Tuesday, December 15, 2009

Can Reduced Carbon Emissions Boost The Economy?

While most advocates of government intervention to lower carbon emissions concede that it will be associated with an economic cost (though they argue that these costs are lower than the cost of "climate change"), a minority (particularly vocal here in Sweden(note Swedish language link)) argues that even aside from the alleged benefits on the climate from reduced emissions, carbon emission cuts will benefit the economy. These "green technologies" will supposedly create jobs and enhance efficiency.

Yet if that was really true, why would these new technologies require government intervention in the form of carbon taxes, subsidies, ban on light bulbs etc.? If they are so profitable then entrepreneurs would invest in them anyway.

Now many will think that this argument assumes that markets are perfect. The failure to bring the benefits of these technologies represents a market failure which government intervention must stop.

Well, markets may not be perfect for various reasons, but unless you have specific reasons for believing they will fail in a particular case, then the above framework is still useful.

If you assume that carbon emissions are harmful to the climate and that this creates costs, then it is easy to see why a "market failure" would appear in this case. But since the argument was that even apart from that, carbon emission cuts are beneficial; it really doesn't count in this context.

Going through the possible causes of market failure reveals no possible source of market failure.

No evidence exists that green investments will create any more positive externalities than other investments or reduce other negative externalities (the exception being emissions which are actually harmful to people's health, but most forms of carbon emissions aren't.)

Some would argue that one potential positive externality would be if workers in industries that benefit from carbon emission reduction policies had higher pay than those in industries that suffer from it. Yet as no statistics (as far as I know) is available for "green" industries, no evidence exists for it. And given how workers in the industry most obviously hurt by a policy to reduce carbon emissions, the oil and gas industry, earn a lot more than average, it is unlikely to be true if anyone had actually compiled such statistics.

And furthermore, even if it had been shown that "green workers" earned more it wouldn't necessarily prove that it is beneficial to the economy as high paying jobs usually are associated with higher capital investments and/or higher education spending, that crowds out other investment spending.

Nor does any evidence exist that entrepreneurs have foolishly underestimated the profitably of green investments. In fact, despite various forms of subsidies green technology in the car industry have been less profitable than other technologies, and the same is generally true for other industries. Only when subsidies are really high is it profitable, but since the subsidies represents a loss for the rest of society, that obviously doesn't count.

What we do know however is that a policy designed to reduce carbon emissions will make energy more expensive, something which will make it more expensive to trade and operate businesses and increase the cost of living, all of which is associated with a lower standard of living.

But won't the new "green industries" create job? Well, yes, in the same sense that a ban on all cars and reversal to horse and cartridge transports would create jobs, or in the sense that a ban on tractors in favor of spades in construction work would create jobs. But those new jobs would come at the expense of other jobs-and would be far less productive.