BFI NewsJun 01, 2016

Pricing the Problem of Climate Change

Greenstone argues that we have to accept the real price of the energy we consume, and price accordingly

As a social issue, global warming is exactly that: global. It’s not as simple as investing in cleaner energy sources in any one country. Energy is critical to growth, and because fossil fuels are abundant, they are broadly utilized to sustain the growth of world economies. The problem, Michael Greenstone argued in his Friedman Forum talk on the Global Climate Challenge, is that the economic incentives to utilize those fossil fuels are stronger than the incentives to use alternatives that don’t contribute carbon dioxide gases to the atmosphere.

Daunting as it may seem, Greenstone deconstructed the global policy challenge of climate change in economic terms, highlighting the ways that current policy prescriptions might come up short and suggesting alternative approaches that leverage the elemental forces of economic theory.

Greenstone explained that access to energy is critical to growing a country’s economy, but much of the world has trouble gaining access to energy and has to import it as cheaply as possible. Fossil fuels are cheap, and thus satisfy this demand in spades: they make up 86 percent of the world’s energy mix. Technological innovation in extracting fossil fuels—notably fracking—has outpaced innovation in renewable energy, only widening this gap. “It’s as though five- to tenyear supply of natural gas fell out of the sky,” said Greenstone.

The story is similar when it comes to transportation. To provide the incentive for electric cars to overtake gas-powered models, oil would need to cost $470 per barrel by 2020, explained Greenstone. It currently sits aabout a tenth of that.

We can’t reasonably ask developing nations to forgo growth of their economies, enduring low wages and poverty to make up for the CO2 emissions of the rest of the world. “Without global climate action, we’re asking those countries to either use less energy or use more expensive energy sources.”

Global action, in Greenstone’s view, hinges on a basic economic fact: the price of energy is inaccurate. “We have an energy system around the world that does not account for the full costs of consuming energy,” said Greenstone. “As a result, the market leads us into consuming fossil fuels.”

What are those full costs? For one, air pollution measurably shortens lives of citizens, a fact Greenstone observed in a study of the Huai River Heating Policy in China. Incontrovertibly, fossil fuel use is shifting global temperatures to give us a higher concentration of very hot days. That means higher mortality among global populations, dead crops, and inefficient workers.

Greenstone argued that the only way to fix the problem is to properly price it through a global tax on carbon.

Other policy prescriptions depend too heavily on technology subverting the economic realities of fossil fuel consumption. He pointed to his recent study of energy efficiency investments for homeowners in the Midwest; his findings suggest that weatherization and energy efficiency tools only realized 39 percent of promised savings. Leaning too heavily on these sorts of programs may only forestall reckoning with the fact that fossil fuels aren’t priced correctly.

Greenstone argued that by pricing the problem with a carbon tax, the market will correct itself and innovation will move away from fossil fuel extraction and toward renewable sources. No technology will fix climate change, but embracing economic policy that accepts the realities of the damage it’s doing to our world can at least set us on the right path toward ameliorating the harm.

—Mark Riechers