Two opinions: yes and no

The Wall Street Journal
SEPTEMBER 21, 2009


There's little doubt: Cutting greenhouse gases will be costly.

But that leads to two big questions. First, how costly? And second, can nations afford it?

As policy makers around the world take action to avoid a predicted climate catastrophe, the debate is turning to the costs of reducing carbon-dioxide emissions. Energy-efficiency measures are often pricey, and alternative energy sources are more expensive than the fossil fuels they replace. A steep price on carbon emissions will ripple through the economy.

Does that mean a serious effort to tackle global warming is incompatible with economic growth? Or can we make significant cuts in greenhouse-gas emissions without causing serious damage to the economy?

We put the question to a pair of experts. Robert Stavins, a professor of business and government at Harvard University and director of Harvard's environmental economics program, says the answer to the second question is yes: Making the necessary cuts need cause little more than a blip in world-wide growth if smart policies are used.

Steven Hayward, a fellow at the American Enterprise Institute for Public Policy Research, says no: Energy use—and the carbon dioxide it emits—is so central to the world's economy that major cuts can't be made without significant damage.

Of course, the answers can depend in large part on how "significant cuts" and "serious damage" are defined. Many scientists, the European Parliament and the Waxman-Markey climate legislation approved by the U.S. House of Representatives have set a goal of cutting carbon emissions about 80% by 2050, so that was picked as constituting significant cuts.

As the accompanying essays show, such a definition leaves plenty of room for disagreement.
Michael Totty

YES: The Transition Can Be Gradual--and Affordable

The world is facing a potential catastrophe from greenhouse-gas emissions. But nations don't have to wreck their economies to avert the crisis.

Critics argue that the legislation passed earlier this year by the U.S. House of Representatives--to cut U.S. emissions 80% below 2005 levels by 2050--will mean big, disruptive changes to our infrastructure and untold economic damage. But they make a couple of basic errors. For one thing, they seem to think we'd have to replace the entire infrastructure quickly, paying trillions of dollars to shift to cleaner power. They also seem to assume that we have to choose between much more expensive energy and no energy at all.

The move to greener power doesn't have to be completed immediately, and it doesn't have to be painful. The right transition plan will increase consumers' bills gradually and modestly, and allow companies to make gradual, well-timed moves.

How would this work? One way is via a combination of national and multinational cap-and-trade systems. Companies around the world would be issued rights by their governments to produce carbon, which they could buy and sell on an open market. If they wanted to produce more carbon, they could buy another company's rights. If they produced less carbon than they needed, they could sell their extra rights. What's more, companies could earn more rights by creating appropriate "offsets" that mitigated their carbon use, such as planting forests. Nations could add carbon taxes to the mix.

The effect would be to send price signals through the market--making use of less carbon-intensive fuels more cost-competitive, providing incentives for energy efficiency and stimulating climate-friendly technological change, such as methods of capturing and storing carbon.

More Efficient

True, in the short term changing the energy mix will come at some cost, but this will hardly stop economic growth. As economies have grown and matured, they have become more adept at squeezing more economic activity out of each unit of energy they generate and consume. Consider this: From 1990 to 2007, while world emissions rose 38%, world economic growth soared 75%--emissions per unit of economic activity fell by more than 20%.

Critics argue we can't possibly increase efficiency enough to hit the 80% goal. In a very limited sense, that's true. Efficiency improvements alone, like the ones that propelled us forward in the past, won't get us where we need to go by 2050. But this plan doesn't rely solely on boosting efficiency. It brings together a host of other changes, such as moving toward greener power sources. What's more, making gradual changes means we don't have to scrap still-productive power plants, but rather begin to move new investment in the right direction.

As for how much this will cost, the best economic analyses--including studies from the U.S. Congressional Budget Office and the U.S. Energy Information Administration--say such a policy in the U.S. would cost considerably less than 1% of gross domestic product per year in the long term, or up to $175 per household in 2020. (That's the cost of one postage stamp per household per day.)

