Will our economy be stronger with reliable food, water, health, weather, coastlines, jobs, and international borders, or without them?
To ask the question is to answer it. But somehow it is still news when Felipe Calderon heads up a seven-nation study to “present an economic case” for reducing carbon emissions. There is a ‘duh’ answer to this question: all our wealth, everything we have ever held dear, and all our hopes for the future are the greatest possible costs and therefore best avoided.
But pretend we don’t know the ‘duh’ answer and, like Fellipe Calderon, try to find the ‘cost’ of mitigation – the ‘cost’ of doing something about pollution. Surely we can work that out? We can do the calculating but here is one problem: we have never been correct about the ‘costs’ of environmental regulations in the past. Not acid rain, not The Montreal Protocol and the ozone layer, nor seat belts, de-leaded gasoline, The Clean Air Act, The Clean Water Act, and many others. In fact *all* the others.
How’s 0.00 for a batting average?
Traditional economists are wrong every single time they try to cost environmental and health regulations. But for some reason they are still invited onto TV, into Congress and into boardrooms to testify to what they predict the ‘costs’ of environmental legislation will be. It’s perverse that we still ask them, and that we listen to their answers. What we should say is: “Your ‘costs’ of climate regulation are wrong. We they are wrong because you are *always* wrong. And you are always wrong in the same direction.” But instead we trot out a different old-school economist, and this one predicts that, yes, ‘costs’ will be large, but they will be manageable.
This is also wrong. But not for lack of effort. Economists have an impossible task: to forecast innovation, new policies, compliance, human understanding, human behavior, businesses behavior, consumers, etc, and do this for every individual, every household, city, region and nation on earth. Rather than fail at this impossible task, old-school economists choose instead to succeed at a much simpler task: multiply today’s problems by today’s costs.
If it costs $2,000 to insulate an attic, multiply that by 100,000,000 houses for the US and you’re good. Maybe drop the prices a little due to ‘efficiencies’ or ‘innovation’. Perhaps take the price reductions of the last ten years and extrapolate forwards in a straight line. Then calculate the energy savings, using today’s cost of energy. Repeat the same basic exercise for every known source of carbon pollution in the economy, and every current way of reducing those emissions. It’s a big effort, but simple. Old-school economists do this for carbon pollution just like they did for acid rain and every other environmental law. And just like every other case, the answer they come up with is meaningless.
Consider the attic as an opportunity instead of as a cost, because that’s how the market sees it: Thanks to new legislation you have a new market of 100,000,000 customers for a $2,000 insulation product. How do revenues of 200Bn sound? That market is yours if you can improve on a system that hasn’t changed much in 50 years. Not in the product, delivery, service, data management (zero), or any other significant way. Feel lucky? You should do. The costs you are saving your customers currently assume a monopoly supply of energy from a remote source. Costs have previously not changed price from day to day or minute to minute, or even in response to demand. Despite the fact that demand varies wildly and from place to place. No benefits have previously been recognized for reduction of demand on the fixed assets of the monopolist. All of this will of course change, can be changed by you. So I expect you can insulate for less than $2,000, save more energy, save more money, and improve grid reliability all at the same time.
Multiply that attic innovation by every possible way of creating efficiency and energy currently known, and those currently unknown, and there you see our future. And it looks nothing like the one old-school economists see.
Why do I keep saying ‘old school’ economists? Because those are the majority that for decades have assumed that (and I am not kidding) that all consumers know everything about the market, and they only act rationally in economic self-interest. Really, they assume that. Now, new-school economists know that we are not rational or all-knowing, so they can’t tell us the future either, but they *know* that they can’t. They don’t get invited on to TV, and certainly not into the climate-denier Wall Street Journal.
Given that the future is so rosy for innovation do we sit back and wait for the market to do its’ magic? No, there is 1) too much friction in the current system, 2) massive resistance to change from vested interests, and 3) no ‘starting gun’ for that market of 100 million homes, and all the other opportunities.
Because the true cost of inaction is everything we hold dear, we know it’s worth giving the market a very good reason to start moving. We could legislate individual changes through caps or taxes, but a price on carbon pollution is the ideal starting gun. Companies are budgeting internally for the cost of carbon pollution already (even ExxonMobil). When we create an external, shared, price it will shift the playing field enough to overcome both inertia and active resistance.
Then the market will do its stuff and the old-school economists will be proven wrong. Again.