Tuesday, April 21, 2009

Greenhouse Gas Dynamics and Economic Development

On the day before Earth Day, the NY Times Joe Tienery gets politically incorrect and argues that economic development is a "friend" of fighting climate change. He throws a healthy punch at the I = P*A*T formula. But, as someone who has written an entire book on this issue, permit me to comment.

Here are the energy facts for the United States over the last 60 years. Note that energy consumption per-capita increases and now has been flat for about 20 years. This is despite ongoing income growth. So, Tierney is right that energy consumption per dollar of output has declined BUT note that total energy consumption just keeps rising (population growth). Given that all Mother Nature cares about is total GHG, she would be upset. The data reveal that there is some truth to Tiernery's story but not enough progress has taken place during a century of growth to reduce our GHG emissions. Why? The short answer is incentives. Economic development is not sufficient for achieving environmental progress we all also need explicit incentives not to pollute.

Economic development "solves" environmental problems under the following circumstances;

1. the health and amenity consequences of the pollution caused by the status quo technology are immediate
2. the growing middle class do not like the pollution
3. on the supply side, economic development causes engineering triumphs that unbundle the pollution from economic activity.

Under these conditions , a democracy will choose to regulate itself to enact incentives to fight off the annoying pollution.

So, in the case of indoor air quality or urban lead emissions these 3 conditions hold.

As Arik Levinson and Hilton have documented, as nations get richer --- yes they consume more gasoline but they consume higher quality gasoline and (lead per gallon)
declines faster than gasoline consumption increases so in richer nations total lead emissions from driving declines ; in terms of the math

total emissions = technique*quantity where technique = lead per gallon

In the case of Climate change, the 3 conditions do not hold. There is a latency to climate change. There is currently no private incentive for households to not drive that Hummer (free riding) and even President Obama appears to be unable to enact cap and trade so there is no market incentive to induce innovation (i.e the next Prius) to unbundle GHG emissions from miles driven. If our engineers could invent a car that gets 1 million miles per gallon, then GHG would shrink; but what incentive do they have to achieve that right now?

Ehrlich would worry that Tienery's optimism will Lull Larry Summers into not enacting carbon regulation because our economy will just "magically" get green. While I am a Chicago economist, even I don't believe that. We need a credible carbon nudge from government and the Chinese need this nudge as well.