Whose "Economy" Is It Anyway?

(1/9/2009) - One of the most popular arguments against a carbon tax, cap-and-trade system, or any other government-run program that would attempt to help companies internalize costs that they would otherwise externalize, is that such programs would hurt the economy by increasing businesses expenses on non-productive activities, therefore dampening aggregate economic growth (or, in our present situation, deepen the recession).  In short, it will “hurt the economy.”

On the face of it, this is an accurate argument.  Of course, one could accept it and still make the case that the sacrifice is worth it.  But as long as people in favor of internalizing the costs of damaging the environment do not control the discourse and change it away from "the sacrifice is worth it," they will be fighting an uphill battle. 

Shifting the Debate Away from “the economy”

I believe that it is wiser to reject the premise of the argument entirely.  When talking heads and politicians discuss the “economy,” they are inevitably referring to the Gross Domestic Product (GDP), the “total cost of all completed goods and services produced within the country in a stipulated period of time.”  

GDP, which has become the most common measurement of economic success, is a deeply flawed device for measuring increases in standards of living and productivity.  First, suppose there are two next-door-neighbor families, each of which has one each of which has one spouse that works as a full-time lawyer and one that stays at home.  In this scenario, the lawyer is contributing to the GDP, while the spouse is not, because their services have no attached price.  Now consider the highly hypothetical situation that each hires one spouse out to the other as a nanny/maid/gardener/cook for $20,000 a year.  The same work is done, but the GDP has been increased by $40,000 a year.

The GDP also increases from treating problems it would be best to avoid in the first place.  Marlboro adds to the GDP when they sell cigarettes to a customer, and the surgeon contributes to the GDP when she operates on the smoker’s throat cancer.  Jailing criminals adds to GDP, as does pollution and extraction of natural resources (depreciation is not included in calculations of GDP).

Of course, I’m not the first person to point out these shortcomings.  The problem is that this discussion hasn’t yet made it into the national political discussion.  Even though a well designed cap and trade system risks limiting GDP as calculated above, it will almost certainly have a positive effect overall.

One of the major obstacles that stands in the way of moving beyond GDP is that the world lacks a good way to estimate the value of natural resources – forests, oceans, rivers, soil, the atmosphere, etc.  How do we estimate the value of clean air?  Of a forest’s ability to prevent erosion and soak up water?   

One way would be to create (heavily regulated) markets for natural resources.  Pay to pollute permits like a cap and trade system is one example.  These systems would (in theory) allow market dynamics to ascertain a price and help prevent companies from externalizing costs.  Catch shares is another version of this same idea. 

A major advantage of this approach is that it puts the value of natural resources in terms that many people can understand – dollars.  This would subvert the argument that raising taxes or increasing regulation is bad for “the economy,” because it will change the definition of what “the economy” is. 

While many of these systems sound promising, its  important to remember that market dynamics is just one of many tools, and cannot solve all of our problems.  For example, there are many different types of carbon-based fuels, each of which plays a different role in society and occurs naturally in different concentrations.  There is a lot of coal in the world, while oil production will most likely peak by 2030 (if you’re going to be optimistic).  Not even considering global warming, conserving oil makes sense because there just isn’t that much if we look at the long term (the next 100 years). 

A cap and trade or carbon tax won’t necessarily reflect this dynamic.  A carbon tax of $100 per ton would raise the price of gasoline by about $1 a gallon, or about 25-66%, depending on where you start ($1.50 or $4 a gallon).  The same tax will increase the cost of coal by anywhere from 500-1000%, depending on the type of coal (different coal has different carbon contents).  The price of electricity generated by coal-fired plants would increase by about $0.10-$0.11 per kWh – up from the current average of $0.08/kWh for all electricity. 

A price increase of $0.10 per kWh would easily make wind energy price-competitive with coal (if it isn’t already), and make solar thermal a sound alternative in many parts of the country.  At the same time, the $100 per ton carbon tax (or equivalent cap and trade, which I actually prefer), wouldn’t have the same impact on the transportation industry, and it would be good to consider additional measures.

This Isn't Your Father's Economy

Another thing to consider is that, while promoting clean energy through carbon regulation might not be a threat to the "real" economy (GDP + all those other things), it is a threat to carbon-based businesses.  Coal companies WILL be hurt.  If electric cars catch on, many mechanics will need to start looking for a new line of work, as electric motors require much less maintence than internal combustion engines. 

In the aggregate, there might be a net gain in jobs.  But for some, "the economy" becomes "my economy," and the picture isn't bright.  If the government is going to favor certain products through carbon-related policy (as I believe it should), it also needs to be conscious of the losses some people will suffer.  General increases in job training funds and money for continuing education should be made availible.