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Cost/Benefit Analysis Cannot Justify Waxman-Markey's Aggressive Targets

Chip Knappenberger was perhaps the first analyst to demonstrate the negligible impact on global temperatures that would result from unilateral U.S. adoption of the pending Waxman-Markey bill. Knappenberger showed that even if the U.S. cut its emissions by 83% (of the 2005 level) by the year 2050, and then capped them at that level indefinitely, the schedule of global temperature increases would only be postponed by about five years.

Naturally, supporters of strong government action argued that the whole point of Waxman-Markey was to give American negotiators credibility when they demanded reciprocal action from other countries; Paul Krugman says as much in a recent blog post. Yet this leads to the next major problem: If the whole world adopted the stringent emission cutbacks in Waxman-Markey, then the costs to the global economy would far outweigh any reasonable estimate of the benefits (measured in avoided climate damage).

I explained this point in a previous post, but since then Resources for the Future (RFF) has released an excellent primer on climate mitigation policies. Even though two of the papers’ authors now work for the Obama administration, it too agrees with me: Standard economic analyses cannot justify the sharp emission cuts laid out in Waxman-Markey. Its costs far outweigh its benefits, as a simple perusal of the “consensus” models will show.

The RFF paper discusses its results in terms of modeled impacts from two different atmospheric concentration targets, namely, limiting the CO2 concentration to 550 ppm or adopting a more stringent ceiling of 450 ppm. In order to gauge the likely impacts of worldwide adoption of Waxman-Markey, we have to translate Waxman-Markey’s emission targets into the appropriate atmospheric concentrations.

Fortunately, the RFF paper makes such a link. The authors find (on page 5) that across the models and stabilization scenarios they lay out in their Table 1, stabilizing concentrations at 550 ppm means that global emissions can rise only 15 to 55 percent above 2000 levels by 2050. In contrast, to stabilize concentrations at the more stringent ceiling of 450 ppm, global emissions must fall 35 to 50 percent below 2000 levels, by the year 2050.

Recall that Waxman-Markey mandates an 83 percent reduction in emissions by 2050, relative to the year 2005 levels. Clearly, of the two scenarios studied by the RFF paper, the more stringent policy–limiting atmospheric concentrations to 450 ppm–comes closest to what “worldwide adoption of Waxman-Markey” would mean. So what does the RFF paper have to say about the costs of such an aggressive target?

Under the 450 ppm CO2 target, cumulative GDP losses are about 1.0 – 2.5 percent and 1.5 – 5.5 percent in 2025 and 2050, respectively, or about $8 – $43 trillion in present value from 2010 to 2050. (p. 5)

So the next time Joe Romm or Paul Krugman tells you that “the science” says aggressive climate action is cheap, point them to this RFF study, which says the cumulative cost through 2050, expressed today in present-value terms, is up to $43 trillion worldwide.

If we assume the U.S. would suffer a quarter of these global damages, it means the present-value estimate of lost American output (just through 2050, mind you) works out to a range of $2 trillion to $11 trillion (page 6). If proponents of aggressive government measures want to say the benefits justify such costs, fair enough; but let’s not kid ourselves that this is going to be cheap.

Later in the paper, the authors discuss the possible benefits of aggressive mitigation policies. But as I explained in my earlier post, the aggressive emission cutbacks of Waxman-Markey cannot be justified. Standard cost/benefit analyses show that more reasonable targets–such as a concentration of 550 ppm–are the obvious policy responses to the IPCC forecasts of climate damage. It is only by making fairly ad hoc assumptions that one can inflate present-value estimates of future climate impacts, to the point where a 450 ppm stabilization target is more efficient than a looser target.

Chip Knappenberger has shown that unilateral adoption of Waxman-Markey will impose large costs on the U.S. economy with no appreciable climate benefits. Yet mainstream models of the global economy and climate system show that worldwide adoption of Waxman-Markey would be foolish as well. It takes heroic assumptions both of lurking climate catastrophes and of international dipomacy to justify support for the current bill.

35 comments

1 Andrew { 06.05.09 at 9:07 am }

The flailings of Capn’Trade supporters are getting comical!

