New growth climate change theory

The price of apocalypse mitigation

Published October 14, 2006 12:14AM (EDT)

In the current issue of Economist's Voice, Harry D. Saunders questions Joseph Stiglitz' claim that a tax on carbon emissions could combat global warming without imposing significant economic costs on society. We'll skip the details and cut right to the chase: Saunders says Stiglitz's proposal "reinforces a commonly-purveyed, seductive, but as yet-unsubstantiated 'free lunch' mentality: energy consumption can be reduced without sacrificing economic welfare."

"We owe it to the public," Saunders concludes, "as well as to the economics profession, to be realistic about the level of pain required to implement [a tax on carbon emissions.]"

Hey, no pain, no gain, that's what I always say when trying to get back home over the East Bay hills by bicycle. Suck it up, Harry! Be a man! And please -- do you really mean to insinuate that no one is out there telling us that cutting back on greenhouse gases might cost a penny or two? How about the constant barrage of op ed pieces, white papers, and psuedo-economic treatises bankrolled by the energy industry and pumped out by bogus think tank pundits-for-hire who scream in BIG BLOCK LETTERS that daring to do anything at all about climate change is "economic suicide"?

And really, any economist who wants to talk about the costs of mitigating climate change should be ethically, not to mention professionally, obligated to at least nod in the general direction of the elephant in the room: What are the economic costs of not doing anything?

Admittedly, figuring out the costs of a global phenomenon that will take decades to unfold is tricky. But for some alarming ballpark figures, you can try the numbers touted in a study released Wednesday by the environmental advocacy group Friends of the Earth. Rising temperatures, sea levels, extreme weather events, oh what the heck, let's say, just for fun, $20 trillion by 2100.

Everybody, it's time to start peddling, now! Even if you compensate for the agenda of Friends of the Earth (no, they're not in bed with corrupt lobbyists like Jack Abramoff like some think tanks we know, but they're also not exactly disinterested bystanders), it seems pretty safe to say that doing nothing won't come cheap.

Now, anyone who has ever had their car engine seize up because they neglected changing the motor oil for too long learns a key economic lesson. It's much cheaper to keep the car running if you get regular oil changes than to fix it when the whole thing goes kablooey. Simple enough concept to apply to the problem of global warming: Pay now, rather than pay more later.

Market-oriented economists will tell us that the market will come up with solutions to our energy needs when the price mechanism ensures that entrepreneurs can make a profit doing so. They'll argue that the problem with trying to pay now is that we don't know what to pay for. We can't "pick winners" so we shouldn't even try.

But a funny thing has been happening at the cutting edge of economic growth theory over the last two decades. Starting with economist Paul Romer's landmark 1990 paper, "Endogenous Technological Change," a new breed of "new growth theory" economists, most of whom rely on some seriously heavy duty mathematics to "prove" their points, are arguing that the the key to economic growth is the rate of accumulation of knowledge in a society, and that government policy plays a critical role in determining that rate.

In his superb work of economic history, "Knowledge and the Wealth of Nations," about which I wrote several posts earlier this year, David Warsh tells the story of this Paul Romer-induced paradigm shift. I also interviewed Romer for Salon back in 1998.

To quote myself:

"Romer's research suggests that, while the government shouldn't get involved in a short-term game of picking winners among specific industries, state policy can influence long-term productivity and growth trends. As examples he cites the creation of the land-grant university system in the late 19th century and the establishment of computer science departments in the 1950s. Romer believes that we could be experiencing higher growth rates than we are now if we helped fuel them with more appropriate policies."

"'The reason new growth matters is that policy can influence that long-run trend,' said Romer. 'You wouldn't care if there was nothing you could do about it. But we need to get the policymakers to focus on long-run fundamentals, because I don't believe we have fundamentally changed the trend rate of growth in the economy yet. I don't think we've made the changes that we need to make.'"

What does this have to do with climate change? In September, the accountancy firm PricewaterhouseCoopers released a study in which they modeled multiple different approaches to climate mitigation, ranging from "Scorched Earth" (in which we do nothing) to "Green Growth." (Thanks to SciDev.Net for the link.) I was intrigued to see, in the Green Growth models, references to new developments in climate change mitigation modeling that clearly built upon Romer's landmark insights. A little digging around resulted in the discovery of a special issue of the Energy Journal from this summer devoted to the topic of "Endogenous Technological Change and the Economics of Atmospheric Stabilization."

(Don't be scared: "endogenous" means "arising from within")

A layman-friendly summary of the research in the Energy Journal special issue can be found in this article in Nature magazine. But here's my best effort at a quick-and-dirty summary:

Climate change mitigation will require significant technological progress; in developing new sources of renewable energy, pushing energy efficiency to new heights, perfecting carbon sequestration technologies. We can't depend on private enterprise to deliver this progress in a timely fashion, because the market incentives are not there, but the sooner we get started developing these technologies, the better our climate mitigation payoff will be. What Romer teaches us is that government action can play a critical role. If the proper policies for "inducing" technological change are put into place, everyone will benefit, because the nature of knowledge is that it can be shared by all. There is also a positive feedback loop factor involved -- the self-improvement of "learning-by-doing." Once you get your hands dirty, you figure out what works and what doesn't, and you organically improve your processes.

To return to the car analogy: say you started learning how to change the oil yourself, and as you were doing that, you got hip to the value of regularly checking the wear on your timing belts, and learned more about keeping your engine well-tuned -- heck, maybe you even ended up going whole hog and converting your car to run on biodiesel. The act of engaging with the process encourages the accumulation of more knowledge -- independent of the day to day incentives of the market.

From the PricewaterhouseCoopers study: "As mentioned above, the introduction of induced (or endogenous) technological change has been one of the most important recent developments in economic modelling and related climate change analysis. This is related to the wider endogenous growth literature and refers to the effects of learning-by-doing and/or investment in R&D/knowledge in allowing climate policy measures to influence the direction and pace of technological development in the model..."

When you stop to reflect, it shouldn't come as that big of a surprise that one of the core questions of development economics -- what role should the government play in encouraging economic growth? -- would also be one of the central issues of climate change mitigation. To see Romer's work pop up in the context of global warming is as profound a proof of the underlying theme of this blog -- the incestuous interconnections between trade, technology, development, and the environment -- that I could ask for.

I can't testify as to whether Romer's equations prove anything. All I can say is that a lot of smart people believe he helped change the direction of economic thought. And if do believe in those equations, then you probably believe that government decisions can proactively encourage the accumulation of knowledge. What we need now is the accumulation of knowledge on technologies that will help us address the human impact on the climate. The earlier you start that process of accumulation, the faster it goes. It's time to get those trend lines pumping. Like, well, starting yesterday.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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