Global warming is real. It is predominantly anthropogenic. Left unchecked, it will likely warm the earth by 3-7 C by the end of the century. What should the United States do about it?
Very little, if anything at all.
As economists, we are inclined to take the vantage point of the benevolent dictator, that omnific individual with his hands upon all of the policy levers available to the state. When placed in such a position, the question of how to respond to global warming is answered by performing a simple comparison: does x, the cost of optimally mitigating carbon emissions, exceed y, the benefit of that carbon mitigation? Where the answer is yes, the global carbon mitigation effort remains rightfully nascent, where the answer is no, it springs up and becomes law with a just and sudden force.
H.L. Mencken once wrote, “Explanations exist; they have existed for all times, for there is always an well-known solution to every human problem — neat, plausible, and wrong.” Such is the economist’s explanation of climate change.
Global warming is a tragedy of the commons, carbon emissions are a negative externality, and reducing CO2 in the atmosphere is a global public good. These types of problems have been well-studied by economists, and solutions to them are known. Unfortunately, these solutions require a sovereign power to enact them, and in this world there is no global power to enforce economically optimal solutions, no benevolent dictator, no organ of international government capable of superceding national sovereignty and its attendant self-interest. The international system is not cooperative — it is best defined as anarchic and follows the Thucydidean maxim: the strong do as they can... the weak suffer as they must.
Instead of thinking as economists, we should think as international relations realists. In the realist school of thought, a man comports with another’s will only in proportion to the cudgel wielded over his head. We will not, solely through moral suasion, convince others to act against their own national interests.
Countless man-hours of scientists and economists have gone into trying to estimate the costs and benefits of climate change mitigation. Yet the real question is not whether y is greater than x, but rather whether it is greater than x + z, where z is the cost of enforcing an agreed upon reduction in carbon emissions. This is the minimum threshold that must be passed before any action is possible, and the chances of passing it in the near future are slim: not in least part because we lack the technology to monitor the emissions of other countries. But even if we did have the technology, the nature of the problem makes the challenge nearly impossible. Suppose two nations Alpha and Beta, agree to limit their emissions, and suppose further that it is cheaper for Alpha to reduce its emissions in the present while it is cheaper for Beta to limit its emissions in the future. What prevents Beta from reneging on its agreement after Alpha has already committed to a reduction? The act of punishing a defector, whether it comes in the form of a trade sanction or other action, is itself a public good that carries some cost to the punisher.
The sound and the fury that has characterized the public discourse on global warming often obscures a basic economic fact: we are in the situation we are in because it requires fewer resources to generate electricity with coal or propel automobiles with petroleum than it does to accomplish those same goals with solar cells and biofuels. The “green economy” our politicians have placed on a pedestal is not an improvement over our existing one — there is no gain to be had in producing with the effort of three men what we previously accomplished with two. We should tolerate this inefficiency only insofar as it helps us avoid some other, greater harm.
There are many who would have us act unilaterally, who claim we will gain some sort of “competitive edge” over China and the rest of the world by pursuing national policies of innovation or economic re-engineering. Through the magic of innovation, we will improve our economy, gain power relative to the rest of the world, and save the environment all in one stroke. This is nonsense.
Firstly, it misunderstands international trade. Our economic well-being is independent of Chinese productivity. The idea that other nations will “steal our jobs” or otherwise capitalize off of our unwillingness to go green is a fallacy. The belief that another country’s rise or fall impacts our economic well-being in any appreciable way is unsupported by economic theory and disproven by empirical evidence (ignoring, for simplicity, the prospect of military confrontation, where relative strength does indeed matter). There is no race or contest being played out; the U.S. and China are not Pepsi and Coca Cola writ large.
Secondly, it misunderstands the nature of public goods problems, in which players benefit by avoiding the costs of providing the good rather than leaping headlong into them. When we offer to reduce our carbon emissions, pay for green research, or otherwise make some sacrifice for the global environment, we are merely generating a benefit for the rest of the world to free-ride off of, bearing the weight of having three men do the work of two so that others will not have to make the same effort.
Lastly, it misunderstands the nature of innovation. The word is tossed around like a magic wand, but it is merely a means to an end. National policies to subsidize innovation have no more a successful track record than national policies that subsidize capital formation. The policies themselves (usually large, government spending boondoggles like the Synthetic Fuels Corporation), are economic distortions — they place incidences on some and make beneficiaries out of others, but on the net, society as a whole loses. Innovation is doubly worse as a public policy — not only is it a distortion, but information creation is yet another global public good. Take, for example, the tale of solar power. U.S. companies, at considerable cost to the taxpayer, have made advances in solar cells, making them at lower cost and with greater efficiency. Their inventors have reaped considerable reward for the sale of their intellectual property. But nearly all of the productivity gains from those technological developments have gone to countries like China and Malaysia, the places where it makes economic sense to manufacture solar cells.
It is not in our national self-interest to try and bear the costs of global warming by ourselves. For a wealthy, cold, non-agrarian, stable country such as ours, it is unclear whether we even stand that much to lose from a rise in temperatures. There have been several studies that suggest the costs of mitigating climate change exceed the benefits in a country such as the United States — work by William Nordhaus and Robert Mendelsohn of Yale, Richard Tol of Carnegie Mellon, Melissa Dell and Benjamin Olken of MIT, and others, suggest this outcome is likely.
But even if we take the estimates provided by the advocates of aggressive action, the math comes up short. For example, the National Resource Defense Council estimates that if left unchecked, global warming will cost the U.S. 1.8 percent of its GDP by the year 2100. Meanwhile the Stern Review estimates the cost of carbon mitigation to total 2 percent of world GDP by the year 2100. It appears that the hot areas of the world should be bribing us to take action, not the other way around.
More to the point, unilateral action will not mitigate climate change. The U.S. is only a small fraction of total emissions. Even if all of the Annex I countries of the Kyoto Protocol agreed to binding constraints, they would account for less than half of the world’s total emissions, and a far smaller fraction of the expected growth in emissions between now and 2100. To act unilaterally, or even in conjunction with the rest of the developed world, would mean paying the full measure of mitigating climate change while receiving only a fraction of its benefit.
It is tempting to play the crusader, to make some moral, if futile stand in defense of our current thermostat setting. But we must be realistic. There is little hope of creating an enforceable global carbon constraint, and without the existence of such a regime, there is little point in surrendering our national economy to green adventures.