2 Adam Allpow { 06.05.09 at 2:37 pm }

Well I just read your article and the Discussion Paper. You present a strong argument but I wonder what alternative there is. Surely something must be done to curb climate change.

3 rbradley { 06.05.09 at 3:33 pm }

Adam:

This is where study of costs and benefits, or trying to assess the “premium cost” and “redemption value” in terms of an “insurance policy,” comes into play.

The alternative to policy activism is do no harm so a wealthier society from nonpriced carbon is in a better situation to deal with future climate change, natural or anthropogenic.

All pain and no gain policies have an opportunity cost in terms of less adaptation.

The other policy imperative is to improve public policies in general knowing that society has less slack in addressing big potential problems. So reduce statism to allow more agricultural sectors to adapt to climate change and remove immigration barriers to let people move to preferred climates.

4 Adam Allpow { 06.05.09 at 8:58 pm }

rbradley,

Excuse my laymen interpretation for what you said. But what I understand from your second paragraph is “let the future deal with it because it’s too costly now.” While I agree that the proposed solution may be too costly, postponing any action is irresponsible. Some action must be taken, if only investments in technology we assume will help reduce costs in the future.

And that was my question. I accept that the proposed fix is flawed economically. But surely something can be done that is of sound economic policy.

Also, removing immigration barriers seems rather like moving to the dry side of a sinking ship.

5 Markus Stocker { 06.06.09 at 4:18 am }

RFF paper: “Standard economic analyses cannot justify the sharp emission cuts laid out in Waxman-Markey.”

You know what I wonder? If nature is not an element of standard economics, how can a standard economic analysis account for any cost/benefit w.r.t. the environment?

I totally agree with you, it won’t be cheap, not just in terms of money, but also, I think, in terms of sacrifice by (ideally) everyone. And it is no wonder it won’t be cheap: “The estimated value of environmental goods and services was about $33 trillion in the late 1990s.” (Kaufmann and Cleveland. Environmental Science.) Without being an expert in economics, I believe, those $33 trillion are seen as a free subsidy in our economic modelling.

Now, as long as we get those $33 trillion it’s probably going to be all good. But what about if they decrease, while, perhaps, our need for growth increases? Yes, Robert, given the order of magnitute of those figures, I believe, it is reasonable to assume it won’t be cheap.

Which doesn’t answer the question of necessity.

6 Andrew { 06.06.09 at 10:48 am }

You guys aren’t getting this are you? Tell me, is a society made poorer by efforts to combat climate change better or worse equipped to deal with climate changes which will happen anyway? This question is especially important considering the fact that the measures taken will have little effect on that change (and zero on natural changes).

Do you not understand that the best way to cope with changes that will occur is to get as rich as possible? How thick can you get!

7 Richard W. Fulmer { 06.06.09 at 11:53 am }

Adam,
If global warming does, in fact, place “Earth in the balance,” then we cannot afford to run a nationwide, much less a worldwide, experiment. The more serious the problem is, the less we can afford “solutions” that make it worse. Unfortunately, Waxman-Markey could do just that by driving energy-intensive industry out of the United States and into less efficient countries such as China. The net effect could well be increased worldwide CO2 emissions.

While “doing something” might make us feel better in the short run, we must first make sure that the “something” we do does no harm. Not only would waiting enable us to generate wealth needed to more effectively deal with global warming, it would also give us time to better understand the problem and to devise effective responses.

8 Adam Allpow { 06.06.09 at 2:22 pm }

Richard,
Again, I concede that the Waxman-Markey plan is flawed. I do not support it. But, neither do I support sitting on our hands. The idea that we are somehow gathering funds for future use is simply untrue. The U.S. government has no function to “save up.”

I suppose my suggestion was this: Shouldn’t we be investing in emerging technologies? I am not an expert; but, from my understanding, tide energy is a good start. Also, although massive wind-farms and solar arrays may not be entirely feasible, why not turbines and panels on individual homes and businesses? The government could help to reduce that cost, either by sponsoring X-prize like contests or by directly subsidizing it.

