Tuesday, October 02, 2007

Climate Change Economics

The debate between economic progress and environmental preservation is one that is not going away. For every environmental problem there is solution and economic consequences are always calculated. Economic policy development has focused on how to best minimize climate change while maintaining current economic conditions.

Arthur Laffer and Wayne Winegarden have recently written about cap-and-trade systems in the National Post. There assessment indicates that cap-and-trade systems for reducing GHG emissions are not the most effective means to do so and would likely cause harm to the economy. You may remember Arthur Laffer(Wiki) from the Laffer Curve regarding optimal taxation levels. They also have a more in-depth study titled "The Adverse Economic Impacts from Cap&Trade Regulations" sponsored by the Free Enterprise Education Institute.

In the National Post article they make a compelling argument against cap&trade because of the European example not being as effective as expected. They use other economic arguments against cap&trade which are logical. I have not read the complete study so I am basing my comments on the article. Generally, there analysis is sound and regulations do have some sort of economic impact. I do have a problem with a couple of points they raise. First, they determine regulations that would limit emissions would create economic impacts on the economy similar to supply shocks of energy. The idea is that emission limits will limit energy supply and constrain the economy. Quite likely this will happen but any regulations will be known long before enactment giving time to adapt and efficiency is a byproduct of energy supply shocks. They state that overall energy intensity has decreased over the last 30 years while energy prices have generally increased. I have yet to review any energy intensity data or studies but I am not certain if energy intensity measure consider changes in the underlying economy. Obviously technological advances have significant impacts on the energy intensity of the economy but the economy has shifted to a more service based economy possibly creating the reduction.

Needless to say the debate between economics and the environment will continue. I look forward to the day when overall structures change and the two will not be adversarial but will complement each other.

2 comments:

luis said...

Great post!

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