In the end, we would be delaying 2050's expected economic output by no more than a few months. And bear in mind that previous environmental actions, such as attacking smog-forming air pollution and cutting acid rain, have consistently turned out to be much cheaper than predicted.

Critics are wary of raising energy prices, arguing that no nations have grown wealthy with expensive power. But historically, it is the scarcity and cost of energy that have prompted technological changes as well as the use of new forms of power. What's more, critics challenge the price estimates the experts have set out. They say that the predictions depend on extensive--and unrealistic--cooperation among nations. In particular, they say, developing nations won't sign onto plans for curbing emissions, for fear of losing their economic momentum.

Indeed, we do need a sensible international arrangement in place to achieve low costs, and the economic pain will be much greater if we don't set up an international carbon market. But it can be done. Many nations have already initiated such emissions-control policies. And the world can be brought together in a meaningful, long-term arrangement that is scientifically sound, economically rational and politically pragmatic. [EVchart_G]

Road to Cooperation

For instance, the U.S. and China have been involved in intense talks about climate policy. If the two nations come together in a bilateral agreement--a real possibility--they would have much more leverage to persuade other major nations to join. From there, developing nations could be brought on board by giving them targets that reduce emissions without stifling growth. Advanced nations might agree to more-severe emissions cuts and allow developing nations to make gradual cuts in the early decades as they rise toward the world's average per-capita emissions. With the right incentives, developing countries can and will move onto less carbon-intensive growth paths.

The longer we put off serious action, the more aggressive our future efforts will need to be, as greenhouse gases and carbon-spewing capital assets continue to accumulate. Plants built today will determine emissions for a generation. In the steel sector--where plant lifetimes typically exceed 25 years--more than half of all plants in the world are now less than 10 years old. The picture is similar in the cement industry, as well as more broadly throughout the economy. For every year of delay before moving to a sustainable emissions path, the global cost of taking necessary actions increases by hundreds of billions of dollars.

Reducing Costs

Critics argue that we can afford to wait because the world of tomorrow will be wealthier and better able to absorb the costs. But acting sooner, such as by adopting the emission caps proposed in the U.S. House legislation, will lower the ultimate costs of achieving the target, because there will be more time allowed for gradual transition--which is what keeps costs down. Perhaps most important, the costs of failing to take action--the damages of climate change--would be substantially greater.

Getting serious about climate change won't be free, and it won't be easy. But if state-of-the-science predictions about the consequences of continued inaction are correct, the time has come for meaningful and sensible action.

--Dr. Stavins is the Albert Pratt professor of business and government at the Harvard Kennedy School, a research associate of the National Bureau of Economic Research and a university fellow of Resources for the Future. He can be reached at Printed in The Wall Street Journal, page A17 Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved

The Wall Street Journal
* SEPTEMBER 21, 2009

NO: Alternatives Are Simply Too Expensive

The U.S. and Western Europe can point to a remarkable achievement over the past 40 years: significant reductions in air pollution with only a modest effect on our economic growth and prosperity. So, why can't we expect to do the same with greenhouse-gas emissions?

Greenhouse gas isn't a traditional air-pollution problem. It is an energy-use problem, and that makes a world of difference. Traditional air pollution is an unwanted byproduct. Reducing it does not require any constraint on fossil-fuel use. Indeed, over the past few decades, we've doubled consumption of some fossil fuels while making huge cuts in pollution.

Carbon dioxide, however, is the result of complete fuel combustion. Apart from still-unproven technologies, there's no way to remove it from the process. The only way to reduce emissions is to burn less fuel, which means less energy output.

So, to meet the target the climate campaigners have set, the U.S., Europe and Japan will have to replace virtually their entire fossil-fuel energy infrastructure. For the U.S., the 80% target means reducing fossil-fuel greenhouse-gas emissions to a level the nation last experienced in 1910. On a per-capita basis, we'd have to go back to the level of about 1875.