The government should not run the market-place. But the market has many powerful vested interests against the adoption of cleaner energy; so the government, for lack of a better agency, must nudge the market.

9 Andrew { 06.06.09 at 4:05 pm }

“he market has many powerful vested interests against the adoption of cleaner energy”

Do you even know what a market is? The market itself has no “vested interests”-I mean really how ridiculous. If alternatives can’t succeed in the market, rather than conclude their is something wrong with the alternatives, you suggest that rather than following rational self interest as individuals, people are conspiring against those energy sources. Puh-leeze.

“The idea that we are somehow gathering funds for future use is simply untrue. The U.S. government has no function to “save up.””

“We” and then you say the government. So what you are saying is that only the government can invest in new technologies and only the government can get us to adapt. Hogwash. People make rational decisions for their own self interest, and it is rational and in their self interest to adapt to changes. It’s “government” this and “government” that with you. Why? If you really believe that “The government should not run the market-place” then that you repeatedly suggest they do so is, frankly, absurd.

10 Andrew { 06.06.09 at 4:14 pm }

As a matter of fact, if your believe we should invest tons of cash in alternative energy, then go ahead and put up or shut up-put all your personal money into it. You have no right to effectively force other people to make investments which might fail and on which they will get no material return through taxing them.

11 Richard W. Fulmer { 06.06.09 at 9:06 pm }

Adam,
I like the idea of a prize, but wouldn’t the market sufficiently reward any company or individual that comes up with a clean power source that is economically competitive with fossil fuels?

Technology that requires government subsidies to be competitive is technology that costs more. If something costs more, then (generally) more resources (and more pollution) are needed to produce it. In the U.S. during the late 1800’s, electricity was produced by distributed generators – equipment located at individual homes and factories. Power generation became centralized because doing so was more efficient – that is, fewer resources were needed to build one large central plant than were needed to build hundreds of small, distributed generators.

Another problem with subsidies is that they are typically distributed on the basis of politics rather than on science.

What about nuclear power? Right now, nuke is politically dead, but it may be the only viable, low emission alternative to fossil fuels for the foreseeable future. If so, could it be resurrected from its political grave?

12 Andrew { 06.06.09 at 9:52 pm }

Funny thing about the X-prize analogy-that was created by the market and got people doing things that took NASA, a government institution, years, very quickly relatively.

13 Adam Allpow { 06.07.09 at 12:12 am }

Wow. To think I would get a civil response was naive I suppose. I suppose I’ll answer as many of those mud pies as possible.

Yes. I absolutely know what “the market” is. It is imperfect. And, though it may not have a collective cognizance, individuals and corporations therein certainly do. It is against the interest of the existing powerful corporations to change course. Not because other courses are necessarily bad, but rather that the existing corporations have investments (factories, trained workers, experience, etc.) That is not to say that the existing corporations are somehow evil – just that there are burdens to their adaptation to technologies beyond their expertise and investments. Startup technology faces the burden to overcome the entrenched status quo, thereby making its progression somewhat slower than necessary. Furthermore, I do support market based funding for this research; but I believe the government has a role in expanding research grants and stimulating investment.

There is no correlation to the cost of a technology and the pollution it outputs. I don’t know why you would say that, Richard. Photovoltaic cells costs a mint; yet, over their lifetime, contribute a net benefit to the environment.

Of course there is something “wrong with the alternative.” That is the given assumption! The issue is how to enhance the alternative, or, to put it another way, how to make clean energy more competitive.

Your electricity argument is somewhat flawed. First, there were prizes awarded for advances in electricity related technology. The World’s Fair and state fairs, places where discovery was awarded in both cash and social connections, received government funding. Furthermore, another burgeoning technology of the 19th century was the railroad. The railroad received all manner of help from the government, from corporate charters, to land grants, to actual bonds.

Do not argue that subsidies are awarded improperly and therefor there should be no subsidies. Rather, you should argue that subsidies should be awarded properly. “We must not let the perfect be the enemy of the good.”

But, as a point of agreement, nuclear power is a valuable option. Which, incidentally, was outstandingly government funded.

