Thomas Gale Moore
Senior Fellow
Hoover Institution
Proponents of acting now to slow or even to prevent climate change start by suggesting that the United States, Western Europe, and perhaps the world adopt a "no-regrets" policy. The definition of such a policy varies with the author or authors. If it means policies sensible in themselves, then few impartial observers would be opposed. The federal government, for example, sells water to California farmers who grow rice -- a crop that generates massive amounts of methane, a major greenhouse gas -- at heavily subsidized rates. Eliminating the water subsidies would be economically efficient, even if policy makers were indifferent to possible climate change. Other sound policies might include inducing energy producing nations to refrain from providing their populace with extraordinarily cheap gasoline or urging former communist countries to allow oil, gas, and coal prices to rise to market levels.
Usually, however, no-regrets policies imply regulation designed to induce consumers and businesses to conserve fuel. Many advocates claim that the cost of these policies is negative, that is, they would bring economic gains in addition to any benefit from reduced greenhouse gas emissions. Such assertions are questionable. If consumers or businesses could save money by taking these steps, why don't they do it?
Fuel economy standards are often suggested as a "cheap" or even "no cost" way to save fuel. The United States has experimented with such standards for autos and they are not cheap. Nor do they save much fuel. Just this year General Motors was forced to boost the price of its lowest cost model by $200 to meet the latest exhaust standards. To comply with earlier requirements, automobile manufacturers have installed expensive fuel saving technology and made cars lighter, smaller, and, consequently, more dangerous than they need be, increasing highway fatalities. Moreover, since driving the light small car is cheaper -- it travels farther on a gallon of gas -- people go more miles, thus offsetting, at least partly, the fuel savings.
Setting rigid standards is virtually always inefficient, likely to inflate costs and rarely produces much gain. In the 1970s, for example, Congress amended the Clean Air Act -- ostensibly to reduce air pollution -- to protect coal miners in the Midwest by forcing new power plants to burn local "dirty" coal but install expensive scrubbers. As a result, power companies constructed few new plants and maintained the old ones, which were highly polluting, long past their expected lifetime. It is easier to believe in little green men from Mars, than in Congress's acting to put coal miners out of work now in order to protect people a hundred years hence from warm weather. Unfortunately Congress could be stampeded, however, into adopting a regulatory scheme that would be inefficient, ineffective, unnecessary, and costly but which did not obviously endanger these jobs.
European nations have recommended a carbon or an energy tax to curtail CO2 production. Although, no one knows how high taxes would have to be to achieve a given level of emission reduction, a carbon tax of several hundred dollars per ton would have to be levied to reduce fossil fuel use significantly. The price of gasoline would have to rise by at least one dollar per gallon. In a period when Congress has been weighing the repeal of the 1993 4.3 cent boost in the federal gas tax, legislators are as likely to vote to double fuel prices as to give up free parking at National Airport. Even if such a tax were imposed raising hundreds of billions of dollars per year, what do you think the government would do with the windfall? Recycle the funds? Spend them? Or waste them?
Marketable quotas of carbon emissions would also be an efficient method of reducing greenhouse gases and would, in principle, make meeting a particular emission standard achievable. Jockeying over the initial allocation of these quotas, however, might undermine any accord. Each country would like to start with certificates for emitting the most carbon. Already the Japanese claim that the right formula for allocating permitted emissions should be based on CO2/GDP, while the French assert that it should reflect CO2 per person. If a per capita formula were used, all countries would have an incentive to exaggerate their numbers. Third World countries would oppose the Japanese proposal, which favors rich nations with low carbon emissions.
Other possible bases for allocating the initial quotas include reductions from existing levels or from levels at another point in time. The United States and other nations with relatively high current emissions would favor this option while poor agricultural states would object. States that already have high energy taxes and, therefore, relatively low levels of carbon emissions or that exploit nuclear power would want credit for their modest carbon ouput. Regions dependent on coal for much of their power would oppose carbon-based schemes and argue for applying restrictions to total energy consumption.
The costs of either the tax or the emission certificates would depend on the levels imposed. Holding CO2 emissions constant at some level, such as the output of 1990 or, more realistically, the likely output in the year 2000, would only slow the buildup of CO2. To stabilize concentrations of CO2 in the atmosphere, cuts from 1990 levels would be required. DRI, a major consulting firm, calculated that the government would have to exact taxes of $100 to $200 per ton of carbon to trim U.S. emissions to 1990 levels by the year 2010 -- depressing GDP by 2.3 to 4.2 percent -- roughly $1700 to $3100 per household -- with the higher estimate being over twice the amount spent on all other environmental issues. Even the $100 tax implies a loss of a million jobs two years after it is levied as industry and consumers adjust to much higher energy costs. Given political pressures to protect certain industries and some favored consumers, costs could well exceed those numbers.
The previous essay indicated that the cost of global warming would be, at most, one to one and one-half percent of world GDP. Only a few poor countries that might suffer from rising sea levels or be unable to adjust their agriculture would suffer significantly. If emission controls are intended to protect those countries, then this kind of foreign aid might be better targeted to promoting their economic development. Since the cost of slowing warming exceeds the projected benefits by a substantial margin, however, the right strategy is to do nothing, except perhaps to help poor countries improve their economies. That way there will be no regrets.
References:
Lawrence M. Horwitz. "The Impact of Carbon Dioxide Emission Reductions on Living Standards and Lifestyles," SPECIAL REPORT, American Council for Capital Formation, Center for Policy Research, October 1995.
William D. Nordhaus. MANAGING THE GLOBAL COMMONS: THE ECONOMIC OF CLIMATE CHANGE, Cambridge, MA: MIT Press, 1994.
Thomas Schelling. "Some Economics of Global Warming" THE AMERICAN ECONOMIC REVIEW 82 (March 1992): 1-14.
Summary for Policymakers: The Economic and Social Dimensions of Climate Change, IPCC Working Group III (1995).
Thomas Gale Moore. "Central Planning USA-Style: The Case Against Corporate Average Fuel Economy (CAFE) Standards" HOOVER ESSAYS SERIES IN PUBLIC POLICY, 1991)
Robert W. Crandall and John D. Graham. "The Effect of Fuel Economy Standards on Automobile Safety," JOURNAL OF LAW AND ECONOMICS, 32 (April 1989): 97-118.
Originally Published in The World Climate Report September 1996.