It is not even clear the goal of replacing fossil fuels can be accomplished at any cost, a point the International Energy Agency raised in its most recent annual energy forecast: "Even leaving aside any debate about the political feasibility of the 450 Policy Scenario, it is uncertain whether the scale of the transformation envisaged is even technically achievable, as the scenario assumes broad deployment of technologies that have not yet been proven. The technology shift, if achievable, would certainly be unprecedented in scale and speed of deployment."

The basic problem is that current and proposed alternatives--solar, wind, biofuels, hydrogen, more nukes--are much more expensive than fossil fuels. Credible estimates for implementing low or noncarbon energy in the U.S. over the next generation start in the low trillions of dollars. Reasonable people will argue how much this will pinch economic growth, but no one can doubt that the sign will be negative.

The Master Resource

Why? Energy is not like other goods that can be substituted or done without. It has rightly been called the master resource, because it is fundamental to everything else in the economy. There are no examples of a nation that grew wealthy on expensive energy.

True, we have a track record of success in this area. Over the past few decades, the U.S. has become more carbon-efficient while boosting its economic growth. But, for all our efforts, emissions keep going up. Hitting the 80% target by 2050 would mean roughly tripling our efficiency improvements and sustaining them for years to come--surely an impossible feat.

Maybe there will be some energy-technology breakthroughs, but even if so the cost to the economy will still be very large. Power plants, refineries and transmission grids are long-lasting assets, so a rapid switch to new technology will mean retiring assets before their useful life is over and diverting trillions in capital from other sectors. It is the equivalent of replacing your car, all of your household appliances, and your roof to boot, before they are worn out. This will obviously affect other consumption significantly.

Some climate campaigners argue for making gradual changes, using methods like trading licenses to produce carbon. But those plans are based on extremely rosy predictions about how much we can achieve and how much they'll cost. The optimistic price estimates in the Waxman-Markey bill, for instance, assume we'll set up an international system to trade offsets. This free market, the thinking goes, will help keep energy costs relatively steady and protect U.S. consumers from much hardship.

But the obstacles to getting an international system in place are huge--if not insurmountable. Already, Australia, New Zealand and Russia are showing signs of backing out of the existing emissions-cutting framework. The diplomatic house of cards can't withstand further gusts of national self-interest.

Then there's problem of developing nations. If the world is going to hit the 80% target, nations like China and India need to be held to big emissions cuts. Why? Even if the U.S. and other industrialized nations somehow achieved the 80% reduction target, it would have virtually no climate benefit because of soaring emissions from developing nations. As the International Energy Agency concluded, the major nations in the Organization for Economic Cooperation and Development "alone cannot put the world onto the path to 450-ppm trajectory, even if they were to reduce their emissions to zero" (emphasis added).

A Slim Chance

And the chances of getting emerging economies on board with an ambitious emissions plan are slim to none. Yes, world-wide treaties have been hammered out in the past to curb pollution. But, once again, things are different where energy is concerned. Developing nations need to bring huge new amounts of energy online over the next 40 years; is there any realistic chance they will adopt expensive energy on a scale that even rich nations can't afford?

Proponents suggest that we give developing nations lower goals to start with, to help them catch up to the rest of the world. But some of the biggest developing nations--and biggest greenhouse-gas emitters--have indicated they won't accept any kind of cap. For one, India has been pretty straightforward for a long time: They'll think about emissions limits when they are as wealthy as the industrialized world is today. How many times do India and China have to say "no" to emissions limits before we believe them?

Finally, the idea that we must act now to avoid bigger costs down the road just doesn't hold water. Simply put, the world of tomorrow will be considerably richer than today--and much better able to absorb the costs of climate change. Yale University's William Nordhaus, one of the top climate economists, thinks it is sound to allow about half or more of the prospective damage from climate change to simply occur--since the world 40 or 60 years from now will be in a much better situation to handle the economic effects.

--Mr. Hayward is F.K. Weyerhaeuser fellow at the American Enterprise Institute, and the author of the annual Index of Leading Environmental Indicators. He can be reached at Printed in The Wall Street Journal, page A17

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved

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Can Countries Cut Carbon Emission without Hurting Economic Growth?
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Edited by: on Friday, 25-Sep-2009 17:37:47 EDT