Tuesday, March 24, 2009

Polluting for Free

In 2005, every U.S. citizen emitted 20.1 metric tons (on average) of carbon dioxide into the atmosphere due to energy-related consumption. To put that into perspective, Europeans emitted 8.2 metric tons of energy-related carbon dioxide per capita, while the Chinese only emitted 4.1 metric tons.

Why do we Americans emit so much more carbon dioxide on a per capita basis compared to the rest of the world? Some argue that greater energy consumption – which clearly leads to greater environmental degradation - allows for higher living standards. I wouldn’t hesitate to say that the average American has a higher “living standard” than the Chinese, but I wouldn’t make the same statement when comparing America to the living standard of Europeans. I argue that the main reason why American’s can afford to emit so much carbon dioxide and other pollutants into the atmosphere is because the environmental impact of energy consumption is not embedded into the price of energy. To put it simply, there is no economic cost associated with polluting, so there is no incentive to stop. The movement to develop a green/renewable energy industry will surely fail if energy prices continue to discount the environmental impact of excavation, production and use of fossil fuels. Why? The price points of energy produced from solar or wind on a massive scale are significantly higher compared to energy produced from conventional sources such as coal or oil.

How can we embed the environmental cost into the price of energy? There are several ways the United States can modify the price of conventional energy sources to reduce consumption and motivate the technological innovation necessary to get the green/renewable energy industry up and running. We can take a page from Europe’s book and artificially inflate the price of energy by creating a price floor. For example, setting the price floor for petroleum to $3.50 per gallon creates an artificial price at which gas will never fall below regardless of the market price of a barrel of oil. The key is to determine a price level that shifts consumer preferences away from conventional energy sources. Another solution is the cap and trade system, which is also employed in Europe. The cap and trade system creates extra cost for energy producers that go above and beyond their emissions requirements set by the government. Conversely, companies that have emission levels below threshold requirements can create extra revenue by selling credits to over-emitters. An alternative option is to tax energy producers for every metric ton of carbon dioxide pollution.

The three alternatives highlighted above all have slightly different economic consequences that are difficult to predict with any degree of accuracy. However, one thing is certain. As the price for conventional energy sources increases – as it will if the government taxes either the manufacturer of energy or the end user of energy directly - the demand for alternative solutions will increase. This will open the door for the green/renewable energy industry to compete on terms of price, which is the biggest impediment that is restricting alternative energy sources ability to penetrate the market.

2 comments:

lima charlie said...

I cannot agree anymore with your reason as to why American's can easily afford to emit so much pollution. In particular, your example of setting a price floor for petroleum is a practical and simple solution. Furthermore, when gas prices where at around $4.00 per gallon, it was demonstrated that American's began to shift their thinking and everyday practices of consuming gas in order to accommodate for the high prices. Because we have "test-driven" how consumers react to expensive prices, it seems that this approach has been proven effective in altering the ways American's consume gas.

However, I do want to shed light on the population that really feels these price increases: low-income populations. These families and individuals are the ones that really pay the price for such policies, as their resources are even more constrained. For example, one could argue that if gas prices are too high, they can simply jump on the bus as an alternative mode of transportation. This, however, can be difficult for single-parent households who cannot afford a babysitter and need to take their kids with them as they run their errands. This is why social policy "enthusiasts" such as me, have a hard time with environmental policies that deal with price regulations, as they often have colossal effects on low-income populations.

A solution to meet the needs of both environmentalists and low-income populations is perhaps have the difference of the market price of gas to the floor price go towards transportation vouchers to needy families. Unless this has already been proposed, I feel this could be a way to satisfy the needs of both parties.

This class has really helped me realize the importance of smart energy and the negative and dangerous effects bad practices has had on the environment. I am now a proponent for such changes; yet, I really wanted to highlight the importance to incorporate the needs of low-income populations as part of their policies.

Yuval said...

On a similar note, why are there no high-speed trains (such as the ones popular in France, Japan and elsewhere) in the United States? Amtrak has long since passed its sell-by date, and Greyhound is not a bastion of inter-city travel comfort. If gasoline prices receive an artificial floor to discourage driving, there could be more buses or light rail within a city (and even vouchers for the poor, although since most general public policies don't take the poor into account, this smells of red herring), but that wouldn't solve the problem of going from San Antonio to Chicago or Dallas to Austin. The technology clearly exists and building these trains would reduce traffic congestion, improve on carbon emissions and save lives through fewer car accidents on the highway. It would have stimulus benefits as well, along with being neat to go from Austin to Dallas in an hour.