It’s time to finish up my thoughts on CO2 emissions. In previous posts, I discussed why I felt taking risk mitigation actions on our CO2 growth made rational sense and why I’m concerned about those that simply assume there is no risk at all without evidence.
However, I think the strongest of the conservative counter arguments has always been fear that we break the economy through what essentially amounts to an overwhelming energy tax. So let’s talk about how economics works and see if we can address this concern.
Let’s start with this quote as a typical of AGW Skeptics:
Few people have any problem with anthropogenic global warming being treated as a tentative theory worthy of further investigation.
Many do, however, have a problem with the idea that a tentative theory that is completely devoid of critical evidence should be used as a justification for permanently dampening the economic prospects of mankind.
Here we meet the claim that current CO2 curbing proposals will permanently the economy for the rest of forever.
I look at this argument I want to scream? Isn’t this guy supposed to be a conservative? Why such an incredible lack of faith in the markets?
How Markets Work
I’m sure you all know that the free market works by the law of supply and demand. If you have large demand suppliers can charge higher prices and make greater profits. So more suppliers enter the market to take advantage of the increased profits. As more companies supply products and services competition increases. This causes the prices and profit margins on that demand to drop, but it also reduces desire to supply for that demand. In addition, as supply goes up, economies of scale reduces the over all costs.
Of course, if supply grows too large, then the profit just isn’t there. This causes supply to drop and for prices to rise. As prices rise, demand drops.
The net result is that we end up with a sort of equilibrium where the market finds just the right price to give the optimal supply and demand that is worth it to the most customers and companies.
How does this apply to the quote above?
The quote above basically assumes that the free market does not function. It assumes that if we decide to place a so-called “carbon tax” on fossil fuels that demand will not go up for alternative energy sources thus increasing competition and economies of scale on those sources and reducing their comparative price with fossil fuels.
In reality, as the cost of fossil fuels rise, the demand for alternative energy sources will naturally increase and there will be higher profit margins to be made from these sources. Then the market will work it’s magic (over a long period of time perhaps) and eventually a new equilibrium will be reached where alternative energy sources are naturally more competitive with fossil fuels. So, if we believe markets work the way they are supposed to, we don’t have to worry about hindering the human race forever.
What About the Short Run? Why We Need to Avoid Sudden Jolts
While we have nothing to fear in the long run, we need to have great respect for the short run. In the short run, the market won’t be able to respond and the net result will be massive increases to energy costs across the board. (Even non carbon energy will increase at first due to the increase in demand for them caused by the sudden jolt over fossil fuels costing more.)
You do not want sudden jolts to the economy like this, especially anthropogenic jolts. When suddenly millions can’t afford the cost of their energy, you’ll have sudden poverty, unrest, and a lot of bad things. We don’t really know how bad, or for how long. But that lack of knowledge should scare us. It could be very bad and for a very long time.
Nevertheless, the bad period will be temporary. Eventually the market will recover from anything we do to it and will get back to where it was at. So any ‘carbon tax’ we add will only be temporary.
Market Problems
But in saying ‘the market will fix it in the long run’ I’m essentially glossing over just how bad it could be in the short run. The invisible hand of the market is often the blind hand. The way it ‘fixes the problem’ may be by getting rid of the surplus population by letting them starve to death. This reduces demand for fossil fuels, thus reducing the costs, etc. It’s a victory not worth having.
So while I have faith that the market will ‘fix the problem’ I do not have faith that I’d like the fix. As Keynes is famous for saying, the market can stay irrational longer than you can stay solvent.
The Zero Cost Solution
I think we need a clear and present danger in AGW before I’m willing to use a fix like a massive carbon tax. If we get to a point where things are going bad fast, and we know for sure people are going to die either way, then I’d be in favor of a massive carbon tax so that we can quickly save the planet. But not before.
But this raises the question. Can’t we just reduce the “tax” on carbon and take longer to fix the CO2 problem? Yes. That is possible. And not very hard.
But if this is true, then it means it’s also possible, at least in principle, to maybe even eliminate the additional costs via a trade off with how long we take to fix the CO2.
In my next post I’ll explain how emissions trading works and how it can be tweaked to not cause a short term economic impact.
The Time Frame for a Non-Cost Solution
Obviously the time frame on a ‘no impact’ solution would be much much longer than the quicker fix (if you can call it that) supported by democrats. As I mentioned in my previous post, I’m advocating for nothing less than five decades before we actually stop the CO2 growth. Probably longer.
But at least it’s good news that we can both decide to try to act on CO2 growth for risk mitigation reasons and also still reject the current liberal policies that we fear will cause an economic disaster. Curbing CO2 growth does not have to be a trade off between atmospheric and economic disaster.