14 Adam Allpow { 06.07.09 at 12:17 am }

Update,
Richard, I’m sorry to have implicated that you were uncivil. You were. Andrew was not.

15 Andrew { 06.07.09 at 12:57 am }

Oh come now Adam. That you seem to continue in your sparkling view of the market as flawed and the government as better doesn’t maybe deserve a little comeuppance? Really? Where does the money you are subsidizing with come from? Hm? Why do you-why does anyone for that matter-get to make energy investment decisions for everyone? Puh-leeze!

And you say I’m uncivil. How about you rise above that and explain why you have the right to say investments ought to be done with other people’s money? No? To bad. Go on whining that I’m being “Uncivil”

“nuclear power is a valuable option. Which, incidentally, was outstandingly government funded.”

And government killed to. Subsidies are bad for reasons beyond mere imperfect. They distort price signals and put a measure of political uncertainty into the market. They confuse the hell out of the consumers, producers, damn near everyone. The market makes decisions that make sense not based off of “entrenched status quo”. Government has done a great deal more to screw up energy than the market ever did, and your anti-market rhetoric is getting tiresome.

I don’t give a crap what you are going to say next however, because frankly you are frustrating the hell out of me. Good day sir.

Civil enough for you?

16 Adam Allpow { 06.07.09 at 2:42 am }

Andrew, (whether you read this or not)

Here is why the government has a role in this. Climate change poses a serious risk to the common good. The Preamble states that the Constitution exists to “promote the general welfare.” Avoiding potentially life threatening environmental changes is certainly a promotion of the general welfare.

Why does someone either have to accept all pillars of free market or be labeled anti-market? All aspects of society must be open to debate. Or, to put a different spin on the issue, we must have a market-place of ideas.

The government did not kill nuclear energy. The several “incidents” involved with nuclear power brought public approval to a screeching halt. The people’s perception killed it. If there were popular votes in nuclear power, we’d have more.

All things distort price signals. We may as well be reading tea leaves for the insight price signals get us most of the time. Government intervention is no more or less unpredictable than board decisions.

I agree, the market does make decisions that make sense. Those decisions, over time, evolve into the status quo. Large corporations have undeniable interests in their investments (factories, labor training, materials purchased, marketing techniques, real estate, political connections, connections to other corporations, connections to other markets, etc.) So, if an emerging technology does not mesh well with those investments, the existing firms will resist. The large capital holders will not invest. Sure, other technologies will eventually emerge through a slower process of being funded by smaller firms, who do not have those existing investments. But in a situation where the public good is at risk, speed is a factor.

And that is what this article and the reading was about. It’s a matter of cost/benefit analysis. The Waxman-Markey bill is not the right solution. But neither is a purely market driven solution. I have suggested no hard numbers, merely a question. What, if not the Waxman-Markey bill, should the government role be?

17 Markus Stocker { 06.07.09 at 4:09 am }

“You guys aren’t getting this are you?”

Perhaps, “we” all are not getting this. Perhaps, we don’t, like those on Easter Island didn’t. Why? Because while humans are equipped with almost perfect senses for imminent dangers, we aren’t very good at spotting those approaching us slowly, those that should be spotted before they are at their tipping point. Environmental degradation is one of those.

I agree with most of the discussion on subsidies, especially with Andrew when he said that they distort price signals. I wonder though, why is it always bad to subsidize clean technologies, but it is OK to subsidize the oil industry? This I have never understood. Same with nuclear. If you would internalize the full price of the risk for environmental degradation of storing for thousands of years safely nuclear waste, I don’t believe for a second that the price for nuclear would be competitive on the market. The price of nuclear is competitive on the market because the risk is on the shoulders of everyone, well, perhaps not equally as, in their self interest, those in Nevada don’t seem to be happy with the Yucca Mountain project; no one would, in their backyard, in their self interest.

The problem, IMO, why it is hard for wind, tide, solar & co. to be competitive on the market is that it is economically cheaper to mine oil and coal because they appear concentrated in nature.

