Various efforts are afoot to sell schemes limiting greenhouse gas emissions as not merely good for the environment but good for the economy, too. We should be suspicious. If such measures were truly good for the economy, then why would they have to be mandated? Why wouldn’t individuals and businesses jump at the opportunity to achieve economic gains voluntarily?
Earlier this year, a Heritage Foundation study calculated that imposing limits on greenhouse gas emissions via the Lieberman-Warner bill would have cost the economy $1.7 trillion cumulatively by the year 2030. The reason for these losses is fairly straightforward: Meeting the bill’s caps on emissions would require using less energy and substituting renewable energy for fossil fuels—even though renewable sources are more expensive than fossils fuels. Switching to renewables, thus, requires making fossil fuels artificially more expensive.
So, in what world could higher energy prices and forced reductions in consumption make people better off? Believe it or not, agenda-driven research is attempting to posit such scenarios, and these, naturally, are being cited as support for environmental proposals by President-elect Barack Obama. One widely-cited study is that of David Roland-Horst, a researcher at the University of California–Berkeley who examined California’s experience with energy-efficiency mandates since the 1970s. The San Francisco Chronicle credulously describes the study:
Although the Berkeley study examines complicated policies, its central observation is simple. When people use less energy, they spend less on utility bills and have more to spend on other things, from groceries to clothes to lattes. That spurs job creation.
As a result, California should prosper even if a cap and trade system raises electricity costs, Roland-Host said. Although the price of electricity would probably go up, the state and its residents could avoid paying more by using less energy.
In other words, it is claimed that even though energy prices are higher, people will benefit overall because the higher prices redirect their spending to other higher-valued things.
But if resources have higher-valued alternative uses, then individuals will adjust their spending on their own. They don’t need government mandates to do it. The only way this makes sense, is if you suppose that consumers’ real preferences are not reflected by their actual choices—i.e., that they are irrational and need to be led to their true interests by government-distorted price signals.
David Kreutzer of The Heritage Foundation notes some reasons to doubt that California’s program has been a net plus:
… Californians pay 36 percent more for their electricity, have watched manufacturing’s share of state output drop by 15 percent since 1980, need less electricity for heating and cooling than the rest of the nation, live in smaller houses than the national average, and pay billions of dollars to generate electricity using inefficient alternatives.
What about the idea that higher prices (combined with government investments) can induce more research in energy efficiency and that such research will over time produce gains that more than offset the higher prices? For instance, a recent report of the Center for American Progress states:
Public and private investment in energy efficiency reduces energy demand and lowers energy costs, which in turn means that money spent now on energy efficiency will pay for itself through lower energy bills over the long term. Lowering energy costs for educational buildings eventually means more funds for teachers, books, and scholarships. Retrofitting hospitals over time releases money for better patient care. And providing incentives for investment in more private-sector energy savings at commercial buildings, factories, and residential homes helps American businesses and consumers save and invest money over the long term and improve our quality of life.
This argument is really just a more subtle version of the free lunch argument. Resources directed to research that the government wants done have alternative uses—such as research by private companies. Government-directed research might produce gains in energy-efficiency, but those gains are not free. They come at the cost of whatever gains would have been produced had the government not interfered. Again, government doesn’t have to tell individuals and private businesses to pursue economic gains. They already do that on their own. That’s why our economy today is more efficient at doing everything than were the economies of 10, 20, and 50 years ago.
Another false argument being made is that shifting to a low-carbon-emitting economy will lead to lots of new jobs because people will have to be hired to build the new energy-efficient infrastructure as well as retrofit existing facilities. The CAP report argues, for instance, that a federal $100 billion green recovery program would add 2 million new jobs to the economy and reduce the unemployment rate to 4.4 percent. And President-elect Obama says that 5 million new jobs can be created with a program of $150 billion.
But, as Ken Green of the American Enterprise Institute notes, this is the broken window fallacy identified by Frederic Bastiat 160 years ago. Bastiat “explained the fallacy as follows:”
Imagine some shopkeepers get their windows broken by a rock-throwing child. At first, people sympathize with the shopkeepers, until someone claims that the broken windows really aren’t that bad. After all, they “create work” for the glassmaker, who might then be able to buy more food, benefiting the grocer, or buy more clothes, benefiting the tailor. If enough windows are broken, the glassmaker might even hire an assistant, creating a job.
Did the child therefore do a public service by breaking the windows? No. We must also consider what the shopkeepers would have done with the money they used to fix their windows had those windows not been broken. …
Now consider Obama’s “green jobs” plan, which includes regulations, subsidies, and renewable-power mandates. The “broken windows” in this case would be lost jobs and lost capital in the coal, oil, gas, nuclear, and automobile industries. These industries currently employ more than one million people directly. Conventional power plants would be closed and massive amounts of energy infrastructure would be dismantled. After breaking these windows, the Obama plan would then create new jobs in the renewable energy sector. The costs of replacing those windows would ultimately be passed on to taxpayers and energy consumers.
Earlier this year, the San Francisco Chronicle was given an assessment of the cap-and-trade idea that did not ignore the jobs that would be lost in fossil fuel production:
So if somebody wants to build a coal-powered plant, they can. It’s just that it will bankrupt them because they’re going to be charged a huge sum for all that greenhouse gas that’s being emitted.
That assessment, of course, came from Barack Obama. Proponents of schemes to limit energy consumption should always be so honest.