Sunday, March 1, 2009

GHG emissions reductions: invest or regulate?

Clearly, there are lots of interesting developments going on in the CO2 regulation front of energy policy, including the President's projection of revenues of $645 billion from auctioning CO2 credits, his call for a market-based cap-and-trade system for greenhouse gases in his non-state of the union address on Tuesday, the executive memo instructing the EPA to reexamine California's application to regulate CO2 emissions from vehicles, and the EPA's own decision to move forward on developing CO2 emissions even in the absence of new congressional authority. Moreover, the American Recovery and Reinvestment Act of 2009 is supposed to make substantial new investments in clean energy technology.

While I have been an avid supporter of both a cap and trade system and substantial public investments in energy technology and infrastructure that reduces greenhouse gas emissions, it has occurred to me that it is possible that these two approaches might work at cross-purposes. One of the reasons that a cap and trade approach is touted is that it doesn't "pick a winner" since what is important is how much the total greenhouse gas concentrations are in the atmosphere, and not where they come from. Presumably, the private sector will be able to sort out the most economically efficient ways of reducing greenhouse gases to the acceptable levels, and we will be able to achieve our enviromental goals at a minimum cost to our economy. While there are other market-based proposals, such as a carbon tax, it seems that a cap and trade system is what the President and Congress are almost certainly going to agree on.

However, who these days is actually doing the investing? How many banks would be bankrupt today if the federal government had not stepped in with TARP to supposedly keep the credit markets from crashing? If the "private money" is actually public money, then what economic benefit is there to adding the banks and the investment community to the process of getting money into these companies and projects? Price signals alone, as the current economic situation should tell us, are not always the very best way to determine the worthiness of a particular action. If you ask me, I trust the technical experts and, yes, "bureaucrats" who would be making these decisions based on a wide range of relevant factors and not just price far more than I trust the same clowns on Wall Street who put us in this mess to begin with. The cap and trade system will be a good way to comprehensively remove incentives to pollute, but we shouldn't let the supposedly sacrosanct principles of the free market keep us from making wise investments in the technology and infrastructure we need to avert the worst consequences of global warming.


Rachel said...

I actually strongly disagree with having government pick the best technologies to invest in. Most likely, nobody in government will have the same amount of experience and insider knowledge of technologies as people in the actual industries will have. If the government cares about the wide range of relevant factors beyond price then they can regulate those factors, but the market is going to almost certainly be far more efficient at finding the most economical solution to meeting the regulations. In my opinion, this is better than throwing money at the pet projects of bureaucrats or the projects supported by particularly vocal lobbyists (as unfortunately is too often the case in government).

Having worked on advanced technology in the automotive industry, a highly regulated sector, I have seen countless times where government picked "winning" technologies much to the detriment of actual environmental progress. The most notable example which springs to my mind is the support of ethanol, which has widely been derided as causing more harm to the environment than good. Other examples include excessive funding of fuel cells at the expensive of other technologies such as batteries, tax credits specifically to hybrids including luxury ones like the Lexus 400h which get worse fuel economy than many other vehicles, and lastly (a somewhat more controversial example) the forcing by the state of California to produce all electric vehicles decades before the battery technology was ready. Contrast this with the regulating of emissions, which left the companies free to pick technologies, and has successfully resulted in much cleaner vehicles with minimal additional cost to the consumer.

John D. said...

I think it will be very difficult for the government sector to force a set of GHG technologies. GHG emmisions are extremely technical and diverse across industries. I think it would be very difficult for the governement to pick a solution that works for everyone. Besides, why should the government care why GHG emmisions decrease? When you use a carbon tax or a cap and trade system you allow industrial innovation to be on your side and work for you.

Furthermore, the recent economic downturn has killed Ethanol because it is so EXPENSIVE relative to gasoline. Why would we incentive a more expensive form of energy that will raise our food costs in the time of a depression?