Finally, I have difficulties to follow Richard when he said “Not only would waiting enable us to generate wealth needed to more effectively deal with global warming.” Why are we always thinking that we are actually growing? We are generating wealth? The economy can expand indefinitively? This illusion is only triggered because human genius was able to tap the energy the sun stored in Earth over billion of years. This gave us, temporary, the ability to quickly add the horse power of billions more hands in industry and generate what we did. But, I don’t believe, there is a net wealth generation. Plus, 20% of us are in the illusion of being more and more wealthy on the shoulders of the rest 80%. But, to admit this is too difficult for us 20% isn’t it? Like Matrix, the movie, better and easier to rest in illusion. Plus, I do think, society, even the 20% society, is poorer compared to just 30 years ago. Is it the government? Or are nature’s 33 trillion subsidies getting less? Or is the economy shrinking?

We should be thinking about development instead of growth.

(To the “Uncivil” discussion: I think, humans are what we are, also because we allow the opinions of others be.)

18 Ed Reid { 06.07.09 at 9:16 am }

Two questions for your consideration:
1) By what percentage must global GHG emissions be reduced to halt the accumulation of carbon in the atmosphere?
2) Why has no individual or group advocated reductions of that percentage?

19 Andrew { 06.07.09 at 11:55 am }

Marcus-why do you assume I am OK with oil subsidies? Did I ever say I was? Because I’m not. That you put this on me is…odd, really.

20 rbradley { 06.07.09 at 1:41 pm }

Andrew:

You need to be a lot more civil. Go ahead and assume that Adam is just as well intentioned as you. I’ll let this one go (I read it too late), but let’s be polite as much as you disagree with his assumptions and worldview.

21 Andrew { 06.07.09 at 3:43 pm }

Sorry, I’m giving myself a time out for that one.

22 Markus Stocker { 06.07.09 at 4:44 pm }

Andrew:

This is a bad coincidence, I’m sorry. I didn’t want to imply you assume oil subsidies are OK, even though I quoted you in the previous sentence. In fact, my comment and questions were not directed to anyone.

What I tried to express is that I sometimes hear the argument of subsidies against clean / more environmental friendly technologies, while probably most energy sources are subsidized. As such, IMO, it is not a good argument. I hope, I could clarify myself better.

23 Richard W. Fulmer { 06.07.09 at 11:08 pm }

Adam,
I believe that there is a strong correlation between cost and pollution. Money is simply a medium of exchange, and when we spend it, we’re really spending the goods and services we produced in order to obtain the money.

All goods and services have inherent pollution costs, since everything we do uses resources and produces pollution. While reading this blog, you are burning calories (resources), emiting CO2, and producing waste products.

I am not familiar with the steps required to manufacture solar cells, but their high cost suggests that their production must be either resource intensive, labor intensive, or both. Either way, the greater the monetary cost, the greater the resource cost and, therefore, the greater the impact on the environment.

If we’re really concerned about the environment, then acting efficiently should be a primary concern. I believe that one of the reasons that countries with free markets tend to be cleaner than those with command economies is that markets reward efficiency and penalize inefficiency.

I agree with your point that companies with huge investments in existing factories and processes have little incentive to develop technologies that will make their assets obsolete. That’s one of the reasons that I don’t like government regulation. All too often, regulators become captives of the industries they are supposed to be regulating, and end up working to protect their industries from competition and the innovation that competition engenders.

Anyway, good discussion everyone. Andrew, thanks for agreeing to keep it polite.

24 Busting the "Clean Energy Bank" (Another Problem with Waxman-Markey) — MasterResource { 06.08.09 at 1:02 am }

[...] to be “exhibit B” in the case against Waxman-Markey (“exhibit A” in that case can be found here) and yet another bit of evidence that politicians suffer from short-term-memory syndrome. Few seem [...]

25 Markus Stocker { 06.08.09 at 4:19 am }

Richard:

One thought: Are costs not also influenced by streamlining production and massive adoption?

