Aug 09 2022

A Good Start on Climate Change

The US is about to pass into law the first real action on climate change in decades. Obviously there is a lot of politics involved, and I don’t want to get sucked into that, but rather I want to discuss the strategy of this approach to mitigating climate change. Here is a summary of the climate-related provisions in the bill. The bill provides tax incentive and grants for states, industry, and individuals to purchase electric vehicles, install green energy, make buildings energy efficient, convert cement, steel, and agricultural industries to more green methods, reduce leaks from methane pipes, and accelerate research in green technologies and manufacturing. Proponents estimate these measures will reduce US carbon emissions by 40% by 2030.

This projected reduction, however, is not compared to zero reduction, but rather what would happen without the bill:

Recent modeling by Rhodium Group highlights the substantial emissions reduction impact of these provisions. Under a business-as-usual scenario, the United States is on track to reduce greenhouse gas (GHG) emissions by between 24% to 35% by 2030 compared to 2005 levels. Should the IRA become law, this would increase to between 31% to 44% by 2030.

So it looks like the provision will produce an additional 10% reduction. Critics would also argue that this is only for the US and therefore as a percental of global GHG emissions, this is small potatoes. In a tradeoff to get support, the bill also would increase leasing for more oil and gas drilling:

“…it requires the U.S. Department of the Interior to lease 2 million acres in federal lands onshore and 60 million acres offshore each year for oil and gas development (or whatever acreage the industry requests, whichever is smaller).”

This has some environmentalists upset (aren’t we supposed to be reducing fossil fuel production). I don’t think they should be. There is a very deliberate strategy to this bill, and I think it is the correct one. At the top level, strategically there are two basic approaches to reducing GHG emissions, or specifically the burning of fossil fuels (which is the major contributor) – either we reduce supply of fossil fuels or we reduce demand. These, of course, are not mutually exclusive, we can do both, but specific measures usually fall into one or the other category.

The concept of reducing supply as a strategy is that this will increase the cost of fossil fuels, which will create a market incentive to reduce the use of fossil fuels (buy more fuel efficient cars, drive less) and to innovate green technology and greater efficiency. There is some merit to this strategy. Let the free market sort out how to accomplish this goal, but give them a huge incentive to. And there is evidence that as gas prices rise people drive less, and look for more fuel efficient cars. The downside of this strategy is that it can harm the economy and drive inflation, and (depending on the details of policy) can harm the lowest income people most.

Conceptually, reducing demand is a more logical approach. The ultimate goal is a world in which we can cheaply supply all our energy and transportation needs with technology that emits little or no GHGs. This would eliminate the demand for fossil fuels. It makes more sense to get there by creating and deploying green technology, rather than limiting fossil fuel supply in the hopes that this will spur green technology. The upside of this approach is that there’s no downside, at least not much of one (really just an opportunity cost whenever the government spends money).

This approach can reap immediate benefits, lowering the cost of energy through subsidies, and lowering the cost of transitioning to green technology. This is more of a win-win. Also, reducing pollution has other benefits, such as improved health and reduced healthcare costs, which are mostly seen locally. I also think this approach is better because we already have the technology to make the transition. It’s not as if we have no idea what will replace fossil fuel, and so we need to create an incentive to find solutions. We have solutions, we just need to implement them.

In reality these two strategies, reducing the cost of green technology vs increasing the cost of fossil fuels, work in tandem. What really matters (to choosing one over the other) is the relative cost of both, rather than the absolute cost. By reducing the cost of green energy, however, you make overall energy costs low, while making fossil fuel costs higher you make overall energy costs high. The latter is politically more difficult and likely strategically less effective. This is especially true when the global market depends on many countries that are not exactly our allies. The war in Ukraine has made clear the effects of raising gas prices, which helps fund Putin’s war.

What about the argument that US policy is simply too little by itself to effect global GHG levels? This is certainly true, but this point falls flat as an argument against climate policy for two reasons. First, it is the responsibility of the US to take care of US GHG emissions. We cannot directly affect what other countries are doing, but we need to keep our own house clean. But, the US can have significant indirect effects on the rest of the world. We are still the largest economy in the world by a large margin (US GDP is $20.89 trillion, compared to $14.72 for China). Politically, achieving our own climate goals will make it easier to pressure other countries to do the same. And perhaps most importantly, research and development of green technologies will be shared with the rest of the world. Making green technologies cheap and abundant will affect the global economy.

This is another reason to use the carrot approach rather than the stick – if the US leans heavily into green technology and we reap economic benefits, this will provide a huge incentive for other countries to follow. If, rather, we take the stick approach and make sacrifices in order to first reduce fossil fuels, we may become a cautionary tale for other countries.

The bottom line is that I think this bill is a good approach, and a good start. We need to do more, but this will go a long way toward reaching our goals. Anything that accelerates the adoption of green technologies will have some benefit, in terms of mitigating climate change and reducing the health costs of pollution. Many of these technologies are also on the cusp of breaking through, and these kinds of incentives can provide a critical push at a critical moment. Hopefully this will lead to a domino effect, leading to more research, development, and adoption of green technologies. Seeing the benefits of this policy can also lead to a massive shift in the politics of climate change. It will be interesting to see how that plays out.

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