2010 had this much higher baseline of fossil fuel costs included as an assumption, and their projections still showed healthy rates of growth of GDP and employment.
That matters because it is utterly absurd to claim that somehow we cannot spend an amount that is equal or less than our savings from lower than projected fossil fuel costs, in order to reduce the threat from global warming. If a baseline, in which fossil fuels cost us $5.4 trillion more in 2019 than we are actually paying, was somehow thought to be manageable, then devoting $5.4 trillion in 2019 towards reducing greenhouse gas emissions must also be affordable. Given the enormous savings we are experiencing on fossil fuels, it takes some pretty sloppy thinking to argue that this sort of spending for saving the planet is somehow not economically practical.
This brings me back to the issue I raised earlier as to whether spending to reduce GHG emissions should even be seen as a burden. Ever since the collapse of the housing bubble and the Great Recession, the United States and much of the world have suffered from secular stagnation. Or, to put it in more straightforward terms, there has not been enough demand in the economy.
This means that the economy is not supply constrained. If we choose to spend more money on roads and bridges, or electric cars and clean energy, we can do it because the economy has idle resources (meaning unemployed workers and idle production capacity) that can be put to use for these purposes. That contrasts with the situation where the economy is supply constrained, where the only way we can get more workers and other resources for these tasks would be to pull them away from other sectors in the economy.
While it is difficult to know how much the United States and other major economies are operating below their capacity, given the lack of inflationary pressure in any major economy, it is likely that there is still a substantial amount of idle resources. (This is likely more the case in Europe than in the United States, at present.) Insofar as there are unemployed resources, reducing emissions can essentially be a free lunch. We can spend to put people to work without having to tax to reduce spending in other areas. While an ambitious program of the scale needed to avoid massive and permanent damage to the environment will almost certainly require substantial taxes, the existence of unemployed workers and excess capacity in many areas will reduce this burden.
In any case, it is important that we talk about the problem in a way that reflects the reality. The opponents of measures to reduce to GHG emissions are not at all interested in preserving market outcomes. They are insisting on their right to dump their sewage on our lawn, or more specifically to make the planet uninhabitable for anyone who doesn’t have the money to protect themselves from the consequences. This has nothing to do with a question of market principles, it is about using the power of government to screw the people with less money and power.