26 Richard W. Fulmer { 06.08.09 at 12:10 pm }

Markus,
Yes, absolutely. Mass producing “widgets” should significantly reduce the per widget cost of production. And I agree that government subsidies could increase widget demand by pushing prices below manufacturing costs, enabling manufacturers to expand their factories sooner than they would have in the absence of such subsidies.

A few thoughts, though. First, governments are notoriously bad at picking viable technologies (e.g., corn-based ethanol). Also, subsidies tend to go to established companies with well-healed lobbyists – the very companies that, as Adam has pointed out, have the least to gain by coming up with innovations that will make their factories obsolete. Next, once subsidies are put into place, they are very hard to eliminate (e.g., farm subsidies in general and sugar subsidies in particular). Then there’s human nature. People tend to be about as productive as they need to be, and subsidies reduce this need.

Finally, subsidies mask profit and loss making it impossible to determine whether a given technology produces more energy than it consumes. For example, if making ethanol from corn is to have any value at all, more energy must be contained in the ethanol than is expended to grow the corn, harvest it, transport it, process it, and transport the final product to consumers. Without market pricing, how can we know whether ethanol production results in a net energy profit? The task of determining this by performing some sort of energy balance would be monumental.

While there are a number of studies out there purporting to do just that, their findings range anywhere from a net energy loss of 30% to a net gain of 30%. Who is right? Without free market pricing, I contend that we cannot know. Some years ago, I attended a DOE session in which a government study was presented that claimed that producing ethanol from corn resulted in a net energy gain. I asked one of the researchers whether the energy used by the farm workers and their families was included on the “energy cost” side of the ledger. The researcher replied that no study considered such data. Yet, worker energy use is a real cost which, in the free market, would be incorporated into production costs in the form of wages.

Furthermore, for such energy balance study to be accurate, it would have to done for every farm since farms vary in efficiency and distance from ethanol plants. An oil company, for example, does not assume that, because oil production in general is profitable, every well that it drills will also be profitable regardless of how many barrels of oil the well will produce each day, the oil’s quality (e.g., sulfur content), miles of pipe that must be laid to the well, etc.

27 Markus Stocker { 06.08.09 at 6:37 pm }

Richard:

Thanks for your comment, thoughtful and interesting. You say, “oil production in general is profitable.” Even though, I do not have clue about the oil industry, I assume this is true. Now, let’s abstract from economy, free market, subsidies, etc. what is the natural difference that makes oil production profitable and for instance solar not as much (if I recall correctly 1 kWh from oil is cheaper than from solar)? Abstract from cost of technologies, subsidies, labor, all the human added costs and distortions. For some reason, the two sources must be *naturally* different in profitability. Yes? No? Why? It is clear, that there is certainly as much energy coming from the sun as there is below ground in oil. The conversion efficiency is probably a component that creates differences in profitability. But then, again, this seems to be also a technological question.

So, if there is one, what is the fundamental *natural* difference that makes oil more profitable than solar?

Why I ask? Because I wonder if there are none, there seems to be little reason to believe the difference in profitability is a fundamental issue, but is rather caused by human factors and systems.

Apoligies if this doesn’t make any sense, it’s 1:30am in my corner of the world :)

28 Richard W. Fulmer { 06.08.09 at 6:55 pm }

Markus,
Wow, interesting question. I believe that oil production is inherently more profitable monetarily than solar power because it yields a greater “energy profit.” This is because oil is, in effect, “concentrated sunlight” collected over millions of years.

The sun produces a vast amount of energy every second, but it is very diffuse by the time it reaches the Earth. As a result, a lot of area must be covered by some sort of collecting device in order to gather a meaningful amount of energy.

29 Markus Stocker { 06.09.09 at 5:16 am }

Richard:

Exactly my opinion. While there are highly concentrated mines for oil, as you say, “concentrated sunlight,” there are no highly concentrated mines for wind, solar, waves, etc.

I think, there is a nice link to thermodynamics here. Oil sources have low entropy. Concentrated energy sources, such as oil, rely on a non-spontaneous process, that is reverse entropy, i.e. transform low concentrations into high concentrations, that requires work, work that has been done by nature over billion of years.

