On the Economics of Environmental Policy

In his book, A Conflict of Visions (1987), Thomas Sowell discusses the principles of the constrained and unconstrained visions in an attempt to explain why we struggle against each other so much with government policy. The unconstrained vision is that of achieving the objective despite the external forces, and the constrained vision is achieving an outcome as a compromise through a series of trade-offs. Sowell does not declare either vision wrong or right but rather argues that there is a time and place for each. Anyone who has engaged in any sort of significant project can relate to the constrained vision because they experienced the trade-offs that were necessary to achieve the end goal, even if it was somewhat different than they expected. Alternatively, the unconstrained vision is not as commonly realized. One of the best examples in our modern age, is WWII: there was no compromise, as there was no outcome other than absolute victory for the allies that was acceptable. To be certain, there is a time and place for each, but we must be careful when approaching something with the unconstrained vision, because much harm can be done in the process.

These same principles apply for environmental policy. At the present time, we can observe many hot debates and vitriol over the subject of environmental policies. This has infused our culture and contaminated polite discourse. It is my contention that only the most extreme of arguments ever make it to the public through our media and politicians, and by that point we are all so far apart on the subject that there is no hope of meaningful dialogue.

Anthropogenic climate change is almost universally accepted, but the degree of impact by humans is not well characterized, and certainly not known to any degree of precision. This is evidenced in the wide variations produced by the climate models and the rather consistent failure rate of their predictions. The models are getting better though. One of the key aspects of the models, which we can predict with a reasonable degree of accuracy, is the lag phase from input to result. Ruddiman, in his book, Plows, Plagues and Petroleum (2005), describes this concept very well in layman’s terms. This lag phase explains why, for example, that the coldest and hottest parts of the year occur after the solstices rather than peaking at the solstices. On global climate scale, this lag phase is not a month, but rather 30 - 50 years. This is where the economics begins to enter into the discussion because the results of our green initiatives are likely not to be observed in our lifetime, whereas the economic impact is rather immediate.

Economics is not just the flow of money or the profitability of something, it encompasses factors of social demographics, politics, and natural laws as well. Additionally, we can look at economics from an observational perspective and from an interventional or engineering perspective. Most importantly, economics helps us to predict how any given initiative is going to play out in the real world.

I often get presented with the argument that, as a society, we have to take extreme measures now for the sake of the environment to ensure there is a future for our grandchildren. Now this is of course, an emotional argument, but it does have merit, and it also demonstrates forethought. The problem with it, is that the forethought is too narrowly focused, and resembles the unconstrained vision. People will often say, “I don’t care about the economics, it’s not about money.” This position erroneously assumes that enacting environmental policies and initiatives is about making money. Quite to the contrary, it is about ensuring those initiatives are successfully implemented. We must be clear on this; these are no small feats; they are national and global in scale and have serious ramifications. Probably the most important unanticipated outcome is the cost of energy. Energy, in all its forms and measures, is wealth. The more energy you have or control, the wealthier you are. Energy poverty is poverty. Whether measured in calories, joules, kilowatt hours, or British thermal units, the more you have at your disposal, the higher your quality of life, and the less you have at your disposal, the poorer your quality of life. The cost of energy in terms of the full societal cost, is a matrix of resources, regulations, inputs, etc. These may inflate and reduce the end-user price tag, but they are all accounted for in society as a whole. Subsidies, for example, do not reduce the cost of green energy, they only move a resource from one place to another while also incurring an additional overhead cost. This is not to say that subsidies are inherently bad, but rather, we need to use them sparingly in order to achieve a result, while not also incurring excessive waste. In his book, The Collapse of Complex Societies (1990), Joseph A. Tainter describes how with every generation, the input into society yields less return. With this in mind, we must always consider the cost of major initiatives and ensure that the means by which we pursue our objectives do not in and of themselves cause them to fail.

The problem with most green energy solutions is that they are very expensive. Expensive not just in terms of dollars, but in energy inputs and societal resources. To this day, despite many of these solutions reaching industries of scale and becoming very mature, they are still heavily subsidized while still resulting in higher end-user energy costs. This is not to say that we shouldn’t pursue them, but we must consider the rate at which we do, and the timeliness in which we do. As we have seen, when the cost of living increases sharply, those living in a democracy have the power to reverse those things that are perceived to be the cause. We can rightly say that the current cost of living increase is largely in part due to the cost of energy: from direct and cumulative taxation at all levels of the value chain to overheads, regulations and bureaucracy that add cost to the value chain that is then redirected to non-productive government activities. The cost of energy causes everything to raise in price and reduces our society’s overall productivity. These are natural laws of economics that even authoritarian regimes cannot escape, i.e. no economic model is immune. Universally, when the energy resource within a society can no longer support and sustain its current consumption it will reflect in degraded quality of life and necessitates some means of acquiring energy inexpensively and in large quantities. This is a major driver of wars (arguably the only driver) and civil unrest. Even an authoritarian regime, when the quality of life is degraded enough, can no longer effectively rule its citizens, and the society will dissolve. In fact, prior to the industrial revolution and humankind’s discovery and exploitation of fossil fuels, invading another nation and expropriating their resources (both natural and human), was the only means of supplying the ever-increasing demand for energy.

In the end, it is necessary to measure the economic cost of transitioning to green energy because energy is at the heart of every society, and if we don’t manage the transition well, it will cause economic collapse, which will, of a certainty, cause all green initiatives to cease. In the current political and economic climate, there is the real and present risk that global bad actors and regimes will overtake us in the West, and their way of life could be imposed on us. They are not limited by green initiatives and therefore have an economic advantage. The inconvenient truth regarding all this, is that only in the event of a global climate disaster, will the playing field be levelled. Bad actors will be forced to address the climate question just as we are. In the interim, bad actors will continue to play a game of climate chicken, and so far, it is looking like they are winning. Therefore, in conclusion, we must move away from the rhetoric and focus solely on the economics and built good-faith metrics. We must make near-term trade-offs in order to achieve a long-term objective of a greener economy. And finally, these economic metrics must be used as a throttle for the implementation of economic policies and initiatives, because an unthrottled agenda will fail either by economic collapse or by political change of direction.