Wind, solar, waves, instead, have high entropy, diffuse energy. For those, there is no natural subsidy, in terms of work that has been applied to make a source economically interesting to mine. With wind, solar, waves, we have to do some more work than with oil, i.e. as you write, we need collect over a large area, we need to concentrate it, reverse entropy. What an awful job, indeed!

My point here is, should, must, we be more conscious of this? Use our concentrated energy sources more sparingly? Move along entropy’s arrow a little bit slower? Find a way to balance the two entropy arrows, i.e. to be sustainable?

I’m sorry, if such questions start to be a bit too off the standard discussion on this blog. It is probably good to remain focused.

30 Richard W. Fulmer { 06.09.09 at 9:49 am }

As Rob Bradley and I explained in “Energy: The Master Resource,” oil and coal will never “run out.” Instead, as these resources gradually become harder to find and extract, their prices will rise providing people with incentives to find alternatives. Our fossil fuel reserves, however, are so large that this process will take hundreds of years.

My grandfather was born in 1876 and died in 1975. The technology change in just his lifetime was profound – he literally went from the horse and buggy to the landing on the moon. We are as incapable of imagining the technology that will exist by the time fossil fuels become uneconomic to extract as my grandfather was of imagining the personal computer back in 1900.

As I said in the book, trying to conserve oil for future generations is like 19th Century Arabs stockpiling camel dung (an early fuel) for their descendents.

The sustainability of fossil fuel use should not be a problem, therefore, unless governments get involved. By interfering with market pricing, governments distort the signals that warn producers and consumers of approaching scarcity. Pushing prices below their market levels (as the United States did in the 1970s and as Iran and Venezuela are doing now) encourages consumption and discourages production – leading to manmade shortages. Price supports, on the other hand, discourage consumption and could lead to unnecessary deaths as people are encouraged to drive smaller, lighter cars. “Blood for oil,” if you will.

I know I’m sounding like a broken record about government interference in the marketplace, but I think that we need to have a profound sense of humility when it comes to trying to overrule the knowledge and choices of millions of people around the world with that of a few individuals in government. Leonard Read provided a very nice illustration of the immense knowledge that is needed to control an economy in his classic essay: “I, Pencil” (http://www.econlib.org/library/Essays/rdPncl1.html).

31 Markus Stocker { 06.09.09 at 10:32 am }

Richard:

I didn’t make the connection you are one of the authors of “Energy: The Master Resource.” I have a copy of the book, though I haven’t read it yet, but it just jumped higher in the stack. Perhaps I’ll understand your arguments better.

I think follow your argument; the last drop of oil would be unpaiable, and so, well before we are at the last drop, oil will get much more expensive. Sounds reasonable.

We are also on the same line on the wisdom of the independent decisions of millions of people around the world and it’s inherent power. In this regard, I wonder though about the role of information. Intuitively, I would argue, the more informed the better the choice. I would also argue, we, generally, are not enough informed ending up making irrational choices.

However, I stuck on your “encourage to drive smaller, lighter cars” and “unnecessary deads,” but I’ll leave this discussion out.

32 Richard W. Fulmer { 06.09.09 at 3:06 pm }

Markus,
Hope you enjoy the book. Thanks to you and Adam for the interesting discussion!

33 Markus Stocker { 06.09.09 at 5:11 pm }

Richard:

Thank you for your comments and thoughts, and for the “I, Pencil” reference; well worth a read, or two!

34 Another Look at the Costs/Benefits of Waxman-Markey: A Dog that Won’t Hunt — MasterResource { 06.17.09 at 10:38 am }

[...] in a follow-up post, I documented that a recently released summary paper from Resources for the Future (RFF) reached [...]

35 Craig Goodrich { 06.27.09 at 3:59 pm }

Bear in mind also that the effects of increasing CO2 are logarithmic — by all accounts, even the models of the most dedicated climate hysterics — which means that the evil effects of a 650 ppm cap rather than a 550 ppm cap would be at most 2.6% worse, even ignoring the saturation effect (which would reduce the effects to negligible), while the economic benefits (or rather, mitigation of the economic disaster of WM) would be quite substantial.

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